Fair Model

Midterms: It’s The Economy

James BaileyLeave a comment

This is my last post before the midterms Tuesday. What will they bring?

Midterm elections are usually bad for the President’s party:

I don’t think this year will be an exception to the rule. I see many indicators pointing in the same direction.

The largest US prediction market Kalshi currently gives Democrats a 91% chance to take the House and a 66% chance to take the Senate. The international Polymarket and play-money Manifold currently give slightly higher chances, 93/67 and 94/69. Forecaster Nate Silver is higher still at 95/76.

The best odds I’m seeing for Republicans among the models I have followed for years is Ray Fair giving Dems only a 60% chance to take the House (he doesn’t forecast the Senate). In Fair’s model, the economy is working in favor of Republicans; inflation is a negative for them but economic growth is a stronger positive (including the 3.4% Q3 GDP estimate just released today).

In practice though I think economic issues are working in favor of Democrats. The economy is good in many ways, like 4.2% unemployment- but most people aren’t happy about it. Consumer sentiment is at record lows. Economic growth is solid but largely driven by the AI boom, which gives people plenty to be nervous about. Inflation is only a bit high (3.4% vs a 2% target) but easy to tie to administration policies like tariffs, war, and pressuring the Fed to lower interest rates. Ad spending indicates that politicians on both sides think tariffs have gone from a minor issue that voters have mixed feelings about to a major issue that voters don’t like:

Gas prices have long been especially salient, and are currently high because of the Iran war. I said here in March:

if the US administration wants to avoid a midterm wipeout driven by high gas prices, I see only 3 options:

  1. Get lucky and see the Iranian regime fall quickly
  2. Negotiate an end to the war quickly (which might itself be unpopular if they can’t get a good deal) or just declare victory and go home (but its not clear whether Iran would re-open the strait now just because the US stopped bombing)
  3. Restrict Exports

But they took none of those three options, and now it seems the midterm wipeout is coming.

I predicted a ‘moderate red wave’ here in 2022. I predict a blue wave for 2026 that is bigger than the red wave of 2022, though not a ‘mega tsunami‘. The main things Republicans have going for them are the Senate map (Dems need to win in multiple 2024 red states to win) and the possibility that angry anti-incumbent voters will take down some Dems too.

Forecasting Swing States with Economic Data

James Bailey1 Comment

Ray Fair at Yale runs one of the oldest models to use economic data to predict US election results. It predicts vote shares for President and the US House as a function of real GDP growth during the election year, inflation over the incumbent president’s term, and the number of quarters with rapid real GDP growth (over 3.2%) during the president’s term.

Currently his model predicts a 49.28 Democratic share of the two-party vote for President, and a 47.26 Democratic share for the House. This will change once Q3 GDP results are released on October 30th, probably with a slight bump for the dems since Q3 GDP growth is predicted to be 2.5%, but these should be close to the final prediction. Will it be correct?

Probably not; it has been directionally wrong several times, most recently over-estimating Trump’s vote share by 3.4% in 2020. But is there a better economic model? Perhaps we should consider other economic variables (Nate Silver had a good piece on this back in 2011), or weight these variables differently. Its hard to say given the small sample of US national elections we have to work with and the potential for over-fitting models.

But one obvious improvement to me is to change what we are trying to estimate. Presidential elections in the US aren’t determined by the national vote share, but by the electoral college. Why not model the vote share in swing states instead?

Doing this well would make for a good political science or economics paper. I’m not going to do a full workup just for a blog post, but I will note that the Bureau of Economic Analysis just released the last state GDP numbers that they will prior to the election:

Mostly this strikes me as a good map for Harris, with every swing state except Nevada seeing GDP growth above the national average of 3.0%. Of course, this is just the most recent quarter; older data matters too. Here’s real GDP growth over the past year (not per capita, since that is harder to get, though it likely matters more):

RegionReal GDP Growth Q2 2023 – Q2 2024
US3.0%
Arizona2.6%
Georgia3.5%
Michigan2.0%
Nevada3.4%
North Carolina4.4%
Pennsylvania2.5%
Wisconsin3.3%

Still a better map for Harris, though closer this time, with 4 of 7 swing states showing growth above the national average. I say this assuming as Fair does that the candidate from the incumbent President’s party is the one that will get the credit/blame for economic conditions. But for states I think it is an open question to what extent people assign credit/blame to the incumbent Governor’s party as opposed to the President. Georgia and Nevada currently have Republican governors.

Overall I see this as one more set of indicators that showing an election that is very close, but slightly favoring Harris. Just like prediction markets (Harris currently at a 50% chance on Polymarket, 55% on PredictIt) and forecasts based mainly on polls (Nate Silver at 55%, Split Ticket at 56%, The Economist / Andrew Gelman at 60%). Some of these forecasts also include national economic data:

Gelman suggests that the economy won’t matter much this time:

We found that these economic metrics only seemed to affect voter behaviour when incumbents were running for re-election, suggesting that term-limited presidents do not bequeath their economic legacies to their parties’ heirs apparent. Moreover, the magnitude of this effect has shrunk in recent years because the electorate has become more polarised, meaning that there are fewer “swing voters” whose decisions are influenced by economic conditions.

But while the economy is only one factor, I do think it still matters, and that forecasters have been underrating state economic data, especially given that in two of the last 6 Presidential elections the electoral college winner lost the national popular vote. I look forward to seeing more serious research on this topic.

Recession or not, the biggest GDP political football is 3 months away

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US GDP fell for the second straight quarter according to statistics released this week by the Bureau of Economic Analysis. This means that by one common definition we’re now in a recession, which has ignited a debate about whether “two consecutive quarters of negative GDP growth” is the best definition (as opposed to ‘when the NBER says there’s one’, like I generally teach and Jeremy argued for here, or something else).

Naturally this debate has political overtones, since the party in power would be blamed for a recession, so we’ve seen the White House CEA argue that we’re not in a recession, many on the other side argue that we are, and plentiful hypocrisy from people who should know better.

But in political terms, the fight over the binary “are we in a recession” call won’t be the big economic factor in November’s elections- that will be inflation and GDP, especially 3rd quarter GDP. One of the oldest and best predictors of US elections is the Fair Model, which uses inflation and the number of recent “strong growth quarters”. Fair’s update following the recent Q2 GDP announcement states:

the predicted vote share for the Democrats is 46.70, which compares to 48.99 in October. The smaller predicted vote share for the Democrats is due to two fewer strong growth quarters and slightly higher inflation

By Election Day we’ll have 3 more months of economic data making it clear whether inflation is getting under control and whether economic activity is picking back up or continuing to decline. Monthly data releases on inflation and unemployment will be closely watched, but the most discussed release will likely be third quarter GDP. It will summarize 3 months instead of just one, it will be of huge relevance to the debate over how severe the recession is or whether we’re even in one, and it will likely be released less than two weeks before election day. The NBER almost certainly won’t weigh in by then; they tend to take over a year to date recessions, not adjudicate debates in real time.

So when BEA does release their Q3 GDP estimate in late October, what will it say? Markets currently estimate at least a 75% chance it will be positive (they had estimated a 36% chance of positive Q2 GDP just before the latest announcement). That sounds high to me, the yield curve is still inverted and I bet investment will continue to drag, but forecasting exact GDP numbers is hard. Its a much easier bet that whatever the number turns out to be will loom large in political debates just before the elections. Perhaps we’ll get the Q3 GDP growth number that would make for the most chaotic debate: 0.0%.