Surprisingly strong economy shifts political calculations

The U.S. economy is hitting a stride, growing at a 2.4-percent rate in the second quarter in a surprisingly strong showing that adds confidence to the idea that the nation may avoid a long-threatened recession.

The growing economy comes coupled with other good economic news: Inflation is slowing, and unemployment sits at just 3.6 percent. 

Markets have noticed. The Dow Jones Industrial Average is up more than 4 percent over the last month and more than 6 percent this year, despite dropping Thursday. 

It’s all good news for the White House and President Biden, who have used the recent string of positive economic announcements to tout their stewardship over the economy as they head into an election next year. 

But it doesn’t mean the administration can breathe easy — over the economy or Biden’s political future.

Some economists think a recession is still possible, and Republicans, while more focused in recent weeks on probes into Hunter Biden’s legal difficulties, have not dropped their economic criticisms of the White House.

“It’s entertaining to watch the administration sit here and say, ‘Oh everything’s great now,” Rep. Mike Lawler (R-N.Y.) said Thursday.

“Yes, inflation has come down, but the economy in no way is growing at the levels that it needs to be and we need to enact reasonable and responsible budget cuts going forward to right size our economy and get the country moving in the right direction,” added Lawler, who represents a swing district and is one of the more vulnerable House Republicans in next year’s election.

The White House rebuked GOP lawmakers, pointing remarks from to Fox Business Channel’s Cheryl Casone, who said Thursday: “There goes that recession talk, right?” 

“Even Fox Business is welcoming today’s blockbuster economic growth numbers, the latest in a long line of proof points that Bidenomics is delivering for middle class families,” spokesperson Andrew Bates said in a memo. “That’s because this strong growth report is objectively good news for the American people, which elected officials should support regardless of their political party.”

The resilience of the economy has been a surprise for a number of reasons.

Market commentators for most of Biden’s term have been worried about a recession, and as the Federal Reserve launched a series of interest rate hikes in response to rising inflation, the fear was that a downturn would be hard to avoid.

The Federal Reserve itself in March predicted a “mild recession,” before reversing its position Wednesday after raising interest rates another quarter-percent.

“The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession,” Federal Reserve chairman Jerome Powell said Wednesday.

That resilience has taken several different forms but has been nowhere more noticeable than in the labor market. Unemployment has remained near historic lows even as the Fed has undertaken one of the fastest interest rate tightening cycles on record in response to prices that climbed as high as 9.1 percent annually last June.

Lower employment is usually associated with lower prices due to how much businesses have to pay workers and still turn a profit. But that relationship has been called into question during the recent inflation, as prices have been steadily falling since last June while unemployment has remained near record lows.

The unusual nature of the post-pandemic inflation, driven in part by massive consumer savings during the lockdown era and supply chain shutdowns, was likely the primary reason. Price fluctuations occurred in different sectors of the economy at different times, and companies raked in record profits, choosing to keep prices high.

In making the case for its handling of the economy, the Biden administration Thursday pointed to investments it made when Democrats held majorities in Congress in 2021 and 2022. Those investments were mostly in the Inflation Reduction Act, a bipartisan transportation and infrastructure bill and a major semiconductor bill.

This has led to investments north of $190 billion as of May, much of it in green tech and industry, that is expected to lead to a factory construction boom.

The White House Council of Economic Advisers (CEA) touted the investment in plants and equipment in a blog post Thursday, noting its contribution to the beefy GDP number.

“Nonresidential private fixed investment accelerated, contributing 1 percentage point to [second quarter] growth. Private construction of manufacturing facilities alone, such as factories, contributed about 0.4 percentage point, this category’s largest growth contribution since 1981,” economists with the CEA wrote.

Some key factors do leave a number of economists wary of another ding on the economy later this year. Millions will see an end to the three-year pause in student loan payments later this year, which could put a crunch on consumer spending.

Interest rate hikes have also weighed heavily on the housing market for more than a year, driving high mortgage rates and dampening demand.

Demand is beginning to rise again, but so are prices with would-be sellers reluctant to give up their low mortgage rates and put their homes on the market. 

Powell said Wednesday that the housing market has “a ways to go” before it reaches a balance and prices cool.

The news of economic growth comes just weeks after the White House launched its “Bideonomics” messaging, which was met with speculation at the time about whether they were taking a victory lap too soon.

Throughout Biden’s presidency, Republicans have hammered him for high inflation, and they sought to use it against Democrats in the 2022 midterms. They are expected to focus on the economy, along with their investigations into the Biden family, again in 2024.

Biden celebrated that the GDP number Thursday, arguing that the economic progress “wasn’t inevitable or accidental” but was due to Bidenomics — a message voters can expect to keep hearing as Biden and officials traverse the country to tout their work on the economy.

“[H]ard-working Americans are seeing the results: Our unemployment rate remains near record lows, inflation has fallen by two thirds, real wages are higher than they were before the pandemic, and we’ve seen more than half a trillion dollars in private sector investment commitments in clean energy and manufacturing,” he said.