By Peter Schroeder - 07/03/12 09:00 AM EDT
Weak June manufacturing numbers released Monday intensified concern about the fragility of the economic recovery and turned election-watchers’ attention toward unemployment numbers due out at the end of this week.
The reports, just four months before voters cast their ballots in the presidential election, come amid a wave of bad news on the global economy, which is seen by both the White House and President Obama’s critics as the most potent threat to his chances of securing a second term in office.
Manufacturing had been a key component of job growth earlier this year, but the index from the Institute for Supply Management (ISM) found national factory activity fell in June to 49.7 from 53.5 the previous month. Any reading below 50 shows a contracting in activity, while a reading of 47 would suggest a recession.
The ISM report shifted attention back to the economy after a period in which Obama has been boosted by the prominence of other issues.
While Republican presidential candidate Mitt Romney views any day where the main subject is not the economy as a lost opportunity, Obama benefits when the subject is shifted to other issues that could offer him solider ground — or simply an opportunity to attack his rival.
Over the past few weeks, Obama has seen momentum shift in his favor, particularly on the heels of the administration’s announcement that it would no longer deport certain illegal immigrants brought to the United States as children. The move allowed Obama to appeal to Hispanic swing voters while placing Romney in a difficult spot.
The manufacturing report returned the spotlight to the economy, where it will likely remain after the Fourth of July holiday as markets and politicians await Friday’s jobs report, an indicator vital to the narratives of both presidential campaigns.
Domestic growth is almost assuredly being held back by dire developments across the globe — which has terrible implications for Obama’s campaign.
China reported Monday that its manufacturing sector had also taken a hit, as its index fell to 50.2 from 50.4. Concerns about an economic slowdown in China pushed its central bank to cut interest rates in June for the first time since 2008.
New employment data from the European Union found that European unemployment had hit record levels since it first started tracking continental data in 1995. Unemployment in the euro area now stands at 11.1 percent.
Still, there are some positive spots on the economic front, especially in the U.S. housing sector.
Long a drag on the recovery, a new June report found home prices actually climbed in major cities in April. And the Commerce Department reported Monday that new construction spending climbed 0.9 percent in May, its second month of gains and its highest level since December 2009.
Recent political developments have also offered signs of daylight in Europe.
On Friday, European leaders appeared to finally strike a compromise on the future of the eurozone. After huddling for hours at a private summit that had markets desperate for positive developments, Europe’s leaders emerged with a compromise that lays the groundwork for a unified banking sector, targeted relief and a tighter fiscal union.
“They actually took concrete steps to move forward to attempt to integrate key parts of the European Union that they failed to do at its initiation,” said Andrew Busch of BMO Capital Markets. “In the past we’ve not had anything concrete or solid that you could hang your hat on. These are part of the steps that you have to take to fix the problems in Europe.”
Under the agreement, European nations will establish the European Central Bank as the continent’s independent banking regulator, and provide bailout funds directly to ailing banks — a move that will relieve burdened sovereign balance sheets in nations like Spain and Italy.
However, while the agreement is a promising development for the long-term viability of the eurozone, it is not expected to yield much in terms of immediate economic benefits, either there or in the United States.
“In the short run, the best we can hope for in the United States is that Europe basically muddles through,” said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics.
And even if Europe manages to muddle, the bleak new manufacturing data cast a fresh shadow on the nation’s recovery.
“We never expected anything like the magnitude of the decline in the new orders index,” RDQ Economics wrote in a research note, adding that “uncertainty about the state of the economic expansion just got ratcheted up a notch with this report.”