This week in Bidenomics: Trolling the doomsayers
President Biden is going after the pessimists. It’s working, for now.
“Last summer, plenty of Wall Street analysts were saying that by the end of the year, there’d be a recession,” Biden said at a January 26 speech on the economy. “They’ve been telling me since I got elected we’re going to be in a recession. Well, it turns out, thank God, they were wrong.”
Biden’s correct. GDP growth during the first two quarters of 2022 was slightly negative, suggesting a recession was due. But the economy bounced back in the second half of 2022, with the latest numbers showing real GDP growth of 2.9% in the fourth quater. For the third-quarter, GDP grew 3.2%. That brings GDP growth for all of 2022 to 2.1%.
“I’m not sure the news could have been any better,” Biden said in his Jan. 26 speech. “Economic growth is up. Wages are up.”
Fair enough. The average GDP growth rate for the 10 years prior to the COVID pandemic in 2020 was 2.3%. GDP shrank by 2.8% in 2020, then exploded by 5.9% in 2021. That surprisingly strong growth, fueled by trillions of dollars in fiscal and monetary stimulus, helped cause the inflation that has been Biden’s biggest domestic problem. A return to modest growth rates ought to help tame inflation, which is exactly what Biden and his fellow Democrats want.
Biden has a three-month window to bask in the good news and keep reminding Americans that things are pretty good. Then, trouble. The GDP report for the first quarter of 2023 comes out in late April, and that is likely to be more troubling. The Atlanta Fed’s GDP Now tool estimates scant 0.7% GDP growth for the current quarter. Some economists think that’s way too optimistic. S&P Global sees the economy shrinking by 1.6% in the first quarter, which would be a much steeper decline in activity than in the first half of 2022.
Sure, this could be another predicted recession that doesn’t materialize. Yet many of the seeds of a slowdown are already planted. Residential investment, for instance, fell for the seventh quarter in a row at the end of 2022. That suggests consumers are spending down the savings they accumulated when many people stayed home during the COVID pandemic. Business investment slowed sharply at the end of 2022. Manufacturing activity is declining.
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A big difference between now and the false recession of early 2022 is rising interest rates. Since last March, the Federal Reserve has hiked interest rates by roughly 4.5 percentage points, with another quarter-point hike likely on February 1. Those rate hikes are supposed to slow economic growth, by making the cost of purchasing anything with credit higher, which in turn softens demand and takes pressure off prices. Since there’s a lag between rate hikes and the purchases businesses and consumers make (or don’t make), the full effect of those rate hikes hasn’t yet hit the economy. But they’re bound to reduce growth.
At some point during the next several months, we ought to be able to answer the question markets care most about: Will the Fed slow the economy just enough or too much? The good news is that inflation is coming down, falling from a peak of 9% in June to 6.4% in December. If that trend continues, inflation will be getting close to the Fed’s target of 2% or so by the middle of 2023, which would likely allow the Fed to stop hiking rates for good.
The bad news is that the Fed may already have gone too far. Consumer spending, adjusted for inflation, fell in both November and December, which could be the harbinger of a downturn. “[The] slump in spending suggests [a] recession could have already started,” Capital Economics noted in a January 27 analysis. “Despite the resilience of fourth-quarter GDP growth, the economy was on the precipice of a recession, and may have already fallen off the ledge.”
The affable Biden, inclined to see the sunny side, certainly won’t be telling voters that—and the data may back him up for a good long while. Recessions are normally only apparent in hindsight, which means that by the time a recession is official, a recovery has typically begun. That could be the story of 2023: a brief slide into recession that’s so mild it doesn’t feel like one. The doomsayers could end up being right, and it may not matter.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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