President Joe Biden is expected to praise the economy’s resilience and booming labour market in his State of the Union address on Tuesday, while ignoring — or glossing over — some of its trouble spots.
“Put simply, I would argue that the Biden economic plan is working,” Biden said Friday, following the announcement of January’s record-breaking 517,000 job gains.
While inflation has moderated slightly and the labour market has remained remarkably stable, price increases remain historically high, the housing market is in a tailspin, and most economists predict a recession this year.
“The economy is strong, but inflation is too high, and recession risks are high,” says Gus Faucher, chief economist at PNC Financial Services Group.
Before Biden’s address to Congress, here’s a look at the economy’s strengths and weaknesses.
Unemployment has reached a 54-year low.
Despite the Federal Reserve’s aggressive interest rate hikes aimed at discouraging business hiring and investment in order to contain inflation, job growth has slowed but remained astonishingly strong.
Average monthly job growth slowed to 291,000 in the final three months of 2022, down from 423,000 in the previous quarter, but this is still a strong performance. Employers in the United States added 4.8 million jobs in 2018, trailing only the 7.3 million added in 2021.
In January, unemployment fell to a 54-year low of 3.4%.
“That means we’ve created more jobs in two years than any (four-year) presidential term in history,” Biden said on Friday.
According to Faucher, Biden deserves credit for spearheading the $1.9 trillion American Rescue Plan, which boosted the economy while the United States was still recovering from the COVID-19 pandemic in March 2021.
However, the massive job gains can also be attributed to the nation’s 22 million job losses during COVID’s early days in the spring of 2020. Restaurants, bars, shops, and hotels laid off so many employees that there was plenty of room for a comeback as Americans resumed dining out, travelling, and other activities.
The rate of inflation is slowing.
Annual inflation fell to 6.5% in December, down from 7.1% the previous month and a 40-year high of 9.1% in June of last year.
Economists cite improving supply-chain bottlenecks and product shortages, as well as falling commodity prices such as oil, corn, and wheat in the face of global recession fears.
Faucher praises Biden for drawing 180 million barrels of oil from the Strategic Petroleum Reserve during a period when gasoline prices peaked at a record $5 per gallon in June.
He claims that “we did see energy prices begin to fall after the president decided” to tap the reserve.
Consumer spending has remained stable.
After a scorching 2021, consumer spending slowed last year. Despite soaring inflation and the Fed’s largest rate hike in four decades, it grew a solid 2.8%.
Faucher attributes some of her success to Biden’s American Rescue Plan, which distributed $1,400 checks to the majority of Americans in March 2021. The Trump administration’s COVID stimulus checks, combined with savings amassed during COVID lockdowns, increased Americans’ pandemic-related cash reserves to $2.6 trillion.
Their finances, on the other hand, were already in good shape. In the third quarter, household debt was at a historically low 9.7% of disposable personal income.
Business investment has been consistent.
Despite rising interest rates, business spending on computers, factory machines, trucks, and other goods increased 3.6% last year as companies responded to strong consumer demand.
Inflation remains high.
Although inflation has slowed to 6.5%, it remains the highest level since 1982, excluding the current bout of price increases that began in spring 2021.
While goods price increases have slowed, Fed Chair Jerome Powell has stated that lowering inflation in the long run will mean slowing wage growth in service industries such as health and education, which could be a more difficult challenge.
If Biden is praised for providing a financial cushion to consumers, he is also blamed for contributing to inflation in the first place with the $1.9 trillion American Rescue Plan, according to Faucher. He claims that the extra cash triggered a consumer spending spree, which, along with supply issues and high commodity prices, contributed to inflation.
The housing market is in a severe slump.
In December, the number of new homes started by builders fell for the fourth consecutive month, and existing home sales fell for the 11th consecutive month to their lowest level since 2010.
Economists attribute the slump to Fed rate hikes, which increased mortgage rates from 3% in early 2022 to 7% before a recent pullback to 6.1%. The Fed’s rate hike campaign was prompted by high inflation, which was fueled in part by Biden’s stimulus package.
Meanwhile, home prices are likely to have peaked, and economists predict drops of up to 15% this year.
Less housing construction means fewer jobs for workers and less economic investment. Furthermore, lower home prices reduce household wealth, reducing consumer spending.
Manufacturing is shrinking.
High interest rates have also harmed manufacturing because businesses cannot afford to buy goods when borrowing costs are high.
Manufacturing activity fell for the third month in a row in January.
Part of the industry’s problems are unrelated to Biden’s policies. Consumers who bought TVs, appliances, and furniture while stuck at home during the pandemic have shifted their purchases to services such as travelling and going to the theatre as the pandemic has eased.
Most economists believe a recession will occur in 2023.
Although consumer spending and business investment expanded strongly in 2022, they began to deteriorate late last year as inflation and Fed rate hikes took their toll. According to Wolters Kluwer Blue Chip Economic Indicators, the majority of economists expect a mild recession this year.
Following a 2.8% increase in GDP in 2022 (based on averaging the four quarters), Faucher expects GDP to be flat this year as the country loses about 2 million jobs.