Economy Elbows Other Issues Aside : Campaign: Despite a cascade of rhetoric on other subjects, financial well-being will be uppermost on the voters’ minds at polls Tuesday.

“It’s the economy, stupid.”

That poster hanging in Democratic presidential candidate Bill Clinton’s campaign headquarters in Little Rock says it all about what really matters in the 1992 presidential election.

Jobs, income, and economic growth have been the touchstones of a bitter campaign that has largely been framed by voter anxieties over the nation’s economic future. To an extraordinary degree, the American public seems to have had a thirst for straight talk on those issues this year. And each time George Bush, Bill Clinton, Ross Perot--and the media itself--have changed the subject, the public has wrenched the political debate back to the economy.

For most of the campaign, the economy has acted like a millstone around Bush’s neck, dragging down his reelection prospects.

But in the last week, he has been buoyed by a new government report showing that the economy grew more rapidly than expected in the third quarter--at a 2.7% pace. Bush insisted that the report--the last major piece of economic news before the election--seemed to show that the nation had finally pulled out of its doldrums.

Although some economists warned the growth rate may be revised downward, the latest figures still raise new questions about the direction of the economy on the eve of the election.

Economists agree the economy is slowly recovering, and no longer seems in danger of falling back into recession. The nation has, as Bush often recites on the stump, now experienced six straight quarters of economic growth, dating back to the spring of 1991. The recession, technically defined, probably ended in April or May of 1991.

“The economy is scraping the bottom, but may be showing some signs of life,” observes Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

But the final snapshot of the economy that will be in the minds of American voters as they go to the polls Tuesday will not be a rosy one. Growth remains anemic, and the unemployment rate has hardly budged in months.

At 7.5%, the jobless rate was higher in September than during the depths of the recession in early 1991; roughly one million jobs have been lost in the last year alone. In California, where the September unemployment rate of 9.4% was nearly two percentage points higher than the national average, the outlook seems even more grim.

Corporate cutbacks of middle managers nationwide have spread the pain to the broad professional classes, adding to the anxious sense that few jobs are safe.

What’s more, the underlying structural problems of the American economy--a prolonged credit crunch in the financial system, a massive restructuring of the defense establishment, public and private debts that hinder national savings and investment--have still not been fully addressed.

Many metropolitan areas continue to suffer from a surplus of shopping malls, office buildings and other remnants of the 1980s that have pummeled the real estate market and banks.

While corporations and families have gradually, painfully, begun to pay off the debts amassed in the 1980s, debt burdens remain far above the levels that prevailed before the Reagan era.

So for most Americans, the economy today seems stuck in a gray zone between recession and recovery, where old definitions of boom and bust don’t quite fit. Some economists even have begun to dub it a “growth recession.”

“It looks like there is a tiny recovery, but it takes a magnifying glass to see it,” observes Allen Sinai, chief economist of the Boston Group Economic Advisers, a New York research group.

“The third-quarter growth figures are positive, but the underlying fundamentals really haven’t changed--employment is still weak, and consumer confidence is still weak,” adds Ross DeVol, a senior economist at the WEFA Group, a Bala Cynwyd, Pa., forecasting firm.

Bush, in his final campaign push, has been doing his best to fight the perception among economists, Democratic politicians and the general public that last week’s upbeat report overstated the health of the economy.

“For 11 months, Gov. Clinton and a bunch of the other liberal Democrats were running around saying everything that was wrong with me and everything that’s wrong with America, and now we see the American economy is growing, not shrinking, and we are going to win this election,” Bush said in a rally in St. Louis on Friday.

Clinton has sought to dismiss the latest figures and pound away at his basic theme that Bush has allowed the nation to drift into economic purgatory. “For one thing, unemployment has hardly dropped at all,” Clinton said in a television interview Friday. “How can you look at 12 years of people working harder for less money and say, well, we have one good three-month period. Let’s forget about it all and say trickle-down economics works.”

Economic reality seems somewhere between the rhetoric of the two major candidates.

In fact, the economic picture is mixed--and confused. For every positive number, there seems to be an offsetting negative one to throw off forecasters. True, growth has resumed and all of the recessionary losses in the nation’s output of goods and services have been recovered. But economic growth is still less than half of the pace of the average postwar recovery and has been insufficient to restart the job-creation process.

