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Democrats move to shore up faltering recovery

By Lori Montgomery and Neil Irwin
Tuesday, August 24, 2010; 11:17 PM

A rapidly weakening economy threatens to undermine President Obama's assertion that he has set the nation on a path to prosperity and, with barely two months until congressional midterm elections, Democrats find themselves with few options for reviving the faltering recovery.

The latest sign that the economy is losing steam: Home sales fell 27 percent in July, the steepest one-month drop since figures were first compiled in 1968, according to a report released Tuesday. Analysts had expected sales to decline following the expiration of a federal tax credit for homebuyers this spring, but the drop was nearly twice as large as forecast.

The housing report punctuated a wave of bad news that has been building all summer. The number of jobless claims has risen in each of the past four weeks and last week hit its highest point in nine months. Private-sector job creation is trending well below the level needed to keep up with population growth. Retail sales have also been disappointing.

Economists generally do not expect a dip back into recession, although many say the risk has grown with each new piece of disheartening data.

Obama and congressional Democrats have been working frenetically to counter the trend, winning a series of relatively small initiatives to extend unemployment benefits, avert state layoffs and cut taxes for firms that hire unemployed workers.

But with the budget deficit soaring and polls showing deep skepticism about the impact of Obama's economic policies, even many Democrats are reluctant to support additional spending on the economy. That has left Obama with few alternatives for improving the trajectory of the recovery and reducing a stubbornly high jobless rate, which was stuck in July at 9.5 percent.

"They have played their policy hand, and they've got to hope it's good enough," said Mark Zandi, chief economist at Moody's Analytics who has been advising congressional Democrats. Given the political environment, he said, "there's nothing they can do to make a significant difference in the next six months, or even a year."

Republicans quickly sought Tuesday to capitalize on the gloomy news. Addressing the City Club of Cleveland, House GOP Leader John Boehner (Ohio) blamed Obama for "an economy stalled by 'stimulus' spending and hamstrung by uncertainty." Casting the the November election as a referendum on Obama's "discredited" policies, Boehner urged the president to fire his entire economic team, starting with Treasury Secretary Timothy F. Geithner.

"The American people are asking 'where are the jobs?' and all the president's economic team has to offer are promises of 'green shoots' that never seem to grow," Boehner said. Noting that Obama's budget director and chief economist have already announced their resignations, Boehner said Obama "should ask for - and accept - the resignations of the remaining members of his economic team," including Geithner and Lawrence Summers, head of the National Economic Council.

Boehner offered few ideas for turning the economy around. House Republicans have not released a detailed economic agenda, and Boehner's speech - delivered amid a bus tour of battleground House districts in Rust Belt states - did little to expand on the GOP's long-standing platform of lower taxes and less federal regulation.

Vice President Biden, who stood in for a vacationing Obama, derided Boehner's economic plan as a rehash of the laissez-faire policies the led the country to the brink of a financial meltdown in the final days of the Bush administration. "Mr. Boehner is nostalgic for those good old days, but Americans are not," Biden said during an event called to showcase the success of last year's $814 billion stimulus package.

His voice dripping with sarcasm, Biden also thanked Boehner for suggesting that the president fire his top economic advisers. "Very constructive advice," he said, "and we thank the leader for that."

Later, White House deputy press secretary Bill Burton defended Geithner and Summers, calling them "the people who made the tough decisions, who did the hard work to get the economy going again."

As recently as this spring, the U.S. economic recovery appeared to be accelerating. Many economists gave credit to the stimulus package and the $700 billion bailout of the banking system proposed by Bush and carried out by Obama.

On Tuesday, the nonpartisan Congressional Budget Office affirmed that view of the stimulus package, estimating that it added as many as 3.3 million jobs to the economy during the second quarter of this year and may have prevented the nation from lapsing into recession. The CBO also said the package will cost about $814 billion through 2019 - less than the $862 billion previously estimated.

But momentum is fading fast. On Friday, the Commerce Department will revise its estimate of second quarter economic growth. Forecasters expect gross domestic product to have risen at a 1.4 percent annual rate during the April through June quarter - far below the 2.4 percent rate first estimated and below the 2.5 to 3 percent level at which the U.S. economy should expand based solely on population growth and increased productivity.

Instead of gaining ground in the second quarter, the United States economy lost ground.

While many private and government forecasters still agree that growth will return to about 2.5 percent for the second half of the year, that consensus could soon change if the economy continues to deteriorate. And even a 3 percent growth rate is not strong enough to significantly bring down unemployment.

White House economist Jared Bernstein said the administration is "by no means out of bullets." He cited billions of dollars that have yet to be spent from last year's stimulus package and ticked off a list of policies the White House is pursuing, including a measure designed to encourage hiring by small businesses that has been blocked by Republicans in the Senate. Democratic leaders in the Senate say they hope to push the bill to final passage when Congress returns after Labor Day.

Obama is also pressing for tax rebates for homeowners who invest in renewable energy projects and other green renovations, as well as for an extension of an existing tax credit for manufacturers of solar panels, wind turbines and other clean-energy equipment.

"We're continuously promoting the most effective ways to create the most jobs, and our agenda is demonstrably working to achieve that goal," Bernstein said. "The Recovery Act contributed to the turnaround from horrifying negatives to positives, and that's the momentum we are trying to build on."

He acknowledged that Congress had not approved all the stimulus money Obama had sought. But, he said, "In the world we live in, we're doing everything we can to create the conditions for greater job growth in key sectors of the economy."

montgomeryl@washpost.com irwinn@washpost.com

Staff writers Brady Dennis, Paul Kane and Michael Shear contributed to this report.

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