Possible bad news for all the politics junkies out there: The 2008 election may be over tomorrow. Well, pretty much at least. See, tomorrow is when the Commerce Department releases its monthly retail sales numbers. Analysts will be closely monitoring the sales data for signs that the so-far indestructible consumer is finally collapsing under the quadruple whammy of falling housing prices, tighter credit, higher gas prices, and a slowing labor market.
A consumer collapse is essential to the bears' case for a sharp economic slowdown or even a recession. And if that happens, not only does it seem likely the Democrats will take the White House, but it might well be a blowout. Yale political science Prof. Ray Fair, a guy who runs a great political forecasting model, told me the following a few weeks back: If you assume the economy stays relatively healthy—a dip in the fourth quarter but gross domestic product growth close to 3 percent next year—his model is predicting a Democratic win in 2008 with 52 percent of the two-party vote. But if there's a recession, then the Democrats' share would rise to 55 percent.
But will there be a consumer-led recession? A few points on that:
1) Consumers are grumpy. Merrill Lynch economist David Rosenberg points out that over the four months to November, the University of Michigan consumer sentiment index has collapsed by 15.4 points to 75.0. "In the 30-year history of the data series, we've only seen two other times (we are not including the Katrina effect here) when consumer confidence has fallen so far so fast at this critical shopping period for retailers, and they were October 2001 and October 1990—both times the economy was officially in recession."
2) But consumer-led recessions are rare. As Ed Yardeni of Oak Associates notes, consumer spending has detracted from economic growth in just 14 quarters since 1953. What does cause recessions? Yardeni explains:
In the past, a big contributor to economy-wide recessions was residential investment, which has already been a big negative for seven quarters straight through Q3. It may have three more quarters left on the downside. Another big negative during recessions was the change in inventories from accumulation to liquidation, but that's diminished since the late 1980s with better just-in-time controls. Capital spending can also be a big downer, but that's usually after it was a big upper, which hasn't been the case this time.
But as economic Bruce Kasman of JPMorgan explains, corporate America—except for financials—is still in pretty good shape:
If the expansion is to be in jeopardy, it will come through a broad-based corporate retrenchment. A significant pullback in hiring and the work week would quickly undermine labor income and household spending. And the effect likely would be magnified by a fall in equity prices. But the favorable position of the corporate sector argues against such a shift. Inventories are lean, foreign demand growth remains solid, and while profits may have peaked, margins are elevated.
3) Consumers are employed, with more money to spend. The bulls' case from First Trust Advisers: "Our analysis shows that mortgage re-sets will depress consumption growth by no more than 0.2 percentage points per year. Meanwhile, wages and salaries have grown 2 percentage points faster than GDP in the past year. In addition, resources that were going into housing have shifted and are now showing up in other areas of the economy.... This is still the Energizer Bunny economy; it keeps going and going and going."
And what if the retail sales report and subsequent data show the consumer is still healthy and spending? Then you have to start believing that not only will the economy only brake a bit in the fourth quarter, but it will then begin to accelerate in 2008. And in that case, the presidential race is anybody's game.