This week in Bidenomics: It’s been a pretty good year – Yahoo Finance

This week in Bidenomics: It's been a pretty good year - Yahoo Finance

If current economic trends continue, 2022 will end as a year where danger flared, alarms sounded, and emergency interventions did just enough to avert disaster.

The biggest economic story of 2022 was inflation. It peaked at 9.1% in June, the same month gasoline prices hit $5.02 per gallon. Since then, inflation has moderated. Year-on-year inflation is now at 7.1%. Gas prices are down to about $3.15. Improving confidence surveys suggest that consumers have noticed.

The inflation police, aka the Federal Reserve, acknowledged that it has waited too long to deal with rising prices. The first rate hike by the Fed came in March, when inflation was already 8.6%. The Fed has now raised rates by nearly 4 percentage points this year, one of the fastest tightening cycles ever. The Fed wants to cut inflation all the way down to 2%, but could accept 3% for a period of time if everything else seems in order.

What happens in 2023 will let us know if 2022 ended well. A prominent group of forecasters predicts inflation falls below 3% by the end of 2023, with an unemployment rate of 3.7% now to 4.4% a year from now. That would be the desired ‘soft landing’ in which the economy cools down but there is no recession, or else a very mild one. That could pave the way for a strong recovery in the second half of 2023, when wages finally outpace inflation and consumer and business purchasing power improves.

If 2023 goes like this, that would be President Biden’s last two years [first?] presidential term. Biden’s first major stumbling block came in the summer of 2021, during the failed withdrawal of US troops from Afghanistan and the fall of the US-backed Afghan government. Biden sank even further as he insisted inflation would be temporary and rapidly rising prices proved him wrong.

To be approval rating hit a low of 38% in July 2022, shortly after gas prices hit all-time highs. That suggested Republicans would romp in November’s midterm elections, which are often a referendum on how well the current president is doing.

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But Biden and his fellow Democrats rallied. In August, Biden signed the Inflation Reduction Act (IRA), which, contrary to its name, mainly finances green energy projects to help reduce carbon emissions. The bill contained many provisions that Americans broadly support, while more controversial Social Security measures failed to pass. As a result, there is no meaningful response to the IRA chasing Biden the way President Obama’s opposition to the Affordable Care Act did after that law was passed in 2010.

The CHIPS Act, which Biden also signed in August, enjoyed some bipartisan support and addressed the growing need to offset the Chinese government’s support for key industries. This is a new American foray into “industrial policy”, and there may be unintended consequences. But for now Biden continues to show pioneering work in a factory to brag about the return of tech manufacturing to America.

After two negative quarters of GDP growth at the start of the year, output recovered, with GDP growing at a solid 3.2% in the third quarter. The unemployment rate remains remarkably low at 3.7%. Economists are expressing disbelief that employers are still creating 335,000 new jobs per month, which should not happen if the Fed raises rates.

Biden and his fellow Democrats dodged a bullet in the meantime, holding on to the Senate and losing the House by a much smaller margin than expected. They could or should have lost both houses decisively. The president’s party almost always loses ground in midterm elections, especially when there are economic headwinds. High inflation certainly qualifies.

Republicans messed up the midterm elections. They put forward some absurd Trumpian candidates and were on the wrong side of the electorate on abortion rights, which is a top 3 campaign issue now that the conservative Supreme Court overturned Roe v. Wade.

Biden makes a good case that the Democrats outperformed on the merits. In terms of legislative achievements, Biden has signed more major bills in two years than most presidents have in four years. Biden has also shown vital leadership in supporting Ukraine in its fight against Russian invaders.

The socialist left within Biden’s party was unable to force everything through the government on voters. Democrats look like they can really get things done. Biden’s self-proclaimed pragmatism looks somewhat legit.

One piece is missing. Biden’s approval rating is still underwater at a measly 43%. Things have improved slightly now that inflation has come down, but voters remain clearly hesitant about Biden. To get his approval back above 50%, he probably needs a much sharper fall in inflation. If we get into a recession, it should start and end quickly, without fear of anticipation. The Fed needs to see enough progress against inflation to stop raising rates so the housing market can stabilize. It would be nice if stocks bounce back after a bear market in 2022.

Biden may feel pretty good about the way 2022 is turning out, but he needs steady improvement in 2023 if he wants to be a popular president again. He says he plans to run for re-election in 2024, even if he turns 82. Biden’s age and health will factor into that decision, but so will the direction of the economy in 2023.

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

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