Monday, June 06, 2011

Economic fears may dent Obama's re-election hopes

Business Times - 07 Jun 2011

Economic fears may dent Obama's re-election hopes


A TSUNAMI of bad economic news is raising new concerns about the prospects for the recovery of the US economy and for the re-election of US President Barack Obama.

While it may too early to consider the likelihood of a double-dip recession and for a Republican takeover of the White House in 2013, the mood on Wall Street and in Washington is certainly dipping. A negative private job report sent the Dow on its biggest fall in a year on Wednesday.

Indeed, figures released last Wednesday and showing a big drop in manufacturing employment was another indication that job growth continues to be slow. And while the US Labor Department announced the next day that the number of jobless benefit applications fell by 6,000 to a seasonally adjusted 422,000, very few economists were cheering. There was no change in the number of Americans who continued to receive unemployment cheques totalling 13.71 million in the week ended May 21.

Adding to the gloomy picture of the job market was the May job report that was published by the US Labor Department which showed that hiring slowed down last month. According to the report, the American economy added just 54,000 jobs in May, compared with the rise in non-farm payrolls by 232,000 jobs in April. That was the smallest increase in eight months. Overall the unemployment rate rose to 9.1 per cent in May from 9 per cent in April.

More specifically, the drop in manufacturing employment reflects the slow growth in manufacturing - the sector which was supposed to serve as the main engine of the economic recovery. This, together with reports of plummeting consumer spending - which all trace back to higher gas prices - and a drop in housing prices, explains why investors decided to dump stocks and put their money in safe US treasuries.

Add to that the continuing political instability in the Middle East, the crisis in the eurozone, and the production interruptions following Japan's earthquake, and it is becoming clear why Obama administration officials expect growth rate of about 2 to 3 per cent this year and no dramatic changes in the economic conditions before next year's election - which makes them very worried.

Much of this anxiety has to do with the recognition that Washington is not going to apply any major monetary and fiscal measures as part of an effort to accelerate economic growth. The Federal Reserve is not expected to initiate a new round of pumping money into the financial system. Indeed, the Federal US$600 billion programme to buy Treasury bonds, or quantitative easing (QE), comes to an end this month.

The programme was supposed to keep interest rates low and encourage companies to borrow more money and hire more people. Business did borrow money but did less-than-expected hiring. And now these companies will have to get used to operating in a market that isn't pumped by Fed-made cash.

At the same time, not much good news is expected on the fiscal side of the equation in the form of an economic stimulus driven by more federal spending and/or tax cuts. The Republicans in Congress have made it clear that they will continue to oppose new federal spending initiatives while the Democrats oppose new plans to cut taxes.

The monetary and fiscal stimulatory strategy embraced by Washington in the wake of the Great Recession may have prevented a new Great Depression but has failed to re-energise the economy. And with Washington not being able to inject the economy with monetary or fiscal steroids, business and consumers are going to be on their own as they face the realities of the US economy that include structural barriers to economic growth and a rise in unemployment coupled with mounting federal deficits.

Indeed, the warning that it might downgrade the US government credit rating if Congress did not increase the US debt limit in the coming weeks that was issued by Moody's Investors Service on Thursday only helped to highlight the current US fiscal quandary.

If anything, the continuing legislative deadlock on Capitol Hill over a strategy to cut the federal deficit - Congress has yet to approve a rise in the US debt ceiling - is likely to ignite even more uncertainty among businesses while reducing consumer confidence. And if companies aren't stepping up their production and consumers aren't increasing their spending, the economic recovery could come to a halt, reducing the chances that President Obama will return to the White House after next year's presidential election.

President Obama and his aides are hoping that the somewhat better-the-expected recovery of the American auto industry, fuelled in part by the federal financial assistance that the White House provided to the ailing US car companies - a programme that the Republicans had opposed - could be promoted during the election campaign as an example of an economic recovery strategy driven by the action of the federal government and which the Republicans regard as a violation of free-market principles.

Moreover, the recent Republican plans to cut federal support for government-backed social and health programmes have not enjoyed support among the American voters, and may explain why the Republicans ended up losing recently a special election for a Congressional seat in upstate New York in a very conservative and pro-Republican district. The Democratic candidate won the race by stressing her opposition to the Republican economic agenda.

President Obama and the Democrats are also going to insist that any plan to cut the federal deficit should include raising taxes on wealthy Americans, an idea that Republicans reject but which, according to public opinion polls, most American support.

So while this week's poor economic numbers may not bode big electoral triumphs for President Obama, the current White House occupant can probably count on his Republican adversaries - whose failure to come up with an credible alternative economic agenda could mean that they would snatch an electoral defeat out of the jaws of victory.

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