Election day economics. Some economists see GNP report as feather in Republicans' cap

With only a little more than three months left until the presidential election, the economy is sticking to a Republican script. It will be tough for Democratic nominee Michael Dukakis to criticize yesterday's government report that the gross national product (GNP), the measure of the nation's output, grew by 3.1 percent in the second quarter of 1988. The growth rate would have been even stronger had the drought not cut 0.5 percent from agricultural output, which leaves an increase in the inflation rate as the only economic cause for concern.

Although the government will revise the second quarter number two more times in the weeks ahead, it will issue only one more GNP report before the November elections. Based on the current strong performance, it is unlikely the economy will change substantially between now and November.

``So far it is the best of all worlds from the point of view of an incumbent politician,'' says Robert Dederick, a former Commerce Department official, who is now an economist at Northern Trust Company in Chicago. Based on the relatively strong economy, Prof. Ray Fair of Yale University is predicting a Republican win in a very close election. However, he adds, since the election is so close, ``Other issues may well decide who wins.''

Although it is certainly not a given that an incumbent will win if the economy is strong, the status of the economy will not be a political drawback. For example, when Jimmy Carter was running for reelection in 1980, the economy downshifted dramatically in the second quarter, falling 9.1 percent. ``My equation predicted Ronald Reagan would win because of the poor GNP growth and the high inflation,'' says Mr. Fair.

``That was a freak,'' says Charles Schultze, then-chairman of the Council of Economic Advisers. President Carter, in an effort to cut down on the inflation rate, placed controls on consumer credit. The controls worked so effectively, recalls Mr. Schultze, ``that everyone acted like it was immoral to buy anything on credit.'' Schultze, however, does not believe the second quarter report alone caused Carter's defeat. ``There was the impact of high inflation and soaring interest rates,'' he adds.

There is no question the administration is pleased with the second quarter number. Commerce Department economist Robert Ortner calls it, ``a pretty sweet report.'' He says the report shows a continuation of the trend toward exports and a reduction of consumer spending. Mr. Ortner also says capital spending is on the rise - a factor that will make the economy more competitive.

The only sour note for the administration is the rising inflation rate. According to a Commerce Department index, prices rose by 4.7 percent, the largest advance since inflation increased 5.5 percent in the third quarter of 1987.

The Federal Reserve Board will be watching the rising inflation rate carefully. In a recent appearance before Congress, Fed chairman Alan Greenspan said he would be willing to raise interest rates to prevent a resurgence of inflation. Thus, he said the Fed had been raising short term interest rates to try to stem some of the growth of the economy. Mr. Greenspan indicated he expected the economy to slow down in the second half to a 2 to 2.5 percent annual growth rate.

The first indication of whether the Fed is correct will come Aug. 5 when the government releases the July unemployment figures. In June the unemployment rate shrank to 5.3 percent. If that number continues to drop, the Fed might tighten interest rates some more.

But even if the unemployment rate falls further, economist Brian Fabbri of Thomson McKinnon Securities Inc. says the Fed will not act right away. ``They will wait to get more data on the second half.''

The Fed is likely to get what it wants, says economist Lincoln Anderson of Bear Stearns & Co. He expects consumer spending to remain restrained, while capital investment slows down. This would keep the economy on a modest growth curve while helping to alleviate the trade deficit.

This will be a departure from some past election years, says Professor Fair, when incumbents have tended to try to accelerate economic growth. ``Sometimes they get as much as 6 or 7 percent growth,'' he notes. Fair has found this helps at the election booth. For every 1 percent growth, he says, an incumbent gets a 1 percentage point increase in share at the election booth. Thus, the current strength in the economy is giving the Republicans ``a slight head start.'' Based on his formula, Mr. Dukakis would win 48.2 percent of the vote. But Fair points out that his estimates have an average error of three percentage points. Thus, on the basis of the economy, he says, ``This election is really too close to call.''

A chart on presidential elections and the GNP in yesterday's Monitor reversed the 1980 and 1984 results. In 1980, Mr. Reagan defeated Jimmy Carter, and in 1984 President Reagan defeated Walter Mondale.