Bloomberg News

Obama’s Struggle to Win Iowa Shows Fiscal Stalemate’s Cost

October 16, 2012

President Barack Obama

With its low unemployment and sound housing market, Iowa boasts the economy that President Barack Obama once promised the entire country. Photographer: Jin Lee/Bloomberg

At Accumold in Ankeny, Iowa, revenue of almost $25 million is about a third higher than before the 2008 credit crisis. A year after doubling its factory’s size, the company tentatively plans to more than double it again.

“We’re literally looking to add dozens of people,” says Roger Hargens, 59, the company’s chief executive officer. “2010 was a record year. 2011 was a record year, and this year’s a record year.”

Accumold, a privately held maker of small components for medical devices and electronics, illustrates the comparative prosperity that makes Iowa an unusual battleground in a presidential election that’s focused on a weak national economy.

With its low unemployment and sound housing market, Iowa boasts the economy that President Barack Obama once promised the entire country. The jobless rate in August was 5.5 percent, well below that month’s national rate of 8.1 percent. Housing prices, which never soared as they did in other battleground states such as Nevada or Florida, hover above pre-crisis levels.

The state’s relative cheer is complicating Republican challenger Mitt Romney’s efforts to paint Obama as a failed economic steward.

“It’s not really possible to come here and talk about economic Armageddon,” said Sue Dvorsky, chairwoman of the Iowa Democratic Party, who acknowledges that Obama isn’t replicating 2008’s voter enthusiasm. “Nobody feels that.”

Trouble Signs

At the same time, the president is struggling to dispatch his Republican rival as fissures have appeared in Iowa’s surface sheen. Since the U.S. recession’s June 2009 end, the state has created jobs at half the national average. Last month, the Iowa Business Council’s third-quarter business-confidence reading fell seven points to 61 on a 100-point scale.

An uptick in the jobless rate, from 5.1 percent in June, has dented Iowans’ optimism, partly because of uncertainty about the stalemate in Washington over tax and spending policies.

“It’s the kind of enthusiasm you get treading water, knowing that the next guy drowned,” says economist Peter Orazem of Iowa State University in Ames. “There’s still a lot of unease.”

Mike Mahaffey, a former state Republican chairman, says Romney hopes to capitalize on voters’ disquiet about the future. “They are concerned about the next four years, not as much about the last four years,” he said.

Race Tied

Obama and Romney were deadlocked at 48 percent apiece in a survey of 600 likely Iowa voters conducted Oct. 11-14 by Manchester, New Hampshire-based American Research Group Inc. The margin of error was plus or minus 4 percentage points.

Worse news, from the president’s perspective, was delivered in an earlier poll by Selzer & Co. of Des Moines, Iowa, who also conducts surveys for Bloomberg News. In the Sept. 23-26 Iowa Poll, 54 percent of Iowans said the U.S. is on the wrong track.

Iowa missed the housing frenzy that consumed states such as California, Arizona and Florida. Between the end of 2001 and the end of 2005, home prices in Florida rose more than six times as fast as those in Iowa, according to the Freddie Mac house price index. Today, Florida’s prices remain 43 percent below their bubble peak, while Iowa values are higher.

Farm income, even after a severe drought, remains strong. Soybean prices are up almost 25 percent this year and corn has risen about 14 percent.

“We probably have less reason to demand change because things are pretty good,” says Roger Koppen, CEO of Farmers Cooperative in Ames, with 5,600 members the second-largest such organization in the nation.

Estate Tax Concern

Farmers are small businessmen, too, and the president has had trouble wooing that group. Howard Hill, who raises corn, soybeans and pure-bred Angus cows, is frustrated by uncertainty over future estate-tax rates. He’s struggling to map out plans to pass on his 2,600-acre operation to his son.

The current $5 million estate-tax exemption covers only about 500 acres, he says, not nearly enough for a viable operation. “It’s a nightmare to do any estate planning,” Hill says. “The whole issue of uncertainty is really causing people to not want to grow their business.”

Hill says he is standing pat, though his banker would happily lend him money to buy more land or equipment. And the president can forget about his vote. “He’s been a miserable leader,” Hill says of Obama. “We’ve spent tons and tons of money, and we still have way too many people out of work.”

Diverse Economy

Since the early 1980s farm crisis, Iowa has diversified economically. Advanced manufacturing and financial services are now as central to the state’s prosperity as corn and soybean prices. Earlier this year, Google Inc. (GOOG:US) announced a $300 million expansion of a 5-year-old data farm in Council Bluffs, near the Nebraska border.

