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Analysis: Oil, stock jitters add twist to U.S. presidential race

WASHINGTON (Reuters) -- The economy's future is commanding center stage in the U.S. presidential election, with falling stock markets and surging oil prices that could hurt American wallets adding a new twist to an already tight race.

So far at least, the U.S. economic boom has proved a boon to Democratic candidate Al Gore, who has not missed a chance to claim some credit for helping oversee a record expansion that has cut unemployment to levels not seen in a generation.

But as U.S. stock prices crumble and Middle East violence pushes up oil prices, some analysts are wondering whether the resulting squeeze on consumers may prompt them to seek revenge on the current administration and thus favor Gore's Republican challenger, Texas Governor George W. Bush.

"If the economy falls apart, it would benefit Bush and the incumbent (party candidate Gore) will take the blame," said Sung Won Sohn, chief economist at Wells Fargo Bank in Minneapolis.

But other observers say that recent market jitters and new worries over the fate of the much-awaited economy's soft landing could cut both ways -- depending on how much pain the spend-happy U.S. consumer will feel at the end of the day.

"It all depends on how short-lived the turmoil is," said James Glassman, senior economist at Chase Securities in New York. "Things like that tend to prompt calls for stability, which could favor the incumbent."

Blue-chip stocks as measured by the Dow Jones industrial average fell more than 3.6 percent on Thursday as investors fretted about the outlook for U.S. corporate earnings.

Meanwhile, crude oil jumped almost $3 a barrel to trade at above $36 a barrel after Israeli helicopters fired at targets near Palestinian President Yasser Arafat's headquarters and a U.S. Navy destroyer was attacked in Yemen.

The Federal Reserve, which raised interest rates steadily through much of this year to keep the economy from overheating, has long worried that rising stock prices have boosted consumer spending so much that demand has outstripped the economy's potential to produce, raising the threat of higher inflation.

'Stinking rich'

While lofty oil prices could have a similar inflationary effect, they could also hurt the economy from the opposite end by forcing consumers to spend so much more on energy that they will drastically cut their spending on other goods, prompting a sharp slowdown in U.S. growth.

But unless oil prices remain at their current levels for a long time, many analysts think such a "hard landing" scenario remains a distant possibility in an economy supported by still-robust demand, low inflation and rising productivity.

Diane Swonk, an economist at Bank One Corp. in Chicago, says consumer wealth has risen so much over recent years that a dent in the high-flying stock market and spiking energy costs will do little immediate harm to their spending patterns.

"This economy is hard to stop," she said. "We've made a lot of money over recent years -- it's not like many people aren't stinking rich anymore."

Gore earlier on Thursday said he was heartened by a drop in U.S. joblessness to 3.9 percent last month, noting that rising productivity had enabled the U.S. economic behemoth to grow at faster rates than before with lower inflation in the process.

"We're seeing a strengthening of the base of our economy," he said in an interview on NBC television. "And we continue to see these very large productivity gains, which give us the ability to have high growth rates with low inflation."

Many economists argue that rising energy prices and lower stock prices could help smooth the economy's transition to a lower -- and less inflation-prone -- growth rate ahead.

Fed policymakers have kept key short-term borrowing costs steady at their past three rate meetings but continued to warn that the prime risk to the outlook is rising inflation, signaling they might raise rates yet to contain that threat.

Letting blood

The central bank's rate-setting committee next meets a week after the Nov. 7 election amid expectations it will keep interest rates steady once again. Fed watchers are split on whether the group will raise rates again early next year.

For now at least, few think that rising oil prices will stoke inflation to such a level that immediate Fed action might be required. And the stock market's bloodletting may actually leave the economy in a better state then it was before.

"It all just adds to an important trend that was already underway, and it wasn't unfavorable," said Chase's Glassman. "These things come to and end at some point, the market can't keep rising 20 or 30 percent forever."

But even in the best of worlds, jittery financial markets add an element of uncertainty that is unlikely to do much good for Gore, whose campaign has emphasized economic policies aimed at helping investors and ordinary consumers alike.

"While Gore was counting on a virtually perfect economic environment, it isn't one right now," said Greg Valliere of Schwab Washington Research Group. "It's not the trump card he was counting on."

Reuters news material shall not be published, broadcast, rewritten for broadcast or publication or redistributed directly or indirectly in any medium.




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Thursday, October 12, 2000


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