Biden tries to navigate fits and starts of economic recovery

An onslaught of surprising economic data is raising difficult questions for President Biden as he attempts to steer the recovery without derailing it.

Republicans have pounced on unexpectedly high inflation readings and a disappointing jobs report for April, arguing they are the products of an overzealous government response that could kneecap the economy.

Democrats counter that price hikes will be temporary, and that government programs and spending are needed to ensure a quick rebound and avoid the kind of multiyear sluggish recovery that followed the Great Recession.

But economists say both sides, to a certain degree, are flying blind given the potential quirks of an economy reawakening from a pandemic-induced slumber.

It could take months before either side is vindicated.

“It’s harder to tell in data what’s an anomaly and a blip and what’s a new trend,” said Scott Ruesterholz, a portfolio manager at Insight Investment, pointing to unusual and unexpected starts and stops in the data over the past few months.

“This is an unprecedented recession, so we’re having an unprecedented recovery.”

The pace of job gains has become one of the most dissected pieces of economic data, particularly after employers added just 266,000 workers to payrolls last month. Economists were largely expecting that figure to be closer to 1 million.

Republicans have vociferously argued that various emergency unemployment programs at the federal level are encouraging workers to stay on the sidelines.

“As my Republican colleagues and I have warned for months, incentives matter,” Sen. Chuck Grassley (R-Iowa) said Wednesday.

The additional $300 in weekly unemployment benefits, he argued, put some people in the position of earning more by not working.

“I don’t blame workers for taking that deal. I blame the government policy that puts them in this predicament,” Grassley said.

GOP governors in more than a dozen states have moved to eliminate the benefits coming from Washington, though the vast majority won’t officially sever ties until late June, about six weeks before they’re slated to expire.

Democrats argue the labor shortage stems more from low wages and a lack of access to child care for parents who want to return to the workforce.

Senate Budget Committee Chairman Bernie Sander (I-Vt.) has called on the Labor Department to make sure the benefits get to unemployed workers in the GOP-led states, but it’s unclear whether the agency has enough time, or even the legal authority, to do so.

“As Secretary, you are obligated to ensure this aid gets to workers,” he wrote in a letter to Labor Secretary Marty Walsh, arguing that allowing the benefits to lapse will leave families in need high and dry.

“They will be forced into poverty — either with poor jobs with unfair wages or no income at all — if you fail to provide these benefits.”

But focusing on the monthly jobs numbers may be a poor starting point, some economists say.

Ruesterholz, of Insight Investment, noted that seasonal adjustments may have widely distorted the April jobs report, given that many seasonal factors may not apply during this phase of the recovery. When such adjustments are stripped out, employers added more than 1 million jobs in April, similar to the previous month.

When it comes to child care, the latest data from the Education Department says 61 percent of 4th graders have access to full-time, in-person school options, but that data is from March, making it hard to draw connections with the April jobs report. Other analyses suggest that unemployment has fallen faster in states that have moved to reopen schools, bolstering the Democratic argument.

The lag between policy implementation and seeing the results can often take months. Economists point out that even if GOP governors are successful in their efforts to get people back into the labor force, there’s likely to be a two-month gap before the numbers will come in showing whether it worked.

State-level unemployment data for July won’t be available until September, and the emergency programs will have already expired by then.

It could take even longer to know whether they led to increases in poverty.

“To an extent, I think they are flying blind in a way they normally aren’t,” Ruesterholz said of policymakers trying to interpret economic data.

Biden faces a similarly sticky issue with inflation.

Republicans have warned that Biden’s spending programs, including the $1.9 trillion COVID-19 relief bill that became law in March, have pumped too much money into the economy, risking runaway inflation.

Both Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have said they expect a near-term boost in prices as businesses struggle to keep up with newfound demand. That uptick, they say, will be “transitory” and will cool off once supply chains are back up and running at normal capacity.

But it’s unclear just how long that transition period is expected to last.

The latest Consumer Price Index came in unexpectedly high, rising 0.8 percent in April, four times faster than economists expected.

The data, however, was driven by a few anomalies that could very likely prove fleeting, such as a 10 percent spike in used car prices that could have more to do with rental companies, a major supplier of used cars, holding on to their stocks in anticipation of a boom in summer travel as vaccinations rise.

“All of these are heavily impacted by the reopening process and accounted for nearly all of the jump,” said Ryan Detrick, chief market strategist at LPL Financial.

“But once the reopening has taken place and these bottlenecks have cleared, we would expect inflation readings to come back down.”

Already, exorbitant lumber prices that have led to shortages in housing construction are starting to subside as sawmills come back online.

Still, with the Federal Reserve sending signals that it will wait to see inflation show up in the data before taking precautionary measures, some critics are warning that any intervention from the central bank will come too late.

Larry Summers, a Democrat and former Treasury secretary who has criticized Biden’s spending agenda over inflation fears, said this week that the Fed was creating “dangerous complacency” in markets.

“When, as I think is quite likely, there is a strong need to adjust policy, those adjustments will come as a surprise,” he told a conference hosted by the Federal Reserve Bank of Atlanta, adding that the sudden jolt would do “real damage to financial stability, and may do real damage to the economy.”

As more economic data flows in over the next few months, Democrats defending Biden’s agenda and Republicans hoping to scale back or torpedo his spending plans are sure to seize on the inevitable ebbs and flows to make their case. By autumn, when the data is more likely to be consistent, both parties will be gearing up for the 2022 midterm elections just a year away.

Brad McMillan, chief investment officer for Commonwealth Financial Network, said that until there is a clear, ongoing trend in the data, over-the-top rhetoric should be set aside.

“Once again, remain calm and carry on,” he said.