June 1 (Bloomberg) -- George W. Bush has the kind of economy any U.S. president would want in an election year: Gross domestic product is rising at a 4.4 percent annual rate. Jobs are being added at the fastest pace since early 2000. Inflation is 2.3 percent, down from 3.1 percent four years ago.

So why do just 29 percent of Americans polled by the Gallup Organization last month say the economy is in good or excellent condition, versus 43 percent in January? Why do 54 percent say Democratic rival John Kerry would be better at handling the economy than Bush?

``The news about jobs is not getting through -- it's that simple,'' said Andrew Kohut, director of the Pew Research Center in Washington. ``In part it's because it's being crowded out by the events in Iraq and by soaring gasoline prices.''

Other polls tell a story similar to Gallup's, which was based on a survey of 1,000 persons surveyed on May 2-4. In a CBS News poll of 1,113 adults on May 20-23, 57 percent said they disapproved of Bush's performance on the economy, and 65 percent said the country was on the ``wrong track.'' That was the most since November 1994, during the first Bill Clinton administration, when Republicans regained control of the U.S. House and Senate for the first time in 42 years.

``The guy's in a hole,'' Charles E. Cook Jr., editor of the nonpartisan Cook Political Report in Washington, said of Bush in an interview. ``You don't get re-elected with these kinds of numbers. He's got to turn it around.''

Front Page Issue

The disconnect between the economy and Bush's poll numbers has the president and his advisers searching for an explanation. ``When the primary thing they're seeing in the news is negative reports out of Iraq, then that's going to color their thinking broadly on everything,'' Matthew Dowd, the Bush campaign's chief strategist, said in an interview. ``It's going to take an accumulation of time when Iraq is no longer on the front pages'' for the numbers to ``shift upward again,'' he said.

In an interview with television reporters on May 25, Bush also blamed dissatisfaction with the economy partly on mounting U.S. casualties in Iraq and Americans' anger over the prisoner abuse scandal that has emerged.

Gasoline Prices

The Defense Department says 802 Americans have been killed in the Iraq war, 662 since Bush declared an end to major combat on May 1, 2003. Eighty-four percent of Americans said they opposed ``sexual humiliation'' of prisoners, such as that shown in photographs taken in Abu Ghraib prison in Iraq, according to a Washington Post-ABC News poll of 1,005 adults conducted May 20- 23.

``Obviously, much of the attitude for our citizens is being shaped by what they see on their TV screens from Iraq -- I know that,'' Bush, 57, said.

A 36 percent rise in the average price of gasoline this year to $2.05 a gallon on Friday has contributed to the negative views of the economy, said Richard T. Curtin, director of the University of Michigan's monthly index of consumer sentiment. The index fell to 90.2 in May, a seven-month low, from 94.2 in April, the university reported on Friday. Economists had expected the index to be unchanged, based on the median estimate of 52 economists surveyed by Bloomberg News.

Milk, Medical Care

Optimism over the 625,000 jobs added in the past two months has been ``exactly offset by the rise in gasoline prices,'' Curtin said in an interview.

Kerry, a four-term senator from Massachusetts, said on May 19 the surge in gasoline prices is costing Americans an average of $593 a more a year, compared with 2000, the year before Bush took office. ``We're seeing the economic opportunity of Americans disappearing into gas tanks around the country,'' Kerry, 60, said in a statement.

``The reason that gas prices are high is because of politicians like John Kerry who vote for higher gas taxes and block the energy legislation'' that would increase domestic capacity and lower prices, said Steve Schmidt, a spokesman for Bush's re-election campaign.

While overall inflation remains in check, other visible prices in addition to gasoline are rising. Milk prices jumped 4.9 percent in the 12 months ended in April, Labor Department statistics show. Medical care costs gained 4.7 percent, hotel prices 8.8 percent and the cost of tuition, school fees and child care increased 7.4 percent.

