Sluggish economy may mean narrow Obama defeat

COSTA MESA, Calif. – Chapman University President and Economist James Doti is calling a Mitt Romney victory by 3.2 percentage points in an election he said “is almost too close to call.”

He cited a weak U.S. economic recovery that will continue at least through the end of 2013, according to the university’s latest economic forecast, today’s relatively high unemployment and President Obama’s mediocre approval ratings.

Still, the slight uptick in the economy from last year has improved Obama’s chances of staying in the Oval Office another four years; Republicans should not expect to coast to an easy victory. He quipped, “My betting window is closed.”

For more than 20 years Doti’s Presidential Indicator Forecast formulas correctly have picked the winner of the popular vote in every presidential election. The formulas also have predicted the winner of the Electoral College every year except 2000, when Al Gore won the popular vote but lost the Electoral College vote to George W. Bush.

Doti presented the Presidential Indicator at Chapman’s annual economic forecast Thursday.  Doti, an economist who earned his doctorate at the University of Chicago under the late Nobel laureate Milton Friedman, spoke at The Hilton in Costa Mesa before about 800 community and business leaders from Orange County, an area dubbed “Reagan Country” for its conservative and Republican leanings.

The Chapman economic forecast is one of the most accurate in the country, exactly predicting the growth of the gross domestic product the last two years of 1.7 percent in 2011 and a projected 2.3 percent in 2012, which has held up for the first half of the year. The forecast is for 2.6 percent in 2013.

Although better than economic decline, this level of growth is anemic for a recovery. By contrast, the equivalent years of President Reagan’s recovery saw the economy rising out of the early 1980s recession with GDP growth of 4.3 percent in 1983, 7.3 percent in 1984 and 3.9 percent in 1985.

Possible big real estate recovery in 2012

What’s helping the recovery is “the possibility of a major real estate recovery in 2012,” Doti said. He conceded that other forecasters, such as Gary Schiller, are predicting further price drops because of continued housing foreclosures. Doti said of Schiller, “He doesn’t know what he’s talking about.”

Doti conceded that some foreclosures will continue. But a key factor now is that the rental vacancy rate has been trending downward, to a projected 8.8 percent in 2013 from 11.1 percent in 2010. The 30-year average for rental vacancies is 8.2 percent.

Homeowner vacancies also are trending downward, to 2.2 percent in 2013 from 2.9 percent in 2010. For that, the historical average is 1.9 percent.

Housing starts also are expected to jump from 601,000 units in 2011 to 706,000 in 2012 and 852,000 in 2013. That’s a rise of 15.7 percent in 2012 and another 20.7 percent in 2013.

The Chapman Forecast calculates a 4.1 percent increase in housing values in 2013. “The first real appreciation above inflation since the crash,” Doti said. By contrast, housing prices crashed 9.2 percent in 2008 and 11.9 percent in 2010.

Hazards that might slow recovery

But he warned there are hazards that could slow the recovery. One would be the expiration of the Bush tax cuts next January. “That would drain the $600 billion from the economy, an unmitigated disaster,” Doti warned. “It would be the biggest tax increase in history.” The top long-term capital gains tax rate would jump to 20 percent from 15 percent, a whopping 33 percent increase.

All income tax rates would rise. For example, the bottom income tax bracket would be hiked to 15 percent from 10 percent, a whopping 50 percent gouging. And the top rate would rise to 39.6 percent from 35 percent.

It’s amazing that President Obama presents his tax increases as only affecting his billionaire pal Warren Buffett. In reality, the government would get the gold mine and the middle-class taxpayer would get the shaft.

And, according to Doti, the economy would be slammed. However, Doti’s forecast “assumes the can will be kicked down the road again” on the Bush tax cuts, he said. On the other hand, it may well be that, if Obama is re-elected, his reconfirmed arrogance would lead him to let the Bush tax cuts expire.

Romney has promised he would make the Bush tax cuts permanent, then cut taxes further. In response, Obama has said that, because Romney would cut taxes on the rich, “It ain’t right.” But as we have seen, if the Bush tax cuts expire it’s the middle class that really would get gouged.

A meltdown in Europe?

Another looming factor is a potential economic meltdown in Europe. The end of the euro currency – or its continuation only as a Northern European currency, with Greece, Italy, Spain and Portugal departing – would hurt Germany. That’s because Germany currently benefits from the weaker countries dragging down the value of the euro, making its exports cheaper.

In that scenario, “a stronger euro would make German products cost a lot more, “Doti explained. “Mercedes, Audis, Porsches, BMWs all could double in price” around the world, including in America. That would slow the German economy and reduce American exports to Germany and the rest of Europe.

Conceding the well known “stubbornness” of Germans, Doti still expects, “Germany will find the will to keep things together” in Europe.

Although Doti remains cautiously optimistic, he also laid out a worst-case scenario: there’s no real estate recovery; the Bush tax cuts expire; and there’s a Eurozone meltdown. “If all three happen, it’s a disaster.”