Mon October 29, 2012
What Type Of Economy Will Next President Inherit?
Originally published on Mon October 29, 2012 12:29 pm
Later this week we'll get another snapshot of the U.S. job market: the last unemployment report before next week's presidential election.
Forecasters expect another sign of slow but steady job growth. Whoever is in the Oval Office next year will have to cope with a sluggish U.S. economy and confront some urgent policy decisions.
One thing to keep in mind about the economy by the next Inauguration Day: It will be nowhere near the disaster of four years ago. Back then, employers were laying off hundreds of thousands of workers a month. Banks were in danger of collapse. And economic output was shrinking at a rate of nearly 9 percent.
IHS Global Insight's chief economist, Nariman Behravesh, says while the economy is not yet healthy, it has vastly improved. Companies are slowly adding workers. The financial system has stabilized. And last Friday came word that output grew in the third quarter by a modest 2 percent.
"We've been stuck in this healing process for the last four years and it's slowly coming to an end and the economy is on the mend," Behravesh says.
Home prices have finally started going up again, while gasoline prices have come down.
Picking Up, Cutting Back
Richard and Janet Coover, who attended an Obama rally in Dayton, Ohio, last week, say they see things turning up. Richard is a machinist, and Janet works at a battery factory.
"The economy is starting to pick up. It's quite evident in this area. People that you know that have been looking for employment are now getting actual shots at positions," Richard says.
"And you see more and more jobs out there," Janet adds. "And then I hear of friends getting jobs and everything. So I think it's really moving forward."
A report on Friday showed consumer sentiment across the country now at its highest level since the fall of 2007. But just as consumers are starting to feel better and spend more freely, businesses have started cutting back.
Kathy Trautman, the area manager of a Manpower office in Dayton that supplies temporary workers to manufacturers and other companies, says the trends were looking up in the first half of the year.
"But as of late July, we started to see a flattening or softening off. It's not the kind of drops that we saw in 2008, but it's more or less a lack of growth," she says.
Trautman says that's partly because of a drop in demand in Europe and Asia — and partly because of the cloud now hanging over Washington.
"Many of our clients seem to be in a holding pattern connected with this uncertainty of the direction," Trautman says.
Over A Cliff?
That's one of the issues the man in the Oval Office next year will have to address to foster a more broad-based economic recovery. Not so long ago, business spending and exports were among the bright spots in the economy, while housing was in the dumps and consumers were sitting on their hands.
Economist Behravesh says the situation has now reversed.
"If this is a four-cylinder car, it's only firing at two of the four cylinders, basically," he says. "Housing, consumer spending are doing OK, but exports are not and business spending is not doing that well."
Business people have long worried about the federal government's growing debt levels. But reversing the debt too quickly could be even worse.
"The first priority for Congress and the new president will be to prevent the fiscal cliff from happening," says Lynn Reaser, past president of the National Association for Business Economics.
Reaser is talking about the big tax hikes and draconian spending cuts that are set to kick in automatically at the first of the year, unless lawmakers and the president head them off.
"This could really push the economy over the cliff and push us into recession," Reaser says.
Both President Obama and GOP presidential nominee Mitt Romney have said they want to avoid the automatic spending cuts and most of the tax hikes, though Obama would allow taxes to go up for the wealthiest Americans.
Last week, the CEOs of dozens of big companies issued a statement urging lawmakers to adopt a long-term deficit-cutting plan that includes both spending cuts and new tax revenues — similar to what the president's Simpson-Bowles commission recommended.
Behravesh says that would be the best-case scenario. Worst case, he says, is continued gridlock.
"I would say the risk is that that uncertainty stays with us," he says. "The politicians in D.C. continue to have this standoff, and this drags on. I think that's probably the biggest risk facing the U.S. right now."
There are other risks, of course: A conflict in the Middle East could send gas prices soaring. Political breakdown in Europe could threaten the global financial system.
If those shoes don't drop, though, whoever is in the White House could expect both growth and hiring to accelerate in the years to come. As to the policy debate that's now weighing on business people, that's within the power of Congress and the president to solve.