Campaignomics

Could it really be as simple as falling gas prices? President Bush is enjoying a bump up in the polls: His approval ratings-as measured by the USA Today/Gallup Poll-have drifted up from the mid-30s in early June to 44 percent now, their highest levels in more than a year. And this rebound comes despite Americans' widespread unhappiness over the war in Iraq, anxiety about rising income inequality, and job insecurity bred of globalization.

Gas prices are down more than 66 cents a gallon in the past seven weeks, easing inflation worries and boosting the stock market, with the Dow Jones industrial average close to a record high. Last week, the Conference Board reported that consumers' outlook for the next six months had improved markedly since August.

The timing for a turnaround certainly is auspicious for Republicans going into the November 7 midterm congressional elections. All year long, Democrats have been trouncing Republicans in the polls, seemingly poised to retake one or both houses of Congress. But the latest Gallup survey found voter preferences split evenly between Democrats and Republicans. Is the economy suddenly giving the GOP a lift? Indirectly, says James Campbell, a University at Buffalo-SUNY political science professor and author of Before the Vote: Forecasting American National Elections. "With congressional elections, the economy only directly matters at the margins," he explains. "But the economy does affect presidential approval ratings, and they do affect congressional elections."

As he stumps for GOP candidates, the president is talking more and more about the economy, first because he believes it is trending his way and second, many suspect, because he wants to distract voters from an unpopular war. Just last week, Bush carried the "good news" economic message to Meyer Tool in Cincinnati, while also continuing to pound home the theme that the Grand Old Party is better equipped to fight the war against global terrorism. That argument has also boosted Bush, some pols believe.

The Chart. The Democrats, of course, aren't convinced about the economy. They've got their own message, focused on uncertainty, anxiety, and stagnation. And there isn't likely to be any letup in the shrill rhetoric as the midterm melee enters its final round. An improving economy-or voters' perception of an improving economy-might just keep the GOP in control of the House of Representatives, the branch that many analysts see as most likely to change hands. At least that's the conclusion of University of Texas-Dallas political science professors Patrick Brandt and Thomas Brunell. The duo just finished testing a forecasting model that attempts to predict the outcome of the battle for the House. Their three main factors are the presidential approval rating, inflation rate (think of it as a proxy for gas prices), and unemployment rate. Using a model-generated prediction of a 43 percent presidential approval rating on Election Day, the Brandt-Brunell formula predicts the GOP will retain 220 seats, a loss of 12 seats but still enough to keep control. And every 2 additional Bush approval points would mean a loss of one seat fewer.

Brandt and Brunell's forecast parallels what has become known among Internet economics junkies as The Chart. It tracks Bush's approval ratings against the price of gasoline. Higher prices mean Bush's approval goes down and vice versa. "The correlation between the two is unbelievable," says Andy Laperriere, policy analyst at ISI Group in Washington, D.C. "I almost can't believe it. I mean, I don't believe it. That can't be all there is to it."

Even though some Democrats and their allies see a Texas-size conspiracy behind the sharp decline in gas prices-two former oilmen do run the country, after all-industry analysts note there are rational economic reasons behind the downturn. Market psychology changed in August, following a subdued hrricane season forecast, a truce in the war in Lebanon, and the end of the peak driving season. Then major energy trader Goldman Sachs embarked upon a massive liquidation of its position in gasoline futures. "These things conspired to put tremendous downward pressure on gasoline," says Larry Goldstein, president of the Petroleum Industry Research Foundation. "Use the word 'conspired,' if you want, but not 'conspiracy.'"

Where oil prices are headed now is anyone's guess. Goldstein believes that this is a temporary calm and that world capacity to produce and refine oil is so tight that any geopolitical or industry event could send prices soaring again. Energy economist and longtime bear Michael Lynch, however, wouldn't be surprised to see $40-per-barrel crude oil (down from the July peak of $74) by the end of the year.

The dip in gas prices is clearly buoying consumer confidence, but there are plenty of storm clouds on the horizon and long-standing economic problems. Among them: America's declining competitive position, the deficit, exploding consumer debt, the relentless rise in healthcare costs, and the growing income gap between the richest and poorest Americans. Here's how some of the economy's vital signs are shaping up ahead of Election Day:

Wages

This is an issue on which Democrats hope to make hay but also one in which a lot depends on how you slice and dice the numbers. During the past year, according to the Labor Department, average weekly earnings for private-sector workers rose by 4.2 percent. But once you factor in a 3.8 percent rise in prices in the same period, that gain gets trimmed back to 0.4 percent. Still, the increase is lots better than in 2005 when real average weekly earnings fell 0.2 percent. "Wage growth has been a real negative, but it's looking better, and I think people are starting to feel that in their pocketbooks," says Nariman Behravesh, chief economist at Global Insight in Waltham, Mass.

