As Wall Street and Main Street fret about a potential recession, White House officials are projecting confidence about the economy’s ability to weather the storm in 2023.
“We’re feeling cautiously optimistic because we are starting to see some real concrete measurable signs of progress,” Aviva Aron-Dine, deputy director of the White House National Economic Council, told CNN in a Zoom interview.
The Biden administration economist pointed to a range of metrics showing inflation has cooled off, real wages have heated up and the job market has defied doomsday predictions.
The White House is hoping for a soft landing, in which the Federal Reserve tames inflation without crashing the economy.
“We remain optimistic about a transition to stable, steady growth with lower inflation – without giving up labor market gains, without a recession,” Aron-Dine said.
So far, so good – at least from the administration’s perspective.
For the moment, metrics suggest the economy has remained resilient and consumers are more optimistic as inflation has eased. The Conference Board’s latest consumer confidence index this month, for example, showed a significant jump from November. And after spiking to record highs in June, gas prices have plunged to 17-month lows, delivering a major boost to consumers.
And some broader trends appear to be working in the administration’s favor, like hiring, which has slowed but has not collapsed.
There is “absolutely no sign” that job growth will fall on a “sustained basis” below a pace of roughly 150,000 jobs a month, Aron-Dine said.
Last month, the US economy added a surprisingly strong 263,000 jobs. That’s down sharply from 647,000 in the same period last year – but still a very healthy pace.
Despite a series of mass layoffs in the tech and media industries, Aron-Dine added that there is “no sign of a big increase in unemployment.”
Indeed, initial jobless claims remain very low. The Labor Department said Thursday that first-time claims for unemployment benefits rose just slightly in the latest week and remain near two-month lows. However, some economists – including ones at the Fed – warn this trend could be about to change due in large part to continued pressure from higher borrowing costs.
After raising interest rates for a seventh meeting in a row, the Fed last week projected the unemployment rate will rise from a historically low level of 3.7% today to 4.6% by the end of next year. That implies an increase of approximately 1.6 million unemployed people.
Some, though certainly not all, business leaders and major banks expect the US economy will slip into a downturn next year. For instance, PNC is now projecting a “mild recession” that is similar to the downturns of 1990-1991 and 2001.
“The risk of a recession is elevated right now – certainly higher than six months or a year ago,” Gus Faucher, chief economist at PNC, told CNN. “We need to be prepared for a recession sometime in the spring or summer of 2023.”
Other economists including Mark Zandi, the chief economist at Moody’s Analytics, are growing more confident a recession may be avoided.
Although Fed officials say a soft landing is still possible, some of the Fed’s own metrics are flashing red.
A New York Fed model that uses shifts in the bond market to forecast recession risks finds there is a 38% chance of a recession in the next 12 months. That narrowly surpasses the peak in 2019 and is the highest level since just before the Great Recession.
There are signs that cracks are forming in consumer spending – the main engine of the US economy – due to high inflation that has forced some Americans to dip into savings and turn to credit cards. Retail sales declined in November by the most in nearly a year as shoppers pulled back on everything from furniture and cars to even e-commerce.
Asked about the surprise retail sales slump, Aron-Dine noted this metric can experience significant volatility.
“If you look at the data over a more extended period, you’re just not seeing any signs that would make us think that is a significant concern,” she said.
In that effort to transition away from high inflation, Aron-Dine said, the White House continues to evaluate ongoing risks, calling the war in Ukraine “one of the most significant risks that we monitor.”
“I think all year, we’ve seen that there are signs of real strength and opportunities for a successful transition, and that there are significant risks. And so our work, our strategy has been about trying to take advantage of the strengths and mitigates the risk,” she said, later adding, “I think we have reason for optimism, reasons to believe the US economy is well positioned, but there are global challenges and high on that list is potential downstream consequences of the war in Ukraine for food and energy as we saw this year and more generally.”
Another hurdle Biden’s economic team will face in the new year will be achieving consensus among a newly divided Congress.
Biden’s first two years in office were marked by the passage the administration’s proposed major spending bills aimed at bolstering the country’s recovery from the coronavirus pandemic, rebuilding the nation’s infrastructure, overhauling major social safety net programs, enhancing domestic supply chains and making climate investments.
But some major provisions the Biden White House has pushed for, including the revival of the enhanced child credit have failed to move forward in Congress. The previous expansion of the child tax credit lifted 2.1 million children out of poverty in 2021, according to the Census Bureau.
A last-ditch effort this month to pass the credit into law as part of the $1.7 trillion government spending bill failed. And with Republicans taking over the House of Representatives next year, its passage is even less likely.
“It is a disappointment that Republicans blocked inclusion of Child Tax Credit improvements during the lame duck,” Aron-Dine said, adding, “I won’t get ahead of agenda setting our strategy for next year, but of course, this will remain a priority for us.”
Along with broader efforts to tackle inflation and avoid a recession, the implementation of the Inflation Reduction Act will also be top of mind for Biden economic officials in the coming year.
A slate of provisions in the IRA are scheduled to roll out in January, including home energy efficiency tax credits and a $35 cap on the cost of insulin for seniors on Medicare.
And CNN previously reported that along with deploying a messaging strategy aimed at highlighting existing accomplishments, as Biden heads into the new year, the White House is looking to highlight ways the Inflation Reduction Act will lower everyday costs.
Aron-Dine told CNN that the enactment of the IRA “is just going to have a huge effect in shaping our work in the year ahead, with one of our biggest priorities really being just making sure that we fully realize the potential of that law.”
And as the administration prepares to frame Biden’s agenda ahead of the State of the Union address next year, National Economic Council Director Brian Deese told the Wall Street Journal this week that officials are considering a push for policies aimed at getting Americans back to work, including childcare and eldercare benefits.
It’s not clear whether the White House is considering using executive authority or proposals to Congress to move forward on the initiative. Aron-Dine declined to offer specifics.