[Marxism] "Stark Signs of a Slowdown, Days Before Election"

[Fred Feldman]

October 31, 2008
Stark Signs of a Slowdown, Days Before Election 
By PETER S. GOODMAN
Less than a week before Americans go to the polls to select a president, a
government report released Thursday showed that the economy contracted in
the third quarter as consumer spending dipped for the first time in 17
years.

Economists said the drop in economic activity - with the gross domestic
product shrinking at a 0.3 percent annual rate - presages more bad news in
the months ahead. The impacts of a now-global financial crisis are
continuing to squeeze companies and impede investment, prompting more
layoffs and another wave of austerity. 

"The economy has taken a turn for the worse, big time," said Allen Sinai,
chief global economist for Decision Economics, a consulting and forecasting
group. "Consumption literally caved in. It is a prelude to much worse news
on the economy over the next couple of quarters. The fundamentals around the
consumer are all negative, and there are no signs of any help anytime soon,
from anywhere."

In an election likely to be decided by the economy, the latest batch of
dismal data offered no comfort to the Republican nominee, Senator John
McCain of Arizona, who has been running behind the Democratic
standard-bearer, Senator Barack Obama of Illinois, according to polls.

Though he has labored to distance himself from his fellow Republican,
President Bush, whose approval ratings have dropped below 30 percent, Mr.
McCain has battled perceptions that he is linked to the economic stewardship
of the incumbent administration.

Economic downturns have proved unkind to candidates from the incumbent's
party. Many analysts argue that the recession of 1990 and 1991 cost
President Bush a chance at re-election in 1992. President Jimmy Carter, a
Democrat, lost his 1980 re-election bid to Ronald Reagan after a
particularly nasty recession earlier that year. In 1960, in the midst of a
recession, John F. Kennedy, a Democrat, defeated Richard Nixon, who had been
vice president in the Eisenhower administration.

Not since 1900, when William McKinley, a Republican, won re-election, has
the incumbent party retained the White House in the midst of or within a few
months after a recession.

In a statement Thursday morning, the White House acknowledged the weakening
of the economy, while pinning the blame on a series of unusual events.

"Today's G.D.P. report is weak, but it is not unexpected," a White House
spokeswoman Dana M. Perino. "A number of things contributed to the slowing
economy in the third quarter - record high energy prices, housing and credit
concerns, two major hurricanes and a prolonged Boeing strike. The president
is taking forceful actions to return the economy to growth and job creation
by early next year. While we continue to face serious challenges, the United
States remains the best place to do business, and we're positioned to bounce
back."

Whoever captures the White House seems certain to inherit a starkly
challenging economic picture. Thursday's government report showed that
consumer spending - which makes up more than 70 percent of American economy
activity - dipped at 3.1 percent annual rate between July and September,
after growing at a 1.2 percent annual rate in the previous three months.

That was the largest three-month drop since the second quarter of 1980, a
contraction that was in some sense artificial: the Carter administration,
seeking to suffocate inflation, imposed limits on bank borrowing. Putting
that episode aside, this year's drop represents the sharpest decline in
consumer spending since the end of 1974.

Economists saw in the data a testament to the degree to which many
households are so strapped that the very culture of American consumption has
been altered.

After years of pulling winnings from soaring stock markets, borrowing
against the appreciating value of homes and leaning on abundantly available
credit cards, Americans are finding those arteries of finance sharply
constricted. For the first time in a generation, cash is broadly tight.

"The American consumer is finally hitting a wall that simply hasn't been
there for 17 years," said Jared Bernstein, senior economist at the
labor-oriented Economic Policy Institute in Washington. "What you see here
is just a confluence of negative events closing every avenue that consumers
have tapped over the years. There's only a couple of ways that consumers can
finance their spending. It's labor income or nonlabor income, and both are
on the mat."

Indeed, the economy has shed 760,000 jobs since the beginning of the year,
with layoffs accelerating in recent months. Many companies have cut the
hours of workers on the payroll, further diminishing paychecks.

Housing prices have continued to plunge, removing home loans as a channel
for finance. Banks still reckoning with disastrous investments on real
estate have gotten tight, cutting credit even to people with relatively
decent histories.

This month, consumer confidence, a broadly watched gauge of American
sentiment, plunged to its lowest level on record, attesting to the new
psychology of worry and scrimping that now holds sway.

Tucked into the data released Thursday was a worrying sign of a new,
potentially pernicious phase of the downturn: Investment by businesses for
things like machinery, trucks, computers and software slipped by 1 percent
in the third quarter. If past downturns are any guide, that dip could
swiftly accelerate, as companies recognize diminishing business
opportunities and forgo purchases. 

"When business decides it's time to cut back, it happens quickly," Mr. Sinai
said. "They say, 'We're not hiring, so why do we have to buy equipment if we
don't have additional workers? Why do we have to replace equipment?' "

And as orders dry up, layoffs accelerate, further diminishing spending power
and further reducing business in a downward spiral. 

This is the thinking behind forecasts that now broadly assume the
unemployment rate could jump from the current 6.1 percent to beyond 8
percent by the middle of next year, a level last seen a quarter-century ago.


This is the image that has many analysts assuming that the next six months
will bring more pronounced contraction, as the downturn deepens into the
most painful recession since the early 1980s, and perhaps even the 1970s,
when the oil shocks assailed the nation.

"We are now entering the harshest part of the recession," declared Nigel
Gault, chief United States economist for the research group, IHS Global
Insight, in a note to clients.

One clear bright spot throughout the downturn has been American exports,
which continued to advance in the third quarter, expanding at a 5.9 percent
annual rate. But that was down sharply from the 12.3 percent clip seen from
April to June. Most economists think a continued slowdown is inevitable as
much of the globe follows the United States into economic disarray.

The financial crisis born in the United States has spread to Asia, Europe,
Latin America and the Middle East. Many countries that have been major
buyers of American-made goods are now suffering.

"How are you going to export into that world?" asked Barry P. Bosworth, an
economist at the Brookings Institution in Washington.

Another continued source of economic growth is government spending, which
expanded at a 5.8 percent annual pace. Military spending surged at an 18.1
percent annual rate, and federal spending over all jumped at a 13.8 percent
annual clip.

"There's a message in that," said Mr. Bernstein, the Economy Policy
Institute economist, who has lobbied Congress to unleash another package of
government spending measures to stimulate the economy. "The one part of the
G.D.P. we can reliably count on in these times is government."