The White House believes the US economy can still nail a “soft landing” as the large-scale government investments enacted by Joe Biden help buoy the labour market in the months and years ahead, a top adviser to the president said.
The comments from Heather Boushey, a member of the White House council of economic advisers, come as many economists fear a significant slowdown and possibly a recession as the Federal Reserve barrels forward with the most aggressive plan to raise interest rates and root out high inflation since the early 1980s.
Fed officials projected this month that the US would narrowly avoid a contraction in 2023, with output increasing by just 0.5 per cent. US central bankers expect the nation’s unemployment rate to rise from 3.7 per cent in November to 4.6 per cent by the end of next year, implying the likely loss of tens of thousands of jobs.
But Boushey told the Financial Times that a series of laws passed by Congress and signed by the president during his first two years in office had created “funding streams” for infrastructure, clean energy and semiconductor manufacturing that would help blunt any downturn for the “real economy”.
While there continued to be “challenges” and “unforeseen things”, from Covid-19 to the war in Ukraine, hurting the outlook, she said, the recent legislation would be “pushing in the other direction”.
“We remain optimistic that we will be able to see the soft landing that we are looking for,” she said. “Time will tell but I think the pieces are in place to have a fighting chance to do so.”
The US labour market performed more strongly than expected over the past three months, even with the Fed’s monetary tightening in high gear: it recorded average monthly job gains of 272,000 — a sign of resilience that has been met with relief by the White House.
“We have delivered the sharpest recovery in jobs of any recent recovery — to see that is still ongoing is really remarkable.”
Boushey pointed to three specific pieces of legislation that would support the US labour market: the Bipartisan Infrastructure Law passed in November 2021, the Chips and Science Act and the Inflation Reduction Act passed in the summer of 2022.
“We are seeing private sector investments on top of public sector investments in the real economy and in the industrial base of the United States, which we know have strong multiplier effects,” she said.
Meanwhile, inflation has started to ease, something that has comforted the Biden administration, with the annual increase in the consumer price index dropping from a peak of 9.1 per cent in June to 7. 1 per cent in November, though it remains at a level Fed officials deem far too high.
According to the American Automobile Association, the average petrol price in the US was $3.1 per gallon this week, lower than its level of $3.6 per gallon a month ago and even lower than $3.2 per gallon a year ago, before Russia’s full-scale invasion of Ukraine.
While the Fed is primarily responsible for fighting inflation, the White House has tried to take action to curb price rises this year, including big releases of oil from the Strategic Petroleum Reserve. “The [consumer price index is] down two full points from where it was last summer, that’s a marked achievement,” Boushey said. “We had a plan, the president executed on that plan, and you can see the benefits for the American people.”
The Fed’s efforts to cool the economy are far from complete. This year it raised its benchmark interest rate from near zero to a target range of 4.25 to 4.50 per cent. According to the most recent projections released in mid-December, most officials see it rising above 5 per cent next year and staying there at least until 2024.
A soft or “softish” landing was still “possible”, Fed chair Jay Powell said at his final press conference of the year, though he added that “events of the last few months have raised the degree of difficulty”. In early December, 85 per cent of economists polled by the Financial Times in a joint survey with the University of Chicago’s Booth School of Business projected a recession next year.
The US economy is vulnerable not just because of the impact of the Fed’s policies but also due to the risk of new external shocks, including from the war in Ukraine and China’s struggle to contain Covid-19 as it relaxes its lockdowns.
Domestically, the White House is likely to have less flexibility to tackle any economic or financial crises because Republicans are due to take control of the House of Representatives in January.
However, Boushey was confident that complete gridlock could be avoided. “Divided government is always a challenge, but one of the things that President Biden has demonstrated is that he is willing to work with anyone — Democrat, Republican, independent — to get things done.”
The biggest risk posed by Washington to the US economy would be if Congress fails to agree on an increase in the debt limit next year, which could lead to a default on government debt. Republicans have already warned that they will demand deep spending cuts in exchange for a vote to raise the debt ceiling, which Democrats and the White House would oppose, leading to a high-stakes stand-off.
“The debt ceiling does remain a challenge,” Boushey said. “Government defaulting on their debt would be potentially very bad for the US economy . . . and would not benefit the American people. So the president will be doing everything he can do to have us not enter that situation.”