In Biden’s Economy, Growth Is Exploding But Americans Don’t Seem More Impressed.

In News
Biden Economy

The new G.D.P. estimates indicate that the economy under Biden has more than recovered from the pandemic’s impact. Still, a significant portion of that gain is lost when subsequent rising prices are considered. Indeed, growth remains below its pre-pandemic trend when adjusted for inflation.

In Summary

  • Biden’s poll numbers continue to deteriorate as consumer confidence is eroded by soaring inflation. Last year, the economy increased at its fastest pace since 1984. However, voters feel pessimistic about the state of the economy and their financial futures.
  • Inflation is eating incomes, although even significant wage growth cannot keep up; the last president, Ronald Reagan, faced an economy beleaguered by rising costs and clogged supply lines.
  • The administration’s economic policy is predicated on curbing the pandemic and reining in inflation. This year, price gains are projected to wane, partly due to inherent factors and partly due to fiscal and monetary policy.
  • The Federal Reserve is preparing to hike interest rates, further dampening consumer and business demand.
  • The Federal Reserve estimated that inflation would be around 2.6% this year, a significant decrease from the present rate; however, it remains over the central bank’s target of 2%.
Biden Economy
Ian Shepherdson

Despite solid growth, Biden’s poll numbers continue dwindling as consumer confidence in the economy is eroded by soaring inflation.

President Biden is grappling with an unsettling disconnect: the economy expanded at its highest pace since 1984 last year, yet voters are downright pessimistic about economic circumstances and financial prospects.

According to economists, the divide dates back to the enduring pandemic and high prices. Inflation is at its highest rate since 1982, eroding gains and shrinking paychecks as even solid wage increases struggle to keep up. And, notwithstanding vaccines, life has not yet returned to normal in the sense that many people anticipated.

The discrepancy presents a massive obstacle for Mr. Biden and his party in the run-up to the November midterm elections. Consumer confidence in the economy — and Mr. Biden’s management — could be a disadvantage for Democrats as they fight to retain control of the House and Senate.

Mr. Biden and his top aides are attempting to refocus attention on the positives, citing the economy’s strong recovery and growing wages, as well as attempts to repair snarled supply chains and boost domestic manufacturing.

“We are finally forging a 21st-century American economy, with the fastest economic growth in over four decades and the greatest year of job growth in American history,” Mr. Biden said in a statement following Thursday’s release of gross domestic product figures.

However, inflation has muddied that story.

The new G.D.P. data indicate that the economy has more than recovered from the pandemic, but a significant portion of that gain is lost when recent price increases are factored in. Indeed, growth remains below its pre-pandemic trend when adjusted for inflation.

Trends in G.D.P. vs. pre-pandemic

Economic output has exceeded its pre-pandemic trend in nominal terms, but it has not yet caught up when adjusted for inflation.

Inflation’s bite on the recovery is palpable in everyday life. Workers’ incomes are increasing at the quickest rate in decades — but as they pay more for couches, secondhand cars, steaks, and frozen chicken, many are discovering that today’s larger cheque does not stretch as far as last year’s smaller one. While the unemployment rate has fallen considerably faster than virtually everyone anticipated, millions remain unemployed due to child care concerns and coronavirus fears.

“It’s difficult to be optimistic while a pandemic is still raging,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. Additionally, “pocketbook concerns are particularly vital.”

Biden Economy
President Ronald Reagan

Drawing parallels between the reigns of Ronald Reagan and Joe Biden

The disconnect between the economy’s performance on paper and how it feels on the ground has made it difficult for Mr. Biden to capitalize politically on what has been, by most metrics, a historically strong economic recovery, especially when inflation is included in.

Mr. Biden may take solace because the previous president to have a similar blend of robust growth and inflation was Ronald Reagan. Early in his administration, he, too, saddled an economy beleaguered by rising costs and clogged supply channels. He, too, struggled at first to persuade Americans that the economy was improving. Nonetheless, his “morning in America” slogan propelled him to a landslide re-election victory in 1984.

