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Friday, October 27, 2006

GDP Growth Slows in Third Quarter

Free Exchange from The Economist reviews today's release of GDP data showing third quarter real GDP growth falling to 1.6% (advance estimate) and discusses some of the political implications:

Big, bad news for Mr Bush, by Economist.com: It is hard to contemplate the new US GDP figures without a mental image forming of Republican campaign strategists rolling around on the ground, gripping their bellies and moaning "It hurts! It hurts!" Second quarter GDP growth was a lacklustre 2.6% (annualised)... This morning ... the news came that America's economy had disappointed again, growing by just 1.6% in the third quarter... There has been a tepid attempt to bring up the Dow's record levels, but this has fallen rather flat: the record isn't a record if you adjust for inflation, and anyway, the Dow isn't a very good proxy for economic health, or even investor confidence. It has only thirty companies in it, and these are weighted by cost rather than market capitalisation, which means that it is easily blown about by outsized movements in the prices of a few stocks. The S&P 500, which is much more representative, is still well below its 2000 peak.

In the New York Times on Tuesday, Eduardo Porter wrote This Time, it's Not the Economy:

President Bush, in hopes of winning credit for his party’s stewardship of the economy, is spending two days this week campaigning on the theme that the economy is purring. “No question that a strong economy is going to help our candidates,” Mr. Bush said in a CNBC interview yesterday, “primarily because they have got something to run on, they can say our economy’s good because I voted for tax relief.”

But Republican candidates do not seem to be getting any traction from the glowing economic statistics with midterm elections just two weeks away.

We'd suggest that this is because the statistics, like GDP, are not actually glowing; in fact, they're barely emitting enough light to check your watch by. Even fantastic headline numbers, like 4.6% unemployment, disguise weak wage growth and sagging labour force participation. Perhaps even more problematically for the Republicans, what growth there is isn't being felt by the average voter. Companies are increasing compensation--but they're spending it on benefits like health insurance, which doesn't feel the same as a wage increase even if you're one of the unlucky few who gets a $100,000 cancer treatment out of it. And income growth is concentrated among the wealthy, who are too few to swing an election.

Ironically, this last may be helping the Republicans, a little, by fuelling surging tax revenues. These have reduced his administration's projected budget deficits to roughly 2% of GDP, which is practically parsimonious by historical standards. That makes Mr Bush's tax cuts, eagerly supported by Republicans, look a lot more affordable. Though probably we won't hear Mr Bush, or any other Republicans, thanking rising income inequality in any of their stump speeches.

Update: Free Exchange has an update that tries to paint a rosier picture of the data based upon this (free) article on the GDP figures from The Economist. However, as noted, even if the current figures do provide some hope, and there is doubt about that, there is a "grimmer picture for the long-run."

    Posted by on Friday, October 27, 2006 at 09:31 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (24)

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