White House sees glimmers of economic hope after a dreadful year

After a brutal six months of soaring inflation and sinking consumer confidence, the Biden administration is seeing signs of hope on the economy.

Inflation may finally have peaked. Gas prices have fallen for more than two months. The job market remains hot and unemployment is near historic lows. Issues other than epic price spikes and President Joe Biden’s dismal poll numbers now regularly dominate headlines.

None of these trends is a lock to continue. Prices remain highly elevated. Russia’s war on Ukraine could send oil prices soaring again. And Federal Reserve Chair Jerome Powell vowed Friday that the central bank will do whatever it takes to kill high inflation, triggering a stock market rout and fueling fears that the Fed could push too hard on raising interest rates and tip the economy into recession.

But for now, as one top Biden aide said, “the trend is our friend” and the trend looks a lot better than it did a few months back, with the government reporting that the Fed’s preferred measure of inflation decelerated in July.

“We saw a materially better inflation number on Friday, and lower gas prices mean we will probably see even more improvement in consumer sentiment,” said Jan Hatzius, chief economist at Goldman Sachs. “I’m cautiously optimistic on the path of inflation.”

That has helped create a lot better mood around the White House and in Democratic campaign circles at summer’s end than at its beginning. Existential dread about an inflation-fueled political wipeout in the November midterm elections has declined. Political polling sites such as FiveThirtyEight now give the party a slightly improved chance of holding the House, citing greater enthusiasm among base Democratic voters.

“Great to see consumers feeling better about the economy,” White House Chief of Staff Ron Klain tweeted Friday over a story about the second month in a row of a recovery in consumer confidence from record lows.

Klain listed recent positive data including readings on unemployment claims, personal income, inflation and spending. “A LOT of work left to do on the economy, but here is the econ news we have gotten in the past 24 hours,” he wrote above the list, complete with emojis.

Even as Klain tweeted, however, Wall Street delivered a signal of just how fragile the situation remains. Stocks tanked after Powell delivered his highly anticipated speech at an annual conference in Jackson Hole, Wyo., reiterating the central bank’s commitment to bringing inflation — which is still running at 40-year highs — much further down.

The central bank chief warned that continued rate hikes, which Wall Street and most Democrats want to see less of, will cause “some pain” to the economy.

The Fed’s actions have already pushed up mortgage rates and driven down new home sales. And home prices fell in July. If Russia’s war on Ukraine intensifies, that could drive up gas prices again as could failure to implement a global price cap on Russian oil, a top administration priority led by Treasury Secretary Janet Yellen.

Nonetheless, the outlook in the White House and in Democratic campaign circles is improved.

"I don't think anyone expects that we are home free on the economy or inflation or that election night in November will be an especially great moment for us," said a person close to the West Wing who was not authorized to speak on the record. "But we knew the tide was going to turn at some point on prices."

The person added that there is "definitely a sense of optimism over what the next couple of months could bring. The vibe walking around here is still nervous but it's way, way better than it was a month ago."

Some Democratic officials now even whisper about actually holding onto the House, once an almost unthinkable outcome given public anger over inflation and Biden’s poor approval ratings on the economy and overall job performance. But a recent NBC poll showed voter approval of Biden’s handling of the economy has risen 7 points since May.

Most Democrats are hesitant to speak for attribution about what they view as their improved standing. But several senior administration officials told POLITICO that their optimism has risen, especially since Democrats squeezed out a special election win in a hotly contested Upstate New York swing congressional district, based largely on heavy turnout among abortion rights supporters.

“Gas prices are down and historic investments in building America are up thanks to Democrats,” said Chris Taylor, a spokesman for the Democratic Congressional Campaign Committee, which assists candidates for the House. “Republicans are on defense because in every election this summer, voters have rejected their extremist agenda.”

Republicans, for their part, note that most prices are still so elevated that inflation is outpacing wage gains and voters are angry at the direction of the country. They also argue that the New York special election was a one-off that should not be extrapolated into a trend.

“Inflation is still going to be an enormous issue with grocery prices showing the largest increases since the 1980s and Democrats adding $20 billion in new taxes,” said a GOP campaign strategist working on some of the most competitive House races who did not want to be identified by name. “The Inflation Reduction Act won’t do anything to reduce inflation. And New York is historically blue."

Risks to the current run of fairly decent economic data are everywhere. Still, senior administration officials now say they expect to see inflation continue to drop, allowing the Fed to slow down on hikes. And they expect the decline in gas prices — which already helped boost consumer confidence more than expected in August — to flow through into better numbers for Biden and Democratic candidates.

They are, however, staying cautious in public remarks given how high many prices remain.

“Lower gas prices are providing families with some much-needed breathing room but nobody should be contemplating any sort of victory lap because our work is not done and prices remain much too inflated,” Council of Economic Advisers member and longtime Biden economic aide Jared Bernstein said in an interview.

Despite the continued risks, Bernstein and other Biden advisers reject the notion pushed by some economists, including former Democratic Treasury Secretary Larry Summers, that inflation will meaningfully come down only when demand for labor eases and the unemployment rate rises by several points, perhaps to 6 percent or more. They say that while some companies including Ford have announced layoff plans, many for now are simply enacting hiring freezes.

That has driven down the number of job openings from record levels without boosting an unemployment rate that's now at 3.5 percent.

Indeed, both some recent public polling and Wall Street predictions on inflation offer some support to Democratic optimism that the midterms will not be completely dominated by economic malaise.

Democrats point to the recent NBC News poll showing “threats to Democracy” as voters’ top concern, outpacing worries over the economy and inflation that have been the number one issue in every poll for months.

“We don’t normally put ‘threats to Democracy’ on the issue agenda questionnaire, but we thought it was important to do it this time,” said Jeff Horwitt, who helped conduct the NBC survey. “And women’s rights came up more than anything else when we asked what kind of protest sign a voter might hold up. It’s not just Trump.”