Martin Feldstein: The Economy and the Presidency

CAMBRIDGE - America's presidential election is now just six months away. If history is a reliable guide, the outcome will depend significantly on the economy's performance between now and November 6, and on Americans' perception of their economic future under the two candidates.

At the moment, America's economy is limping along with slow growth and high unemployment. Output grew by just 1.5 per cent last year, and real GDP per capita is lower now than before the economic downturn began at the end of 2007. Although annual GDP growth was 3 per cent in the fourth quarter of 2011, more than half of that reflected inventory accumulation. Final sales to households, businesses, and foreign buyers rose at only a 1.1 per cent annual rate, even slower than earlier in the year. And the preliminary estimate for annual GDP growth in the first quarter of 2012 was a disappointing 2.2 per cent, with only a 1.6 per cent rise in final sales.

The labour market has been similarly disappointing. The March unemployment rate of 8.2 per cent was nearly three percentage points above what most economists would consider a desirable and sustainable long-run level rate. Although the rate was down from 9 per cent a year ago, about half of the change reflected a rise in the number of people who have stopped looking for work, rather than an increase in job creation and the employment rate.

Indeed, the official unemployment rate understates the weakness of the labour market. An estimated 6 per cent of all employees are working fewer hours per week than they would like, and about 2 per cent of potential employees are not counted as unemployed because they have not looked for work in the past few weeks, even though they would like to work. Adding these individuals to those officially classified as unemployed implies that about 15 per cent of potential labour-force participants are working less than they want.