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Are The Democrats Ready For 10 Percent Unemployment? Are The Democrats Ready For 10 Percent Unemployment?

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OFF TO THE RACES

Are The Democrats Ready For 10 Percent Unemployment?

It Could Happen Early In 2010, It Could Linger, And It Could Deal The Party A Serious Blow At The Polls

Obviously, there are many variables that can drive a political party's fortune in next November's elections, but the economy and jobs dwarf all others. Polls may show a majority of Americans understand that this recession started under President George W. Bush, but every day, President Obama, and inferentially his party, take on a bit more ownership. By the 2010 midterm elections, the economy will completely belong to Obama and Democrats.

What should concern Democrats is that while there is a diversity of views about just how much the economy will grow next year, the views of both optimists and pessimists converge on the politically important question of unemployment: The consensus is there will be very, very little job growth next year.

 

Gross domestic product, the broadest gauge of the health of the U.S. economy, declined by 6.4 percent in the first quarter of this year and dropped again by a more modest 0.7 percent in the second quarter. The monthly Blue Chip Economic Indicators survey of over 50 top economists currently projects a GDP growth rate of 3.2 percent for the just-ended third quarter, but forecasts that growth to the economy to slow down to a 2.4 percent growth rate for the fourth quarter of this year and 2.5 percent for all of next year.

The highly regarded Wall Street economic and policy analysis shop ISI Group forecasts a slightly lower 3.0 percent growth in the third quarter of this year, then 3.0 percent again for the fourth quarter, somewhat better than Blue Chip, then 4.0 percent for 2010, considerably more upbeat than Blue Chip.

Eventually businesses will begin to start rehiring, start replenishing their inventories and expanding again, but only when they feel comfortable in doing so.

 

Of course, from a political perspective, far more important than GDP is unemployment. Unemployment is the face of the economy, the headline number that is driven into people's brains more than any other. In 1982, it was unemployment cracking 10 percent three weeks before Election Day that triggered Republican losses in President Reagan's first-term midterm election. That year the GOP lost 26 seats in the House, and while there were no net losses in the Senate, had fewer than 60,000 votes switched, Republicans would have lost four seats and their majority in that chamber.

The ISI Group forecast is for unemployment to peak at 10 percent in this current, fourth quarter, then fall only slightly to 9.5 percent for the fourth quarter of next year (read 2010 midterm election), and notch down again only a bit for the fourth quarter of 2011. The Blue Chip survey projects unemployment to average 10 percent for the next three quarters and improve only modestly in the second half of next year. On Monday, the National Association of Business Economists released a survey of its members projecting that unemployment will rise to 10 percent in the first quarter of next year and edge down to 9.5 percent by the end of 2010. Basically, all three project unemployment scenarios that would likely be deadly for Democrats: unemployment of at, over or within spitting distance of double digits for a full year leading into a midterm election.

The rule of thumb among economists is that a GDP growth rate of at least 2.5 percent is necessary to begin any meaningful job creation under normal circumstances. Of course, this recession has been anything but normal. According to a regression analysis by ISI, the peak-to-trough decline in payroll employment for a GDP decline like the U.S. has experienced should have been about 3.7 percent, but it has been a decline of 5.8 percent. Payroll employment is now on track to drop to a level not seen since 1999, ISI points out. Simply put, last winter business feared the possibility of a second Great Depression and slashed payrolls, inventories and other costs in anticipation of a worst-case scenario. While this has indeed been an ugly recession, it hasn't been a second Great Depression, thus business laid off more employees and cut costs more than necessary, getting more out of each worker. The result has been that with those gigantic productivity gains have come higher earnings, much greater than anticipated. Eventually they will begin to start rehiring, start replenishing their inventories and expanding again, but only when they feel comfortable in doing so.

When talking about economic, or for that matter stock market, forecasting, it's important to remember that whenever there is a broad consensus on anything, there's always the chance that the herd is wrong. This is why contrarians beat the market on occasion. Maybe the conventional wisdom on the unemployment is wrong, but it would need to be very, very wrong for jobs creation to be strong enough as to not be a liability for any party in power next year. The distinct possibility, and maybe even probability, that unemployment will be hovering around 10 percent for a solid year should petrify.

 

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