Biden’s ‘Slight’ Recession Would Mean Economic Pain for Millions

Rich Miller and Josh Wingrove
·5 min read
28

(Bloomberg) -- Joe Biden conceded the risk of a “very slight” recession, but even a mild downturn would be painful for American households and politically perilous for the president.

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Economic contractions -- even modest ones -- traditionally lead to markedly higher unemployment as companies slash their payrolls by millions of workers in response to lower demand. That would undercut Biden, who has touted job growth to argue the economy is on strong footing despite decades-high inflation.

A US recession “is a break,” said JPMorgan Chase & Co. chief economist Bruce Kasman. “It is a move up in the unemployment rate of 2% or more.”

In an interview on Tuesday with CNN, Biden said the American people didn’t need to prepare for an economic downturn, citing the resiliency of the US economy.

“I don’t think there will be a recession. If it is, it’ll be a very slight recession. That is, we’ll move down slightly,” he said.

Biden has frequently dismissed speculation of a US recession brought on by Federal Reserve interest rate hikes aimed at taming high inflation. Upbeat talk about the economy is a staple of any American administration, as presidents look to shore up consumer and business confidence while staving off political fallout from a contraction.

The US is in an “economic transition,” Biden said in a tweet Wednesday after receiving a briefing on the economy from Brian Deese, director of his National Economic Council.

Forecasts of a recession are multiplying as the Fed feels compelled to ratchet interest rates ever higher to get control of an inflation that’s proven to be higher and more persistent than it expected.

Anna Wong, chief US economist at Bloomberg Economics, expects the country will fall into a recession in the second half of 2023 that eventually pushes the unemployment rate up to 4.9%, from 3.5% now.

“There is a substantial risk that a worse-than-expected global downturn or financial turmoil can pull forward that US recession to the first half of the year,” she said.

Biden’s comments over the health of the world’s biggest economy come as the outlook for other nations darkens as well. The International Monetary Fund, which is hosting its sprawling annual meetings in Washington this week, said in its outlook report that “the worst is yet to come” for the global economy and cut its growth forecasts, citing reverberations from the war in Ukraine and China’s slowdown, as well as the impacts from higher interest rates internationally.

Biden’s prediction that any recession would be “very slight,” if it happened, meanwhile evoked his top economic advisers’ frequent assertions in 2021 that inflation would be “transitory.”

In the dozen recessions since World War II, the economy contracted by 2.5% on average, while unemployment rose about 3.8 percentage points and corporate profits fell some 15%. The average length of the contraction was 10 months.

Every percentage-point gain in the unemployment rate means about 1.6 million lost American jobs, Wong said.

Aggressive Fed

Expectations are that the Federal Reserve will have little choice but to keep rate hikes aggressive, and hold them high longer, to drive down price growth -- possibly increasing the chances of job losses and a downturn.

“Because of how entrenched inflation is, the Fed can’t afford to be forward looking” and pivot quickly to rate cuts, said Robert Dent, senior US economist at Nomura Securities International Inc. “You need to see realized inflation move lower. They are going to be hiking into the recession, and holding rates at an elevated level.”

Mark Zandi, chief economist for Moody’s Analytics, sees roughly even odds of a US recession over the next 12 to 18 months. “I agree with the president that if we do suffer a recession it should be short and less severe than typical,” Zandi said in an email, saying that household balance sheets and state and local government finances are all strong.

A Biden spokeswoman downplayed the president’s CNN comment.

“The president has been pretty consistent, has said multiple times in the past -- while recession is possible, he does not think there will be a recession,” Press Secretary Karine Jean-Pierre said Wednesday.

The US has occasionally experienced mild recessions as measured by output. The Bureau of Economic Analysis calculates that GDP actually rose by 0.7% during the 2001 recession. But unemployment still increased markedly -- from a low of 3.8% in April 2000 to a peak of 6.3% in June of 2003.

Job Losses

Any recession would likely put millions of people out of work, robbing Biden of one of his key metrics for his own economic performance: job gains. Fed policy makers see joblessness rising to 4.4% at the end of next year, according to their median forecast released last month.

Like Biden, they may prove too optimistic. Fed officials have failed to correctly predict how high joblessness would rise during, or in the wake of, almost every recession over the past 50 years.

Northwestern University professor Robert Gordon said unemployment would have to rise to at least 6% for the Fed to reduce inflation back to its 2% target over the next few years.

“The Fed is not going to be successful in bringing down inflation as much as it wants over the next two years and it will have to face a choice of temporarily giving up on its objective on inflation or raising rates a lot higher than the market thinks it will,” Gordon, an expert on economic cycles, said.

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