Obama’s Toughest Re-Election Challenge May Come From Economy

President Barack Obama is facing a rising threat from potentially his toughest re-election opponent: the American economy.

The Labor Department reported yesterday that job growth slowed to 54,000 in May, down from 232,000 in April and the smallest gain in eight months. The unemployment rate rose to 9.1 percent, the highest level this year.

“If job creation doesn’t continue on the pace it’s been on in recent months, that’s going to be an enormous hurdle for the president,” said Tad Devine, a Democratic strategist who worked for the party’s 2000 and 2004 presidential nominees.

The jobs report was the latest economic indicator suggesting the nation’s recovery from the worst recession since the 1930s has hit a soft patch as Obama’s 2012 campaign organization gets geared up and Republican candidates line up to vie for their party’s presidential nomination.

U.S. consumer spending slowed in the first quarter of the year and confidence levels have since fallen. Manufacturing growth, a consistent contributor to the recovery, weakened across the globe in May. The S&P/Case-Shiller Index released May 31 showed U.S. home prices in March dropped to the lowest level since 2003, further eroding home equity available to Americans.

“It highlights the tenuous nature of things,” said Mark Zandi, chief economist for Moody’s Analytics in West Chester, Pennsylvania. “Everybody has been through so much it really doesn’t take much to push people over the proverbial edge.”

Trimming Forecasts

Over the past two weeks, private economists at firms such as J.P. Morgan, Goldman Sachs and Macroeconomic Advisers cut their forecasts for economic growth in the current quarter. Zandi, who began the second quarter forecasting a 3.7 percent growth rate for the period, has trimmed his estimate to 2.2 percent.

The 1.8 percent growth rate in the first quarter, a decline from 3.1 percent the prior quarter, also came in below forecasters’ estimates.

Obama hasn’t suffered in the polls so far. Gallup’s daily tracking poll showed him with an average 51 percent job approval May 31 through June 2. It has climbed from 41 percent in mid- April, following the killing of Osama bin Laden and an easing of gasoline prices.

Potential Republican candidates for the White House are making the economy an issue. Former Massachusetts Governor Mitt Romney, who formally announced his candidacy for the Republican nomination this week, said yesterday in New Hampshire that the number of people out of work is “simply inexcusable.”

“The Obama policies have failed America,” he said.

Stocks Down

Investor concern over the economy has sent stocks down, extending the longest streak of weekly losses for the Dow Jones Industrial Average since 2004, while Treasuries rose.

The Dow lost 97.29 points, or 0.8 percent, to 12,151.26 at 4 p.m. in New York, adding to its fifth straight weekly loss. The Standard & Poor’s 500 Index declined 1 percent. The euro strengthened 1 percent to $1.4637 as the Dollar Index slumped 0.8 percent to 73.714. Treasuries rose, pushing yields on two- year notes to a seven-month low of 0.41 percent.

The current ebb parallels the movement of the U.S. economy last year, when payrolls grew by an average of more than 300,000 from March through May only to slow down and start shedding jobs in the wake of the European debt crisis. Growth picked up again in October. Zandi is among the forecasters who say the recovery likely will strengthen again in the second half of 2011.

‘Bumps on the Road’

Obama, speaking yesterday at a Chrysler Group LLC plant in Toledo, Ohio, said “there are always going to be some bumps on the road to recovery.”

“This economy took a big hit,” Obama told auto workers hours after the jobs numbers were released. “It’s taking a while to mend.”

Slowing growth would at least temporarily cut into the pace of employment gains in an economy that still has a long way to go in digging out from the recession. Only 1.8 million of the more than 8.7 million jobs lost since January 2008 have been regained.

Even before the recent series of negative indicators, forecasters predicted Obama would face a challenging economic climate for re-election. The unemployment rate in the final quarter of 2012 was expected to be 7.9 percent, according to the median forecast of economists in a Bloomberg survey taken May 2 through 12. Zandi said he expects the Election Day unemployment rate to be “north of 8 percent.”

Reagan’s Victory

Ronald Reagan, who faced an unemployment rate of 7.2 percent on Election Day in 1984, was the only U.S. president to win re-election with a jobless rate above 6 percent since World War II.

A soft recovery also increases the challenge to Obama’s message that the nation is on a positive trajectory. The White House has distilled the theme into the catchphrase “Win the Future.”

Devine said the credibility of Obama’s view of the path forward -- more than a specific jobless rate -- will be the most important ingredient in his re-election campaign.

“Voters will make choices on how they feel the candidate will affect their future,” Devine said. “I don’t think there’s a magic number for unemployment.”

Reagan won 49 states against Democrat Walter Mondale with an unemployment rate that was “really high at the time” because “people believed he had the nation headed in the right direction,” he said.

Public Pessimism

The public right now is pessimistic. The proportion of Americans who believe they will be better off in 10 years dropped from 72 percent in 2009 to 54 percent this year, according to a survey by the Pew Economic Mobility Project.

Fewer than half of Americans now believe their children will enjoy a higher standard of living, a centerpiece of the traditional American Dream, the March poll found. That’s down from 62 percent who thought so in 2009.

“The danger is that if we continue to take two steps forward, two steps back, people are going to continue to suffer a high level of economic anxiety,” said Bill Carrick, a Democratic strategist. “There’s no way that can be good politically for the president.”

Even during months when net job gains have been stronger, the labor market has been slow. Typically jobs churn with millions of new employees hired every month during recessions as well as boom times.

Layoffs and Hiring

Layoffs in March, the last month for which data is available, were at 1.6 million, the lowest since the Labor Department began keeping data in 2001. Hiring has been subdued for an expansion, reaching 4 million new employees that month, lower than the depths of the nation’s 2001 recession.

The result is that while workers with jobs face less danger of losing them, it remains hard for people who were thrown out of work or are looking for a job after graduation, said Heidi Shierholz, a labor economist at the Economic Policy Institute in Washington.

That lack of movement also has ramifications for people who are looking to advance. Through 2008, an average of more than 2.7 million workers quit their jobs every month, often to go on to better positions. On average, 1 million fewer workers have quit their jobs each month of the Obama presidency, for a cumulative total of 27 million through March.

“It represents a lot of lost opportunities: higher wages, a better skills or interests match, a better commute, all the millions of reasons people quit to take a new job,” Shierholz said.

To contact the reporter on this story: Mike Dorning in Washington D.C. at mdorning@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

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