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Economy Seen Neither Too Good Nor Bad to Decide Election

Federal Reserve Chairman Ben S. Bernanke is predicting an election-year economy that’s neither here nor there: growth that disappoints yet keeps the U.S. from slipping back into the recession billionaire Bill Gross has indicated may happen.

“Nobody’s satisfied with where we are today, of course, but there certainly has been significant improvement since mid- 2009 when the recovery began,” Bernanke told Congress on July 18. “I recognize that many Americans will still feel that the situation is not satisfactory, but it’s going in the right direction.”

With voters focused on the economy as their most important issue, growth that muddles along may fail to provide Republican Mitt Romney with the ammunition to unseat President Barack Obama, according to Dan Schnur, director of the Jesse M. Unruh Institute of Politics at the University of Southern California in Los Angeles. Fed officials predict a U.S. expansion of 1.9 percent to 2.4 percent this year, with unemployment stuck around 8 percent.

“It’s not good enough to automatically re-elect Obama, but it’s not bad enough to automatically elect Romney,” said Schnur, a campaign adviser to Republican Arizona Senator John McCain’s first bid for the White House in 2000. “We’re in this in-between stage, which makes the election something of a jump ball.”

Bernanke isn’t predicting the recession that Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., referenced in a July 16 Twitter post. Gross said the U.S. is “approaching recession when measured by employment, retail sales, investment and corporate profits.”

Rising Joblessness

The unemployment rate will end the year at 8 percent to 8.2 percent and fall to 7.5 percent to 8 percent in 2013, Fed officials estimate. Joblessness was 8.2 percent in June, up from 8.1 percent in April.

“There is less than an even chance of a recession starting in the second half of 2012,” said Martin Feldstein, a professor at Harvard University in Cambridge, Massachusetts. “Growth is likely to be at a rate of less than 2 percent. But the risks are on the downside, and growth of less than 1 percent cannot be ruled out.”

Feldstein is a former president of the National Bureau of Economic Research -- a private, nonprofit, nonpartisan research organization -- and a member of the NBER business-cycle committee that decides when U.S. recessions start and stop. He also served as chief economic adviser to President Ronald Reagan.

‘Significant Decline’

While some economists determine a recession by looking for two quarters of falling economic output, the NBER committee -- which declared the last recession ended in June 2009 -- defines it as “a significant decline in activity.” Among the indicators the panel looks at are gross domestic product, employment and real income.

Panel members also review the monthly GDP estimate by forecasting firm Macroeconomic Advisers as part of their decision making, as well as estimates constructed by two committee members: Harvard economist James Stock and Mark Watson at Princeton University in New Jersey.

Economists forecast a 20 percent probability of a recession within the next 12 months, the same as in January, according to the median response of 53 who were surveyed by Bloomberg News from July 6 to July 10.

Strengthening Signs

The residential real-estate market has shown signs of strength even as other parts of the economy cool. New U.S. home construction rose in June to the highest level in almost four years, climbing 6.9 percent to a 760,000 annual pace after a revised 711,000 rate in May that was faster than initially estimated, the Commerce Department in Washington said July 18.

“We’re growing roughly at a pace that’s enough to absorb the growth in the working-age population but nowhere near fast enough to make up for the ground that was lost in the labor market during the downturn,” said Scott Brown, chief economist in St. Petersburg, Florida, at Raymond James Financial Inc., which oversees $363 billion.

Employers added 80,000 jobs in June, missing the 100,000 median estimate of economists in a Bloomberg News survey, after a revised 77,000 in May and 68,000 in April, the slowest pace in almost a year. Through June, the economy had recovered about 3.84 million of the almost 9 million jobs lost as a result of the 18-month recession.

Focal Point

The economy is poised to be the focal point for this November’s election. Forty-five percent of Americans choose unemployment and jobs as the most important issue facing the nation, compared with 18 percent for the federal deficit and 13 percent for health care, according to a Bloomberg National Poll of 1,002 adults conducted June 15-18. The margin of error is 3.1 percentage points.

The outlook has weakened in the last few months as the sovereign-debt crisis in Europe worsened. Concern that fiscal tightening in the U.S. will curb growth also has damped confidence. Fed officials in June lowered their forecast for the expansion this year from an April projection of 2.4 percent to 2.9 percent.

“The withdrawal of government spending, plus the troubles in Europe, have substantially cut into the recovery that had begun in the second half of 2009,” said Jeffrey Frankel, a member of the NBER business-cycle committee and a professor at Harvard. “But I would expect that we would probably escape recession if the fiscal cliff weren’t there.”

Reductions in federal spending, a halt to payroll-tax cuts and expiration of income-tax cuts enacted under President George W. Bush are slated to take effect at year-end.

‘Fiscal Cliff’

Frankel said while the changes don’t begin until Jan. 1, concerns already are curbing growth.

“If political gridlock remains, then the economy could fall back into recession even before the end of the year,” he said.

Retail sales unexpectedly fell for a third month in June as limited employment gains took a toll on consumers. The 0.5 percent drop followed a 0.2 percent decrease in May, Commerce Department figures showed last week. The retail figures prompted economists at Morgan Stanley, Goldman Sachs Group Inc. and Credit Suisse Group AG to lower their forecasts for growth in the second quarter.

“The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year,” Bernanke told Congress July 17. Progress in reducing unemployment probably will be “frustratingly slow,” and the Fed is “prepared to take further action as appropriate,” he said.

Easing Tools

Easing tools include further purchases of Treasuries and mortgage-backed securities, and altering the Fed’s language on the outlook for interest rates, Bernanke said. Another option is to use the so-called discount window for direct lending to banks. Last month, the Fed decided to prolong through the end of the year its so-called Operation Twist program to lengthen maturities of Treasuries on its balance sheet.

“The economy’s losing momentum,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “There seems to be some question” in Bernanke’s “mind about whether we’re going to make the previous growth forecasts -- maybe that growth is even less than moderate -- but I certainly did not hear any talk of a recession” during his testimony.

While Bernanke isn’t forecasting a contraction in growth, he did tell Congress last week that a failure to avert a shock in fiscal policy next year would “probably knock the recovery back into a recession and cost a lot of jobs.”

Getting Worse

In the Gallup Organization tracking poll conducted July 15- 17, 57 percent of Americans said the economy is getting worse versus 37 percent who said it is getting better. The U.S. expanded at a 1.9 percent pace in the first quarter, down from 3 percent in the last three months of 2011. The economy grew by 1.4 percent in the second quarter, according to the median estimate of economists in a Bloomberg News survey.

Even if the U.S. does slip into a mild recession, that still may fail to provide the catalyst to swing voters one way or another, according to Schnur.

“Whether the economy is very slowly growing or whether it’s preparing for a turn to the worse, either way voters feel unsettled,” he said. “Either way, economic issues don’t necessarily drive them to the challenger, but the current landscape doesn’t provide many opportunities for the incumbent.”

To contact the reporters on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net; Steve Matthews in Atlanta at smatthews@bloomberg.net

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

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