The Wall Street Journal headline reads: “Economy Sinks Markets.” But it could as easily have read, “Economy Sinks Obama.” Consider where we are less than 15 months before the presidential election:
The Dow Jones Industrial Average lost 419.63 points, or 3.7%, Thursday, and is down 9.5% for August amid soaring trading volume and some of the worst volatility on record. Angst about the health of the U.S. and European economies, and the stability of European banks, sent investors rushing to the safety of U.S. Treasurys. Yields on the 10-year note briefly dropped below 2% for the first time in at least 50 years. Gold jumped to a new record.
The latest batch of economic data offered little reason for optimism. Sales of previously owned homes fell 3.5% in July from June, the National Association of Realtors reported, another sign that the hoped-for housing recovery isn’t materializing. The data came as a surprise because of earlier reports of an increase in May and June in the number of contracts signed to buy homes. That suggests some buyers are backing out of deals.
President Obama recently assured us that we are not facing a double-dip recession. But to seasoned investors “recession” is in the eye of the beholder:
“If it’s not a recession, it sure feels like one. And if it feels like one, it doesn’t matter if you can prove it with statistics or not,” said John Hailer, president of Natixis Global Asset Management in the U.S. and Asia. “We have some real tough problems in front of us, and we really need some leadership in corporate America and Washington...There’s a lot of nervousness in the market.”
Moreover, we really could be heading for that double-dip:
Four dozen economic forecasters surveyed by The Wall Street Journal earlier in August said there was only a 13% chance that a recession already has begun. But they saw rising risks that one is looming. On average, they put the odds of recession in the next year at 29%, up from 17% only a month earlier; 10 of them put the odds at 40% or higher.
“We’ve said there is a 35% chance of recession, but if the stock-market weakness persists, we’re going to keep on raising those odds,” Ethan Harris, economist at Bank of American Merrill Lynch, said Thursday.
Jim Pethokoukis of Reuters reports that this isn’t the worst of it:
The White House’s worst-case scenario for the economy on Election Day next year has become Wall Street’s baseline scenario. After looking at a string of weak economic reports and Europe’s growing fear of debt meltdown and contagion, JPMorgan – led by Obama pal Jamie Dimon – has just come out with a politically poisonous forecast.
The megabank now thinks the economy won’t grow much faster over the next 12 months than it did during the first half of this year — and that’s assuming Europe doesn’t go all pear shaped. It sees GDP growth at just 1.5 percent this year, 1.3 percent next year with unemployment at … 9.5 percent heading into the final days of the election season. “The risks of recession are clearly elevated,” the bank said.
The president cannot escape blame for much of this. The lack of a coherent fiscal vision, the ever-increasing mound of regulation, the incessant talk of tax hikes and the search for more and more ways to spend taxpayer dollars have not been the cure; they are exacerbating and extending our economic slump. Even if Obama got his entire wish list (payroll tax cut, patent reform, a grand bargain on the debt, a new stimulus), would that confidence required for investment, hiring and consumption return? I highly doubt American business will thrill to the prospect of taxes on the “rich” and a grab bag of new spending. Frankly, the best thing for Obama and the economy may very well be that nothing more on his to-do list gets checked off.
Should the unemployment rate worsen (a distinct possibility if growth is grinding to a halt) Obama, if a minimally acceptable Republican alternative is on the ballot, won’t be reelected. The bus tour won’t help. Scaring old people won’t help. Vilifying a current or former governor (or some other reasonable alternative) won’t help. The American people simply won’t stand for an economic record this bad. In fact, Obama told us that. It might have been his most accurate pronouncement on the economy.