The Economy Is Doing Fine, for the Time Being
Republican charges of a “Biden recession” during the midterm campaign failed to ignite a red wave, and the latest release of data from the Bureau of Economic Analysis (BEA) explains why. In the third quarter, the economy grew 2.9 percent after inflation. That strong growth is revised from the BEA’s 2.6 percent estimate released just before the midterm election, and it’s faster growth than Americans saw in 10 of the 16 quarters of Donald Trump’s presidency.
The new data from the BEA, a 50-year-old division of the Commerce Department lauded for its independence and accuracy, also show that people’s disposable incomes outpaced inflation in the third quarter. They did so on both an overall and a per capita basis. That solid performance was driven mainly by wage and salary gains and a sharp drop in the trade deficit. Businesses noticed: They increased their fixed investments by more than a 5 rate percent in the third quarter. Whether this economic strength helped account for the Democrats’ surprisingly strong showing is unclear but it’s certainly plausible given that the media’ narrative that inflation or a Biden recession would doom the party polls, in fact, did not happen.
This recent growth may be a high watermark for some time. Despite the coming waves of new infrastructure and climate spending contained in the president’s bipartisan infrastructure act and the Inflation Reduction Act, the economy is poised to slow as the Federal Reserve’s recent large interest rate hikes dampen growth. With that slowdown nearly at hand and inflation beginning to ease, the Fed has hinted that it may moderate future interest rate hikes, which would be welcome. If it doesn’t restrain itself in its efforts to curb inflation, it risks triggering a real recession.
The divided government that begins in 2023 when Republicans control the House also threatens the economy. GOP House leadership could insist on deep spending cuts that would worsen the slowdown engineered by the Fed. Happily, Senate Republicans who want more defense spending may help the administration dodge that bullet by cooperating with Democrats on a big budget deal later this month.
Most troubling, the GOP’s sizable MAGA caucus in the House could refuse to raise the debt limit early next year. Democrats should head the Republicans off by raising the debt limit while they still run both chambers of Congress, perhaps as part of a budget deal. Otherwise, the kamikaze Republicans could force the Treasury to stop paying the government’s bills, from Social Security benefits and military salaries to interest owed on U.S. government debt. And since U.S. and foreign banks and most foreign governments hold much of that Treasury debt, failing to raise the debt limit could trigger a global financial crisis and a terrible worldwide downturn.
Divided government will likely doom the passage of new Biden administration initiatives for affordable housing, child care, and restoring the expanded child credit. History shows that’s just par for the course. Every president since Ronald Reagan but one has faced a House or Senate held by the other party during the second two years of their first term—and none of them enacted significant new legislation in those years. Only George W. Bush enjoyed one-party control for his entire first term—and benefitted greatly from it when Congress passed a Medicare outpatient prescription drug benefit in December 2003.
Nevertheless, despite the divided Congress, the economy could be pretty strong again in 2024 because the Fed giveth as well as taketh away—and timing is everything. If its tight money policy brings down inflation while pushing up unemployment, the Fed may be ready by early 2024 to cut interest rates again. That’s what financial markets generally expect—and if they’re right, the economy could be in solid recovery mode for the 2024 election.
This essay was originally published by Washington Monthly