Although the presidential election is still a year away, Thursday’s strong GDP report has seriously weakened — at least for now, and perhaps for good — the Democratic case against how President Bush has handled the economy.
The economy's sizzling 7.2 percent growth rate in the third quarter appears to offer strong evidence that deep tax cuts can quickly and directly spur enough spending to shift the economy’s momentum. While growth is certain to slow in coming quarters from the fastest period of expansion in 19 years, most forecasters now believe the economy at last is on track for strong, sustainable growth.
“This was not the news they wanted to hear at the DNC headquarters,” said Dan Mitchell, senior fellow at the conservative Heritage Foundation, referring to the Democratic National Committee.
Barring an economic miracle in the next 12 months, the eventual Democratic nominee still will be able to point to Bush’s abysmal record on job creation. Even if Treasury Secretary John Snow’s optimistic projections are accurate and the economy creates 2 million net new jobs by Election Day, Bush will be the first president since Herbert Hoover to preside over a four-year term in which total payroll employment declined.
That argument surely will resonate with the nation’s 13 million unemployed or underemployed workers.
But presuming the economy is adding jobs steadily next year, the White House likely will be able to fashion a plausible story of an economy that has been turned around after a stubborn recession exacerbated by the 9/11 terrorist attack.
“The Democrats would love from a political perspective to have a bad economy that they could complain about and use to advance their case,” said Don Straszheim of Straszheim Global Advisors. “The leverage of their argument is clearly hurt by this.”
Greg Valliere, chief strategist at Schwab Washington Research Group, said the stunning growth will force the Democrats to shift their focus away from the economic landscape.
“The economy becomes a neutral or even a slight positive for (Bush),” Valliere said. “Democrats … are going to have to talk a little bit less about the economy and more about Iraq, and that is a tricky area for them.”
Of course one quarter of outsized growth in the nation’s gross domestic product does not guarantee an extended economic rebound, and Bush’s economic policy still has plenty of vociferous critics.
Iris Lav, deputy director of the liberal Center on Budget and Policy Priorities, said the lower withholding rates and child tax credit checks that helped boost growth over the summer were only a small highly visible component of a massive tax cut package aimed at shrinking government and “rewarding high-income individuals.”
The resulting budget deficits will lead to higher long-term interest rates for years to come, she said.
“What is really troubling is if you look down the road a few years, then the economy is in very troubling shape,” she said.
But when it comes to the economy, voters tend to look back at the past few months rather than into an uncertain future.
The only economic indicator that really matters to voters at election time is real disposable income, Mitchell said.
“If people have higher income over time, they tend to vote for the party in power. If incomes are stagnant or falling, they vote against it,” he said.
He pointed to the example of 1996, when the economy finally was accelerating after years of sluggish growth and President Clinton was re-elected by an overwhelming majority over Republican Bob Dole.
“I think a lot of Republican would agree that he was not the strongest possible candidate, but he had terrible timing,” Mitchell said. “You could have had the best Republican candidate in the world.”
While the latest report reflected only a single quarter of strong growth, after five quarters of slow to moderate growth, analysts found much reason for encouragement.
Spending on business equipment and software rose at a 15 percent clip in the quarter, its fastest pace in more than three years. Strong business and consumer demand left wholesalers and retailers with depleted inventories that likely will be rebuilt in coming quarters, adding an important underpinning to growth.
Consumer spending may already be slowing, and the impact of a final wave of mortgage refinancing is waning. “But with capital spending and exports coming on, GDP growth in the next year will be more balanced and sustainable,” said Paul Kasriel, director of economic research at Northern Trust Co.
The big question is how rapidly the growth translates into increased employment. The economy added jobs in September for the first time in eight months, according to preliminary data, although the modest 57,000 jobs was well short of the number typically needed to absorb new workers joining the labor pool.
Straszheim said he expects the economy to add fewer than 100,000 jobs a month during the next six months, sending the unemployment rate higher than its current 6.1 percent. Forecasting the performance of the U.S. economy from month to month is notoriously difficult, but Mitchell noted that employment is a lagging indicator of economic growth. So even if the GDP growth slows to a more modest pace of 4 or 5 percent in coming quarters, at some point the rising demand and rising corporate profits are likely to result in sharply increased hiring, leading to the virtuous circle of a sustainable recovery.
“If I was a Democratic campaign strategist, I would be very, very nervous putting my eggs in that basket, because if this expansion behaves in any way similar to past expansions, they will wind up with egg on their face,” he said.