Glum Economic Forecast is Bad News for Incumbents

A recent New York Times/CBS News poll reveals that this is the most unpopular Congress in the history of their polls. A whopping 82% of Americans disapprove of the way that Congress has been handling its job. What’s more is that most Americans think Congress should be more concerned about creating jobs than cutting spending despite consistent calls from Republicans and the Tea Party to reduce the size of government. This news shouldn’t come as a surprise because the signs of a much weaker economy than previously understood have been missed this week amid the debt ceiling debate. Three critical pieces of economic data show that the “recovery” will be longer and more painful than perceived by politicians.
First, manufacturing growth had been a bright spot over the past two years. From Caterpillar tractors to American-made autos to smaller items, manufacturing firms had shown growth and hiring of workers. This week the Institute for Supply Management data showed slower growth than expected and even more troubling, the New Orders Index, which tracks the manufacturing industry’s stability, shows a contraction in the manufacturing sector in thenext few months. Second, consumer spending showed the first decline in two years during June. Consumers make up 70% of the U.S. economy and a decrease in spending ripples throughout all sectors. The same factors that have afflicted the economy for three years, namely a weak job market and low housing prices are leading individuals to try and save more or payoff debt instead of spend. The lack of spending hinders the momentum for any recovery.
Most troubling this week was news on the overall Gross Domestic Product (GDP) growth. The Commerce Department adjusted both 1st quarterand 2nd quarter growth significantly downward. In other words, the economy was much weaker than at first thought—in fact 1st quarter growth was only 0.3%, barely growth at all and 2nd quarter was not much better at 1.3%. A growth rate of at least 2.5%-3% is needed to simply provide jobs for the population growth, let alone lower unemployment.
As we contemplate the size, scope and budget of governments at the federal and state levels, it is imperative that leaders of all parties are honest about the current state of the economy and specifically lower and middle class households. Our economy remains weak with households feeling the continuing financial pressure. The lack of savings combined with a weak-housing market and high unemployment will continue to plague ordinary people—policy decisions must take this truth into account. The lingering effects of a poor economy will likely translate to a tough 2012 election cycle for incumbents. Most of the focus so far has been on President Obama’s reelection chances, but record setting disapproval ratings should put all Washington politicians on notice.