Yahoo Finance This week in Bidenomics: The Great Disappearing Recession
Joe Biden might actually get through his first presidential term without the recession forecasters have been predicting for much of the time he’s been in office.
Amid strong hiring, falling inflation, solid corporate earnings, and a stock market rally, recessionistas are starting to change their outlook. Bank of America got investors’ attention this week with a research note headlined, “Imagine no recession, it’s easy if you try.” Here’s the bottom line, according to BofA: “What’s out: Mild recession. What’s in: soft landing.”
A soft landing, for those who don’t speak econogeek, is an optimal outcome in which Federal Reserve interest rate hikes get inflation under control without causing a recession or notable rise in unemployment. The Fed is deliberately trying to slow the economy, by making borrowing more expensive. That should reduce demand for goods and services and ease inflationary pressure. The Fed has indicated it will raise rates as much as necessary to get inflation down, even if a recession is the result.
It’s looking more and more like a recession will not be the result. The year-over-year inflation rate has dropped from 9% in June 2020 to just 3% now. A bit lower and it will be right in the Fed’s target range.
The latest jobs report shows employers added 187,000 new jobs in July, a slowdown from the first half of the year, when the economy created 270,000 new jobs per month, on average. A slowdown is exactly what the Fed wants to see. A slower pace of hiring means a cooling economy, which means softer demand, which means less inflation. That’s why stocks rose on the news of the weaker job growth in May: The Fed’s tactics seem to be working, and inflation may soon become a non-issue.
There’s more upbeat news. Wage growth picked up a little in July, with incomes growing 4.4% year over year. With inflation at 3%, the typical family is getting ahead. That’s an important turnaround. From 2021 until recently, real earnings have been negative. Part of that was a distortion caused by the COVID disruptions, but as inflation began to heat up in 2021, year-over-year price hikes outpaced earnings growth. That trend finally seems to be reversed. Assuming it continues, workers will be able to regain ground they lost to inflation during the last two years.
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The upbeat vibe is making it into mainstream reporting, which is what Biden needs for voters to shake off the blues and start feeling better about the economy. The Wall Street Journal reported on Aug. 4 that “a Goldilocks job market is in sight.” The day before, Bloomberg argued that the most convincing sign of an ongoing boom is that “CEOs across the country are opting to reinvest more of their profits in expansion projects rather than handing the money back to shareholders.”
Biden, however, faces a maddening problem: Voters seem to be giving him no credit at all for record job gains and improving inflation. Consumer confidence has improved recently, but Biden’s approval rating is mired around 41%, with no improvement at all during the last year, even as the inflation rate has plunged.
Yahoo Finance recently asked Nobel prize-winning economist Paul Krugman if there’s a snazzy economic theory that explains the disconnect between a solid economy and Biden’s weak ratings. “The short answer is, god knows,” Krugman says. “It’s really kind of mysterious. Lots of people think we’re in a recession when in fact we’re in an extraordinary jobs boom. We are somehow a nation in which people who are doing fine are sure really bad things are happening to someone else they don’t happen to know.”
Biden, campaigning for a second term, has about a year to solve the mystery and convince voters to perk up. Around this time in 2024, voters will be making their final decisions on whether to give Biden a second term or send him packing.
One thing that could happen is the shock of last year’s inflation spike gradually wears off, assuming price spirals don’t return and wage gains continue to outstrip price hikes. That might actually be logical, given that the pain of two years of rising prices is still there. Prices for most things haven’t fallen. They’ve just been going up by less. It might simply take a while for Americans to feel the sting of inflation is abating.
Then there’s the possibility the recession is merely delayed, rather than canceled. The New York Times offered a helpful reminder recently: Americans sometimes turn optimistic just as a recession is about to strike. And there are still recession believers. “The number of forecasters that are ditching a recession scenario is growing,” Oxford Economics wrote to clients on Aug. 3. "We’re not ready to make this change.” Oxford still thinks a mild recession will start in the fourth quarter, or perhaps early in 2024. If you’re waiting for the worst, you still might get lucky.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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