It makes sense that the trajectory of the economy would be a major factor in how Americans would vote on Election Day.

But what are the most important economic metrics?

In a new note to clients, Deutsche Bank economist Carl Riccadonna takes a look at how changes in the 'misery index' -- the sum of the unemployment rate and the inflation rate -- are correlated to voting decisions:

The evolution of the misery index over the prior presidential term has often provided useful guidance regarding the election outcome. Thus, to the extent the “Are you better off?” question was explained by the misery index, this has been a significant predictive tool of many recent elections. If the index is rising (i.e. economic deterioration) and the incumbent party is unseated or if it is falling and they retain power, we consider that a validating result for this analysis. The model fails if the index is rising and the sitting party retains control, or if it is falling and they cede control. The following figure shows the trajectory of the misery index from 1964 to present with a dot highlighting the quarter immediately preceding the various presidential elections. The dot is filled (black) when the misery index accurately predicted the election outcome (based on a comparison to the level of the index four years earlier). The misery index has accurately predicted nine of the last twelve elections. However, there are some instances when the move in the index was marginal, in which case changing economic conditions were potentially not a pressing political issue. If we raise the threshold to a full percentage point move, it accurately predicted the electoral outcome on all eight occasions.

On this year's election:

If voters purely act based on the misery index, this analysis points to reelection for Mr. Obama, as the index is currently 9.7% (8.1% unemployment + 1.6% inflation) versus 11.3% (6.0% + 5.3%) in Q3 2008. Of course, in a tight race other factors such as voter turnout could tip the balance..

There's no question that the 'misery index' is high.  However, it is down from four years ago.  Here's the chart:

misery index

Deutsche Bank


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