Obama to key on fiscal strengths in State of the Union

(MoneyWatch) President Obama is expected to focus on economic renewal in his State of the Union address this week. But if that theme echoes his 2012 speech, the changing economic and political backdrop of late could give Mr. Obama added leverage in pursuing his agenda.

Sources close to the White House tell CBS News that Mr. Obama on Tuesday will highlight the need for job creation, wage growth and a more equitable distribution of income, leaving such recent hot-button issues as gun control and immigration in the background.

That shift would play into two emerging strengths for the administration. First, an economic recovery that wobbled frequently during Mr. Obama's first term appears finally to be stabilizing.

Second, the president's Republican opponents are fighting among themselves as they struggle to regroup from the GOP's electoral losses last November. Far from the united political front that fought administration policies during Mr. Obama's first four years in office, GOP lawmakers more recently have had to give ground on signature issues, including raising taxes on wealthy Americans.

Those fissures have only widened during the ongoing negotiations in Washington over $1.2 trillion in across-the-board spending cuts set to start kicking in next month. Breaking from tradition, more ideologically-minded Republicans are refusing to consider further changes to the tax code even if a failure to head off the so-called sequester triggers large spending cuts for defense companies, a traditional base of support for conservatives. That is putting them at odds with arguably more pragmatic GOP legislators, such as Sens. John McCain, R-Ariz., and Kelly Ayotte, R-N.H., who say that sequestration could hinder the nation's military readiness.

Perhaps the greatest difference for Mr. Obama this year is that the economy, while still fragile, appears at last to be emerging from the four-year funk that followed the 2008 financial crash. Although economic growth remains subdued, many experts expect it to pick up in the second half of the year and in 2014. Research firm Macroeconomic Advisers estimates that GDP will expand 2.1 percent in the January-to-March quarter and 2.6 percent for the year, a projection that is in line with most forecasts. More important, the economy seems to be snapping out of a pattern that prevailed during Mr. Obama's first term in which growth accelerated earlier in the year, only to sputter in later months.

Such predictions could come to naught if the global economy suffered a sudden shock, such as a flare-up of Europe's debt crisis. If all the cuts mandated under the sequester were to take effect this year, amounting to some $85 billion in spending, GDP would fall 0.5 percent, according to the Congressional Budget Office. According to the White House, the sequester would require large cuts to a range of federal spending, including education, small business, mental health and food safety programs. Beyond that decline, a prolonged fiscal stalemate could sap investor and consumer confidence.

For now, investors remain sanguine. "As long as we don't end up with the kind of gridlock that we had at the end of 2011, then the market will focus on corporate earnings and the economy's fundamentals," said Ed Yardeni, president and chief investment strategist for institutional investor advisory Yardeni Research.

Propelling those fundamentals is a strengthening labor market, rising home prices, steady consumer spending, falling energy costs and bullish stock market. These trends have dovetailed with an improving picture overseas. Europe's fiscal woes have abated, even if their underlying cause -- anemic growth and regional trade imbalances -- remain unresolved. A slowdown in China, the world's second-largest economy, also appears to have eased.

They also give the administration something that, until recently, it lacked in championing its economic policies -- a positive story to tell. For the first time since entering the White House, Mr. Obama can credibly claim that the recovery is taking root, even while issuing the usual admonitions that much work remains to be done.

"He could do nothing and just continue to ride the kind of wave of a recovery that started out weak, but that's starting to show signs of strengthening and breaking out," Yardeni said.

Not that Mr. Obama will stand pat. Underscoring the White House's stance in the latest budget talks, in his weekly radio remarks over the weekend he bluntly accused Republicans of ignoring the interests of working- and middle-class people. "They would rather ask more from the vast majority of Americans and put our recovery at risk than close even a single tax loophole that benefits the wealthy," Mr. Obama said.

Among the loopholes Mr. Obama could attack Tuesday is the tax break on "carried interest," which allows private equity, hedge fund and other investment managers to be taxed at the lower capital gains rate of 20 percent. The president has said that such earnings should be taxed as ordinary income. Another possible target: proposals to allow U.S. corporations to repatriate overseas earnings at a preferred rate.

At the same time, in previewing his SOTU address before Democratic lawmakers last week in Lansdowne, Va., Mr. Obama said he is "eager and anxious to do a big deal, a big package" that would end the fiscal impasse threatening to set back the recovery.

For elements of the business community, such a deal chiefly means reducing the nation's deficit. "We also hope [Mr. Obama] emphasizes the urgent need to address the fiscal crisis with a bold plan that slows the growth of runaway spending, reforms entitlement programs and overhauls our tax code," said a spokeswoman for the U.S. Chamber of Commerce by email.

In calling for stronger economic growth, the trade association also favors proposals for increasing energy production, expanding trade, "modernizing" federal regulation, and reforming immigration and visa policies, she added.

Still, no grand fiscal bargain is likely to emerge. Lacking the votes in Congress to overcome Republican opposition, the White House is almost certain to aim for more incremental gains. That, too, would represent business as usual in an era when the trench warfare of contemporary politics forces elected leaders to settle for smaller victories.

While Mr. Obama in his 2012 State of the Union remarks vowed to lay out a blueprint "for an economy that's built to last," for instance, he stopped short of offering specific proposals. And the prescriptions he did lay out, including a plan to give homeowners mortgage relief, were limited in scale. Short of an armistice on Capitol Hill, any policy wins this year are likely to be equally modest.

  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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