July 2011: Who would have thought?

July 31, 2011

A tip of the cap to the late, great New York newspaper columnist Jimmy Cannon for borrowing his signature phrase: nobody asked me, but…

Who ever would have thought on the last day of July in the year 2011 that the United States, the world’s superpower, would be two days from default?

Or that Apple would have more cash on hand than the U.S. Treasury?

Or that the debt rating for the U.S. would be in jeopardy of slipping from AAA?

Or that the recovery of the U.S.economy—the world’s largest—would show signs of faltering, with GDP growth estimates continuing to fall?

Or that unemployment (as measured by Gallup in its daily tracking survey) would remain stuck at virtually the same level—roughly 9%—as at the end of July 2010?

The truth: no-one would have predicted the economic and political conditions prevailing today. Conventional wisdom held was that the U.S. would enjoy steady economic growth in 2011 with declining unemployment. That hasn’t happened. Also a surprise: that Washington’s political leadership—especially President Barack Obama—didn’t move more decisively (and quickly) to defuse the debt limit crisis.

What other surprises await?

A “double-dip” W-shaped recession in the U.S. could occur. Some observers, like Douglas McIntyre of 24/7 Wall Street, argue that it has already begun.

It’s not clear that the European Union has resolved its debt crisis with the latest bailout of Greece; there are continued worries about the national finances of Spain, Italy, Ireland and Portugal.

Simply put, the global economic forecast is problematic.

Political implications

It may be that the last-minute debt ceiling deal in Washington will calm markets and help the economy by reducing uncertainty.

Even if that is so, 2012 is an election year and the lagging economy will be the paramount issue of the upcoming campaigns.

Last week’s disturbing report of slower GDP growth represents a significant hurdle for Democrats. It’s hard to envision a surge in private sector hiring based on such slow growth. And if there is no improvement in the dismal unemployment numbers, the odds on the Democratic Party retaining the Presidency or control of the Senate decline dramatically.

The dramatic recent decline in support for President Obama among independent voters is, it can be argued, a direct reflection of their discontent with the economy.

Does this all mean that the die is already cast for Republican victories in 2012? The short answer is: no. More than a year from the election, the picture can change dramatically. Infighting in the Republican Party could leave residual hard feelings and less-than-optimal turnout by “the base.” Independent voters in key swing states may be put off by Tea Party rhetoric. A last-minute crisis—domestic or foreign—might swing undecideds behind President Obama.

So it’s possible that the results on November 6, 2012 will include Democratic victories in close Senate races and the reelection of President Obama, and we’ll ask: “Who would have thought?”

But with current economic trends, I wouldn’t bet on it.


Copyright © 2011 Jefferson Flanders
All rights reserved

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