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Thursday, 18 September 2008

US economy's fundamentals OK?

WASHINGTON - US UNEMPLOYMENT is at a five-year high.

Financial firms that withstood the Great Depression are failing. Congress and the outgoing president are gridlocked.

So when Republican presidential candidate John McCain declared that 'the fundamentals of our economy are strong,' it drew ridicule from his Democratic rival Barack Obama.

Mr McCain later toned down his remarks, but his observation reflected a debate among analysts and policymakers about the economy's underlying health.

Polls show a majority of voters put the economy as their No. 1 concern with seven weeks to go until the presidential election.

Many economists believe the US is now in a recession. Signs of economic distress are everywhere as housing prices continue to fall and the nation's financial system is pounded by a series of shocks, including a 504-point drop in the Dow Jones industrials on Monday.

'Strains in financial markets have increased significantly and labour markets have weakened further,' the Federal Reserve said in a sober assessment on Tuesday.

But in deciding against lowering interest rates, the central bank signalled that it didn't see the economy's present situation as dire.

'When you have jobs being lost, industrial production down, personal incomes down and so forth, the economy's not in good shape,' said Mr Nariman Behravesh, chief economist at Global Insight, a Lexington, Massachusetts, forecasting firm.

Still, he added, 'If the issue is whether the US had a dynamic, resilient economy, and that the long-term trends are positive, I completely agree.'

'It's important not to get carried away with gloom and doom.'

And Mr David Wyss, chief economist for Standard & Poor's, said that while there is a serious financial sector problem, 'the fundamental economy actually isn't in that bad a shape.'

But, Mr Wyss added, 'I still think we're in a recession.'

That dichotomy is at the heart of the dispute over Mr McCain's remarks. Mr McCain declared on Monday that 'the fundamentals of our economy are strong,' a phrase he has used before.

After Democrats pounced, he backtracked and declared the economy to be in a crisis and said 'fundamentals are threatened.'

Democrats kept up their assault. 'How can John McCain fix our economy if he doesn't understand it's broken?' asked an Obama TV ad.

While the housing and financial sectors are in near meltdown, the larger economy is plodding along, the numbers suggest.

After turning negative in the final three months of 2007 and growing at an anaemic 0.9 per cent in the first three months of 2008, the nation's gross domestic product - helped by government stimulus checks - grew at 3.3 per cent in the April-June quarter.

A relatively weak dollar has helped US exports. High prices for food and other commodities have helped agriculture and the energy and mining industries.

A survey of CEOs by accounting firm PriceWaterHouseCoopers found that while the unemployment rate jumped to 6.1 per cent in August, a majority of the top corporate leaders surveyed said they are not planning significant cutbacks of people, products or services.

Instead, the CEOs are focusing on opportunities to improve efficiency and ways to emerge from the slowdown in a better position to compete.

That doesn't mean all is rosy.

'If all of this should lead to a tightening of credit, which it very well might, that would be a serious concern to manufacturers,' said Mr Hank Cox, a spokesman for the National Association of Manufacturers.

Lack experience
With the economy now at centre stage, both Mr McCain and Mr Obama must try to overcome the fact that neither has much experience with markets or finance, nor do their running mates.

Mr McCain may be at a bigger disadvantage because his party has controlled the White House for eight years - and voters often blame the party in power for hard times.

Still, new polling suggests the Wall Street tumult is helping Mr McCain, at least for now. He and Mr Obama now are trusted equally on the economy, with 34 per cent of voters naming each as the candidate who would do a better job, according to a wires pollconducted last week.

Previously, Mr Obama had held a solid advantage on the issue. Democrats have also been seeking to link Mr McCain with unpopular Bush economic policies ? something Mr McCain has been pushing back against.

In a recent McCain television ad, an announcer asserts, 'We're worse off than we were four years ago.'

That not only takes a dig at President Bush, but also evokes the memory of Mr Ronald Reagan, the Republican who famously asked voters in 1980 if they were better off than four years earlier.

Mr Reagan also had a ready definition of economic downturns.

'A recession was when your neighbour lost his job, and a depression was when you lost yours.'

'Recovery would come when then President Jimmy Carter, the Democrat he beat in the election, lost his,' he liked to add. -- AP

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