In Ames, Sauer-Danfoss Inc. (SHS:US) produces hydrostatic pumps for a variety of construction vehicles. The company had a near death experience during the financial crisis, with orders in key markets falling 40 percent to 60 percent, says Kells Hall, president of the company’s Propel division. “We were talking to bankruptcy lawyers. The banks called our notes.”

Orders rebounded so sharply in 2010 that Sauer-Danfoss had to begin shipping products from its factory outside Shanghai to satisfy demand from U.S. customers. This year, the Ames-based division expects a record year, Hall said.

Employment, down one-third since the end of 2007, has been slower to recover. The Ames plant employs 625 manufacturing workers compared with almost 900 before the crisis, yet is producing record volume thanks to greater use of robotics and the outsourcing of functions such as machining.

Half the Workers

On the factory floor, an arrow-straight assembly line using half as many people as before the crisis turns out pumps for vehicles made by Deere & Co. (DE:US) and Caterpillar Inc. (CAT:US) A short walk from this line, one of 14 in the building, robots automatically paint pumps in one of five customer-selected colors, including Deere’s familiar bright green and Caterpillar’s school-bus yellow.

In rust belt states such as Ohio, where the trade deficit is blamed for the hemorrhage of manufacturing jobs, Obama and Romney have competed to see who can be tougher on China. Iowa’s exports last year of $13.3 billion were more than one-and-a-half times its imports, meaning the state’s workers have a great deal to lose in any trade war.

John Deere tractors, along with corn, soybeans and pork, are prominent in Iowa’s outbound shipments. Sauer-Danfoss, which drew 54 percent of its second-quarter revenue from non-U.S. customers, also is a good illustration of landlocked Iowa’s reliance upon global trade.

Stealing Jobs

Romney hasn’t shied from airing his criticism in Iowa of Obama’s trade policy. One campaign television ad called “Stand up to China,” alleges that “China is stealing American ideas and technology” and says the president failed seven times to take action, according to New York-based Kantar Media’s CMAG, which tracks political advertising.

Obama has countered with two China-related ads, including one that claims: “Romney’s never stood up to China. All he’s done is send them our jobs.” The jab is a reference to the challenger’s tenure at private equity firm Bain Capital, which invested in companies that moved work to China.

Like respondents to a recent Bloomberg National Poll who said by 50 percent to 41 percent that they doubted Romney would follow through on his pledge to toughen China policy, some in Iowa are skeptical.

‘Just Rhetoric’

“It’s just rhetoric,” says Hall. “China is a major, dominant economic power. No longer can the U.S. try to play hardball with China.”

Though Sauer-Danfoss derived only 6 percent of its second- quarter revenue from China, the company plans to expand production there. By 2015, it expects almost half of construction equipment globally will be made in China, meaning escalating demand for Sauer-Danfoss hydraulic gear.

“We have no intention to spend more on brick and mortar in the United States,” Hall said. “We’re going to invest in China.”

Four years after the worst of the financial crisis, its effects linger. In Des Moines, Principal Financial Group, a provider of life insurance and retirement products, watches the economy through the eyes of its 125,000 business clients.

“They’re being very cautious -- very cautious about hiring and investing in plant and equipment,” says Larry Zimpleman, Principal’s CEO. The recovery “continues to be a slow and grinding, but positive, movement.”

Subdued Economy

Principal Financial has more assets under management than before the 2008 crunch, $367 billion compared with a $317 billion pre-crisis peak. And the insurer’s share price is up more than 10 percent this year.

Still, Zimpleman expects the U.S. economy to remain relatively subdued for a decade. Principal’s long-range forecast assumes the yield on the 10-year Treasury note, at 1.66 percent yesterday, will reach 3 percent to 3.5 percent by the end of that period. That would be well below the 5.4 percent average for the 1995-2005 period and a sign of weak activity.

Back at Accumold, the 160 employees are up from 145 a year ago and almost twice the pre-crisis level. Hargens expects to hire an additional 50 or 60 workers for production jobs with a starting hourly wage of $11 to $15 as well as higher-skilled positions that pay $15 to $30.

Even at a company enjoying a mini-boom, it isn’t difficult to spot storm clouds. Most arise from Washington. As policymakers near the “fiscal cliff” -- the $607 billion of automatic spending reductions and tax increases that will be triggered unless a government compromise is reached this year -- taxes could rise. The administration’s new health-care law is unsettling. And there are always new regulations to monitor.

“People do believe the economy is doing better, and the statistics show that,” Hargens said. “But there are these looming concerns.”

To contact the reporter on this story: David J. Lynch in Washington at dlynch27@bloomberg.net

To contact the editor responsible for this story: Jeanne Cummings at jcummings21@bloomberg.net


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