The economic outlook is not expected to improve much, if at all, heading into the election. Growth is likely to remain below 2 percent in the third quarter, while the unemployment rate will stay above 8 percent. Concern is growing that Congress won’t act to avert the fiscal cliff of tax increases and spending cuts set to take effect in January, which the Congressional Budget Office has predicted would lead the United States into a recession.
The crisis in the euro zone is worsening, and the threat to the global economy is escalating. Government bond yields of Italy and Spain have peaked vis-a-vis those of Germany, fueling speculation about the economic and political sustainability of the euro as a common currency. Partly because of continued uncertainty in Europe, the International Monetary Fund has revised growth projections for China and India downward for this year and next. In turn, the outlook for U.S. exports to Europe and the emerging economies is deteriorating. Above all, the dampening effect of the European crisis is likely to delay investment and hiring decisions, further slowing the anemic recovery we have seen so far in the United States.
What does this all mean for the U.S. presidential election?
It’s important to remember that this is not a national campaign but 50 simultaneous state elections — and the outcome for 40 of them can be predicted with some accuracy. This year, election observers shouldn’t obsess over national unemployment figures. The key is to watch economic and political indicators in the 10 states that are closely contested: Ohio, Florida, Pennsylvania, Nevada, Colorado, Iowa, Virginia, North Carolina, New Hampshire and Wisconsin.
Many of the swing states are doing better economically than the country as a whole is. Ohio, for example, has a 7.2 percent unemployment rate, more than a point below the national average. And recent polls in several swing states show Obama running ahead of his national polling margins.
The biggest threat to Obama is a late surge for Mitt Romney, which could be precipitated by a collapse in the euro zone and further weakening of the domestic economy. In a bad economy, late-deciding voters often break for a credible challenger, so Obama’s team needs to establish a large lead now, before any further economic weakening. Presidents who fail to set the tone early usually end up losing, as Presidents Jimmy Carter and George H.W. Bush did.
So, yes, “it’s the economy, stupid.” But this year, it’s an economy that stretches from local indicators in just 10 key states to the threat of national and perhaps global economic weakening. Obama needs to hope that the swing-state economies at least stay stable and that any bad news from abroad waits until after Nov. 6.