This from a column three weeks ago by Charlie Cook:
Spending time last week on both Capitol Hill and Wall Street provided me with a stark and fascinating contrast...
In New York, everyone is white-knuckled as fears over the economy and a mounting credit crunch are pervasive...
However, among elected officials and staffs in Washington, there seems to be little talk about the economy and hardly any mention that the housing sector is in a free-fall.
That probably won't be true much longer:
U.S. home prices fell 4.5 percent in the third quarter from a year earlier, the sharpest drop since Standard & Poor's began its nationwide housing index in 1987 and another sign that the housing slump is far from over, the research group said Tuesday.
The index also showed that prices fell 1.7 percent from the previous three-month period, the largest quarter-to-quarter decline in the index's history.
In the third quarter of this year, home prices fell in 46 states. The United States Conference of Mayors (pdf) predicts that new housing starts will plummet 20% next year, which will mean a major loss in jobs and earnings, and that foreclosures will increase by at least 1.4 million in 2008.
Thus, it’s no surprise consumers are gloomy:
Consumer confidence fell for a fourth straight month in November to its lowest in two years on concerns about rising gas prices and financial market volatility.
The Conference Board said on Tuesday its index of consumer sentiment fell to 87.3 in November from a revised 95.2 in October, a sharper fall than expected...
The index was at its lowest since October 2005, when it read 85.2 in the aftermath of Hurricane Katrina, the Conference Board said.
What does this all amount to?
Wall Street is betting on a recession...
Investors in stocks and bonds are paying prices that indicate they believe a snowballing housing crisis and worsening credit crunch will soon tip the U.S. economy into a recession, analysts said...
Investors were so eager to buy ultra-safe government bonds yesterday that they were willing to accept sharply lower interest rates...
Stocks are now down more than 10 percent from their peak in October. The Standard & Poor's 500-stock index fell 2.3 percent yesterday, dropping the market to a level that Wall Street analysts say reflects an expectation that corporate profits will fall.
Taken together, those and other data indicate that financial markets have a decidedly negative prognosis for the economy. "They're saying the odds of a recession are pretty damn high," said Diane Swonk, chief economist at Mesirow Financial.
What are the political implications for all of this? Foreclosures will become a political issue, with demands for a moratorium. And the economic jolt will be more heavily concentrated in the swing districts and battleground states. In 2006 Democrats knocked off several Republicans in rural or "exurban" districts. These areas were supposed to be the foundation of Republican success for the next few decades. But these are areas where people drive more (and therefore see more of their income get sucked up by higher gas prices), and in many of these areas people have a greater share of their equity tied up in their homes. Look for similar districts to be the 2008 Congressional battlegrounds.
There could be a similar pattern on the state level. The Conference of Mayors lists all major metro areas and estimates loss of growth in Gross Metropolitan Product (GMP) due to the mortgage crisis. Metro areas in California, South Carolina and Washington look to be hit hard, and none of those states should be a battleground in 2008. But the remaining metro areas that are estimated to lose significant growth in GMP are mostly in battleground states: Colorado, Florida, Iowa, Michigan, Nevada, New Hampshire and Oregon.
Washington DC and the presidential campaigns may be lagging behind the leading indicators, but look for the economy, especially the credit and housing crisis, to become a bigger issue in the campaign.