The Republican chair of the Federal Reserve doesn’t think it’s happening. Neither does the Democratic president, Joe Biden, nor do a good number of economists.
And yet, many Americans appear to believe the world’s largest economy is in a recession, creating yet another liability for Biden in the run-up to November’s midterm elections, where voters are already inclined to hand Republicans control of at least one chamber of Congress.
The case for the country experiencing a contraction was bolstered on Thursday when the Bureau of Economic Analysis reported the economy shrank for the second straight quarter, a worrying data point that doesn’t satisfy the technical definition of a recession, but nonetheless underscores the damage done by snarled global supply chains and America’s continuing bout of high inflation.
“It suggests, overall, the economy is weakening, it’s certainly losing steam, where there are storm clouds not only on the horizon but we’re entering them right now,” said James W Hughes, dean emeritus of the Edward J Bloustein School of Planning and Public Policy at Rutgers University. “But I don’t think it’s clear whether we’re in a recession right now.”
Biden attempted to downplay the data after its release, saying that a growth slowdown is “no surprise” after the US economy expanded rapidly last year and made up ground from the record collapse caused by Covid-19 in 2020.
“Even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure,” Biden said in a statement that called for the passage of the Inflation Reduction Act, a compromise bill Democrats announced this week to fund party priorities such as lowering healthcare costs and fighting climate change, while also reducing the federal budget deficit.
The Republican chair of the Federal Reserve, Jerome Powell, appeared inclined to agree. The central bank has spent much of this year raising interest rates to keep prices in check, and on Wednesday announced another big increase.
“I do not think the US is currently in a recession and the reason is there are just too many areas of the economy that are performing too well,” Powell said, speaking the day before the GDP data was released.
But to Republicans, the report was all the proof they needed that the economy is on the decline, and that the president is to blame. Indeed, they had a moniker at the ready: “Joe Biden’s recession”.
“Biden and Democrats are responsible for our shrinking economy, and they’re only trying to make it worse,” the Republican National Committee chair, Ronna McDaniel, said.
Their announcement wasn’t exactly correct.
While many countries consider two consecutive quarters of economic contraction to be a recession, in the US, the private National Bureau of Economic Research makes the call, and defines it as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”.
Surveys indicate Americans aren’t waiting for those economists to weigh in.
The University of Michigan’s consumer sentiment index, which measures Americans’ views of the economy, hit its lowest point ever in June. Though it rebounded slightly in July, the survey’s figure is lower than even April 2020, when Covid-19 had cost more than 20 million people their jobs and the unemployment rate hit 14.7%.
“It’s shock, after shock, after shock and we’re in an environment where these shocks are affecting morale,” said Gregory Daco, chief economist at the consultancy EY-Parthenon. The disruptions include the past year and a half of rising inflation, the sharp uptick in gas prices in 2022 and the Covid-19 pandemic itself, particularly the new variants that have hampered the return of everyday life.
All of that has sucked the cheer out of what would normally be a critical asset for the Biden administration: low unemployment. The jobless rate was 3.6% in June, near where it was before the pandemic, and the economy has added hundreds of thousands of jobs in recent months.
To Daco, the question of why the economy is where it is can’t be answered by the actions of one man.
“I don’t think you can really put the blame on any administration when it comes to the state of the economy, especially when you have a shock” like the Covid-19 pandemic, he said. “That blame game doesn’t really serve much purpose.”
Voters nonetheless seem ready to take their frustration out on Biden. A SSRS poll conducted for CNN and released earlier in July found only 30% of respondents agreed with his handling of the economy, and just 38% approved of his job performance in general.
The poll aggregator FiveThirtyEight puts the odds of the Democrats losing control of the House of Representatives as high, and they may also become the minority in the Senate. The Republicans waiting to take over leadership of Congress’s lower house are said to be planning investigations of the first two years of Biden’s presidency, including the inflation wave.
Consumer prices have climbed 9.1% for the 12 months until June, a rate not seen since the early 1980s. The forces pushing them up are myriad, and include the Fed’s zero interest rate policies during the Covid-19 downturn, the government’s attempts to rescue the economy by sending consumers money and the global supply chain disruptions that remain from the days of pandemic lockdowns, which have been worsened by new shocks to oil and food markets caused by the war in Ukraine.
Much has been made of Biden’s policies in 2021, particularly the $1.9tn American Rescue Plan, which was intended to jolt the economy’s recovery from the Covid-19 pandemic by again sending Americans stimulus checks, and also aiding unemployed workers and local governments.
Economists differ over how much that package added to inflation. William Spriggs, chief economist of the AFL-CIO trade union federation, sees it as one of the few things keeping the economy going.
“People have been able to spin the story, with the help of economists, that the inflation is Biden’s fault,” he said. Instead, Spriggs credited the American Rescue Plan with giving consumers the funds to continue spending, even as the economy contracted in the second quarter of this year.
With its power to raise interest rates and drive up costs for mortgages, car loans and other sorts of debt, the Fed is the most powerful inflation fighter in Washington. It is near certain the central bank, which operates independently from the White House and Congress, will continue raising interest rates when it meets again in September, though perhaps not as aggressively as in months past.
The central bank’s approach poses its own problems, Spriggs said. Higher interest rates in the United States won’t do much to lower global oil and food prices that are hitting American markets, but could cut into the consumer spending he argues is keeping the economy afloat – and create the recession the Fed says it’s trying to avoid.
“If the economy overheated, then how do you get two quarters of negative growth?” asked Spriggs. “That’s self evident, and I find it disturbing that the Fed is talking about the overheating economy, and because of that, the Fed therefore becomes a threat.”