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WITH scarcely seven weeks to go until election day, strategists in both the Republican and Democratic campaigns are working overtime. There are new advertisements to write, debates to win and undecided voters to be influenced. But perhaps all this frenetic activity is futile. Many of the number-crunchers reckon that the biggest influence on voters' behaviour has already occurred: the rate of economic growth in the second quarter of an election year. With revised figures showing the economy booming along at an annual rate of 4.8% in April, May and June, Bill Clinton cannot lose.
Sensibly, the strategists do not put too much faith in such seers. But, as far as Mr Clinton is concerned, the good economic news just seems to keep coming. Far from slowing down over the summer, as many had expected, the expansion continues apace. Indicators of consumer confidence are buoyant; manufacturers' orders are accelerating; and, most important, the labour market shows no sign of running out of steam. A quarter of a million new non-farm jobs were created in August and America's unemployment rate fell to 5.1%--a low that has been matched only once since 1980.
As always, the statistics need careful interpretation. The dramatic drop in the unemployment rate comes mainly from a shrinking of the labour force. Many new jobs came from the public sector, especially in local education, where some states have brought in mandates to shrink class sizes by recruiting more teachers. The growth of private jobs has actually slowed since June. Nonetheless, with unemployment among men of 25 and over at 3.8% (see chart), there is no question that the labour market is tight. And, unsurprisingly, wages are edging up: average hourly pay in August was 3.6% higher than a year ago, the biggest annual wage increase since December 1990.
The combination of low unemployment and swelling paypackets raises the chances of (and the need for) a rise in interest rates at the Federal Reserve's monetary-policy meeting on September 24th. Accelerating wages, the biggest single component in firms' costs, often herald inflationary pressure. At its previous meeting in July, the Fed decided against raising rates. It opted for an "asymmetric" position--meaning that it had a bias towards tightening in future. Today, with an ever-tighter labour market, members of the Federal Reserve Board are publicly voicing concern.
One might expect higher interest rates to be music to the Republicans' ears, particularly if they prompt a long-expected stockmarket correction. But, fortunately for Mr Clinton, the bond market seems to have already factored in a rate increase of between 25 and 50 basis points (hundredths of a percentage point). And the stockmarket rose on the day the strong employment figures were released. There seems to be a consensus that a modest rise in interest rates now will temper the economy's excesses and let the recovery steam ahead.
Some Cassandras, however, are less sanguine. Stephen Roach, chief economist at Morgan Stanley, thinks much higher interest rates are in the offing. He makes a striking comparison between today's economy and that of spring 1988. Then, too, the economy was well into the sixth year of a recovery; unemployment had fallen below 5.5% and stayed there until mid-1990. Meanwhile, wage-growth rose from 3% a year to nearly 4.5% and, in response, the Federal Reserve lifted interest rates by 300 basis points. The parallels today are sufficient, he believes, for an overall rise of 175 basis points (to 7%) before mid-1997, far more than most people on Wall Street expect.
No one believes that the booming growth earlier this year can be sustained for long without upward pressure on prices. But the issue of whether unemployment is already "too low" is trickier. Much depends on what you believe the NAIRU, or "non-accelerating inflation rate of unemployment", is. This is the rate of joblessness that is consistent with no inflationary pressure. Economists long thought that America's NAIRU was around 6%, but unemployment has been well below that level for two years, with scant signs of inflation. Whatever the reasons for this (perhaps globalisation, possibly corporate downsizing), the optimists reckon that America's NAIRU has been brought down--perhaps to 5.5%. Few would put it much lower than that. So, with the actual rate at 5.1%, it is only a matter of time before increasing wage pressure pushes up prices.
The inflationary risk of higher wages depends on how far they are matched by productivity gains. If workers are producing more efficiently, then companies can afford to pay them more without raising overall costs. But evidence of greater productivity is mixed. The most recent statistics released this week show that in the year to June manufacturing productivity rose by 4.2%, while wages and benefits rose only 3.9%. But once you include the service sector of the economy, productivity gains are not keeping up with pay rises. Overall non-farm business productivity rose only 0.8% in the year to the second quarter and overall worker compensation by 3.7%.
Given that American companies have been investing more, this miserable productivity performance is a puzzle. One possibility is that improvements are not being measured properly; another is that they take time to come through. A third rationale--suggested by Robert Reich, the labour secretary, this week--is that there has not been enough investment in people to help them use all those fancy new machines that firms have bought.
In a new study, Mr Reich's chief economist, Lisa Lynch, together with Sandra Black of Harvard University, measured the impact on firms' productivity of different kinds of investment geared towards people, as well as changes in workplace practices. They found that raising the educational level of employees in a firm by one year, for instance, improved productivity by 8.5% in manufacturing and 13% in non-manufacturing.
The conclusion for Mr Reich is clear: use government policy to foster this kind of investment in people. Hence Mr Clinton's campaign proposals for tax credits for college education: a clearly-targeted proposal to address a specific problem. Meanwhile, the Republicans' across-the-board income-tax cut can be lambasted as fiscally dangerous and insufficiently targeted.
Whatever the economic merits of targeted tinkering with the tax system, the state of the economy is clearly helping the Democrats. With wages rising and most Americans admitting that they feel better-off, Mr Dole's tax-cutting message is proving hard to sell. Signs of discomfort are becoming evident in the Dole campaign: new advertisements, which barely mention the tax cuts, are being aired on television. Clearly the strategists are still trying hard. But the game may already be over on the economic front.
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