Biden and Democrats Will Likely Benefit from a Rare Economic "Sweet Spot" This Year
The economy is growing robustly...but even if it slows, it's good news
The January Jobs Report showed again the amazing strength and resilience of the U.S. economy. 353,000 new jobs were added, and the previous two months’ totals were revised upwards by 126,000. The country ended 2023 on an economic high note and is starting 2024 on a similar track. This is all great news. Most economists and pundits were predicting a recession by now, or at least a significant slowdown by now, and it hasn’t come to pass; in fact, the exact opposite is happening.
Republicans and MAGA are even having a hard time coming up with excuses or reasons why the economy is actually bad, despite this jobs report. They tend to cite inflation, which was very high in 2022 and has slowly tapered down. More specifically, they like to cite specific aspects of inflation, such as the price of certain meat products or cereal. They previously used eggs as the prime example of life being unaffordable, but since their peak price they’ve come right back down to where they were before their steep rise.
This is a sign of desperation, however. If you have to parse out a tiny fraction of the economy to persuade others that the whole is bad, you simply don’t have the data on your side. That said, there is a reason why the inflation argument is utilized over and over again: it resonates with much of the population. Prices of almost everything did rise significantly over the last couple years and has created some pockets of unaffordability (housing, for example). And while the rate of inflation is coming down, that does not mean we are experiencing a decrease in prices, or deflation. Prices are still rising, just at a much slower pace than two years ago.
Wages on average have increased at a faster pace than inflation, which is good, but even so, it is at the very least annoying that higher wages haven’t translated to a much higher level of purchasing power, and at worst devastating for those whose wages haven’t kept up with inflation. The fact is, inflation was an issue that everyone felt, and is still feeling to some degree, which is probably why polls that attempt to measure the public’s perception of the economy result in worse numbers than what the data is suggesting they should be perceiving.
But it’s this very phenomenon that will give Biden a major advantage leading up to the 2024 presidential election than he would otherwise get. Whatever the economy does from here on out, barring an apocalyptic catastrophe, it’s a win-win scenario.
Recent economic conditions have created a “Sweet Spot” for Biden
The interesting thing about inflation is that it throws off the more common conventions of macroeconomic conditions. In a low inflationary environment during modern times, otherwise called “normal" conditions, it’s good news if the economy is going strong and bad news when the economy is slowing or contracting. But the recent high-inflation period has turned this on its head (See my article “When Good Economic Data is Bad News”).
When inflation gets significantly high, this can be an indicator of the economy being too strong or too “hot”. Therefore, the accepted remedy is to somehow slow the economy down, which the Federal Reserve (The Fed) attempts to do by raising rates (it’s more complicated than this, but for the sake of simplicity, we’ll go with this narrative). The idea is that higher interest rates will cause the cost of doing business to go up, which will slow economic activity, which will eventually slow the overall economy and keep prices from continuing to rise at the intolerable pace it had been.
In response to the high-inflation period in 2022, the Fed did raise rates. They raised rates at one of the fastest paces in history. This contributed to the trauma of the high inflation, as already-high prices were subject to even higher costs due to higher interest rates. This was primarily manifested through borrowing costs for consumers, especially in housing or auto loans. It was supposed to work this way, of course, as it was expected that this type of business activity would slow down, and prices would be reduced as a result.
One of the major indicators of a slowing economy is the Bureau of Labor Statistics’ (BLS) monthly jobs report that comes out on the first Friday of every month. As indicated in this report, employment numbers are supposed to go down when rates are higher, due to the slowdown in business activity just described. Conversely, employment numbers should go up when rates are lower, as this will cause business activity to be higher.
The interesting thing about the Fed’s recent attempt to quell inflation is that they are winning the battle, inflation is going down, but the jobs numbers are not following suit. They have been unexpectedly staying relatively high. The rate of jobs growth has slowed some, but the numbers are still pretty robust. About 3 million jobs were created in 2023, higher than every single year of the Trump administration. This is lower than Biden’s yearly average of 5.5 million previous to 2023, but those numbers were historically very high. The bottom line is that there has not been anything close to the slowdown of job creation that most people expected there would be.
In addition, even though inflation is definitely lower and more tolerable than it was, it’s still staying stubbornly above the target rate that the Fed wants to see, which is 2%. It’s settled into the mid-3%’s, which is low enough to be pleasantly noticeable, but not low enough to be practically unnoticeable, which is the main goal.
