WSJ: Thanks to Oil, Economy Faces Headwinds in Political Season

Dilemma for President Bush

By GREG IP and JACKIE CALMES
Staff Reporters of THE WALL STREET JOURNAL
August 9, 2004; Page A1

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Oil shocks helped cost two recent American presidents re-election: Jimmy Carter in 1980 and George H.W. Bush in 1992. The 2004 fuel jolt may threaten Mr. Bush's son's bid for a second term as well. Less than a week ago, George W. Bush was saying, "When it comes to creating jobs for America's workers, we've turned the corner, and we're not turning back." But the news that employers added just 32,000 jobs in July -- the lowest total this year and a sharp deceleration from the spring -- presents the White House with a dilemma: whether to acknowledge trouble (and imply the president's economic measures to date haven't worked so well), or insist the expansion remains on track (and risk appearing out of touch with workers' worries).


With polls showing voters more confident of Democratic challenger John Kerry's economic stewardship, Bush aides are honing a series of economic campaign proposals, discussing everything from simplifying the tax code to adding more tax incentives to expand access to health insurance. Just a few weeks from the Republican convention, President Bush is close to making final decisions on a second-term agenda that will stress economic initiatives under the theme of an "ownership era," according to one adviser. For Mr. Bush, who argues passionately that the economy is strong, being put on the defensive now must seem a cruel irony: Economic data released after the fact showed that the economy in 1992 had begun its long boom when the voters, not sensing that yet, booted his father from office.

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High oil prices aren't the only thing weighing on the market and the broader economy. Another factor is the fading effect of the stimulus policies that were designed to counteract the 2001 recession and sluggish recovery. Some economists believe consumers needed the steroids of repeated tax cuts and successive rounds of mortgage-refinancing to sustain their remarkable spending binge from late 2001 through the spring. With that stimulus now wearing off and Treasury and the Fed in no position to administer more, consumers may finally be retrenching partly in response to the high debt levels they've taken on in recent years... Indeed, there are troubling signs that the business caution about investing and hiring that restrained the economy from 2001 to mid-2003 might be returning. Software companies reported a sudden falloff in orders in late June. And the growth in capital-equipment orders appears to have eased. The new softness in the labor market risks creating a vicious circle of weakening growth. The economy's "only tailwind was significant employment growth," says George Magnus, an economist at UBS AG. "Without it, we're facing an uphill task."

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Another force driving oil prices higher is turmoil in the Middle East. That factor means prices could fall just as sharply as they rose, if fears of instability were calmed. But it also risks raising the political damage to President Bush. To the extent voters connect the dots, they may combine two of the American public's main concerns about Mr. Bush -- an uncertain economy and instability in Iraq -- into one big one. Mr. Kerry, touting his energy plan in Missouri Friday, did his best to link the two. "We are at war, a war on terror, where much of the focus of that war is in the Middle East," he said. "Guess what else is in the Middle East," he added. "Oil." Kerry campaign advisers assert that the "terror premium" has added as much as $15 to a barrel of oil, higher than many private estimates. "Instability and danger in the Middle East are driving up the price of oil," Mr. Kerry said in another recent speech. "Higher premiums weaken our economy and risk our security," he added. "But it doesn't have to be this way."


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---- Mary Kissel, Greg Hitt and Michael Williams contributed to this article.

Write to Greg Ip at greg.ip@wsj.com and Jackie Calmes at jackie.calmes@wsj.com

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