Iraq and the economy are likely to be the keys to whether President Bush is awarded a second term next November. History and current events seem to favor Bush. But veterans in both parties know how quickly political fortunes can change.

And in a nation that appears as closely divided as it was in 2000 -- when the presidential election essentially produced a statistical tie -- a shock to the economy or major setbacks in Iraq (search) could turn the tide.

"If in the battleground states (search) there's a continued loss of industrial jobs, and if we have a Democratic candidate who can use that effectively in places like Pennsylvania, Michigan, Wisconsin and Oregon, then Bush may be in trouble," said James Thurber, a presidential scholar at American University.

Still, Thurber said, reflecting a widespread view, "Bush is going to be very hard to beat."

At year's end, the president was riding high. Saddam Hussein was in custody. Libya's Moammar Gadhafi (search) was welcoming U.N. weapons inspectors. The Dow Jones Industrial Average was holding above 10,000 on a series of upbeat economic reports.

And Congress approved a Medicare prescription drug benefit that gave the president and his party a major stake in what traditionally has been Democratic territory.

Furthermore, the president was sitting atop a political war chest of upward of $100 million -- with no primary opposition. The last three presidents to run unopposed -- Republicans Richard Nixon (1992) and Ronald Reagan (1984) and Democrat Bill Clinton (1996) -- were all handily re-elected.

There were some shadows on the horizon, however, for Bush.

Howard Dean (search) was emerging as the clear Democratic front-runner. Even though his strong anti-war stance seemed an easy target for Republicans, his ability to raise funds and energize volunteers by adroit use of the Internet did not go unnoticed among Bush's advisers.

These supporters may show up in droves on Election Day.

Iraq remains the biggest wild card for Bush.

Saddam's capture gave him an immediate boost in the polls and made Americans more optimistic about prospects for a speedier U.S. troop withdrawal.

But Saddam's capture clearly did not lessen the terrorist threat at home, as last week's raising of the alert level underscored. Guerrilla attacks on coalition forces and their helpers continued unabated after Saddam's arrest.

Democratic pollster Peter Hart describes the post-Saddam spike in Bush's popularity as a "pogo stick bounce" sure to come down rapidly in the coming weeks.

Richard Haas, the president of the Council on Foreign Relations (search), says it's too early to know whether Saddam's arrest marks a turning point. "So a month from now, two months from now, six months from now, it will be the situation in Iraq that will determine whether the Democrats have an issue on which the president is vulnerable," said Haas, who has served in both Bush administrations.

Bush found out earlier this year how quickly events can backfire. His landing on an aircraft carrier off the California coast in May -- dressed in a flight suit and under a "mission accomplished" banner -- to declare an end to major combat looked like a public relations coup at the time. That image became less compelling as the American death toll in Iraq climbed.

Bush supporters claim the president's tax cuts were a major factor in revitalizing the economy. But the recovery has been uneven. Employment rolls remain 2.4 million jobs lower than when the recession began in March 2001.

The sinking dollar also could pose problems.

The greenback has lost nearly a third of its value against the euro and other major currencies over the past three years. In the short term, this has been good for U.S. manufacturers, allowing them to charge lower prices overseas and raising the price of competing imports at home.

But if the decline accelerates, it could hurt confidence and trigger inflation. Some economists cite an uncanny similarity to 1987, when a floundering dollar helped trigger a stock-market crash.

Democrats are emphasizing job losses, shortcomings in the new prescription drug bill, meager funds for schools, and tax cuts they claim are too beneficial to the wealthy.

For now, Republicans, while warning against complacency, are not taking such criticisms too seriously.

"On the two issues that matter the most, national security and economic security, Bush is winning. And no Democratic rhetoric or spin will undermine that," said GOP pollster Frank Luntz.