The U.S Economy: The Perception and Reality

While the U.S. economy shows strong fundamentals, such as low unemployment and robust consumer spending, challenges like inflation, geopolitical risks, and fiscal deficits need careful management to sustain growth and stability.

Comparing the economic fundamentals under the Biden administration to those during the Trump administration involves looking at several critical indicators, including GDP growth, unemployment, inflation, and stock market performance.

GDP Growth

• Biden Administration: The U.S. economy has shown resilience post-pandemic, with GDP growth rates stabilizing around 2.8% in 2023, though growth could decelerate slightly in 2024 to about 0.7% (J.P. Morgan | Official Website).
• Trump Administration: Before the pandemic, the economy experienced robust growth, peaking at 2.9% in 2018. However, the economy contracted sharply in 2020 due to the COVID-19 pandemic (The Conference Board).

Unemployment

• Biden Administration: Unemployment rates have dropped significantly from pandemic highs, hovering around 3.6% in mid-2024, indicating a strong labor market (The Conference Board).
• Trump Administration: The unemployment rate was historically low, reaching 3.5% in 2019 before spiking to over 14% in April 2020, caused by the pandemic. It improved to 6.3% by the end of Trump's term (BEA).

Inflation

• Biden Administration: Inflation has been a significant issue, with rates peaking at over 6% in early 2023 before moderating to around 3.3% by mid-2024.
• Trump Administration: Inflation remained relatively stable and low, averaging around 2% for much of his term. However, inflationary pressures emerged towards the end of 2020 due to pandemic-related supply chain disruptions.

Stock Market Performance

• Biden Administration: The stock market has shown resilience with periodic volatility. The S&P 500 continued to grow, albeit slower than the initial post-pandemic recovery phase (The Conference Board).
• Trump Administration: The stock market experienced significant gains, with major indices like the S&P 500 reaching new highs due to corporate tax cuts and deregulation. However, due to the pandemic, there was a sharp decline in early 2020, followed by a rapid recovery towards the end of his term (BEA) (The Conference Board).

Fiscal Policies

• Biden Administration: The administration has implemented significant fiscal measures, including the American Rescue Plan, to stimulate the economy and support recovery from the pandemic. The fiscal deficit has increased but could narrow slightly in 2024 (J.P. Morgan | Official Website)
• Trump Administration: Major fiscal policies included the Tax Cuts and Jobs Act, which lowered corporate tax rates and various deregulatory measures.

These policies initially boosted economic growth but increased the federal deficit (The Conference Board). While both administrations have faced unique challenges and circumstances, the Biden administration has achieved strong fundamentals in the aftermath of the pandemic, with improvements in GDP growth, unemployment, and a moderated inflation outlook. However, public perception remains skewed due to political polarization and differing impacts on various demographic groups.

However, Biden's economy has begun to normalize. In May, the U.S. economy saw an addition of 272,000 jobs, which indicates continued job growth. However, despite this increase in employment, the unemployment rate rose to 4%. Several factors can explain this seeming paradox:

1. Labor Force Participation Rate: If more people start looking for jobs and reenter the labor force, unemployment can increase even if the economy adds many more jobs.
2. Mismatch in Job Skills and Opening: There might be a mismatch between job seekers' skills and those in demand.
3. Regional and Sectoral Disparities: Job growth might be concentrated in specific regions or industries. At the same time, other areas or sectors experience stagnation or job losses, leading to an overall increase in the unemployment rate.
4. Temporary Job Market Dynamics: Seasonal factors or temporary layoffs in specific industries could also cause a short-term increase in the unemployment rate.

Understanding these dynamics helps to provide a more complete picture of the labor market beyond the headline numbers.

The paradox in an economy exists when job growth coincides with a rising unemployment rate, such as what happened in the U.S. economy in May 2024. Many economists had predicted a recession in the U.S. economy, which has not materialized. Instead, the U.S. economy has been charging on. So why are many people pessimistic about the thriving economy?

Factors, including media coverage, political narratives, and individual experiences, influence the divergence between perception and reality in the U.S. economy. While macroeconomic indicators show a recovering and resilient economy, ongoing challenges like inflation and political sentiments continue to shape public sentiment. The news media, political pundits, and individuals with anti-Biden sentiments tend to disproportionately emphasize harmful elements like inflation in their reporting, potentially shaping a perception of economic instability among the general public.

Opposition groups often use economic challenges to erode confidence in the current administration, while individual experiences, however genuine, may significantly influence public perceptions of the real economy. President Biden's advanced age, at 81 years old, has become a focal point of public concern. As the oldest U.S. president, his decision to run for a second term has led many voters to question his ability to effectively serve, with his age overshadowing his achievements in office. In recent times, President Biden's stance in support of Israel during its war with Hamas has resulted in the disaffection of several potential voters. It has also caused a schism within the Democratic Party.

