Will the economy decide the election?

How will today’s favorable economic outlook affect next year’s election? A couple of years ago, many economic forecasts saw a high risk of renewed recession in the U.S. economy. If Congress had forced savage fiscal restraint on the still-budding expansion, that could have happened; but it was otherwise a much too pessimistic assessment. Today most forecasts see an expansion strong enough to get the Fed leaning against the wind and boosting its policy interest rate. That seems a reasonable outlook. At this point, the main uncertainty is not about whether Congress will do fiscal damage but about an expanded terrorist threat. More on that below.

Most political pundits see a good economy as helping the incumbent president’s party. But “It’s the economy, stupid” is not a fool-proof predictor. In part this is because a healthy economy is often better for some people than others. If we let the data choose, a better predictor comes from the idea that a party that has been in power for a while begins to look stale and out of good ideas.

Incumbency is generally helpful in politics. In the post war period, sitting presidents running for reelection have won eight times and lost three times. But the outcomes of elections after a party has held the White House for two terms are strikingly different. After Harry Truman’s two terms, the Republican Dwight Eisenhower won. After Eisenhower’s two terms, Jack Kennedy won. After the Kennedy-Johnson two terms, Richard Nixon won. After the Nixon-Ford pair of terms, Jimmy Carter won. After Ronald Reagan’s two terms, George Bush kept the White House Republican for another four years. After Clinton’s two terms, George Bush II won. And after his two terms, Barack Obama won. So after holding the White House for two terms, the incumbent party has lost six times and won once. This record cannot please Hillary Clinton.

But if the evidence supports the idea that voters want change after eight years, they presumably want change other things being equal. And other things were hardly equal across all those election years. The economy was between pretty bad and terrible when the incumbent’s party lost in 1960, 1980, 1992 and 2008, and it was very good in 1988, the one time the two-term incumbent party was given a third term. These data support the idea that the economy matters and suggest it may have been decisive in some elections. The current forecast of continued expansion without inflation cannot please the Republican candidates.

But will the economy decide this this election? This time may be special. ISIS could become the elephant in the room that is more important to voters than the usual desire for change or the satisfaction with the present economy. A parallel would be the 1968 election when the Vietnam War and the protest movement dominated the election. Russia and France have both been targeted and all countries appear more vulnerable than they did a few weeks ago. Dealing with ISIS was always going to matter. But Paris has stepped up the urgency and spreading atrocities, particularly any with U.S. targets, would make destroying ISIS the great challenge for any U.S. president. Then the election would go to the candidate that seems best able to meet it.

Editor’s note: This op-ed also appeared in Real Clear Markets on November 24, 2015.