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Legacy Content / OFF TO THE RACES

Summer's Storylines

Will Bad News For Obama And Good News For The Economy Reconcile?

August 4, 2009

In today's world, there is a natural tendency for storylines to develop. While some developments that support the storyline get great weight, others, to the extent they don't get too frequent or important, get discarded.

Over the last couple of weeks, a political storyline started to develop stating that President Obama's administration and his Democratic agenda were in free fall, in almost a death spiral down to the depths of Jimmy Carter-land, along with other failed presidents.

It held that his party was coming apart at the seams on the all-important issue of health care while his job approval rating was nose-diving.

 

Among longtime Democratic Washington insiders, the mood was dark and very pessimistic, while reports said that the mood in the White House was as bad or worse.

Many congressional Democrats reported getting an earful of complaints on the House passage of climate change legislation during the Independence Day recess. They are now headed home wondering what their party's agenda will create for them in August. As members fan out across the country, the reactions they receive will dictate how the Democratic agenda will fare this fall.

There is still a spirited debate in the economic world about what the shape of any recovery might be.

If the public response is profoundly negative, then nothing that was accomplished before this point matters and Democrats will be in hunker-down mode. They will be convinced that the next 15 months are about survival, and getting re-elected in November 2010, in what could be a very nasty environment for them. On the other hand, if the reception they receive is positive, then it will embolden them to keep going and get their agenda passed.

Another storyline that has been trying to develop is that the recession has bottomed out and there are increasing signs that a recovery is beginning. The index of leading economic indicators has been pointing up for three months, and initial unemployment claims have declined comparable to recovery points in the past.

Then, the gross domestic product figures were released last week, showing that while the first-quarter economy had dropped 6.4 percent, even worse than previously thought, the preliminary decline for the second quarter was just 1 percent, far better than expected. On Monday, a report by International Strategy & Investment stated, flat out, "We can't recall a week with as much positive economic news as last week."

Ed Hyman, ISI's chief economist, who for the last 29 years has been named the top economist on Wall Street by Institutional Investor magazine, lifted the firm's GDP forecast for next year from 3.5 percent to 4 percent, holding their projection for the third quarter of this year at 2 percent and 3 percent for the fourth quarter.

Sure, the unemployment number is politically potent, but with the stock market -- read 401(k) and retirement plans -- back to its highest level since the November election and most economic indicators pointing up, we could be seeing a very positive economic storyline developing.

There is still a spirited debate in the economic world about what the shape of any recovery might be. Some say that depleted inventories and pent-up spending could build a "V"-shaped recovery; the best case for that is that historically the deeper the recession, the faster the recovery and job creation.

A second school of thought is that it could be a "W" recovery, with a bounce-back, but a weak one that can't sustain itself. Particularly late next year, when the stimulus will have worked itself through the system, the market will take another drop, before making an eventual rebound.

The final and most pessimistic projection is the "L," in which we have bottomed out, but persistently tight credit markets will prevent anything approaching a robust recovery from occurring for several years to come.

The question is whether we have two very divergent storylines developing. The first is a negative political narrative, driven by people who like Obama yet are disappointed by his agenda and question his effectiveness. The second is a positive economic picture. The show will be how these two conflicting storylines reconcile with each other.

Does the positive economic picture have a positive effect on the political one, or does the negative political storyline prevent Obama from getting credit for an economic upturn?

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