Joe Biden is fighting the Fed.
That’s the takeaway from the most recent report on the economy, showing that the third quarter grew more rapidly than expected in spite of rising interest rates. One reason is obvious: the president and his Democrat allies continue to pump up government spending, boosting growth, even as the Federal Reserve says a slowdown may be necessary to tame inflation “sustainably.”
Investors are not happy. Stocks are nearing correction territory, down roughly 10 percent from the highs of the summer. There are concerns that interest rate cuts, which might propel another earnings surge and another market rally, are not likely any time soon.
Simply put, soaring government spending has put the economy on a sugar high.
In the third quarter, total real GDP grew 2.9 percent year-over-year; federal outlays accelerated, growing 5.5 percent over the year-earlier quarter. It was the largest jump since the height of the pandemic, when Congress and the Trump administration threw everything possible into the economy to stave off a deep recession. It worked; the U.S. experienced a very sharp downdraft when the government decreed that businesses had to shut down, but then it bounced back quickly, thanks to enormous government stimulus spending.
What has gone so very wrong under President Biden is that federal and local government spending is still growing dramatically, even though the crisis has passed. Some of the increase in the most recent quarter stemmed from national defense spending, reflecting the war in Ukraine, which climbed 4.9 percent year-to-year in real terms. But more consequential was a 6.3 percent boost in nondefense spending. State and local government spending expanded 3.9 percent.
None of this is surprising. Joe Biden has a singular approach to every issue: spend more money, even as inflation eats away at real incomes.
His administration never considers the power of free markets, never imagines just getting out of the way and letting animal spirits and the profit motive funnel investment into our most productive industries. Instead, Biden’s White House is obsessed with directing traffic: more money for unpopular EVs and windmills, for instance, and less for necessary oil and gas production and pipelines.
The federal budget deficit has grown like Topsy since Biden took office, including in the just-completed fiscal year when, adjusting for the cancellation of the president’s student loan forgiveness, the deficit swelled to nearly $2 trillion. That was roughly double the year-before total, and over 30 percent higher than the Congressional Budget Office expected in June. Imagine being off by over 30 percent just three months from the end of the fiscal year.
There is no excuse for this amount of spending, and it will not end well. With interest rates up from near-zero levels just two years ago, the interest cost of our debt is the fastest-growing part of the federal budget, projected to triple to $1.4 trillion by 2032. Within 30 years, net interest is projected to overtake Medicare and other large federal programs.
Republicans in the House, alarmed by our swelling debt, will push for spending cuts, taking away the sugar bowl. Most economists are looking for a slowdown next year; recession expectations have proven premature before, but it takes roughly 18 months for monetary policy to take effect. Fed Chair Jerome Powell, arguably late to the anti-inflation party, started hiking rates in March 2022, about 19 months ago.
The Bureau of Economic Analysis reported that the annualized real growth rate in the third quarter was a remarkable 4.9 percent, up from 2.1 percent in the second quarter.
President Biden was jubilant, saying, “It is a testament to the resilience of American consumers and American workers, supported by Bidenomics — my plan to grow the economy by growing the middle class.” He should have said, “growing the government” — some 27 percent of the jobs added were government hires.
What the president also failed to mention was that real disposable income in the third quarter actually fell 1 percent, after a 3.5 percent jump in the second quarter. And the personal saving rate fell to 3.8 percent in the third quarter, down from 5.2 percent in the second quarter.
When disposable income falls, the consumer is less well off. Part of the slide was because top-line inflation ticked up. The personal consumption expenditures (PCE) price index — the preferred inflation gauge of the Federal Reserve — increased 2.9 percent, compared to 2.5 percent in the second quarter. The core rate, excluding food and energy prices, increased 2.4 percent, compared with an increase of 3.7 percent in the prior period. The most recent read on the PCE, for October, showed inflation basically stuck at around 3.5 percent — way higher than the Fed’s 2 percent target.
Someone might ask the president, in the unlikely event that he hosts an unscripted press conference, why, if Bidenomics is such a success, the stock market is tumbling and consumers are again pessimistic. In October, sentiment fell sharply, to the lowest level in five months, as consumers became worried once again about inflation. With oil prices again heading higher and housing affordability the lowest in decades, it is no wonder.
We will soon be embroiled in a fight over government spending. Conservatives in the House are determined to bring down our deficits; an embattled president is equally determined to keep the spigots wide open. Biden continues to press for student loan relief, in his failing quest to win over young voters, and has recently proposed a $105 billion package mainly to fund the war in Ukraine. He faces resistance on both fronts, and rightly so.
Biden and his administration have never conceded that too-high spending sparked the worst inflation in 40 years; we do not look for a sudden awakening.
Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.