George W. Bush is about to begin his presidency with the economy in steep decline and with no easy way to get America’s engine of growth back on track and running at full throttle anytime soon.
Told by his chief economic adviser, Larry Lindsey, that he should expect the first six months, perhaps the first year of his administration, to be a rocky one on the economic front, Mr. Bush used his meetings with top business leaders and high-tech executives to bleakly characterize the weakening economy that he will inherit from President Clinton.
Indeed, Mr. Bush now talks about laying the groundwork for what he calls the economic recovery, and an unending line of top business leaders and economists are reinforcing his message: This is an economy in trouble. The prognosis does not look good. Only a strong, combined dose of income tax cuts and further interest rate cuts can get it back on its feet.
John F. Welch Jr., General Electric’s chairman and CEO, emerged from a meeting with Mr. Bush and a dozen other business leaders telling reporters that there is “clearly a slowdown. It has been sharp and real. We embrace [Mr. Bush’s] thinking around tax policy.”
If there was any skepticism in the Washington news media that Mr. Bush was exaggerating his assessment of a declining economy to make the case for his tax rate cut proposals, that was quickly dissipated when the government confirmed that new job growth has slowed to a crawl. Job layoffs were climbing, especially in technology but also in manufacturing, retail and other sectors.
“We’ve never seen an economy suddenly fall off a cliff like this,” said Ed Yardeni, chief economist at Deutsche Bank Securities.
Unemployment is always a lagging economic indicator, but the Labor Department report showing the jobless rate holding at 4 percent did not reflect the 133,000 big business layoffs to come that were announced last month.
How bad is it going to get? Bruce Steinberg, chief economist at Merrill Lynch, says that “job growth at the end of last year was running at the slowest pace since 1992, and it will weaken further in the months ahead.”
Mr. Yardeni and other economists think that the jobless rate will hit 4.5 percent to 5 percent by year’s end reflecting much slower consumer spending, business cutbacks and weakening financial markets.
The closely watched composite index of leading economic indicators from the Conference Board fell again in November by 0.3 percent, after falling 0.3 percent in October. With the technology sector in a free-fall and Internet job cuts up by nearly 20 percent, the short-term economic horizon does not look good for the United States and for Mr. Bush’s first year in office. And that spells political trouble.
The numbers are getting so grim that even Democratic leaders are now acknowledging that a major tax cut must be passed early this year and say that they are prepared for a larger cut than they supported in last year’s campaign. They had backed a $250 billion cut, but House Democratic Leader Richard A. Gephardt told reporters last week: “Obviously we’re now looking at larger amounts than that because of the enlarged surplus projections and because of the slowdown in the economy.”
With Mr. Lindsey and Paul O’Neill, the incoming Treasury secretary, telling Mr. Bush to prepare for the worst, a set of economic plans is already being discussed to act quickly once he is sworn into office.
Vice President-elect Richard B. Cheney and other Bush advisers are already privately talking with Democratic leaders about how far they are willing to go on tax cuts. Mr. Bush’s package is $1.3 trillion over 10 years. Mr. Gephardt, a key architect in Ronald Reagan’s 1986 tax rate reductions, may be willing to go to $700 billion, maybe higher if the economic numbers continue to worsen, say Bush insiders.
The Bush high command wants the new president to hit the ground running after his inauguration, and the first signals he will want to send will be on economic policy. Being discussed in Mr. Bush’s inner circle: Call on Congress to expedite work on his tax cut proposals and make any income tax rate cuts retroactive to Jan. 1. Another possibility: Dropping the antitrust suit against Microsoft, which would send a powerful and needed signal to the technology industry and the stock markets that “this administration is not going to punish success,” a Bush adviser says.
With the 50-50 split in the Senate and the GOP’s threadbare margin in the House, Democratic support will be critical to Mr. Bush’s getting early action on tax rate cuts this year. The response to Mr. Cheney’s feelers among key House and Senate Democrats “has been positive,” says one insider.
“If the economy continues to decline and unemployment begins to rise, Democrats will suffer as much or more more than the Republicans if they block Bush’s economic stimulus package,” says a Bush adviser on Capitol Hill. “They will be under political pressure to do something.”
Thus, with Mr. Gephardt sending signals that a bigger tax cut is a necessity, the playing field is set for action on the centerpiece of the Bush agenda: Breathing new life back into America’s rapidly deteriorating economy.