A Democrat -- no matter who that turns out to be -- remains the likely winner of the 2016 U.S. presidential election by a margin of 326 to 212 electoral votes. But new sensitivity analysis shows it would take only a slight shift in economic and political factors to flip the outcome to a Republican victory, according to the latest update of the economy-based Moody's Analytics election model.  

Updates through the October forecast cycle show an ever-closer contest shaping up. The economic variables all point toward the Democrats having a distinct advantage, but the political variables point strongly toward the Republican ticket, leaving the ultimate outcome on a razor's edge.

Predicting the Presidential Election

In spite of those numbers, details of the model results reveal an extremely close contest decided by only a handful of states. Similar to the last few election cycles, 2016 will ultimately boil down to the decisions made in Florida, Ohio, Colorado, New Hampshire and Virginia. The margin of victory for the Democrats is less than two-thirds of a percentage point in all five states, and in the past three months since the model was first updated, three of the five states have already switched columns at least once.

With the margin of victory in each of these important swing states still solidly within the margin of error, we will likely see them swing back and forth on a monthly basis running up to the election, underlining the closeness of the contest to come. Furthermore, three of the candidates for the Republican nomination enjoy favorite-son status in Ohio or Florida, potentially making the outcome of those important states even more unpredictable.

In the last month, the economic data underlying the model have weakened slightly and the forecast for gasoline prices has come up a bit, pulling the margins in each of the five swing states well below two-thirds of a percentage point. In fact, Florida and Colorado are each within 0.2 of a percentage point of swinging one way or the other. If economic data continue to come in slower than anticipated, each of these swing states could easily move into the Republican column and turn the outcome of the election.

The model's political variables have also swung slightly in favor of the challengers, as the president's approval rating edged down from the previous month's moving average. Sensitivity analysis on the model shows that a swing in the president's approval rating, holding all else equal, of as little as 4 percentage points -- which is just outside the margin of error for many presidential opinion polls -- could be enough to move the outcome of the election away from the incumbent Democrats. Given the rampant uncertainty in federal fiscal policy and various geopolitical crises brewing overseas, a turn of that magnitude in the president's approval rating, in either direction, is well within the bounds of possibility.

Given how close the 2016 election is set to become, we undertook several sensitivity analysis exercises to hypothesize what changes in the economic and political landscapes between now and Election Day could swing the outcome from a Democratic to a Republican win. These exercises truly underline the closeness of the next election. Should any additional weakness versus expectations come in the economy in the 12 months left before the election, the Democrats' edge would likely be outmatched by the Republicans' advantages in the model's political variables. Under a scenario in which the economy recovers at a slightly slower pace than expected, the election would more than likely swing to the challengers.

That scenario assumes more sluggish gains in national personal income growth and house price gains, but actually lower-than-expected gasoline prices, averaging $2.86 per gallon by Election Day. This is consistent with an economy limited by a higher-than-expected value of the U.S. dollar, slower-than-expected growth overseas, and troubled financial markets in the face of the Fed's moves to normalize interest rates over the next several years. In such an instance, the president's approval rating would need to dip by less than 1 percentage point to give Republicans a win. Given that such persistent sluggishness in the economy would more than likely result in a decreased presidential approval rating, all else equal, a scenario along these lines would push Democrats out of the White House without the U.S. falling back into recession.

Analyzing Personal Income

The Fed's Confusing Signals

Further, the variables with the most sway in pulling the election one way of the other are gasoline prices, and the incumbent president's approval rating. The Moody's Analytics baseline forecast projects gasoline prices of about $2.93 per gallon on Election Day in 2016. To swing the outcome of the election by itself, the price of gasoline would need to rise approximately 60 cents per gallon higher than the baseline. This is unlikely outside of a major geopolitical shock to oil markets. However, when combining an increase in gasoline prices with a change in the president's approval rating, a swing becomes much more feasible.

Image placeholder title

Given that a change in the president's approval rating of only 4% can swing the election on its own, the combination of a 2% decline in the approval rating and a 20-cent increase in the price of gasoline above the baseline assumptions would be adequate to move enough swing states into the Republican column to oust the Democrats. Given that a 2% swing is well within the margin of error for most presidential opinion polls, and that several geopolitical clouds loom on the horizon of the energy outlook, the 2016 presidential election could prove one of the closest on record.

The Moody's Analytics Presidential Election Model forecasts whether the incumbent party will maintain control over the White House using a mixture of economic, demographic and political data. The model successfully predicted every election back to 1980, including a perfect electoral vote prediction in the 2012 election.

Read Moody's Analytics Chief Economist Mark Zandi's explanation of the election model.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.