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Economic Impact: Signs in the economy show presidential race is too close to call

With the election less than a month away, pundits are providing a variety of reasons why either presidential candidate will win in November.

What does the economy tell us about a potential winner? It seems to be telling us that the race is too close to call.

One key indicator gives Donald Trump the advantage while two other indicators tend to give Hillary Clinton the edge.

The analysis is based on three economic indicators that give us a sense of the mood of voters looking at whether the incumbent party retained or lost control of the White House over the past 16 presidential elections - from 1952-2012.

The three economic indicators are:

• Stock market performance (three months leading up to the election);

• Change in the unemployment rate (year leading up to the election); and

• Change in employment (six months leading up to the election).

For the stock market indicator, if the S&P 500 is up in the three months leading up to the election, then the incumbent party won 78 percent of the time.

But the incumbent party lost 86 percent of the time when the S&P 500 is down over the same period.

The S&P 500 is currently down 0.8 percent from the beginning of August which predicts that Trump has a slight advantage over Clinton. But we still have another month of stock market results to consider.

If the unemployment rate increases in the year leading up to the election, then the incumbent party lost 100 percent of the time. Yet the incumbent party won 67 percent of the time when the jobless rate decreases.

The jobless rate edged up to 5 percent in September after three months at 4.9 percent. But September’s rate is down from the 5.1 percent rate in September 2015 but it is unchanged from October and November 2015 figures. That gives Clinton a slight edge over Trump. But one more jobless report is slated to be released before the election.

On the employment indicator, the incumbent party lost 100 percent of the time when the number of jobs created fell over the six months leading up to the election. But the party’s candidate won 68 percent of the time when employment rose over the same period.

Employers have added about 850,000 jobs since May 2016, which gives the advantage to Clinton.

Using historical view of changes in the stock market, unemployment rate, and employment as a predictor of the election is a simple approach.

Even using more complex models such as the Vote-Share Model created by Ray Fair at Yale University or the Political Economy model by Michael Lewis-Beck of the University of Iowa and Charles Tien of Hunter College, the presidential outcomes differ by narrow margins. 

The Fair Model—which is based on broad measures of growth captured in GDP—predicts a Trump victory, while the Political Economy Model—which is based on economic growth as well as Gallup’s Presidential Approval—suggests a Clinton victory.

With no clear winner based on the economy or the most recent polls, it looks like it will be a long election night.

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