`Wage Recession'

Moreover, while U.S. corporate profits jumped 32 percent in the 12 months ended in March, the biggest increase since 1984, according to Commerce Department figures, average hourly pay of production workers rose 2.2 percent in the year through April, the slowest pace for that period since 1987. After accounting for inflation, the gain was 0.5 percent, according to the Bureau of Labor Statistics.

The slow income growth amounts to a ``wage recession'' that makes the rise in GDP irrelevant to many voters, Mark Mellman, a pollster for the Kerry campaign, said in an interview. ``GDP is an abstraction,'' he said. ``People can't eat the GDP, they can't use it to buy medicine, they can't educate their kids with the GDP.''

Bush's low approval rating on the economy reflects in part ``the bias of the press and the disconnect between reality and what is being promulgated'' Labor Secretary Elaine Chao said in a television interview. ``The national unemployment rate is 5.6 percent,'' Chao said in a televised interview Friday. ``That is lower than the average unemployment rate for the decade of the 1970s, 1980s and 1990s.''

Interest Rates

Interest rates are another concern of consumers, the University of Michigan's Curtin said. ``A record number of consumers expect interest rates to increase,'' he said. ``Even though things are improving now, they expect the expansion to slow.''

Rates on 30-year home mortgages rose to 6.3 percent the week of May 20 from 5.85 percent on Jan. 2, Freddie Mac, the second- largest U.S. mortgage finance company, said. Sales of new houses fell 11.8 percent in April, the biggest decline in a decade, after mortgage rates reached a five-month high, the Commerce Department reported last Wednesday.

While sales of existing homes rose 2.5 percent in April to the second-highest annual rate on record, new home sales are considered a harbinger of the market for used homes. Mortgage lending probably will decline to $2.4 trillion in 2004, down 36 percent from the record $3.7 trillion in 2003, according to Frank Nothaft, chief economist at Freddie Mac, the second-largest U.S. mortgage buyer after Fannie Mae.

Iraq Factor

The higher mortgage rates are already slowing refinancing, a source of cash for homeowners. ``The housing market is not going to crash, it's just no longer going to be an ATM machine, and a lot of homeowners ha become addicted to that little thing,'' Paul McCulley, a managing director at Pacific Investment Management Co., said at a panel discussion in New York on May 20.

Growing concern about Iraq may be the main reason that Bush's approval ratings for his handling of the economy are skidding, said Cook Political Report's Cook. ``People are souring on Iraq, and when they start turning on you, they pretty much sour across the board,'' he said. ``They stop differentiating between the two.'' Forty percent of those surveyed in the Washington Post-ABC News poll said they approved of how Bush was handling the war in Iraq, down from 55 percent in January.

Between March 2003, when the war started, and last September, matters were reversed: Perceptions that the U.S. was succeeding in Iraq overshadowed Americans' angst about the lack of job growth, said Thomas Riehle, Washington manager for the Ipsos Group, a French-based pollster operating in the U.S.

GDP Growth

Ipsos' polls showed that Bush's overall approval rating, which had fallen to 56 percent before the first quarter of 2003, from 77 percent a year before, rose to 62 percent in the second three months of 2003, after the quick U.S. military victory in Iraq, and averaged 55 percent in the three following quarters. Since mid-January, it has fallen again and stood at 50 percent in May.

``Bush was getting good marks on his handling of the economy then for one reason -- people were no longer nervous about how the war in Iraq would affect the economy,'' Riehle said in an interview. ``Since then, they've lost confidence in his foreign policy, and that's driving other measures down.''

The economy lost 2.7 million jobs between March 2000 and August 2003, giving rise to Democratic charges that Bush was presiding over a ``jobless recovery.''

In September, the economy began what is now eight straight months of job gains, adding 625,000 jobs in March and April alone -- the biggest two-month rise since early 2000. Gross domestic product rose at a 4.4 percent annual pace in the first quarter, more than the previously reported 4.2 percent, the Commerce Department said Thursday.

