There is still the potential for an election year secular exhilaration if the unemployment rate declines even marginally, as the government forecasts it to:
This would bring our “animal spirits” measure up above zero:
Thus from our point of view an Obama reelection appears possible in spite of the high unemployment rate. See Never Wrong Forecasting Model Predicts an Obama Victory In 2012. Last time we had a Republican Congress and a “liberal” Democratic president we ended up with a surplus, not that this would be likely this time, the problems are too big after Georgy-Porgy Budget Buster and Obomba the guns and butter reactionary Democrat.
Any sustained increases in the unemployment rate will, however, destroy our implicit confidence determinant utterly, and it will fall to match the levels of the Michigan sentiment measure (green in lower graph).
It is pretty much guaranteed that we’ll get infrastructure stimulus with money printed by the Fed, unless the Republicans decide it is more important to torpedo Obomba and the economy and probably the viability of their party for some time to come.
The mood in 2012 promises to be pretty weird.