This week in Bidenomics: The back-to-normal economy

During the eight years prior to the COVID outbreak in 2020, the economy added an average of 196,000 new jobs per month.

The latest job numbers show a gain of 199,000 jobs in November 2023, essentially the same as the pre-COVID norm.

During the same pre-COVID period, real earnings, adjusted for inflation, rose by an average of 0.8% per year. The latest measure of real earnings growth is exactly the same, 0.8%.

Inflation during those eight pre-COVID years averaged 1.6%. It’s now 3.2%. But inflation has been rapidly falling, and many economists think it will be close to 2% by the end of 2024. Perhaps more important, a confidence survey found that consumers are worrying a lot less about inflation than they were a few months ago, the main reason confidence jumped in late November.

Investors and economists have been heartily debating whether there will be a soft landing or a hard landing or maybe even no landing, and whether a recession is imminent. But there’s a simpler and less jargony way to describe what’s happening to the US economy: It’s simply getting back to normal.

The 2020 COVID pandemic produced deep distortions in the economy that lasted, and will probably continue to last, a lot longer than experts expected at the time. And they went beyond the effects of the pandemic itself to include stimulus measures the United States and other governments took, deep behavioral changes by businesses and consumers, and multiple second- and third-order effects as everybody reacted and counter-reacted to new economic pressures.

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The list of distortions is long, but a few of the most important examples include extreme snarls in global supply chains, a massive surge in demand for goods as people got stuck at home got more stuff, and an unprecedented $6 trillion in US stimulus spending that quickly bounced the economy out of a COVID-induced recession. Among other things, those phenomena supercharged spending and triggered labor hoarding at many companies worried about running short of workers needed to meet elevated demand.

The most obvious economic impact was a spurt of inflation, which rose from the typical 2% range in early 2021 to a peak of 8.9% in June 2022. The extraordinary job growth under President Biden was also a byproduct of COVID, as that massive stimulus supercharged a recovery and companies raced to hire everybody they could find. For the first two years of Biden’s presidency, employment growth averaged 500,000 new jobs per month, roughly three times what is normal in a healthy economy. Job growth is good, but job growth that fast probably made inflation worse.

More than three years after COVID struck, we’re finally returning to normal economic patterns. A 5.2% surge in GDP growth in the third quarter may have been the last hurrah. GDP growth for the current quarter is tracking at just 0.9%, according to S&P Global Market Intelligence. Something like $2.5 trillion in “excess savings” that Americans accumulated during the pandemic, when they couldn’t go out and spend, is dwindling, which means the fuel for booming GDP growth is running low.

This is generally good. A return to normal would benefit mostly everybody, including the incumbent running for reelection, Biden. During COVID and its aftermath, there was a lot of talk about a “new era” of structurally higher inflation, maybe even stagflation, driven by de-globalization, populism, nationalism, and other isms that would necessitate permanently higher interest rates and government austerity that would put living standards under stress.

But maybe not. If job and economic growth continue to cool, inflation will fall back to normal ranges and the Federal Reserve will ease up on monetary policy. Interest rates, including the cost of mortgages, will fall — not back to the crazy low levels of 2021, but by enough to cut borrowers a break. Home values will fall and affordability will improve from the terrible levels they’re at now, allowing more people to become homeowners.

There are risks, of course, as there always are. If job and economic growth soften too much, they could slide into recessionary territory. Inflation would probably no longer be a problem, but rising unemployment and lost incomes would be. If that occurred in the months before the 2024 election, it would harm Biden’s reelection odds as much as any inflation. But we’re not there yet, and maybe we’ll get to enjoy normal for a while before the next bad thing happens.

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

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