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The likelihood of a recession is spiking, and it could spell political doom for President Biden.
Biden’s approval ratings have taken a battering as inflation has soared to its highest level since the early 1980s and the national average gas price has reached $5 per gallon.
But the most direct cure for soaring inflation — a hike in interest rates by the Federal Reserve — brings its own kind of pain unless it is weighted perfectly.
Just last week, the Fed raised its benchmark interest rate by three-quarters of a percentage point, the largest upward leap since 1994.
Bringing an overheated economy in for a soft landing is legendarily difficult. The chances of applying the economic brakes too lightly or too hard are high. In the first scenario, inflation continues to rage. In the second, economic growth goes into reverse, throwing people out of jobs
Biden, who recently told ABC talk show host Jimmy Kimmel that inflation is “the bane of our existence,” likely could not weather that storm.
The president’s approval rating stood just under 40 percent on Monday, according to the data and polling site FiveThirtyEight. Roughly 54 percent of respondents to its most recent survey disapprove of Biden’s job performance.
Democrats face stiff headwinds in November’s midterm elections. In private, virtually no one in either party expects the president’s party to hold on to its thin House majority, though the prognosis in the Senate is not quite so bleak.
Even economists who have some sympathy for Biden’s predicament and hold out hope that a recession can be averted admit that the political die is cast if they’re wrong.
“I don’t think the president or Democratic candidates could withstand the political fallout of a recession, because if that hits, that means unemployment rises. Right now, the president has very clearly benefited from the tight labor market and low unemployment. If we go into a recession, that will no longer be true,” said Mark Zandi, the chief economist of Moody’s Analytics.
Zandi himself is not predicting a recession, stressing bright spots in the economy that extend beyond the job market to strong savings and low levels of personal debt.
But, he added, high inflation probably means that for Democrats “it’s too late for the midterms. Even if things turn quickly here, I don’t think it is going to make a meaningful difference when people vote in November.”
Republicans are blasting away at Biden for what they characterize as economic mismanagement — even as the White House notes that inflation is a problem in many developed nations and that the U.S. economy has recovered better than many from the pandemic.
Former Vice President Mike Pence, a potential 2024 GOP presidential candidate, said in a Chicago speech Monday that the “confidence and pride that were once synonymous with the American people in recent years [have] been replaced with fear and a national anxiety.”
Pence called for a change in direction to deal with a range of economic woes.
It’s not only Republicans who are sounding the alarm.
Larry Summers, who served as Treasury secretary under former President Clinton and director of the National Economic Council under former President Obama, told NBC’s “Meet the Press” on Sunday that his “best guess is that a recession is ahead.”
It was likely that “the Fed is going to raise interest rates enough that the economy will slip into recession,” Summers said.
On Sunday, a Wall Street Journal report noted that its survey of economists put the chances of a recession within the next 12 months at 44 percent. The news organization noted this was “a level usually seen only on the brink of or during actual recessions.”
The public mood around inflation provides no respite for Biden or the Democrats.
An Economist-YouGov poll released last week indicated that 56 percent believe the nation is currently in a recession, in contrast to just 22 percent who say it is not and another 22 percent who say they are not sure.
A recession is usually defined as two consecutive quarters of negative gross domestic product (GDP) growth.
The U.S. GDP did slide at a 1.4 percent annualized rate during the first quarter, but modest growth is expected in the soon-to-end second quarter.
On Monday, Biden told reporters in Rehoboth Beach, Del., that there is “nothing inevitable about a recession.”
The previous day, Treasury Secretary Janet Yellen had hit a similar note.
Yellen said a recession was not “at all inevitable” during an interview with ABC’s “This Week” — though she did acknowledge that inflation is “unacceptably high” and that she expects the economy to slow.
Ryan Severino, the chief economist at JLL, told this column that he, too, does not see a recession as inevitable. He argued that the Fed has historically performed better at trying to execute soft landings than is generally believed.
However, Severino also noted that managing public perceptions is crucial.
Emphasizing the role that “a loss of confidence” has in recessions, he added, “If you believe things are going to get worse, and you adjust your behavior, it can become a bit of a self-fulfilling prophesy.”
Severino argued that by merely curbing inflation, the Fed could help restore confidence.
But even so, he noted that when it comes to the possibility of a recession, “the risk is objectively going up.”
That alone is bad news for the president and his party.
The Memo is a reported column by Niall Stanage.