Economic numbers
GEOFF COLVIN: Americans are always concerned about jobs and money, but in an election year the subject becomes turbocharged -- and that's where we are right now. Polls show the economy is No. 1 on voters' minds. Whether you're a stock clerk or a CEO, you want to know if you'll still have a job by the end of this year. Will you get a raise? And with stocks near two and a half-year highs, what should you be buying now?
Brian Wesbury is chief economist at Griffin Kubik Stephens & Thompson in Chicago. He believes the current boom could be in trouble if Washington keeps spending too much. Jeffrey Saut is an investment strategist with Raymond James in St. Petersburg, Florida. He thinks the boom may already be over.
Mr. Saut, we just learned that the economy grew at a 4 percent annual rate in the fourth quarter, a totally respectable number after the incredible 8.2 percent rate in the third quarter. Consumer confidence came in today also, up sharply. What's wrong with any of this? Why isn't it just good news pure and simple?
JEFFREY SAUT: Well, I think you misquoted me a little bit. I don't think that the boom is over. I do think that you saw the peak of the economic momentum...
COLVIN: But you have said we've gone from fast to slow, right?
SAUT: Yeah, I've called it the foxtrot economy, as in fast, fast followed by slow, slow. And I think you saw the fast, fast numbers in the third and fourth quarter of 2003 pretty much driven by one-off items like the tax cuts, the tax rebates, the refi afterburner and the deficit spending. And while I still think that the GDP growth is going to stay positive, I think you're going to be on a much slower ramp rate in the second half of this year.
COLVIN: Slower growth. Mr. Wesbury, what do you see?
BRIAN WESBURY: Well, I see much stronger growth in 2004 than Jeff does. My concerns about government spending are more long-term. I think right now with the Federal Reserve very easy, holding interest rates at 45-plus year lows, and with the tax cuts still, in my opinion, affecting the economy dramatically, I think we're in for a 4 to 5 percent real GDP year in 2004. So very strong, no matter when you compare it to in our history.
COLVIN: Four to 5 percent would be fabulous if we can do it. Do you think that's just off the charts and not reasonable, Mr. Saut?
SAUT: Well, I thought that the GDP growth number would actually be above 5 percent today, and for the first quarter of '04, I was looking for something like 4 or 4.5 percent. But by the second half, I think that we'd be on a glide path back to something between 3.5 and 4 percent.
COLVIN: Let's talk a bit about jobs, because again the polling shows that this is one of the top concerns, and it's certainly been a real battleground in the election rhetoric and so forth. It always helps to put a face on some of these numbers, so we did something recently. We went out and spoke to an unemployed executive about what it's like to be looking for a job today. Now he says he doesn't appear on the statistics. In fact, if the Labor Department did call him up, he would be registered and counted as unemployed because he's looking for a job and hasn't found one. But, Mr. Saut, I gather that you have some concerns with the way these unemployment numbers are put together, right?
SAUT: Well, I think the government to some degree miscounts the unemployed in this country, yes.
COLVIN: What's the problem?
SAUT: Well, I just moved down here from around Detroit, Michigan, and a lot of people that were laid off to the OEM or suppliers to the automotive business have become, if you will, consultants, working for themselves, except they have no customers.
COLVIN: But if they get called up by the Labor Department, they say, well, I'm a consultant, and so they don't get counted as unemployed.
SAUT:Indeed.
COLVIN: Okay. Mr. Wesbury, you have some concerns about the unemployment numbers also, but in the opposite direction, right?
WESBURY: That's exactly right. My belief is that employment has been much stronger than most people believe, and especially, as you said, as we're hearing in this turbocharged environment of the election year. There's two different statistics that the Bureau of Labor Statistics calculates every month. One of them shows that last year we lost 74,000 jobs; the other shows that we gained 2 million jobs. And I would argue with the economy growing at 6 percent rate in the last two quarters, housing at record levels this year, all-time record levels, car sales and retail sales strong, I would argue that all of those indicators suggest that we do have job growth. And I'm a little less of a believer in these weak job growth numbers. I think there's some real problems with measurement today.
COLVIN: Mr. Saut, I think that your view of the job picture is one of the factors that leads you to a somewhat more downbeat view of the economy overall?
