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Whose Economy Will It Be in 2016?

The ugly midterm campaign season provided one area of common ground: Americans and their candidates were almost universal in their disdain for the country’s economic performance over the past six years. In exit polls on Election Day, 78% of voters said they were worried about the economy. Democrats learned the hard way this election that if you have to give speeches to convince people that things are going well, then things aren’t going well. The funny thing, though, is that nearly all the data shows that the economy is, in fact, doing well, even while the Democrats didn’t.

Tuesday’s results showed that, for the moment, the economy and public discontent have fueled the GOP. Yet slowly but surely trend lines are emerging that could very easily turn this into the Democrats’ economy—and perhaps Hillary Clinton’s—by 2016. Or not.

This year’s campaign proved the degree to which our big picture economic indicators simply fail to capture the multifaceted realities of a country with 320 million souls and nearly as many individual distinct experiences. Our economic indicators may be going up, but the mood of voters is decidedly down. As much as we rely on those indicators to frame our discussion, one-size-fits-all economic numbers simply cannot capture the disparity of experiences that see rural America struggling and a metropolis such as Detroit imploding (and perhaps reinventing itself) while other communities ranging from Silicon Valley to Nebraska are enjoying multi-year boom times.

Still, how that “big picture” economic sentiment develops over the next two years will, in ways big and small, shape the narrative of the 2016 presidential race and leaves a big question looming: Will the Democratic nominee, whether it’s Hillary Clinton or someone else, be boosted or punished by what is widely perceived as Barack Obama’s economy?

Even as President Obama made an effort this fall to defend the economic record of his administration, few seem persuaded. Gallup’s weekly poll of economic conditions continues to show that more than half of those surveyed reject the notion that economic trends are improving. In fact, according to Rasmussen, 44% of Americans still think that we are in a recession. In state after state, race after race, candidates ran on a promise that they would do everything possible to reverse the decline of the American middle class, address the problem of stagnant wages, and above all, depart from economic policies that enjoy bipartisan scorn for failing the middle class. And in state after state, Republicans who made that argument and blamed Obama reaped electoral victory.

Yet there is an almost inverse relationship between the political narrative and the actual numbers. Almost every single piece of data that we collectively use to gauge “the economy” has pointed consistently and steadily up, not just recently, but steadily over recent years. Unemployment is at its lowest level—statistically—in many years. GDP growth may be unexciting, but it has been steady and consistent at about 2.5% annually. Inflation is—statistically speaking—non-existent. Housing prices have recovered much of their 2008-2009 collapse.

None of this has dented public anger, and the primary explanation is that wage growth has been unimpressive. The ancillary explanation is that the story of unimpressive wage growth has been loudly and consistently told, along with an emphasis on underemployment, long-term unemployment and millions of workers unable to find meaningful jobs.

The question for the next two years heading into the presidential election is how long will public sentiment remain grimly negative about all things economy?

If a majority of Americans continue to view the economic landscape through dark-tinted glasses, it hardly bodes well for a Hillary Clinton or anyone associated with what so many deem “failed” policies. The Republican narrative is that big government policies epitomized by Obamacare have crippled the middle class, to which Democrats respond somewhat defensively that things are improving under their watch and that better policies are needed to allow those gains to be more widely shared.

They have a tough sell. No one who is anxious about the morphing employment trends or changing wage landscape is likely to be swayed by a good GDP report, or by a politician or pundit telling them that “the economy” is doing better. If a plurality of voters are still convinced two years from now that “the economy” is getting worse, an entire smorgasbord of economic indicators aren’t going to convince them otherwise. After all, if you’re staring down looming bills and fears about your retirement savings, how comforting is it to know that the nation’s “total seasonally-adjusted nonfarm payroll employment” has risen steadily over the past 52 months?

This yawning gap between what our numbers say and what most people feel is both extreme and increasingly unprecedented. For much of the 20th century, when the lattice of economic numbers painted a positive picture, that was reflected in how most people viewed their present and future—not because the numbers shaped their experience but rather because the numbers represented it.

The crisis of 2008-2009 was sufficiently jarring that it’s understandable that it will take a long time before a majority of the populace feels secure about their economic future. While many people still believe the economy is headed south, fewer people believe it than did last year or the year before or the year before. The gap may still yawn wide between economic perception and statistical reality but it is slowly narrowing.

But will the lines cross before 2016? Will more people at the end of next year think that the American system is thriving? And what will that do to the election narrative? How does that affect the primaries in the first half of the year, and the general election in November? What happens if those lines cross sometime between when people vote for the nominees and when they vote in the general election?

By about this time next year, the various contenders for the presidency will begin to develop a story about the economy. Yes, other issues will matter, as they do now. But unless Ebola becomes a domestic contagion, or ISIL overruns Iraq, or there is some dramatic domestic terrorism incident, national security is likely to be trumped by the economy. Social issues also appear to loom less large on the national stage, simmering tensions over race, reproductive rights and the definition of marriage notwithstanding. That leaves the economy.

It wasn’t always so. Bill Clinton may famously have won on the slogan, “It’s the economy, stupid!” but that was remarkable in part because it departed from the elections since World War II, few of which hinged in any material way on “the economy.” Even Jimmy Carter’s defeat in 1980 to Ronald Reagan, when the U.S. was mired in stagflation and malaise, rested as much on the feeling that America was slipping in the Cold War and was being humiliated by a hostage-taking, embassy-seizing Iran.

