Security and Economy Rule the Midterm

President Bush and his party have made it clear that the final weeks of the elections will be about two issues: national security and the economic recovery.

The war in Iraq, and our efforts to help the Iraqis’ fledgling democracy overcome its terrorist insurgency, is the administration’s biggest political challenge right now. Still, polls show a 51 percent majority believes Iraq is a key battle in the war on terrorism, and most Americans, 50 percent to 42 percent, say the country is safer today than it was before Sept. 11.

Meanwhile, a growing economy is fast emerging as a big political plus for Bush and his party that they intend to promote for all it’s worth.

The economy has faced huge obstacles as a result of Sept. 11, the Enron and WorldCom scandals, Hurricane Katrina and a sharp spike in oil costs that pushed gasoline prices to record levels. But it’s also shown resilience, largely due to the innovation and productivity of American businesses, with the help of Bush’s well-timed tax cuts, which injected the economy with the liquidity needed to recover.

As this is written, the price of a barrel of crude oil in the world market had plunged to the $57 to $58 range, down sharply from the $78 high that severely squeezed our economy, fueled inflation and threatened to short-circuit the Bush recovery.

Cheaper oil has led to a precipitous decline in gas prices from a high of $3 or more to nearly $2 or less for a gallon of regular in some states. It couldn’t come at a better time for the Republicans, who are going to need every break they can get to hold down their expected losses in the House and Senate.

The GOP and most Americans are not the only ones breathing a sigh of relief. Lower gas prices are having a rippling effect across the economy, slashing overhead costs for the struggling airline and trucking industries and for businesses in general. Everything from manufacturing to fertilizers are affected by lower oil and gas prices, effectively giving the economy a huge tax cut.

Here are some other reasons why the economy remains the GOP’s best issue:

  • The Dow is hitting all-time highs, lifting other major stock indexes, as well as stock markets around the world. Markets react to fundamentals in the economy and future trends point to continued growth and expansion here at home and around the globe.

Last week, the Dow was surging toward 12,000, a new benchmark that was unthinkable this summer when Iran loomed as a danger in the Middle East and war broke out between Hezbollah and Israel. But the collapse of oil and gas prices, a pause in the Fed’s interest rate hikes and stronger quarterly earnings reports have combined to push the markets higher and, with it, worker and retiree 401(k) pension funds.

  • Manufacturing shipments have been "solid," says David Malpass, chief economist at Bear Stearns. Factory shipments rose a healthy 1.1 percent in August and have increased 5.8 percent since the second quarter.
  • There are some signs the housing market may be bouncing back, too. New home sales rose by 4.3 percent in August, mortgage rates are falling, and Malpass sees "demographic support for more housing, which should begin to soften the housing slowdown."
  • America of course is still building at a healthy pace in the commercial construction sector. In a year-over-year comparison of August’s data, non-residential construction increased by 23.8 percent ($312 billion)
  • Recent consumer confidence surveys show that Americans are still bullish about their economic future and they’re spending accordingly. Retail sales have been decent and real consumption growth is forecast to run between 3.2 percent and 3.5 percent in the third quarter.
  • The economy has grown by over 4 percent so far this year, though there are forecasts of slightly slower growth in this quarter. Even so, we’re looking at an annual growth rate of better than 3 percent for 2006, which is healthy by any standard.
  • All of this growth is producing higher tax revenues, both for the feds and the states, and that is driving down the budget deficit much faster than anyone predicted. The deficit fell to less than $260 billion for the fiscal year that just ended.

That’s still way too high, but it is much lower than the $300 billion the administration forecast in July and way below the $424 billion deficit that the White House predicted in its February budget.

At this pace, Bush will be well ahead of his promise to slash the deficit in half by the end of his second term, when it is projected to fall to $188 billion. With unemployment dropping to a 4.6 percent low, jobless benefit claims down and with auto companies reporting 16.6 million (annual rate) autos and light trucks sold in September, this economy’s record deserves more promotion than it has been getting.

Expect to hear more about it from Bush and the Republicans before Election Day.