Faltering economy gives Bush a bad day on election trail

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The Independent Online

For George Bush it is probably as well the election is so close at hand.

For George Bush it is probably as well the election is so close at hand.

Consumer confidence is sliding, oil and petrol prices are soaring, the Dow is back below 10,000, inflation is stirring and the dollar is tumbling - in short, the economic recovery of which he has made so much on the campaign trail looks decidedly frayed.

A month or two ago, such a combination of bad news might have weighed heavily on the battle for the White House. Now, with most voters' minds long since made up, they may be too late to have much impact on the outcome. But no matter whether Mr Bush or John Kerry wins on 2 November, the new President will inherit economic problems galore.

The past two days have brought a flood of statistics. Some were expected - most notably the Treasury Department announcement of a final $413bn federal budget deficit for fiscal 2004, the largest such shortfall, but actually less than the $500bn or more forecast earlier in the year. Some, however, were not.

That other US deficit is growing by the month. In August, thanks mainly to stagnant exports and the ever-rising cost of imported oil, the trade shortfall jumped to $54bn in August, the second largest ever, topped only by a $55bn deficit in June.

On the basis of the past three months, the US is running at an annual deficit of some $640bn. That in turn is bound to exert downward pressure on the dollar, only increasing the dollar cost of imports, and thus the risk of a surge in inflation.

Beneath the surface, that may already be happening. Yesterday the government announced that wholesale prices edged up just 0.1 per cent in September. But that masked a fall in energy prices. The "core" rate rose by 0.3 per cent - more than expected - and the recent surge in oil prices is bound to feed through into wholesale, and almost certainly consumer, prices in the months ahead.

For Mr Bush, there was only one piece of unambiguously good news: a 1.5 per cent boost in retail sales in September, the best showing in six months. But, here too, the mood may be changing.

A major reason for yesterday's drop in the dollar against the euro and the pound was a notably downbeat consumer confidence report by the University of Michigan. The closely watched UM index fell to a preliminary 87.5 in October. Given that consumer spending accounts for 70 per cent of US gross domestic product, that trend could mean the economy is about to enter a slow patch.

Already analysts are adjusting down growth rate predictions. The first Commerce Department estimate of third quarter GDP - the last major piece of pre-election economic news - comes at the end of this month, days before the vote.

But Morgan Stanley, for one, has already shaved its forecast to 4 per cent from 4.6 per cent. With oil prices passing $55 a barrel yesterday in New York, and showing no sign of abating, analysts are also cutting 2005 growth estimates.

Industrial production is already pointing in that direction. Also featuring in the slew of statistics yesterday was an anaemic 0.1 per cent increase in September's factory output, less than that expected by Wall Street and following a revised fall in production of 0.1 per cent in August. Simultaneously, the Federal Reserve Bank of New York's monthly survey pointed to a sharp slowdown in manufacturing in the state thus far this month.

The trend concerns only one month and one state, albeit one of the largest and industrially most important in the country. Coupled with the other data however, it casts renewed doubt on the earlier assertions of Alan Greenspan, the Fed chairman, that the economy had weathered the rise in oil prices, to put its early summer wobbles behind it.

Yesterday Mr Greenspan was delivering another speech on oil prices in which he said their rise might knock 0.75 per cent off GDP. Every sign is still, though, that the Fed will continue to nudge interest rates higher when policymakers next meet on 10 November.

Despite three consecutive increases, the benchmark federal funds rate is still only 1.75 per cent, compared with the 3 per cent or so regarded as "neutral", neither overtight nor overlax. But if the economy continues to stutter, the central bank may pass on a further increase at its final policy-setting meeting in December.

But whoever is inaugurated on 20 January will have some tough economic choices to make. During the debates the candidates swapped stump speech accusations about deficits, taxes, and jobs. Very soon, either Mr Bush or Mr Kerry must deal with these problems for real.