SAUT: Well, I think the economy is going to muddle through and I think that job growth is going to be sub-par from most of your post-World War II recession recovery sequences. Because I think this is not your father's typical business cycle. I think it's a different animal.
COLVIN: It has been different all along from the very beginning, that's for sure. Another big issue in election year economics is the Fed. The market seems obsessed right now with when the Fed is going to raise interest rates. In fact, the Fed is much less likely to change rates in an election year than in other years. I want to ask both of you, starting with you, Mr. Saut, is the Fed political, and should it raise rates this year?
SAUT: I lived inside the Beltway for many years, and I would suggest that Alan Greenspan is a political animal since he has survived so far this long inside the Beltway. That said, I don't think Alan Greenspan is going to raise the short-term interest rates anytime soon, especially in light of my belief that we're in a muddle-through, fox trot type economy. However, in the longer data debt instruments, I think that they intend to be mean reverting and that they will be on a tendency to rise going forward.
COLVIN: Mr. Wesbury, what do you think? Is the Fed political and, quite separately, should the Fed raise rates this year?
WESBURY: Well, of course the Fed's political. It exists inside the Beltway, as Jeff has said, and my belief is that clearly they pay attention to the political waves that are taking place.
But the issue here is, why is the Fed not raising interest rates? And I don't believe it has anything to do with the politics of the current environment. They're looking at inflation, they're looking at growth, they're looking at unemployment, and they're saying we don't need to increase interest rates. I disagree with that.
I believe that the Federal Reserve is stoking and starting to stoke some inflationary fires. And we can see it because the price of gold and commodity prices are up. The value of the dollar is down, the yield curve is very steep. All of these things tell me that the Fed is holding interest rates too low today. I suspect that the Fed will hike interest rates May or June of this year, and the reason will be very simple. We will be creating jobs, and I think the economy will be growing closer to 5 percent than 3.5 percent, and the Fed will have no choice but to hike rates to avoid rising inflation.
COLVIN: What do you think is the biggest threat to the fast growth you see ahead? Is it the deficit?
WESBURY: No, it's not the deficit. What I would argue is that what is the biggest threat is either trade protectionism, because we've headed down that road with steel and lumber, and it looks like we may do something on furniture, and we did some textile protectionism, and also big government spending. The government is spending faster than it has in over a decade. Government is growing as a share of GDP, and whenever the government grows as a share of GDP, it has the potential to crowd out the private sector. And that's what I worry about today in terms of economic policy.
COLVIN: Mr. Saut, I can't let you go without asking you what stocks you like right now.
SAUT: I have a very eclectic approach to the stock market. I don't want to get painted into a style box. I have been telling people if you were smart enough to buy the tech and telecoms in February and March, which we were, and smart enough to hold them until today, which I wasn't, then I think you should at this juncture, you know, they've grown probably into a very large portion of your investment portfolio, and I think rather than watering the weeds, you should pick the flowers and sell some of those...
COLVIN: Time to bail out at last.
SAUT: Well, not bail out, but at least bring them back within the weightings of the S&P 500. So I'm more cautious on the equity markets here.
COLVIN: And what do you like to buy? What should we be getting into?
SAUT: I like dividend-paying stocks. I like things like Unum(Provident) convertible preferred, which is a turnaround story with a better than 6 percent yield. I like Constellation Brands convertible preferred, the people that make St. Pauli Girl beer, Almaden Wines, Simi Wines. I think they're statistically cheap stocks. I think they're good risk/reward bets. I also like, if you like tech, I like backdoor plays into tech, like Symantec. With the MyDoom virus now proliferating in the country, I think Symantec has a pretty bright future.
COLVIN: Thanks for your views, Mr. Wesbury, Mr. Saut. We've got to go. Thanks so much.
Fundraising
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COLVIN: Every election sets a new record for money raised and spent, and this one has already done so: In just the first nine months of last year President Bush raised $85 million and is on track to raise over $200 million this primary season. That puts him miles ahead of any other candidate, but John Kerry and Howard Dean are breaking new ground as well -- they've both passed up federal matching funds because accepting the money would have forced them to limit their primary spending to a mere $45 million each. They figure they can raise much more on their own, and then spend it all.
