America’s glorious economy should help Kamala Harris

Voters are starting to notice the good news just in time for the election

Photograph: Getty Images

Oct 27th 2024 | Washington, DC

America was supposed to be in recession. When the Federal Reserve began to raise interest rates at the fastest pace since the early 1980s, few economists expected the economy to be heading into a presidential election in this state. Indeed, even a few months ago few thought things would be this good. Inflation-adjusted quarterly growth in annualised terms has averaged 2.9% since the start of 2023, above its long-term trend. On October 30th America will publish its GDP figure for this year’s third quarter. According to a usually reliable model from the Atlanta Fed, the economy probably expanded at an annualised pace of 3.3%, nearly twice as high as the median forecast in July, at the start of the quarter.

And it gets better for Kamala Harris. Not only is growth holding up well; a deceleration in inflation means that the benefits are becoming more tangible for ordinary Americans, showing up as real increases in spending power. That may be why consumers, long disgruntled about the state of the economy, are at last beginning to cheer up. By itself this will not be decisive: voters still think a Trump presidency would be better for them financially. Yet the strong economy will provide a welcome tailwind for Ms Harris in the final ten days of her presidential campaign.

Although GDP is, by definition, an extremely broad measure, and one that may be too abstract for voters, it relates to more concrete factors with which they are intimately familiar, from wages to prices. In building a model to forecast the election, The Economist has identified some economic indicators that may contribute to the outcome. Five in particular bear close examination as America heads for its vote on November 5th: real (inflation adjusted) income, real consumption, unemployment, inflation and consumer sentiment. Their recent readings are all positive for Ms Harris.

Start with personal income. In real terms, after-tax income per person has risen at a year-on-year pace of roughly 2.6% in recent months. That is basically the same as the pre-pandemic average, with one notable difference: even faster growth last year means that income levels are higher than they would have been if their pre-pandemic trend had continued. Just before covid-19 arrived, estimates by the Congressional Budget Office, a non-partisan scorekeeper, suggested that real incomes per person would be about $51,000 now. Instead, they have reached a little more than $52,000.

Rising incomes have encouraged a rebound in consumption. In 2022 and 2023, as Americans grappled with the effects of high inflation, their spending in shops, restaurants and entertainment venues slowed in real terms. As inflation has ebbed their spending has picked up again. In the past six months real consumption has increased by 2.8% compared with the same period a year earlier, the fastest increase in more than two years—a sign of confidence in the health of the economy.

For some time analysts were concerned that this meant Americans were living beyond their means and racking up uncomfortable credit-card debts. But a sizeable revision to income figures last month revealed that the personal savings rate is now about 5%, more than twice as high as in early 2022. The implication is that robust consumer spending is more sustainable than previously thought.

Underlying all of this strength is a solid labour market and a deceleration in inflation. Five weeks ago, when the Federal Reserve started to cut interest rates, there was rising concern about weakness in the labour market. Although this concern has not fully abated, the recent run of data has been reassuring. The unemployment rate has ticked down for two straight months, dipping to 4.1% in September. Job growth has surprised on the upside. And the labour-force-participation rate for workers between 25 and 54, in the prime of their careers, is nearly 84%, just shy of the record high. At the same time, inflation—far and away the main source of discontent about President Joe Biden’s handling of the economy—has continued to recede. It is not far from the Fed’s target of 2%.

The “misery index”, which adds the unemployment rate and the annual inflation rate, is a straightforward way of looking at how the economy is affecting ordinary people. In September the index fell to 6.5%, its lowest since early 2020, when Donald Trump was still in the Oval Office.

Are people noticing these improvements? One of the biggest data puzzles of recent times remains as pertinent as ever: despite the economy’s strength, sentiment has been persistently glum. At the start of this year that at last seemed to be changing, with a closely watched survey, conducted by the University of Michigan, turning sharply higher. In recent months it has shifted lower again. It now appears to be the most important economic indicator working against Ms Harris.

On closer examination, however, sentiment may not be so bleak. A shift in the Michigan survey’s methodology in April, from phone to online interviews, accounts for a roughly 11% decline in the index, according to a new study by Ryan Cummings and Ernie Tedeschi, two economists who worked in Mr Biden’s White House. With the old methodology in place, the index would in fact be bouncing along near a three-year high. Meanwhile, an alternative measure of economic sentiment—an index calculated by Goldman Sachs, a bank, and based on social-media posts—is much rosier. Its upward lilt points to a clear increase in optimism in the past half year. That is a welcome development for Ms Harris. If Mr Trump wins on November 5th, it will be in spite of the state of the economy. ■