Analysis: For Obama re-election hope, economy is still key

VINEYARD HAVEN, Massachusetts Tue Aug 24, 2010 3:22pm EDT

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VINEYARD HAVEN, Massachusetts (Reuters) - Forget about President Barack Obama's healthcare reforms and crackdown on Wall Street. American voters care most about their own wallets and U.S. elections are always about the economy.

If he can deliver a solid recovery that makes Americans feel financially more secure, Obama may well win a second term, said analysts who use economic data to forecast election outcomes.

But there is not much Obama can do between now and the November midterm congressional poll to shield his Democratic party from voter disapproval.

Recent economic news has been grim and Republican opposition on Capitol Hill has thwarted administration efforts to provide additional government stimulus for growth.

A Reuters/Ipsos poll on Tuesday found 72 percent of those asked said they were very concerned about joblessness, while Obama's approval rating, at 45 percent, was overtaken for the first time by a 52 percent disapproval rating.

That said, he has awhile before the 2012 presidential race gets fully underway, which gives the White House something of a cushion to get the economy moving more quickly.

"Obama still has time to turn the key economic indicators around. For the voter, these things really start to matter about a year or so before the election," according to Michael Lewis-Beck, a political science professor at Iowa University and author of the book "Forecasting Elections".

OBAMA SHADOWS REAGAN'S POLL DECLINE

For a striking example of how a recovering economy can redeem flagging poll fortunes, look no further than Republican President Ronald Reagan's experience during his first term.

A deep recession and soaring unemployment led to midterm congressional election losses. But he bounced back decisively to win a second term as growth, and household incomes recovered.

Despite growing concerns about the budget gap, voters in 2012 will not be guided by intense Republican criticism of the deficit, forecast at $1.47 trillion in fiscal 2010, analysts say.

"Over the past 60 years, the best predictor of presidential election outcomes has been the change in real disposable income in the months leading up to the election," said Larry Bartels, a professor of politics and public affairs at Princeton University.

"I very much doubt that any large number of voters will vote for or against Obama based on the magnitude of the federal budget deficit," he said, noting the U.S. deficit fell by 90 percent during Bill Clinton's first term and "most people did not notice."

President Clinton turned a budget deficit into a surplus of $236 billion by the time he left office in January 2001.

But worries about the deficit are real. The Reuters/Ipsos poll found that 67 percent of respondents were very concerned about government spending.

If Obama succeeds in getting the economy growing, the fact that unemployment is still high by the time of the presidential election should not matter.

The Federal Reserve forecasts unemployment will have fallen to between 7.1 percent and 7.5 percent by 2012.

This is still high by historic U.S. standards, but the trend will be Obama's friend.

"What matters is the direction unemployment is moving, not the overall number. If it comes to pass, the sense of improvement will be a huge boost to his electoral prospects," said Chris Bowers, campaign director for the Daily Kos, which offers online political commentary.

OBAMA MIDTERM WOE

The economy is certainly not helping Obama at the moment and will likely cement Democratic losses on November 2.

Growth slowed in the second quarter, raising concern for a double dip U.S. recession and the kind of prolonged stagnation that recalls Japan's lost decade.

Furthermore, the GDP numbers will be revised on Friday, with analysts predicting a steep cut to show the economy expanded by just 1.4 percent on an annual basis in the second quarter, versus 2.4 percent previously reported.

That pocketbook feeling also looks bleak. Real U.S. personal income grew 1.7 percent in 2008 and barely at all last year, inching up by just 0.6 percent. It grew by just 0.2 percent in June, the latest month for which data is available.

Even if the economy continues to grow at a moderate pace, it may not be able to attain the sort of altitude needed to start to mop up jobless workers and bring the unemployment level down from currency levels of 9.5 percent.

But academic models which gauge the performance of the economy to estimate who will win the election still predict a tight race, with some seeing Democrats maintaining control of the U.S. House of Representatives.

A paper co-authored by Lewis-Beck and co-author Charles Tien, who chairs the political science department at Hunter College in New York, forecast Democrats shedding 22 seats in November.

"While serious, this outcome is not as serious as it could be, as this number allows the Democrats to retain their majority in the House," they wrote in a paper due to be presented next month at the American Political Science Association. "Given the difficulties of the times, Obama and the Democrats could do worse."

(Editing by Jackie Frank)

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