It's Gonna Be The Economy, StupidPaul Magnusson
President Clinton is barely a third of the way through his first term, yet his top economic advisers are marching into the Oval Office clutching charts and prognostications for 1996. Why the top-level skull sessions? To gauge the economy's health and determine what, if anything, can be done to give the 40-month-old expansion legs to make it to Election Day '96. "That's where we need to be focusing our attention now," frets a senior Administration official.
Clinton has a lot riding on this recovery. "If the economy gets even a little bit shaky, he will absolutely plummet in the polls," predicts University of Cincinnati political analyst Alfred Tuchfarber. So far, though, the President is doing well. He is on track with his promise to create 8 million jobs during his first term. Real growth is in the 3%-plus range, and inflation is nowhere to be found. The federal budget deficit is shrinking faster than predicted.
BEAR TRAPS. The problem, of course, is that the current expansion is looking a bit long in the tooth. It started in March, 1991, and will be 68 months old if it lasts until the next Presidential election. The great booms of the 1960s and 1980s lasted longer--106 and 92 months, respectively. But the average length of the last six major expansions is just 59 months, and most were shorter (chart).
Not to worry, the Council of Economic Advisers is telling Clinton. In its July 15 economic review, the CEA will forecast growth of 2.7% for 1995--fast enough to keep creating new jobs but not so fast as to rekindle inflation. What's more, the CEA is arguing that the Bush recovery, which officially began in March, 1991, was so lackluster that it makes more sense to date the expansion from mid-1992, when unemployment peaked. That would make this upturn a mere two years old.
Certainly, there is independent support for the CEA's optimism. According to a soon-to-be-published study by the Center for International Business Cycle Research at Columbia University, the current expansion should make it to December, 1996. That prediction is based on the historical behavior of the prime rate during business cycles.
Most private forecasters share the Administration's view that the expansion isn't in any immediate danger. The Blue Chip consensus forecast shows a growth rate of 2.8% for 1995. Even pessimistic economic seers expect the economy's performance to be a plus for Clinton in '96. For example, DRI/McGraw- Hill's latest estimate shows a slowdown in 1995, followed by a gradual economic pickup in 1996.
But Clinton's path is strewn with bear traps. The dollar's recent decline against the Japanese yen and German mark runs the risk of driving up long-term interest rates as lenders demand a premium for declining dollar assets. Higher bond yields, in turn, could strangle the expansion at precisely the wrong time for Clinton's reelection efforts. So, too, could overzealous hikes in short-term rates by the Federal Reserve to head off inflation. That could panic the markets and prompt consumers to shut their wallets.
BUDGET RESTRAINTS. Still, figuring out what the Administration could actually do to stretch out the current expansion has the economic team stumped. If the economy sags badly, White House political advisers may try to revive Clinton's 1992 promise of a middle-class tax cut to stimulate consumer spending. But that would force Congress to suspend newly enacted pay-as-you-go rules for curbing the deficit.
Reviving Clinton's investment plans for public infrastructure--a stimulus favored by Labor Secretary Robert B. Reich and White House liberals--faces the same budgetary restraints. Another possibility endorsed by Fed Chairman Alan Greenspan: a new deficit-reduction effort to lower long-term rates and add life to the expansion.
For now, the Clintonites are hoping the economy won't need such strong medicine. After all, real wages are beginning to climb, putting more money in consumers' pockets. Business spending on equipment is still surging, promising big productivity gains. And with Europe and Japan climbing out of recession, net U.S. exports will start adding growth to the economy. "We know what is going to sustain the recovery," says CEA Chair Laura D'Andrea Tyson. "Jobs, income, and confidence. The real question is, what could stop it?" The Clintonites hope the answer is--nothing.