This week in Bidenomics: One last splurge?

The overachiever of the year is the American consumer. But don't expect heroics.

The US economy has blown past expectations so far in 2023, largely because shoppers keep spending even though economists think they should be running out of gas. The latest upside surprise was a jump in retail spending in July that was nearly twice as large as forecasters expected. Spending on restaurant meals, online stuff, and general merchandise boomed.

Bank of America called it “remarkable.”

Strong spending led Goldman Sachs to raise its third quarter forecast for GDP growth from 1.5% to 2.2%. The Atlanta Federal Reserve’s "GDP Now" formula forecasts whopping GDP growth of 5.8% in the current quarter. It’s worth recalling that six or 12 months ago, many economists thought we’d be in a recession by now.

A “soft landing” scenario, in which Federal Reserve interest rate hikes get inflation down without tanking the economy, looks increasingly likely. The Fed has raised rates by 5.25 percentage points in 18 months. That’s a rapid pace of monetary tightening. The annual inflation rate has fallen from 9% in June 2022 to 3.2% now, suggesting the Fed’s plan is working.

When the Fed slams the brakes on the economy, as it has done recently, growth usually slows and unemployment rises. Yet GDP growth seems to be picking up rather than slowing down. And the unemployment rate is a super-low 3.5%, same as it was when inflation peaked last summer.

For President Biden, this is all terrific news as he campaigns for reelection in 2024. Biden has been crisscrossing the country bragging about the economy and saying his programs are the reason inflation is coming down, while the job market remains strong. He’s fudging; Biden’s signature laws boosting infrastructure, semiconductor manufacturing, and green energy have barely started flowing into the economy. But he’s right about the general health of the economy.

Can it last? Hmmmm. Given all the mistaken predictions of a recession, it seems foolish to suggest a recession could still happen on Biden’s watch. Yet the evidence of a looming slowdown begs to be noticed.

One factor keeping spending buoyant during the last two years has been “excess savings” Americans accumulated during the COVID pandemic, when everybody was stuck at home with little to do. Economists think Americans banked at least $2 trillion more than what savings would have been in a normal economy. That’s a lot of freakin’ money.

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As vaccines rolled out and COVID receded, Americans basically started partying, and that excess savings paid the tab. Spending on travel and going out boomed, even amid elevated prices. Inflation obviously bothered people, which is why consumer confidence levels sank as inflation peaked. But people paid anyway, probably because the money was there.

The money is finally drying up. A new study by economists at the Federal Reserve Bank of San Francisco estimates that excess savings peaked at $2.1 trillion in August 2021. By 2022, consumer spending was down about $100 billion of that each month. There may now be less than $200 billion in excess savings, which means it will basically be gone soon.

There are other signs a slowdown is coming. A metric called the “leading economic indicators” has fallen for 16 months in a row, which would ordinarily mean a recession is coming, period. In pre-COVID times, the LEI had a flawless record predicting recessions. Capital Economics points out that if the LEI is wrong this time, it will be the first false positive in 60 years.

That could happen.

The COVID and post-COVID eras have been unique for a few reasons. First was the deep recession that materialized out of nowhere when COVID struck in 2020. Then there were huge amounts of fiscal and monetary stimulus that promptly ended the recession. After that came the fastest economic recovery in modern history. Along the way there were unprecedented shifts in consumer spending as people locked down, then sprung free. Some of those forces still have lingering effects, which is why forecasters are struggling mightily to figure out where the economy is headed.

Another recession will come sooner or later. A recession wouldn’t be so bad for Biden if it came soon and was shallow and short-lived, with a recovery underway by this time next year, when Election Day just a few months off. A deeper recession could finish Biden, but that may not be in the cards.

The post-COVID splurge could end this fall, but that might just mean we settle back into something that feels like normal.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.

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