The problem for today’s political cycles is that for all the sophistication of vote-getting and message-targeting, campaign narratives are not as fluid, flexible and dynamic as the world itself. In 1991, George H.W. Bush and his team approached the 1992 election with a sense of confidence born of high poll numbers for the victory in the first Gulf War, only to be felled by a rapidly deteriorating economy. What appeared to be a very close race hinging on character and foreign policy in 2008 turned into a fairly easy Obama victory in the face of a crumbling financial system.

Given the tenor of the midterms, it’s likely that most candidates will start gaming out 2016 with the presumption that current economic trends of decent albeit sluggish GDP growth and lousy wage growth will continue, which will mean little abatement of today’s anger and discontent. That is certainly possible, especially given that large companies can produce output that helps boost GDP without needing to hire many workers or invest much capital. Such is the nature of the efficiency revolution driven by technology, and the wage revolution driven by globalization. If so, then the Republicans could have a starting advantage hammering the message that the Obama administration—even with an oppositional or inert Congress after 2010—has failed the middle class and added layers of government bureaucracy that have kept us back.

Resting on that argument, however, is probably a mistake. Economic systems can and do shift rapidly. To whit: there are signs in the past few months that wages are indeed growing. Consumer confidence, not really a good gauge of how people behave but a decent snapshot of how they feel, has been climbing to highs not seen since before the financial crisis. While the decline of manufacturing jobs in America has been a multi-decade phenomenon, with only about 12 million manufacturing jobs left, the power of that story is waning. Bluntly, we have already lost most of those jobs, and while that base may continue to slowly erode, it will be challenging to use that decline as political fuel. At some point in the 20th century, you could no longer whip up electoral passions by pointing to the plight of farmers—there were simply too few left, and agribusiness was producing more than enough food.

And while it’s true that numbers such as the unemployment rate fail to account for the millions on disability payments and the millions more who have simply dropped of the workforce, the numbers also don’t quite capture potent trends such as self-employment and entrepreneurial activity. It’s easy enough to dismiss those trends as marginal, but something is fueling this stealth recovery and it isn’t just retailers hiring part-timers or fast-food restaurants opening more franchises.

If, then, the economic picture a year from now continues to brighten statistically, it is likely that attitudes will also start to shift, not towards bushy-tailed optimism but away at least from muttering pessimism and simmering rage. There will be plenty of that, no doubt, but not enough to carry a campaign.

It’s also possible, of course, that matters economic unravel, that China really does implode and brings the world economy down with it, or that the structural weaknesses of the global financial system are unable to adjust to a new Euro crisis, or a debt bubble somewhere. But that too would upset whatever narrative the contesting campaigns set in place and set the stage for a similar scenario to 2008 when the year began with the assumption that the election would be referendum on the national security legacy of George W. Bush and instead became an election about who could best save the middle class from a global financial implosion.

What’s most important here is a version of “Stein’s law.” Named (perhaps erroneously) after economist Herbert Stein, it goes something like this: “If something cannot go one forever, it will stop.” Republicans may be confident that two years from now a substantial portion of the electorate will be just as angry, just as struggling and just as willing to affix blame on the Democrats. Many Democrats may believe that the surest path to victory in 2016 lies in channeling that anger and anxiety toward Republicans.

But already, there are signs that this common and accepted narrative about the economy is fracturing. It is fracturing because there is no one single truth here. Unemployment is high; wages are not what people expect; but multiple regions are flourishing, as are large numbers of people. These midterms saw a high percentage of older voters and white voters, who may be encountering particularly large economic headwinds. But in presidential election years, others will vote whose experiences and perspectives are less fraught and less dire. Though, of course, many Millennials—which has proven the core of the Democratic vote in 2008 and 2012—are struggling as well and despairing of the future, so the narrative of discontent may prove disturbingly resilient.

Nevertheless, looking ahead to 2016, it may not be a winning formula to run as if everything is still a mess.

That’s because absent a crisis (always possible and never truly predictable), everything won’t be. No, we won’t be revisiting the giddy (and unreasonable) optimism of the 1990s anytime soon, even if the stock market remains on a startlingly upward path. Yet the crisis atmosphere of this election cycle cannot be endlessly fed by rhetoric without enough real-world resonance.

Most likely heading into 2016 we face an overall economic picture that is just good enough to counter the collapse and crisis message, but not nearly good enough to lead to an era of good feelings. Maybe, and just maybe, that will offer an opening to someone willing finally to talk not just of two Americas, but of many Americas, some struggling mightily, some succeeding admirably, and multitudes in between. That would be a powerful message, because it would be real and true. Of that we have had precious little of late, but it may prove a winning formula for 2016.

This article originally appeared on Politico Magazine.

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Zachary Karabell
Head of Global Strategies, Envestnet, Inc., Consultant to Investment Committee*

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Author’s disclaimer: The opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities, or investment advice or a recommended course of action in any given situation. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. Information obtained from third party resources are believed to be reliable but not guaranteed. This paper may contain ‘forward-looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader.

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