US economy at the point of ‘maximum danger’

The president helped the economy recover, but his interventionism may be storing up future problems

Poor old Joe Biden – the guy just can’t seem to catch a break. Polls from The New York Times show that across the electorate, voters prefer Donald Trump to the current president on immigration, on national security and, perhaps most perplexingly, on the economy.

For months, there have been worries that the 11 successive rises in interest rates by the US Federal Reserve, to a 22-year high of 5.5pc, could tip the world’s largest economy into a recession. That hasn’t come to pass. Instead, Americans have kept on spending, seemingly immune to inflation. In the third quarter of this year, the world’s largest economy grew at an astonishing annualised rate of 4.9pc. Is this enough to sound the “all clear”? Or is the US economy (and by extension the rest of the world) in the midst of that Wile E. Coyote moment of blissful ignorance after running off a cliff but before gravity asserts itself?

Certainly, the reluctance of voters to credit Biden with pulling the economy back from the brink suggests they feel there’s a danger it’s the latter scenario. Ominous warnings from the executives on Wall Street and Main Street add weight to that argument.

The evidence is finely balanced. On the one hand, the Fed has all but declared “mission accomplished” in the fight to tame inflation, rate rises are now on hold, US unemployment has remained below 4pc for the last year and a half, and the economy is growing far faster than economists predicted.

But, on the other, US consumers, after months of soaking up price rises and still spending, appear to be growing punch drunk. The price of food has risen 24pc since the start of the pandemic; energy prices are up by 37pc. Even as shoppers continue to open their wallets, consumer sentiment has started to nose-dive. There’s definitely something of a paradox at play here. Policies enacted by both the Trump and Biden administrations ensured the US weathered the economic fallout from the pandemic better than other developed countries and bounced back more quickly.

During lockdowns, most people were spending less, enabling them to pay down debts and build up savings. On top of this, the government introduced a raft of measures, including enhanced unemployment benefits, moratoriums on student loan repayments and childcare tax credits.

Stimulus spending after the pandemic helped the job market and the wider economy to recover faster than in most other developed nations. A tight labour market has, in turn, boosted wages. It’s certainly true Biden’s full-throated government interventionism may be storing up problems for the future. Extraordinarily, the White House has just received a rebuke from France of all countries for overegging its industrial policy. However, the US economy is clearly outperforming Europe for the time being. A recent analysis of household finances conducted for the Fed by the University of Chicago found that the median household wealth rose by 37pc between 2019 and 2022.

This means that the average American actually emerged from the pandemic with their finances in a better state than before. And yet, the polls suggest Americans aren’t feeling it. What gives? Part of the issue is that a big driver of rising household wealth has been an increase in house prices and pension pots. That’s all well and good, but it doesn’t really help with the weekly grocery bill. And, even as inflation starts to fall, shoppers are more likely to be more conscious that the price of milk is much higher than it was two years ago rather than the fact it is now plateauing. In a survey by Bankrate out last week, a full 50pc of respondents said their financial situation has worsened since Biden was elected president while just 21pc said they were better off. In another survey conducted by The New York Times, 53pc of voters said Biden’s policies had hurt them personally.

What’s more, it’s unclear the worst is behind us. Jamie Dimon, the chief executive of JP Morgan and the high priest of Wall Street, recently declared: “This may be the most dangerous time the world has seen in decades.” He is worried the military conflicts in Ukraine and Israel will lead to persistent inflation and higher interest rates. He also cited burgeoning national debt and “the largest peacetime fiscal deficits ever”.

Similarly, Elon Musk, the Tesla boss who has his finger on the pulse of Main Street, has repeatedly warned the high interest rate environment is creating affordability issues. Of course, he’s principally concerned about car loans but it holds true for mortgage payments too. According to recent data, Americans are still sitting on around $1 trillion of savings they built up during the pandemic. This cash has acted as a buffer against higher prices and interest rates. But it will run out eventually, accentuating the pain. At that point, consumer sentiment will worsen and belts will start to tighten.

The trouble is, the federal government has already played its hand. The US deficit was $2 trillion in the 12 months to September, twice what was expected in the middle of last year. Government borrowing costs are now higher than at any time since the financial crisis. That means more tax dollars will be needed to service debt.

During a campaign debate with Jimmy Carter in 1980, Ronald Reagan stared down the cameras and posed the ultimate political question to voters: “Are you better off today than you were four years ago?”

The average American is. Unfortunately for Biden, most voters would reply in the negative.

That may not be fair but it’s a huge issue for the president with only 12 months to go until the election – especially as there’s a chance this might be as good as things get.

‘Americans emerged from the pandemic with their finances in a better state. Yet they aren’t feeling it’