The U.S. Economy: What Does it Mean for Politicians?
By Alex M. Brill :

Just when the news is fully saturated with the idea that the U.S. economy is on the brink of a recession caused by the bursting of the sub-prime lending bubble, we get some surprising news last week: The U.S. economy grew at a 3.9 percent (all growth rates are annualized) from July through September, the fastest rate in six quarters. Exports surged 16.2 percent and consumer spending remained strong.

What's more, jobs are being created and the unemployment rate remains low. While economists had expected a paltry 80,000 new jobs for October, the government reported 166,000.

Nevertheless, we continue to get doses of worrisome news: home prices are falling, oil prices are rising and consumer confidence (as measured by the Conference Board) is now at the lowest point since Hurricane Katrina.

There is a longstanding tradition of legislative intervention to address the consequences of economic change. How might the economic outlook shape the Congressional agenda?

What's Happening to the Economy?

Consumer Spending

The economic expansion of the last five years has been heavily fueled by strong consumer demand. Personal consumption currently consumes 70 percent of total U.S. output and while overall real economic growth has averaged 3.0 percent since 2002, personal consumption has averaged 3.2 percent growth. Many economists -- including former Federal Reserve Board Chairman Alan Greenspan -- have remarked that some of this surge has been driven by rapidly rising home prices and the ease by which a homeowner can get an equity line of credit or refinance a mortgage and "cash out" the increase in home value. If this is correct, then there is valid concern that falling home prices will result in less consumer spending and a weaker economy.

And, if fact, home prices are declining. The S&P/Case-Shilling Home Price Index has dropped 4.4 percent over the 12 months through August; the latest available data. Meanwhile, consumer spending has remained strong at 3 percent. Perhaps we just need to wait a while longer before we see a drop off in spending as a result of the housing market's weakness; or perhaps this link is more tenuous than some had suggested.

One place to look to try to see if this is just a matter of time before consumers collapse is to look to see if personal debt is rising. Are Americans simply borrowing on their credit cards when they can no longer borrow from their home? The best answer will come from the Federal Reserve Board's quarterly report indicating the fraction of after-tax income that households spend servicing their debt obligations. The data for the third quarter won't be available until December but the recent trend has been down, not up.

Exports

The U.S. and the world economy have tended to be in relative synch in terms of growth. When the U.S. economy slipped into recession in 2001, the world economy slowed considerably as well. Today, things appear different. While forecasts for U.S. growth are marked down, forecasts for global growth are increasing. Above trend growth in Europe combined with a dramatically cheaper dollar has led to an increase in U.S. exports. Over the last year, U.S. exports have increased nearly 10 percent while the overall economy has grown by 2.6 percent. This export surge added 1.8 points to overall U.S. growth in the last quarter. After accounting for the offsetting surge in imports, overall trade boosted growth by nearly a percentage point.

Investment

Further good news last week was that business investment in equipment and software remains strong. This sometimes volatile statistic increased 5.9 percent in the third quarter compared to just 1.4 percent over the last year. Given rising costs of borrowing money and discussions of tax increases on business investment, sturdy growth in this category is an important indicator that there is long-term confidence in the global economy.

Jobs and Income

In addition to a strong boost in output in the U.S. economy last quarter, last week we received good jobs numbers as well. The net increase in employment was 166,000 in October and the U.S. has increased employment by 1.7 million jobs in the last twelve months. While neither of these statistics is stellar, they are consistent with solid economic performance and not consistent with an economy teetering on the edge of recession.

Blip or Turning Point?

The question for economists trying to peer into the 2008 economy is if last week's data is the beginning of a new course for the U.S. economy or just noise in the data. Both the jobs data and the GDP data will be revised twice in the next two months and big changes can show it in revisions. In addition, the fastest single quarter of growth since 2003 (Q3, 2003) occurred in the slowest of the four most recent years and the second faster quarter (Q1, 2006) occurred in the second slowest year. So, even an entire quarter of data may not clearly point to the broader trend for growth.

Furthermore, the weak consumer survey data, continued slide of the housing market and oil prices heading towards $100 all suggest that the risks for the U.S. economy remain despite last week's good news.

What's A Politician to Do?

Politicians do not like to sit idle while the economy undergoes any type of negative change, whether it is a loss of manufacturing jobs, a deceleration of median wages or a full blown recession. At present, Congressional intervention aimed at the natural ebb and flow of the economy is focused on providing assistance for those caught in the downturn of the housing market, just like the large legislative action focused on the devastation after Hurricane Katrina. Much as economists worry about contagion effects from housing on to the broader economy, there is rightful concern of contagion effects in Congress, too. If the labor market deteriorates, expect additional unemployment assistance. If the trade deficit worsens, expect more assistance to import sensitive industries. If home heating prices rise too high this winter, expect relief to lower income families.