Brooklyn's Progress
December 2006/January 2007

BY JOEL L. NAROFF, PH.D., CHIEF ECONOMIST, COMMERCE BANK

There was a sea change in the political landscape as the Democrats regained control of both houses of Congress. Will the turnover in Washington have a major impact on the economy? Most likely, not a whole lot of changes will occur.

Critically, although the Democrats now control Congress, there is still a Republican in the White House. Thus, any extreme policy change will likely be met by a veto. And the Democrats don’t have a veto-proof majority in either house.   

Does this mean there will be gridlock? I don’t think of it that way. Instead, another way of looking at it is that the only programs that can get through both Congress and the President are centrist programs. The extreme liberal or conservative ideas will likely not pass muster in this divided government. 

That is not to say there will not be major differences. Many of the tax and spending programs the Republicans backed will not be implemented. Meanwhile, a number of favorite Democratic policies will become law. But they will be things the President can accept.

And then there is the reality that the Democrats will now be at least partially responsible for governing. And here the economic environment may play a major role. There are a number of significant problems facing the economy. First, growth is clearly slowing. The economy expanded by a very sluggish 1.6% in the third quarter. This was the smallest rise in more than three years. This comes on top of a mediocre 2.6% second quarter growth rate. In other words, for six months the economy has muddled along.

The major problem is that the housing market continues to fall apart. The cut back in home construction reduced growth by more than one percentage point. That is huge.  Existing home sales fell sharply in September and, although new home sales were up, they were still well below the September 2005 sales pace. Most notably, housing prices for both new and existing homes posted declines from last year. That almost never occurs. Add to that the drop in building permits and it sure looks like the housing market has yet to hit bottom.

Indeed, the market may have a way to go before it recovers. In many places, sellers are still in denial, refusing to believe that the prices are actually falling. They need to either start lowering prices or pulling homes off the market so the bottom can be reached. But don’t expect an immediate turnaround. Buyers are likely to go through a phase of denial where they don’t recognize that the price declines are past. Until that happens, the market cannot fully recover. Thus, it could be many months before any strength returns to the housing market.

It is in this economic context that the Democrats take over. With the presidential election only two years away, any moves that hurt the economy could affect the Democrats’ chances of maintaining control of Congress and possibly winning the presidency. Thus, while I do expect some changes, I don’t think that they will be major. At least not until after the 2008 election.

Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank, America’s Most Convenient Bank, is a leading financial services retailer with more than 400 convenient stores in New Jersey, New York, Connecticut, Pennsylvania, Delaware, Washington, DC, Maryland, Virginia and Southeast Florida. Commerce Bancorp (NYSE: CBH) is headquartered in Cherry Hill, NJ and has more than $43 billion in assets. For more information about Commerce, please visit the company’s interactive financial resource center at commerceonline.com.