4 economic outcomes that could cost Biden the election, top economist says

“It’s the economy, stupid.” That was James Carville’s immortal phrase to explain Bill Clinton’s surprising victory in 1992, ending Democrats’ 12-year exile from national office. It’s held true in presidential elections ever since. But the “vibecession” that Joe Biden can’t seem to shake off, heading into his likely rematch with Donald Trump, suggests that despite all the positive data he keeps touting as a sign of his success, voters feel as though the economy is floundering.

The economy has improved since the lingering hardships of the pandemic. Biden has managed to lower inflation from 9% in July 2022, while keeping the unemployment rate around a 54-year low. That delicate balancing act seemed to defy expectations, as economists predicted that unemployment would have to rise for inflation to fall. EY’s chief economist Gregory Daco has referred to Biden’s economy as the “holy grail of non-inflationary growth.”

Come November, the strength of the economy will take center stage in the presidential election. In an interview with Fortune, Mark Zandi, chief economist at Moody’s Analytics, explained that his team's model predicts Biden will win reelection if the economy continues to improve because.

“It's about the change in the economy, as much as, if not more than, the level of things,” he said.

Zandi has been bullish on the current state of the economy during Biden’s tenure in office. His forecasts have been repeatedly cited by Biden’s White House as proving the strength of their “Bidenomics” policies, although he insists he’s not a partisan figure. House Republicans, meanwhile, call him “Biden’s favorite economic forecaster.”

That recalls another famous campaign slogan, pegged to economics: Ronald Reagan's clinching question in 1980: "Are you better off than you were four years ago?"

The importance of perceptions

Zandi and his Moody’s team found that voters are starting to believe the economy is improving, according to an analysis released in February. It accords with the sudden uptick in consumer sentiment surveys that prompted another prominent economist, Arindrajit Dube, of the University of Massachusetts Amherst, to post on X: “The vibes are catching up with the hard data on the economy, and the Great Vibecession is looking increasingly … transitory.”

That’s a notable change from 2023 when economists were stumped by the electorate’s pessimism despite unmistakably positive data. Now, Americans’ perception of the economy seems to be more aligned with the underlying hard data that points to a recovery. According to Moody’s analysis, which assumes a rematch of 2020, Biden will win if the economy continues on its current trajectory.

However, any changes to the promising momentum of the U.S. economy along four key metrics would mean Biden loses the election, according to Zandi. Changes for the worse would affect voters’ perceptions about the country’s economy causing them to lose faith in Biden as the sitting president.

“When people think about the economy, they're thinking, ‘How well am I doing today compared to some point in the past?’” Zandi says.

Much of Biden’s economic record lies with several landmark pieces of legislation: the Inflation Reduction Act and the CHIPS and Science Act. Meanwhile, Trump’s economic record includes a massive package of tax cuts and the ignominious distinction of being the first president since Herbert Hoover to leave office with fewer jobs than when he entered. In recent months, Trump has also taken to crediting himself with the ongoing stock market rally on the grounds that investors are eagerly awaiting his imminent reelection.

In its analysis Moody’s also cites several political factors such as Biden's approval ratings, the presence of third-party candidates, and most importantly turnout, that would alter the course of the presidential race. But if those things play out as Moody’s predicts the presidential race will hinge on just a few percentage points only four economic factors.

1 - It's almost impossible to substitute gas when prices go up

For Zandi and company, “There's nothing that will do more damage, more quickly to the economy, and to Biden's reelection bid than if gasoline prices jump,” he says.

That’s because gas prices play an outsize role in determining voters’ perception of the economy. “We chose gasoline prices because they are the most conspicuous price, we see them every day,” Moody’s director of economic research Brendan La Cerda said during a webinar about the analysis last month. “They inform perceptions of overall inflation—accurate or not.”

If gas prices rise more than 2% year-over-year on a quarterly average price by the third quarter of 2024, when the election is held, Biden could lose, Moody’s projects. Current prices for regular gas are $3.15 but if they rose to more than $3.94 by election day it would be enough to win Trump the election.

Gas prices can be such a notable barometer of both consumer confidence and spending power is that it is almost impossible to substitute. There is no alternative for filling up one’s gas tank. People must simply absorb the cost. Cutting back is less of an option than it is even compared to other essentials like groceries or heating bills. “It's very hard to substitute away from gasoline, people tend to consume a fixed amount of gasoline on a regular basis,” according to La Cerda.

Zandi adds that the closer possible price increases happen to election day, the greater their influence could be.

