James Pethokoukis

Certainly the “whisper estimate” for Democratic House loses is now 50+ with plenty of upside risk. But my pal Andy Roth at the Club for Growth thinks the upside number could be quite large, indeed:

I’m tracking four of the prognosticators who rate House races — Cook, Rothenberg, Sabato and CQ.

There have been some updates since my last blog post, so I thought I’d update my rankings of Democratic seats in play.

Between the four an incredible 104 Democratic seats are in play, up from 103.  I think there are a few more seats that will come into play over the coming weeks.

– 36 (was 26) seats are very slightly to strongly leaning Republican.

– 21 (was 16) are pure toss ups to very slightly tilting Democratic.

– 29 (was 25) are leaning Democratic

That means an incredible 77 seats are very seriously in play.  Now, in fairness, I did change the methodology slightly.  I’m now using the most aggressive prognosticator.  I’m doing this because updates are slow in coming and the first one to call a race more competitive seems accurate.

Another 27 seats are rated likely Democratic but at least one of the four, and in 15 cases two or more of the prognosticators.

The latest Gallup numbers are not good for the White House or congressional Democrats. The overnight tracking has Barack Obama’s approval-disapproval rating at 41 percent-52 percent. Based on the Rahm Emanuel formulation that for every point below 50 percent, the Dems lose five House seats, it looks like the GOP will take the lower chamber. This bit from a Weekly Standard piece I did pretty much explains it:

Declaring a “Recovery Summer” victory tour at the start of June must have looked like a pretty safe wager for the Obama administration. The economy seemed to have shifted firmly into gear during the spring. Lawrence Summers, director of the National Economic Council, told the Financial Times in early April that the economy was “moving toward escape velocity. You hear a lot less talk of ‘W’-shaped recoveries and double-dips than you did six months ago.”

A big reason for White House optimism was a stronger job market. The economy added an average of 320,000 net new jobs a month during March, April, and May, about half of them in the private sector. Granted, the unemployment rate still hovered close to 10 percent. But if the economy kept growing at a 3 percent annual clip or greater—creating lots and lots of new jobs in the process—unemployment would eventually fall, perhaps dramatically. As one White House insider remarked upon reviewing all the macro-indicators and then evaluating the economic team’s performance, “It looks like we got things just about right.

Since then, however, the economy has fallen back to earth, and “Recovery Summer” looks more like a bad bet. Private sector job growth has fallen by two-thirds, and the unemployment rate is still at a sky-high 9.5 percent. And if the size of the U.S. workforce, as measured by the Labor Department, had stayed constant since April—instead of shrinking by a million—the unemployment rate would be 10.4 percent. Jobless claims are at their highest level since February. Worse yet, the expansion is decelerating. After growing by 5.7 percent in the final quarter of 2009 and 3.7 percent in the first quarter of 2010, GDP advanced by just 2.4 percent from April through June, according to the Commerce Department. And new data show the final second-quarter number may actually be closer to flat, with growth for the rest of the year just 1 to 2 percent at best.

I think we can officially declare Recovery Summer dead. Here is today’s tale of the economic tape.
Here is IHS Global:

Combining the bigger-than-expected trade deficit with other weak data suggests that Q2 growth was only 1.2% rather than the 2.4% originally estimated, placing the economy on even shakier ground than it seemed, and underlining why the Fed has shifted towards an easing bias.

Action Economics:

The market’s might face their biggest downside economic surprise of this recent growth slowdown yet in the form of a downward Q2 GDP revision, which today’s U.S. trade deficit figures suggest will be a whopper. We now expect the 2.4% advance Q2 GDP gain to face a huge downward adjustment to the 1% area, with a hit from trade of as much as $18 bln that we conservatively peg at $12 bln, as the BEA’s seemingly pessimistic $45 bln deficit assumption for June turned out to be excessively optimistic instead. A change in China’s VAT rebate policy in June may explain a part of the surprise, though the GDP gain in Q2 is likely poised for an alarming 1-handle regardless of this distortion.

