What is the status of the American Economy? It depends on who you ask, how the question is interpreted, and how the respondent feels about it. And sometimes how the respondent wants you to believe about it.
An interesting example of this recently occurred on Fox news with respect to the recent report that the unemployment rate has come in under four percent for 26 straight months. Such a report is good news to anyone who wants to see citizens of the country, and the country as a whole, do well, regardless of which party holds the White House.
But when it comes to hardball party politics, Republicans prefer bad economic news if it hurts the Biden White House. The good news regarding employment had Fox News commentator, Maria Bartiromo, trying to poke holes in the report, wondering if the economy was “too good.” Comments from this conservative commentator, however expected, prompted independent journalist, Aaron Rupar, to respond with, “The economy is doing better than expected-it’s time for my favorite Friday tradition, Maria Bartiromo and company to cope with yet another strong Biden jobs report.”
Fox commentators have continually struggled with strong jobs reports, even prompting conservative economist, Larry Kudlow, to recently admit that we currently have a strong economy. As Ms. Bartiromo struggled with this latest, another conservative economist, Stephen Moore, tried to help her out by crediting former President Trump as deserving for the good news under Joe Biden.
That’s quite a stretch — Trump and his Republicans hold Biden responsible for world-wide inflation, but Trump, out of office for three years, is nevertheless responsible for today’s strong job numbers? That’s too much to believe, except for those who want to believe it.
The fact is that Biden inherited an economy not yet recovered from the Pandemic, suffering high unemployment and economic disruptions including interrupted supply chains contributing to world-wide inflation. Trump supporters blame the Pandemic on China and inflation on Biden. But Trump initially had denied the Pandemic, and the U.S. under his leadership, or lack thereof, was among the least effective of nations to deal with it.
Regardless of what voters believe about the Pandemic and inflation, Biden inherited the problems. And since 2020, we have come out of the worst of the Pandemic, inflation has come down in the U.S. faster than in the rest of the world, job growth is strong, and the U.S. economy is still the world’s strongest and getting stronger, with no other nation even close.
That said, the economy is still a problem for both parties. Republicans struggle with strong economic reports, taking every opportunity to highlight problems, real or imagined. And indeed, there are problems, some of which have long been neglected such as the almost obscene inequality of income and wealth.
Of course the most visible problem is the stubborn inflation. Although the rate of inflation has significantly declined, it is still above the Fed target of two percent, and prices of visible goods such as groceries remain above pre-pandemic levels. A major component of the Consumer Price Index is housing and rent, including imputed rent of owner-occupied housing (23.8% of the CPI), that is not actually paid out-of-pocket.
Republicans, assisted by a firehose of noise and smoke from right wing media, will naturally make the most of prices that are above pre-pandemic levels. Because food prices are so visible, they will remain a problem for Democrats. Complicating the problem is that even if the inflation rate would go to zero, that means that prices are not increasing, and does not mean that prices will decline to previous levels.
Americans spend a lower proportion of their disposable income on food than citizens of any nation in the world. As noted in previous columns, this is due to a productive agricultural system that includes foreign-born labor willing to perform backbreaking labor at low wages to produce and process fruits and vegetables, and do the arduous and often-dangerous work in slaughter houses. Nevertheless, relatively higher food prices are politically toxic, and Republicans will feast — no pun intended — on this phenomenon.
The national economy has a lot of moving parts. A characteristic of economic policy is that every policy move has multiple effects, including unintended consequences. To tame inflation the Fed raised interest rates, intended to impede borrowing and spending, thereby reducing demand, hence prices. Higher interest rates favor banks as they increase the spread between what banks charge for loans and what they pay depositors. But higher interest rates have increased mortgage rates, putting a damper on the housing market. Reluctance of potential sellers of houses with low rate mortgages to sell, only to have to buy with a higher rate, has reduced American mobility.
Low interest rates were a major factor in the financial bull market. Financial markets have thus far remained high even with rising interest rates that were predicted to tank the markets. The conventional wisdom, probably correct in this case, is that financial markets have remained high because of high corporate profits and, so far, lack of the recession that was predicted to occur with rising interest rates.
Wall Street money managers have been anxiously awaiting a predicted reduction in interest rates by the Fed, anticipating extending the bull market into the future. Some money managers were predicting as many as six cuts during 2024. But with the recent report of inflation remaining stubborn, they have reduced predictions to three, or even two. And if inflation remains stubborn, there is the possibility of zero cuts by the Fed, which would greatly disappoint Wall Street.
As baseball sage, Yogi Berra, reminded us, “It’s tough to predict stuff, especially in the future.” But Fed Chair Powell has been clear that he is in no rush to cut interest rates. It should surprise nobody if the Fed is reluctant to cut rates until inflation is at, or very near, the Fed target of two percent.
What is also clear is that the economy is a political problem for both parties — a strong economy a problem for Republicans, and stubborn inflation a problem for Democrats.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears monthly in the Monroe Times.
