State of the Union: Will 3% GDP Growth Get Obama Re-elected?
Is the U.S. in grave condition as former Indiana governor Mitch Daniels claimed Tuesday? That view, popular among Republican leaders, suggests that America is dead. If you believe that the world will end in December 2012 — or just that Newt Gingrich will be the Republican nominee who would lose by 11 points in November – I could relate to that “grave” feeling. Thanks for the pick-me-up, Mitch!
But with 3% economic growth in the fourth quarter of 2011 and 853,000 new jobs created in the second half of 2011, the important question to me is whether GDP will grow enough in the next nine months to keep the White House in President Obama’s hands come January 2013.
As I posted recently, I am not an objective observer when it comes to Obama and I think there are five reasons to re-elect him. I doubt that my reasons will sway the American electorate. Instead, I am convinced that Yale economics professor Ray C. Fair has a better idea of what it will take for Obama to win a second term in November.
As I wrote last September, Fair has an uncanny ability to predict election outcomes based on a simple formula that relates the growth in GDP during the three quarters prior to the election to the incumbent’s share of the popular vote that November.
In November 2010, Fair estimated that the U.S. economy would be growing at 3.69% during the first three quarters of 2012 — and that Obama would receive 56% of the popular vote in November.
But now Fair believes that the economy will grow more slowly than he did back then — yielding Obama a mere 50.17% of the popular vote, reports the Washington Post. Interestingly, Real Clear Politics estimates that if Obama faces Gingrich in November, he would be re-elected with 50.9% of the vote to Gingrich’s 39.9%.
A closer look at Fair’s latest predictions — from last October — reveals that he does not believe the 3% GDP growth in the fourth quarter is sustainable. Back then, he expected 2.75% growth in GDP which would yield Obama 50% of the popular vote.
But in an interview I conducted with professor Fair Wednesday morning, he made it clear that he has not yet published his latest GDP growth prediction — he expects to publish that on January 30th.
That 50.17% vote share estimate was based on a separate analysis hepublished January 4th of the effect that canceling the payroll tax cut would have on Obama’s vote share. In a nutshell, Fair assumed that if the payroll tax cut extension lasts only through February 2012 instead of through December, it will cost Obama 1.6 percentage points of his electoral margin.
It remains to be seen whether Fair will boost his GDP growth forecast on Monday. But he told me that his model has a “standard error of 2.5 percentage points.” So unless the economy grows by enough for Fair’s model to predict at least a 2.5 percentage point Obama advantage over his Republican rival, the election outcome, in Fair’s view, will be too close to call.
We’ll see what Fair believes is the most likely forecast for 2012 GDP growth. He seems to believe that the battle over that payroll tax cut extension could determine the outcome in November — or at least help push the electoral vote share more decisively in the direction of the winner of that battle.
It just seems ironic — but hardly surprising — that Republicans would oppose tax cuts to put the brakes on the U.S. economy so they can increase their chance of achieving their cherished dream of making Obama a one-term president.
Source: Peter Cohan, Forbes
Optimism for 2012?
IMF statistics released today are forecasting an anemic 1.8% growth for the US economy in 2012. This compares to a 2.3% forecast by the Commerce Department, which is now looking to be overly optimistic. Four years after the start of the great recession and two and a half years after its end, there is a sense of increasing traction but little reason for much optimism. Domestic demand is weak and modest growth in disposable income is more a result of unsustainable tax cuts and transfer payments than wage improvement. Our European trading partners have drifted back into recession and face difficult banking and sovereign debt problems with considerable risk to their economies.
We need additional US jobs to accelerate income growth and build domestic demand. Jobs must come from government or private sector spending. There is continuing pressure on Federal, state, and local government to cut spending and jobs. The private sector is increasingly global, driven by the necessity of creating profits, not better domestic jobs.
America’s global corporations want lower corporate taxes, less regulation, fewer unionized workers, and labor saving productivity gains. However, until balancing in the global economy reaches a more mature stage, none of these are likely to bring good jobs back to America. While US manufacturing is world class in many areas, lower cost of production here does not mean the US manufacturing can or will suddenly become competitive in all areas. The gap is wide and the US market requires sufficient supplies of skill workers to accommodate the shift. Skilled labor is for now far cheaper and work rules far loser in developing markets. For years to come many new jobs are likely to be temporary or part time, with full time employment commanding lower pay than many workers earned in the past.
