The state of the economy as President
Joe Biden
prepares for his
State of the Union
address is uncertain: While the country has dodged a long-feared recession so far, there are signs of trouble, and families have been scorched by high
inflation
.
Government finances, meanwhile, are in bad shape and set to be the subject of a clash between the White House and congressional Republicans.
MOUNTING EVIDENCE OF INFLATION SLOWDOWN MEANS FED SET TO EASE OFF THE BRAKES
Avoiding recession — but troubling economic indicators
On the surface, the economy remains strong, despite the warnings of recession in 2022 from Republicans and many economists.
Gross domestic product grew a respectable 2.1% in 2022, the Bureau of Economic Analysis
reported
. GDP had declined in the first two quarters of the year, which is commonly taken to indicate a recession. But growth bounced back in the second half of the year.
Meanwhile, the labor market remains rock-solid. At 3.5%, the unemployment rate is tied for the lowest it has been since the 1950s. Monthly job growth averaged 375,000 in 2022, a very strong clip.
Still, some economic indicators suggest that commerce could slow in 2023 and that the risk of recession still looms.
Most notably, the latest figures showed business investment slowing, and new data released Friday showed that consumer spending fell for a second straight month in December.
“The consumer is weakening and real personal spending declined more than expected,” noted Edward Moya, a senior market analyst for the Americas OANDA.
Perhaps most threatening is the delayed impact of the Federal Reserve’s efforts to curb inflation by slowing economy-wide spending by hiking interest rates. Its monetary tightening has translated into much higher mortgage rates, which in turn have devastated the housing market. Housing investment fell at a 27% annual rate in the fourth quarter, the GDP report showed.
Families hurt by high inflation
While the broader economy has held up remarkably despite the Fed’s aggressive rate hikes, inflation is hurting U.S. consumers because their real wages have fallen and their paychecks are not stretching as far.
Despite recent declines, inflation is still high. The consumer price index, the most commonly referenced gauge of inflation, is running at 6.5% in the 12 months ending in December — more than three times what is considered healthy by the Fed.
Biden and congressional Democrats have touted declining inflation (the CPI peaked at a crippling 9.1% last summer) but the high prices are still making the lives of consumers more painful.
Biden and other members of the administration have vaunted rising wages as proof of a thriving economy. And it’s true, wages are up — nominal wage growth for nonfarm employees was up 5.1% in the 12 months ending in November, according to the Economic Policy Institute.
But inflation-adjusted wages have been falling — meaning that workers have less purchasing power than a year ago. Median weekly real earnings have actually fallen by 3.4% since the start of 2021, according to data from the Bureau of Labor Statistics.
That situation has caused consumers to believe the economy is in decline, given that their personal financial situation is worse than before.
In fact, a Morning Consult
survey
released last week found that 46% of adults think the economy has already fallen into a recession, while 35% of respondents say it has not.
After this month’s CPI reading, Sen. Rick Scott (R-FL) unloaded on Biden, who has been putting an optimistic spin on recent reports that show inflation, while still very high, is falling from its zenith.
“This CPI is a shameful reminder that Americans have endured rising inflation for two full years under Joe Biden. Two full years of hardworking and poor families, like mine growing up, having to make tough choices when it comes to gas, groceries, and paying the bills,” he said.
The deficit is rising — and a debt limit battle is in store
The federal deficit fell in fiscal year 2022 as emergency pandemic spending measures wound down, providing Biden with a talking point that he frequently boasted about. But deficits are now rising again.
The deficit for the first quarter of fiscal year 2023 rose to $418 billion, $41 billion larger than in the same period the year before.
The federal government faces a long-term mismatch between spending and revenues. The annual deficit is projected by the Congressional Budget Office to steadily increase over the rest of the decade. That will push up the debt, which represents accrued deficits. The federal debt held by the public is already roughly the same as annual total economic output.
Further increases in interest rates could put a major strain on government finances, forcing steep cuts to important programs.
Biden has not offered a plan to stabilize the debt. Republicans, now in control of the House of Representatives, are eager to force his hand on spending cuts or at least to make him pay a political price for the red ink.
They have some leverage over him in the form of the federal debt ceiling, which must be raised legislatively in order to ensure the Treasury is able to pay its bills. Treasury Secretary Janet Yellen has said the limit will have to be raised by around June to avoid some sort of default, which economists say would be economically disastrous.
House Speaker Kevin McCarthy has called for a negotiation with Biden to cut “wasteful spending.” Biden maintains he won’t negotiate and that Congress must simply raise the ceiling.
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Republicans have called out Biden’s rhetoric against the GOP’s plan to use the debt limit deadline to push for less spending. Rep. Jason Smith (R-MO), the chairman of the Ways and Means Committee, told the Washington Examiner during a recent interview that Biden should be working with Republicans.
“Instead of President Biden attacking his political opponents, he should be spending his time working with House Republicans to address the debt ceiling in a way that imposes some fiscal sanity. Otherwise the president is simply scheduling America’s next debt crisis,” Smith said, claiming that “some of the best fiscal reforms” in recent history have come tied to debt limit.
