We are exactly two weeks from election day in the United States. Former Vice President Joe Biden leads in the national polls, but when likely voters are polled on which candidate would handle the economy better it is more of a statistical dead heat. The economic record for Trump is difficult to separate from the current pandemic-driven recession. The simple chart below on the unemployment rate in the United States demonstrates the muddled picture. Supporters of President Trump can point to the fact that the unemployment rate pre-pandemic was at the lowest rate since 1969. Detractors of the President can rebut that unemployment levels briefly surged to Depression-era levels.
U.S. Unemployment Rate
Similarly, supporters of Joe Biden can point to the long track record of job gains during the Obama Administration. While the Obama-Biden administration presided over the bulk of the longest economic expansion in U.S. history, President Trump correctly points out that the recovery from the last downturn was slow and sluggish.
The same set of facts can be used to paint two very different narratives around the last two administration’s success in driving employment in the United States. The picture gets even more confusing when the candidates use their own “facts”! In this article, I wanted to take a long-run examination of the growth in gross domestic product (NYSEMKT:GDP) when both dominant U.S. political parties have occupied the White House.
Using the full set of data on inflation-adjusted economic growth per year from Bloomberg (EHGDUSY Index), which dates to 1930, I have listed the real economic growth per year by President. When there have been transitions of power (like 2020 potentially), economic growth is ascribed to the incumbent.
The mean at the bottom of the table geometrically links the growth rates for the two political parties. For the full dataset, the economy has experienced a 4.4% real growth rate under Democrats over 48 years and a 1.8% real growth rate under Republicans over 42 years.
An obvious criticism of this work over the full dataset would be that it punishes Republicans for the Great Depression, and rewards Democrats for the subsequent recovery and World War II-era expansion. Shrinking this dataset to 1953 with the ascension of Eisenhower, and the economy has expanded by 2.7% per annum over 38 years under Republican leadership. Post-1953, the economy has expanded by 3.4% per year over 28 years with Democrats in the White House. Excluding 1930-1952, and the annual economic growth advantage under Democrats shrinks from 2.6% per year to 0.7%. Even under this shorter time horizon, the elongated economic expansions under Clinton and Obama – large portions of the two longest expansions in U.S. history – boost the economic growth figures of Democrats.
Democrats would likely still rebut that ascribing the -2.8% contraction in 2009 to Democrats, the first year of Obama’s term, understates their growth. The Democratic party would certainly lay the blame for the 2009 contraction at the feet of the Bush 43 White House. They might also note that the historic economic contraction in 2020 under Trump is excluded from these figures given that the final chapters are still being written.
In a capitalistic society, the economy is driven by the collective decisions of millions of consumers and businesses every day. Assessing the impact of a president on economic growth is difficult; monetary policy, global growth trends, and demography all contribute to influence the outcome. Ascribing economic growth solely to one party at a point in time then is even trickier. The United States operates a balanced government, and many years of presidential leadership featured at least partial control of Congress from the minority party. A common narrative has been that the Republican party is pro-business and necessarily pro-growth. Democrats would counter that a broader economic expansion that benefits a wider swath of Americans leads to higher and more durable growth.
As I showed in Stock Market Performance by President, returns under Democrats (13% annualized) have dwarfed returns under Republicans (just over 5%) using the S&P 500 (SPY) and its predecessor indices. The only three presidents with negative stock market returns for their terms over the ninety-plus year study were Republicans – Hoover, Nixon, and George W. Bush. Looking at stock market returns by party can be even more difficult given the forward looking nature of markets extends past a president’s term and the fact that changes in the levels of earnings multiples can influence returns. The look at economic growth should be cleaner. While parties evolve over time, a challenge to long-run looks at economic growth under parties, investors should reject the hypothesis that a Democratic win would be bad for economic growth and markets. History suggests otherwise.
Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance and investment horizon.
Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.