Economic growth slows from a sprint to near-paralysis

Fourth quarter U.S. GDP stats show the housing bust finally biting to the bone. What do the numbers mean for the election?

By Andrew Leonard

Published January 30, 2008 5:13PM (EST)

However you slice it, a drop from 4.9 percent quarterly GDP growth to 0.6 percent is a bona fide cliff dive. There is now a very strong possibility that economic historians will say a recession began in December 2007, when consumer spending finally began to buckle, unable to stand any more pummeling by the housing bust.

But it's not yet a done deal. There is some encouraging news on the jobs front, where the service sector is ticking right along, offering some cover to the dwindling band of optimists who think a recession can still be avoided. But pessimists have the heavier artillery on their side. The main component of the slump in GDP was the housing bust -- residential fixed investment declined by 24 percent in the fourth quarter of 2007. And there is no evidence yet that the housing bust has hit bottom. The most recent statistics on new home sales, housing starts, and building permits all plumbed depths not seen in at least a decade.

Still it's a guessing game -- as anyone who follows economist predictions is all too aware. Which is one reason How the World Works thinks John McCain has been treated unkindly -- even hypocritically -- for his comment in New Hampshire that, "the issue of economics is not something I have understood as well as I should." Not only was this a classic demonstration of "straight talk," but really, who among us, from Ben Bernanke on down, cannot say the same? Even Nobel Prize winners in economics can't forecast recessions, and, to take just one example, the vast disagreement among economists on how to shape a fiscal stimulus rescue package -- or whether one is even necessary -- suggest that "understanding" the economy is a different exercise than, say, understanding nuclear physics or the structure of DNA.

But whether or not a recession is here already, will arrive next month, or doesn't materialize at all in 2008, the GDP numbers announced on Wednesday ensure that the economy will remain the No. 1 issue for voters for the foreseeable future.

Does that make the presidential election a shoo-in for the Democrats, no matter whether the nominee is Hillary Clinton or Barack Obama? Well it likely doesn't hurt, but for a full analysis of the politics of recession, a lengthy, excellent article on the topic by Edward Luce published in the Financial Times on Tuesday is highly recommended.

From the FT:

So is it just a question of settling who is to be the Democratic nominee and then awaiting either Hillary Clinton's or Barack Obama's inevitable capture of the White House? Probably, says Ray C. Fair, a Yale economist whose widely cited forecasting model predicts a 52 per cent to 48 per cent Democratic presidential victory in November, even with a mild slowdown in growth.

But Mr Fair's model, which has a 2.5 per cent margin of error, predicts a whopping 55 per cent to 45 per cent Democratic victory in November if that slowdown indeed turns into a recession. "Almost everything, including all the non-economic factors, suggests a Democratic win this year," he says.

Should Mr Fair's forecast prove anywhere near accurate, it would constitute something of a revolution in American political history. The last time a Democratic presidential nominee won the presidency with more than half the vote was in 1976 when Jimmy Carter defeated Gerald Ford. But that came little more than a year after the Watergate crisis had unseated Richard Nixon and cast a toxic pall over the Republicans.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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2008 Elections Globalization Great Recession How The World Works U.s. Economy