Barclays Capital:

The nominal US trade deficit widened to $49.9bn in June from $42.3bn in May, greater than we ($43.5bn) and the consensus ($42.1bn) had expected and the largest monthly widening in the deficit on record. In real terms, the trade deficit widened to $54.1bn from $46.0. This reflected both soft exports and a surge in imports: nominal exports were down 1.3% m/m (with a 2.2% drop in goods exports) and imports up 3.0% (with a 3.3% jump in the goods component). Both were fairly broad based, but imports were partly driven by a 53.2% surge in the volatile civilian aircraft component, following a 48.9% drop in May. The deterioration in the trade balance in June was much sharper than had been assumed by the BEA in the advance Q2 GDP report. As such, Q2 GDP growth is now tracking just 0.3% q/q (saar), relative to our previous tracking estimate of 1.6% and the initially reported 2.4%.

More and more, Wall Street seems to be converging on the Goldman Sachs forecast of  a second-half growth slowdown. Hard to see how that helps unemployment or Democrat chances of holding both the House and Senate. Remember, if the labor force had not shrunk by one million workers since April, the unemployment rate would be 10.4 percent. Voters may not know those numbers, but they know the economy is far from healthy.

Superpollster Scott Rasmussen apparently noticed my recent column:

A new Rasmussen Reports national telephone survey finds that:

1. 58% oppose a proposal to have the federal government forgive a portion of the mortgage debt owned by troubled homeowners.

2. 63% of voters think a government mortgage forgiveness program is unfair to those who have been regularly paying their mortgages …  vs. 23% who disagree and believe such a program is fair.

3. 48% of homeowners think government-ordered mortgage forgiveness for some homeowners would be bad for the economy … 30% say it would be good for the economy, and 15% believe it would have no impact.

4. Nearly half (49%) of Democrats say government-ordered mortgage forgiveness for some homeowners would be good for the economy. Sixty-seven percent (67%) of GOP voters disagree and say the plan would be bad for the economy. Among unaffiliated voters, 33% say good, but 47% say bad.

5. Sixty-eight percent (68%) of the Political Class say a mortgage forgiveness plan would be good for the economy. Fifty-five percent (55%) of Mainstream voters feel otherwise and think it would hurt the economy.

And while we are on the topic of mortgages, I wrote this piece for Reuters Breakingviews yesterday:

Is it time for another “free” lunch? One Wall Street idea to boost U.S. growth is for the government to loosen rules so millions more Americans can refinance mortgages, thereby freeing up cash for spending. A desperate Washington might be tempted, but should think twice. It’s too reminiscent of how the economy first fell into trouble.

A top Morgan Stanley economist ran the “slam dunk stimulus” plan past the Senate Budget Committee on Tuesday. With the political mood making it almost impossible to contemplate spending more taxpayer money to juice demand, the bank’s economists are suggesting a different route to a stimulus — namely having government-run mortgage lenders loosen the refinancing rules on 37 million mortgages they currently guarantee. That would open the door to many homeowners who haven’t been able to take advantage of the current low interest rates because they owe more than their homes are worth, are unemployed or have low credit scores.

The logic is that with the government already on the hook for these loans, there’s nothing to lose from dispensing with any creditworthiness criteria for refinancing. The median interest rate on the mortgages concerned is 5.75 percent. These loans, the thinking goes, could be refinanced to around 4.50 percent. The 125 basis-point reduction would leave a borrower with a typical $200,000 mortgage better off to the tune of $2,500 a year. If, as Morgan Stanley guesstimates, half the affected homeowners took advantage of this, they would collectively have an extra $46 billion a year burning a hole in their pockets.

One problem is that the government has already tried to streamline the refinancing process with little success. Another is figuring out who would pay any associated fees. But most importantly, the whole idea seems like a deliberate re-creation of the super-cheap credit and lax lending standards that led to the financial crisis in the first place. That’s counter to the White House message that America needs a “new foundation” built on fiscal prudence.

Then again, the approach of elections in November means Washington is filled with jittery politicians who might latch onto a “hair of the dog” fix for a sluggish economy. Better they push themselves away from the bar.

The Treasury Department has officially denied it is planning the mother of all mortgage bailouts. And I have no reason to doubt Team Geithner. But of course that assumes that the whole idea was not being cooked up by the White House political team (Rahm and Ax) and not the good folks at Treasury. During the financial reform debate, banking lobbyists continually complained that Geither and Summers had been usurped by R&A in policymaking. And I have gotten zero pushback from the WH. Food for thought. More to come.

