If current economic trends stay in place, 2022 will end up as a year in which danger flared, alarms blared, and emergency intervention did just enough to prevent 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. Inflation has been moderating ever since. The year-over-year inflation rate is now 7.1%. Gas prices have plunged to around $3.15. Improving confidence surveys suggest consumers have noticed.
The Inflation Police, aka the Federal Reserve, acknowledged it waited too long to head off rising prices. The Fed’s first interest-rate hike came in March, when inflation was already 8.6%. The Fed has now hiked rates by nearly 4 percentage points this year, one of the fastest tightening cycles ever. The Fed wants to push inflation all the way back down to 2%, but might accept 3% for a period of time if everything else seems okay.
What happens in 2023 will let us know if 2022 ended well. One prominent group of forecasters predicts inflation will fall below 3% by the end of 2023, with the unemployment rate inching up from 3.7% now to 4.4% a year from now. That would be the desired “soft landing” in which the economy cools, but there’s no recession, or else a very mild one. That could set the stage for a robust rebound in the second half of 2023, as wages finally get ahead of inflation and the purchasing power of consumers and businesses improves.
If that’s how 2023 goes, it would give President Biden a potent tailwind during the last two years of his [first?] presidential term. Biden’s first big stumble came in the summer of 2021, during the botched withdrawal of U.S. troops from Afghanistan and the fall of the U.S.-backed Afghan government. Biden sank further still as he insisted inflation would be temporary and rapidly rising prices proved him wrong.
His approval rating bottomed at a terrible 38% in July 2022, shortly after gas prices hit the highest levels ever. That suggested Republicans would romp in the November midterm elections, which are often a referendum on how well the current president is performing.
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 cut carbon emissions. The bill included many provisions Americans broadly support, while more controversial social-welfare measures didn’t make the cut. As a result, there’s no meaningful backlash to the IRA that will dog Biden the way opposition to the Affordable Care Act did President Obama after that law 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 U.S. foray into “industrial policy,” and there could be unintended consequences. But for now Biden keeps showing at a factory groundbreakings to brag about tech production returning to America.
After two negative quarters of GDP growth to start the year, output recovered, with GDP growing at a solid 3.2% pace in the third quarter. The unemployment rate remains remarkably low, at 3.7%. Economists express disbelief that employers are still creating 335,000 new jobs per month, which is not supposed to happen when the Fed if jacking up interest rates.
Biden and his fellow Democrats dodged a bullet in the midterms, holding onto the Senate and losing the House by a much narrower margin than expected. They could, or should, have lost both houses decisively. The president’s party almost always loses ground in midterm elections, and that’s especially true if there’s an economic headwind. High inflation certainly qualifies.
Republicans botched the midterms. They ran 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 can make a decent case that Democrats outperformed on the merits. In terms of legislative accomplishments, Biden signed more big bills in two years than most presidents sign in four. Biden has also shown indispensable leadership in his support for Ukraine as it battles Russian invaders.
The socialist left within the Biden’s party wasn’t able to foist government-run everything on voters. Democrats look like they can actually get things done. Biden’s self-proclaimed pragmatism looks somewhat legit.
There’s one missing piece. Biden’s approval rating is still under water, at a weak 43%. It has improved a bit as the inflation rate has fallen, but voters clearly remain reticent of Biden. For his approval to get back above 50%, he probably needs a much sharper drop in inflation. If we’re going to have a recession, it needs to start and end quickly, with no more anticipatory dread. The Fed needs to see enough progress against inflation to stop raising rates, allowing the housing market to stabilize. It would be nice if stocks bounced back after a bear market in 2022.
Biden can feel pretty good about the way 2022 is ending, but he needs steady improvement in 2023 if he wants to become a popular president again. He says he plans to run for reelection in 2024, even though he’ll be 82. Biden’s age and health will factor into that decision, but so will the direction of the economy in 2023.