Nearing Election Day, the economy offers mixed signals to voters.
A flurry of positive data on jobs, growth and consumer confidence suggest that the economy is slowly, steadily improving. Yet few economists think that the sluggish upward movement will improve much next year, regardless of who wins the presidential election.
The slow crawl back from the Great Recession has made it difficult for President Barack Obama to seek re-election. “It could have been worse” is hardly the sexiest of campaign slogans. It’s left fertile ground for Republican challenger Mitt Romney to argue that the economy will improve under his stewardship. Think of the economy as a bowl of soup: It’s not as hot as you’d like it, but it’s not stone cold, either.
The Federal Reserve and mainstream economists forecast another sluggish year in 2013, regardless of who wins the presidency. The U.S. economy continues to face head winds that include the European debt crisis, a global slowdown, flat business investment and consumers continuing to pay down debts rather than spend at the mall.
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“I don’t see that much out there to grow beyond 2 percent to 3 percent,” said Alan Levenson, the chief economist for investment firm T. Rowe Price in Baltimore.
That’s not to say he doesn’t see bright spots. One is housing, which added to economic growth in the latest quarter after dragging against it for the past four years. Levenson expects housing starts to grow by a modest 250,000 in 2013, bringing national housing starts to about 1 million next year.
The U.S. economy grew at an annual rate of 2 percent from July through September. Under normal times, that’s a decent growth rate for a mature economy such as the United States’. But these aren’t normal times, and the economy has grown in fits and spurts since the Great Recession ended in June 2009.
“I’d call it middling growth. If we were in the middle of an economic expansion, this would be healthy . . . but given where we are we’d definitely like to see significantly faster growth than this,” said Scott Hoyt, senior director for forecaster Moody’s Analytics in West Chester, Pa.
The unemployment rate of 7.8 percent has come down only recently to where it was when Obama took office, as alternate measures of unemployment showed large numbers of Americans working two jobs to make ends meet or slogging through jobs while searching for ones that pay better.
The question of how good or bad it is right now depends to some degree on where you are, and where you’ve been. States that are enjoying an energy boom – Oklahoma, Texas and national leader North Dakota – have seen employment rise by 2.3, 2.6 and 6.3 percentage points, respectively, in the third quarter of this year over the same three months of last year.
Other states, such as Washington and California, are benefiting from a strong technology sector, which has been a driver of national growth. Employment from July to September this year rose by 1.9 and 2 percentage points, respectively, in those states.
“Business investment is slowing in the past quarter or two, but since the recovery began a lot of the growth has been driven by spending on software, IT (information technology) . . . and things like that,” said Marisa Di Natale, an economist at Moody’s Analytics who specializes in state economies.
Some states, such as Arizona and California, are bouncing back quickly, after falling more deeply into recession earlier than the rest of country did. Employment in Arizona is up 2.3 percent for the third quarter over a year earlier. In these states, and in the West more broadly, the housing sector bottomed faster it did than other parts of the nation, and housing is contributing again to growth and employment there.
“In Arizona, construction is adding to growth. There has been such a depletion of the housing stock that has been drawn down . . . that we’re now starting to see strong sales growth and price growth in areas like Phoenix,” Di Natale said. “They were the worst of the worst in the recession, and what they’re experiencing now is a sharp bounce-back.”
Even the Rust Belt states of Ohio and Indiana have seen employment revive as the auto industry recovers from the structured bankruptcies of General Motors and Chrysler. Auto sales nationally have been strong, pulling up manufacturers, and these two states saw employment jump 1.9 and 2.4 percentage points, respectively, in the third quarter over the same three months of last year.
These are all signs that the economy continues to recover from what’s widely seen as the deepest downturn since the Great Depression.
But the latest growth numbers from the Commerce Department also show that business investment fell from July to September. Economists worry that the uncertainty surrounding what happens in coming weeks regarding the federal budget crisis of looming spending cuts and tax increases – called the fiscal cliff – is hurting growth and investment.
At year’s end, Bush administration-era tax reductions, extended by Obama, are set to expire. Several other tax breaks are set to end, too, and it comes as deep across-the-board spending cuts are scheduled to take effect if Congress can’t reach a budget deal. On top of that, the United States is expected to hit its debt ceiling in late February or March, and the next president will have to work with Congress either to raise it or to reduce spending severely.
If all these things are left without a fix, it could shave more than 4 percentage points off growth. With a current growth rate around 2 percent, that would amount to instant recession at a time when the Federal Reserve and Treasury have fewer bullets left to reverse it.
On top of fiscal-cliff worries, China’s sizzling economy has been cooling off. Few economists expect a so-called hard landing, in which employment and home prices plunge. China’s growth is important for the United States, which exported more than $100 billion in goods there last year, and it’s even more important for other big developing countries such as Brazil and India, which help global economic growth.
Should Romney defeat Obama, he’s pledged to label China a currency manipulator on his first day in office and to pave the way for retaliatory penalties against goods that are unfairly cheap and harm U.S. manufacturers. While that’s an attractive political stance, it’s sure to provoke an important trading partner that’s already threatened to respond in kind.
“I think it would be bad for the world in general,” said Pablo Goldberg, the head of emerging market research for the big global bank HSBC.
If lawmakers could end their streak of gridlock and find common ground on debt and deficit issues, it could provoke more growth in the United States and abroad than currently is forecast, Goldberg said.
“Good news can drive the animal spirits” and spark growth, he said.