By Ashok Nilakantan
New York, Jul 16 (IANS): With inflation at a staggering 13 per cent, WPI at 11 per cent and CPI at 9 per cent, the US economy is in a tailspin and American voters see this as a “Bad Economy” in a crucial year of the mid-term polls in 2022 where inflation goes on ballot as the Democrats and Republicans face off to capture the 435-member house of representatives in the upcoming election on November 8.
Inflation, soaring gas prices, and rising grocery prices are all odds stacked against the Democrats as President Joe Biden’s rating is constantly falling since September of last year till date. The worst was 33 per cent in September 2021, bad for any incumbent president in the first year of governance. But the gun legislation, and the executive order on abortion rights seem to have tilted the balance slightly with ratings going over 44 per cent.
Voters see a bad economy, even if they’re doing OK, says a New York Times/Siena poll. There is remarkable pessimism despite the labor market’s resilience, and that could be costly for the Democrats, and the economy.
The fastest inflation in 40 years has Americans feeling dour about the economy, even as their own finances have, so far, held up relatively well. Just 10 percent of registered voters say the US economy is “good” or “excellent”, according to the poll – a remarkable degree of pessimism at a time when wages are rising and the unemployment rate is near a 50-year low. But the rapidly rising cost of food, gas and other essentials is wiping out pay increases and eroding living standards.
American voters taking a grim outlook of the status of the country’s economy is actually bad news for President Biden and Congressional Democrats heading into this fall’s midterm elections, given that 78 percent of voters say inflation will be “extremely important” when they head to the polls . A Biden voter in 2020, Christina Simmons has more than doubled her salary in recent years but feels she is falling behind. She plans to vote for Republicans in the midterm elections. And that’s not a happy trend for the Democrats.
The New York Times/Siena College poll of 849 registered voters from July 5 to 7 this year says tt could be bad news for the economy as well. One long-running index of consumer sentiment hit a record low in June, as the CPI exploded to 9.1 per cent, and other surveys show Americans are getting mighty nervous about both their own finances and the economy, in general.
Economists have a take on consumer sentiment, one which can be easily influenced by media narratives and indicators unrepresentative of the broader economy, like certain grocery prices or shortages of particular goods. At least in theory, economic pessimism can become self-fulfilling, as consumers pull back their spending, leading to layoffs and, ultimately, to a recession, the poll reveals.
Simmons grew up poor and has worked hard to give her 7-year-old son a better life. She has climbed the ranks at the health insurer where she works near Jacksonville, Fla., and has more than doubled her salary over the past few years. Yet she feels as if she is falling behind. “I worked my butt off to get to where I’m at so I could take vacations with my son,” she said.
Simmons, 30, is still able to make ends meet, partly because she is able to save money on gas by working remotely. But she is worried about what could happen if the economy slows and puts her job in jeopardy – a result of being promoted, she said, is that she is farther from customers, making her more vulnerable to layoffs. She has cut out modest luxuries, like a gym membership and nights out with friends, to build up her savings. “I’m saving the money just in case it gets even worse,” she said.
Is inflation bad? Indeed, but it would generally depend on the circumstances. Fast price increases spell trouble, economics suggest, but moderate price gains can lead to higher wages and job growth.
How exactly does inflation hit the poorer sections in society? Inflation can be pretty much hard to shoulder for poorer households as they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Does inflation affect the stock market? This is a pertinent question because many income earners in the US park part of their savings in the blue chips in order to double the value of their savings, like a rain check, but most of them are seasoned to handle cyclical changes of the bulls and the bears. Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better. Many executives are paid bonuses in terms of the company’s shares, and rise and fall in the money markets can affect their future prospects.
Now, decisions like Simmons’s, extrapolated across millions of households, could help cause the very recession she fears. They could also have political consequences. She voted for Donald J. Trump for President in 2016, then for Biden in 2020. But she plans to switch back to supporting Republicans this November, in large part because of the rising cost of living. She isn’t sure how much responsibility Biden bears for inflation, but knows he hasn’t managed to fix it.
Biden and his advisers have argued that while inflation is a serious problem, the economy is strong in other ways. They point to the robust job market, the record-breaking rebound in economic output and wage growth that has been fastest for low-wage workers. But those arguments have failed to mollify voters, says the poll.
Even among Democrats, only 20 percent of voters said the economy was good or excellent; among independents, some of whom Democrats must woo if they hope to retain control of Congress, that figure is just 8 percent. (Only 4 percent of Republicans say the economy is doing well.)
But while voters are pessimistic about the overall economy, many say their own finances are still holding up relatively well. Forty-three percent of voters in the Times/Siena survey said their personal financial situation was good or excellent. Even among those who said the national economy was “poor”, a third of voters said they were doing fine personally.
Economists Tiffany Wilding and Allison Boxer say that June’s Consumer Price Index inflation data likely set alarms blaring in the minds of Federal Reserve officials. Core inflation now appears broadly entrenched across goods and services, which should solidify Fed officials’ confidence that restrictive policy is appropriate.
They now expect the Fed to announce, at minimum, another 75-basis-point (bp) hike in the policy rate at both the July and September meetings, with growing risks of a 100-bp hike. In June the Fed announced a 75 basis points hike in interest rates against the normal 25 basis points increase it resorts to.
Nomura, a Japanese financial agency advising portfolio advisors, believes that the Fed could be aggressive and could even announce the next rate increase as steep as 100 basis points to control inflation.
At the same time, they believe June’s inflation reading raises the odds of recession, which they now estimate is more likely than not in the next 12 months. Indeed, it is increasingly likely that the Fed will need to engineer an outright contraction in real activity to moderate inflation back to target over the next few years. If inflation turns out to be more persistent in the face of slower activity, a more severe contraction may be needed, they say.