In the afterglow of Bill Clinton’s masterful speech, which defended the Obama economy and panned the Romney-Ryan economic vision, Democrats were exultant, and Republicans a little downcast on Thursday morning. The financial news added to the growing sense of euphoria, as the stock market soared to multiyear highs on positive developments in Europe and the U.S.
But those who are ready to declare the election over—prepared to deem the next several weeks moot—should remember one of the early maxims from Clinton’s 1992 campaign: “It’s the economy, stupid.” Yes, things seem to be going better. And the question as to whether people are better off today than they were four years ago may be losing some currency. But the next several weeks present a minefield for President Obama and his reelection campaign. In fact, there are three major sources of danger.
First, jobs. Forget about GDP, or car sales, or the stock market. Jobs and the unemployment rate remain the most politically potent economic indicators. And while the trend has generally been positive in recent months, the levels are still troubling. The unemployment rate remains at an unacceptably high rate of 8.3 percent. The tale of jobs growth under Obama is a tangled one that defies a simple slogan. More than 4 million private-sector jobs have been added since early 2010. But relentless cuts in public-sector jobs, combined with the steep employment drops in 2008 and early 2009, mean the country has a massive jobs deficit. The economy has been adding jobs, but not at a pace sufficient to bring down the unemployment rate.
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Now recent signs have been positive. On Thursday, ADP, the payroll-processing company, said the private sector created 201,000 jobs in August—much better than expected. The same day, the Labor Department reported first-time unemployment claims fell, and Challenger reported that announced job cuts in August were at a 20-month low.
That’s great. But it doesn’t mean we’re going to get a blow-out positive number when the Bureau of Labor Statistics releases the August jobs report Friday morning. The much-bruited report is always a statistical mishmash, full of seasonal adjustment and subject to revision. Given the size of the U.S. population, the difference between adding 150,000 payroll jobs and losing 150,000 payroll jobs is statistically insignificant. Just because unemployment claims are down and the ADP report was positive doesn’t mean the BLS jobs report will be. It’s entirely possible that the report will show the economy added only 30,000 jobs, or lost 30,000 jobs in the month. A poor jobs report—and another one in early October—would undercut the Democrats’ narrative of recovery and provide a new opening for Romney.
Second, Europe. In August, as we all know, Europe takes a vacation. So did the European financial crisis. For a few weeks all was quiet on the continent’s fiscal fronts, with a general absence of bad news. And when the European Central Bank reconvened after its holiday, it seemed to do something positive. Thursday morning the ECB announced a new program under which it would buy the government bonds of troubled countries provided they would abide by reform programs. The markets responded favorably.
But that doesn’t mean a European crisis is off the table. Far from it. Nothing fundamental has changed about Greece, or Spain—countries with 24 percent unemployment and shrinking economies. The rest of Europe seems to lack a sense of urgency about its poor growth prospects. On Thursday the ECB announced it wouldn’t be cutting interest rates, and the U.K.’s central bank, evidently pleased with the country’s depression, also announced it would leave interest rates where they are. The European Central Bank can temporarily halt a panic in the markets. But only a combination of aggressive reform and growth can help reduce the underlying factors that feed the intermittent panics. That’s not happening. All of which means the potential for European debt crises to affect the American banking system, and hence our markets and economy, is very much a factor for the next two months.
Third, China. China may be on the way to becoming the world’s largest economy and leaving the U.S. in the dust. In the meantime, however, it remains a relatively opaque, authoritarian, nondemocratic country with brittle infrastructure and a frail political and legal system. For years rampant Chinese growth was a basic assumption—for companies, for commodity producers, for the world’s economies, including America’s. China isn’t in any danger of going into recession, but its growth rate has been slowing. An index that tracks China’s manufacturing sector is registering its lowest reading since 2009. My colleague Dan Levin recently reported on China’s slowdown.
The world has yet to grapple with a China of this size that slows down. And neither has China. Should China’s economy continue to slow in the next several weeks, it could manifest itself in several ways—reduced demand for commodities, declining sales for multinationals, social unrest in China, increased foreign belligerence with neighbors and the U.S. (Secretary of State Hilary Clinton was dissed during her visit). Each of these factors has the potential to disrupt the U.S. economy.
So, yes, the campaign is growing shorter. The flow of data has generally been positive and is making it harder for Romney to make his case that the nation needs a new economic steward. But consider this. Four years ago a financial crisis in the U.S. that manifested itself in unusual and unexpected ways played havoc with the presidential campaigns. Things may seem more placid in the U.S. now than they were four years ago, but the potential for a September or October economic surprise still exists.
