Slow economy forecast for fall election

It's likely to be a bumpy ride for the US economy between now and Election Day.

With only three months to go before the Nov. 4 contest, many economists expect a dreary backdrop at the ballot box: a rising unemployment rate, falling home prices, and stressed consumer bank accounts.

There could be some bright spots as well: US business continuing to sell goods abroad and some energy-producing areas of the nation experiencing minibooms. But on the whole, the economic news is expected to be gloomy.

"It looks like we will have a mild recession but a long recession," says David Wyss, chief economist for Standard & Poor's in New York.

One of the latest signs came Friday when the Department of Labor reported that the July unemployment rate rose to 5.7 percent, up from 5.5 percent in June. The economy lost 51,000 jobs, the seventh month in a row for job losses. By Election Day, some experts predict, the jobless rate will be 6 percent.

"Layoffs are going to continue as we go into a gradual downturn," says Mr. Wyss.

If the economy continues to fade, this could be the first election during a recession since 1980, when Republican Ronald Reagan defeated a sitting Democrat, President Jimmy Carter.

The economy and double-digit inflation weren't the only challenges facing Mr. Carter. That race was also marked by long gasoline lines and the hostage crisis in Tehran. But the economy is usually a key indicator of which party will take the White House, economists and political scientists note. That could present a major hurdle to the Republicans' presumed nominee, John McCain.

"There's an absolute and direct correlation between the economy and the outcome of elections," says Stephen Hess, a senior fellow at the Brookings Institution in Washington. "Just look at the gross domestic product – one simple data point – and whether it's up or down: If it's down and we're in a recessionary period, it is a rare exception for the out-party to lose."

But this campaign is already unusual, say Mr. Hess and other political analysts. The first African-American candidate, Barack Obama, is squaring off against Senator McCain, who paints himself as a maverick. While McCain regularly states he's proud to be a member of the GOP, he has also worked to distance himself from President Bush.

That's one reason national polls show a tight race, analysts say. The other is the fact that Obama is the first black presidential candidate of a major party.

"This is an election that's really all about Barack Obama," says Hess. "If it wasn't Barack Obama, this would be a landslide for the Democrats."

Economically, some of the hardest-hit states are also key battlegrounds. The National Employment Law Project (NELP) finds 12 states with unemployment rates already over 6 percent.

"A lot of the job loss is in the Midwest," says Christine Owens, national director of NELP. "The economy is their No. 1 issue."

Ohio's unemployment rate already tops 6 percent. Michigan's is 8.5 percent, the highest in the country.

Recent polls show Obama ahead in Ohio, although by only two percentage points, less than the margin of error. In Michigan, polls also show a tossup.

While a recent building boom has kept the construction trades busy around Detroit in the past year or two, Michigan has been hard hit by the foreclosure crisis as well as by woes in the auto industry.

"I would like to think we're going to learn our lesson and go back to the Democratic Party," says Ed Coffey, business representative of the Michigan Building and Trades Council in Detroit. "I guess my dad was right: If you want to live like a Republican, vote like a Democrat."

Mr. Coffey was originally a strong supporter of Sen. Hillary Rodham Clinton primarily because of the Clinton administration's economic record. He's now on the Obama bandwagon, but he admits some union households that have voted Republican in the past may be attracted to McCain.

"If they're of a persuasion that they can't see their way clear to vote for an African-American, I think McCain would be more palatable to them than George Bush," he says. "But it's going to be close."

McCain also has support in sectors of the economy that are doing well, such as commercial construction. While residential construction lost about 5,200 jobs in July, the commercial and industrial construction sector gained 4,100 jobs, according to Friday's employment report.

"Our industry is still very vibrant," says Gerry Fritz, spokesman for the Associated Builders and Contractors, which represents commercial and industrial contractors. "On the issues that are important to our industry, McCain came back with a great score."

Part of the problem for the national economy is an issue of timing. Currently, consumers are still spending some of the $100 billion in rebates sent out this spring. By Election Day, however, that money is likely to be gone.

"There is not another check in the mail," says Dan Meckstroth, chief economist at Manufacturers Alliance/MAPI in Arlington, Va. "Consumer spending levels have to come down."

The growth of consumer income has been crucial in past elections, says Larry Bartels, a Princeton University economist and author of "Unequal Democracy: The Political Economy of the New Gilded Age," a book published by The Russell Sage Foundation, which supports research in the social sciences.

"The tipping point for a party in power for eight years is around 2 percent real growth in income around the election," says Mr. Bartels. "Most of the forecasts are for somewhat less."

In fact, economists say income growth this year might be negative. The average annual wage growth is slightly more than 3 percent, but the headline inflation rate is closer to 5 percent. This would indicate the average worker has lost about 2 percent in real terms on income.