This week in Bidenomics: The president vs. the business cycle

Much of the nation is baking. But the overheated job market is finally cooling off, which could mean one of two things: either a welcome return to normal or the beginning of a slide into recession.

The 2024 presidential election could turn on the outcome.

Biden is basically in a game of chicken with the business cycle. One tolerable scenario for him would have been to get a mild recession over and done with in 2023, so a recovery would be well underway as the 2024 elections hit the home stretch. That now seems unlikely to happen. So Biden has to hope there’s no downturn at all for the next 15 months. He can’t really control that, of course.

The Federal Reserve can, to some extent, and it’s not necessarily on Biden’s side.

The Fed has already raised interest rates by 5 percentage points since last March, and it may push rates a bit higher still to assure it gets inflation back to the 2% range it prefers.

Such rapid monetary tightening is supposed to crimp hiring and maybe even reduce employment. It hasn’t, yet. So the odds are maybe 50-50 that the Fed will push interest rates a bit higher by the end of the year.

If Biden were Donald Trump, he’d surely be blasting the Fed for trying to deflate the labor market and kneecap economic growth.

But Biden is the economy’s chief cheerleader, crisscrossing the nation on a kind of whistle-stop tour to tout new factories, brag about job growth, and remind voters that inflation is coming down.

Hiring slowdown

For some time, economists have been expecting a torrid pace of hiring to slow down. It finally seems to be happening.

Employers created 209,000 new jobs in June, well below the average of 316,000 new jobs each month for the past year. But there’s nothing wrong with that slowdown. In a normal economy, 209,000 new jobs per month would be a strong showing. A healthy economy can chug along even if monthly job creation averages just 100,000.

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We have not been in a normal economy, though. The 2020 COVID pandemic caused massive distortions still evident three years later. Employment plunged in April 2020 as businesses girded for a deep recession. But hiring promptly rebounded, thanks to massive amounts of fiscal and monetary stimulus. Total employment hit a new high in June 2022, and job creation continued at a nearly unprecedented pace until last month.

The June numbers are the lowest since December 2020, when there was a momentary pullback in hiring as a new COVID variant spooked businesses. Since Joe Biden took office in 2021, he has overseen the biggest employment boom in modern history. So what comes next?

Economists don't know. Many have been predicting a sharp slowdown in hiring, along with a recession, for months. They've been consistently wrong, perhaps because a combination of working from home, revamped supply chains, technical innovation, and all that stimulus have changed the economy in some fundamental way they haven’t accounted for. Or they've just gotten the timing wrong, and a recession is going to take longer to materialize than the usual forecasting models predict.

'Structurally understaffed'

The difference is crucial for Biden.

The bull case for him is that underlying trends will fuel a strong labor market for the foreseeable future.

Rick Rieder, head of global allocation investment at BlackRock, argues that many companies are "structurally understaffed," partly because of an aging population and the retirement of the baby boomers.

Other analysts think companies are "hoarding" labor because of difficulties they’ve had during recent years finding the right people. Even if there’s a recession, such trends could keep unemployment low and temper the usual pain of layoffs and income loss.

The bear case for Biden is that stimulus money and pandemic effects have merely delayed an inevitable downturn. During the pandemic, for instance, consumers built trillions of dollars in "excess savings," because they couldn’t spend on travel, dining out, and other types of activities. That excess savings has allowed consumers to keep spending, even as high inflation dented real incomes. But it’s likely to be gone by the end of the year, which could leave a hole in the economy in 2024, just as the election is heating up.

Oxford Economics recently changed its forecast from a modest recession beginning in the third quarter of 2023 — which is now — to one starting in the fourth quarter. But the forecasting firm reserves the right to change its outlook again.

"Our conviction about a recession starting this year is waning," the firm said in a June 30 analysis. "The economy has been more resilient than initially thought, but the pandemic hasn't repealed the business cycle and a recession will occur at some point, with several leading indicators pointing toward a downturn in the next 12 months." If they could extend that to 15 or 20 months, Biden would probably be thrilled.

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

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