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Obama Recovery From Bush Slump Proves No Morning in America Yet

The brightening economy as the 2012 election year begins doesn’t yet match Ronald Reagan’s “Morning in America.”

President Barack Obama presides over an economy that eluded the threat of a double-dip recession in mid-2011 and now is strengthening, with growth accelerating in the fourth quarter to a 2.8 percent rate, the fastest in 18 months, from 1.8 percent the previous quarter.

Still, the pace remains well short of the recovery that helped propel the re-election of Reagan -- who, like Obama, faced a contraction considered in its time to be the worst since the Great Depression and also lost congressional support in mid- term elections.

“We’re getting growth but we’re not getting prosperity,” said Neal Soss, chief economist at Credit Suisse in New York, who was an assistant to former Federal Reserve Chairman Paul Volcker from 1981 to 1983.

Gross domestic product in the final three months of 1983 rose at an annualized 8.5 percent, the third straight quarter of growth greater than 8 percent. While the unemployment rate last month was only two-tenths of a percentage point higher than in December 1983 -- 8.5 percent compared with 8.3 percent -- joblessness that year dropped 2.5 percentage points in just 12 months, compared with a decline of less than 1 percentage point in 2011.

While Reagan’s rebound to victory as the economy shifted direction is a precedent Obama supporters would like to follow, Reagan, a Republican, had an advantage because his recession was caused by high inflation, which the Federal Reserve countered by raising interest rates.

Worldwide Credit Crunch

Now the world’s largest economy is struggling with the aftermath of a global credit crunch triggered by a plunge in the housing market and record debt, which Kenneth Rogoff, an economics professor at Harvard University in Cambridge, Massachusetts, said is harder to come back from.

“When you have a deep financial crisis paired with recession, it’s a completely different animal than a normal recession,” Rogoff said in an interview in Davos, Switzerland, last week. “The one in the Reagan administration was a very typical, more normal one, caused by a tightening of monetary policy. Comparing that with the latest recession is not a good analogy.”

Obama, a Democrat, inherited a contraction that started in December 2007, during Republican George W. Bush’s presidency, and was exacerbated by turmoil in financial markets following the collapse of Lehman Brothers Holdings Inc. in September 2008. When Obama took office in the first quarter of 2009, the economy was shrinking at a 6.7 percent annual rate.

Banking Panics

History shows that recoveries take longer when they follow financial crises, according to the 2009 book “This Time Is Different: Eight Centuries of Financial Folly,” by economists Carmen Reinhart and Rogoff. The authors traced similarities among such crises in 66 countries dating back to medieval times, including sovereign defaults, banking panics and inflationary surges.

The level of debt held now by governments, the financial industry and especially consumers remains a greater drag on the U.S. than in 1983, Reinhart said Jan. 27 in a radio interview from Davos on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. In the third quarter of 2011, total household debt was 86 percent of GDP, compared with 47 percent in the third quarter of 1983, according to the U.S. Commerce Department.

“The capacity for households to carry on to be the engine of growth that they have been in past recoveries is simply not there,” said Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington.

‘Dramatically Different’

The difference in the rebounds means the mood of the electorate as 1984 began also was “dramatically different from the situation that faces Barack Obama,” said Peter Hart, the pollster for Reagan’s Democratic rival, Walter Mondale.

Reagan started his re-election year with a job-approval rating of 54 percent, compared with 43 percent for Obama, Gallup poll data show. The Conference Board’s Consumer Confidence Index in December 1983 was 103.6, and 43 percent of the public thought the U.S. was headed in the right direction, based on an ABC/Washington Post poll.

Last month, consumer confidence was 64.5, and the share of the public who said on Jan. 15 the country is heading in the right direction was 30 percent.

“Reagan could talk about morning in America and could come from that perspective,” Hart said. “The major difference this time is that Americans are much more likely to believe we are in a long-term decline.”

Industrial Production

In the final three months of 1983, average after-tax personal income had risen 4.2 percent from a year earlier, adjusted for inflation, according to the Commerce Department. In the final quarter of last year, it had dropped 0.8 percent. Industrial production in December 1983 was up 10.84 percent from a year earlier, compared with 2.95 percent in December 2011.

