Heading into his State of the Union address on Tuesday, President Joe Biden sees an America with a bright future.
The Republicans' vision is much bleaker: a nation beset by crippling debt and inflation for which Biden is largely responsible. Additionally, now the Republicans, with a majority in the House, are hell-bent on blocking the president.
The harsh reality is that the United States is walking a tightrope, trying to balance efforts to reduce inflation with the need to stay on its feet and avoid falling into recession. Additionally, this happens with the apparent contradiction of a buoyant labor market and the lowest unemployment rate in the last 54 years.
Judging by his previous speeches, Biden believes that the measures passed during his presidency can shower the United States with new factories and protect it from climate change. Roads, bridges, sewage systems, ports, and internet service would improve. The middle class would gain in financial security. Additionally, the same would happen with the position of the country in the international economic hierarchy.
Proof of this, declared the president on Friday, is the report on the labor market for January. 517,000 jobs were created and the unemployment rate fell to 3.4%, proving with “crystal clarity” that the “chorus of detractors” is wrong.
“This is where we are: the largest job growth in history,” Biden added. "Simply put, I would say that Biden's economic plan works."
Republicans respond. They say Biden's trillion-dollar budget is responsible for the high rate of inflation and rising gas and food prices. Republican lawmakers want to repeal their tax increases and increased funding for the IRS. They oppose his student debt forgiveness and blame him for migrants trying to cross the border from Mexico.
Neither side fully understands the state of the economy.
A group of experts read the data and say that a recession is on the horizon. Another group focuses on a different set of numbers and sees cause for rejoicing. It is a disorienting moment.
Biden can celebrate the low unemployment rate while Republicans deplore dangerously high inflation.
“It's the best of times and the worst of times for the US economy, to borrow a phrase,” says Mark Zandi, chief economist at Moody's Analytics. “The economy is replete with contradictions as it struggles to overcome the tremendous blows of the pandemic and the Russian invasion of Ukraine.”
Zandi expects the US economy to "dodge" a recession this year, although many economists believe there will be a downturn.
Gus Faucher, chief economist at PNC Financial Services, believes the probability of a recession this year is 60%, but that it will be "mild" because "labor shortages will limit layoffs. Consumer income statements are in a very good state and the banking system is solid”.
Most people in the United States take it for granted that the country is already in a recession, but personally they feel good.
Just 24% believe the national economy is doing well and 76% say conditions are poor, according to a survey by The Associated Press-NORC Center for Public Affairs Research. At the same time, 57% say that their personal situation is good.
The crucial economic force right now is the Federal Reserve (Fed), the nation's central bank, which is tasked with keeping prices stable and inflation around 2%. Consumer prices rose 6.5% last year. To bring down inflation, the Fed has tried to rein in jobs and growth by raising its benchmark interest rate over the past year. When Biden delivered the State of the Union address in 2022, the Fed rate was close to zero. It is now above 4.5%, the fastest rise in four decades, and central bank president Jerome Powell said on Wednesday that it will likely continue to rise.
"Without price stability, the economy doesn't work for anyone," Powell told reporters after the most recent Fed board meeting.
The Fed's rate hike signals a 180-degree shift in the way the economy works.
Since the 2008 financial crisis, the central bank has kept the benchmark rate at its lowest historical levels. This made it easy for tech startups to emerge, because cheap money meant investors expected them to focus on growth rather than profit. Consumers have grown accustomed to historically low-interest mortgages and car loans.
The rate jump last year produced a sudden turnaround. The bags fell. Prominent tech stocks like Google and Microsoft announced layoffs. As computer chip factories built new plants and lauded Biden's moves, the world economy veered from semiconductor shortages to gluts. Mortgage rates jumped to 7% before dipping to 6% last week. The increase meant that monthly payments became inaccessible to those who aspired to buy a home, forcing them to continue renting.
Glenn Kelman, CEO of Redfin real estate, notes that the housing market is stronger than many anticipated, but the years of low rates have exacerbated generational inequality. Baby boomers got rich as their property values increased, but rates jumped when millennials wanted to buy and found prices out of reach.
“A generation ago, boomers owned 21% of America's wealth,” adds Kelman. “For millennials, the figure is 7%. They are still outside, looking in."
Although Biden says his mission is to give Americans a sense of confidence, the challenge he faces is that of an economy with few certainties.
In 2020, when the pandemic began, government aid was such that a financial market decline turned into a rise. In 2021, Biden tried to reassure the country that rising prices were a passing inconvenience, but found that the general perception of his first two years in office was defined by inflation. Higher interest rates were expected to trigger layoffs and rising unemployment, but the strength of hiring is a sign that the economy is still clinging to traditional expectations.
The economic challenge for Biden could be that no one knows what will happen.
“We are in an environment of great uncertainty,” says Gregory Draco, chief economist at EY-Parthenon. "The conflicting signals we continue to receive make it extremely difficult to get an accurate picture."
