With the increasingly anomalous exception of ISM manufacturing (which is dancing to its own, sad song), the incoming data suggests the US economy has inflected and may be on cruise control for the foreseeable future.
This week, for example, ISM services came in decent and ADP was solid on Wednesday, potentially setting the stage for another good jobs report.
The gap between ISM services and the factory gauge is now the widest in four years.
If “it’s the economy, stupid”, then things are looking much better now for Donald Trump’s re-election bid than they looked in August, when a recession scare tied to tariff jitters sent consumer sentiment tumbling and inverted the 2s10s curve.
To the extent it’s accurate to say that Trump’s 2020 bid is in better shape now than it was late in the summer due to a rebound in economic activity, he can thank the Fed and the Chinese for cutting rates and agreeing to an interim trade deal, respectively. Were it not for a dovish central bank and a (very) patient Xi Jinping, things might be looking particularly grim. After all, Trump now holds the dubious distinction of being only the third president in history to be impeached and he very nearly took the US to war with Iran this week, something which, while helpful as a distraction from the impeachment trial, likely wouldn’t have played well for a man who has repeatedly promised to extricate the country from costly foreign fiascos.
But how reliable is the old “good economy/incumbent wins” rule of thumb? For their part, Morgan Stanley says investors should exercise a healthy degree of skepticism.
“We have no precedent for an incumbent with a good economy but weak poll numbers”, the bank writes, in a note dated January 6, adding that “even if you find this rule of thumb compelling, it is worth noting that there’s a competing rule of thumb [which says] Presidents with negative net approval ratings tend to lose their bid for re-election”.
The bank rather dryly notes that “based on polling data over the past 12 months, President Trump’s highest net approval rating is the lowest of any incumbent seeking re-election, and he has maintained a consistent net-negative approval rating for nearly all of his presidency”.
Who’s tired of all the winning?
Jokes aside, the bank also suggests that while a solid economy may be necessary for an incumbent to triumph, it might not be sufficient. In addition to the tiny sample size, Morgan writes the following:
The economy tends to grow, with US GDP having been positive 243 of the last 279 quarters going back to 1950. Hence, incumbents are typically running when the economy is good, making the economic variable more like a constant. Other incumbency advantages (i.e., typically not having to run in a primary, name recognition) are also near constants. Said differently, there’s not sufficient evidence to conclude a good economy is more powerful than other potential variables in determining incumbency advantage.
Finally, the bank writes that for the time being, Americans do not seem to be all that focused on the economy, with the percentage of voters mentioning economic issues as the country’s most important problem sitting near a two-decade nadir.
Far more critical are healthcare, immigration and leadership, issues Democrats are pounding the table on.
Earlier this month, a CBS News poll showed Sanders, Biden and Buttigieg locked a three-way tie among Democrats in Iowa, with each garnering 23% support. Elizabeth Warren, whose fundraising efforts faltered in Q4, was at 16%.