Obama Must Stick or Twist on Jobs and Growth

With his approval ratings on the floor, President Barack Obama will on Thursday unveil an eagerly awaited speech on job creation that will define the 2012 battle for the White House.

President Barack Obama
Photo by: Pete Souza

Reports indicate the President will propose a $300 billion package that staff close to the President say will quickly boost hiring and push unemployment back towards 8 percent.

The package, which democrats want to be "bold," is widely reported to involve tax credits to boost hiring, a plan to renovate America’s schools, training programs for the unemployed and a plan to prevent teachers being laid off.

The individual measures that make up the $300 billion package may help create a few jobs in the areas that are targeted but at the macro level the rate of unemployment will be about the health of the US and global economy which are currently teetering on the edge of a nasty slowdown.

Friday’s US jobs data showed no jobs where created in August and, with business sentiment weak, maintaining demand will be crucial to economic growth and job creation.

Stephen Lewis, the chief economist at Monument Securities in London, believes the US cannot enter recession as long as the American consumer keeps spending.

The boss of International Paper, Jon Faraci told CNBC on Tuesday that getting consumers spending will be the key.

“This economy is 70 percent consumer driven, so we need consumers spending some of their discretionary income if we're going to have demand that's gong to lead to more jobs,” Faraci explained.

With the euro zone debt crisis dominating investors' attention and the stock market hugely volatile, American consumers and business leaders are nervous.

Factor in weakness in the housing market and it is difficult to see what will trigger a jump in the consumer spending and business investment needed to boost growth and encourage significant hiring by the private sector.

Growth Estimates Cut

US growth estimates have been cut sharply by all the major investment banks and speculation is rife that the Federal Reserve will pull the trigger on further unconventional measures in the coming weeks or months.

Following the bitter battle over the debt ceiling in Washington there are serious question marks over whether America has the fiscal firepower to mount another major stimulus package but some analysts believe the President has some room for maneuver.

“Contrary to popular belief, we think global economic policymakers can prevent a hard landing for the global economy, provided they act promptly,” said Jan Amrit Poser, the chief economist at Sarasin in Zurich as he downgraded his targets for US growth in 2011 and 2012.

“If they announce short-term stimulus packages while outlining the long-term measures they intend to use to curtail the rising debt burden, they will demonstrate their determination to support the economy and stimulate public confidence in their intention to undertake savings,” Poser added.

“We expect US President Barack Obama will use this option and mount a new stimulus programme that provides extended unemployment benefits and subsidies for small and medium-sized businesses,” he said.

Like the Democrats, Poser is calling for some bold action. Put off the short-term cuts and go all in to reboot demand while presenting a credible plan to reduce long-term spending.

If Obama is to twist, it is likely America will have to consider spending more than $300 billion on a jobs package.

Edward Hugh, a Barcelona-based economic blogger and euro skeptic, believes Obama and those with any fiscal firepower will be forced into another round of stimulus measures by the time the G20 meets in December.

On Thursday, G7 finance ministers meet in France amid reports stimulus is back on the table as the economic situation deteriorates.

Courageous Leadership Needed

In order to deliver such a plan, which would be highly controversial and bitterly opposed by the Republican party and whoever they choose to run against Obama next year, the president is going to have to show some courageous leadership, something that is currently in short supply.

“The failure of Western political leadership threatens our mild recession scenario in the US, and is causing market despair with Europe,” Charles Robertson, the global chief economist at Renaissance Capital wrote in a research note.

Citing the strength of political leadership in the good times of the 1950s, 1960s and 1980s - think Reagan, Thatcher, Kennedy and Helmut Kohl - Robertson sees similarities with the 1970s - not a time known for its political leadership.

“In the economic mess that was the 1970s, with high unemployment, stagflation, ideologically-driven terrorists and market disorder, we struggle to remember great leaders," Robertson wrote.

"US presidents Gerald Ford and Jimmy Carter, UK Prime Minister James Callaghan, one-term French President Giscard D’Estaing and German Chancellor Helmut Schmidt may have all been good men, but very few would cite them as their political heroes,” he added.

Obama is the new Jimmy Carter is a narrative the Republican Party is desperate to pin on the current resident of the White House, who they hope leaves office as a one-term President.

The jobs plan is something that will be used against the President by his opponents who claim he is spending money America cannot afford and racking up more debts that will lead the country to ruin.

Under sustained attack with six out of 10 Americans believing he is not leading the economy properly, Obama needs to decide whether he goes all in or allows his opponents to dictate the agenda.

Whatever route he takes, the President’s success will be dependent on the economy.