INSIGHT: US economy could surge after November elections

11 October 2012 17:18  [Source: ICIS news]

US businesses await outcome of pivotal national electionBy Joe Kamalick

WASHINGTON (ICIS)--The US economic recovery is stumbling and weak, but the national elections on 6 November could change all that, regardless of who wins the contest, recent data suggest.

On one hand, companies are holding back on hiring, and there is even talk of a new recession in the first half of 2013 if Congress fails to resolve the “fiscal cliff” that would impose massive tax increases and sharp cuts in federal spending beginning in January.

The Conference Board reported this week that its employment trends index fell in September, following a downward revision in August’s reading.

“In September, the employment trends index declined for the third time in four months, suggesting that employment growth will weaken further in the fourth quarter,” said Gad Levanon, the board’s director of macroeconomic research.

“The US economy entered a soft patch in the spring [second quarter] and the result has been lacklustre job growth, which is likely to continue through the first half of 2013,” Levanon said.

But maybe not.

There are indications that US companies, especially small business employers, are prepared to take on new hires and make broad capital improvements, once they know what the near-term future will bring.

Essentially, employers are waiting to see results of what many think will be an historic US election.

Many US business interests and trade groups are openly hoping for a victory in the presidential election contest for the Republican candidate, former Massachusetts governor and businessman Mitt Romney.

But even if incumbent President Barack Obama wins a second term in the White House, the US business community will at least have some measure of certainty about the future course of federal policy and regulations.

A second four-year term for the Obama administration may not be what US business interests would prefer, but the outcome of the election will at least let them know – one way or another – what to expect.

The hiatus in US business development – a major component of the nation’s lacklustre GDP growth so far this year – was apparent in survey results this week from the National Federation of Independent Business (NFIB), the leading US trade group for grass-roots commercial enterprise.

The federation said that hiring plans among US small business owners fell sharply in September, and the outlook for the economy among small business owners declined to another “recession-level” reading.

NFIB said that its small business optimism index fell marginally by 0.1 points in September to a reading of 92.8 from 92.9 in August.

While the decline was small, the federation said it signalled yet another month of recession-level readings for the index.

“Since the commencement of NFIB’s monthly surveys in 1986, the index has been below 93 a total of 56 times,” the federation said, and “32 of those have occurred since the recovery began in June 2009.”

The index was at 94 or better in three months during the first half of this year but has been below the recession-level measure of 93 since June.

“September was another month of low expectations and pessimism for the small-business community,” the federation said, noting in particular that last month’s index was “pulled down by a deterioration in labour market indicators, with job creation plans plunging six points.”

NFIB chief economist William Dunkelberg said that small business owners are in “maintenance mode”, essentially avoiding taking actions or making decisions until they know the results of the elections.

“The election is essentially a horse race,” Dunkelberg said, “and its outcomes would have vastly divergent policy implications” for small business owners.

In addition to the headline contest between Democrat Obama and Republican Romney, all 435 seats in the US House of Representatives are up for re-election, as are about one-third of Senate chairs.

“Everyone is waiting to see what happens,” said Dunkelberg, “especially small-business owners who have a lot at stake in the outcome – which could mean higher marginal tax rates and more deficits, or lower marginal tax rates and less government.”

He said that uncertainty about the election outcome is second only to worries about the economy, “which is only keeping up with population growth”.

So, in the meantime, he said, “owners are in maintenance mode, spending only where necessary and not hiring, expanding or ordering more inventories until the future becomes more clear.”

In addition to the six-point drop in hiring plans, the NFIB survey showed a 3-point decline in plans for capital expenditures and marginal declines in inventory-building and job openings.

There was a four-point gain in the percentage of small business owners who expect the US economy to improve, but that rise only moved the rate up to positive territory with barely 2% of owners expecting better economic times ahead.

The health of and prospects for small businesses are important because small firms – judged to be those with 500 or fewer employees – are the principal jobs generators for the nation’s economy.

According to the US Small Business Administration (SBA), small enterprises employ more than half of all US workers. More importantly, those small firms traditionally generate more than 75% of the nation’s new jobs.

US businesses are said to be sitting on more than $1,000bn (€770bn) in cash but are reluctant to commit those funds to capital investments or hiring until they know which way political winds are blowing.

Whether Obama is re-elected or Romney wins the White House, businesses are likely to make decisions on how to allocate their fluid assets once the vote outcome is known, so the cash flow may well begin early in the new year.

That opening of financial floodgates will almost certainly trigger stronger US economic growth in 2013, regardless of who sits in the White House or controls Congress.

($1 = €0.77)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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