Economy stumbles toward November

Experts foresee little improvement in lead-up to presidential Election Day.

The economic recovery is stumbling as the November election approaches, threatening President Obama’s hopes for reelection and increasing pressure on Congress to stave off the so-called “fiscal cliff” at year’s end.

The Labor Department reported last week that the economy added just 80,000 jobs in June, confirming fears of a springtime slowdown after a winter of robust employment growth. The unemployment rate held at 8.2 percent, and after gross domestic product grew by 3 percent in the fourth quarter of 2011, it slowed to 1.9 percent in the first quarter this year, with expectations for second-quarter GDP growth at around 2 percent or less.

Economic analysts say job growth is unlikely to accelerate significantly over the next several months, citing the drags of Europe’s recession and China’s slowdown, along with lingering uncertainties over the future of U.S. fiscal policy.

“Those are the three major sources of uncertainty right now for U.S. businesses,” said Andrew Busch, global currency and public policy strategist at BMO Capital Markets. “The only thing right now the United States can control is what happens domestically.”

Busch said the best hope is that the weak jobs report spurs the Obama administration and Congress to act sooner on the slate of expiring tax rates and scheduled spending cuts set to take effect at the end of the year. But officials in both parties acknowledge major action is unlikely before the election.

Business leaders have no reason to think differently. “What I am hearing is that they are exceptionally pessimistic that anything positive is going to come out of Washington until 2013,” Busch said.

The result is that companies are unlikely to add significant numbers of new workers or make major investments without a clearer picture of what the tax code will look like. 

“If the country is run on a quarter-to-quarter basis,” Busch said, “it’s almost impossible for business to think longer term or even medium term on making investment decisions, on building a plant or whether to hire new workers if they don’t know what the rules are or if the rules are going to change.”

“Muddling along is probably the best we can hope for at the moment,” he added.

Daniel Alpert, managing partner at Westwood Capital, also said the best-case scenario in the short term is for the U.S. economy to “chug along” with “anemic job growth.” But he said the biggest obstacle to faster growth is deflationary pressure on global prices, not the looming fiscal cliff.

“I don’t think businesses worry about the fiscal cliff,” Alpert said.

The president last week signed a two-year highway bill and legislation preventing a hike in student loan interest rates, which supporters said would help job creation. But Busch said any impact the law will have on the economy is likely to be minor.

“It’ll help, but just in a very minor way,” he said. “Those are not important moves by either Congress or the president.”

Friday’s monthly jobs report marked the third straight lackluster reading on the economy. Employers have added an average of 75,000 jobs a month in April-June after averaging 225,000 jobs in the previous four months.

While the Obama administration cautioned against reading too much into the report, Republicans pounced. Mitt Romney, the presumptive GOP presidential nominee, said the report was “a kick in the gut.” House Majority Leader Eric Cantor (R-Va.) called the data “miserable” and declared on Tuesday that “the economy is stalled.”

Other indicators have also pointed to a slowdown, including a dip in confidence among small businesses. “There is a lessening of confidence every single day,” Cantor said.

There were a couple of bright spots in the jobs report, including an increase in wages and hours worked. A significant chunk of the new jobs were temporary hires, which could be a sign of future permanent posts. And recent readings from the auto and housing industries, as well as on consumer spending, have been more positive.

Yet on the whole, the economic data over the last few months has boosted the GOP’s bid to make the presidential election a referendum on Obama, as Republicans argue that his policies have failed to produce a meaningful economic recovery.

Congress has responded to the most recent dip more rhetorically than substantively. House Republicans and Senate Democrats have pushed competing versions of a small-business tax break to boost the economy in the short term, but an agreement is unlikely.

The Federal Reserve is weighing a third round of quantitative easing to boost employment, but economists do not expect the Fed to make a big move in the heat of a presidential election.

For Obama and policymakers, the economy on Election Day and in the lame-duck session of Congress could look a lot as it does today.