US economy souring, so what's a Democrat to do?

DAVID ESPO, Associated Press

WASHINGTON (AP) — Five months before the elections, the uneven economic recovery is sputtering and job growth is anemic. Stock prices are down to 2011 levels and news on the European debt front is menacing.

What’s a Democrat to do?

Ride it out, as President Barack Obama tried to do on Friday in the aftermath of particularly dreary economic reports. “We will come back stronger,” he said in Golden Valley, Minn. “We do have better days ahead.”

Or conjure fears of an even worse fate.

The Republicans’ “only plan is to hand more tax breaks to millionaires, Big Oil, special interests and corporations that ship jobs overseas,” said House Democratic leader Nancy Pelosi of California.

Whatever the merit of Obama’s optimism or the truth of Pelosi’s charge — one was challenged by Republican presidential candidate Mitt Romney, the other by GOP congressional leaders — no Democrat was claiming they can take the place of a strong economic recovery when it comes to the party’s political fortunes.

Yet after 3½ years in office and uncounted battles with Republicans, it isn’t obvious what type of stimulus measures might be available to Obama and his allies in Congress.

“Businesses have pulled in their horns, given the growing amount of uncertainty,” said Sung Won Sohn, an economics professor at California State University. He said the administration and Congress must immediately address a “fiscal cliff” approaching at year’s end. That’s when tax cuts first enacted during the administration of George W. Bush are set to expire, across-the-board spending cuts are scheduled to take effect and government borrowing is due to hit the debt ceiling.

The Congressional Budget Office estimates that expiration of the tax cuts and implementation of automatic spending cuts would “represent an additional drag on the weak economic expansion.” The result would be a 1.3 percent economic contraction in the first half of 2013 and “probably be judged to be a recession,” it said.

It’s a threat that Sohn and others cited Friday as a reason that companies are putting the brakes on hiring.

Yet Obama and Republicans have staked out dramatically different positions on tax cuts and spending reductions, and barring a change, there is no significant possibility of compromise legislation before the November elections to address any of the issues raised by Sohn.

Obama and most Democrats want to allow tax cuts expire at year’s end for wealthier wages earners as a way to cut future deficits. Republicans generally oppose any tax increases. Both sides seem content to submit their disagreement to the voters this fall.

On spending, Republicans want to avoid the across-the-board reductions cemented into place last fall when the two sides failed to agree on an overall plan to attack the nation’s ever-escalating debt. The GOP warns that the impact of the cuts on the Pentagon would be detrimental to the nation’s security. Democrats accuse Republicans of seeking deeper reductions in social programs and are opposed.

That issue, like taxes and a possible increase in the debt limit, probably will be handled in a postelection session of Congress this fall, if not in 2013.

The short-term outlook turned gloomy late last week.

The Labor Department said the economy produced only 69,000 jobs in May, the fewest in a year. The unemployment rate rose from 8.1 percent to 8.2 percent. No president since Franklin D. Roosevelt in the Great Depression has won a new term with joblessness that high.

The construction industry cut 28,000 positions, its worst monthly performance in two years. Manufacturing activity slowed, although a measure of new orders rose to a 13-month high in a suggestion of better times ahead. Sales of new homes climbed 3.3 percent in April to the second highest level in two years, but the rate is still just half the level that economists consider healthy.

The Dow Jones industrial average dropped 200 points and closed down for the year.

Compounding the uncertainty, another significant threat to the recovery is well beyond the reach of the administration and Congress.

Mark Zandi, chief economist at Moody’s Analytics, said the officials with the biggest influence over the short-term fate of the economy are in Europe, struggling with a debt crisis and in China, struggling with a slowdown.

“The Europeans have to figure out a way to keep Greece in the eurozone, at least for the next six to 12 months,” he said.

The worry is that a disorderly Greek exit from the eurozone could cause a loss of investor confidence and risk a spread of weakness to Spain. “The Spanish banks have announced more loan losses and it is clear they don’t have sufficient capital reserves to cover those losses and it is not clear where they are going to get that capital,” Zandi said.

The risk is a crisis akin to the one that froze the U.S. banking system in 2008, feeding the worst economic downturn since the Great Depression.

If there is little that can be done to affect the economy itself in the short-term, there’s plenty of competition to shape public sentiment.

“This crisis has been going on for 40 months,” Romney said told CNBC on Friday. “The job of the president is to get America back to work.”

But while Romney tries to make the election a referendum on Obama, Democrats have different ideas.

“The natural state of a presidential election is to be a referendum on the incumbent. … The natural strategy of the incumbent in this case is to turn it from a referendum to a choice,” said Mark Mellman, a pollster who works for Democrats.

Obama’s campaign has invested heavily in advertising in about a dozen pivotal states, attacking Romney’s claim that his business experience qualifies him to lead the economic recovery.

In some of the states, North Carolina and Nevada among them, unemployment is higher than the national average. In others, including Iowa and Ohio, it is lower. In many, the polls are close, mirroring the national surveys.

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AP Economics Writer Martin Crutsinger contributed to this report.