Election-year recession may hurt Republicans

Peter Tuchman, a trader on the floor of the New York Stock Exchange wipes his face during the trading day July 26, 2007.

WASHINGTON (Reuters) - Wall Street is bracing for an election-year recession that a growing number of economists say is inevitable, and history suggests Republicans should be particularly nervous.

Voters don't look favorably upon the incumbent party that has the misfortune of presiding over a downturn.

Ask Jimmy Carter, whose 1980 campaign against Ronald Reagan failed after the Iranian Revolution sent oil prices soaring and tripped the U.S. economy into a brief but painful recession.

Former President George H. W. Bush, father of current President George W. Bush, blamed a recession that ended in March 1991 in part for his poor showing against Bill Clinton in 1992 -- the campaign that spawned the infamous "It's the economy, stupid" quote.

"The Republican candidate is going to be faced with a conundrum that they're already running away from Bush on the Iraq war, and now they're going to have to do it on the economy too," said Kenneth Rogoff, a professor at Harvard University and former chief economist of the International Monetary Fund.

Worries about a recession have steadily grown in recent months as a housing downturn and a spike in mortgage defaults led to billions of dollars in losses at banks. That has shaken global financial markets and prompted lenders to crack down on the easy money that helped drive strong economic growth in recent years.

Economic worries intensified on Friday when government data showed the job market was faltering. The economy created far fewer jobs than expected in December and the unemployment rate jumped to a two-year high of 5 percent.

On Wednesday, well-respected investment bank Goldman Sachs joined the ranks of economists saying that the U.S. economy was in or near a recession, noting that steep declines in employment are invariably associated with imminent downturns.

"The recession is likely to last two or three quarters and should be relatively mild by historical standards," Goldman Sachs analyst Ed McKelvey said.

He thinks the U.S. Federal Reserve will continue to slash interest rates, which would help the economy swiftly recover.

HOW LONG AND HOW BAD?

While politics and economics typically go hand-in-hand when the economy heads south, the correlation is weaker in a healthy economy, where other issues can trump economics.

If there is a recession, the impact on Republicans may depend on how deep the economy sinks.

Ray Fair, an economics professor at Yale University, developed an equation some 30 years ago that has been remarkably accurate in predicting which party will win. The two biggest factors are economic growth and inflation, both of which are going the wrong way for Republicans.

Using an interactive model (here) put together by Fair to predict the 2008 election, the formula shows that in a mild recession where the economy shrinks at a rate of 0.5 percent for the first three quarters of this year, Republicans would win 46.3 percent of the presidential vote.

Plug in a more severe recession with a negative 2 percent rate, and Republicans can expect to garner only 45.2 percent of the vote.

That contrasts with what would happen if the economy grows at a rate of 2.5 percent -- with the formula showing that Republicans can expect to win 48.3 percent of the presidential vote.

To be sure, not everyone thinks a recession is inevitable. St. Louis Federal Reserve President William Poole said on Wednesday that he did not know whether the U.S. economy would suffer a recession, and it would be a mistake to say that a downturn was clearly at hand.

The wild card may be what sort of fiscal stimulus package the Bush Administration and Congress can agree on to kick-start the economy. Bush has hinted that he may announce something at his State of the Union address at the end of this month.

Wall Street is hoping for tax cuts. Dean Baker, an economist with the Center for Economic and Policy Research in Washington, said it may take some time before the Republican White House and Democratic-controlled Congress can reach agreement on a stimulus plan, and by then it may be too late to have much effect on the November election.

"They're not going to be able to stop a recession but they could certainly ameliorate it and get the economy going again," he said.

(Editing by Leslie Adler)