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Obama and the economy: 3 things to watch

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Obama and the economy: 3 things to watch

  • President Barack Obama is briefed by Liz Sherwood-Randall, senior director for European Affairs, and Mike Froman, deputy national security advisor for International Economic Affairs, in the Oval Office on Friday.
    Pete Souza/White HousePresident Barack Obama is briefed by Liz Sherwood-Randall, senior director for European Affairs, and Mike Froman, deputy national security advisor for International Economic Affairs, in the Oval Office on Friday.

BOSTON — Economics is an up and down game. So, too, is politics.

But as President Barack Obama has been reminded in recent weeks, the two are inextricably linked. And right now for the White House, the direction on both is decidedly down.

Mitt Romney, naturally, has pounced on the bad news.

In a speech Thursday that he no doubt dreamed of making, the GOP nominee said President Obama "simply doesn't understand" the free-market economy.

Then Romney got downright nasty:

“This is not just a failure of policy. It is a moral failure of tragic proportions. Our government has a moral commitment to help every American help himself — him and herself — and today, that fundamental commitment has been broken.”

President Obama fired back Friday at a hastily called press conference, putting the blame on Congress for not enacting his job growth proposals:

“Right now, people in this town should be focused on doing everything we can to keep our recovery going. It’s critical we take the actions we can to strengthen the American economy now.”

President Obama also said private-sector hiring in the United States is "fine" and proceeding at "a solid pace," in contrast to shrinking public-sector employment. The comment prompted gleeful howls of outrage from his Republican critics.

The link between economics and politics is strong in any election year, of course. Remember the "It's the economy, stupid," rallying cry that helped put Bill Clinton in the White House two decades ago.

But it's even more pronounced with the U.S. economy sputtering again, and much of the rest of the world looking shaky, too. So as we careen towards November's election, here are the three biggest things to watch — for both the economy and the presidency.

U.S. jobs picture

It's almost a cliche to say the strength or weakness of the labor market is the most important economic indicator in the US. But it happens to be true.

That's because in the economy, consumer spending makes up about two-thirds of economic activity. That means in order for the economy to grow, people must spend. But they don't spend if they don't have money. And they don't have money if they don't have jobs.

And right now the jobs picture is dismal. The economy produced a shockingly low 69,000 jobs in May, while the US unemployment rate ticked up to 8.2 percent.

But the employment issue is even more important following the global economic crisis that began in 2008. That's because that crisis resulted in a huge structural problem for the world's largest economy.

This time around the biggest hurdle to sustained economic recovery has been debt. Consumers have piled up enormous amounts of the stuff — thanks to years of running up giant mortgage debts, huge credit card bills and other financial obligations.

So instead of buying things that help propel economic growth, many consumers today are — quite logically — paying down debts, restructuring them, or even defaulting on them.

As Business Insider editor-in-chief Henry Blodget smartly explains, this debt unwinding will take time. There can be no shortcuts to this process, and in the end you can't pay off debt by borrowing more money.

All of this is bad news for the labor market.

That's because the thrifty and largely prudent behavior of consumers right now is damaging the private sector, which means companies have less money, and less confidence, to hire more workers.

It also means that real economic recovery in the US is likely to be a long, slow and painful process.

Europe's enormous mess

Europe's debt and economic crisis isn't exactly the stuff of exciting headlines.

The details are arcane and complex. Its main actors are dull and ineffectual European leaders, as well as pinstriped bankers and bureaucrats in Berlin, Frankfurt, Athens, Madrid and elsewhere around the unhappy continent.

But here's the problem: what happens in Europe does not stay in Europe.

The European Union is the largest economic entity on the planet — a teeming, churning giant home to more than 500 million people and an annual gross domestic product of some $17 trillion.

It's a major market for U.S. companies like Ford, General Electric, Coca-Cola and plenty of others who sell their products there. It's also critical to the export-dependent economies of China, Russia and others around the world, including those of eastern and central Europe who live next door to this raging economic and political disaster.

According to the OECD and scads of other increasingly worried economists, the euro crisis represents the biggest risk to the global economy. It's now also a growing risk to Europe's biggest economy Germany, where exports have fallen for the first time this year.

Most worrying, Europe's sovereign debt woes are a grave risk to the global financial system as big banks everywhere hold European debt.

It was the very real fear of a global credit crunch that made things so scary in 2008. Europe's crisis has the potential to be even worse.

President Obama addressed the point at Friday's press conference, urging his European colleagues to, well, act:

“This is a global economy now, and what happens anywhere in the world can have an impact,” he said. “The good news is there is a path out of this challenge. These decisions are fundamentally in the hands of Europe’s leaders.”

China's economic slowdown

Finally, there's China. Far from being the menace that many in Washington, D.C., make it out to be, China is frightening right now for its economic weakness.

Economic figures there have been a mess  — from a slowing GDP, to weakness in bank lending, electricity output, luxury goods sales and other aspects of the economy. Most ominously, China's manufacturing sector has shrunk for seven straight months.

The sudden slowdown has leaders in Beijing — who are already on edge about an ongoing and rocky leadership transition — feeling even more nervous about short-term economic prospects.

This week Beijing cut interest rates in an attempt to boost growth, the first time it's done that since 2008.

There's also talk about another big government stimulus package in the works. But many China watchers warn this is unlikely to stimulate domestic demand, while the country's key exporters will be challenged by the ongoing weakness in Europe and the United States.

So where does all of this global economic unease leave President Obama, Mitt Romney, and the rest of us as we head towards November's election?

On the campaign trail, of course, fighting, scratching and clawing for votes as each candidate strives to present the most compelling argument about how to fix the mess we're in.

But as the political circus comes to your town, pay close attention to the steady stream of economic reports coming out of Washington, Brussels and Beijing.

That's where this election will really be decided, for better or worse.

This article originally appeared on GlobalPost.

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