It appears that the US economy might be slipping back into a recession. Economic growth in the second quarter of this year was officially lowered to an annual rate of 1.6% from the rate of 2.4% reported originally. More disturbing is that the trend in real GDP growth is downwards from 5% in the fourth quarter of 2009 to 3.7% in the first quarter of 2010 to 1.6% for the second quarter. Most disturbing is that job growth has been too anemic to reduce the unemployment rate, which is stuck in the 9.5% range – an ominous level for consumer confidence, the economy, and the Democrats with the mid-term elections looming.
Now while “Rome” burns, or in this case the US economy tanks, “Nero” fiddles. President Obama is entitled to vacation time and the occasional round of golf. However, he has done little over the summer to turn the tide for the economy. It appears, if one is sufficiently cynical, that the President and his team have written off the mid-term elections and are setting their sights on 2012. Perhaps they believe they can emulate their success in 2008 and that of Bill Clinton in 1996. In 2012, Obama will not be the outsider and agent of change. He will be the insider facing a possible majority of the electorate disenchanted with the change he orchestrated during his first 18 months in office. And in 1994, and more so in 1996, the US economy was on an upward growth trajectory with the unemployment rate falling steadily and sharply.
The US economy is not following the traditional path of recovery. Large companies are still reluctant to make major investments, preferring instead to continue to build up their record holdings of cash. Small and medium size companies continue to face difficulties borrowing money, as banks are reluctant to lend, preferring to sit on record holdings of excess reserves with the Federal Reserve. The housing market has yet to recover. Consumers, concerned about their future prospects, prefer to reduce their debts than to return to the free-spending ways in the 1990s and mid-part of the first decade of this century.
With more headlines warning of the possibility of a double dip and deflation, and many economists and major investors warning of a day of reckoning for the US Government and the US economy as a result of the record budget deficits and spiraling debt, it is easy to understand the behavior of companies, banks and consumers.
Pessimism has a way of feeding itself and in the process destroying confidence. As confidence erodes and the economy stalls, more people become pessimistic leading to self-fulfilling expectations as confidence, spending and the economy decline further. A vicious circle can develop.
So is there anything that Obama can do, other than to be a cheerleader boosting the confidence of the people?
Monetary policy is under the direction of Ben Bernanke, the Chair of the Federal Reserve, and he is running out of policy levers.
The President can influence fiscal policy. With the mid-term elections on the horizon and the Republicans smelling victory, it is very unlikely that any new spending initiatives might be approved by Congress. Not even the Democrat members would support any new initiatives with the budget deficit sitting in the $1.5 trillion range. Republicans might support tax cuts, but they are unlikely to be on the table at this time.
Thus, other than try to convince Americans that the economy is recovering and job gains will pick up, there is little that the President can do. He could invite business and financial leaders to regular meetings at the White House to try to “persuade” them to start spending and lending. He also might work with Congress to more aggressively enforce existing trade laws to favor US companies. Otherwise, he might as well work on his golf game – perhaps he might be able to figure out what is wrong with Tiger’s game – and wait for 2011.
The opinion expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.