There are critical distinctions. Mr. Reagan took office at the height of the late 1970s and early 1980s “Great Inflation,” when interest rates were extremely high; by 1984, both price growth and borrowing costs had eased. Economic growth also rose near the end of Mr. Reagan’s first term, although most economists now anticipate a growth as the post-pandemic boom fades. And Mr. Reagan ran for re-election when economic views were much less politicized than they are today.

Mr. Biden’s predicament is evident in polling and survey data.

According to a Gallup poll done this month, Americans have a more negative perspective of the economy than a positive one: only 29% believe the economy is improving. In comparison, 67% say it is deteriorating.

Consumer expectations data from the Federal Reserve Bank of New York indicate that a sizable proportion of consumers expect to be worse off financially a year from now: 26.3 percent in December, up from 9.9 percent at the end of 2019, before the outbreak of the coronavirus. This shift occurred while inflation expectations soared as measured by the same survey.

Part of the doomsday scenario is inextricably linked to the long-running pandemic. While many hoped that once vaccines became widely available, the economy would reopen and normal life would resume, repeated waves of infection have prevented that from happening.

“There was a great deal of hope a year ago,” said Karen Dynan, a Harvard economist and former Obama administration Treasury official. “We received the vaccines faster than anticipated, and we believed our lives could resume normalcy, and everyone expected the economy to follow suit. And perhaps I was a little naive.”

Biden Economy
Karen Dynan

Reining in on the pandemic and inflation is key.

Persuading voters that they are benefiting from recent advances toward reviving the economy is likely contingent on two things: containing the pandemic and reining in inflation.

This year, price gains are projected to fade, partly due to natural factors and partly due to fiscal and monetary policy. While Congress and the White House pushed significant amounts of money into the economy last year through enhanced unemployment insurance, one-time checks, and other perks, that support is ebbing, which means that people will have less new money to spend this year. As demand declines, it may provide a window of opportunity for battered supply systems to catch up.

The Federal Reserve is likewise preparing to raise interest rates, signaling an initial hike at its March meeting; it has already begun to withdraw extra stimulus for the economy. Increased borrowing costs should further dampen consumer and business demand, delaying hiring and wage growth.

The difficulty for the administration is that if the Fed dramatically slows the economy to end inflation, voters may not be happier. However, both rapid growth and rapid inflation and slow growth and slow inflation may prove to be undesirable results from a worker’s standpoint.

“Nirvana would be a blend of robust growth and low inflation,” said Nela Richardson, chief economist at A.D.P., a payroll processor and source of job data. “That would be more difficult.”

Policymakers believe the Fed will be able to arrange what economists refer to as a “soft landing,” stabilizing prices while also maintaining a relatively healthy labor market and steady growth.

Biden Economy
Nela Richardson

The hurdle that lies ahead

However, economists have warned that achieving that goal may be difficult, and the timing may conflict with the American political cycle. By November, price increases are predicted to begin to slow, but excessive expenses may not have disappeared by then.

In December, the Fed forecast that inflation would average around 2.6% out on Friday — but still above the central bank’s target of 2%.

The Federal Reserve is politically neutral and acts independently of the White House, but its policies can affect political results.

“The question is whether you want to be in a scenario where demand is constrained, and we slow down as we approach an election cycle?” As Ms. Richardson put it. “There is considerable risk involved.”

Meanwhile, Republicans have focused exclusively on rising prices, blaming them on the administration’s 2021 stimulus program and arguing that they impede % progress.

“There are significant red lights here, with galloping inflation, a major decline in real disposable income, and G.D.P. growth fueled primarily by a transitory building in inventories,” Representative Kevin Brady, a Republican from Texas, said in a release following the release of the G.D.P. data. “Given that many Americans have lost faith in President Biden’s ability to repair the economy, it is premature for President Biden to celebrate given the difficulties workers and families confront.”

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