It’s the economy, again.
With the US economy likely to straddle the line between growth and contraction in the months before the presidential election, the issue may be the Republican ticket’s Achilles heel as in the 1992 contest.
Even if Sen. John McCain promised to create millions of jobs Thursday night in his speech accepting the GOP presidential nomination, investors got a bad dose of reality on the labor market Friday.
The economy lost 84,000 jobs in August, more than expected, while the unemployment rate jumped from 5.7 percent to 6.1 percent. That's grounds to provoke more worries about the economy, giving Democratic presidential candiate Barack Obama even more ammunition against the GOP.
In picking Alaska Gov. Sarah Palin over successful businessman and former governor Mitt Romney, McCain passed on an easy opportunity to offset his admitted weakness in economics and shore up the credentials of the GOP ticket.
“He isn't comfortable handling these issues himself,” says William A. Niskanen, a McCain supporter, who is chairman of the Cato Institute and headed President Reagan’s Council of Economic Advisers. “It would be valuable if he had a credible, respected economic spokesman.”
“It appears from the convention that they are trying to avoid the economy and I guess that's not surprising given the track record of the Bush administration and McCain's unwillingness to distance himself on policies,” quips economist Larry Michel, president of the Economic Policy Institute, a liberal Washington think tank.
Though a good part of such election handicapping depends on partisan analysis and opinion, economic data and history offer some insights.
Niskanen’s study of presidential elections between 1896 and 2004 shows three keys to victory for the incumbent party—good economic growth, fiscal restraint and a candidate seeking re-election. “None of these apply to McCain,” says Niskanen.
Arguably, none of those qualifiers applied to George H.W. Bush in 1992. All three clearly did in 1996, when Bill Clinton easily won re-election. In 2004, a case could be made either way.
During the Bush administration, job creation and economic growth have been historically weak. More recently, consumers have been squeezed by the surging price of petroleum products and other commodities that affect food prices, while the housing-mortgage meltdown has left millions facing home foreclosure or negative equity.
The economy grew at an average rate of 2.31 percent between 2001 and 2007 and is averaging just 1.46 percent over the past three quarters. The best year was 3.60 percent in 2004, just above the 3.42 percent average of the Reagan years. During the Clinton administration, growth averaged 3.76 a year, peaking at 4.5 percent.
The GOP may be most vulnerable on the jobs front. Nonfarm payrolls are up about 5.1 million between the inauguration of Pres. Bush and July 2008, vs. 22 million during the Clinton presidency and 16 million in the Reagan era.
In addition, the unemployment rate has been climbing, touching 5.7 percent in July, a four-year high; economists expect the jobless rate to easily surpass 6 percent in the year ahead.
Labor market conditions are particularly powerful in influencing voters’ perceptions about the economy and though a lagging economic indicator they can still prove deadly for a candidate. Such was the case with the failed re-election of Pres. George H.W. Bush.
In the 1992 election year, though economic growth had recovered nicely from the 1990-1991 recession, the jobless rate continued to rise. Even though it peaked in June 1992, it barely moved lower going the election. (In contrast, in 2004, the jobless rate has been falling steadily for a year going into the election.)
Given those circumstances, there’s healthy debate about similarities with today.
"There are some similarities," says former congressman Leon Panetta, who served as chief of staff and director of the Office of Budget and Management under Clinton. "Clearly, pocketbook issues always play a huge role in the election."
Glenn Hubbard, chief White House economist from 2001-2003 and a key player in the 2003 tax cut plan, disagrees.
“This is probably a very different cycle than we’ve seen before,” says Hubbard, who’s now dean of Columbia University Graduate School of Business. “The broader credit crisis is very much on voters’ minds.”
That’s certainly one of the keys for the economy — and the election contest — going forward.
Until mid-2007, Republicans could boast of the housing boom and its wealth effect. The median price of a single-family home jumped from $147,300 in 2000 to almost $222,000 in 2006. Through the first half of this year, however, the median price had slipped back to $201,300 – an increase of 36.8 percent and less than the 39.5-percent gain of the Clinton years.
More broadly, economic growth probably peaked at 3.3 percent in the second quarter and is expected to slow -- perhaps even contract, as early as the fourth quarter. (Hubbard sees growth in the 1.0-1.5-percent range over the next year.)
"I think the news from here on in will be good," counters Niskanen. “ [Second-quarter] GDP was surprisingly good, the stock market is up, oil prices are way off, the bad news on gasoline and food is behind us.”
Nevertheless, layoffs are likely to rise. Job placement firm Challenger Grey & Christmas estimates corporate downsizing will surpass 2007’s 12-month total by the middle of October and could exceed 1 million for the first time since 2005.
Elsewhere, there are few signs of prosperity for the average voter.
The median household income was $50,233 according to the 2007 Census, vs. $50,557 in 2000. By comparison, income rose 14 percent during the Clinton years and 8 percent during the Reagan era.
"This has been the worst period of economic growth for the vast middle class since WWII,” says Michel.
And perhaps even worse for others. The poverty rate was 12.5 percent in 2007, up from 9.6 percent in 2000. During the Clinton years, it fell from 13.3 percent in 1993.
Message Over Matter
In the end, it may be more about message and timing than data and debate
“While he is not an expert, he is very good,” says Hubbard of McCain. “His raw instincts are the right ones.”
Panetta, who founded the Panetta Institute for Public Policy, says McCain has "credibility on the issue," of the economy, pointing to a campaign ad wherein he essentially acknowledges that Americans are worse off than they were four years ago.
Or, as Hubbard puts it, "People want to know: Is it going to get better next year?"
Future, past or present, the Democrats may have failed to fully seize the high ground.
"I would use the Bill Clinton formula," explains Panetta. "The Republicans have been totally irresponsible handling the budget, say you're going to implement budget discipline and at same time make investments that are also going to produce jobs for people and help the middle class."