The Economy on Election Day: Worse

Politicians often like to ask voters if they feel better off today than at some carefully chosen point in the past. If Barack Obama or John McCain asks that question on November 4, most Americans will probably answer no. And it won't matter what point in recent years they're comparing it to.

Economic predictions always come with caveats, because nobody completely understands how consumers behave or markets react. But most economists agree that the next several months are shaping up as one of the gloomiest stretches in years. Here's how key parts of the economy will probably look when voters go to the polls on November 4:

A recession will seem imminent. It may already be underway, in fact, although by Election Day the candidates still won't be able to say definitively whether we're in a recession. By the conventional measure of a recession—two consecutive quarters of negative economic growth—the economy, believe it or not, is doing OK. GDP growth in the second quarter was a surprisingly healthy 2.8 percent. Economists expect much weaker numbers when third-quarter figures come out on October 30.

Regardless of what those numbers show, it's obvious that a lot is going wrong, and consumers feel downbeat. The $700 billion financial bailout plan targets huge problems that many Americans don't understand, and it doesn't seem to be working anyway—the stock markets plunged by a stunning 4 percent on the first trading day after it was approved. More bank failures will probably occur over the next month. And jobs are getting more scarce. Whether or not we're in a bona fide recession by November 4, it will sure feel like it.

The unemployment rate will still be 6.1 percent on Election Day, since the next set of numbers doesn't come out until November 7. But expect the news about jobs to get steadily worse. The latest projections from the Conference Board suggest the unemployment rate could rise above 7 percent by the middle of 2009. As hiring weakens, workers who are still employed tend to get smaller raises and therefore spend less, which will deepen a downturn.

The housing market still has farther to go before it bottoms out, and the Wall Street bailout bill won't change that. Nationwide, home values have fallen by about 18 percent since peaking in 2006, and they may have to fall 10 or 15 percent more before the market stabilizes. A recent report by the Milken Institute suggests housing prices should finally hit a floor sometime next year. Until we get there, however, household wealth will keep falling, which means consumers will be even gloomier on Election Day—and more reluctant to spend.

Financial shocks will probably continue to rattle investors. Problems in Europe seem to be trailing right behind those in the United States, dragging down the stock markets worldwide. Some experts predict that as many as 1,000 banks could fail over the next year or two. By Election Day, other household names—perhaps a couple of big insurers—could join the list of Once Unthinkable Failures.

The stock markets will continue to induce nausea, although it's very hard to predict whether stocks will plunge farther or rebound by November 4. Many market watchers are stunned at how far they've fallen already—yet reluctant to predict a rally, given how manic the markets have been since the Great Unwind began in September. To recover ground lost just since September 1, the markets would have to rise about 15 percent by Election Day. Recovering all the losses for the year would take a 25 percent surge. That seems unlikely given that so many other trends are negative.

Consumer confidence, already glum, will probably dip further by November 4. The numbers released by the Conference Board at the end of September had ticked up a little from readings over the summer, but the survey was taken before the market mayhem that dominated the last week of September. It stands to reason that the next batch of numbers, due at the end of October, will be much lower and that consumers may be downright depressed when they pull the lever on Election Day.

Inflation may be the only boogeyman consumers don't have to worry about. Falling prices for homes, oil, steel, and other basic commodities will help keep overall inflation low, making it a nonissue on Election Day. But there will be plenty of other things on voters' minds.