Some would say it's not all gloom and doom for the President on the political front. The Administration has shown a remarkable degree of flexibility on almost every major decision concerning Iraq in recent days, rethinking its positions on sending more troops, embracing the United Nations, reconstructing the Iraqi military, and its relations with former Iraqi leader Ahmed Chalabi. And now, a new government, albeit interim and with limited credibility, has been formed in the country once terrorized by Saddam Hussein.
If only the Administration would show a similar flexibility in its economic approach. But the Bush team seems determined to stay focused on its main domestic economic message: making temporary tax cuts permanent.
PAIN AT THE PUMP. After all, the economy is giving Bush fits even though the main Presidential forecasting models, which are mostly based on key economic variables (like gross domestic product, inflation, and unemployment), still show Bush winning handily come November. But it's the economics of everyday life that are troubling people and showing up in his poll numbers.
Take the surge in energy prices. The price of oil is up a third since December. The nationwide average for unleaded gasoline is over two bucks a gallon. The overall inflation rate may be subdued, but these price increases are taking a lot of money out of people's pockets.
And interest rates are up. The rate on the traditional 30-year mortgage is a full percentage point higher over the past two months, a shift that has upped the price of owning home by some 10%. It's highly likely that home prices have peaked and will come down somewhat with the change in the interest-rate climate for the worse.
HOUSING'S FOUNDATION. Certainly, the housing market is vulnerable, with home prices at worrisome heights. For instance, the household price-to-earnings ratio (the ratio of the median existing house price to apartment rents) was essentially stable for 15 years leading up to 1999. Since then, it has soared, with home prices up a third and apartments rentals flat, according to calculations by Economy.com, an economic-consulting firm based in West Chester, Pa.
Contrary to popular perception, housing prices do go down. Median new home prices fell 13% from April, 1990, to May, 1992. The decline was closer to 20% in inflation-adjusted terms, says David Rosenberg, chief North American economist at Merrill Lynch & Co. That drop in household wealth hardly helped the re-election prospects of George Bush Sr.
Yes, the job market is improving. But the gains have only been recorded over the past several months. Hundreds of thousands of previously discouraged workers may now feel optimistic enough to look for work, but it could take months before they land it.
TO-DO LIST. What's more, it might be another year or so before employees are willing to risk marching into the boss' office and demanding a 5% pay hike -- or threaten to walk. Job insecurity is now a way of corporate life, with management well-versed in the mechanics of downsizing, restructuring, outsourcing, off-shoring, and other techniques that cast a pall over worker confidence.
None of this is to say the economy isn't gaining traction. Business does see enough demand to boost capital spending and hiring plans. But the everyday negatives could explain why the President isn't getting the kind of bounce history suggests he should from an improving economy.
Perhaps he won't -- unless voters gain greater confidence in the Administration's ability to increase America's energy independence, get rid of most -- if not all -- of the mammoth federal budget deficit, adopt a consistent trade policy, and a better articulate its approach toward taxes. Until then, the Bush team's mantra of "make temporary tax cuts permanent" will sound awfully thin, and beside the point. Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online