'People have just rendered a judgment': Inflation erodes Biden's wins

President Joe Biden may soon bear witness to an economic miracle: Inflation has slowed and Wall Street is bullish about the chances of the U.S. avoiding a recession next year despite the Federal Reserve’s record rate hikes.

But achieving a so-called soft landing might not mean a lick to voters

When it comes to Biden and the economy, it’s possible that “people have just rendered a judgment and are not revisiting the judgment,” said James Carville, the Democratic campaign guru who made “it’s the economy, stupid” the unofficial motto of Bill Clinton’s 1992 presidential campaign.

Low unemployment, real wage growth and a fast-growing economy should be providing a boost to the public’s perception of Biden’s economic policies. It hasn’t, as countless polls demonstrate. But with inflation still climbing — albeit at a much slower rate than last year — affordability remains a top concern for voters. And that’s been enough to keep Biden’s polls on the economy deeply underwater.

The result?: “People’s attitudes about the economy are pretty stubbornly in the wrong place” for the president, Carville said.

Those attitudes won’t change if other gauges that typically define the political economy — payrolls, GDP growth and consumption — deteriorate. All three have remained healthy even as the Consumer Price Index cratered from more than 9 percent last year to a little more than 3 percent as of October. The Commerce Department on Wednesday estimated that the U.S. economy grew by 5.2 percent during the third quarter — a remarkable expansion that underscores Biden's case that his agenda has kept the country on solid footing following the global pandemic.

On Thursday, Commerce will report the personal consumption expenditures price index — the Fed's preferred measure of inflation — for October.

Some economic models have forecast that a slowdown in growth could eat away at the president’s share of the vote in 2024.

“Models based on growth & unemployment may not apply this time,” Monmouth University’s polling director Patrick Murray told POLITICO in a text message.

“We do know he is NOT getting credit for good jobs numbers and decent growth BECAUSE of inflation. If unemployment goes up, will Biden get enough credit for deflation that jobs and growth don’t matter to voters? We just don’t know,” Murray said.

White House officials say they’re hopeful the economy will continue to expand even as inflation falls closer to the Fed’s 2 percent target — National Economic Council Director Lael Brainard notes that inflation averaged about 2.9 percent in the two decades prior to the pandemic — and workers feel the effects of wages rising faster than price increases.

“If the question is whether this White House—or the American people—would welcome continued falling inflation accompanied by continued strength in the labor market, the answer is unambiguously yes,” White House spokesperson Michael Kikukawa said. “While some forecasters once predicted a 100% chance of recession, President Biden’s policies are now being credited with helping prevent such a downturn as inflation has fallen.”

Another boost could come if the Fed cuts rates next year. One White House official who was granted anonymity to speak frankly observed that markets have increasingly priced in rate cuts, which would bring down mortgage rates and reduce borrowing costs for consumers and businesses.

The economic indicators that determine a “soft landing” matter less than how people actually experience the economy, another White House official told POLITICO. If prices climb at a level that feels normal, the public’s concerns about the state of the economy should ease, the official said.

But that’s also why inflation has been so hard for Biden to shake — even with the greater likelihood of a soft landing.

“On the inflation front, at this point, I think the die has already been cast,” said Alec Phillps, the chief U.S. economist at Goldman Sachs, in an interview. “There’s probably not that much of a difference between, 2.5 percent inflation and 3.5 percent inflation from a political perspective.”

For now, there’s little sign of public sentiment on the economy improving. While consumer confidence rebounded in November, and a growing number of people are feeling good about their own financial situation, the Conference Board’s regular survey also found that about two-thirds still believe a recession is “somewhat” or “very likely” to occur in the next year.

“There is a great disconnect between how people perceive their own personal circumstances and how they perceive how the nation as a whole is doing,” said David Kelly, the chief global strategist and head of the global market insights strategy team at J.P. Morgan Asset Management. That’s unlikely to change with the deluge of negative headlines about the economy from many news outlets.

“I think a lot of it has to do with the way people imbibe information in 2023,” he said. “And if that's the case, it doesn't matter what the economy does next year. People are going to think the economy is awful.”