For a brief interlude earlier this year, it looked like the economy would heal just in time for President Barack Obama’s reelection campaign. Employers were creating jobs at a robust 200,000 per month, sending the unemployment rate beneath 9 percent for the first time in 21 months. The stock market refilled battered 401(k)s with a nifty four-month rally. And the White House confidently predicted that the U.S. would soon regain all of the ground lost in the recession.
That was before an earthquake in Japan, unrest in the Middle East, debt woes in Europe, and dysfunction in Washington conspired to sap the momentum. Suddenly, before you could say “Jimmy Carter,” the notion of an election-year expansion had evaporated, replaced by fears of a recessionary relapse. “At one time, it looked like the President was going to be a shoo-in. Then they let the air out of the recovery balloon,” says Chris Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi UFJ in New York.
The goodwill accompanying the inauguration of the nation’s first black President in January 2009 is long gone. Obama’s approval ratings, as measured by Gallup, have plunged from 69 percent to as low as 38 percent as he presides over a poorer, angrier, less secure nation battling the toughest times since the Great Depression.
From vacant housing developments in Nevada to idle assembly lines in Ohio, voters are deeply pessimistic. Seventy-two percent of the public says the nation is on the wrong track, according to the latest Bloomberg National Poll.
Not since Franklin D. Roosevelt in 1936 has an incumbent President gone before an electorate racked by such economic distress. Almost 14 million Americans are unemployed, twice the number four years ago. Median household income has plunged almost 10 percent since the December 2007 onset of the recession, with most of that decline coming after the official start of the recovery. More than one-fifth of all homeowners are underwater on their mortgages. And multiple doses of fiscal stimulus and three years of near-zero interest rates have failed to provide a cure, leaving policymakers fresh out of ideas.
“What’s going to decide this election is jobs and the economy,” says David Winston, a Republican pollster and strategist. “The door is wide open for Republicans.”
Things could get worse. Europe’s debt crisis threatens to freeze global credit flows. Even China’s economic miracle is showing signs of fatigue. Two years ago the Obama Administration predicted the economy would grow by 3.8 percent this year and 4 percent the next. Instead, it’s likely to expand by just 1.6 percent in 2011 and 2.2 percent in 2012, according to economists surveyed by Bloomberg.
Much of what ails the U.S. predated Obama’s arrival in the White House and will be there to greet whoever occupies the Oval Office in 2013. Consumers are still chipping away at the same debt mountain that has blocked the road to prosperity throughout the crisis. Total household debt as of the second quarter was $13.3 trillion, more than twice the 1999 figure and down only slightly from the 2008 peak of $13.9 trillion, according to the Federal Reserve. John Herrmann, senior fixed-income strategist at State Street Global Markets (STT) in Boston, says the economy still faces “a minimum of four or five years of deleveraging by households” before it’s healthy. “That’s a long, slow, and tedious process,” he says.
No President since FDR in 1936 has been reelected with unemployment above 7.2 percent. The latest White House economic forecast, released in September, calls for the jobless rate to average 8.3 percent next year—and that assumes the economy grows more than twice as fast as Goldman Sachs (GS) expects it will.
Each of the two major political parties is haunted by the memory of a one-term President undone by an underperforming economy. For the Democrats, Carter provides the object lesson. For the Republicans, it’s George H.W. Bush, the victim of James Carville’s remorseless “it’s the economy, stupid” mantra in 1992.
How tough is Obama’s road ahead? At this point in the election calendar, he’s doing worse than both Carter and Bush. Despite runaway inflation and gas lines, the U.S. produced nearly 170,000 jobs per month in the summer of 1979, almost five times the pace during the comparable period this year. Likewise, one year before President George H.W. Bush sought a second term, the unemployment rate was 7 percent. Today it is 9.1 percent. “The President is incredibly vulnerable because of the economy,” says Matthew Dowd, a Republican strategist and a Bloomberg News consultant.
Indeed, popular support is draining from the White House. In the Bloomberg poll, 64 percent of respondents said they will either definitely vote for someone other than Obama or consider doing so. More than half say his $447 billion jobs plan would do nothing to lower the jobless rate.
Mark Mellman, a Democratic pollster, says incumbents can defy hard times and win a new mandate only by transforming the election into something other than the customary vote on their performance. “It’s important to make it at least a choice between the incumbent and the challenger, if not a referendum on the challenger,” he said.
So the President may appeal to Florida retirees by casting his Republican rival as extreme on Social Security. Or he may try to round up Latino votes in Arizona by assailing Republican proposals to crack down on illegal immigrants. And he’ll continually underscore the long-term, structural dimensions of the economy’s ailments. “People understand that the seeds for this were sown long before the President became President,” says Democratic Senator Michael Bennet of Colorado. “They’re not going to be deciding this election based on bumper stickers or slogans.”
For all his economic woes, Obama retains some strengths. Shifting demographics continue to make states such as Virginia more hospitable terrain for the Democrats. Likewise, in Wisconsin, Republican Governor Scott Walker’s campaign to curtail labor rights could give the President a boost by energizing union member turnout.
Obama also may find an ally in the passage of time. In September, employers added 103,000 jobs—better than expected, though still not great. The President ultimately has to hope that the economy continues to expand, however anemically, enabling him to claim progress. “Then he can say, ‘Don’t change horses; we’re moving in the right direction,’ ” says Jared Bernstein, a former White House economist. “But that’s pretty tough to argue if you’re not moving in the right direction.”