Jul 1, 2022 - Economy

The economic trend that could hurt Democrats most in the midterms

U.S. real personal disposable income
Data: FactSet, Bureau of Economic Analysis; Chart: Jacque Schrag/Axios

A key indicator of the financial health of Americans has declined steadily for the last 14 months, in yet another ominous sign from the economy that Democrats will face tough midterm elections.

Driving the news: Real per capita disposable income — the money consumers can spend after accounting for taxes and inflation — is dropping sharply, according to government data released Thursday.

Why it matters: Pollsters, political scientists and economists consider this measure of the household buying power to be, perhaps, the single best economic predictor of election results. Rising real incomes tend to predict rising vote share for the president's party during the midterm elections, and vice versa.

By the numbers: Real — meaning inflation-adjusted — per capita disposable income fell to $45,490 in May, down 3.6% from the previous year.

  • In fact, since March 2021 — when the last round of stimulus checks artificially puffed personal disposable income to a record high level of nearly $57,000 — real incomes are down 20%.

The big picture: In a recent note attempting to ballpark the outlook for Democrats in the November elections, Goldman Sachs analysts found that "real disposable income is the strongest predictor of election results among the economic variables we consider."

  • "It is also particularly relevant in the current election cycle, as elevated inflation and a decline in fiscal transfers have weighed it down compared with a year ago," they wrote, adding that the direction of income data suggests "a large loss" is in store for Democrats in the elections.

Longtime Democratic pollster Mark Mellman said on the political podcast "Hacks on Tap" earlier this year that "people look at all kinds of economic indicators unemployment, GDP, growth. The one that is most important politically that people never look at, is change in real disposable income."

  • Mellman added: "That's the most important politically, because it measures the impact of inflation in wage growth and unemployment, all those things into one. It has to do with what people can buy when they reach into their wallet."

Yes, but: This isn't a foolproof predictor of election outcomes. Goldman analysts, for example, note that other key economic indicators — such as the still-low unemployment rate — historically would suggest that the Democrats should fare well.

  • But the message being sent by the data on disposable income is largely consistent with noneconomic data that bode ill for the Democrats — such as the president's sagging approval ratings and voter preference for generic Republicans over Democrats in recent polling.

The bottom line: Unless something drastic happens — and the recent Supreme Court decisions and Jan. 6 hearings could qualify — the Democratic party could be up against a whopper of a midterm wave.

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