Manufacturing Gain

The economy expanded 5 percent in the 12 months through March, the most since 1984. GDP may grow 4.6 percent this year, compared with 3.1 percent last year, according to the median forecast of 56 economists surveyed by Bloomberg News earlier this month. This year's projected growth also would be the fastest since 1984, when the economy grew 7.2 percent.

A gauge of U.S. manufacturing unexpectedly rose in May as increased demand prompted more factories to hire than at any time in 31 years, the Institute for Supply Management reported today. The group's factory index gained to 62.8 from 62.4 in April, topping the median forecast of 61.5 in a Bloomberg News survey of 64 economists. The Commerce Department also reported today that construction spending in April rose for a third month.

``I'm surprised,'' Tom Gallagher, Washington political analyst for International Strategy and Investment Group Inc., a Wall Street economic consulting firm, said of the slide in Bush's approval ratings on the economy. ``Even given the usual lags in public perceptions, the polls don't square with the economic statistics.''

Better Shape

Even with the recent surge in jobs, the economy has lost 1.5 million jobs during Bush's term, including 2.9 million manufacturing jobs, which typically pay more than the service jobs that account for most of the jobs now being added. Thirteen of the 17 so-called battleground states -- those that both parties say will have the closest races in the election -- have lost jobs under Bush.

They include such manufacturing states as Ohio, where former Vice President Al Gore defeated Bush in 2000. Ohio, which added 4,300 jobs in April, has lost 214,500 jobs under Bush. Michigan, which Gore also won in 2000, gained 19,300 jobs in April but has lost 204,200 jobs since Bush took office. Florida, which Bush won by 537 votes in 2000, has added 266,200 jobs under Bush, the most of any state.

Bush began 2004 with the economy in better shape than it was for some of his recent predecessors at the start of election year, the Pew Research Center's Kohut said. Last January, the unemployment rate was 5.6 percent, real disposable income was up 4.4 percent from a year before, and the University of Michigan consumer confidence index stood at 103.8.

`Iraq, Stupid'

The same figures for Clinton, Bush's immediate predecessor, were 5.6 percent, 1.5 percent and 89.3; those for Bush's father, George H. W. Bush, were 7.3 percent, 2.8 percent and 67.5; and those for Ronald Reagan were 8 percent, 6.7 percent and 100.1.

The unemployment rate in the U.S. was 5.6 percent in April, the same as it was in January; real disposable income in March stood at 4.5 percent above its level of a year before and the consumer confidence index in May stood at 94.20.

Even though the unemployment rate was higher in the early 1980s, Kohut said, ``there was a sense of progress, and people had a sense that things were getting better.'' That doesn't seem to be the case today, he said.

Greg Mankiw, chairman of the President's Council of Economic Advisers, and Bush's chief economic adviser, said he is confident that Americans are mindful that the economy is improving. ``If you ask if people are better off than they were four years ago, the answer is yes,'' Mankiw said at a May 21 CNBC Finance Forum in New York. The White House declined to say which figures Mankiw was using to back up his assertion, and Mankiw declined to be interviewed for this story.

The disparity between the economy and the polls ``underscores that Bush's electoral fate is tied to Iraq,'' ISI's Gallagher said. ``Failure to produce a turnaround there could stop the economic recovery from delivering his re-election, while an improvement in Iraq could lead to an improvement in Bush's economic approval rating.''

Gallagher recalled that in the 1992 presidential campaign, then-candidate Clinton prevailed over incumbent President George H. W. Bush by using the slogan, ``It's the Economy, Stupid,'' to remind voters about how sluggish the recovery was.

This time, Gallagher said in a May 27 letter to clients, ``It's Iraq, Stupid.''

To contact the reporter on this story:
Art Pine in Washington apine@bloomberg.net or
Brendan Murray in Washington at brmurray@bloomberg.net.

To contact the editor responsible for this story:
Kevin Miller at
or kmiller@bloomberg.net.

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