Pethokoukis - Euro a Dagger in O's Future

By James Pethokoukis

November 16, 2011, 11:05 am

Even if nothing else goes wrong, President Obama will almost surely face the most challenging reelection environment for any American president since the Great Depression. Here’s Douglas Elmendorf, director of the Congressional Budget Office, yesterday to Congress: “CBO expects real GDP to grow in the vicinity of 1½ percent this calendar year … and around 2½ percent next year. With modest growth in output, CBO expects employment to expand very slowly during the rest of this year and next year, leaving the unemployment rate close to 9 percent through the end of 2012.”

Elmendorf’s “This is as good as it gets” baseline forecast used to be Team Obama’s DEFCON 1 scenario. Even worse, it assumes nothing else goes particularly wrong (or right). Not that CBO doesn’t acknowledge some downside risk. Among “uncertainties” Elmendorf highlighted was “resolution of concerns that some European governments may default on their debts.”

But how uncertain really? The eurozone is falling into recession, with the region’s economy probably shrinking both this quarter and next. IHS Global Insight sees no growth at all for 2012 as a whole. This stagnation dramatically raises the odds of a messy default by Greece with financial contagion spreading to the rest of the eurozone and then America. The San Francisco Fed puts the odds of a U.S. recession at more likely than not, concluding “the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession. … The odds are greater than 50 percent that we will experience a recession sometime early in 2012.”

How bad a recession? Bad enough that Barclays Capital thinks unemployment could hit 12 percent and home prices could fall another 7 percent. But whatever the impact of recession on jobs and housing, the reality that the economy would again be “back in the ditch” might be enough to guarantee Obama’s first term would be his last. While Europe’s problems aren’t Obama’s fault, voters would hold him accountable for an economy too weak to withstand overseas shocks. Perhaps, they might justifiably reason, the president should have been focusing on economic growth rather than healthcare reform in 2010, especially if the Supreme Court rules against ObamaCare smack in the middle of a new contraction.

Recall how an election-year recession affected Jimmy Carter in 1980. Forecasting models suggest Obama might not do much better than Carter if a downturn occurs in 2012. The Obama political team surely has thought about this and must shudder at the possibility.