Why has wage growth been so sluggish? Blame globalization, the decline in union power, rapid technological change-all could be factors. According to the Census Bureau, median annual earnings for men fell to $41,386 in 2005 from $43,158 in 2003 (adjusted for inflation), despite a growing economy. Women's earnings also fell in 2005 to $31,858 from $32,285 a year earlier, the lowest level since 2000. Similarly worrisome to many workers is the rise in income inequality. Research by economists Thomas Piketty and Emmanuel Saez shows that the top 10 percent of households grabbed 46 percent of the income in 2004, the most recent year for which numbers are available, versus 33 percent in 1970. Sounds really unfair until you realize that the top 10 percent are taking home a smaller share now than in 2000.

Growth

Gross domestic product, the broad measure of the economy's health, has grown for 23 straight quarters-and topped 3 percent in nine of the past 14 quarters. Last week, GDP growth for the second quarter was revised downward to 2.6 percent from 2.9 percent, partly because of a bigger decline in residential construction than previously announced. How does the fat part of the Bush expansion-the best three-year period-stack up with those of Bill Clinton and Ronald Reagan? During the past three years, the nation's economy has gotten 11.5 percent bigger, after a shallow recession in 2001. From 1997 through 1999, the Clinton economy grew by a total of 14.2 percent; the Reagan economy expanded by 18.1 percent from 1983 through 1985 after the deep 1981-82 recession. "This has been a pretty good expansion, but it's hard to live up to the expansion of the '80s and '90s," says Carl Tannenbaum, chief economist at LaSalle Bank in Chicago. Even so, GDP has been an iffy political predictor. Strong GDP growth didn't save the president's father in 1992 or congressional Democrats in 1994, or help Al Gore in 2000.

Jobs

istorically an economic statistic with broad political resonance, the unemployment rate is currently at 4.7 percent, down from a peak during the Bush years of 6.3 percent in June 2003. That's not as low as it fell during the Clinton-era boom, when the rate dropped to 3.8 percent in April 2000 as the Internet bubble was beginning to burst. But it's a third of a percentage point lower than in any single month during the '80s boom. Critics of the Bush economy will point an accusing finger at job growth, and they do have a major point. During the past three years, the economy has generated 5.7 million net new jobs versus 9.5 million in 1997-99 and 9.8 million in 1983-85. The real question: Is today's American economy anywhere near full employment? "During the '90s, if you could spell Internet, you got hired as a Web page designer," says Mark Vitner, senior economist at Wachovia. "Today, full employment is probably [when unemployment is] around 5 percent. And we are a bit under that." Even if you take a broader look at unemployment, lumping in so-called discouraged workers, the unemployment rate is still only 5.0 percent.

Stocks

Last week, the Dow Jones industrial average flirted with an all-time-high close. Nowadays, the average American worker isn't just a wage slave but a shareholder, too. In fact, slightly more than half of all U.S. households invest in equities, either directly or indirectly through self-directed retirement accounts such as 401(k)'s and IRAs, according to a recent study by the Investment Company Institute. In the early 1990s, that fraction was only about a third. And in the early 1980s, just a fifth of all households invested in stocks. So a joyous Wall Street often means a happy Main Street. And Wall Street is upbeat right now. The market has rebounded from a spring sell-off, with the Standard & Poor's 500 index gaining 5 percent since the end of June. For the year, the S&P is up around 7 percent, which is just average by historic standards. But this is not a typical year-it's a midterm election year. And the S&P 500 has gained only 4.3 percent on average since World War II in midterm election years. "We're definitely doing a whole lot better than average," says Sam Stovall, chief investment strategist for S&P.

The fact that Wall Street has gotten its groove back may be one reason investor confidence has turned around and is as high as it's been since March, according to the UBS/Gallup Poll of Investor Attitudes. Of course, investors still have to muddle through October, a month traditionally associated with major market scares and poor stock performance.

Housing

The sharp downturn in residential real estate is already hurting the economy, as evidenced by the second-quarter GDP numbers. With home sales plummeting and median home prices falling for the first time in more than a decade, one might expect the loud pop in the housing bubble to ring in voters' ears. To be sure, some political observers have coined the term "mortgage moms" to describe voters whose worries about their monthly payments could help Democrats.

Yet according to a recent Gallup Poll, housing ranks below healthcare costs and gas prices among voters' concerns. That's in part because 83 percent of homeowners have long-term, fixed-rate mortgages, leaving them largely unaffected by recent rate increases-as long as they don't sell. And only about 7 percent sell each year. Besides, there are signs that any truly nasty effects from a downturn in housing might be more or less contained in that sector. Bruce Kasman, head of economic research at JPMorgan Chase, says that even though housing has been weak for a year, data suggest that the consumer sector is still in remarkably good shape. Throughout spring and summer, real consumer spending averaged around 3 percent, despite a faltering housing market and rising gas prices. Lower gas prices and rising wages could hel offset reduced home-equity withdrawals by homeowners.

But that's only a guess. Most housing downturns are caused by spikes in interest rates or recessions, not speculative bubbles bursting. So the big unknown is how long and severe this unique housing slump will be and whether it will lead to a recession. But almost no one expects that to happen before November 7.

By James Pethokoukis, with Marianne Lavelle, Paul J. Lim and Alex Markels