US braces for make-or-break economic data

WASHINGTON – The United States is bracing for growth figures that will set the tone for the last 100 days of the race to the White House and help decide if the Fed pulls the trigger on more economic stimulus.

Early Friday in Washington, the Commerce Department will release its first estimate of how much the world’s largest economy grew in the second quarter of this year, from April to June.

With the fog of crisis hanging thick in the air, economists’ estimates range wildly.
While Briefing.com puts the Wall Street consensus at 1.2 percent, respected estimates range from close to zero to fairly robust growth of two percent.

Anything close to two percent would be a thumping victory for President Barack Obama, all but killing suggestions that the economy is ready to take another dive.

According to one political scientist, two percent growth would even portend near-certain victory for the president on November 6.

Emory University professor Alan Abramowitz has devised a formula to predict the election winner, based on incumbency, polarization, the president’s approval rating and second quarter GDP.

The model has correctly predicted the popular vote in the last five elections.

“If GDP growth comes in at two percent,” he said recently, “then my model would forecast that the president would end up with close to 51 percent of the popular vote.”

On all but four occasions – in 1824, 1876, 1888 and 2000 – winning the popular vote has been enough to carry the election.

But amid doubts about the rate of consumer spending, business investment and government outlays in the last few months, a two percent growth rate is far from assured.

If growth is closer to one percent, it will provide a major boon to Republican challenger Mitt Romney, enough, perhaps to break the stalemate that has characterized the race so far.

Although Romney has heavily attacked Obama’s economic policies amid poor jobs data, both candidates currently hold 46 percent of the vote, according to Gallup tracking polls, a level of support that has changed little in the last three months.

And both campaigns face additional pitfalls on Friday.

The Commerce Department will also present revisions to the last few years of growth data, based on fuller evidence that has the potential to recast the political race.

Any sign that growth has been even slower than first thought would be highly damaging to Obama, while evidence of better growth could spur renewed optimism and upgrade his economic legacy.

“Market participants are probably mostly concerned with Q2 and the previous quarter or two,” said Stephen Stanley of Pierpont Securities, “though significant revisions over the past few years could find their way into the political campaign conversation.”

Significantly, both the second quarter data and the revisions also have the potential to recast the policy of the Federal Reserve.

Until now, the Fed has been cautious about launching any major new stimulus, but the new data has the potential to tip the scales toward new action.

But not everyone is convinced that action would come when the Fed’s top policy panel meets next week.

A sharp downward revision to first quarter GDP or a negative surprise for the second quarter “will increase the pressure on the Fed to do something next week,” said Joseph LaVorgna of Deutsche Bank.

But, he added, action at the September 12-13 meeting was more likely.