The US economy grew at a slim 1.5 percent pace during the second quarter of the year, the Commerce Department reported Friday morning. While far less iconic than the unemployment rate, the GDP figure nevertheless will have key impacts on the presidential campaign as well as on congressional debates.
First, the report will be weaponized by Republicans in charging that President Obama failed to produce a thriving economy during his first term – and that raising taxes amid a slumping economic expansion is the wrong move.
Indeed, for the Romney campaign, the report is one more piece of ammunition.
“I think it's very disappointing for the future of the economy,” said Glenn Hubbard, the dean of Columbia University’s business school and a top Romney economic adviser, in a statement. “It's about half of what potential growth actually is in the American economy and recoveries should be much more vigorous even after a financial crisis. If we keep up at this rate, over the next year or two, we will simply never get back to full employment.”
The reason for slow economic growth will be hotly debated by Congress in the coming months as the parties battle over the extension of the Bush tax cuts.
Senate minority leader Mitch McConnell (R) of Kentucky has repeatedly stressed that Democrats agreed to a two-year extension of the Bush tax cuts in December 2010, when the most recent GDP figure was about 2.5 percent for the third quarter of that year.
So why, Senator McConnell asks, when the economy is less robust now, are Democrats willing to extend the Bush tax cuts for only the first $250,000 in household income?
“They’re not even pretending to care about the economy,” McConnell said on the Senate floor Thursday. “They've sort of given up on the argument that this is about the economy” to focus on electoral politics.
House minority leader Nancy Pelosi (D) of California told reporters Thursday that Democrats swallowed hard in 2010 and took the full extension of the Bush tax cuts to get one of their favored measures – extended unemployment benefits – continued as well.
“It was a one-time thing,” Representative Pelosi said. “It was a passage that we were unhappy with, but could not pull the plug on unemployment insurance.”
On Wednesday, the Senate approved an extension of the Bush tax cuts along the Democrats’ preferred lines by a slim 51-to-48 vote. Sen. Charles Schumer (D) of New York called the moment a “watershed” for Democrats.
Not only had they de-linked middle-class tax cuts from those for the wealthy, Senator Schumer argued, but they also managed to put Republicans in dicey electoral territory.
“The choice before the public is clear,” he said. “The House can either pass these middle-class tax cuts, like we did, or it will be clear they're putting millionaires first.”
Still, the GOP-controlled House is expected to defeat the measure next week, while passing the Republican-favored extension of all the reductions in marginal income-tax rates. That would leave the two chambers at loggerheads yet again.
While Congress battles, the report also shed some light on the depth of the Great Recession. Government economists had previously believed the economy contracted by 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, but Friday’s revised data showed a slightly smaller downturn of 4.7 percent.
The reason for the change: Spending by state and local governments was higher than had been reported earlier.
After that was announced Friday, in jumped the White House, arguing that the findings proved that their economic stimulus program – which pushed cash down to the state and local levels to offset crimped budgets – worked.
“It is noteworthy that State and local government purchases were revised up in 2009, which is consistent with the Recovery Act cushioning the effect of the recession and helping to launch the recovery,” wrote Alan Krueger, chairman of the White House Council of Economic Advisers. “Since the Recovery Act funds have been phasing out, however, declining State and local government activity has subtracted from GDP.”
Between Friday and Election Day, several more crucial economic reports are due to be released. The presidential candidates will deal with four more unemployment reports and three more GDP data points. Two releases will be on the eve of voting: the first estimate of third-quarter GDP, out Oct. 26, and unemployment figures for October, released just four days before Election Day.