But here are some of the reactions to my piece:

1. A New $800 Billion Stimulus Through Fannie and Freddie? (Dan Indiviglio of The Atlantic)

2. Is Obama about to forgive billions in  mortgage principal? (Ed Morrissey of Hot Air)

3. An August Surprise from Obama (The Daily Caller)

4.  Help coming for homeowners (Kevin Drum of Mother Jones)

5. An August Surprise from Obama? (Glenn Reynolds at Instapundit)

6. White House to bail out underwater mortgages? (Moe Lane at Red State)

One of the mysteries of the Great Recession is why unemployment rose so far so fast. The usual rule of thumb, Okun’s Law, called for a much lower rate of joblessness.  The White House has been hoping that as the economy turned around, the labor market would outperform just as it underperformed during the downturn.  As it turns out, the downturn was deeper than first thought, so the “snapback” scenario is less likely. This from JPMorgan:

The revisions incorporated in last Friday’s GDP report go part way toward resolving two puzzles concerning the recent recession and recovery.

First, the unemployment rate had arguably looked too high relative to the decline in output experienced over the course of the recession. The first chart below estimates an Okun’s Law (the relation between GDP and unemployment) through 2006, and then since 2007 sees what that would predict about unemployment given the revised and pre-revised data.

The pre-revised GDP data implied that the Q1 unemployment rate should have been about 8.7%, the revised data imply it should be 9.1%. Both estimates fall short of the 9.7% unemployment rate actually experienced that quarter, though the newer data close about half the gap.

The forward-looking implication of partly resolving this first puzzle might be seen as negative, as some had argued that the excessive increase in the unemployment rate meant companies over-fired and that a snap-back is coming. The over-firing argument now looks less compelling. (To be sure, we’ve never found any tendency for Okun’s Laws errors to subsequently reverse themselves).

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President Barack Obama’s “recovery summer” has become a summer swoon. GDP growth has downshifted, as have his poll numbers. And with Democrats likely to suffer big losses in November’s elections, the president will have to rethink his economic agenda or face gridlock in 2011.

A new Reuters-Ipsos survey puts Obama’s job approval at 48 percent, down two points from June. It’s a number that doesn’t bode well for Democrats in the congressional midterms. Since 1962, the party of a president with an approval rating under 50 percent lost an average of 41 seats in the House of Representatives. Republicans currently need 39 seats to retake the lower chamber, and thereby regain control over the initiation of tax and spending bills. (Other polls are even more discouraging. The RealClearPolitics poll aggregator has Obama at 46.0 approve, 48.7 disapprove.)

Drill a bit deeper into the poll and the danger for congressional Democrats appears even more acute. In the poll, 46 percent said they would vote Republican for Congress against 44 percent who preferred Democrats. In 2008, Democrats took 55 percent of that vote. For now at least, Republicans are also much more determined to vote in November’s polls than Democrats.

Meanwhile, 31 percent of respondents said they “strongly disapprove” of Obama’s performance, a five point jump. The economy is draining his popularity more and more every day. The Reuters poll suggests it is his weakest issue, and voters are gloomier about America’s direction than they were last summer. That’s not an unreasonable assessment. Though the U.S. economy is expanding, the annual growth rate is probably now closer to 2 percent than 3 percent — not enough to chip away much at the 9.5 percent unemployment rate before the elections come around.

A change of control in Congress might seem a harbinger of gridlock next year. The dark scenario would involve battles as Republicans try to repeal parts of recent healthcare and financial sector legislation. But with greater numbers, the GOP might in fact feel more secure and thus more willing to haggle — as it did during Bill Clinton’s presidency.

Hashing out compromises would, however, also require Obama to shift toward the Republicans on key issues like taxes and regulation. Doing so would be a much better option than spending his next two years defending the sweeping reforms passed in his first two.

Well, they’re not good and signal great danger for Democrats in the midterm election. The good folks at RealClearPolitics sums things up nicely:

My pal Dan Clifton, political analyst over at Strategas, sees Democrats losing 50-60 seats in the House and 5-7 in the Senate. Noting Obama’s low approval rating — 44 percent according to Gallup — he produced this chart: