Defying Gravity

HUNGRY FOR MOVEMENT

If voters have so lowered their expectations, how can they also still be hopeful? It’s easiest to explain it this way: Living in the U.S. and working in the sluggish economy over the last two years was like sitting in a lukewarm bath: The water wasn’t hot enough to be relaxing, but it wasn’t getting colder, either. Bathers got used to it. And every once in a while, the faucet dripped out a few scalding splashes that promised more comfort on the way.

The economy has grown, albeit at an uninspiring and historically behind-the-curve annual rate of 2 percent. About 150,000 additional workers per month have netted jobs. The private sector has replaced all the jobs it lost since Obama took office.

The recovery, however uninspiring, is a recovery. The economy isn’t contracting. Companies aren’t shedding more workers than they hire, and the unemployment rate isn’t rising.

Just as important, small rays of hope are appearing in sectors of the economy that voters notice most. Housing starts have steadily ticked up over the past 18 months. Home prices appear to have bottomed out nationwide around January and have been rising since. Foreclosures have slowed. In the past year, 1.3 million underwater homeowners who owed more than their homes were worth are now slightly above the surface. Small-business owners are reporting a mini-surge in plans to hire and invest, driven by rising hope that the economy is headed toward better days, according to the latest survey by the National Federation of Independent Business. Morgan Stanley has seen a big rise in its measure of corporate optimism. Consumer confidence rose for much of the past year, dipped in the spring, but then rose again in August, according to the University of Michigan. The unemployment rate for college graduates in August was just 4.1 percent; 6.6 percent for workers with some college experience. Both are statistically significant parts of Obama’s base.

Stock and mutual-fund holdings, often the basis of retirements savings, have grown in value from $9.1 trillion at the end of 2008 to $14.3 trillion in September, according to the Federal Reserve Board. Americans are saving more and are paying down credit-card debt, a process economists call “deleveraging.” Deutsche Bank economists wrote this month that household balance sheets have rebounded to their strongest levels in a decade. They calculated that household buying power is up “significantly” over the past year, thanks to rising home values. Taken together, they wrote, “these two developments are supportive of further modest gains in consumer spending and suggest household deleveraging is no longer a serious headwind to economic expansion.”

Voters appear to be prizing that (albeit slow) progress over the economy’s still-terrible levels of output and job growth. This attitude fits at least one historical pattern of American politics: University of Michigan economist Justin Wolfers studied more than 600 gubernatorial elections across recent American history—a much more robust sample size than presidential elections—and found that voters were much more likely to retain an incumbent when unemployment was falling, regardless of how high the rate was. It’s all about trajectory, no matter how slow or slight. Three years ago, the unemployment rate stood at 10 percent, meaning that it dropped almost 2 full points during Obama’s first term; those are the headlines voters remember, regardless of how the job data are interpreted.

As Jared Bernstein, the former top economist to Vice President Joe Biden, put it: “It makes a great deal of difference if you are sailing into a storm or sailing out of it.”

The implications for Romney are serious and, at this late stage, possibly fatal. Republicans were confident that the race would be a referendum on Obama’s record, as was the case with most reelection campaigns: The incumbent failed to fix the economy—case closed; president fired. “It’s the ultimate negative campaign ad—the reality of the economy,” says chief Romney pollster Neil Newhouse.

Yet signs are few that the ad is working. There is scant polling evidence to suggest that Romney has persuaded voters to hold Obama more accountable and to view him as a credible and trustworthy alternative. The Republican hasn’t held a lead at or outside a single poll’s margin of error since mid-February, and he has trailed Obama by an average of 4.6 points (the very edge of the margin of error) in 18 polls taken since the end of the Democratic convention. Romney’s supporters like to paint this election as similar to 1980, when challenger Ronald Reagan thumped a malaise-ridden Jimmy Carter. But Carter led Reagan in only four of the last 27 polls taken before Election Day and never by more than the margin of error.

One explanation may be that voters started growing more optimistic about the Obama economy even before Romney locked down the nomination in April, according to Allstate/NJ polling. The December 2011 survey found that only 20 percent of adults said the country was going in the right direction; 70 percent said it was on the wrong track. In March, 30 percent said right direction, 60 percent said wrong track. By mid-September, 35 percent said right direction, while 56 percent said wrong track. Two in five survey respondents said that Obama’s policies have not significantly helped the country but are starting to move it in the right direction.