This week in Bidenomics: A recession cushion dwindles
Economists want to know when consumers will run out of gas. The emerging answer: At a lousy time for President Biden as his reelection bid ramps up.
The US economy has remained surprisingly resilient for a couple of reasons. One has been the strong demand for workers even as signs of a possible recession intensify. Consumers have done their part, too, with a burst in spending that powered the economy through the Covid pandemic and is still going strong.
Behind that surge in spending is a lot of “excess savings” that is still swelling personal bank accounts. Some of that came from the $5 trillion Congress injected into the economy through several stimulus programs it passed in 2020 and 2021. That’s nearly three times the amount of stimulus Congress passed during the Great Recession in 2008 and 2009. Consumers also hunkered down for months while awaiting vaccines and an all-clear from public-health authorities, spending less and saving more.
That generated about $2.1 trillion in excess savings, or money consumers banked beyond what they would have saved if pre-Covid trends had stayed in place. They’ve spent about $1.6 trillion of that, according to new research by the Federal Reserve Bank of San Francisco. That means they have about $500 billion left.
The Fed researchers think that $500 billion will continue to goose spending until late this year or early 2024, at which point all the excess savings will be gone. Then what?
It’s possible consumers will downshift smoothly and the economy will transition to normal, pre-Covid spending patterns without rising unemployment or a drop in output.
But Biden has to prepare for the possibility that the oft-heralded recession, which forecasters have been predicting ever since the last one ended in April 2020, could actually materialize just as the 2024 presidential campaigns hits full stride.
Economic forecasting is always risky, and many Covid-era distortions knocked prediction models completely out of whack.
Excess savings, for instance, could help explain the remarkable amount of money people are spending on cars. The average cost of a new car has jumped by 21% during the last three years, to more than $48,000. Big price hikes are usually unsustainable, because shoppers find cheaper alternatives, forcing sellers to bring prices back down. Yet car buyers keep paying more, as if a newfound windfall has made them little less judicious than usual.
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It (probably) has to end. Moody’s Analytics puts the odds of a recession during the next year at 50%. Oxford Economics expects a recession to start in the second half of 2023. A key forecasting metric, the index of leading indicators, has been solidly negative for the last year, at levels consistent with a looming downturn.
Skeptical readers—hopefully all of you!—might ask, if so many recession predictions have turned out to be wrong lately, why would they be right this time? That excess savings is part of the answer. Consumers have been gloomy, with confidence at recessionary levels, but they’ve continued to spend like it’s boom times. When the excess savings is gone, spending might begin to match those sour attitudes.
Meanwhile, the labor market is already softening up, with the number of job openings dropping from 12 million a year ago to 9.6 million now. The next step could be a rising unemployment rate. Lending standards have been tightening as the Federal Reserve raises interest rates, to combat inflation, and now they’re sure to tighten more due to several bank failures. The full drawdown of excess savings would eliminate the recession cushion that has kept many consumers willing to spend. A pullback in demand would cement a recession.
At the moment, economic conditions are favorable to Biden, since low unemployment typically leads an incumbent president to reelection. Inflation is a wild card, but that has dropped from an annualized peak of 9% last year to 4.9%, and is likely to fall further.
A recession would clearly dampen Biden’s reelection odds. A brewing irony is that one of Biden’s biggest legislative accomplishments, the American Rescue Plan of 2021, could end up being a barrier to reelection. Democrats who controlled Congress in Biden’s first year passed the ARP after record amounts of fiscal and monetary stimulus were already goosing the economy. The ARP provided another $2 trillion in stimulus, which we now know contributed to runaway inflation.
It may also turn out to have delayed a recession, by boosting savings, until the worst possible moment for Biden.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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