Will the next president inherit a recession?

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - With the threat of a recession looming, investors and economists are looking ahead to how the three remaining U.S. presidential contenders might tackle a slowing economy if they win November's election.

If the U.S. economy continues its ominous decline, that could translate into a flurry of significant economic policy changes come January, when either Democratic Sen. Barack Obama, fellow Democrat Sen. Hillary Clinton, or Republican Sen. John McCain is inaugurated.

Clinton kept her presidential hopes alive on Tuesday with key wins in Texas and Ohio, while McCain wrapped up the Republican nomination.

No matter who wins in November, trade is likely to be near the top of the economic agenda, and the federal deficit will probably balloon, at least until the economy recovers from the pain of a housing downturn, tightening credit terms and rising costs for food and energy.

Populist campaign trail themes voiced by Democrats, such as blaming global trade for worker ills, have raised eyebrows on free-market-loving Wall Street. They have also tapped into a vein of middle-class discontent, and may set the policy tone -- particularly if Obama or Clinton prevail and walk into the White House with the backing of a solidly Democratic Congress.

A McCain victory would be more complicated since he would most likely have to negotiate with an opposition-controlled Congress. Still, Congress has shown recently that it can cooperate with a Republican White House when faced with an economic crisis, as evidenced by the swift passage of a $168 billion fiscal stimulus plan last month.

"The major question is what the economy is doing" come January, said Andrew Bernard, professor of international economics at Dartmouth University's Tuck School of Business.

If the U.S. economy slips into recession -- which some economists believe it already has -- that would likely strengthen the argument of those who blame global trade for U.S. workers' stagnant wages and the loss of factory jobs.

Many in the investment community take a different view. With Clinton and Obama trading barbs over who would be tougher on trade, there are concerns that a Democratic administration would discourage the cross-border flow of money and goods that has helped enrich corporate America and foreign firms.

"I'm hoping that a lot of this (trade talk) is rhetoric, but I think that there are serious economic issues that, if left untackled, will rise up in the form of protectionism and anti-immigration sentiment," Bernard said.

ECONOMIC ANXIETY

At issue is a sense of economic anxiety that is particularly acute among middle-income families whose wages have essentially been flat for the better part of this decade, said William Galston, senior fellow at the Brookings Institution think tank in Washington.

"There are underlying economic factors driving the (trade) debate in this direction," he said. "Since George W. Bush has taken office, the U.S. has lost fully 20 percent of its manufacturing jobs. Whatever economic explanation you want to give for that ... it creates a political dynamic that makes the continuation of business as usual almost impossible."

In non-stop campaigning ahead of Tuesday's contests, Illinois' Obama and New York's Clinton both vowed to renegotiate the much-maligned North American Free Trade Agreement to add environmental and worker protections.

Galston said if Obama or Clinton win in November, they would likely seek a pause in trade negotiations while they worked with Congress on improving benefits for workers displaced by globalization. The next step would probably be a push for more spending on infrastructure, which would be popular with cash-strapped state and local governments but could inflate the federal deficit.