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Bush gets no lift from economic growth

When the cycles of the economy and a presidential election coincide this November, history would ordain that President Bush would coast to re-election.

Models that measure these things going back to World War II -- plotting economic growth and the election cycle -- predict that Bush would win in a mini-landslide with 56 percent or 57 percent of the vote.

Indeed, President Bill Clinton won re-election in 1996 on unemployment, inflation and economic growth numbers close to or worse than today's. By some measures -- including productivity, homeownership levels, real estate values and interest rates -- 1996 pales in comparison to 2004.

But there is another history that could repeat itself: 1992, when Bush's father, George H.W. Bush, was sent packing from the White House because public perceptions of bad times overwhelmed statistics showing an economy clearly on the mend.

Add the Iraq war, a big variable the historic models don't account for, and Bush could find that a reasonably healthy economy provides surprisingly thin gruel for his re-election bid.

Democratic nominee John Kerry's campaign has pounced on the economy as a big Bush vulnerability, opening a two-week offensive in California on Thursday outlining $419 billion in middle-class tax cuts to "create good-paying jobs in America, instead of shipping jobs overseas."

Kerry received added fuel Friday when the Congressional Budget Office reported that the Bush tax cuts benefited the wealthy far more in dollar terms than the middle class.

"It is bad enough that George Bush has no plan to help middle-class families squeezed by declining wages and skyrocketing costs for health care, energy and college tuition,'' Kerry said in a statement Friday. "Now we find that he is deliberately stacking the deck against them."

The Bush campaign, on the defensive, argued that all taxpayers have seen their income taxes drop and that many low-income workers saw theirs eliminated, while families with children received large credits that cut their taxes by much more than the middle-income average.

The Bush camp has been touting good statistics and making the best of bad ones, while retreating on the line that the economy has "turned a corner."

Seeking a fresh second-term economic agenda within the constraints of a big budget deficit, Bush touted an "ownership society" platform last week that largely rehashes past policy initiatives. And the president retreated on comments that he might favor a national sales tax as part of a tax reform plan that may be unveiled at the upcoming Republican National Convention.

Still, the consensus among economists is that the economy is doing reasonably well despite a recent slowdown from the spring and has weathered a series of major shocks -- terrorist attacks, corporate scandals and war -- remarkably well.

As the Federal Reserve put it Tuesday when it raised interest rates one- quarter of a percentage point, "The economy nevertheless appears poised to resume a stronger pace of expansion going forward."

Yet the numbers also provide plenty of fodder for Kerry, who points to high budget deficits, spiking oil prices, soaring health care costs, rising bankruptcies, slow wage growth and, most of all, weak job creation, all of which add up to what he calls the "middle-class squeeze."

Presidents are routinely assigned responsibility for the economy, and while they do set broad fiscal and regulatory policy, they do not control the business cycle. Much depends on timing. Clinton had the good luck to inherit a recovery, and Bush the bad luck to inherit a recession.

The spike in oil prices, related to the Iraq war and terrorism threats, is widely blamed for the recent economic slowdown from the blistering pace of last winter and spring.

"The fact is the business cycle is the business cycle, and the Bush administration is no more responsible for what we see now than the Clinton administration was responsible for the recession that came on us in the second half of 2000," said Allen Sinai, chief global economist for Decision Economics Inc., a forecasting firm.

Bush faces a harder uphill climb, given that his stewardship is compared not to Clinton's first term but to his second, when an economic boom and stock market bubble created a prosperity that makes today's growth seem anemic.

The 5.5 percent unemployment rate in July is identical to what Clinton faced in July 1996 when he went on to win re-election. It is much lower than the 7.7 percent rate that Bush's father saw in July 1992.

The problem for Bush is that unemployment was only 4 percent in July 2000, setting a new standard for good times.

"If you went back and you asked people in the 1980s what full employment was, they would have told you 6 percent," said Martin Regalia, chief economist of the U.S. Chamber of Commerce. "We're at 5.5 percent now, and everybody says it's a jobs problem."

No statistic better mirrors the dissonance between economic performance and public perception than the jobs numbers themselves. Bush never tires of saying 1.5 million jobs have been created over the past 11 months, while Kerry dwells on the net loss of 1.1 million jobs since Bush took office, which he contends is the worst record since the Great Depression.

