Rising U.S. unemployment, to borrow a phrase, has been a giant vampire squid wrapped around the face of the Obama administration, sucking out its popularity and thus draining momentum from its legislative agenda. But now the White House received some good news from the jobs front. The unemployment in July unexpectedly fell to 9.4 percent from 9.5 percent in June. This breaks a string of 16-straight months where the unemployment rate had either risen or stayed flat, including every month of the Obama term. (Recall the rate was 7.6 percent in January.)
Now, the economy still lost a quarter of a million jobs. And had the same number of people been looking for work in July as June, the rate would have risen. Plus, the broader unemployment rate is still over 16 percent. But the news headlines will show the traditional jobless rate easing, making the approach toward double digits a bit slower if also more unlikely. Here are the political impacts of a possible economic turning point:
1) A third positive data point for Obamanomics. The stock market has been up sharply, the decline in GDP has slowed sharply and now Team Obama can point to a dip in the jobless rate. (Plus cash for clunkers seems pretty popular.) When the market was down, GDP collapsing and the unemployment rate soaring, it was tough for the White House to counter GOP claims that its stimulus plan was anything but a miserable failure. Now Republicans have to make a tougher argument, that a) a “real” recovery plan would be working faster rather than this sugar high from government spending, and b) it’s really the natural strength of the economy (with some help from monetary policy) taking over rather than anything the Democrats have done. More of a muddle than “Obamanomics has done nothing!”
2) Makes the economy a bit less of a negative for healthcare and climate change legislation. The bad economy — and rising unemployment in particular — hurt the Obamacrat agenda in several ways. First, with the economy worsening, it meant Obama had yet to fix the economy. And that was the main thing he was elected to do. Until that is done, healthcare and climate change look like distractions from Job One. Second, a weak economy made it seem to voters like it wasn’t a good time to pass legislation that would add taxes and costs to the economy. Third, the bad economy made Obama less popular and thus his agenda less popular. To the extent that Obama looks like he is capably managing an actual recovery, it will also help momentum on these other issues. And certainly Democrats don’t want to see unemployment hit 10 percent right when healthcare crunch-time hits in the autumn.
3) There is a risk Obama and the Democrats overplay their hand. Look, the unemployment rate is still double what Americans have become used to during the past generation. Plus, the broader unemployment rate is at scary levels, particularly in states like Michigan and California. And this dip could be followed by a reversal. After the 1990-91 recession ended, the unemployment rate took a similar dip, from 6.8 percent to 6.7 percent. But then it started rising again for the next year and half, eventually hitting 7.8 percent. This was due to a combination of slow economic growth and discouraged workers looking for jobs again (which meant the Labor Department started tracking them again). A lengthy jobless recovery may well be in the offing. Dems would be wise to avoid premature celebration. Here is how IHS Global Insight puts it: “The unemployment rate fell, but it is hard to believe that it has peaked already. … We will need to see sustained employment gains before concluding that unemployment has peaked, and that probably won’t be until the first half of 2010 with unemployment above 10 percent.” This is why the White House is taking a cautious stance today.
4) Voter anxieties are likely to remain high even if the worst is over. President Bush, the first one, lost the 1992 presidential election to Bill Clinton because of the economy and the lingering impact of the 1990-91 recession. Two years later, though, it was the Democrats’ turn to feel the brunt of widespread economic anxiety as the Republicans captured both the House and the Senate. Even though the economy had been growing for 14 straight quarters by then and the unemployment rate was down to 5.8 percent from a high of 7.8 percent in 1992, 72 percent of Americans still thought the economy was only “fair” or “poor,” and 66 percent thought the nation was headed in the wrong direction. That’s right—3½ years after the 1990-91 recession ended, the economy was still weighing negatively on voters. Lesson: It takes a long time after a bad downturn for people to feel safe and confident.
5) The GOP argument just got tougher. The Republicans would be crazy to pull back from attacking Obama’s management of the economy, given high joblessness and massive deficits. But they need to prepare themselves for two things. First, there could be a big GDP pop in the near future. The typical first quarter after a recession shows 5 percent GDP growth or better. And if employers overestimated the severity of the downturn and cut too many jobs, the same upside surprise could happen with employment. At that point, it will seem like Obamanomics might be working, and GOPers better have an answer. Still, if we get a Reagan style “v-shape” recovery and boom, Republicans are in deep trouble, though concerns about the deficit may give a bit of cover. More likely: a good quarter or two followed by weak growth and continued high unemployment. The Long Recession Scenario, or 1990s Japan-lite. Why? Still lots of economic uncertainty after financial meltdown, impact of huge deficits on interest rates, weak consumers, a dead housing market, and the high-tax, high-regulation Obama agenda among others.
Bottom line: The unemployment report provides a short-term boost to Obama’s popularity and agenda, but does not change the likely scenario that on Election Day 2010 (maybe even 2012), voters will not be thrilled about the economy. And to the extent the economy improves, will voters view it as a real turnaround or one manufactured by unsustainable government spending, as with cash for clunkers? A foundation of rock or sand?