Obama's new grand bargain: Does the economy need it?

In a shift, President Obama offers Republicans a new 'grand bargain' – cuts in corporate taxes in exchange for a jobs program. The recovery in the labor market makes Obama's jobs program a tougher sell.

In offering Republicans a new "grand bargain," President Obama is hoping to reinvigorate his stalled domestic economic agenda. He is also putting the need for more middle class jobs at the center of his political message.

If this were 2009 or even 2010, when the unemployment rate was nearly 10 percent, the push for a jobs program would have broad appeal. Now, with the economy growing and unemployment falling, Mr. Obama may have to work harder to sell his ideas.

At an Amazon.com distribution center in Chattanooga, Tenn., Tuesday, he is set to agree to a cut in corporate tax rates – a long-cherished Republican goal – in exchange for a significant investment for some kind of job creation program. (The size and type of program are still vague. Up to now, the president's grand bargain was a cut in corporate tax rates in exchange for tax reform for individuals.)

The unemployment rate has fallen to 7.6 percent. For more than a year, the US has been adding jobs at a clip of nearly 200,000 a month. After losing 8.7 million jobs during the Great Recession, the economy has recovered three-quarters of them.

The gist of Obama's appeal is that the pace of the recovery is too slow and that the jobs being created aren't bolstering the middle-class. On Monday, the day before the president's visit to its Chattanooga warehouse, Amazon.com announced it was adding 5,000 new warehouse jobs across the nation. The Internet retailer also pointed out that the pay of those jobs was 30 percent higher than wages at traditional retail stores.

The problem of a shrinking middle class predates the recession. And research points to various factors, including technology, trade, and tax policy, for widening the gap, rather than the lack of jobs programs.

Nevertheless, the president can point to this recovery as the nation's slowest in the postwar era. And the latest economic data suggests it's not likely to speed up anytime soon.

For example: While US consumer sentiment reached a post-recession high in July, according to the last week's read of the Thompson Reuters/University of Michigan Consumer Sentiment Index, this week the Conference Board reported that consumer confidence has fallen. The problem wasn't current economic conditions, which actually improved between June and July. It was the economic outlook, with fewer Americans expecting an increase in pay or more jobs during the next six months.

The housing market is also a mixed bag. Sales of existing homes dropped unexpectedly in June, falling 1.2 percent to a 5.08 million annualized rate. Inventory remains tight, but the months’ supply of homes rose slightly, to 5.2. And pending home sales fell slightly.

But sales of brand new homes had a huge month in June, rising 8.3 percent to a seasonally adjusted annualized rate of 497,000, according to the Commerce Department.  New homes sold at their quickest pace since May 2008, and rose 38 percent above the level seen in June 2012. And home prices in May notched their biggest year-over-year gain in six months, according to the S&P/Case-Shiller home prices index, pushed upwards by tight inventory. Home prices were up 12.2 percent from a year earlier. 

And what about the outlook for jobs? More will be known Friday, when the Labor Department reports employment figures for July. An early indicator, the number of people applying for unemployment benefits for the first time, rose by 7,000 in last week's report to 343,000 claims. Economists pointed to seasonal factors, including school closings and the annual shuttering of many auto plants for retooling, rather than any big change in the job market. “We see the week-to-week volatility as reflecting the variation in the auto retooling process, not any fundamental change in labor market conditions,” Barclays Research economist Michael Gapen wrote in an e-mailed analysis.

“We’re sustaining the improvement we saw from late last year, but not necessarily gaining a great deal of momentum on top of that,” Sean Incremona, a senior economist at 4Cast Inc. in New York, told Bloomberg.