America’s Divergent Economy
As election season approaches, Bidenomics will face a reckoning with
One of the leading indicators of how a presidential election will turn out is how the typical American is feeling about the economy three weeks out from election date. As this upcoming election cycle and campaign trail begins, here it is no different. Over the past three years, the Biden administration has embarked on a novel economic approach for the United States, coined “Bidenomics”, where the central idea is to invest in the American economy from the middle out through targeted public investments in manufacturing and industry. Biden’s idea was to escape from the “failed” trickle down policies of the past and to flee the Republican idea of tax cuts. Three years later, how is it going so far?
Since Biden took office, the US has added 13 million jobs, where 800k of those are in manufacturing and 300k of those are in clean energy. Granted, Biden did take office at the helm of one of the deepest economic crises following COVID-19, where mass layoffs were rampant. However, 13 million, whatever the cause of it, is significant nonetheless. This is reflected in the unemployment rate which has been at a 50-year low for several months now.
One of Biden’s proudest data points is certainly the manufacturing boom he has created in the country. Since his presidency began, private companies have announced $614 billion in investments in 21st century industries (read: semiconductors, electronics, EVs, batteries, clean energy), and nearly $400 billion in infrastructure, an incredible shift from the past few decades. The total construction and manufacturing spending over the past few years has had an absolute boom.
Consumer spending, a major point of how citizens feel about their economic conditions, has also been excellent. Fueling the economy’s surprising annualized growth rate of 4.9% in Q3, and around ~70% of US GDP, real personal-consumption expenditures are on track to rise 2.2% this year. The resilient labor market and decreasing inflation coupled with the upcoming holiday season show that consumers are still ready to spend. Consumer spending may be the tide that keeps the economy afloat and away from a recession.
Businesses, which benefit most from this spending, are also doing great. More than 80% of the 469 S&P 500 companies that have reported earnings so far this quarter have beat analyst expectations - the highest rate since 2021. Business applications have boomed since the Biden presidency began.
After Biden’s four signature bills have been signed - The American Rescue Plan, Bipartisan Infrastructure, CHIPS, and IRA - it seems America is back to being an industrial powerhouse.
Yet, the rooftop-solar and electric-vehicle subsidies don’t help the average American buy groceries or fill up their gas tanks. This week, data showed inflation declined in October, with an increase of 3.2% relative to 12 months earlier, a decrease from September's 3.7% and a dramatic change from the pandemic (and 40 year) high of 9.1%. Inflation is certainly trending in the right direction, a big win for the Biden administration.
However, since the beginning of Biden’s presidency, average prices have gone up a total of ~17%, while gasoline prices nationwide have increased 52%. Blame it on COVID, Putin, China, or any other world leader, but everytime Americans go to the grocery store or the pump they feel Bidenomics in action - regardless if the perception is factual or not.
And yet, it's not just limited to food or gas. Nationwide rent has increased 20% since Biden has taken office. The Tesla may be cheap but the one-bedroom apartment is not.
The most important question of all, then, of course, is real wages (nominal wages minus
inflation). Are wages keeping up with inflation? Americans care whether an hour of work will allow them to afford more groceries, rent, gasoline, and other common daily goods - and the inevitable comparison will be to a pre-Biden white house. Answering it is a complicated question.
As we see in the chart above, real wages are below the pre-pandemic trend line, yet are increasing faster than inflation in recent months and trending in the right direction. Real wages will likely catch pre-pandemic levels shortly, if they haven’t caught up to those levels already. However, real wages are down from January 2021 when Biden took office. Workers will certainly need to feel and see their higher real wages to tell pollsters they are happy with the economy.
What about higher wage workers? Folks like software engineers, doctors, and lawyers tend to skew the average numbers in these data sets. According to labor economist Erin Dube, average real wages for production and non-supervisory workers (~80% of private workforce) are already above pre-pandemic levels. Depending on the economic situation of the voter, they could be analyzing the state of the economy differently.
