Will Friday Bring Another Bloody Nose for Bush?

BY DAN DORFMAN
October 6, 2004

It could be another political K.O. for John Kerry on Friday evening when he battles George Bush in the second of their three presidential debates after having bloodied him in the first bout.

That's the unappetizing scenario savvy economic analyst Madeline Schnapp serves up for the president following what she predicts will be Friday morning's announcement of an extremely disappointing September jobs report.

In brief, she expects the numbers to give Mr. Bush another bloody nose, which will hurt him with the electorate.

The general expectation is that when the Bureau of Labor Statistics officially releases the numbers, they will show that September produced 150,000 to 200,000 new jobs. But Ms. Schnapp, who plies her trade at Trim Tabs Investment Research, a well-regarded West Coast-based research service for institutional investors, thinks those are fairy tale numbers. She, in turn, expects only a modest monthly creation of 50,000 to 100,000 jobs.

Since Friday's debate will center on the economy, she views the impending job revelations as bad news for the president. "Mr. Bush will be on the defensive, Mr. Kerry will be on the offensive and it will make the presidential race even more of a squeaker and put the president at political risk," she tells me.

Why a disappointing September jobs report?

Ms. Schnapp kicks off with a clear sign of a weakening economy, such as bum tidings on personal income, which are gleaned from tax withholding data from the Treasury Department. Pointing to the latest word on wages and salaries, she notes when they're growing 5% year over year, it suggests a moderately growing economy. Less then 5% signals a slowing economy. In August, year-over-year growth was 8.3%. Last month, growth tumbled to just 3.6%.

A sloppy online job index - an aggregate measure of jobs posted on such online job sites asMonster.com,Flip-Dog.comandHotJobs.com- is yet another indicator Ms. Schnapp uses to document her forecast. The first three weeks of September showed weakening growth, she said.

Further, she points out, the agonizing trend toward the increasing creation of low-paying jobs shows no signs of let ting up. Noting that we're in our second post-recession year, she observes this time around about 48% of new jobs are low paying (in such area as fast food, temps, and retailing), versus 56% when we came out of the 1994-95 recession. Most of the higher-paying jobs, in turn, are being created overseas, a worrisome employment trend, Ms. Schapp points out, that will be difficult for the president to defend.

As far as the September jobless numbers go, she figures the monthly report will show a rate of 5.4%, the same as in August.

Yet other signs she points to as indicative of economic difficulty:

The real estate market peaked in early July and is softening in many parts of the country. Money supply growth has been flat the past six weeks.

While vehicle sales were strong in August, thanks largely to $5,000 rebates and 0% financing for six years from General Motors, if GM's sales were removed, vehicle sales for the month would have been flat.

Growth is being constrained by high debt and rising energy prices. What does it all mean to economic growth?

A number of months ago, many economists were projecting third-quarter GDP growth as high as 4.5% to 4.8%. Those numbers have since been scaled back. Ms. Schnapp figures the third quarter will come in at around the same level as the second quarter's revised growth of 3.3%. Further, she sees 3.3%-3.5% GDP growth for the current quarter, a performance she feels is also likely for all of 2005.

"The thing to really keep in mind this is really not a strengthening economy," she said.

"We're entering 2005 with nearly a trillion dollar deficit, which means," she says, "upward pressure on bonds and higher interest rates on corporate borrowings and that will constrain economic growth. Mr. Bush and Alan Greenspan," she went on, "are placing a bet that lower interest rates will allow government and the public to fund more debt in an environment of a faster economy and then repay their debt over the next 15 years. The problem," as she sees it, "it may - or may not - happen."

Relating her economic thinking to the likely performance of stock prices, Ms. Schnapp looks for a stagnating market for a long time, at least, she says, through the first half of next year. In terms of the S&P 500, now about 1134, she sees it languishing in a 1050-1150 trading range between now and mid-2005.