Where does all that money come from -- and who may be expecting access and favors should their man win? President Bush's biggest donors in this election are mainly financial firms, led by Merrill Lynch.
John Kerry's biggest donors are law firms and financial outfits,
while Howard Dean has received most from big corporations and universities.
Nearly all of John Edwards' biggest supporters are, like him, lawyers. What about donations from individuals like you and me?
About half of all individual donations come from people who in some ways are pretty similar.
MICHAEL MANCINI: They are all pretty upscale in terms of influence , affluence, well educated, certainly people of the means to contribute to a political campaign.
COLVIN: But in other ways individual donors are extremely diverse. Claritas, a demographic research firm, has categorized donors to this year's primaries. Howard Dean's donors, for example, are often the young Digerati.
The what?
MANCINI: They are young singles, married, childless, well educated, highest ranking for masters and above, incomes in the mid
90's.
COLVIN: The young Digerati live in cities, demand broadband Internet access, have two cell phones, and hang out in coffee houses. Just the opposite of John Edwards supporters, who tend to live in so-called Old Milltowns, where folks like to watch daytime TV and go camping.
Dramatically different from them are many John Kerry supporters, who live in wealthy suburbs, the Blueblood Estates. They like to read FORTUNE magazine.
As for George Bush's donors, the majority of the wealthiest upper crust support him, but some often inhabit the Winner's Circle. They live in new subdivisions; built outside the beltways, younger in age, prime time family raising. These families watch the Cartoon Network, read Parents magazine, and enjoy skiing -- and don't go unanimously for Bush.
The battle is going to be in the Winner's Circle where Bush does well, and John Kerry does well, and that's the swing segment, that's where I think elections are fought.
If you want to join the fight, visit Amazon.com, where you can donate to any candidate with just a few clicks.
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Investor class
KAREN GIBBS: Politicians are not just battling for your money, but for your vote. And you -- our viewer, the investors of America -- are a ripe battleground. Political strategists and pollsters of all stripes want to know whether you're voting with your 401(k). Just about 65 percent of voting citizens say they have some kind of portfolio, but whether investments drive the vote is up to debate.
John Zogby, president and CEO of the polling firm Zogby International, says watch out if you ignore the burgeoning investor class. He joins us from St. Louis. Ruy Teixeira, a fellow at both the Center for American Progress and the Century Foundation, believes the simple act of participating in the market does not rock your vote.
So, John, is there really an investor class that votes their 401(k)?
JOHN ZOGBY: Actually there is, and there's one further qualifier that's important, and this is something that Ruy doesn't take into account. It's not simply the act of having an investment; it's what you call yourself. If you say or respond to our polling that, yes, I am a member of the investor class, regardless of whether you're a blue collar worker or Donald Trump, then you have a tendency to vote more conservatively. And so self-identification is the key, not the very act of being an investor.
GIBBS: How big is this investor class?
ZOGBY: Well, the investor, the self-identified investor class today is about one in three likely voters. It was at one time, during the big bull market, and actually much of 2002 and early 2003, it was upwards of about 52 percent of total voters.
GIBBS: John, can you actually say that someone that holds maybe 10 shares of a stock in his 401(k) or his pension plan is like a Donald Trump or a Warren Buffett?
ZOGBY: You cannot say that, absolutely, because that person is not likely to see himself or herself as "a member" of the investor class. However, a member of a labor union who is earning maybe $45,000, $50,000, $60,000 a year has a decent sized 401(k) portfolio, who says in our polling, "Yes, I am a member of the investor class," is more likely to lean on the Republican side than the same union member, same demographic, but who says "I'm not a member of the investor class." That's the qualifier.
GIBBS: Ruy, is this just another way to divide and conquer? I mean we've seen the race issue, the gender issue, the class issue, and now we're talking whether you invest in the stock market or not. Where do you stand?
RUY TEIXEIRA: Well, I've always thought one thing that's very attractive about this concept to Republicans, and they typically use it not in the sense John is, you know, your self ID and who do you identify with, but more as a simple statement of the fact that we know more and more households hold at least some stock, typically in retirement vehicles. And the very act of just participating in the market in some way, no matter how small, will move them inevitably toward the Republican Party's vision of an America where there's less regulation, lower taxes, businesses left alone to do its thing and drive up its stock prices.
