Five things you need to know about the economy before Election Day

Five things you need to know about the economy before Election Day

President Biden made a big bet on an economic rebound when he took office in January 2021, just as the US economy was accelerating its recovery from the COVID-19 recession.

The combination of a $2 trillion stimulus package passed in March 2021, the Federal Reserve’s refusal to raise interest rates, and a rapid vaccine rollout helped propel the United States toward two years of blazing job growth and flat consumer spending.

But the high inflation left in its wake — largely due to factors beyond Biden’s control — has hurt some of the benefits of the rebound for many American households.

Republicans are counting on high prices and recession fears to help them win House and Senate majorities in Tuesday’s midterm elections. Inflation has been on voters’ minds and can be a powerful force for the GOP.

Democrats counter that rapid job growth under their leadership, recent progress in lowering gas prices and other key legislative victories have left the United States in a better position than any other country currently in the faced with similar circumstances.

Here are the five things you need to know about the US economy ahead of Election Day.

The labor market is still strong, but could run out of steam

A help wanted sign sits in a window.

The Help Wanted sign is displayed in Deerfield, Illinois on Wednesday, September 21, 2022.

No president before Biden has presided over such a strong labor market.

The United States has gained more than 10 million jobs since Biden took office in January 2021 and has seen the unemployment rate fall to 3.5%, in line with its pre-pandemic level, no later than only in September. While the vast majority of these job gains simply replace jobs lost to the pandemic, the strong overall job gains are just one aspect of a stellar market for job seekers.

Wages have risen 4.7% over the past year thanks to unprecedented demand for workers. With about two jobs open for every unemployed American, job seekers have been able to move from company to company and land better jobs with higher pay along the way.

October’s jobs report showed the US gained 261,000 jobs last month, but with the most recent data some signs of an impending slowdown have emerged. Unemployment rose despite maintaining the same labor force size, and some key industries hit by higher interest rates reversed course.

“No one should worry that the US labor market is about to start to sink. Unemployment is still low and job growth is strong, but today’s report shows there could be leaks,” wrote Nick Bunker, director of economic research at Indeed, in an analysis. Friday.

Inflation has been difficult to control

Gasoline prices are displayed at a gas station in Sacramento, Calif., Friday, Sept. 30, 2022. (AP Photo/Rich Pedroncelli)

The US economy has avoided the long and exhausting recovery from the pandemic-induced recession that has left other countries far worse off. But the United States has been unable to avoid the global surge in inflation caused by the choppy global economy and worldwide efforts to stabilize it.

Consumer prices rose 8.2% year on year in September, according to the Labor Department’s Consumer Price Index (CPI), a popular way to gauge inflation. Although the annual inflation rate is down after peaking at 9.1% in June, it remains near four-decade highs and prices are well north of where they started in January 2021.

Economists attribute the global inflationary surge to a wide range of factors.

And while Republicans have blamed US inflation on Biden’s stimulus bill, most economists believe the central bank’s low interest rates, supply chain dysfunctions, pent-up demand during the pandemic and war-induced supply shocks in Ukraine played a much larger role.

Economic growth is stagnating

After two quarters of contraction in gross domestic product (GDP) and a quarter of growth – both largely driven by the vagaries of international trade – the US economy is about as big as it was at the start of the year.

Despite Republican claims to the contrary, the United States was not in a recession earlier this year when GDP turned negative, thanks in large part to a booming job market and flat consumer spending. . But the latest economic growth review showed a sharp decline in some business spending and a plateau in domestic consumption.

The economy was destined to slow in 2022 after growing 5.7% in 2021, a rapid pace driven largely by the return of the COVID-19 recession. Economists, however, are increasingly concerned that the United States could slide into a recession next year.

Interest rates are rising

High inflation prompted the Federal Reserve to make a series of giant interest rate hikes, the effects of which could tip the United States into a recession. While the bank is likely to slow the pace of future rate hikes, Fed Chairman Jerome Powell has made it clear that he and his colleagues are not yet considering stopping them.

“The pace of interest rate hikes will slow, but not stop. The Fed is committed to derailing inflation even though officials believe that will require higher unemployment,” Diane Swonk, chief economist at KPMG, said in a Wednesday analysis.

The Fed is expected to increase its base interest rate range, currently set at 3.75 to 4%, by another 1.25 percentage points before stopping at some point next year. The bank will also keep rates high until inflation drops or the economy slips into a recession.

“They would like to avoid causing a larger and more prolonged rise in unemployment, if possible. They don’t want to accidentally trigger a crisis in the credit markets. The jury is still out on how well they can calibrate rate hikes to achieve these goals,” Swonk wrote.

The housing market downturn is far from the bottom

A house in Mount Lebanon, Pa., under contract, Oct. 17, 2022. (AP Photo/Gene J. Puskar)

The Fed snapped more than a decade of steady house price growth and post-pandemic home sales boom by starting to raise interest rates in March.

Rapid rate hikes from the Fed pushed the average rate on a 30-year fixed-rate mortgage above 7% for the first time since before the housing market collapsed in the early 2000s.

Housing experts are confident that the United States will not experience another foreclosure crisis like the one in 2008, let alone the financial panic it caused. But economists and analysts expect house prices to fall and home sales to fall even deeper in 2023 as mortgage rates continue to rise.

“Mortgage rates could take longer to come down than many had expected, meaning housing trends could continue to deteriorate as the economy adjusts to higher rates,” said Redfin’s deputy chief economist, Taylor Marr, in an analysis.

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