What is a recession?
In Washington, the answer might depend on whether your party controls the White House and Congress.
To wit: last July, the White House Council of Economic Advisers (CEA) tried to answer that question for the American public. “While some maintain that two consecutive quarters of falling real GDP [economic growth] constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle,” the CEA said. “Instead, both official determinations of recessions and economists’ assessment of economic activity are based on a holistic look at the data — including the labor market, consumer and business spending, industrial production, and incomes.”
In that article, the CEA said the decline in U.S. GDP in early 2022, even if followed by another quarter of negative growth, probably did not indicate a recession since other fundamentals were strong. To state the obvious, the White House was eager, heading into a midterm election last year, to assure voters that the economy would rebound quickly.
But with the failure of three banks, still-tepid economic growth, historically high inflation, and less-than-spectacular manufacturing readings, would the CEA make the same statement today?
While the midterms are over, President Joe Biden is only 20 months out from a potential reelection campaign, so our guess is that his White House economists would continue to hedge and to focus on the most positive economic indicators. But what picture does the data actually paint? And, most importantly (since campaign season is just around the corner): what do the American people think? Let’s take a look.
Inflation, Incomes, And Industrial Production … Oh My.
The 2022 CEA report cited above said economists look at several factors, including industrial production and incomes, to determine whether the country is in a recession.
According to a survey by the U.S. Census Bureau, the median U.S. household income in 2021 was $70,784, down from $71,186 in 2020. On a regional basis, the northeast and south are suffering the most while incomes in the Midwest and west actually rose slightly, according to the Peter G. Peterson Foundation. Still, CNBC found those incomes are not enough to be considered securely within the middle class in many major American cities.
Incomes are falling, of course, at a time when prices are rising.
While consumer inflation has tempered over the last few months, it is still higher than normal. This week, The Washington Post released a study in which it examined how three different households had fared during the era of higher prices. The Post found “the prices of many frequently purchased items have increased, ranging from 2 percent to 115 percent.” For basic items like milk, eggs, and chicken breasts, “the price increase was much more extreme than overall inflation numbers.”
In other words: even if prices are coming down, focusing on the broad inflation numbers may not make voters feel much better. In fact, it may make them feel like Washington is out of touch with their everyday reality.
There also is this nugget: According to the S&P CoreLogic Case-Shiller index, home prices also fell for the seventh consecutive month in January. Remember that for many Americans their homes are their most valuable asset. These values will have a direct impact on how families feel about their own financial security.
That data point is important, but let’s get back to the numbers the CEA specifically said economists should look at when determining whether the United States is in a recession.
The Federal Reserve is in charge of measuring industrial production. In its latest report, released on March 17, the Fed said Industrial production was unchanged between January and February and that total industrial production in February was 0.2 percent below its level from a year earlier. And, back in January, the Fed’s data indicated U.S. manufacturers were almost certainly experiencing a recession. (According to the Fed’s February report, manufacturers did not do much better that month.)
But what about the economy as a whole? After all, a decline in economic growth is how most people probably gauge a recession even if it is not the “official” definition according to the CEA.
In the second half of 2022, U.S. GDP returned to growth, expanding at a rate of 3.2 percent in the third quarter and 2.7 percent in the fourth. That news certainly is good, but the World Bank warned this week that most countries could be entering a prolonged period of lower growth. The organization estimates the potential global growth rate will average 2.2 percent throughout the rest of this decade — the lowest average growth rate in 30 years. (For reference, the average growth rate was 3.5 percent in the early 2000s and 2.6 percent between 2011 and 2021.)
No wonder Americans are feeling nervous.
How Americans Are Feeling About The Economy
According to a recent National Public Radio poll, the economy is the top issue on voters’ minds and, “when it comes to the economy, [President] Biden continues to get poor marks.” In fact, just 38 percent voters of all political persuasions approve how the president is handing the economy, including 28 percent of the independents President Biden will need to win over in order to win a second term in the White House.
Americans’ economic confidence has been shaken further by recent bank failures. An Associated Press survey found only 10 percent of Americans have a high level of confidence in the nation’s banks. Americans also think Washington policymakers are not doing enough to restore their confidence. More than half of respondents (56 percent) told The Associated Press the government is not doing enough to regulate banks and other financial institutions. “The worry about under-regulation is bipartisan,” The Associated Press said. In fact, 63 percent of Democrats said current bank regulation is insufficient while 51 percent of Republicans said the same thing.
Digging a bit deeper into the data, it’s also clear that economic worries are weighing on some Americans minds’ more than others.
Recall the data above that showed the average American household income in 2021 was around $70,000 a year. These families report feeling stressed. According to another Associated Press survey, about half of U.S. adults in households earning less than $60,000 annually and about 4 in 10 of those in households earning $60,000 to $100,000 say they are very stressed by their personal finances. Those numbers compare with only about one-quarter of those in higher income households.
The same poll also found Americans are less than optimistic about the future across all income levels.
Thirty-nine percent of people living in households earning at least $100,000 annually predicted their finances will improve in the year ahead. Only 26 percent of people in households with lower incomes said the same. Additionally, 28 percent of people in lower income households predicted their financial situation to worsen. That number compared to 18 percent of people in households with higher incomes.
Everyday Americans are not the only ones who are feeling nervous. This morning, Politico’s “Morning Money” reported the MetLife and the U.S. Chamber of Commerce’s Small Business Index showed far fewer small businesses plan to increase investment over the next year. The survey was fielded before the recent turmoil in the banking system, meaning the country’s entrepreneurs already were feeling nervous about the economy before Silicon Valley Bank.
These dismal ratings come at a time when Americans say wealth is more important to them than ever. The results of a Wall Street Journal poll released this week found 43 percent of Americans say money is “very important” to them, up from 31 percent in 1998. Money ranked higher in importance than patriotism, religion, having children, and community involvement.
What Could These Numbers Mean For The 2024 Election?
According to Nate Silver from the data and elections blog FiveThirtyEight, while any single economic indicator is an imperfect indicator of election outcomes, the economy certainly matters when it comes to presidential reelection. Just ask one-term presidents Jimmy Carter, George H.W. Bush, and Donald Trump.
While the current economic outlook may be foreboding for the current commander in chief, political analysts and armchair prognosticators also should remember more recent history: at this time last year, Republicans were feeling very optimistic about their midterm election chances. The president’s approval numbers were historically low — at a level, in fact, that history indicated his party likely would lose both the U.S. House and Senate, and by large margins. Democrats did lose the House, of course, but not by much. And the party improved its station in the Senate.
Could President Biden defy history again? We will have to wait to see, but recent election history aside, stability in the banking sector, a decline in inflation, and continued economic growth probably would not hurt his chances.
And, oh, by the way – the U.S. government will default on its debt obligations sometime this summer if Congress doesn’t enact an increase to the debt limit.