So much for economic momentum. And perhaps, so much for Democratic hopes for a third straight term in the White House.
The Obama administration had made the argument just before last year’s midterms that a spike in third-quarter GDP for 2014 meant that the economic policies of Barack Obama had finally begun to bear fruit. The final estimate of 2014 Q2 growth by the Bureau of Economic Analysis put annualized GDP expansion at 4.6 percent, a result announced weeks before the midterm elections.
The initial estimate of 2013 Q3 growth, announced just days ahead of the vote, hit 3.5 percent, and eventually reached 5.0 percent. Despite losing big in the midterm elections, the White House and Democrats declared a long-delayed victory over the Great Recession, and vindication for its economic and regulatory policies after nearly six years of a stagnant recovery.
The ground began eroding under that argument almost immediately. The growth, especially in the third quarter, had been driven by unusually high defense spending (an increase of over 16 percent from Q2), and by continuing consumer confidence as expressed in personal consumer expenditures (PCEs). By the fourth quarter, GDP growth decelerated to 2.2 percent, leaving 2014’s overall GDP growth at the same level. The decline in Q4 came mainly from an explosion of imports, which allowed the Obama administration to continue its claims of economic momentum.
This week’s estimate of Q1 growth in 2015 dispels the illusion. The BEA pegged it at 0.2 percent, barely outside of contraction. This time imports can’t be blamed for it; that sector only grew 1.8 percent, while exports fell dramatically by 7.2 percent, the sharpest decline in a year. Exports of goods fell 13.2 percent, the worst in four years.
It’s not just the export-import calculus that collapsed. Overall sales of goods also only increased 0.2 percent, with non-durable goods falling 0.3 percent. Private investment increased 2.0 percent, its weakest result in a year, but only on a big increase in intellectual property investment. Other business investments fell dramatically, especially in structures, which fell 23 percent -- the first decline in two years, and the worst in the past four. Absent inventory adjustments, Q1 would have been in contraction, as real final sales of domestic product dropped 0.5 percent.
Even consumer activity got hit – and this is where the political danger lies for Democrats. Despite a 6.2 percent increase in disposable personal income, PCEs dropped by more than half to 1.9 percent growth, the lowest in a year. That closely matches the annual PCE growth of 2012 (1.8 percent) rather than the 2.5 percent rate of 2014. The happy talk seems to have worn off for American consumers, and they are holding onto their cash again, perhaps preparing for headwinds to come.
That puts Democrats in a similar situation as Republicans faced, ironically when Bill Clinton began pondering a run for the White House. In early 1991, then-popular incumbent George H. W. Bush had to deal with a relatively mild recession that started in the fourth quarter of 1990, one that followed years of uninterrupted expansion from the Reagan era. Bush had just defeated Saddam Hussein and had worked out a bipartisan budget compromise that angered the conservative base of the Republican Party, but won him plaudits from the media.
The recession would be brief; the next three quarters showed moderate growth, ramping up to three straight quarters of GDP growth at 3.9 percent or above in 1992. Annual GDP growth in 1992 would hit 3.6 percent, far above any of the years in the Obama recovery, the peak of which came in 2010 (2.5 percent GDP growth).
Yet, the Clintons were able to beat Bush in 1992 by largely attacking the incumbent on economic confidence, as well as the sense that the nation needed a new direction. Bill Clinton had a long history of success as governor in Arkansas, and his youth and vitality spoke to the mass of Baby Boomers who wanted to see their generation take over from their World War II-era leaders. With help from H. Ross Perot’s independent bid, the Clintons celebrated on Election Night with their campaign theme, Fleetwood Mac’s, “Don’t Stop Thinking About Tomorrow.”
The parallels between Hillary Clinton and George H. W. Bush already exist, especially since her appeal to Democrats will be her ability to lock in the policies begun by Barack Obama. Her age and her long history in Washington DC make her the establishment candidate, with Republican candidates claiming youth and outside-the-Beltway credentials. If Democrats nominate her for the presidency as expected, the argument for her election would be continuity – to “stay the course,” as Reagan himself put it, on the route that Obama created.
That makes Democrats especially dependent on not just the reality of a strong economy, but the perception of economic strength as well. By the time of the general election in 1992, GDP growth had rebounded, but the perception left from the previous year of stagnation and pessimism remained. It created the sense that the nation needed a new direction, even though the expansion begun in the early 1980s had actually only taken a pause.
That is the core of the problem for Clinton and the Democrats in 2016. The Obama recovery has never produced that kind of sustained expansion above stagnation levels. The ranks of chronically unemployed remain high, job creation has remained tepid, and the workforce participation remains at or near lows last seen in the Jimmy Carter administration. The political window for sustained growth and electoral success for Democrats is rapidly closing, and their only serious candidate represents continuity not just to stagnation, but also carries lots of other baggage regarding crony connections to the very people and institutions voters tend to blame in poor economies.
In 1992, James Carville famously noted that when it comes to national elections, “it’s the economy, stupid.” Betting on continuity in a stagnant economy and on a Beltway insider may be the most unwise decision Democrats will make.
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