Americans’ Economic Confidence Is Returning. Will Biden Benefit?

Low approval ratings and rock-bottom consumer confidence figures have dogged President Biden for months now, a worrying sign for the White House as the country enters a presidential election year. But recent data suggests the tide is beginning to turn.

Americans are feeling more confident about the economy than they have in years, by some measures. They increasingly expect inflation to continue its descent, preliminary data indicates, and they think interest rates will soon moderate.

Returning optimism, if it persists, could bolster Mr. Biden’s chances as he pushes for re-election — and spell trouble for former President Donald J. Trump, who is the front-runner for the Republican nomination and has been blasting the Democratic incumbent’s economic record.

But political scientists, consumer sentiment experts and economists alike said it was too early for Democrats to take a victory lap around the latest economic data and confidence figures. Plenty of economic risks remain that could derail the apparent progress. In fact, models that try to predict election outcomes based on economic data currently point to a tossup come November.

“We’re still very early in the election cycle, from the perspective of economic factors,” said Joanne Hsu, who heads one of the most frequently cited sentiment indexes as director of consumer surveys at the University of Michigan. “A lot can happen.”

The University of Michigan’s preliminary survey for January showed an unexpected surge in consumer sentiment: The index climbed to its highest level since July 2021, before inflation surged. While the confidence measure could be revised — and is still slightly below its long-run trend — it has been recovering quickly across age, income, education and geographic groups over the past two months.

Recovering confidence could help Mr. Biden, said Neil Dutta, an economist at Renaissance Macro, especially if consumer sentiment continues to pick up this year as he expects.

If sentiment simply hovered at today’s levels, he said the simple historical relationship between consumer confidence readings and incumbent vote share would give Mr. Biden about 49 percent of the vote. But the job market is strong, gas prices are moderate and the stock market just hit a new record, all of which could drive further improvement.

Ray Fair, an economist at Yale, has for decades produced the most closely followed model of how the economy feeds into election outcomes. His model uses hard economic data — growth and inflation — to predict votes. Its latest update suggested that Democrats face a 50-50 chance of winning the White House in November, and similar odds in the House.

Why is the race predicted to be so close under this model at a time when economic growth is solid? It boils down to inflation. Voters tend to have long memories when it comes to price increases, Mr. Fair said. They think about how much prices have increased over the course of a president’s tenure, not just the latest inflation reading.

That means that while prices have climbed at what is historically a fairly normal pace over the past six months, voters are likely to remember 2022 and late 2021, when they were jumping rapidly.

“Voters look back further than that — the fact that the price level is higher than when Biden took office is what voters are picking up,” Mr. Fair said.

That said, two big surprises to Mr. Fair’s model came in 2016 and 2020, when Mr. Trump performed less well than would have been predicted based on the state of the economy alone. So it is possible that if such a drag repeats — if there is what Mr. Fair called a “negative Trump residual” — it will help Mr. Biden collect a bigger vote share even with higher prices. (But there are too few data points to test that possibility, Mr. Fair notes on his site.)

There are also a lot of uncertainties about how consumer confidence and the economy in general will feed into election outcomes this time around. There’s no question that what is happening with the economy will matter, said Michael Lewis-Beck, a political scientist at the University of Iowa.

“The role of the economy is about as fundamental as it gets: It’s like the rivers flowing to the sea,” he said.

But Mr. Lewis-Beck pointed out that other factors — like the sense of isolation that has dogged many people since the coronavirus and the fact that Mr. Trump is a former president who may be seen by voters as a “quasi-incumbent” — could muddy how closely economic data and election results track one another.

Still, what happens with the economy over the next six months is likely to influence how Americans feel as voters move toward the polls later this year.

If the economy slows, that could be bad for the White House. Months of higher Federal Reserve interest rates could begin to weigh on growth, for instance, or geopolitical turmoil in the Middle East could push up gas prices.

But most economists expect the Fed to begin cutting interest rates and for the economy to cool gradually in 2024. Forecasters in a Bloomberg survey expect unemployment to rise by about half a percentage point by the end of the year, for inflation to continue to slow, and for economic growth to moderate but remain positive.

That mildly hopeful outlook may explain why Mr. Biden’s administration is now talking up the improving consumer sentiment data — which has long seemed to lag improvement in the real economy. Mr. Biden noted the latest jump during a speech on Friday and said that “we’ve got more to do,” as he also highlighted recent economic progress.

“People are looking at all of these things,” Mr. Lewis-Beck said. If Mr. Biden wants to convince voters, he “should stay on message, and I think it will eventually get through.”