Economy steady but job growth moderate

With only two months to go before the election, the US economy seems to have left its soft patch behind - good news for President Bush's reelection campaign. But the economy is still shaky enough to leave plenty of room for Democratic challenger John Kerry to criticize the president.

The latest snapshot shows an economy that has returned to a moderate economic expansion of about 3 percent. At this pace, the economy is not growing fast enough to create large numbers of jobs, make Detroit automakers happy, or fill up mall parking lots. But it is growing fast enough to keep the Federal Reserve Board on track to hike interest rates again when they meet later this month. The pace is certainly fast enough for White House policymakers to breathe a sigh of relief.

"We can say the economic recovery is back on track after being challenged for the last two months," says Anthony Chan, senior economist at JP Morgan Fleming Asset Management in Columbus, Ohio.

When the economy slowed down in June and July, economists began to reduce their growth estimates for the year. Now the slowdown is being viewed as a slowdown in an economic expansion, explains John Silvia, chief economist for Wachovia Securities in Charlotte, N.C. "The economy is fine, we're just decelerating from strong growth to more moderate growth."

Evidence that the economy is back came last Friday when the government reported there were 144,000 new jobs created in August after lackluster gains in June and July. At the same time, the unemployment rate dropped from 5.5 percent to 5.4 percent. This number was a reflection of more people getting discouraged and dropping out of the workforce. Nevertheless, the improvement is being touted by the Bush administration. The president emphasized the strength of the economy as good news at a campaign rally in Wisconsin Friday.

Mr. Bush should be particularly cheered to see the drop in the headline unemployment rate. According to an analysis by Challenger, Gray & Christmas, the incumbent gets a boost when the unemployment rate is 5.5 percent or lower. In the past when the rate was 5.6 percent or higher, the challenging party won.

"They [voters] will draw their conclusion about the overall strength of the economy based almost exclusively on whether they and/or their neighbors find jobs," writes John Challenger, the chief executive of the Chicago outplacement firm.

For example, when Bill Clinton beat the first President Bush in 1992, the unemployment rate averaged 7.5 percent in the three months prior to the election. It's not a sure thing, however, that a low unemployment rate will work for the incumbent's party. Eisenhower beat Stevenson at a time when the three-month unemployment rate averaged 3.17 percent, and Nixon unseated Humphrey at a time when the Democrats had gotten the rate down to 3.43 percent. "Voters may have taken the situation for granted," says Mr. Challenger.

Although the unemployment rate is relatively low - it's below the 50-year average of 5.5 percent - the president is still susceptible to the complaint his administration has failed to create new jobs. Employment growth during the past 3-1/2 years is down 0.2 percent compared with the 50-year average growth of 2.2 percent.

While some voters may shrug off the news, the Federal Reserve dissects the numbers under a microscope. Sluggish employment gains can affect everything from retail sales to budget deficits. The current numbers may not stop the Fed from raising interest rates another 1/4 of a percent when the central bank meets on Sept. 21.

"They are reducing accommodation as opposed to tightening policy," says Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis. "But if there were a weak report for September, the Fed would have to let the numbers dictate their next move when they meet on Nov. 10th."

The Fed may also try to estimate what impact hurricanes Charley and Frances will have on the economy. When hurricane Andrew devastated Florida in August of 1992, it initially depressed the economy as people couldn't get to work and businesses suffered. But then came the cleanup and rebuilding after the damage, which ultimately cost$26.5 billion, the most expensive of any storm.

"It was estimated that Andrew added 0.4 percent to economic growth that year," says Mr. Chan, who anticipates the same thing may happen this year. "Next month there could be a hit in employment because of the hurricane, but then when you rebuild you have to hire people."

While that may help over the short term, Mr. Silvia says policymakers need to look at the growing issue of structural unemployment. In past, he points out, the job market would respond to increases in the nation's Gross Domestic Product. But in the second quarter, the GDP grew by 3 percent at a time when actual buying increased by 4 percent.

"When we want rugs, curtains, carpets and textiles, we go to the store to buy them, and in the past they would come from North Carolina, South Carolina, and Georgia," he says. "But now they come from China. We have to figure out how to get people back to work in a globally competitive environment."