Muddling on

US GDP growth sharpens election knife-edge

The latest US GDP report sharpens the knife-edge of the US election. The economy grew at a two per cent rate in the third quarter, just above expectations, perhaps giving President Barack Obama a wafer-thin advantage. But beneath the headline number, private sector growth has slowed further. That’s a hint of the problems facing whoever next occupies the White House.

Overall growth easily topped the second quarter pace of 1.3 per cent. Government spending made a positive impact, after being a drag in prior quarters. In a Breakingviews calculator based on the economic parameters identified as significant in previous elections by Yale University’s Ray Fair, that’s enough to give Obama a marginal edge over Mitt Romney in the national vote.

But gross private product, which excludes government output, grew at a 1.6 per cent annual rate, down from 1.7 per cent in the second quarter and far below the 4.4 per cent average of the two quarters before that. The sluggishness of private sector activity may have something to do with one of the worst periods in recent years for corporate earnings growth. As of October 25, S&P Capital IQ expects third-quarter earnings for S&P 500 Index companies to be only 1.07 per cent better than a year earlier, the lowest increase since 2009.

The bosses of more than 80 large US companies also on Thursday said uncertainty over US deficits and the so-called fiscal cliff was hurting confidence and investment and called on Congress to act. Helping to reach a deal on an alternative to the combination of tax increases and government spending cuts that could kick in at the end of the year will be an early priority for the president-elect after the November 6 poll.

Obama can take some electoral comfort from the uptick in GDP growth, though it wasn’t big enough to rebut the economic criticism coming from the Romney camp. The polls and the Breakingviews calculator show the fight is very close. But whoever wins will face tough sledding to encourage - or at least get out of the way of — a private sector whose recovery is, if anything, losing steam.