SUNSET BOULEVARD — President Joe Biden formally launched his reelection campaign this week echoing Ronald Reagan’s 1984 “Morning in America ” message, declaring that he’s “never been more optimistic about America’s future.” Unfortunately for Biden, it is very much not Morning in America, at least from an economic perspective. It is more like late afternoon with the sunset, in the form of at least a shallow recession, very much poised to descend upon the land. This was pretty clearly evident from the initial read on gross domestic product growth for the first quarter of the year, which came in today at just 1.1 percent, about half of what Wall Street expected and a decline from 2.6 percent in the fourth quarter of last year. Sure, there were some bright spots in the report. Consumer spending continued to remain remarkably strong. And some of the big miss over Wall Street expectations came from quirky stuff like inventory changes. But outside of consumers, who most economists expect will at some point fairly soon run out of extra cash to keep spending, the report showed that a long and sharp campaign of inflation-fighting Federal Reserve interest rate hikes is finally biting the economy in a significant way. The housing market is declining. Businesses are investing less in hiring and major investment. These are usually the hallmarks of an impending recession which, as we’ve noted before , nearly always follows a series of rate hikes this severe. And perhaps most troublingly, inflation rose at 4.2 percent pace in the first quarter according to figures out Thursday, faster than at the end of last year and at least double the Fed’s preferred pace of around 2 percent. That means that another interest rate hike is highly likely — if not certain — when the Fed meets next week. That could very well be the last of the hikes. And 2024 could actually see rate cuts. But most Wall Street forecasters — and even some left-leaning economists like former Treasury Secretary Larry Summers — say the cumulative effects of the hikes are likely to cause a recession that features at least two quarters of negative growth and a significant increase in the currently rock-bottom 3.5 percent unemployment rate. “I think we’re going to have difficulty getting near a 2 percent inflation target until and unless the economy slows down substantially,” Summers said at an investment conference this week. Many economists were even more blunt in their assessments following Thursday’s anemic GDP report. A client note from Pantheon Macroeconomics' chief economist Ian Shepherdson on Thursday led with this: “In one line: Recession incoming.” And Shepherdson made the critical point that while spending still looks good at the moment, we may be seeing the last of such numbers for a bit. The strong consumer performance in the quarter “was flattered by much warmer-than-usual weather in January and February, and the 8.7 percent one-time cost of living adjustment to Social Security payments.” That’s now all fading. “We expect much weaker consumption in the second quarter,” Shepherdson wrote. “It could easily fall outright as people respond to the deteriorating labor market — rising layoffs and slower hiring will make people nervous — by choosing to save more.” None of this means Biden is cooked. While forecasters and top executives expect a recession later this year, few think it will be prolonged or severe. And if Biden’s promises about the impacts of his big-ticket legislative items from the last two years prove true, things could be looking significantly better as Election Day 2024 approaches, with rates falling instead of rising. It certainly won’t be the tax cut-fueled, gangbusters “Morning in America” economy that helped drive Reagan to a massive landslide in 1984. But it’s also not likely to be “Midnight in America.” Perhaps it will be the cool glow of the predawn hours. Welcome to POLITICO Nightly. Reach out with news, tips and ideas at nightly@politico.com . Or contact tonight’s author at bwhite@politico.com or on Twitter at @EconomyBen .
| 
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.