Political Mess Raises Fears of Recession

Economists are growing increasingly edgy that presidential election recounts and the weak government that is likely to result could nudge an already slowing U.S. economy toward recession.

That’s quite a change from even a few weeks ago, when analysts said that one of the most remarkable aspects of this election season was how little attention corporate and financial America seemed to be paying to politics.

And it represents a substantial shift from what has been an article of faith among executives that gridlock is good for business because it restrains Washington’s impulse to tax, spend and regulate.

“Anybody who tells you all gridlock is good is living on another planet,” said Kevin Muehring, an expert with Medley Global Advisors, a New York economic consulting firm. “There’s good gridlock and bad gridlock, and this is bad.”

Analysts are particularly concerned that a bitterly divided Washington could not respond if--as some now think possible--the U.S. economy slows more than expected, or in the event of an international crisis, such as a sudden additional jump in oil prices.

They fear that doubts about the government’s ability to act could compound worries that American companies won’t be able to make the profits needed to justify their still high stock prices. That could cause investors to turn bearish, consumers to slow purchases and foreigners to take their money elsewhere.

Election uncertainty “comes at a very bad time,” said Mickey D. Levy, chief economist for Bank of America in New York. “We’re slowing down, some big companies have missed their earnings estimates and this stirs another negative into the pot.”

Representatives for Republican George W. Bush sought to play the economy card Tuesday by hinting that any delay in wrapping up the presidential contest could threaten growth and financial stability.

“More and more, we see uncertainty in financial markets,” said James A. Baker III, a Bush campaign advisor and former secretary of State and Treasury under Presidents Ronald Reagan and George Bush. “I’m concerned . . . and I think we ought to all be concerned,” he said.

At least for the moment, both Baker’s warnings and analysts’ worries fell on deaf ears. Two polls out Tuesday suggested that much of the public is ready to wait perhaps another month or more while election recounts proceed.

In the wake of Baker’s remarks, key market indexes rose smartly.

Indeed, a close look at key financial indicators over the last month suggests that investors remain confident in the economy and the markets and have yet to be shaken by recent political or financial events.

For example, 10-year Treasury notes, which investors use as a safe haven in times of turmoil, finished Tuesday just about where they were a month ago with a yield around 5.75%. The dollar, which could be expected to drop if foreigners yanked money from U.S. investments, has barely budged against other major currencies.

The combination of little change in immediate conditions but substantial uncertainty about the future all but guarantees that the Federal Reserve will not take any new steps in its battle against inflation when it meets today.

Indeed, some analysts predicted that, barring crisis, the central bank won’t raise or lower interest rates or even change its announced tilt in favor of future rate hikes until the election recounts are over and the new president is in office.

“I don’t think you’ll see them do anything before next spring,” said David M. Jones, chief economist with Aubrey G. Lanston & Co. in New York.

In recent speeches, Fed Chairman Alan Greenspan and other officials have suggested they believe they are close to achieving their hoped-for soft landing, in which the economy slows from the feverish 5%-plus growth of last spring to a less-inflation-prone 3% to 4%. The Fed raised rates six times between June 1999 and last May.

There was fresh evidence of economic slowdown Tuesday as the government reported that sales at retail stores nationwide edged up a mere 0.1% in October, a sharp contrast with September’s 0.9% jump. The October numbers were especially dampened by a 1% drop in automobile sales, their weakest showing in six months.

But some analysts have begun to worry that the Fed has overdone it and the slowdown could snowball into recession. Even many who believe the economy is still on track worry that investors and executives may have gotten more than they bargained for in the election outcome.

“Throughout the campaign, financial markets signaled they preferred divided government,” said Allen Sinai, chief global economist with Decision Economics Inc. in Boston. “But the incredibly close election and the even more uncertain aftermath has carried the notion of divided government much farther than anybody expected.”

Sinai and others worry that should the economy slow any time in the next few years, a weakened president and divided Congress might not be able to settle on a new spending package to rekindle growth. And they warn that the Fed alone might not be able to do the job.

John G. Lonski, chief economist with Moody’s Investors Service, said that Fed interest rate cuts can spur some kinds of growth, but they may not be able to produce a new burst of consumer spending.

“You can’t forever rely on the Fed,” he said.

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GREENSPAN WARNING

Federal Reserve chief says an economic slowdown presents risks. C4