While Wall Street and Main Street worry about a possible recession, White House officials are optimistic about the economy’s ability to weather the storm in 2023.
“We’re cautiously optimistic because we’re starting to see some real concrete measurable signs of progress,” Aviva Aron-Dine, deputy director of the White House National Economic Council, told CNN in a Zoom interview.
The Biden administration economist cited a variety of metrics that show inflation has slowed, real wages have risen, and the job market has defied doomsday predictions.
The White House is hoping for a soft landing, in which the Federal Reserve can control inflation without crashing the economy.
“We remain optimistic about a transition to stable, steady growth with lower inflation – without giving up labour market gains, without a recession,” Aron-Dine said.
So far, so good – at least from the administration’s perspective.
At the moment, metrics indicate that the economy has remained resilient, and consumers are more optimistic as inflation has eased. The Conference Board’s latest consumer confidence index, for example, showed a significant increase from November. After reaching record highs in June, gas prices have dropped to 17-month lows, providing a significant boost to consumers.
And some broader trends appear to be working in the administration’s favour, such as hiring, which has slowed but not collapsed.
According to Aron-Dine, there is “absolutely no indication” that job growth will slow to less than 150,000 new jobs per month on a sustained basis.
Last month, the US economy added a surprisingly high 263,000 jobs. That’s down from 647,000 in the same period last year, but it’s still a very healthy pace.
Despite a series of mass layoffs in the tech and media industries, Aron-Dine added that there is “no sign of a significant increase in unemployment.”
Indeed, initial jobless claims remain extremely low. According to the Labor Department, first-time claims for unemployment benefits rose slightly in the most recent week and remain near two-month lows. However, some economists, including those at the Fed, warn that this trend may be about to change, owing in large part to continued pressure from higher borrowing costs.
After raising interest rates for the seventh time in a row, the Fed forecasted last week that the unemployment rate would rise from a historically low level of 3.7% today to 4.6% by the end of next year. This translates to an increase of approximately 1.6 million unemployed people.
Some business leaders and major banks believe the US economy will enter a slump next year, but this is far from certain. PNC, for example, now predicts a “mild recession” similar to the downturns of 1990-1991 and 2001.
“The risk of a recession is elevated right now – certainly higher than six months or a year ago,” Gus Faucher, chief economist at PNC, told CNN. “We need to be prepared for a recession sometime in the spring or summer of 2023.”
Other economists, including Moody’s Analytics’ chief economist Mark Zandi, are growing more confident that a recession can be avoided.
Although Fed officials say a soft landing is still possible, some of the Fed’s own metrics are flashing red.
A New York Fed model that forecasts recession risks based on bond market movements finds a 38% chance of a recession in the next 12 months. This surpasses the peak in 2019 and is the highest level since just before the Great Recession.
There are signs that cracks are forming in consumer spending, the main engine of the US economy, as a result of high inflation, which has forced some Americans to dip into savings and turn to credit cards. Retail sales fell by the most in nearly a year in November, as consumers cut back on everything from furniture and cars to e-commerce.
When asked about the unexpected retail sales slump, Aron-Dine pointed out that this metric can be highly volatile.
“If you look at the data over a longer period of time, you’re just not seeing any signs that would lead us to believe that is a significant concern,” she said.
The White House is continuing to evaluate ongoing risks in its effort to transition away from high inflation, according to Aron-Dine, calling the war in Ukraine “one of the most significant risks that we monitor.”
“I think we’ve seen all year that there are signs of real strength and opportunities for a successful transition, as well as significant risks. “And so our work, our strategy has been about trying to take advantage of the strengths while mitigating the risk,” she said, later adding, “I think we have reason for optimism, reasons to believe the US economy is well positioned, but there are global challenges, and high on that list is potential downstream consequences of the war in Ukraine for food and energy, as we saw this year and more generally.”
Another challenge for Biden’s economic team in the new year will be reaching consensus in a newly divided Congress.
Biden’s first two years in office were marked by the passage of the administration’s proposed major spending bills aimed at bolstering the country’s recovery from the coronavirus pandemic, rebuilding the nation’s infrastructure, overhauling major social safety net programmes, enhancing domestic supply chains, and making climate investments.
However, some major provisions pushed for by the Biden White House, such as the reinstatement of the enhanced child credit, have failed to gain traction in Congress. According to the Census Bureau, the previous expansion of the child tax credit lifted 2.1 million children out of poverty by 2021.
A last-ditch effort this month to include the credit in the $1.7 trillion government spending bill failed. With Republicans taking control of the House of Representatives next year, passage is even less likely.
“It is a disappointment that Republicans blocked inclusion of Child Tax Credit improvements during the lame duck,” Aron-Dine said, adding, “I won’t get ahead of the agenda setting our strategy for next year, but of course, this will remain a priority for us.”
Along with broader efforts to combat inflation and avoid a recession, implementation of the Inflation Reduction Act will be a priority for Biden economic officials in the coming year.
A slew of IRA provisions are set to go into effect in January, including tax credits for home energy efficiency and a $35 cap on the cost of insulin for Medicare seniors.
And, as CNN previously reported, the White House is looking to highlight ways the Inflation Reduction Act will lower everyday costs as Biden enters the new year, in addition to deploying a messaging strategy aimed at highlighting existing accomplishments.
According to Aron-Dine, the IRA’s passage “is just going to have a huge effect in shaping our work in the year ahead, with one of our biggest priorities really just making sure that we fully realise the potential of that law.”
As the administration prepares to shape Biden’s agenda ahead of the State of the Union address next year, National Economic Council Director Brian Deese told the Wall Street Journal this week that officials are considering a push for policies aimed at getting Americans back to work, such as childcare and eldercare benefits.
It is unclear whether the White House is considering using executive authority or submitting legislation to Congress to move the initiative forward. Aron-Dine declined to provide specifics.