Yahoo Finance This week in Bidenomics: No stag, no 'flation, just consternation
Federal Reserve Chair Jerome Powell gave a backhand compliment to the Biden economy during his latest press conference on May 1. When a reporter asked if the US economy was entering a period of stagflation, Powell said, “I don’t see the stag or the 'flation.”
So we’ve got that going for us: no stagflation.
Some alarmists think they see signs of it, which would delight Biden critics hoping for an economic collapse that would doom the president’s reelection bid. But stagflation, as the term arose in Britain in the 1960s and the United States in the 1970s, refers to a struggling economy with inflation and unemployment rates both near or in the double digits.
Today, inflation is 3.5% and unemployment is 3.9%, which is why Powell scoffed at the idea.
Yet nobody in America seems happy. The Conference Board’s consumer confidence index has fallen for three months in a row and is now at the levels of July 2022, when inflation was close to its recent peak and shoppers were feeling shellshocked. An uptick in gas prices to kick off 2024 has been one of the factors pushing confidence down.
Stock market investors, meanwhile, are getting whiplash trying to figure out if inflation, which dropped sharply from the 2022 peak through the end of 2023, is mounting a counterattack or a feint.
The annualized inflation rate ticked up from 3.1% to 3.5% during the last three months. The Fed wants to force inflation down to around 2% eventually, so the battle against rising prices seems to be flagging.
Other inflation measures the Fed watches closely are flashing yellow, as well.
These inflation signals could be anomalous, given that the main drivers of inflation are now auto insurance, one of the last sectors to catch up with COVID-related distortions, and rents, which lag real-world conditions by several months. Another concern is above-average wage growth, which is good for workers but can make inflation more entrenched than usual.
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Then came the soft jobs report for April, which suggests inflation fears may be overblown.
Employers added 175,000 jobs for the month, which is a healthy number, but about 65,000 less than economists expected. Wage growth was also a bit weaker than forecasted.
That softish data suggests the labor market is weakening — but that could be good for inflation.
One of the things that normally happens when the Fed raises interest rates — as it has done aggressively for the last two years — is job and economic growth slows, sometimes by a lot. That’s how the Fed gets interest rates down. As the economy cools, investment slows, spending slows, and weaker demand brings prices down.
The great economic surprise of 2023 is that the economy did not cool down, even as the Fed jacked up rates. GDP adjusted for inflation grew by a healthy 2.5% in 2023, faster than the year before. Employers added 3 million jobs, an almost unprecedented pace of growth.
But now the slowdown may finally have arrived. First quarter GDP growth slowed to a 1.6% annual pace.
The April job numbers are the lowest since last October and much more normal than the elevated growth of much of the last two years. “The labor market is cooling slowly from being overheated,” Capital Economics explained in a May 3 research note. “It’s being accompanied by slower growth in hourly earnings.”
Stocks took the bait, with the S&P 500 index jumping more than a full percentage point on the softer job news. That’s not because investors cheer fewer jobs than expected but because they see signs that inflation isn’t such a terrifying bogeyman after all.
If the deflationary trend reasserts itself, it will open the door for modest Fed rate cuts at some point during the next six months, and lower rates are bullish for stocks as long there’s no recession.
Biden cheered the job news, as he always does, declaring, “The great American comeback continues.” But voters don’t seem to agree, and a weakening job market during the next six months could have the opposite effect on voters that it might have on investors eager for softer conditions that would allow the Fed to cut.
Voters have never given Biden credit for what’s going right in the economy, overlooking record job growth and a robust rebound from the COVID pandemic. Instead, they've focused on the scourge of inflation as it eroded buying power.
Biden’s approval rating sank as inflation worsened in 2022 and it has never recovered, even though inflation has dramatically improved. Biden’s dismal approval rating, around 40%, is the most disconnected from economic fundamentals of any president in recent history.
Now, there are nascent signs that workers are beginning to notice a tightening labor market.
In Conference Board consumer surveys, the portion saying jobs are plentiful has fallen this year, while the share saying jobs are hard to get has risen. If that trend continues, voters might start to punish Biden for a tougher job market before they start to credit him for falling inflation.
Even if there’s no stag or 'flation, there’s plenty of consternation for a president seeking reelection to worry about.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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