By James Pethokoukis

With the 2021 elections over, particularly those for the New Jersey and Virginia governorships that typically get lots of national media attention, the focus is now on the 2022 congressional midterms. And the first question I ask myself when thinking about those contests for House and Senate seats is, “What’s the economy going to be like?” 

Now embedded in that question are two assumptions: First, that the state of the US economy matters in a material way for those election outcomes. Second, the better the economy is, the better it is for incumbents. And with Democrats controlling Congress, as well as the White House, a strong economy should be to that party’s benefit.

So where do things stand? Broadly, Wall Street is expecting strong economic and employment growth next year. For instance: Goldman Sachs is forecasting 3.9 percent real GDP growth overall and a steadily declining jobless rate to 3.5 percent in the fourth quarter. And JPMorgan is forecasting 3.3 percent growth, with an unemployment rate of 3.9 percent in the fourth quarter. So pretty solid — assuming continued good news on both COVID-19 vaccinations/treatments and consumer spending from pent-up savings. Also, lots more people should be leaving the sidelines and looking for work.

But not all is good. Inflation is up, and it seems like higher prices might be sticking around for a while. This from GS:

Inflation has risen to a 30-year high, driven by a surge in durable goods prices. Our core view remains that the underlying supply-demand imbalances will, as Chair Powell said last week, largely work themselves out, leaving inflation near the Fed’s goal. But it is now clear that this process will take longer than initially expected, and the inflation overshoot will likely get worse before it gets better.

Now a 30-year high in inflation is probably not an encouraging data point for the incumbent party. Higher prices, along with supply-chain shortages, already seem to have many Americans in a foul mood despite the rapid economic recovery. This from Neil Irwin in the New York Times:

Workers have seized the upper hand in the labor market, attaining the largest raises in decades and quitting their jobs at record rates. The unemployment rate is 4.6 percent and has been falling rapidly. Cumulatively, Americans are sitting on piles of cash; they have accumulated $2.3 trillion more in savings in the last 19 months than would have been expected in the prepandemic path. The median household’s checking account balance was 50 percent higher in July of this year than in 2019, according to the JPMorgan Chase Institute.

Yet workers’ assessment of the economy is scathing. In a Gallup poll in October, 68 percent of respondents said they thought economic conditions were getting worse. The share who thought things were getting better was lower than in April 2009, when the global financial crisis was still underway. And it is not merely a partisan response to the Biden presidency. In the University of Michigan’s consumer sentiment survey, Republicans rate current economic conditions worse than Democrats do — but both groups give ratings about as low as they did in the early 2010s, when unemployment was much higher and Americans’ finances were a wreck. The reasons seem to be tied to the psychology of inflation and the ways people assess their economic well-being — as well as the uneven effects that rising prices and shortages have on different families. It may well be shaped by the psychological scars of the pandemic, one manifestation of this being an era of exhaustion.

So a battle, perhaps, between rising incomes and job growth on one hand, and the unsettling impact from inflation on the other. Which will have the upper hand in determining voter mood a year from now? One political forecasting model that uses economic inputs in that of Yale University’s Ray Fair. His midterms forecast as of the end of October:

The predicted two-party vote share for the House Democrats is 48.99 percent. This is predicted vote share, not seats. Given the current way House districts are configured, a 49 percent vote share for the Democrats would likely result in fewer than 49 percent of the House seats. The prediction shows that the Democrats gain more from output growth than they lose from inflation. They are also helped by the House incumbency effect. They are hurt slightly by the balance effect. 

Both history and the recent election results in New Jersey and Virginia suggest it will be difficult for Democrats to hold Congress next year. And while the economy may help rather than hurt on net, it might not be nearly enough.

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