On the other hand, real disposable income is only now getting back to its middle-term trend. The important distinction between real wages and disposable income is disposable income factors taxes and other mandatory deductions, such as social security. Disposable income is what Americans see in their checking account before going to the grocery store. In 2022, disposable income fell 6% relative to the year prior, but according to estimates will rise 3-4% in the year to come. Americans certainly still remember the traumatizing experience of wages and income falling during the past year, but the trend could prove beneficial.
Polls tend not to be worth our time this early on in the race, but one datapoint that caught my eye from the Fed is that 35% of Americans say they’re worse off now than they were a year ago. A glimpse at the other polls don’t look to be in Biden’s favor either, with most showing their dissatisfaction with the economy. Undoubtedly, the mixed data points on Americans' financial wellbeing above are a factor, as we know 62% of Americans live paycheck to paycheck.
Another issue on the American voters’ mind is the D word: debt. Yet in this case, it's both national and individual. Despite Biden’s campaign claiming he will decrease projected federal debt by $1.5 trillion in a decade from now, that's still reducing it to the manageable and calm $45 trillion. The number may be decreasing, but it's frightening nonetheless. Republicans are aware of this, and will exploit it as their campaigns get closer to the primaries. Most, if not all, contenders have made it a focal point of their campaign strategies and economic plans to reduce the federal debt.
For households, debt is also an issue. The NY Fed recently released a report outlining how aggregate household debt has increased 1.3% in the past year, and increased $3.1 trillion since the end of 2019 to a total balance of $17.29 trillion. Meanwhile, credit card delinquencies amongst those under 40 are at their highest level since the 2008 financial crisis. This phenomenon is most common amongst borrowers between the ages 30-39, a vital part of the Democrats voting bloc. We will have to wait and see whether debt affects the voters mind in the booths.
In response to the rampant inflation over the past two years, the Fed has embarked on their fastest tightening campaign in history by raising rates to a range of 5.25-5.5% in nearly 18 months. Although the Fed paused at its most recent meeting, indications show they may raise another 25 basis points prior to year-end. While the rate hikes may not be Biden’s doing in particular, voters will still put the blame on him for increased borrowing costs.
The effect of the rate-hikes for the typical consumer is most prevalent in mortgage rates, where they have reached a recent peak at nearly 8%. Due to these sharp increases, the average American family can now only afford a 30-year mortgage on a ~$350k house, as opposed to that same family being able to afford a ~$730k house in December 2020. Home affordability, and the subsequent purchases of said homes, is a vital aspect of a thriving economy.
Additionally, the effect of the Fed's interest rate hikes campaign is further felt in American wealth, an important factor for how one measures the economy. It does not seem like it is in Biden’s favor. Since Biden was inaugurated, real total wealth in the United States has decreased 2%, as opposed to during Trump’s four years it grew 30%. The drop during Biden’s term is likely attributed to the decrease in home prices, which are an effect of mortgage rates rising thus curbing demand for homebuyers to buy. Inflation, which reduces the value of bonds, can additionally be a culprit.
Another place Americans see their economic wellbeing is the markets. Under Biden, the S&P 500 has gained 15%, while the NASDAQ has gained 8% - both modest and respectful numbers in itself but miles away from Trump's respective 65% and 135%. Voters tend to remember their portfolio's performance at the booth.
What do all these data points tell us about the economy? There are divergent views of course, but for the average American, it's alright at best. This is reflected in consumer sentiment near all-time lows. The trend in the right direction gives some hope.
So then what is a “good” economy?
In 1964, Judge Potter Stewart ruled in favor of protecting a particular film for free speech and for whether it was breaking pornography regulations through the obscenity test with a now famous adage: “I shall not today attempt to define the type of material, but I know it when I see it.” While similar to but not exactly a supreme court case, the American economy is at a crossroads. On one hand, private and public investment is at its strongest form in memory, yet the typical consumer feels pain at the checkout counter and at the bank.
In less than a year from now, it will be pivotal for the Biden administration to ensure American voters see the economy is faring well after the experiment of Bidenomics. Because while the typical consumer may not be able to define a good economy, they’ll know it when they see it.