Biden is betting that a strong job market will protect the economy from an international slump

WASHINGTON (`) – The U.S. economy faces multiple threats: war in Ukraine, high food bills, soaring gas prices, fragmented supply chains, the ongoing pandemic and rising interest rates slowing growth.

The Biden White House is banking on the US economy being strong enough to withstand these threats, but fears of an impending economic downturn are growing among voters and some Wall Street analysts.

The next few months will test whether President Joe Biden has built a durable job-filled recovery with last year’s $1.9 trillion stimulus package, or a government-aid-overfed economy that could spiral into a downturn. For Democrats, what’s at stake before the midterm elections is whether voters will see firsthand in their lives that inflation can be tamed and the economy can manage to run hot without overheating.

Brian Deese, director of the White House National Economic Council, told reporters this week that the 3.6 percent unemployment rate and last year’s robust growth put the US in a safe place compared to the rest of the world.

“The key question is whether the strength of the US economy now is an asset or a liability,” Deese said. “What we have done over the past 15 months has resulted in a uniquely strong economic recovery in the United States that positions us in a unique position to meet the challenges ahead.”

CONTINUE READING: Federal Reserve signals more aggressive steps to fight inflation

But others see an economy that may struggle to sustain growth while bringing down inflation, which is now at a 40-year high of 7.9 percent. The Federal Reserve has announced a series of interest rate hikes and other inflation-dampening measures this year, but Russia’s invasion of Ukraine has destabilized global energy and food markets in ways that could push prices higher.

Deutsche Bank on Tuesday became the first major financial institution to forecast a US recession. And Harvard University economist Larry Summers — a Democrat and former Treasury Secretary — noted that the US economy slipped into recession within two years whenever inflation exceeded 4 percent and unemployment was below 5 percent, as they are now.

Joe LaVorgna, who worked in the Trump White House and is now chief economist for the Americas at Natixis, said he expects economic growth to be just under 1 percent this year, a potentially dangerous level.

While household balance sheets are strong and unemployment is low, wages are not keeping pace with inflation, which could dampen consumer spending. And supply chain disruptions and higher energy costs will be additional burdens.

“The reason you have a recession when the economy is growing 1 percent is like a weakened immune system,” LaVorgna said. “Any negative event, even a small one, will throw you off track and the stalling speed will become a recession.”

However, given the strength of the labor market and household savings, LaVorgna also expects any downturn to be mild.

So far, consumer spending has been healthy even as the public views the economy as anemic.

According to a poll last month by the Associated Press-NORC Center for Public Affairs Research, nearly 7 in 10 Americans believe the economy is in bad shape. Still, Bank of America noted that total spending on debit and credit cards rose 11 percent year over year in March, and its analysts concluded that households are “strong enough to weather the storm, assuming ‘It doesn’t last too long’.

There are also signs that consumers are adjusting, as higher oil prices have caused the average cost of gasoline to hit $4.15 a gallon, according to the AAA. Gas costs have fallen over the past week, but they’re still 45 percent higher than a year ago.

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One consequence of the higher prices is that Americans have started to use less oil and gas. The US consumed an average of 21.9 million barrels per day in the first full week of February; The number fell 9 percent to 19.9 million barrels in the first week of April, according to the Energy Information Administration. This drop is larger than the normal seasonal drop in 2019, the last full year before the pandemic. Gasoline consumption has fallen by more than 6 percent over the same period.

A recent research note from Goldman Sachs caught the eye of Biden administration officials for suggesting that job growth and wage increases would protect the economy from higher commodity prices. Because of the strong labor market, the economy is better protected from commodity shocks than it was in the 1974, 1980 and 1990 recessions and the 2008 financial crisis.

The White House has watched with some frustration as the public talk about the economy has been reduced to inflation, believing that the strength of the job market and the idea that coronavirus aid provided earlier means families are able to survive to cope with higher prices, largely ignored.

The administration believes that Fed rate hikes and a contraction in deficit spending this year will help bring down inflation. But the key message the White House wants to convey in response to public fears about the economy is that Biden understands their concerns.

The challenge, however, is that many Americans are so focused on inflation that they believe the job market — and the broader economy — is weaker than it actually is. That means the White House needs to make a nuanced argument, acknowledging economic weakness but reiterating the low unemployment rate so that it sticks in the public eye.

The doubts about the economy are – despite the solid employment figures – “a signal that we must continue to work clearly and unequivocally,” said Deese.