Biden’s worst-case economic scenario is unfolding at the worst possible time
File - US President Joe Biden speaks on the anniversary of the Inflation Reduction Act in the East Room of the White House in Washington, DC, on August 16, 2023. (Photo by JIM WATSON/AFP via Getty Images)
Last Thursday, the Bureau of Economic Analysis released its advance estimate for 2024’s first-quarter real GDP growth. At 1.6 percent, it is the worst quarterly performance since the economy contracted by 0.6 percent almost two years ago in the second quarter of 2022. This was a growth level one-third below economists’ expectations of 2.4 percent. It is also a precipitous drop from 2023’s fourth quarter rate of 3.4 percent and 2023’third quarter rate of 4.9 percent.
This slower growth comes on the heels of higher inflation. The March report on overall prices showed the Consumer Price Index for all Urban Consumers rose 3.5 percent over the last year — 3.8 percent when core inflation (minus food and energy) was considered. That figure was higher than any since September 2023 and marked the third consecutive monthly increase.
Then on Friday, came more bad inflation news, this time on personal consumer expenditures excluding food and energy. This is the Federal Reserve’s preferred inflation gauge, and in March it rose 2.8 percent compared to a year ago — the same as in February and above expectations.
This jujitsu juxtaposition of higher inflation and lower growth must not be underestimated. Gone is the charade of someone who has effectively never worked in the private sector telling working Americans how good the economy is. Joe Biden, who loves to harken back to blue-collar Scranton roots, should have known better. Americans now do.
There is but one real measure of the economy for them: Am I putting more on my family’s table? Inflation’s insidious impact is its cumulative effect. Just because inflation’s rate of increase slows (which it isn’t) does not mean its past effect is wiped away (which it’s not). Now the economic growth that the administration hoped would at least outstrip inflation’s increase — and reverse some of that cumulative effect — is not.
The expectation has been for some time that there would be a soft landing from inflation’s lofty heights. The Federal Reserve would begin cutting its interest rates and the slowing economy would pass the baton to lower interest rates that would keep the economy from falling too far. It was the proverbial economic unicorn. And it was going to be seamless.
However, Biden’s high inflation — spurred on by his profligate spending over three-plus years, has given the Fed no opening to begin lowering rates. Expectation has given way to hesitation. Now, rate reductions are not expected for months (if at all this year).
Biden does not have months to spare. He has six — total — before November. While six may be a lifetime in politics, it is just two quarters in economics. It is the difference between chronological and geological time. Economists can wait; politicians cannot.
Biden’s trajectories leading into these six months are not good. Excessive inflation continues. Could it stay high longer — or even go higher still? The economy is slowing. Quickly. Could it go lower still — perhaps even negative?
The stock market was stoked for months by its rate-cut expectations. When these have not come, it refocused on an unexpectedly strong economy — just recently its evidence appeared to be strong corporate earnings reports. Last Thursday’s GDP report argues the economy is no longer strong. Where do the markets look now for reassurance against money being withdrawn from them?
Biden is already down in the polls. According to Real Clear Politics’ average of national polling, his overall job approval rating is just 40.1 percent. His approval rating on the economy is lower still: just 39.4 percent.
Both ratings were compiled while the administration and much of the establishment media said Biden’s economy was good. Now that the data say otherwise, where do those Biden ratings go? Already voters see the recent upswing in prices; soon, they are likely to feel the economy slowing.
Facing these, Biden has few solid options. He has no prospect of getting more spending through Congress — the crutch he has used throughout his presidency, and which helped spike the still persistent inflation. He can, and undoubtedly will, try to curry favor with more targeted giveaways — sector-specific rules and regulations and student loan forgiveness.
But these do not have impacts as broad as the economy itself. There is a reason the economy is the most important political variable: it affects everyone.
Perhaps it is too early to call two reports stagflation. Two data points are a snapshot, not a trend. But their contents — high inflation and low growth — are precisely what stagflation is if they continue.
Biden has six months to see if they will be.
J.T. Young was a professional staffer in the House and Senate from 1987-2000, served in the Department of Treasury and Office of Management and Budget from 2001-2004, and was director of government relations for a Fortune 20 company from 2004-2023.