08 Apr The 2024 Presidential Election
“It’s the economy, stupid!” – James Carville (1992)
Americans vote their wallets. Whether they like the incumbent’s or the challenger’s policies … or hate them both, they’ll vote for the candidate they believe will impact most positively on their economic health. If America’s economy has been performing well, voters will re-elect the incumbent. If it’s been performing poorly, voters will opt for the challenger. That’s one reason why recent one-term Presidents, Bush1 and Trump, became victims of “the economy, stupid.” The most recent two-term Presidents, Clinton, Bush2 and Obama, were blessed with strong economies at re-election time. President Biden therefore would be well-advised to maximize the odds of his re-election year being an uplifting one.
Whether President Biden can engineer good economic times is questionable for a variety of reasons, one of which is that economic management, yet alone economic timing, is a tricky feat. America today is experiencing significant volatility economically, socially, and internationally. Most economists are predicting an imminent recession – it may happen in 2023, or in 2024 …, or possibly in 2025. The ingredients include a yield curve that’s been inverted since June 2022; recent inflation at a 40-year-high that has led the Federal Reserve to raise interest rates and tighten monetary policies; the deadlock over the U.S. debt ceiling; a weakening Dollar; rising oil prices; “crypto winter”; bank failures; the loss of regional bank depositors who have fled to money market funds leaving behind “zombie” banks with little lending power; substantial portfolio losses by insurance companies and pension funds that will pressure their future obligations; a deflating SPAC bubble; highly-leveraged private equity, venture capital and commercial real estate (where vacancies already have reached 2009 levels) (a situation referred to by some as “The Demise of Speculation”); and a burgeoning trade war between America and its largest trading partner, China. The Fed is walking a tightrope in forcing America’s highly-leveraged economy to deleverage at a time when America’s social fabric is torn, America’s government paralyzed, and government debt is at historically-high levels (a subject discussed by TLR on March 25th). Add to these headwinds unprecedented demographic change and health and technology disruptions (such as AI) that are pressuring business and personal relationships. This at a time when great power rivalries are heating up between the West and the Axis of the Sanctioned.
Needless to say, a lot could go wrong between now and November 2024. Avoiding recession being a domestic priority, what is President Biden doing to steady the economy …, noting that steadying the economy also requires the Fed to succeed in its inflation-taming campaign.
If there is to be a recession, the best timing for President Biden would be 2023 or 2025. The worst would be Q2 or Q3 of 2024. Few leaders have succeeded in micro-managing economic boom and bust cycles, yet alone the more difficult task of fine-tuning their timing. The Biden Administration has adopted a strategy of massive industrial-policy subsidies (via the Inflation Reduction Act, the CHIPS and Science Act, and the Infrastructure and Investment and Jobs Act) combined with the Fed’s management of Quantitative Tightening (QT) to increase investment, stimulate job-creation and spending, defeat the inflationary dragon, and lead the American economy to a soft landing and renewed growth.
The Biden Administration’s oil policy reflects that strategy. President Biden in 2022 released 180 million barrels of oil from America’s Strategic Petroleum Reserve (SPR) in an effort to stabilize prices. The releases achieved that goal by cutting gasoline prices at the pump by ~40 cents/gallon compared to what they would have been absent the releases. However, those releases bled the SPR to its lowest level since 1983. There are only 26 million barrels authorized for future release, so there is little firepower remaining to protect against energy shocks. The Administration previously indicated that it would seek to repurchase oil to replenish the SPR at ~$70/barrel, but failed to do so in March when oil dropped to $67/barrel. The Biden Administration has continued to bet that releases to-date plus the authorized additional 26 million barrels will combine with slowing global demand to keep a lid on prices …, and thereby reduce domestic energy inflation.
This week’s employment reports provide additional support for the Administration’s strategy. They show a slowing job market with the gap between job openings and the unemployed being reduced by 20%, a critical factor for Fed Chair Jay Powell’s interest rate policies. Jobless claims also exceeded expectations. Having already brought asset inflation under control, the recent focus of the Fed’s QT program has been wage inflation … and the jobs and jobless claims reports indicate that wage pressures are easing.
Nevertheless, the odds of a 2023 recession are growing as evidenced by March’s string of bank failures. Manufacturing surveys similarly are headed down, as is the Institute of Supply Management’s Non-Manufacturing Index. Its measure of inventories has exceeded new orders since June of last year, the longest stretch since the mid-’70s. The University of Michigan’s Consumer Sentiment Index, its Index of Current Economic Conditions and its Index of Consumer Expectations each is near its lows. In addition, with the announcement by OPEC+ that it will be reducing production beginning May 1st, Goldman Sachs has raised its oil price forecasts for 2023 and 2024 to $95/barrel and $100/barrel, respectively. Each of these magnifies 2023 economic risks. Although the chances of global economies entering a recession this year have grown significantly, that would not necessarily be a bad thing for President Biden. A 2023 recession that’s followed by measurable growth in 2024 would play well for voters next November … as would growth in 2023 and 2024 followed by a 2025 recession. However, should 2024 witness recession, too-slow growth or continued inflation, expect that the next President will be named Trump (or DeSantis, Haley, or Sununu) and the next Congress will have leaders named McConnell and McCarthy.
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Finally (from a good friend)