SalemNews.com, Salem, MA

October 3, 2012

Economy takes center stage

BY ETHAN FORMAN
STAFF WRITER

---- — SALEM — The economy has been hogging the stage during this election season.

It’s sluggish pace would seem to favor Republican challenger Mitt Romney, the former Massachusetts governor and Bain Capital CEO, who emphasizes his business credentials in his bid to be the next leader of the free world. But President Obama makes the case that the economy has improved since he took office in the depths of a recession, and will continue to improve if we stay the course.

We asked three local financial and economic experts to weigh in on what influence the economy has on the election and vice versa.

David Caruso

Founding chairman and CEO

Coastal Capital, Danvers

In 32 years of advising clients about wealth management, Dave Caruso cannot recall a time when the economy has played such a central role in a presidential campaign.

“I can’t remember such a critical discussion on the economy,” Caruso said, “the reason being is we just went through the worst economic crisis in our country.”

Economic indicators like the unemployment rate tend to be lagging indicators, but the stock market and its performance looks forward and gauges sentiment for the future. The Dow Jones Industrial Average may be near its all-time high now, but just how that might translate into an election victory for either side is hard to say.

One way Caruso gauges the stock market’s read on the election is by looking at a Wall Street Election Poll Index conducted by LPL Financial Research.

The poll looks at stocks in S&P 500 industries that tend to do well under Democrats, such as healthcare facilities and services, construction materials, home building and food and staples; versus Republican-favored sectors such as oil and gas drilling, electric utilities, telecommunications services, and coal and consumable fuels.

Since the start of the year, the LPL poll has shown a steady upward trend for Democrat-linked stocks, which favors the status quo — that Democrats will keep their hold on the White House and the Senate. Republican-leaning stocks seemed to do OK until the end of May, Caruso said, but lately there has been a momentum shift in favor of Democrat-leaning sectors.

Historically, if the incumbent wins, it’s good for the stock market because it provides stability, Caruso said. The market also tends to run in cycles, falling during a president’s first and second years in office, but turning around by a president’s fourth year.

The market also favors a Democratic president and a Republican Congress, on the theory that such a stalemate would not mean a lot of regulation thrown at business.

“The market just wants the market to go up,” Caruso said. “It doesn’t matter who is in office.”

Kenneth Ardon

Associate professor of economics

Salem State University

Kenneth Ardon points to computer models that economists use to take a macroeconomic approach to predicting elections; some models even give a state-by-state look. Some models tend to favor a Romney victory.

Since the 1960s, Ardon said, “you can predict the winner most of the time based on what the economy is doing.”

By some measures, he said, Romney should be ahead.

“I think early on Mitt Romney certainly tried to make it about the economy and to get people to blame Obama, and that could be his selling point,” Ardon said.

It’s not so much where things stand in the economy, he said, but “which direction it is going.” Three things play into this: gross domestic product, unemployment and inflation, with the latter being a non-factor in recent years.

Gross domestic product, the value of all goods and services produced, has been weak. It increased 1.3 percent in the second quarter of this year, a little less than the 2 percent increase in the first quarter, according to the U.S. Bureau of Economic Analysis. Ardon said a 3 percent growth rate is desirable, “and we haven’t had that.”

The U.S. unemployment rate stood at 8.1 percent in August, and it is one of the most visible economic indicators there is. Given the high rate of unemployment, one might predict Obama would be doing poorly, but polls show otherwise. But the trend in unemployment has been that the rate is falling, though it’s not coming down quickly, and a falling unemployment rate tends to favor the incumbent president.

“It is coming down, and direction matters,” Ardon said.

Conventional wisdom would have Romney ahead in the polls, so Ardon has been surprised that Obama appears to be in the lead. With about six weeks to go until the election, it’s too late for a dramatic turnaround in the economy.

“If he wins,” Ardon said of Obama, “he is winning despite poor economic performance.”

Robert Lutts

President, founder and chief investment officer

Cabot Money Management, Salem

Robert Lutts said there is “huge uncertainty” with the election, a factor that drove up attendance at Cabot’s 23rd annual conference last Friday at the Hawthorne Hotel. More than 120 clients attended, and Lutts said they have been peppering him with questions about the dynamics at play with the election.

The problem, as Lutts sees it, is a sitting president who seems comfortable raising “huge deficits,” while at the same time keeping interest rates low, in part to help finance the nation’s $16 trillion debt. This is something that impacts savers, who get next to nothing on their money market and savings accounts.

Lutts agrees with Texas Congressman Ron Paul, who, in a recent posting on his Congressional website, was outspoken about what he sees as the Federal Reserve’s manipulation of interest rates.

“Ron Paul, he’s the only one telling the financial truth out there,” said Lutts.

If the government raises taxes, wouldn’t that help reduce the deficit?

Lutts said it would still not be easy to pay down the debt.

“Do you have any idea how much a trillion dollars is? A thousand billion. Do you know how long it takes to create or earn a billion dollars in a commercial enterprise? Some industries take 20 or 30 years to do it,” he said.

“We in the federal government spend a billion dollars like it’s nothing, and that’s why we have a $16 trillion accumulated deficit. It may not be at the breaking point, but it’s certainly worrisome, the debt level.”

Lutts said it is no secret that Romney is favored by many in business.

“Obviously, commercial interests think a Romney win will be more favorable to them — a little more favorable tax environment, a little more favorable commercial environment for creating businesses and running businesses.”

However, Congress may be more important to the economy than who will be the next president, Lutts said, and he suspects the next Congress may be more conservative.

“I think the result of this election is going to be that anybody who has been in there for a significant period of time has a good chance of being voted out, because people are upset at what’s happened. They are not confident in the current group, and they are saying: ‘I’m just going to toss you out.’

“And that may include local politicians like John Tierney and others who are decent guys, but they are all part of the problem and they need to be changed. If Romney gets in, I think business may feel a little bit easier, but I’m not sure it makes a huge difference either way.”

Lutts said he puts his faith in the innovation of the American people and U.S. companies. For instance, innovative companies like Google, Facebook, Twitter, and LinkedIn dominate the Internet and are “titans” of the future.

“We will succeed in spite of our politicians,” Lutts said.

Staff writer Ethan Forman can be reached at 978-338-2673, by email at eforman@salemnews.com or on Twitter at @DanverSalemNews.