Yahoo Finance This week in Bidenomics: Signs of a slowdown
Inflation is finally getting back to normal, which is good news for consumers and bullish for President Biden’s reelection odds. The question is whether there is some bad news lurking behind the good.
Part of the reason inflation is returning to normal levels is that supply chain distortions dating to the 2020 COVID pandemic are finally ironed out. But there could be more worrisome trends, such as consumers becoming more sensitive to prices as they deplete their savings and worry more about job security.
Retailers such as Walmart, Target, and Walgreens are starting to cut prices on thousands of everyday items. They’re not doing this to be nice. Everybody who sells anything in a capitalist economy wants to charge the highest price they can get, and that’s what retailers have been doing for the last few years. Shoppers grumbled about higher prices, but for the most part, they paid up.
Now, shoppers are getting a lot pickier. That’s how supply and demand is supposed to work, but this also coincides with declining savings and other signs of consumer stress. The “excess savings” many families accumulated during the COVID lockdowns are now fully depleted, according to the San Francisco Federal Reserve. The personal savings rate, which was around 7% prior to COVID, has dropped to 3.6%.
There was also a notable uptick in the number of people filing for unemployment insurance in the latest weekly report, with the number of filers reaching a 10-month high. And the University of Michigan’s consumer confidence index dropped to a seven-month low. That’s an eyebrow-raiser because the Michigan index focuses heavily on inflation, and the inflation rate is down to a manageable 3.3%. Gas prices have been falling too, which usually buoys consumer spirits.
Not this time. “Households are now struggling more under the weight of higher interest rates and still-elevated consumer prices,” Capital Economics reported on June 14. “The gradual rise in initial jobless claims, elevated job cut announcements, and the decline in job openings may be affecting sentiment.”
It’s not yet time to ring the recession alarm. Most economists think the economy will continue to grow for the rest of the year and employers will continue to hire. Goldman Sachs, for instance, expects GDP growth of 2% in the fourth quarter of 2024. A cooling economy might even allow the Federal Reserve to cut interest rates by the fall and juice spending a little.
There have been many predictions of a recession during Biden’s presidency, especially after the Fed started jacking up interest rates in 2022 to tackle inflation. Rising rates are intended to slow the economy, and sometimes they’re a little too effective, slowing growth so much that the economy shrinks and unemployment jumps.
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That hasn’t happened this time around, but that’s no guarantee it won’t. “Complacency sets in as the recession does not take hold in the data, but then the recession eventually does show up and comes as a huge surprise," David Rosenberg of Rosenberg Research wrote on June 14. “The recession has indeed been delayed again, but it has not been derailed in our view.”
Biden needs a break on the economy, one of several areas where his approval rating lags that of Donald Trump, his Republican rival in the 2024 presidential race. Inflation has been gradually slowing since it peaked at 9% in 2022, with some prices finally starting to decline. The timing seems good for Biden, especially if gas prices stay steady or decline heading into the fall. The last undecided swing voters would be choosing their candidate as they watch staples get more affordable.
But if inflation is falling because consumers are under mounting financial stress, that would be too much of a good thing. Voters are already edgy about the economy and Biden needs to ease their concerns. If they start to worry about jobs on top of inflation, he’ll have a tough sell in the home stretch of the election.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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