So, I think that's what they really like about it, because when you look at a lot of other demographics about the way the country is changing, you know, the increase in the minority population, the increase in the numbers of professionals, the trend toward the Democrats in the most cutting-edge economic areas in the country, they're not very good for the Republicans. One thing they can look at and say, yeah, this looks great, is that more and more people are becoming members of the so-called investor class defined in that sense. So I can see why it's attractive to them. It's something that sounds like history is on their side. The problem I have with it is, you know, not looking at it as a self-identified demographic. You know, I say I'm a member of the investor class, but looking at it as sort of what people are, they do or do not hold some stock, perhaps in a retirement vehicle, perhaps some other way. I just don't see from the research I've done and the research I've seen that other people have done this is a very big effect in your politics.
So, you know, maybe people who self identify as members of the investor class are particularly conservative, particularly interested in business, particularly oriented toward the Republican Party, and that's why they tend to act a little bit differently politically than people who say they're not members of the investor class. I don't know. I mean, I haven't looked at these data in detail, but my contention is that the simple fact of in an objective sense being part of this investor class is not enough to change politics and it's not the kind of trend that's going to turn the United States into a low-tax, no-regulation utopia that conservative Republicans tend to favor.
ZOGBY: Let me respond to that. I've read your book, The Emerging Democratic Majority, and a very compelling argument, and it's based on demographics, demographic changes into the future. Those groups that traditionally have a greater tendency to be more liberal, have a greater tendency to identify themselves as Democrats, are actually the demographics that are growing, minorities, you even mentioned South Asian minorities, as well as the so-called creative class. My point only is that demographics is not necessarily destiny, so that if you took Ruy's argument solely on the basis of demographic changes, he and his co-author are absolutely, unequivocally correct, except that people don't always, when it comes to voting behavior, identify themselves first as a member of the demographic. There are other qualifiers out there, one of which is the so-called identification as a member of the investor class.
So it's interesting, it's compelling, the truth is probably somewhere in the middle of what the Republicans are arguing that we're going to become basically an ownership society. I don't think that's going to be the case, versus what Ruy and his co-author are arguing, solely demographics.
GIBBS: Well, John, it's interesting, because we've come off a really good stock market year with double-digit gains for the major averages. And if 67 percent of households own stocks and are enjoying that rally, then you would think that it would translate into a 67 percent approval rating for Bush, and it's not there. What are we missing?
ZOGBY: Well, what we're missing is that there are other things in our lives that influence how we vote and how we think. We just completed this huge poll of the red states, those who voted for Bush in 2000, the blue states, those who voted for Gore in 2000. And the actual consultant who wrote our report, John White from Catholic University, came up with a wonderful title: "E Pluribus duo." We're actually two different nations. It is amazing how the reds and the blues are different in terms of spiritual behavior, gun ownership, how they see their world, and so many things. And so that is another further qualifier that determines how we vote and also how we're split.
GIBBS: But Ruy, the politicians are seeming to seize upon this idea of an investor class to try and attract voters to their side, their issues. Is it going to work?
TEIXEIRA: Well, I wouldn't say all politicians. I think we've primarily heard this from the Republican side of the aisle that they're going to appeal to the investor class, they're going to make more people members of the investor class. In fact this whole concept of an ownership society has been floated by Bush and some of his, you know, some of the other people in his administration. And by that they seem to mean that if we extend the opportunities to have stock ownership through tax-favored retirement vehicles, or not even retirement vehicles, but just general savings vehicles, somehow this will make us all part of a different society and a society that will fundamentally sort of disadvantage the Democratic, big-government approach.
So that's clearly being said, but I think the Democrats, while they don't call it the investor class, are going after those kind of voters in a different way, and I think they're probably likely to do more of it in the future. Because, let's face it, who really are the investor class if we're looking at it as an objective demographic? They're primarily middle-income people who have modest amounts of stock in a retirement vehicle. You know, the median holdings of someone who actually has some sort of vehicle like this in the sort of 40th to 60th percentile; the income distribution is only $28,000. And these are people who are getting close to retirement, the 50 to 59 people. And that's not a lot of money, it's not a lot of money. What people want out of their savings, what people want out of their investment in the stock market through these kinds of vehicles, is they want security. There are really no more defined benefit contributions anymore. It's all defined contributions. You are going to be relying on these savings and supplement them with Social Security and other things to finance your retirement. People want security. That's what it's about. So what they're interested in is a way to make that as easy and as effective as possible.