2 - ‘There’s lots of emotions tied into homeownership’ 

If gas prices are an everyday purchase that is charged with added meaning, then buying a home is the once- or twice-a-lifetime equivalent. Moody’s model uses 30-year mortgage rates instead of home appreciation rates because they serve as a better proxy for affordability, which is a more central issue this election cycle, according to La Cerda.

“Buying a house is a major life milestone, and there's a lot of emotions tied into homeownership,” La Cerda said during the webinar.

Moody’s estimates that by election day, the 30-year fixed mortgage rate will be around 6.7%, their current level after coming down from a more than 20-year high in September, when they stood at nearly 8%. If they surge back upwards, specifically to 8.65%, Moody’s projects, then Biden would lose the election. That seems unlikely at this point given that the surge in 2023 was correlated with the Fed raising interest rates, and the Federal Reserve seems unlikely to do so again.

Homeownership carries deeper meanings for first-time homebuyers, Zandi says.

Millennials, now advancing into middle age and peak homebuying and housing formation age along with it, are especially obsessed with homeownership and changes to the housing market, as they fear being priced out of the market forever. Many of them faced the one-two punch of the Great Financial Crisis and the soaring home prices the remote work boom of the pandemic brough on. As the largest generation in the country, millennials’ anxieties about homeownership could have an even more decisive role come November should rates rise—and Biden’s Democratic base skews younger and more millennial.

Moody’s expects mortgage rates to continue to fall over the course of the year. In large part because it expects four interest rate cuts from the Federal Reserve by November. Last week, Fed chair Jerome Powell said he plans to cut interest rates three times. Zandi says he still expects Powell will cut interest rates four times and even if he didn’t, it wouldn’t change his model. Trump, for his part, seems furious about Powell cutting rates, accusing him of trying to help Biden’s reelection, which, besides breaking the norm of central bank independence, implicitly confirms this aspect of Moody’s analysis.

3 - Real household income: is my standard of living better or worse?

As the Fed contemplates rate cuts now that its tamed inflation, Americans are still grappling with high prices, especially at the grocery store. In 2021 and 2022, when inflation raged, paychecks couldn’t keep up with the soaring costs, making people feel worse off even though their take home pay stayed the same. To account for that Moody’s wanted to understand not how much certain key goods might cost, but whether Americans have enough money in their bank accounts to buy them. To capture the effects of inflation and the labor market Zandi’s model measures real personal income, which accounts for total nominal income deflated by the core consumer price index.

“Bottom line what we're saying here is people care about the size of their paychecks, relative to the cost of living, because that determines their standard of living,” La Cerda said during the webinar.

By the third quarter of this year, Moody’s expects real disposable income to grow by around 0.7% compared to the prior year. There is a general consensus that real incomes will rise in 2024, mostly on the backs of falling inflation, which means wage growth will outpace prices. If that trend continues, “people's real incomes by election day will be meaningfully higher than when the President took office,” Zandi says.

The swing in real income needed to change the outcome of Moody’s election forecast from a Biden to a Trump win is substantial. For Trump to win the election, real household incomes would need to fall by at least 3.8% compared to the roughly 1% growth Zandi expects. Zandi’s estimate is roughly in the middle of where other analysts expect household income to grow. Goldman Sachs expects a 3% increase, according to a November analyst note. While the Conference Board forecasted flat real incomes for 2024.

By the third quarter of 2023, the latest available data, real incomes had grown 1.7% compared to the same time in 2019, according to the Treasury Department. That in and of itself was an improvement from 2021 and 2022 when Census Bureau data shows real incomes fell 2.3%.

But if the positive trends shown in 2023 continue, it will mean American’s will have seen roughly two years of real wage gains. “The improvement in real wages will have been sustained, long enough that people will forecast it will continue, which is critical to determining who they vote for,” Zandi says.

4 - Consumer confidence: perception is reality

Real income gains, mortgage rates, and gas prices are all pieces of hard data that wrapped up together can help determine the much more nebulous concept of consumer confidence. While still a valuable metric that captures perceptions of the economy, its importance in determining presidential elections is waning. The unprecedented polarization in American politics has made consumer sentiment surveys less an indication of voters’ confidence in the economy and more a litmus test of party affiliation, according to Zandi.

“Perceptions clearly matter and perceptions are colored by people's political prism,” Zandi said last month.

Nonetheless, Moody’s forecasts continued consumer confidence through for the remainder of the year, which unless it changes will favor a Biden reelection. And while perception is reality, certainly in politics, nothing will be as convincing an argument to voters as the actual state of the economy.

“The economy has to continue to perform well,” Zandi says. “Otherwise, no matter what you say, it's not going to really matter.”

This story was originally featured on Fortune.com