The state of the economy on Election Day will go a long way toward determining who the next president is. And the forecasts suggest Barack Obama has a lot to worry about.
It's clear by now that for the third year in a row, the economy has entered a mid-year stall, after what looked to be a promising start. During the first three months of 2012, for example, employers created about 225,000 jobs per month, on average. Had that pace of hiring remained consistent or accelerated, it would be pushing the unemployment rate down and creating tangible sense of momentum heading into the fall.
But during the second quarter, job growth slowed to an anemic pace of just 75,000 new jobs per month. That's not even enough to keep up with population growth. Nervous consumers, sensing the pullback, have responded by reining in their own spending.
There's now reason to expect the weakening to continue. The latest survey of CEOs by the Business Roundtable shows a downturn in optimism, after a sizeable jump during the first three months of the year. The Vistage CEO Confidence Index, which gauges the sentiment of small- and medium-sized business leaders, dropped even more sharply in the second quarter. And the Moody's Analytics survey of business confidence has now fallen to the same low levels as last summer, when a needless political showdown nearly led to a default on U.S. government debt.
The gloomy outlook is likely to start showing up in a lot of companies' earnings numbers, which directly affect hiring plans and consumer spending. Corporate profits have been one bright spot for the economy, but many analysts see clouds rolling in.
"The vast majority of companies are going to post meager gains or losses," predicts Dick Green of Briefing Research, in a preview of second-quarter earnings reports, which are just beginning to roll in. "The outlook for profits in upcoming quarters will be more uncertain and risky than it has been in years."
The reasons aren't mysterious. The chronic European debt crisis has finally pushed Europe's economy into a slowdown that will probably end up as a considerable recession. Lower demand from Europe has impacted the economy in China, which is Europe's largest importer. That suggests there could be a meaningful falloff in demand for U.S. goods, too.
A bigger concern for business leaders is the home-grown "fiscal cliff," the combination of spending cuts and tax increases slated to go into effect at the end of the year if Washington policymakers don't act to stop them.
"We think the uncertainty will filter into business decisions, into slower corporate spending and slower hiring," says Bank of America Merrill Lynch economist Michelle Meyer.
If the economy were truly their top concern, Washington politicians could easily address many of those issues now and remove a lot of the uncertainty that bothers business leaders. But of course that won't happen, because the economy is not their top concern—electoral politics is. So Democrats and Republicans alike will talk up their brilliant solutions, while together they will do nothing until the November elections, except criticize each other's ideas.
President Obama, ironically, is powerless to do much about the economy that could decide his political future. His recent proposal to extend the "temporary" tax cuts that are set to expire on December 31 for one year, for everybody earning $250,000 or less, is something Republicans actually agree with. But they want to extend the tax cuts for all Americans, not just those below a certain income threshold. With no compromise likely before the elections, the best hope is a last- minute solution, at the very end of the year, when both sides feel they have negotiated for maximum political advantage.
Even then, a deal could be elusive. Some cynics contend that Congressional Republicans might even deliberately stall on resolving pressing economic issues, since economic turmoil arguably weakens Obama's reelection odds and, if he's reelected, support for his overall agenda.
If that's their strategy, it may already be working, since the dysfunction in Washington is beginning to have a tangible impact on the real economy. Bank of America Merrill Lynch predicts that weak first quarter GDP growth of 1.9 percent was as good as it is likely to get all year. If the economy performs that poorly for the remainder of 2012, the Federal Reserve could ride to the rescue with more "quantitative easing." But many investors already expect some such move in the fall, which means financial markets may not enjoy much of a boost if it happens. The Fed might even avoid more monetary stimulus until after the election, lest it appear to be playing political favorites.
Obama could still win, of course, while presiding over a feckless economy. It's not in recession, after all, and Mitt Romney may fail to persuade voters that his ideas are any better. Convincing them that the economy is lousy, however, will probably be an easy sell.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.