Is Economic Policy Uncertainty ‘Presidential’?

The political landscape looks bleak for President Trump. With his favorability ratings hovering around 40 percent, conventional wisdom holds that he is unlikely to be re-elected. And yet, the President may still hold a trump card: public approval of the President’s ‘handling of the economy’ is higher than his overall job approval.

New research by Rodrigo Caputo and Raymond Duch, of the Nuffield Centre for Experimental Social Sciences at the University of Oxford, examines how public opinion of presidential economic policy management is related to consumer sentiment. Using “crowd-sourced” data from several surveys, Caputo and Duch have calculated a Presidential Handling of the Economy (PHE) index–a measure of the nation’s anxiety, enthusiasm, and uncertainty about how economic policy is being managed.

In their analysis, they find that PHE is a very good predictor of future economic growth. Between 20 and 30 percent of the variation in consumer sentiment can be explained by PHE. This, in turn, impacts the strength of the U.S. economy–rising consumer confidence typically indicates greater economic growth. While consumer sentiment has not increased substantially in recent months, it has remained consistently high since Trump’s election: an average of 98 percent confidence, as opposed to 79 percent during President Obama’s tenure.

The ‘economic fundamentals’–including the unemployment rate, real wages, inflation, stock market fluctuations, and the output gap–have been looking good under President Trump. Though this is really due to a large number of factors, public opinion takes a more simplistic view. The general U.S. public sees economic policy management and outcomes as decidedly political. They associate economic policy management most with the executive branch, and specifically with the President.

As the graph below indicates, the public’s perception of President Trump’s handling of the economy compares favorably to those of both Obama and Bush. Furthermore, in the last quarter of 2018, Trump’s PHE increased by four points; according to these findings, this will translate to an increase in Consumer Sentiment of between 1.0% and 2.1%.  PHE is, on average, the highest it has been in 15 years–though nowhere near the stellar PHE performance of President Clinton. It remains to be seen if the “it’s the economy, stupid” approach will generate the same political traction for Trump.

Whether or not PHE performance will be decisive in Trump’s bid for re-election, Caputo and Duch have demonstrated that it is an essential indicator of consumer sentiment and resulting economic activity. The effect of PHE on consumer sentiment is strong, and long-lasting; one shock can significantly impact consumers’ view of long-term economic trends, potential for growth, and estimated future income. In short, public perception of presidential competency can translate to tangible  economic outcomes. When it comes to faith in a Trump economy, believing really is seeing.

Read more about this project by following this link.