When Joe Biden's presidency began on January 20, 2021, the Covid-19 pandemic was still ongoing. Before the pandemic, the U.S. experienced substantial job growth and record-low unemployment rates. However, the pandemic caused a sharp economic downturn in 2020, leading to widespread lockdowns, business closures, and disruptions in financial activities. The initial effect was a significant economic decline marked by a rapid increase in unemployment and a decline in Gross Domestic Product (GDP). In April 2020, unemployment rate spiked to 14.8%. As of early 2024, approximately 1.13 million Americans have died due to COVID-19.

During the economic slowdown, spending on services like travel, entertainment, and dining sharply declined, while consumption of goods such as home improvement, groceries, and electronics increased. President Biden signed the $1.9 trillion America Rescue Plan to provide a substantial stimulus to boost the national economy. He also implemented the Infrastructure Investment and Jobs Act, a significant $1.2 trillion investment to generate job opportunities and revitalize the country's infrastructure.

Inflation Not Created by Biden

The COVID-19 pandemic led to decreased production, disrupted supply chains, rising consumption due to government stimulus, and significant inflationary pressures, making managing inflation more complex during and after the pandemic. In the absence of substantial government stimulus, the economy would have floundered; the U.S. government's $1.9 trillion American Rescue Plan included direct payments to individuals, extended enhanced unemployment benefits, expanded the Child Tax Credit, and allocated funds for state, local, and tribal governments, COVID-19 testing, contact tracing, and vaccine distribution. As a result, it led to a 5.7% annual GDP growth rate, reduced poverty, and accelerated job recovery, lowering the unemployment rate from 6.3% to 3.9% in 2021.

The Infrastructure Investment and Jobs Act was $1.2 trillion and an additional $550 billion in new federal spending, including allocations for roads, bridges, rail, high-speed internet, water infrastructure, power, clean energy, and electric vehicle (E.V.) infrastructure. The spending bill aims to create millions of jobs through infrastructure projects and support the transition to a greener economy.

The experiences of the COVID-19 pandemic and the Great Recession of 2008 differed regarding the significant economic downturns, their impacts, and their responses. The Great Recession started with the housing bubble bursting and the resulting financial crisis, leading to high unemployment and a slow recovery.

On the other hand, The COVID-19 pandemic wreaked havoc globally as the rapid spread of the coronavirus led to widespread illness and fatalities, causing widespread disruptions across all sectors due to lockdowns, social distancing, and business closures, unlike the sector-specific impact of the Great Recession. Therefore, learning from the Great Recession's impact and recovery, it is reasonable to assume that any president would have taken significant action to address the unprecedented crisis posed by the COVID-19 pandemic.

As of mid-2024, the U.S. economy exhibits a mixed but cautiously optimistic outlook. Recent data reveals a slight deceleration in growth, with the first quarter's real GDP growth revised to 1.3% from an initial 1.6% estimate. This moderation is attributed to weaker consumer spending, private inventory investment, and federal government spending. However, there were upward revisions in other areas like state and local government spending and exports (BEA).

Inflation remains a key concern, with the annual inflation rate at 3.3% in May 2024. Although it marks a significant decrease from the high levels seen in 2022 and 2023, the Federal Reserve will keep interest rates high until mid-2024 before considering gradual cuts. This move aligns with projections anticipating the Fed maintaining the federal funds rate at 5.25%-5.5% through mid-2024 before potentially lowering it to around 4.00%-4.25% by year-end (J.P. Morgan ?Official Website).

Corporate profits have shown divergent trends, with financial corporations substantially increasing while nonfinancial corporations faced significant declines (BEA). Consumer spending could slow due to diminished excess savings and plateauing wage gains, though household balance sheets remain relatively healthy (J.P. Morgan | Official Website). Overall, the U.S. economy is navigating through a period of adjustment as it balances the impacts of prior monetary policies and ongoing global economic uncertainties.

A significant challenge for Biden is the public's perception of the economy. Despite favorable macroeconomic data, many Americans are dissatisfied due to the higher living costs compared to a few years ago. This dissatisfaction and political polarization will affect how different groups perceive economic conditions.

Addressing these challenges will require a versatile approach focusing on macroeconomic stability and policies to improve living standards and reduce economic disparities. Effective communication about the state of the economy and the administration's efforts to address these issues is also crucial in shaping public perception.

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Nicholas A. Owoyemi

President & CEO (Author)

Moderate Voices of America

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