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Losing pace?

An economic downshiftcould cause Bush trouble

Like a runner who slows down before the finish line, the US economy may be losing momentum as it approaches the November election.

If that proves to be the case, President Bush may have to brace himself for some uninspiring economic statistics over the next few months.

"We are not talking about a hurricane, but it could rain a bit on Bush's parade," said Nicholas Perna, an economist based in Ridgefield, Conn.

No one anticipates a dramatic slowdown. Most forecasters believe the economy has downshifted from brisk growth to respectable growth. But the change could translate into disappointing numbers, particularly on the jobs front. With employers already nervous about adding people to their payrolls, even a hint of a slowdown could prompt them to put on the brakes.

"In this environment, when the numbers don't come in as strong as expected, businesses pull back," said Mark Zandi, chief economist at, a Pennsylvania forecasting firm.

The government will release a slew of statistics between now and Election Day. Only a few, however, are likely to attract widespread public attention. The rest are either too narrow or too arcane. At the end of this month, the government will put out a revised report on second-quarter growth in the gross domestic product, the broadest gauge of economic performance. The original estimate came in at 3 percent, a moderate pace, and the betting is the revised estimate will look about the same.

In late October, just four days before the election, the report on third-quarter GDP will be released. Zandi expects another 3 percent performance; other forecasters anticipate slightly higher growth. The economy expanded at a 4.5 percent pace in the first quarter of 2004 and 4.2 percent in the fourth quarter of 2003.

The two most closely scrutinized reports will be the employment statistics for August and September. They will come out at the beginning of September and October. Monthly job statistics are notoriously fickle and predicting them accurately is all but impossible. Last month forecasters expected a job gain of better than 200,000 for July. The actual number came in at 32,000. Most forecasters look for moderate job growth of 125,000 to 200,000 a month for August and September. By way of comparison, in the late 1990s, when the economy was soaring, the nation routinely generated about 250,000 jobs a month.

Until a few months ago, the economy appeared to be on a roll. Both businesses and consumers were spending liberally and the job market looked healthy. But in the past two months the economy has encountered what Federal Reserve chairman Alan Greenspan described as a "soft patch." Consumer spending dropped, the stock market lost ground and at least a few technology companies said their business customers were becoming less bullish.

"Most CEOs I talk to have put a little bit of caution on their optimism and termed it 'moderate growth,' " said John Chambers, head of Cisco Systems Inc., a leading Silicon Valley company, in a conference call with investors earlier this month.

Rising energy prices explain some of the change in the economy's fortunes. With oil prices hitting a record $48.70 a barrel last week before retreating somewhat to $46.05 yesterday, consumers have less money to spend on everything else. Retailers that cater to lower-income consumers, such as Wal-Mart, have blamed higher gasoline prices for their disappointing sales.

But energy alone can't explain the slowdown. When the economy took off last year, the rebound was fueled by falling interest rates and big tax cuts. The Federal Reserve has since begun to raise rates, and tax rates are no longer dropping. In a recent report Goldman Sachs said the withdrawal of both monetary and fiscal stimulus means the current slowdown in consumer spending "is likely to persist."

Even at 3 percent, the US economy would be expanding at roughly its average rate of growth over the past 30 years. But where 3 percent growth once was accompanied by a solid increase in jobs, today it can be accomplished with practically no gain in jobs at all. A single word explains the difference: productivity. In response to harsh competitive pressures, American companies have learned to produce more with their existing workers. The result is higher profits but a diminished need to add staff.

"Under these conditions it is hard to get decent job growth," said Anirvan Banerji, director of research at the Economic Cycle Research Institute in New York.

Should the job numbers stay weak, Democratic challenger John F. Kerry is sure to seize on the news. After July's poor employment numbers were released, Kerry said: "The president keeps saying we have turned the corner. But unfortunately today's job numbers further demonstrate that our economy may be taking a U-turn instead."

No matter how the upcoming reports turn out, Bush will be able to point to a number of positive economic indicators as he campaigns this fall. The jobless rate has come down steadily over the past two years, the economy is growing, the beleaguered manufacturing sector is on the mend, and consumer confidence has returned to decent levels.

But in politics, timing counts for a lot. And in the opinion of most forecasters, the timing of the current "soft patch" in the economy is not a plus for the president.

"If the slowing pattern I anticipate occurs, the Bush administration is not going to be happy," said Allen Sinai, chief economist at Decision Economics in New York.

Charles Stein can be reached at 

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