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
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.
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.
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."
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