We generally think of small business as a job engine, however, according to Yuval Rosenberg in an article entitled The Myth Of The Small-Business Job Engine, small business’s role as the star of job creation is not completely accurate. Small businesses defined as companies with fewer than 500 employees account for more than half of all private-sector employment, but eliminate as many jobs as they create, leaving little net gain. According to Ron Jarmin, assistant director for research and methodology at the U.S. Census Bureau and coauthor of that research paper, titled “Who Creates Jobs? Small vs. Large Vs. Young” the only group that disproportionately creates jobs is startups. According to Jarmin and his coauthors, startups account for only about 3 percent of U.S. employment, but they are responsible for nearly 20 percent of the gross number of jobs created year to year.
Initially, start-ups tend to hire highly educated and skilled elite that do not represent the great majority of US workers. While no current statistics are available, this author’s experience is that, for competitive cost and faster time to market, maturing start-ups quickly develop structures to globally outsource work, eventually hiring many more foreigners than local hires.
The loss of wealth and high levels of debt continue to depress domestic demand. For most, home value remains their greatest source of wealth. An increasing number of home owners are underwater. While the unsold inventory overhang may be declining, home values (driven in part by foreclosures) continue to decline reducing the homeowner’s sense of wealth and potentially adding to foreclosures. Consumer confidence, slowing income growth, demographic changes, and slower immigration combine to reduce housing demand. Increasing income inequity also favors savings and investment over spending, particularly spending on real estate. A major revision of the tax code, when and if it comes, is likely to favor a long overdue shift in value emphasis from consumptive real estate to increased savings and investment in productive business capacity.
We are also in the very early stage of a deleveraging cycle that could take decades to unwind. Consumer debt is being paid down, forgiven, and eliminated in bankruptcy. However, consumers will also need to compensate for the reduction of government transfer payments and in disposable income from increased taxes. This means more savings now and expenses for retirement and healthcare in the future.
Without expanding domestic demand, America’s best chance for growth is increased exports with an accompanying reduction in the trade deficit. Exports are tied to growth in the global economy. The IMF predicts the global economy will grow a modest by 3.25% in 2012, down from an earlier forecast of 4%. The also forecasts that the eurozone is set for a “mild recession” in 2012 with GDP expected to shrink by 0.5% compared with a previous forecast of 1.1% growth. The growth forecast for the UK economy has been cut from 1.6% to 0.6%. The German growth forecast has been cut to 0.3% from 1.3%. France has been cut to 0.2% down from 1.4%. A deeper than expected recession in Europe could have serious consequences for the US economy.
The Commerce Department expects U.S. exports to grow in 2012 at a slightly slower pace than in 2011 as shipments to Europe continue to drop. The 27 members of the European Union make up the U.S.’s largest trading partner, consuming about 15% of U.S. exports. Slower growth in emerging markets is also playing a role in dampening demand for U.S. goods. The Commerce Department expects exports to rebound in the second half of 2012, finishing the year up about 12%, compared with a 15% pace in 2011. Much of export strength is from agricultural products and other commodities. Agriculture, while it amplifies in many ways, does not add many high value jobs.
The dollar would have to weaken considerably to promote a strong export growth that adds high value domestic jobs. Presently, the dollar’s value is supported by financial chaos in Europe, foreign quantitative easing, and foreign government intervention to maintain parity with the US dollar. Even with a weaker dollar, US corporations face increasing global competition in higher growth developing markets. State imposed market restrictions and state controlled competition presents difficult obstacles.
Meanwhile the trade deficit continues to climb. The Commerce Department expects the trade deficit will reach $605 billion this year, a 10% increase over 2011 because of the slowing demand for U.S. goods in Europe. A weaker currency would result in higher oil prices that add to the trade deficit.
So, what is there to be optimistic about? In truth, not much beyond the sense that bad as things are they are better than they were, that risk is somewhat reduced (albeit a strong case can be made that European sovereign debt risk is not under control), and that new quantitative easing may be on its way. Maybe that’s enough.
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