When pocketbooks get pinched and many face unemployment, there’s bound to be plenty of anger. This anger generally means high voter turnout at elections. For better or for worse and for whatever it is worth, one key economic data component has been quite good at predicting presidential elections, and that is consumer confidence. If the consumer confidence index is at 100 or higher, then the incumbent party is likely to win. If not, then the opposition party wins.
The consumer confidence index is based on simple economic questions about current conditions and future expectations related to business, employment and family income. There are no questions on contentious social issues such as about war, abortion, or gay marriage. The data has been gathered from 1967.
Here are some examples of the confidence index readings leading up to past presidential elections:
The table above shows that consumer confidence levels correctly predicted the outcome in 9 of the past 11 presidential elections. One may reasonably dispute the outcome in 2000, when the popular vote actually picked the incumbent party candidate (Al Gore), though the electoral-college vote did not. The predictive power rises to 10 of the past 11 elections if we base it on the popular vote count.
The near-perfect predictive power of the consumer confidence index essentially says that at the time of voting, the single most important issue comes down to the economy. As James Carville once said, “it’s the economy, stupid!” Forget the tough talks on terrorism or the flowery talks of hope; voters are rewarding or punishing the incumbent on the economy.
So, what is the current reading on consumer confidence? In May 2011, it was 61. Except for the past three months, it had been generally on the rise. Is there enough time to bring the index up to 100 in 16 months?
Note: there are two measures on consumers’ psyche power. The above analysis is based on the Conference Board’s consumer confidence. There is a separate index called consumer attitudes or sentiment produced by the University of Michigan, and that index is not analyzed in this commentary, although you can read more about today’s data on it here >