Obama offered a re-election message in his State of the Union address last week that relies less on the strength of the economy than did Reagan’s 1984 “Morning in America” campaign theme. Instead, Obama stressed a “fair shot” for middle-class Americans. To win a second term, he doesn’t need to match the lopsided 49-state victory Reagan achieved; he need only get a majority of electoral votes.

Franklin Roosevelt, the most recent U.S. president to confront an economic calamity as serious as the 2008 financial crash Obama inherited, twice won re-election with jobless rates higher than Obama faces: 16.9 percent in 1936 and 14.6 percent in 1940.

No Help

A turnaround isn’t always enough to help an incumbent. An eight-month recession contributed to Bill Clinton’s defeat of President George H.W. Bush, even though it ended in March 1991, 20 months before the November 1992 election. Unemployment rates continued to rise, peaking at 7.8 percent in June 1992, before beginning to fall.

Reagan, who came to office following the inflationary shocks of the 1970s, campaigned for his first term on the basis of bringing down a “misery index” that incorporated both the inflation and unemployment rates. He also was able to benefit from slowing price increases. The Conference Board’s confidence index nearly doubled from December 1982 to the end of 1983 as the cost of living continued to retreat from the 11.8 percent year-over-year rise Reagan faced in January 1981.

Inflation now is tamer than during the Reagan recovery, with consumer prices up 3 percent in the 12 months ended in December, versus 3.8 percent for 1983, according to the Labor Department. Household sentiment was little changed last year, climbing 1.7 percent.

Stock-Market Boost

The stock market provided another boost for Reagan in the run-up to re-election. The benchmark Standard & Poor’s 500 Index climbed 17.3 percent in 1983, while it was unchanged last year. That generated momentum for the Republican, even though the S&P has done better during Obama’s presidency, increasing 55 percent from his inauguration through Jan. 27, versus 22 percent in the comparable period under Reagan.

In the bond market, yields on 10-year Treasury notes were 1.89 percent on Jan. 27, down from 3.387 percent on the same day a year earlier. On Jan. 27, 1984, as Reagan was preparing his re-election bid, 10-year yields were 11.59 percent, up from 10.67 percent a year earlier.

Reagan also didn’t have to cope with a record number of homes in foreclosure left over from a housing bubble; home sales were soaring as he approached re-election, restoring confidence among owners and providing a source of employment growth.

Construction Jobs

“Housing was part of that story,” Soss said. “You added a lot of construction jobs that you aren’t adding now.”

Purchases of previously owned single-family homes in December 1983 were up 23 percent from a year earlier, according to the Washington-based National Association of Realtors. Last month, year-over-year sales rose 4.3 percent.

Still, recent gains in the housing market suggest the industry that precipitated the worst recession since the 1930s won’t be a drag on growth this year. Obama last week proposed a plan aimed at reducing monthly mortgage payments, which would help combat a drop in home prices that Fed policy makers say is weighing on the economy.

Lower rates combined with prices that have fallen to a median of $164,500 last month from $229,000 in June 2007 are making homes affordable for more Americans. A mortgage rate of 4 percent on a fixed 30-year loan of $100,000 would cost about $477 a month, compared with around $1,138 at the December 1983 rate of 13.4 percent.

Rising Consumer Sentiment

An improving job market and freer credit are bolstering consumer sentiment and spending, the biggest part of the U.S. economy. Retail sales have risen every month since June 2011, according to Commerce Department data.

Polls show such signs of strength are beginning to translate into greater public optimism, even as the European debt crisis poses a risk to global financial markets and the U.S. expansion.

More people now believe the economy will get better, with 37 percent expecting improvement in the next year versus 17 percent saying it will worsen, based on an NBC News/Wall Street Journal survey concluded Jan. 24. That’s up from 30 percent expecting improvement a month earlier. Approval of Obama’s handling of the economy also rose to 45 percent from 39 percent in December.

Hart, now chairman of the Washington-based polling firm Hart Research Associates, said Obama probably will benefit if the economy continues to show improvement. Changes also take less time now than in 1984 “to get into the bloodstream” of public opinion in the age of 24-hour cable news and the Internet, he said.

“It will definitely help President Obama if the economy is moving forward and there’s a sense of progression,” Hart said. “Instead of June being the last target point, it may turn out to be October.”

To contact the reporters on this story: Mike Dorning in Washington at mdorning@bloomberg.net; Timothy Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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