TCS Daily

Old News Is Good News

By Kevin Hassett - October 29, 2002 12:00 AM

Economists have often said that economic policy is so difficult because policymakers must try to steer the economy in response to data that are fairly old. It is, the saying goes, a bit like driving while looking at the rear-view mirror. This is especially important now, because the economy was fairly healthy through August, but appears to be slowing down in the fourth quarter. So here's the politically interesting observation: old news is good news and most of the economic news between now and the election will be old. My guess is that Democrats are going to be knocking themselves for forgetting to check the data calendar before devising their political strategy.

Democrats have been beside themselves lately trying to divert voters' attention from terrorism and instead make the economy the big election issue. Dick Gephardt, for example, recently unveiled a new economic stimulus package, while criticizing President Bush for fiddling while the economy burns. "This President has failed to lead," Gephardt writes, but "we are prepared to lead. Democrats will lead."

The economic data over the past few weeks have been a little bit better than expected. That is not wonderful since the September doldrums were so negative that we needed a significant positive surprise to convince nerdy data watchers like myself that we can ignore the risk of the dreaded "double dip." At the same time, the data are clearly not cooperating with the Democrats, who have been trying to alarm the populace with Halloweenish characterizations of Bushonomics. Consumer sentiment is down as low as it gets, but consumers continue to spend like drunken sailors. Initial claims for unemployment insurance have improved, but the corporate sector has started to look ill again. How do you summarize this mixed picture? One of the best ways is to look at the bottom line in the GDP release, and we get the first estimate of GDP this week on the 31st.

While there are always surprises lurking, the economic data that we have in hand suggest that the third quarter of this year was relatively strong. Most folks I chat with who forecast third-quarter GDP growth are saying that it will be well above 3.5 percentage points and might even be above 4 percentage points.

Democrats have wandered the country telling voters that the economy is much worse than Republicans will admit. That a terrible suffering has descended on the land. Republicans countered that they inherited a recession, and have turned the country back around. A rational swing voter will likely care who is correct. If the economy is still floundering, then it might be quite sensible to choose the fellow who is better at reading the data.

The problem is that we pretty much know today that there will be headlines across the land on November 1, the day after the GDP release, stating that the economy is doing far better than anyone expected. Those headlines will be incorrect. The fourth quarter is looking much worse than the third. But it's hard, nonetheless, to think of a scenario wherein the Democrats could look more foolish, and that foolishness will be most evident right before the election.

Indeed, I see only two possible wild cards going into the election (assuming the stock market doesn't crash). First, there will be an employment report for October the Friday before the election. The current consensus estimate suggests that it will be negative, although the declining claims for unemployment insurance probably bound how bad the report can be. Second, the Federal Reserve has begun to signal that it is concerned enough by the bad economic news that it will lower interest rates again at the November 6 meeting (a day after the election). If Fed officials begin to market that policy move in the week before the meeting, they might be singing a song that is pleasant to the ears of Democratic strategists.

But if those two events do not turn the tide, then this election will be one where the economy appears stronger than it is. If that helps Republicans it may provide a kind of cosmic payback to the Bush family, which saw its ambitions dashed by an "it's the economy, stupid" campaign back in 1992. Everyone now acknowledges that the economy was doing much better than challenger Clinton implied back then, the good news just didn't make it into the data in time for the election.



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