Yahoo Finance This week in Bidenomics: The most elusive recession ever
Doomsayers have been predicting a recession for more than a year. They get wronger by the day.
The textbooks say when there’s high inflation and the central bank has to hike interest rates, as the Federal Reserve has been doing, a recession often results. Higher rates choke off hiring, spending, and growth, and the recession itself is often the thing that tames inflation, since consumers tighten up spending and softer demand brings prices down.
The Fed has hiked rates by 5.25 percentage points during the last 16 months, including a quarter-point hike on July 26. That’s one of the most aggressive hiking cycles ever. It’s rational to anticipate a recession, since that’s what happened during similar tightenings in the past.
Yet the US economy stubbornly defies the history books. The latest GDP report shows surprisingly strong growth in the second quarter, which led many forecasters to upgrade their outlook for the rest of the year. The latest reading on jobless claims was the lowest since February. Tech and finance firms have been laying off workers, but the data suggests they’re quickly finding new jobs.
Inflation continues to moderate, and investors broadly think the Fed is done raising rates. That’s one reason stocks have been on a tear, with the S&P 500 index (^GSPC) up 28% from its low last fall. A new all-time high is within reach. Upbeat stock buyers increasingly endorse the “soft landing” scenario in which inflation abates without a recession. In a way, they’re helping make it happen by keeping financial markets buoyant.
Perhaps most encouragingly, consumers are finally starting to feel better, after a year in the dumps. The Conference Board’s confidence index has rebounded to the levels of mid-2021, when COVID vaccines brought newfound freedom and inflation wasn’t yet a devastating problem.
“If this is a slowdown, please bring us more,” Bank of America wrote in a July 28 research note. “The ‘goldilocks’ outcome that financial markets seem to expect may be part of the story after all.”
There’s one lagging indicator: President Biden’s approval rating. Biden’s popularity dropped below 50% two years ago and has never recovered. It deteriorated as inflation got worse and hit its nadir in June 2022, when inflation topped out at 9% and gasoline prices hit $5 per gallon. It has now crept back to around 41%. But there’s no sign, yet, that rising consumer confidence translates to sunnier attitudes toward Biden.
That’s a little weird, since absent a war, the state of the economy is always voters’ biggest concern. It’s possible people still feel stung by inflation, since the cost of rent and food is still rising by more than incomes. And the price hikes of the last two years haven’t been reversed. Prices overall are rising at a modest 3%, but that’s on top of nearly two years of outsized price hikes.
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Biden is touring the country talking up the economy, including bills he has signed that are pumping billions of dollars into green energy, semiconductors, and other sectors. He has a good story to tell. Biden is right when he brags about record levels of job creation during his time in office. He correctly points out that inflation is worse in many other advanced economies and the US recovery from the COVID downturn is the strongest in the world.
Voters don’t seem to be buying it, or maybe they’re not even listening. Biden will have a distinct problem if the economy remains solid yet voters give him no credit for it. A president running for reelection with an approval rating well below 50% is inherently vulnerable.
Three things could happen. First, the economy could remain solid through the 2024 election, with voters gradually warming toward Biden. If his approval rose by even 5 percentage points, he’d be in a much stronger position to win a second term. If inflation retreats for good and the job market remains strong, that might be enough to convince voters the Biden economy really is durable.
It’s also possible voters are sniffing out a coming recession. Many economists have gotten the recession call wrong, but it might be their timing that’s off, rather than the direction of the economy they foresee. There are still signs of a slowing labor market, and consumers will soon spend all of the “excess savings” accumulated during the COVID lockdowns. The weak confidence numbers of the last year, plus Biden’s low approval, could be indications of gathering trouble in the real economy.
Since everything is odd in the aftermath of COVID, there’s also a chance the economy remains strong and Biden continues to flounder in polls. That would be unusually dissonant, but Biden is also the oldest American president ever. Voters do worry about that. Americans normally give presidents a second term when the economy is solid and toss them when trouble appears. Biden will end up lucky if there’s no recession on his watch, but he may also be the first modern president not to capitalize on that.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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