A Bounce For Bush
Steady interest rates and an expanding economy give the president some good news, for a change
It's not really too surprising that George W. Bush's visit to the floor of the New York Stock Exchange last week marked only the second time that a sitting president had made such an appearance. (The first was Ronald Reagan in 1985.) After all, most politicians probably think it's better to be seen as a representative of the common man and Main Street than of shiny-suited financiers and Wall Street.
But Bush's big problem right now is that instead of Main Street or Wall Street, he might be more associated with Haifa Street, the lethal "street of fear" in Baghdad where U.S. and Iraqi troops fought insurgents last month. So Wall Street's not a bad alternative for an embattled president dealing with a foreign policy nightmare, especially when he can talk up what's turning out to be a vibrant economic boom. On the same day that Bush visited the NYSE and gave an upbeat speech at historic Federal Hall in Manhattan-"consumers are confident, investors are optimistic," the president declared-the Commerce Department reported that the U.S. economy grew at a snappy 3.5 percent pace in the fourth quarter of 2006. "This was a strong number," says Joel Prakken, chairman of Macroeconomic Advisers in St. Louis, "that showed the year really ended strong."
Investors agreed, pushing the Dow Jones industrials up nearly 100 points. The economy's performance was especially impressive considering that it wasn't so many weeks ago that economists were whispering that the fourth quarter might be a "one handle"-meaning growth between 1.0 and 1.9 percent. Now instead of a "hard" or "soft" landing, bearish investment pros are talking about a "growth scare" where a surprisingly robust economy would push the Federal Reserve into raising interest rates. (The Fed, in its placid statement last week, seems to be worrying less about both weak growth and rising inflation.)
The fourth-quarter spurt brings the economy full circle. Growth started fast in 2006, up 5.6 percent in the first three months of the year, but then weakened dramatically as the housing market tanked, oil prices rose sharply, and auto production slackened. Gross domestic product grew by only 2.6 percent in the second quarter and 2 percent in the third. Yet for the year, the economy expanded by 3.4 percent-better than the 3.2 percent rate in 2005 despite all those challenges.
Even though many Americans own houses worth less than they were a year ago, they continue to spend like NBA rookies after draft day. Real personal consumption expenditures-a measure of consumer strength-rose 4.4 percent in the fourth quarter. Helping consumers afford their spending habits was a 5.4 percent jump in real disposable personal income. For the year, it climbed 2.7 percent vs. 1.2 percent in 2005. The recent drop in gas prices "means that consumers had more money in their pockets than they expected," says Wachovia senior economist Mark Vitner, "and they spent it." Vitner also notes that lots of those dollars went toward buying ever cheaper flat-panel televisions. "They just flew off the shelves."
Consumers will most likely keep pulling out their credit cards while jobs remain plentiful. Which they are: Unemployment is only 4.6 percent; an average of 187,000 new jobs a month were created in 2006, plus 111,000 in January.
Feeling the pain. Most economists seem to agree with the Fed in predicting that growth in 2007 will be moderate, somewhere in the 2.5 percent to 3.0 percent range. Yet Bush conceded in his Wall Street speech that not everyone is fully benefiting from the five-year economic expansion and that the good top-line numbers may mask underlying economic anxiety. "I know some of our citizens worry about the fact that our dynamic economy is leaving working people behind," Bush said. "We have an obligation to help ensure that every citizen shares in this country's future. The fact is that income inequality is real. It's been rising for more than 25 years."
The admission may be a response to the populist economic message that Democrats employed to pound Republicans during the fall congressional campaigns-when they weren't talking about Iraq, of course. And Democrats have hammered away into the new year, most notably in Virginia Sen. Jim Webb's rebuttal to Bush's State of the Union speech. Webb lambasted the growing gap between CEO pay and workers' wages. "The middle class of this country," he said, "... is losing its place at the table."
Bush's response last week was to defend globalization and free trade, press the need for better education to increase middle-class incomes, and scold corporate boards for not reining in undeserved executive compensation packages. The Bush message: I care. "This speech said that 'I understand your pain, I understand things look good from the 30,000-foot, macro level but maybe not so good from the Main Street level,'" says Gregory Casey, president of BIPAC, a pro-business lobbying group. "But where was this speech six months ago?"
Whether such populist issues continue to bite six months from now will probably depend on whether income and wages, which lagged during the early part of the economic expansion, keep playing catch-up.
For now, though, Bush is happy just to have something to celebrate.
This story appears in the February 12, 2007 print edition of U.S. News & World Report.