Sat, Sep 20, 2008 page9

• Are US economic fundamentals really that strong?

  Unemployment is at a five-year high and the housing and financial sectors are in near meltdown, but the economy plods along

  • By Tom Raum / AP
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  Financial firms that withstood the Great Depression are failing.

  Congress and the outgoing president are gridlocked. So when Republican presidential candidate Senator John McCain declared that “the fundamentals of our economy are strong,” it drew ridicule from his Democratic rival Senator Barack Obama.

  McCain later toned down his remarks, but his observation reflected a debate among analysts and policymakers about the economy’s underlying health. Plenty of them think he’s right.

  Polls show a majority of voters put the economy as their No. 1 concern with seven weeks to go until the presidential election. Many economists believe the US is now in a recession. Signs of economic distress are everywhere as housing prices continue to fall and the nation’s financial system is pounded by a series of shocks, including a 504-point drop in the Dow Jones industrials on Monday.

  “Strains in financial markets have increased significantly and labor markets have weakened further,” the Federal Reserve said in a sober assessment on Tuesday.

  But in deciding against lowering interest rates, the central bank signaled that it didn’t see the economy’s present situation as dire.

  “When you have jobs being lost, industrial production down, personal incomes down and so forth, the economy’s not in good shape,” said Nariman Behravesh, chief economist at Global Insight, a Lexington, Massachusetts, forecasting firm.

  Still, he said, “If the issue is whether the US had a dynamic, resilient economy, and that the long-term trends are positive, I completely agree. ... It’s important not to get carried away with gloom and doom.”

  And David Wyss, chief economist for Standard & Poor’s, said that while there is a serious financial-sector problem “the fundamental economy actually isn’t in that bad a shape.”

  But, Wyss said, “I still think we’re in a recession.”

  That dichotomy is at the heart of the dispute over McCain’s remarks.

  McCain said on Monday that “the fundamentals of our economy are strong,” a phrase he has used before. After Democrats pounced, he backtracked and declared the economy to be in a crisis and said “fundamentals are threatened.”

  Democrats kept up their assault. “How can John McCain fix our economy if he doesn’t understand it’s broken?” asked an Obama TV ad.

  While the housing and financial sectors are in near meltdown, the larger economy is plodding along, the numbers suggest.

  After turning negative in the final three months of last year and growing at an anemic 0.9 percent in the first three months of this year, the nation’s gross domestic product — helped by government stimulus checks — grew at 3.3 percent in the April-June quarter. A relatively weak dollar has helped US exports. High prices for food and other commodities have helped agriculture and the energy and mining industries.

  A survey of CEOs by accounting firm PricewaterhouseCoopers found that, while the unemployment rate jumped to 6.1 percent last month, a majority of the top corporate leaders surveyed said they are not planning significant cutbacks of people, products or services.

  Instead, the CEOs are focusing on opportunities to improve efficiency and ways to emerge from the slowdown in a better position to compete.

  That doesn’t mean all is rosy.

  “If all of this should lead to a tightening of credit, which it very well might, that would be a serious concern to manufacturers,” said Hank Cox, a spokesman for the National Association of Manufacturers.

  US President George W. Bush, despite being the first US chief executive with a master’s degree in business administration, has left most of the heavy lifting in handling the crisis to US Treasury Secretary Henry Paulson.

  “Adjustments in the financial markets can be painful, both for people concerned about their investments and for the employees of the affected firms,” Bush said on Monday.

  He said, “In the long run, I am confident that our capital markets are flexible and resilient and can deal with these adjustments.”

  With the economy now at center stage, both McCain and Obama must try to overcome the fact that neither has much experience with markets or finance, nor do their running mates.

  McCain may be at a bigger disadvantage because his party has controlled the White House for eight years — and voters often blame the party in power for hard times.

  Still, new polling suggests the Wall Street tumult is helping McCain, at least for now. He and Obama now are trusted equally on the economy, with 34 percent of voters saying each would do a better job, an Associated Press-Yahoo News poll conducted last week shows. Previously, Obama had held a solid advantage on the issue.

  Democrats have also been seeking to link McCain with unpopular Bush economic policies — something McCain has been pushing back against.

  In a recent McCain television ad, an announcer says, “We’re worse off than we were four years ago.”

  That not only takes a dig at Bush, but also evokes the memory of Ronald Reagan, the Republican who famously asked voters in 1980 if they were better off than four years earlier.

  Reagan also had a ready definition of economic downturns. A recession was when your neighbor lost his job, and a depression was when you lost yours. Recovery, he liked to say, would come when then-president Jimmy Carter, the Democrat he beat in the election, lost his.
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