When asked about factors that drive presidential elections, presidential advisor James Carville said, "It’s the economy stupid." Given the dependent variable, percentage of two party vote, ignoring votes received by third party candidates) that went to the incumbent party, your task is to predict the incumbent party’s percentage of the two –party vote by using the following independent variables:

• Party in power, use 1 for Republican in power and 0 for when Democrat in power
• Percentage growth in GNP during the first nine months of the election year
• Absolute value of the inflation rate during the first nine months of the election year. Use absolute value because either a positive or negative inflation rate is bad.
• Number of quarters during the last four years in which economic growth was strong. Strong economic growth is defined as growth at an annual level of 3.2% or more.
• Length of time an incumbent party had been in office. Use 0 to denote one term in office, 1 for 2 terms, 1.25 for three terms, 1.5 for four terms, and 1.75 for five or more terms. This definition implies that each term after the first term in office has less influence on the election results than the first term in office.
• Elections during wartime. The elections in 1920 (WWI), 1944 WWII) and 1948 (World War II was still underway in 1945) were defined as wartime elections (elections held during Vietnam are not considered to be wartime elections). During wartime years, the variables related to quarter of good growth and inflation were deemed irrelevant and were set to 0.
• The current president running for re-election. If this is the case, this variable is set to 1; otherwise, this variable is set to 0. In 1976, Gerald Ford was not considered a president running for re-election because he was not elected either as president or as vice-president.

Develop a multiple regression equation that can be used to forecast future elections. It is suggested that you save the 2004 election as a validation point. When fitting a regression equation, it is a good idea to hold back some of the data for use in validation the equation.

Interpret each of the coefficients of the independent variables.

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