John LeBoutillier
Monday Sept 10, 2001

The 1992 James Carville statement - "It's the economy, stupid" - applies today more than ever.

As the economy - or the perception of the economy - goes, so go incumbent politicians.

With the 2002 Congressional races looming, it is no wonder that the Congress is deeply worried about the political effects of a possibly deteriorating economy. And the Bush White House, too, remembers well how the sad economy of 1991-1992 cost the first President Bush his re-election.

Two questions dominate:

1) How bad is the economy?

2) If it is indeed bad, what, if anything, can the Federal Government do about it?

There are several ways to measure the health of the economy. One of them is by measuring corporate earnings. Did you know that the S&P 500 has lost 24.9% - the largest decline since 1958?

No wonder the NASDAQ has crashed!

Did you know that our GDP this year is 9 trillion dollars - and that we have lost 5 trillion because of the crash of tech stocks - in less that six months?

Furthermore, our industrial production in the tech sector has cratered - declining 17.7% in the last six months.

Debt levels are higher today than are normal for 'economic bottoms'. This is the case for both consumers (credit cards) and corporations.

Yet American consumers have continued to spend. It is this spending that so far has offset the other worrisome economic indicators.

Now comes the key question: will consumers continue to spend?

Or will they tighten up when they see unemployment numbers jumping upward - and they read about the continuing waves of major corporate layoffs?

This is the key question because if consumers stop their pace of spending, then the entire economy will certainly plunge into a deep recession - and then a political bloodbath for the GOP will follow.

Two of the main types of consumer spending that sustain an economy are housing starts and new vehicle sales. Both have remained strong during this summer - but neither is expected to grow enough to offset the other signs of deterioration.

The Bush White House hangs its hat - and hopes - on the still-to-be-measured effect of the tax cut and rebate checks. The key question here is: will the $600 - or less - juice up a clearly sagging economy?

When asked - "What do you plan to do with your tax rebate?" - consumers listed their priorities:

Pay Bills - 46%
Save -18%
IRA/401K - 10%
Splurge - 10%
Buy Stocks - 7%
Travel - 8%
Charity - 1%

Do these intentions - and the subsequent actions by consumers - provide enough gas to re-start a clearly deteriorating economy?

Certainly Alan Greenspan's seven interest rate cuts have not done their job.

In fact, none of the economic experts have been correct so far in anticipating this looming economic disaster.

Tomorrow: some bold ideas - economic and political - to reverse this economic downturn.