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How economic headwinds are posing a challenge to Biden

Economic headwinds are posing a challenge to President Biden as he readies a possible reelection bid during which jobs and the economy are likely to take center stage.

The White House has sought to highlight the resilience of the U.S. economy in the face of high inflation, rising interest rates and mounting layoffs across the technology, real estate and media sectors in making arguments for Biden’s economic stewardship.

Inflation had been expected to be a serious headwind for Democrats in last November’s midterms, but instead the party exceeded expectations by gaining a Senate seat while keeping its House losses to a minimum.

New threats are now on the horizon even as the White House hopes for a soft economic landing from Federal Reserve efforts to lower inflation and prevent a recession.

Here are some of the economic challenges confronting Biden.

Big Tech layoffs 

Mounting layoffs at big technology companies — many of which drastically expanded operations throughout the pandemic — have prompted a parade of worrying headlines and concerns among some investors.

Major tech companies have laid off more than 200,000 workers over the past four months, the majority of which are for high-paying, white-collar jobs. Amazon, Microsoft and Google in particular announced tens of thousands of layoffs this week.

The White House said this week that Biden is monitoring the layoffs and is aware of the impact it has on workers and their families.

They also argued that the layoffs overall are at a low level, pushing back on the idea that the decisions by Microsoft and Google represent a major concern for the economy or workers in other industries.

“The U.S. economy continues to grow … and the unemployment is a 50-year low. So leading analysts have publicly stated that they do not believe the recent layoffs in the tech industry are indicative of trends in the broader economy,” press secretary Karine Jean-Pierre said on Friday. 

Only about 190,000 Americans filed new first-time claims for unemployment insurance in the week ending Jan. 14, according to Labor Department data. Layoffs on the whole remain well below average levels from 2019, when new weekly jobless claims regularly topped 200,000 or more.

Robert Frick, corporate economist at Navy Federal Credit Union, said the high demand for workers in other sectors has helped those laid off from big tech firms and other hard-hit sectors find work quickly. 

“The labor market is still so tight that many tech workers, and workers with other skills, are snapped up well before they need to collect an unemployment check,” Frick explained in a Thursday analysis.

Debt ceiling fight

The White House is standing firm that it will not negotiate with Republicans in Congress who are demanding spending cuts in exchange for raising the nation’s debt ceiling.

The White House has pointed to numerous clean debt ceiling hikes in recent years, including when Donald Trump was president and Republicans controlled Congress, as precedent for why House Republicans shouldn’t demand conditions.

Negotiations may be inevitable given the GOP’s control of the House and the fact that Democrats need Republican votes in the Senate to get past procedural obstacles.

The stakes are high, with experts warning that a default would cause deep pain to the economy.

The Treasury Department has already enacted “extraordinary measures” that will allow the U.S. to avoid a default over the next few months, but some kind of deal is likely to be needed in June.

Inflation and the Fed

The Fed’s rapid interest rate hikes have helped bring inflation down from a 9.1 percent annual rate in June to 6.5 percent in December, according to Labor Department data released last week. 

The steady decline of inflation and the slowing of the U.S. economy have pushed the Fed to slow down its interest rate hikes. The Fed is expected to hike its baseline interest rate range by 0.25 percentage points on Feb 1., which would be its smallest rate hike since March 2022.

Some experts and investors think the Fed has already done enough to keep annual inflation moving down to its target of 2 percent and should be careful about weighing down the economy with even higher rates.

“I think there is all the room in the world for the Fed to really reduce its pace of interest rate increases. Honestly, I’d go to zero,” said Josh Bivens, research director at the Economic Policy Institute, a left-leaning think tank.

But Fed leaders have made clear that they are not yet done hiking rates and would rather risk driving the economy into a recession than losing control of inflation.

“You just can’t declare victory too soon, right? If you back off … while inflation is still elevated, it’ll come back ever higher the next time, meaning you have got to do even more damage to take control of it,” said Tom Barkin, president of the Federal Reserve Bank of Richmond, in a Tuesday interview on Fox Business Network.

Consumer spending is slowing

Many Americans are finally reaching their breaking points after two years of high inflation. 

Retail sales fell in both November and December, according to data released Wednesday by the Census Bureau, even amid the traditionally busy holiday shopping season. Factory output has fallen as stores struggle to clear out growing inventories, and the nearly yearlong slump in home sales is also sapping momentum from the economy.

While lower consumer demand is essential to bringing inflation down, a steady decline in spending could keep slowing the economy toward a recession. Roughly two-thirds of U.S. economic activity is driven by consumer spending, but many American households have now burnt through pandemic savings and are leaning on credit cards to keep pace.

“We are seeing some of the imbalances in supply and demand of the past two years that led to high inflation start to unwind. Declines in retail sales, after years of outsized gains in both prices and goods, are a good sign for getting back to normal,” wrote Claudia Sahm, a former Fed research director, in a Friday analysis.

“And it’s a sign of how we are walking a tightrope of lower inflation, keeping jobs, and avoiding a recession,” she wrote

Source: The Hill

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