Could Biden admin, Fed policies lead to ‘troubled’ US economy?

The United States economy is facing several threats, including the war in Ukraine, high prices, painful grocery bills, spiking gasoline prices, troubled supply chains, laggard recovery from the pandemic, and rising interest rates that some economists look upon as a cause of slowdown and a hindrance of growth.

Biden’s White House is betting the US economy is strong enough to withstand these threats, but there are growing fears of a coming economic slump among voters and some Wall Street analysts.

The next few months will test whether President Joe Biden built a durable recovery full of jobs with last year’s $1.9 trillion relief package, or an economy swollen by government aid that could tip into a downturn.

Brian Deese, director of the White House National Economic Council, told reporters this week that the 3.6% unemployment rate and last year’s robust growth puts the US in a safe place compared to the rest of the world.

“The core question is whether the strength of the US economy is now an asset or a liability,” Deese said. “What we have done over the course of the last 15 months is driven a uniquely strong economic recovery in the United States, which positions us uniquely well to deal with the challenges ahead,” he added

But others see an economy that could struggle to preserve growth while reducing inflation now running at a 40-year high of 7.9%. The Federal Reserve has signaled a series of benchmark interest rate increases and other policies to slow inflation this year, yet Russia’s invasion of Ukraine has destabilized the global energy and food markets in ways that could push prices upward.

Deutsche Bank last week became the first major financial institution to forecast a US recession. And Harvard University economist Larry Summers noted that the US economy has gone into recession within two years each time inflation eclipsed 4% and unemployment was below 5% as they are now.

Joe LaVorgna, who worked in the Trump White House and is now chief economist for the Americas at Natixis, said he expects economic growth this year to be just below 1%, a potentially dangerous level.

While household balance sheets are solid and unemployment low, wages are not keeping up with inflation, which could dampen consumer spending. And supply chain disruptions and higher energy costs will be additional drags.

The reason why you have a recession when the economy is growing 1% is it’s like a weakened immune system. Any negative event, even a small one, is going to throw you off course and stall speed becomes a recession.

Still, because of the strong labor market and household savings, LaVorgna also anticipates that any downturn would be mild. So far, consumer spending has been healthy even if the public views the economy as anemic.

There are also signs that consumers are adjusting as higher oil prices have led average gasoline costs to hit $4.15 a gallon, according to AAA. Gas costs have fallen in the past week, but they’re still up 45% from a year ago.

One consequence of higher prices is that Americans began to use less oil and gas. The US consumed a daily average of 21.9 million barrels during the first full week of February; the figure fell 9% to 19.9 million barrels during the first week of April, according to the Energy Information Administration. That decline is larger than the normal seasonal drop-off in 2019, the last full year before the pandemic. Gasoline usage has dropped more than 6% during the same period.

A recent Goldman Sachs research note stood out to Biden administration officials because it suggested that job growth and pay increases would cushion the economy from higher commodity prices. Because of the strong labor market, the economy is better protected from commodity shocks than in the recessions of 1974, 1980, and 1990, as well as the 2008 financial crisis.

The White House has watched with some frustration as the public conversation about the economy has been reduced to inflation, believing that largely ignores the strength of the labor market and the idea that families are able to manage the higher prices because of the coronavirus relief provided earlier.

The administration believes that Fed rate increases as well as a drop in deficit spending this year will help to lower inflation. But the key message that the White House wants to deliver in response to public fears about the economy is that Biden understands their concerns.

The challenge, however, is that many Americans are so focused on inflation that they believe the job market – and wider economy – is weaker than it actually is. That means the White House has to make a nuanced case in which it recognizes the economic weaknesses but repeats the low unemployment rate again, again and again so that it lodges in the public mind.

The doubts about the economy, despite the solid jobs numbers, are a signal that we need to continue to make that case clearly and unambiguously. Steve Forbes, chairman and CEO of Forbes Media, outlines reason why he believes the US will face a recession in the near future.

Steve Forbes, chairman and CEO of Forbes Media, blasted President Biden and the Federal Reserve for their economic policies, arguing that a recession is on the horizon as a result.

Forbes argued on “Varney & Co.” on Monday that those polices are leading to a “troubled” US economy. When host Stuart Varney asked Forbes if he expects a recession in the US this year or next, he responded, “yes, now whether it is an official recession, where you have two quarters in a row [of negative economic growth], who knows? But the economy is going to decline.”

Forbes made the argument reacting to a Wall Street Journal survey of economists who see a growing risk of recession amid the expected aggressive response from the Federal Reserve to try and curb soaring inflation.

The economist surveyed this month on average put the probability of the economy being in recession sometime in the next year at 28%, up from 18% in January and just 13% compared to the same time last year.

On Monday, Forbes outlined the “two principal reasons” he believes the US will face a declining economy in the near future. “One is the Biden administration is still continuing bad policies on regulation and the like and the Federal Reserve does not know how to fight inflation. They are rapidly raising interest rates, that’s going to hit the mortgage market and other things,” he argued.

The Federal Reserve signaled last week that it could raise interest rates by 50-basis points in coming meetings and start to reduce its massive balance sheet at a pace of $95 billion a month as it seeks to cool the hottest inflation in four decades.