Though no one seriously argues that economic conditions today are anywhere near Depression-era levels, the statistics provide grist for both mills.

A payroll survey showed that businesses added a paltry 32,000 jobs in July and just 78,000 in June -- way down from the 885,000 jobs added in the previous three months. That is terrible news for Bush, who has just two more survey releases left before November to show a decided improvement.

But the unemployment rate shows a very different picture. Based on a survey of households that asks workers if they are employed, the report showed a gain of 629,000 jobs in July.

Bush partisans like to note that the payroll survey omits the self- employed and new startups. But economists generally prefer the payroll survey, because it uses a much larger sample and is less volatile. Still, the striking divergence between the two surveys allows the Kerry and Bush camps to claim simultaneously that the economy is doing well or poorly.

“The most important thing to understand here is that we are in a genuine business cycle recovery and have been for some time, as we all know," said Anirvan Banerji, director of research for the Economic Cycle Research Institute, an independent group that studies the business cycle. "It's also been a recovery where we've had significant structural shifts on the job front, which means that this has been a recovery by and large deficient in job growth -- unusually so, more than practically any recovery in memory."

Economists generally ascribe the anemic job growth to extraordinarily high increases in productivity, which mean that businesses can produce more goods and services with less labor. Their productivity quest has been spurred by the need to hold down prices against intense competition from China and India.

Productivity enhancements range from Web-based purchasing to the automated ticketing fast replacing agents at airline ticket counters. Higher productivity is considered a blessing in the long term, because it leads to higher wages and living standards. But in the short run, it reduces jobs.

Such structural shifts mean that a sustainable level of full employment may now be lower than before, said James Glassman, an economist with J.P. Morgan Chase & Co., possibly in the 4 percent to 5 percent range.

"Five and a half percent unemployment might be great by past standards, but the problem is, it's still quite a bit above where we were at the best back in 2000," Glassman said. "We're coming out of a slow period, so everything feels worse now, even though the economy is growing as fast" as it was in 1996.

Lynn Reaser, chief economist and managing director of Banc of America Capital Management, believes the economy "has now become an issue as it was in 1992," when Bush's father lost to Clinton -- ironic, given that Bush has made avoiding his father's fate on the economy a central element of his presidency.

In June and July of the first Bush's re-election campaign, job growth also had slowed, Reaser noted, and today's oil prices, "a very visible barometer" for consumers at the gasoline pump, are double what they were then.

Even on jobs, however, Bush's record is far better than his father's at a similar point in their re-election campaigns. Monthly job gains this year have averaged 177,000, versus just 65,000 under Bush's father.

"In 1992, there was a gap between reality and perception -- the economy was actually relatively healthy, but the public perception was that it was much weaker, and that seems to be the situation presently," Reaser said.

The Chamber of Commerce's Regalia has devised a chart comparing several economic indicators during the first 31/2 years of Clinton's first term to Bush's that would seem to make Bush a shoo-in for re-election: real disposable personal income up 4.8 percent under Clinton and 7.3 percent under Bush, productivity up 2.4 percent versus 14.1 percent, and the average 10-year interest rate at 6.5 percent versus 4.5 percent.

Economic growth in the third quarter of last year, in fact, hit a 20-year high, Banerji noted.

But "the unusual feature of this recovery has been the deficiency in job growth," Banerji said. "Even as you had the strongest GDP (gross domestic product) growth since (Ronald) Reagan's first term, you also had the longest average duration of unemployment. These two occurred simultaneously."

Nigel Gault, a U.S. economist at the forecasting firm Global Insight Inc. who works on the firm's presidential election model -- which predicts Bush pulling in 56 percent of the vote in November -- said workers are not feeling the benefit of rising compensation costs, because so much of what employers are paying is being eaten up by soaring health insurance premiums and pension shortfalls.

"Labor compensation has actually been increasing, but it's going into items that people don't see in their paycheck," Gault said. "That's another reason why most people might not perceive the economy to be as good as the top- line numbers would indicate."

Still, said Glassman of J.P. Morgan Chase, "If somebody had fallen asleep 10 years ago and woken up today, they would wonder what are we all bellyaching about."