Analysts doubt impeachment would impact economy

WASHINGTON -- The U.S. economy's longest peacetime expansion won't be undermined if the House of Representatives votes to impeach President Bill Clinton this week, analysts said Tuesday.

Jobs are plentiful, wages are rising and inflation is at a 12- year low. That translates into confident and contented consumers who aren't likely to let the Washington political fight keep the economy from growing for a ninth consecutive year.

"It's hard to see any direct impact," said Douglas Lee, chief economist at HSBC Washington Analysis. "The economy has been driven by strong consumer spending and good growth in investment." The White House has warned of market turbulence if Clinton is impeached. Still, stocks rose Tuesday even as more House members declared they would vote to send Clinton's case to the Senate for trial. The economic good times, in fact, make it less likely the Senate will vote to remove him from office. The latest New York Times/CBS News poll, conducted Sunday, shows Clinton's job approval rating steady at 67 percent. "Presidential approval ratings go up and down with the economy," Lee said. "We've had a good economy for several years now and Clinton benefits from that." History supports the argument that few long-lasting effects are likely. While a recession worsened after Richard Nixon's 1974 resignation -- before the House could vote on his impeachment -- economists cite the inflation shock after the Arab oil embargo as the main culprit. And while investors reacted negatively to the Senate trial of President Andrew Johnson in 1868, an expanding economy renewed their optimism soon after his acquittal. Today, the U.S. economy is robust and virtually inflation free. The consumer price index is on track to rise only 1.6 percent this year, the best showing since 1986. Unemployment fell last month to 4.4 percent -- almost a 28-year low -- as the economy added 267,000 jobs. And consumer spending rose at a 5.4 percent annual rate through the first three quarters of 1998, a third higher than last year's 3.4 percent increase. Analysts expect strong holiday sales to keep consumer spending strong into the new year. "Consumers are going to keep spending -- the impeachment proceedings aren't going to affect that at all," said John Williams, chief economist at Bankers Trust in New York. If the economy does slow next year to about half the 3.7 percent pace of the first three quarters of this year, as most forecasters are predicting, it will be a result of declining business investment and continued soft demand for U.S. exports. "I don't think impeachment is going to scare the public, though Wall Street might be troubled by anything that goes on for more than a few weeks," said Michael Light, a political analyst for the G-7 Group, a Washington consulting firm. Wall Street may be more sensitive to impeachment than consumers, at least in the short term. The Dow Jones Industrial Average fell 7 percent in the past three weeks as the impeachment process moved forward in the House Judiciary Committee. White House officials say Republicans in Congress need to be mindful. "Any student of the markets will say that uncertainty is bad for the markets," Press Secretary Joe Lockhart said Monday in Israel, where he was traveling with the president. If impeachment concerns caused stocks to fall further and stay lower, that could damp consumer confidence, analysts said. An 18 percent drop in the Dow index from its mid-July high through the end of September contributed to a decline in the University of Michigan's consumer sentiment index to 97.4 in October, its lowest level in 20 months. The latest CNN/Gallup poll shows 48 percent of those asked think a Senate trial would harm the economy. "There is a possible effect through the markets," said Tom Gallagher, a political analyst for Lehman Brothers in Washington. "We're all watching the wealth effect." Economists worry that a prolonged drop in stocks could make people feel less wealthy, leading them to cut back on spending. The reverse is also true, analysts said. As stocks rebounded in October and November, Michigan's sentiment index rose to 102.7. Still, "I assume any impeachment impact will be short-lived," Gallagher said. "So that's not a mechanism that's going to affect the economy." Stocks gained Tuesday as investors focused on an optimistic 1999 profit outlook from General Electric, the country's second-biggest company by market value. The Dow Jones Industrial Average rose 128 points, or 1.47 percent, to close at 8823.30. If an impeachment vote does send stocks skidding, the markets will settle down quickly because investors assume the Senate won't vote to remove Clinton from office, said Cary Leahey, a senior economist at Primark Decision Economics in New York. "The average American thinks Congress shouldn't be voting on this in the first place," he said. That, in turn, should limit the effect on consumer confidence. Consumer confidence slumped a generation ago when the House Judiciary Committee began to deliberate impeaching Nixon. The Conference Board's index of consumer confidence fell to 77.3 in August 1974 -- the month he resigned -- from 92.5 in June. That helped feed a recession that began in November 1973, and caused the economy to contract for three consecutive quarters beginning in September 1974. The parallels aren't exact, though. For one thing, oil prices had shot up and consumer price were rising at more than a 12 percent annual rate. "If you look at what was happening at the time, the economy was going to hell. That's why Nixon's popularity rating fell so much," Gallagher said. Andrew Johnson was the only president actually impeached by the House, in 1868. Research by Spiro Voulgaris of Lehman Brothers' Equity Strategy Group shows stocks returned nearly 10 percent in the three months before the House voted to impeach Johnson, on Feb.24, 1868. They fell during the next two months, though by the time Johnson was acquitted by the Senate on May 16 that year, stocks were rising again and climbed 6 percent in the two months after that. It's hard to know what else was affecting stocks at the time -- largely railroad and financial issues. "There were no Internet IPO's driving the market back then," Gallagher said. If Clinton is impeached and the Senate trial turns into a protracted event, that could derail the legislative process in Congress, with longer-term implications for the country and economy. "There's no reason why the Democrats would even contemplate working with the Republicans" until the election in 2000, said Joel Naroff, chief bank economist at First Union in Philadelphia. "Under those circumstances you've got political gridlock." In that case, impeachment's effects would depend on the outlook for jobs and spending at the time. "When the economy's humming along, the economy can withstand gridlock pretty easily," said Lehman's Gallagher. "If the economy turns down, Washington could be an aggravating factor."

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