If the US election was a referendum of economists, Joe Biden would be a shoo-in for a second term. The consensus was that the world’s largest economy would slip into recession last year. Instead it grew by 3pc. Unemployment hasn’t been this low for this long in 50 years. Wages are climbing. The stock market is going gangbusters.
The trouble is, voters aren’t buying it. Almost six in every 10 voters polled by CBS News described the US economy under Biden as “bad”. Stranger still, the main reason for faster-than-expected growth appears to be the gusto with which Americans are hitting the malls. One economist says, the average American appears to be “miserable, but still spending”.
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Either we’re witnessing a case of mass retail therapy or there’s a huge disconnect between how the US economy is faring and the general mood among soon-to-be voters. Some commentators, apparently stumped by this mystery, have come up with the condescending neologism “vibecession”.
But the missing link between the bloodless, top-down numbers and how well-off voters feel is blindingly obvious: inflation may well be coming down but it remains stubbornly high. Ordinary Americans are reminded of this fact every time they buy groceries, fill their tanks with gas, and (because interest rates are still high) pay their monthly mortgage, car finance or credit card bills.
You only have to look at the 10 national USA TODAY/Suffolk polls that have come out since Biden moved into the White House to see what’s going on. In the first one, which came out in January 2021, the percentage of voters positive about the direction of the economy was 32pc. That figure then proceeded to fall steadily, reaching its nadir of just 9pc in July 2022.
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It is absolutely no coincidence that this was just a month after price increases peaked, hitting levels US consumers had not experienced for more than four decades. It doesn’t matter how often Biden repeats his mantra that inflation has fallen two-thirds from its peak; prices are still rising.
To take just one extreme example, the cost of auto insurance rose by nearly 21pc last year, the sharpest spike since 1976.
Trump also enjoys a landslide advantage over his rival on inflation despite loudly proclaiming a whole host of policies – including slapping 100pc tariffs on foreign cars – that would clearly exacerbate the problem.
Some of the key factors in November’s election will therefore be how fast inflation continues to fall, whether the Fed feels it can cut interest rates and, crucially, when perceptions about high prices start to recalibrate. On all three, the outlook is ominous for Biden.
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Clearly, the US economy did do better under the 45th President than it did under the 46th. But most of that was to do with the fact that Trump was riding on the coat-tails of 10-year economic recovery and Biden had to jump-start the country after the pandemic.
Many Americans pocketed the stimulus cheques handed out by the government and then moaned about the spike in inflation caused by such federal largesse. It’s also true that the US has managed to curb inflation faster than most other rich nations. Trouble is, Americans tend not to compare prices with German supermarkets and Japanese petrol stations.
What’s more, there are some pretty Panglossian takes about the US economy doing the rounds. Americans are saving less than they were before the pandemic and racking up record credit card debt (balances on consumer credit cards and other revolving facilities recently topped $1 trillion for the first time ever). Something similar is obviously happening at a national level with the underlying deficits over the past year approaching 8pc of GDP.
Wages are now growing faster than inflation but they have some way to go to make up for the real terms cuts of recent years. And the phenomenon is not being experienced evenly across the workforces: wages are growing fastest for the young and the lowest-paid – two constituencies that are already predisposed to vote for Biden.
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One economist says his hunch is that, six months from now, households will be feeling better off. Real wages will have risen further, interest rates will be lower and house prices will have started to climb. “So, even if consumers are still aghast at the price of milk, they may feel better able to afford it,” he reasons.
But, it’s just a hunch. And a slight untick in sentiment six months from now doesn’t leave much time for any attendant feel-good factor to percolate through the electorate before they head to the voting booths two months later.
Core inflation is forecast to have fallen back to the US Federal Reserve’s target by the end of the year. But data out in the past few days suggest the “last mile” of the Fed’s battle to get prices under control could be a hard slog. The markets have priced in three interest rate cuts this year. However, that’s starting to look a tad optimistic.
Short of crossing all his digits, what’s Biden’s Plan B? He has already made the case that his stimulus package helped pull the US economy out of its post-pandemic slump. He should now promise it was a one-off and make shoring up the nation’s finances the number one priority of his second term.
Instead Biden looks set to try and shift blame on to businesses.
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“Snack companies think you won’t notice when they charge you just as much for the same size bag but with fewer chips in it,” the President said in his actual State of the Union address. “Too many corporations raise their prices to pad their profits, charging you more and more for less and less.”
It’s what Trump would do. But will it be enough to beat him?
With the starting gun sounding on the election campaign last week, a broad swathe of surveys suggests the two candidates are effectively neck-and-neck. But recent polls show Trump with an 11 to 20-point edge over Biden on which candidate would better handle the economy.
