Corporate Earnings Forecasting Obama Victory

The current U.S. presidential election has seen both candidates locked in a fairly tight battle with polls showing neither able to garner much more than 45% support on a week to week basis. However, in upcoming polls, it is likely that the Obama campaign will receive a boost from its recent convention – as it is customary for a party to get a shot in the arm in the polls of about 5-9%. (In 1992, Bill Clinton received a 16% boost.) This year’s election will set a record for campaign spending as each side tries to convince voters who has the best policies to fix the economy and put Americans back to work.

When President Obama made his acceptance speech earlier at last week’s Democratic Party Convention, it is likely that he was already debriefed on the August jobs number as it is customary for presidents to see this sort of data in advance of its release. The numbers were not great. They showed that only 96000 jobs were created while the data for the previous month was revised lower. Job creation for 2012 is averaging just under 140,000 per month while it was about 153,000 per month in 2011. The June – August period is only averaging 100,000 jobs. Furthermore, over one third of the jobs created in August were in lower paying categories such as restaurants and hotels. Importantly — and going surprisingly unmentioned — is the fact that manufacturing data has been signalling caution for some months.

On the surface, the employment data does not look as bad as the details suggest as the unemployment rate clocked in at 8.1% versus the prior 8.3%. But this is only due to the fact that almost 370,000 Americans dropped out of the labor force (i.e. they gave up looking for work and therefore are not counted in the labor force). For the economy to hit its full potential, jobs must become more plentiful otherwise an increasing number of individuals will be faced with atrophied skillsets.

Some partisans on both sides have claimed that “this is the most important election of our time.” In some ways it is because of the jobs problem – or more specifically, the lack of them. On the positive side, there are undercurrents of optimism in the US employment picture: the rebound in auto industry jobs, the reigning in of health care costs, improving real estate and construction, and a renaissance of U.S. manufacturing.




The question that has become standard in presidential election campaigns is Ronald Reagan’s 1980 question “Are you better off than you were four years ago?” Usually that is an easy question to answer. This time it is a little more difficult. The economy is no longer in freefall, jobs are being added not lost, and the economy is growing – not shrinking. The only trouble is that it is not getting better fast enough.

Looking at the stock market, the story of corporate American is strikingly different. Balance sheets are flush with cash, debt is being serviced relatively easily and corporate profits as a percent of GDP are amongst the highest on record. As the chart shows, if real corporate earnings are growing over the last two years of a president’s first term, re-election has been a good bet. In blue are the presidents who served more than one term in office and the red bars show one term presidents. Based on this data, the odds have favored an incumbent president having to vacate 1600 Pennsylvania Avenue when corporate earnings turn negative.

While President Obama has presided over an environment of decent corporate profit growth, this has not translated down to Main Street. In a perfect world, the positive environment on Wall Street should go hand in hand with a vibrant and growing economy.  The economy would have to begin growing at over 2% annually to produce enough jobs to absorb new entrants into the labor force and provide alternatives for the displaced workers that are part of a normal economy.

While there is always the chance that Barack Obama will be the exception to this historical pattern, the corporate profits indicator says that he will be re-elected again.

Pacifica Partners - Capital Management
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