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Morici: Congressional Elections and Outlook for the U.S. Economy

Democrats are pulling up in the polls—though not doing well, they are doing less badly. Prospects for a Republican sweep seem less likely than two weeks ago, and the Republicans have only themselves to blame.

The Pledge to Americais a rehash of the platform of President George W. Bush—less taxes and government—and does not address the fundamental problems that have left the American growth machine broken.

Banks can’t lend because President Obama’s bank reformsboosted bonuses on Wall Street but left Main Street banks to the wolves. Businesses can’t sell, because the trade policies of Clinton, Bush and Obama have permitted China’s manufacturers a huge unfair price advantage in U.S. and global markets through currency manipulation, mega subsidies and high barriers to U.S. exports.

The Pledge to America addresses none of this and merely redacts failed Bush policies. All this permits the President to thrash the GOP as the party of failed ideas. Add to it the least charismatic national political leader in a century, John Boehner, and the President gets a pass on a lousy economy.

Alexandra Grablewski | Riser | Getty Images

The Republicans will pick up seats but won’t accomplish a sweep.

President Obama will remind us that mid-term elections always cost incumbents a few seats, and continue with statist policies that reward his friends in the environmental and labor movements and on Wall Street.

Twenty-one months into his presidency, Barack Obama has increased the post recession size of the federal government by 25 percent, pushed through bank reforms that leave the “too big to fail” New York banks even bigger than before the crisis—they are gobbling up their smaller brethren and paying big bonuses. His health care reforms may cost the poorest of workers—part timers at McDonalds—their health insurance by dent of regulation, and the private sector—less government subsidized health care, social services and temp jobs—generating only 10 thousand jobs a month.

The economy needs to create 150 thousand jobs a month just to stay even with population growth and reentry of folks who have expired their ability to wait out a lousy jobs market. Growth will be too tepid for that to happen.

Growth

Generally, the outlook is for mediocre growth—less than 3 percent and far less than the 4 to 5 percent needed to appreciably dent unemployment.

Retail sales and consumer spending remain weak and will continue to grow at a real pace of about 2 percent a year. Generally, businesses can accommodate this demand by boosting productivity in existing capacity, and have little incentive to add new employees.

Quarterly Forecasts (percent)

Q210
Q310
Q410
Q111
Q211
2010
Q2011
Q2012
GDP: Annual 1.7 2.6 2.0 2.4 2.4 2.8 2.3 2.4
GDP: Q4/Q4 2.5 2.4 2.4
CPI: Year/Year 1.8 1.3 1.3 1.5 2.2 1.7 2.1 2.3
Core CPI: Year/Year 1.0 0.9 0.9 1.3 1.4 1.0 1.4 1.5
Unemployment 9.7 9.6 9.7 9.8 9.8 9.7 9.9 9.8
Federal Funds 0.125 0.125 0.125 0.125 0.125

Third quarter investment will get a modest lift from a stronger manufacturing sector, especially in autos and technology related equipment. Fleet owners delayed truck replacements during the recession and now face costly maintenance, making new trucks purchases attractive, and technology items are hard to stretch more than an extra year or two.

Otherwise investment remains weak, especially owing to poor new home sales and construction—the nation has a serious excess supply of housing that would take several years to work off even with a growing economy.

Overall, the federal policymakers’ policies have few arrows left in their quill.

Federal stimulus spending remains controversial and unlikely to expand because voters are wary of more deficits and borrowing (which must come from the Middle East and China).

The Administration continues to fantasize that stimulus spending has created or saved 3.5 million jobs but thanks to Rahm Emanuel and Nancy Pelosi, the $787 billion stimulus was structured to maximize the president’s image with environmentalists and labor unions, and pay off Wall Street constituents. Jobs creation was a secondary consideration. Obama got what he paid for—love from the left and New York, and too few jobs for Middle America.

Your Money Your Vote - A CNBC Special Report
Your Money Your Vote - A CNBC Special Report

The Federal Reserve cannot lower short term rates—those are already at near zero levels—and it is doubtful that new purchases of mortgage backed securities would do much. Mortgage rates are already very low.

The overhang in the supply of housing requires that any immediate gain in construction and jobs accomplished by further subsidizing housing purchases, through tax credits or Federal Reserve intervention, will only borrow from sales and construction from a quarter or two into the future.

"The Administration continues to fantasize that stimulus spending has created or saved 3.5 million jobs." -Professor, University of Maryland, Peter Morici

The Treasury has forsaken the third tool of monetary policy—exchange rates—by letting Beijing enforce an undervalued yuan.

The trade deficit is a huge drag on the U.S. economy—creating a growing hole in aggregated demand. It is a primary reason, along with the Administration’s lack of comprehensive action to address the woes of the 8000 regional banks, the economy cannot accomplish growth of 4 or 5 percent, as it should when emerging from a recession.

The deficits on imported oil and with China account for nearly the entire imbalance. The president’s energy policies do not fully exploit, by some long and considerable measure, the potential to substitute domestic energy for foreign oil. The President’s failure to accomplish genuine exchange rate reform in China means that the U.S. will face a long period of mediocre growth that will only further increase the national debt, with too much held in China. Unemployment will stay alarming high.

Double Dip?

The preponderance of risk in my forecasts and those of my colleagues—the consensus of which are fairly similar to mine—are to the downside.

China keeps saying it will do something about its currency but as long as the Obama Administration begs instead of acting, the trade deficit will worsen. Now China is aiming to force U.S. and Japanese auto companies to transfer their hybrid and electric car technology to China, just as China has seized solar and wind technology.

The chances of a double dip recession are at about 50 percent. If the EU patch for Greece and others holds and the U.S. trade deficit does not jump too much, then the economic expansion will continue in the United States, affected but not derailed by troubles in Europe. If troubles in Ireland or Spain escalate into financial bedlam, grab a helmet and head for the trenches. The same applies if President Obama’s ill-conceived drilling bans and excessive emphasis on low-yield alternative energy sources and conservation options, and its continued tolerance of Chinese mercantilism, result in a huge leap in the U.S. trade deficit.

It simply would not take much to knock the U.S. and European economies off track.

The only thing that is certain is that President Obama and his new economic team will reference the mess left by President Bush and assume no responsibility for making things worse by a combination of all too political economic and energy policies and ill-advised actions on energy and China.

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Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.