Economic headwinds pose a challenge for President Biden as he prepares a possible re-election bid that will likely have jobs and the economy at its core.
The White House has sought to highlight the US economy’s resilience in the face of high inflation, rising interest rates and mounting layoffs in the tech, real estate and media sectors by making the case for Biden’s economic responsibility.
Inflation had been expected to be a serious headwind for Democrats in last November’s midterm elections, but instead the party exceeded expectations by winning a Senate seat while keeping House losses to a minimum.
New threats are now looming, even as the White House hopes for a soft economic landing from the Federal Reserve’s efforts to lower inflation and avoid a recession.
Here are some of the economic challenges Biden is facing.
Layoffs at Big Tech
Mounting layoffs at big tech companies — many of which have drastically expanded their operations during the pandemic — have prompted a number of troubling headlines and concerns from some investors.
Big tech companies have laid off more than 200,000 workers in the past four months, most of them for high-paying employees. Amazon, Microsoft and Google in particular announced tens of thousands of layoffs this week.
The White House said this week Biden is monitoring the layoffs and is aware of the impact it is having on workers and their families.
They also argued that layoffs were at a low level overall, dismissing the notion that Microsoft and Google’s decisions posed a major problem for the economy or workers in other industries.
“The US economy continues to grow … and unemployment is at a 50-year low. As a result, leading analysts have publicly stated that they do not believe the recent layoffs in the tech industry are indicative of trends in the broader economy,” press secretary Karine Jean-Pierre said on Friday.
Only about 190,000 Americans filed new initial claims for unemployment insurance in the week ended January 14, according to data from the Labor Department. Layoffs overall remain well below the average level of 2019, when weekly new jobless claims regularly topped 200,000 or more.
Robert Frick, a business economist at Navy Federal Credit Union, said high demand for workers in other sectors has helped those laid off by big tech companies and other hard-hit sectors find jobs quickly.
“The job market is still so tight that many tech workers and workers with other skills are snapped up long before they have to collect an unemployment check,” Frick said in an analysis on Thursday.
Battle for the debt ceiling
The White House says it will not negotiate with Republicans in Congress who are demanding spending cuts in exchange for raising the country’s debt ceiling.
The White House has pointed to numerous clean debt ceiling hikes in recent years, even when Donald Trump was president and Republicans controlled Congress, as precedent for why House Republicans shouldn’t be asking for conditions.
Negotiations may be inevitable given the GOP’s control of the House of Representatives and the fact that Democrats need Republican votes in the Senate to clear procedural obstacles.
The stakes are high and experts warn that a default would inflict deep pain on the economy.
The Treasury Department has already enacted “extraordinary measures” that will allow the US to avoid a default for the next few months, but some sort of agreement will likely be needed in June.
Inflation and the Fed
The Fed’s rapid rate hikes helped bring inflation down from an annual rate of 9.1 percent in June to 6.5 percent in December, according to Labor Department data released last week.
The steady decline in inflation and the slowdown in the US economy have prompted the Fed to slow rate hikes. The Fed is expected to hike its base rate spread by 0.25 percentage point on February 1, which would be the smallest rate hike since March 2022.
Some pundits and investors think the Fed has already done enough to bring annual inflation down to its 2 percent target and should be careful not to burden the economy with even higher interest rates.
“I think there is all the leeway in the world for the Fed to really slow down the pace of rate hikes. Honestly, I’d go to zero,” said Josh Bivens, research director at the Economic Policy Institute, a left-leaning think tank.
But Fed leaders have made it clear that they have not yet completed raising rates and would rather risk pushing the economy into recession than lose control of inflation.
“You just can’t announce victory too soon, can you? If you pull out…while inflation is still high, next time it will be even higher, which means you’ll have to do more damage to get it under control,” said Tom Barkin, president of the Federal Reserve Bank of Richmond , in a Tuesday interview on Fox Business Network.
Consumer spending is slowing
Many Americans are finally reaching breaking point after two years of high inflation.
Retail sales fell in both November and December, even amid the traditionally busy holiday shopping season, according to data released by the Census Bureau on Wednesday. Factory production has slumped as businesses struggle to clear growing inventories, and the nearly year-long slump in home sales is also weakening momentum in the economy.
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While lower consumer demand is essential to bringing down inflation, a steady decline in spending could further slow the economy towards a recession. About two-thirds of US economic activity is driven by consumer spending, but many American households have now used up their pandemic savings and are relying on credit cards to keep up.
“We are seeing some of the supply and demand imbalances of the last two years that have fueled high inflation starting to unwind. Drops in retail sales after years of outsized gains in both prices and goods bode well for a return to normal,” wrote Claudia Sahm, a former Fed research director, in an analysis on Friday.
“And it’s a sign of how we’re walking a fine line between lower inflation, preserving jobs and avoiding a recession,” she wrote
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