And I think if the Democrats, you know, sort of have their head screwed on right about this, they'll see what the Republicans want and raise them by saying, Okay, you want an ownership society? Let's make it universal. Let's make everyone part of it. Let's have a universal 401(k) with some subsidies and matches for low income individuals. You can even start children off with their own account when they're born. There's lots of different ways to do this, lots of different proposals. Let's give this to everybody.
And, you know, maybe according to some Republicans, it would be committing political suicide because it will make everybody a member of the investor class. But I actually think it would be quite smart, because I think, again, what people are looking for is something very practical. They don't want to be Donald Trump, they don't want to be a big-time investor. They know they're unlikely to be so, but they do want security. They do want to be able to save effectively, efficiently and as fast as they can.
GIBBS: John?
ZOGBY: Two important responses to that. One is that investors have the luxury, especially middle income investors, have the luxury of thinking about their long-term investments during times when -- during good times. These are not good times. There is a disconnect between Wall Street and Main Street, and so what you find is, whether it's blue collar workers or lower middle level, white collar workers, or even members of the so-called creative class, these are people who are deeply concerned about their jobs today being exported abroad. And so Democrats would be very successful in addressing the issues of today, and then looking over their shoulder, you know, in the longer run of issues that deal with longer-term future.
GIBBS: Well, John, it's interesting that you bring that up, because you do have kind of a trade off now between layoffs and stock prices. When major corporations announce that they're restructuring and laying off thousands of people, the stock price goes up. What does the investor class that's actually working at that company do? Do they then take the shortcut and say, well, I'll accept the layoff because my 401(k) is going to look better somewhere down the road?
ZOGBY: Karen, this is what's happening and our polling is showing it. Listen to these numbers. I alluded to the fact that 52 percent of likely voters last year, 2002, were self-identified members of the investor class. That's now down to about one in three, about 32 percent. What happened? Those are lower income, middle income, blue collar workers who are much more focused, much more concerned about today, much more concerned about those layoffs and angry and insecure about those layoffs.
At the same time, what's going on is that these lower income, formerly self-identified investors, that anger is being seen right now in the numbers of Democrats and independents who are voting in Iowa and New Hampshire, who we think are going to be voting in South Carolina and other states. I think right now the Republicans are much more on the ropes than they believe they are.
GIBBS: What do you say about that, Ruy? Because it does appear that Republicans and Democrats are pretty much evenly split about this idea, and it could be that Zogby's explanation is probable or possible.
TEIXEIRA: Well, actually I think in terms of what John is saying about how people's actual economic situation on the ground is so much more complicated than what they have in their 401(k)s, and in fact, according to his data, people are shifting from identifying as a member of the investor class to not, mostly because they just feel too pressed and too harried and their holdings have gone down and other things have happened that they no longer feel upbeat enough to think of themselves as members of the investor class.
And again, his point is that creates a difficult market, electoral market, in which Republicans can make their case about, you know, stick with George Bush, his policies will set you free, prosperity is right around the corner, you know, don't give up yet, blah, blah, blah. I mean it's harder for people. And I agree with John. I think that the Republicans are a great deal more vulnerable than most of the press gives them credit for and that the Republicans themselves tend to think, because I think they fundamentally misunderstand how people are feeling out there. And that could be a real problem for them.
ZOGBY: Karen, and again to agree with Ruy, one of the things that we don't do when we poll is we don't ask the question: If things are going to be better off for you six months to a year from now, how would you vote if the election were held today? No, we ask: How would you vote if the election were held today? And today, one in five voters overall tell us that they're afraid of losing their jobs in the next 12 months. That's twice what it is during good times. At the same time, one in four voters who earn $75,000 a year or more tell us that they're afraid of losing their jobs in the next 12 months. That trumps long-term investments, and that I think is going to be the driving force in the election this year.
GIBBS: And we'll have to leave it there. John Zogby, Ruy Teixeira, thank you very much for joining us.
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