• This is a rush transcript from "The Journal Editorial Report," January 2, 2010. This copy may not be in its final form and may be updated.

    PAUL GIGOT, FOX HOST: This week on the "Journal Editorial Report," a new year and a new set of challenges for the country and for President Obama. Amid high unemployment, will the economic recovery continue?

    And with Obama's declining approval ratings, will the GOP make big gains in the midterm elections?

    And with trouble spots all across the globe, will the president's policy of engagement finally show results?

    All that, and our panel's predictions for 2010.

    Welcome to the "Journal Editorial Report," I'm Paul Gigot.

    Well, with the New Year comes a new set of challenges for President Obama and his party, not the least of which are the 2010 midterm elections. With the president's job approval below 50 percent and a potential health care backlash brewing, can Republicans make some big electoral gains this November.

    Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; editorial board members, Dorothy Rabinowitz and Jason Riley; columnist Mary Anastasia O'Grady; and in Washington, senior economics writer Steve Moore.

    Steve, starting with you, the president's approval rating has fallen faster and farther than any recent modern president. How much trouble are the Democrats in?

    STEVE MOORE, SENIOR ECONOMICS WRITER: They're certainly lucky that the midterm elections aren't tomorrow. Right now, they're looking in really deep, deep water. A lot can change in the last year. But I do think there are amazing parallels between the situation the Democrats are in today versus they were — remember, Paul, back in 1993, after Bill Clinton's first year in office and anybody with a D next to their name lost elections in that following year. So I think that Democrats are facing a big problem. The one thing that could bail them out would be an economic recovery.

    GIGOT: Well, but there's one difference between now and 1994, Jason, and that is that it looks like they're going to pass health care this time around. And they failed in 1994. And Rahm Emanuel's argument, the White House chief of staff's argument, if you pass this, that won't happen to you. If you don't pass it, you'll lose just like then.

    JASON RILEY, EDITORIAL BOARD MEMBER: Well, it's a double-edged sword of having the majority in both the White House — having the White House and a majority of the Congress, is that you get to push through legislation on a partisan basis, but then you own it. Your party owns it. And so this passing health care could be what does them in, in the midterm elections.

    GIGOT: Now, passing health care could do that?

    RILEY: Yes.

    GIGOT: Why?

    RILEY: The backlash.

    GIGOT: Backlash, but it's a great triumph. Why would there be a backlash? What backlash are you talking about?

    (LAUGHTER)

    RILEY: In midterm elections, the president's party traditionally loses seats in Congress.

    GIGOT: Sure.