This sets up the “sweet spot” I’ve been mentioning. If the economy stays in this range with robust employment growth and tolerable inflation, then that’s good news for Biden heading into the 2024 presidential election. Strong economic growth without intolerable inflation is generally great for consumers, and good for the politics of the party in power.
On the other hand, the recent levels of growth have created some room for a slow down to occur without being too painful. And a slowdown in the economy should result in significantly slowing down inflation even more, placing it closer to the “unnoticeable” range of 2%. And prices of some of the most-used goods may actually fall as a result.
How the “Sweet Spot” will play out this year.
Recent measures of the population’s perception of the economy have been turning more favorably in recent months because of these trends. Consumer Confidence, a popular gauge of how consumers feel about the economy, had a huge jump in January to a two-year high. Basically, it went back to the levels it was right before inflation got very uncomfortable in mid-2022.
This likely means that people are feeling the effects of the stronger economy and slowing inflation. Wages have been beating inflation over the last year; therefore, it stands to reason that at some point, consumers will feel this and become more and more satisfied. Indeed, it has been demonstrated that people are personally feeling good about their own financial situation, even as polling shows people think the economy overall is struggling. If economic data continues as it has, then these polls should show continued improvement in the economic sentiments of the population.
There usually is a lag with these issues. It can take months for an economic shift to be felt, even if the shifts are immediate. And even longer for the feelings to percolate enough throughout the population to show up in most polls. And this is exactly why the “sweet spot” exists.
If the economy starts turning the other way, which many economists and pundits predicted would happen already due to the Fed raising rates, then the sentiments about the economy wouldn’t be felt throughout the population for several months after the economic data came out and may not even show up in polls for months after that. In addition, if there truly was a significant slowdown in job growth or other economic data points, then it would likely manifest quickly in the prices of some popular goods.
Gasoline is a product that fluctuates on a daily basis, depending on many worldwide factors that are constantly churning and shifting. One of these factors is crude oil prices, which moves up and down partly as supply and demand move up and down. The U.S. consumes a disproportionate amount of the world’s crude oil, as it has the biggest economy in the world, despite its relatively small share of the world’s population. Falling demand here would give reason for worldwide traders and investors to sell any oil holdings they have, or largely avoid buying it, thereby causing its price to reduce.
If an economic slowdown is really happening in the U.S., and starts showing up in the headline data, then it is likely that crude oil prices will go down right away, which means that gasoline prices will likely follow suit soon after. If crude oil prices go down, within days gas prices will go lower as well. And if there’s a sustained period of indicators reflecting an economic slowdown, gas prices will likely have a sustained period of dropping prices.
This may be bad news for the economy, as less people will be gaining jobs and wage growth would stall. But the immediate effects of lower gas prices would be experienced and felt during the months leading up to the 2024 election in November. And after the recent period of stubborn inflation, most people would feel relief in the short term, such as the first 4-6 months. If gas is cheaper, everything they have to leave their homes for becomes less expensive, and this would leave them with more cash in their pockets. Same thing would apply to businesses, which would experience lower prices and more available cash; thus, the products these businesses sell will either have lower prices, or they would at least plateau and cease going higher for some time.
The next domino to fall would be interest rates. If there really was a slowdown starting, the Fed would feel compelled to lower interest rates, much in the same way as they raised them to quell rising prices. Eventually, lower rates would potentially have the effect of spurring the economy and created higher inflation again, but this would be many months, if not years, into the future. The immediate effects in the first several months would be lower costs of borrowing for consumers. So, the mortgages or the auto loans that are taken on during this time would be more affordable than they had been, which many consumers would love.
If the presidential election were held next year, in 2025, then this potential economic slowdown would be more worrisome. In fact, there was always a fear among Democrats that a recession would hit in 2023, and, therefore, the only hope was for it to turn around fast enough before this year’s election to make a difference and not adversely affect the outcome. Instead, any potential slowdown has been put off until the several months before the election, setting the stage for the “sweet spot” I’ve been describing.
Of course, the economy could have such an abrupt catastrophic slowdown that everyone panics and feels the pain immediately. If this happens, then never mind, everything would be up in the air. But if a slowdown does occur as they usually do, over several months, often not obvious to the electorate until well after it happens, then the likelihood of strong positive sentiment and high satisfaction among the population leading up to the 2024 presidential election is very high. By the same token, similar results are likely if the economy stays strong with jobs and wages continuing to grow.
Regardless of how the economy behaves over the next several months, Biden and Democrats are likely to benefit from the results.