The Democrats’ chances of beating President Bush in 2004 were sharply reduced last week by one closely watched economic number.
The Commerce Department’s report that the economy was expanding at a 3.1 percent annual rate in the second quarter must have sent a pall over the Democratic National Committee headquarters here, not to mention the campaign offices of the Democratic presidential contenders.
Barring some catastrophic setback in the war on terrorism, next year’s presidential election is going to be decided by the state of the economy. Who says so? Why, all the Democratic candidates. That single issue is at the core of their campaign agendas, such as they are.
But last week’s strong, upward revision in the nation’s gross domestic product — which measures all the goods and services America produces and sells — dealt a sharp blow to the Democrats’ chief domestic issue.
It’s virtually impossible to overstate both the economic and political importance of the elevated GDP growth. The rate announced in early August was 2.4 percent, much higher than the anemic 1.4 percent of the previous six months.
There was cheering in the White House when the revised estimate came out Thursday morning, showing much stronger consumer demand and business investment, as well as an upsurge in manufacturing for durable-goods orders.
Part of the growth surge was due to increases in defense spending in the war on terrorism, but much of it also is due to the administration’s $350 billion tax-cut package, which is working its way into the economy.
Income tax withholding rates are down in worker paychecks, about $30 billion in child tax-credit refund checks have gone out to 25 million families this summer, and business tax credits are being implemented to buy equipment for future expansion.
While Mr. Bush’s Democratic opponents have pounded his $1.7 trillion in tax cuts over the past three years, the fact is that it has resulted in higher after-tax incomes for most households.
The total economic stimulus from this year’s stepped-up tax cuts won’t be known until the third-quarter GDP numbers are out in November. That’s when we will see the full impact of the child tax-credit refund checks sent out in July and August.
We have already seen incremental numbers this summer that bode well for the rest of the year and beyond. Retail sales jumped by 1.4 percent in July and will likely rise higher as a result of back-to-school buying. In June, U.S. factory orders saw their biggest increase in three months. Home sales have been spectacular, too, due to lower interest rates, though mortgage rates have crept upward lately and housing sales have slowed — though they are still in record territory.
But the most breathtaking number in the revised second-quarter GDP figures was consumer spending, which shot up by 3.8 percent — nearly twice the 2 percent rate between January and March.
Rising corporate earnings have also been a big story this summer, driving stock values higher and boosting worker pensions and other stock portfolios.
Mr. Bush’s tax cuts on stock dividends (15 percent) are also fueling the bull market. Nearly 800 companies have announced dividend increases this year — up from 550 dividend increases announced at this point last year.
All this is raising the economy’s growth rate to highs that few would have predicted just a few months ago. Mr. Bush’s economic advisers have boosted their estimates to 31/2 percent or more by year’s end, and into the 4 percent range in 2004.
Other economists are even more optimistic about future growth. Sung Won Sohn, chief economist at Wells Fargo & Co., says economic growth will run at close to 5 percent in the last six months of this year.
Predictably, at least for the time being, none of this good news seems to have changed the Democrats’ persistent attacks on the Bush economy. Their campaign rhetoric remains frozen in a 2001-2002 recession time warp.
The day Commerce officials released their revised 3.1 percent GDP number, Sen. John Kerry, Massachusetts Democrat, was condemning the Bush economy, saying the president “hasn’t lifted a finger” to strengthen it. Political reporters continue to write about “the sluggish economy.”
But the economy is clearly growing very rapidly and will likely accelerate in the months to come. My predictions: The GDP at nearly 4 percent, the Dow at 10,000, and unemployment in a steep decline by year’s end.
Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.