“The economy continues to putter along,” notes David Wyss, an economist with DRI-McGraw Hill in Lexington, Mass., who describes the uneven pattern as a “stairstep” mode of growth. “It’s moving, but there’s not strong momentum.”

One of the most puzzling economic trends of this puzzling year has been the continuing decline in consumer confidence, which is perhaps the best proxy for how Americans feel about the economy as they head to the polls.

Consumer spending, which represents two-thirds of the nation’s economy, did show some modest improvement in the third quarter. Retail sales are showing signs of strengthening. And personal savings have dipped, another hint that people were willing to make big-ticket purchases in recent months. But surveys of consumer confidence show that public expectations for the future have been sinking.

On the same day last week that the government issued its upbeat news about third-quarter growth, the Conference Board, a business research group, reported that its consumer confidence index fell again in October to 53, the fourth straight monthly decline and the lowest level since last winter’s doldrums.

Many economists find it difficult to understand why consumer confidence continues to fall in the face of other reports of gradual, if inconsistent, economic improvement.

A study by the WEFA Group, for example, has found that trends in four other economic indicators--the inflation rate, the unemployment rate, short-term interest rates and disposable income--have in the past offered fairly accurate predictions of consumer confidence. But based on those indicators today, the consumer confidence index should be 10 to 15 points higher than its current level.

The explanation for today’s downbeat attitudes may lie in the unique nature of this economic cycle. The downturn, which began in July, 1990, has turned into the longest period of recession and subsequent weak growth since World War II, and its very length has generated a new and anxious consumer psychology.

Most slumps since World War II have given way to vigorous turnarounds, with growth reaching the 6% range in the first year of recovery. The current recovery, however, has puttered along in the 1% to 2% range, despite a spurt of 2.9% in the first three months of this year.

Now, more than two years after it began, the current business cycle’s outcome still seems uncertain both to economists and average Americans, prompting lingering fears over personal economic and job security.

“The problem is that there are too many structural problems that are simply not being addressed,” says Robert Hormats, vice chairman of Goldman Sachs International.

The timing of the structural shifts in the economy have also conspired to make the downturn feel even worse. For example, the decline in the defense establishment has accelerated just as other long-term problems--such as the savings and loan crisis--were finally beginning to be addressed in Washington.

Just in the last year, 175,000 jobs have been lost in the defense sector at contractors and subcontractors, according to a study by the Defense Budget Project in Washington.

“I think the economy is growing at a moderate rate now, but we are seeing a massive shift out of defense, and so we are getting a slower recovery as a result,” notes Lee Hoskins, former president of the Federal Reserve Bank of Cleveland.

Those deep-seated factors are likely to take years to work themselves out of the economy’s system.

So far, for instance, consumers and businesses have found that unwinding the debts built up during the 1980s is an exceedingly slow process. For families, total household debt still equals 94% of total after-tax income; in 1981, total debt was just 69% of income.

Given all that, perhaps the most remarkable thing about the American economy is that it is healing as well as it appears to be. The broad consensus among economists is that the nation’s economy will turn in a poor fourth quarter but still will grow at an annual pace of about 1.8% for all of 1992. That is a much better performance than was posted last year when gross domestic product, the nation’s output of goods and services, contracted by 1.2% on a year-over-year basis.

And things may look slightly better for the next President. Growth could hit 2.7% next year, according to the Blue Chip Economic Indicators newsletter, a pace that might put a dent in the stubborn unemployment rate.

When will the recovery begin to accelerate? One wild card is the international picture. Early in this cycle U.S. exports offered a glimmer of hope. Now, a global downturn is dampening the outlook for U.S. sales in foreign markets.

But the return of fast growth will depend at least in part on when consumers and businesses believe they have cleared away enough of the debris from the 1980s, and are ready to get out of their funk.

“The critical point will come when consumers and companies think they have reduced their debt levels enough to begin spending and taking on debt again, and the timing of that is something that is impossible to predict,” says Rosenblum of the Fed. “In the 1990s, will people be willing to assume the debt levels they had in the 1950s, the 1960s, the 1970s, or the 1980s? Nobody knows.”