While many people are uncomfortable communicating bad news, Democrats have a problem these days talking about good news, especially on the economy. Based on the data, President Biden and the Democratic Congress are set to preside over the strongest two-year performance on growth, jobs, and income in decades—so long as the current cycle of inflation eases, and the Omicron variant does not trigger another round of shutdowns. The future paths of inflation and the pandemic are large and important unknowns—but if they break right, everything else points to a Biden boom through 2022.
Over the first three quarters of this year, real GDP increased at a 7.8 percent annual rate—that’s adjusted for the current inflation. The Federal Reserve expects real growth of 5.9 percent for all of 2021, followed by another 3.8 percent increase in 2022. By any recent standard, these are extraordinary gains. From 2000 to 2019, real GDP grew at an average annual rate of 2.2 percent and never reached 3 percent. Investors have noticed: From January 20 to December 7, 2021, the S&P 500 Index jumped 21.7 percent.
Strong growth usually means healthy income gains, and the disposable income of Americans grew 3 percent after inflation over the 10 months from January to October. That far outpaces the gains of only 0.5 percent for the comparable period in 2019 and 1.7 percent in 2018. Wages and salaries comprise nearly all of most households’ incomes, and those earnings also are rising much faster than normal. From January through October, all wage and salary income paid by private businesses increased 2.4 percent after inflation, compared to gains of 0.3 percent for the comparable period in 2019 and 0.7 percent in 2018.
The main reason for the big increase in total wage and salary income is that 5,675,000 Americans who were unemployed when this year began had found new jobs by November. With support from the rounds of pandemic stimulus enacted in December 2020 and January 2021, the jobless rate fell from 6.3 percent last January to 4.2 percent in November, or by one-third over 11 months. Following the Great Recession, it took six years for the jobless rate to fall by one-third.
While the large job gains lifted total wage and salary income well above inflation, new hires typically earn less than the average in their industries. One result is that as prices have risen at a 6 percent annual rate over the past six months, recent gains in average hourly and weekly earnings have lagged the recent inflation. That may be temporary, since wages and salaries generally take more than six months to catch up when inflation heats up suddenly.
For now, 45 percent of households surveyed by Gallup say that inflation is straining their finances. One reason is that the price hikes have especially affected food and gasoline, two items most people have to purchase every week. This sensitivity is also fairly concentrated among lower-income Americans: 71 percent of people in households earning less than $40,000 per year consider inflation a “hardship,” while 71 percent of those in households earning $100,000 or more say it poses no problem.
No one knows yet how long the current uptick in prices will last. However, we can say that this is not a case of the 1970s redux, when a 350 percent jump in oil prices embedded serious, sustained cost increases in almost everything. For one, oil prices have fallen by more than 20 percent over the past three weeks. In any case, most of the current run-up in prices is tied to supply chain bottlenecks and labor shortages, not global commodities.
Americans last experienced this type of inflation in 1946–47, when bottlenecks and shortages arose from the economic restructuring required to pursue years of total war. This time, logistical adjustments should address many of the supply chain issues over the course of a few months. Accordingly, Federal Reserve Chair Jerome Powell says he expects broad price increases to ease substantially over the next six months. Financial markets agree: The yield on 10-year Treasury bonds was less than 1.5 percent this week, which is lower than in mid-February, before prices began to accelerate.
If investors are right—and assuming Omicron doesn’t upend everyone’s lives—the conditions for a very strong economy through 2022 are in place. The personal saving rate spiked from March 2020 to July 2021 at the highest levels since World War II, giving tens of millions of households the means to continue to make purchases put off during the pandemic. Employment will continue to rise, and with it, total wage and salary income. The 2022 rollout of infrastructure projects authorized last month will further support more gains in growth, jobs, and incomes, as will the first tranche of spending from the Build Back Better program if Congress approves the measure.
Given this year’s remarkable gains in growth and employment, why is Biden’s approval on the economy so far underwater? It’s really not very mysterious: Americans’ perceptions of the economy always lag actual economic conditions when those conditions have recently changed. Everyone remembers how terrible the economy was less than one year ago, and many Americans are still unconvinced that the turnaround will last.
So, if the economy continues to improve as economists expect, people will come to believe again. In that case, the midterm elections could well unfold during a formidable Biden boom, which certainly would be good news for the Democrats.