GDP Report Puts Obama in Economic ‘Gray Zone.’ Will Republicans Profit?

By Beacon Staff

The US economy started the year at a less than scintillating pace, giving the Republicans, especially likely presidential challenger Mitt Romney, fodder against President Obama.

In its preliminary look at the first quarter’s Gross Domestic Product, the Commerce Department reported Friday that the economy grew at a 2.2 percent rate, down from a 3 percent rate in the fourth quarter of last year. Economists had anticipated the US economy would slow slightly, but had expected the growth rate to be closer to 2.5 percent.

Although the economy is in no danger of sinking into another recession, the slower rate of growth is now in what economists term the “gray zone” for Mr. Obama. If the economy grows at 3 percent or more, voters are generally happy. If the economy grows at 2 percent or less, voters are antsy.

“This is what makes it difficult for someone facing reelection,” says Linda Hooks, a professor of economics at Washington and Lee University in Lexington, Va. “There is a bit of a trend that when the numbers are below 3 percent, things don’t work out so well for you.”

For example, the last time the economy was this slow was in the last year of President George H.W. Bush’s one term in office, when GDP grew at 2.7 percent.

“The economy was actually recovering, but the president was unable to sell it,” says Larry Sabato, a political scientist at the University of Virginia, in Charlottesville. “Bill Clinton convinced people things were truly bad.”

On Friday, that’s exactly what Republicans started to do. Rep. Kevin Brady (R) of Texas, vice chairman of the congressional Joint Economic Committee, termed the report “beyond disappointing,” in a statement. “While I am thankful that the economy continues to expand, the damage done by the Obama administration’s policies have produced a weak recovery.”

The White House tried to put a more positive tone on the economic data. In a blog post, Alan Kreuger, chairman of the Council of Economic Advisers, called the continued expansion “encouraging,” but he added, “additional growth is needed to replace the jobs lost in the deep recession that began at the end of 2007.”

Mr. Kreuger noted that one big drag on the economy is the belt-tightening in government spending, especially for defense. National defense expenditures fell by 8.1 percent in the first quarter, according to the Commerce Department’s Bureau of Economic Analysis. Kreuger estimated the reduction in government spending subtracted 0.6 percent from overall GDP growth.

Another drag on the economy appears to be a reticent business sector. After spending heavily on new equipment and software, businesses decided to take a break, and spending fell 2.1 percent.

“This is the first decline in fixed business investment since the fourth quarter of 2009,” wrote Representative Brady. “It is this kind of investment that drives job creation in the private sector, not large buildups in inventories.”

Part of the reason for the decline is that businesses spent a lot of money in 2011 to take advantage of a government stimulus program that allowed them to accelerate the depreciation of equipment, notes Sung Won Sohn, an economist at California State University, Channel Islands. “The program was supposed to expire but then Congress renewed it,” explains Mr. Sohn. “But business had already spent money they would have spent in the first quarter, so the slowdown in business spending was not surprising.”

Economists had also expected the GDP numbers would be better, in part because of the mild weather, which boosted home construction and car sales. In the first two months of the year, the jobs market also improved, reflecting better times in Detroit and the mini-boom in homebuilding.

“The warm weather led people to believe the economy was stronger than it was,” says Washington-based Dennis Jacobe, chief economist at Gallup, the polling firm. “With the economy continuing the creep forward, it puts pressure on the Fed.”

On Tuesday, the Federal Reserve said it expected the economy to show modest improvement through the rest of the year and said it would keep interest rates low for the rest of the year. However, the Fed chairman, Ben Bernanke, also seemed to indicate at a press conference that no new stimulus program was imminent.

Looking ahead, Professor Hooks says the economic signals are still “mixed.” The economy is moving forward but at a moderate pace.

Even if the economic numbers remain subpar, Obama will feel the pressure to persuade voters that the momentum has changed for the better. For example, in the second and third years of Ronald Reagan’s presidency, the economy was disappointing. However, as Mr. Jacobe notes, as Reagan ran for reelection, he persuaded voters that the economy was moving in the right direction. As it turned out, the economy grew by a 6.8 percent annual rate in the fourth year of Reagan’s first term.

President Bill Clinton entered the fourth year of his first term with a strong economy, growing at a 3.7 percent annual rate. He had no trouble winning reelection.

Without those robust economic numbers, it won’t be so easy for Obama, says the University of Virginia’s Mr. Sabato. “Obama wanted to put this election away early and the economy is one of the reasons why,” he says. “This is why the skill of the candidates and the teams they put together will really matter this year.”