WASHINGTON — Gas prices keep climbing. The stock market has been tumbling. Interest rates are rising. Consumer confidence is falling. And even the historically strong jobs and housing markets are showing early warning signs of a slowdown.
Less than six months before crucial midterm elections, President Biden and the Democrats aren’t getting much good news lately on the issue that Americans say matters the most to them: the economy.
The risk over the next year of a recession — an economic contraction that lasts at least six months — is uncomfortably high, experts warn, as the Federal Reserve tries to tame inflation near a four-decade peak while the war in Ukraine rages on and another COVID surge builds.
“Everything points to an economy that’s near the tipping point,” said Chris Rupkey, chief economist at FWDBONDS, a financial markets research company. “It’ll be a miracle if we can avoid a recession.”
That uncertain outlook poses a major challenge for Democrats as they try to hold onto their slim congressional majorities in November while Republicans pound away on what they’ve branded “Bidenflation.”
“If there is a general view by the late summer and fall that the economy’s not doing well and that things are down, it’s going to be a tough election for Democrats,” said Simon Rosenberg, president of the centrist Democratic think tank NDN. “The economic challenge is to keep the economy growing and to get inflation under control and the political challenge is to get more credit for the things that have gone well. That’s something that can be done in the next five or six months.”
But it won’t be easy. And in the world of electoral opinion, it may not come in time for the Democrats.
Inflation is dominating Americans’ views of the economy, overwhelming sunnier data and contributing to cautious consumer behavior that ironically makes a recession more likely. A recent Suffolk University/Globe poll found 35 percent of respondents thought the US economy was in recession and another 16 percent a depression (it’s not now in either). And nearly three in 10 respondents in a nationwide poll last month from Navigator Research said they believe the United States lost jobs last year when the economy actually created a record 6.7 million new ones.
“It’s the equivalent of voters in 1946 not knowing who won the war,” Rosenberg said.
The White House needs to do a better job of explaining the strengths of the economy, like last year’s record job growth, and their efforts to fight inflation, said Representative Don Beyer, chair of Congress’s Joint Economic Committee.
“Voters don’t necessarily care exactly why [inflation] is where it is. They just care that it is, and who’s responsible,” said Beyer, a Virginia Democrat. “We’re in a tough position. It’s painful to be the ones in charge at the moment.”
Biden blames high prices on global supply disruptions from the pandemic and Russia’s invasion of Ukraine. He says the administration is doing everything it can to bring inflation down, like releasing oil from the nation’s Strategic Petroleum Reserve to try to ease gas prices that reached record highs last week.
“I want every American to know that I’m taking inflation very seriously and it’s my top domestic priority,” Biden said this month.
But Republicans say high inflation has been caused by Biden’s policies, particularly the $1.9 trillion American Rescue Plan enacted in early 2021 that they and some economists, like former Treasury secretary Larry Summers, say overstimulated the economy.
“Skyrocketing prices, Biden’s gas hike, and the deteriorating economy are on the ballot in November, and voters know Biden and Democrats are to blame,” Ronna McDaniel, chairwoman of the the Republican National Committee, said recently after the latest government report showed the Consumer Price Index had risen 8.3 percent over the previous 12 months. That was an improvement over the annual rate in March, but not by much.
Inflation has been a major factor in pushing Biden’s approval rating down to 40.7 percent, according to an average of national polls by analytics website FiveThirtyEight. An NBC News poll released last Sunday found just 16 percent of American adults think the nation is headed in the right direction, near the low of 12 percent during the 2008 financial crisis.
Even after the leak of a draft Supreme Court opinion that would overturn the federal right to an abortion, the poll found respondents ranked “cost of living” as the most important issue facing the country. Biden’s approval rating on handling the cost of living was just 23 percent.
Americans also have been rattled by seemingly random product shortages and price spikes caused by pandemic supply chain disruptions. The ongoing scramble by parents for baby formula follows past struggles to buy lumber, garage doors, and computer chips and adds to a sense of an economy in chaos.
The Federal Reserve is the government’s main inflation fighter and the central bank has started aggressively raising its benchmark interest rate to try to bring down inflation by reducing demand in the economy. Fed Chair Jerome Powell, newly reappointed by Biden, said on Tuesday that the Fed was determined to do what it takes to rein in price growth even if it meant slowing the economy so much that the unemployment rate starts rising from its current historically low level of 3.6 percent.
He acknowledged “there could be some pain involved,” but expressed confidence the Fed could bring down inflation without triggering a recession. Treasury Secretary Janet Yellen also said last week that she thought there was enough economic momentum in the United States to avoid one even as high inflation threatens economies around the world.
“We are in a global environment where there are significant risks and pressures, but I really don’t expect the United States to fall into a recession,” she told reporters in Germany during an economic summit.
The US economy shrank in the first three months of the year amid the Omicron wave and because of some statistical oddities in trade and inventory calculations. But a recession is normally defined as two straight quarters of contraction and economists said they believe the economy is growing again.
Still, there are some warning signs. First-time claims for unemployment insurance, while still historically low, rose in the week ending May 14 to their highest level since January. And the red-hot housing market could be cooling as mortgage rates rise. The National Association of Realtors reported Thursday that existing home sales fell in April for the third straight month.
Mark Zandi, chief economist at Moody’s Analytics, an economics research and consulting firm, agreed with Powell and Yellen that the economy remains strong despite high inflation. He pointed to continued robust job growth and thinks inflation has peaked. But he predicted the annual Consumer Price Index will still be high, at about 5.3 percent, by Election Day.
“Inflation is high, painfully high, but I attribute that to two massive global supply shocks that continue to scramble things,” Zandi said, referring to the pandemic and Ukraine war. “It’s very, very difficult to navigate around them. That’s what the Fed is trying to do. I think they’ll be able to do it, but that’s why the risks of recession are so high.”
Economists said the pandemic and war make forecasting even more difficult. And all that uncertainty has rattled investors. The broad-based Standard & Poor’s 500 index is down 18 percent this year after hitting a record high. That could further slow the economy.
But the stock market decline might not be all bad news for Biden. He’s rarely boasted about its numerous record highs during his presidency, a sharp contrast with former president Donald Trump. So Biden may not be as invested politically in its current woes. And while the decline will make people feel less wealthy, it could help tame inflation and allow the Fed to be less aggressive in raising interest rates
“If the stock market didn’t fall, the Fed would have to continue pressing on the monetary brakes until it did,” Zandi said.
But the stock market decline could push down consumer confidence by making people feel less wealthy as they see their 401(k) balances drop. About 58 percent of Americans own stocks, according to Gallup.
“If six months ago your stocks were worth $500,000 and now they’re worth $400,000, you’re likely to cut back a little on your spending because you feel poorer,” said Robert J. Shapiro, a senior fellow at Georgetown University’s McDonough School of Business and chairman of the economic advisory firm Sonecon.
Rupkey said investors are anticipating the economy will slow because of the Fed’s efforts to fight inflation. And Democrats are likely to get the blame for that, too.
“If there’s something going wrong with the economy in a major way, it’s pretty much, ‘Throw the bums out,’ ” he said. But a switch of political power in Washington is unlikely to change the direction of inflation.
“As a professional economist, I can’t see either side of the aisle coming up with a good idea on how to ‘whip inflation now,’ as they used to say in the ‘70s,” Rupkey said, referring to an anti-inflation program with the acronym WIN promoted by President Gerald Ford. “It’s very hard for the White House or Congress to control inflation.”