The last time the unemployment rate hit 3.5%, Donald Trump was president and he declared, “We have the hottest ECONOMY on earth!”
If jobs are the gauge, the U.S. economy is even hotter now. Employers stunned economists by creating 528,000 jobs in July, more than twice the forecast. We’ve now regained all the jobs lost during the COVID pandemic, and then some. At 3.5%, the unemployment rate matches the low from January and February of 2020, right before the pandemic struck. But using two decimal points, economist Justin Wolfers calculated the rate at 3.46%, which would be the lowest since 1969, besting Trump.
Biden did some celebrating of his own. “More people are working than at any point in American history,” he said in a statement. “It’s the result of my economic plan to build the economy from the bottom up and the middle out.”
That’s some shameless self-aggrandizing, given that Biden’s policies aren’t the main reason for the impressive post-COVID rebound. The Federal Reserve has had a lot more to do with the sharp recovery, which was already well underway when Biden took office in 2021. Four rounds of fiscal stimulus helped, too, but Biden only signed one of those into law. Trump signed the others.
No matter. Biden is enjoying an updraft, after a lousy year that began with the ugly pullout of U.S. troops from Afghanistan last August and worsened as inflation rose to 9.1% and gasoline prices crested $5 per gallon. The economy actually shrank during the first half of 2022, prompting debate about whether a recession has actually begun.
That question has now been settled. “Economies in recession do not generate 525,000 jobs in any given month and don’t have 3.5% unemployment rates,” RSM chief economist Joe Brusuelas said on Yahoo Finance. Biden has been insisting there’s no recession, which is a bad look, since if you’re explaining, you’re losing. But Biden has been right.
Adding to the momentum, it now looks as if Biden will soon sign an $800 billion bill containing green-energy incentives, more money for the IRS to chase tax evaders, health care subsidies and other priorities Biden has been pursuing since he took office. The so-called Inflation Reduction Act (IRA) doesn’t include the social-welfare programs Biden wants, but that’s a good thing, in a way: Those are unpopular with some moderates and most conservatives, which means the IRA will probably do some good without provoking the kind of backlash kicked up by the Affordable Care Act 12 years ago. Biden won’t really have to pay much of a political price, if any, for signing the IRA.
Republican opponents of the bill are making some hysterical claims about the IRA: It will cause “massive loss of life;” it’s a huge tax hike on middle-class Americans. These scare tactics won’t work because most people won’t notice the IRA in their daily lives, unless they qualify for one of the new electric vehicle tax credits or get a discount on some of the medications that might become cheaper once Medicare can negotiate prices with drug manufacturers. Several analyses find the bill won’t meaningfully affect jobs, inflation or economic growth, which is good, in this instance. The bill will begin to address climate change and other problems without doing any tangible harm.
Gas prices have been plunging as well, giving Biden a kind of mid-summer trifecta of good news. The cost of gas has dropped by nearly $1 per gallon since mid June, and will probably keep falling. Crude oil prices have plunged from $120 per barrel in early June to less than $90, reversing worries of an oil crunch caused by Russia’s invasion of Ukraine. Oil markets will probably remain volatile, but gas prices will likely fall below $4 on average by the end of August.
There’s one more piece that must fall into place for the economy to really be hotter than it was under Trump: Inflation has to come down. Way down. When Trump boasted about the 3.5% unemployment rate in January 2020, inflation was a mere 2.6%, which is to say, there was virtually no meaningful inflation. The inflation rate now is a punishing 9.1%. That’s coming down, and the next annualized figure will be less than 9% and possibly less than 8% when the government releases the data on August 10. Energy prices, which led the way up, will lead the way down. But the cost of food, rent and other items is still rising faster than incomes, which is why many people feel they’re falling behind. It will take a steady decline in prices for months to improve dismal confidence levels.
Still, the outlook for Biden and his fellow Democrats is improving just in time. With the midterm elections three months away, voters are locking in their choices, including whether they'll vote at all. Democrats face tough odds of retaining control of Congress, if only because they have tiny majorities and the president's party almost always loses ground in midterms. Economic improvements voters can actually feel may at least lessen the beating in November.
The hard-to-believe strength in the job market leaves the Federal Reserve with a weird dilemma. The Fed actually wants to slow job growth through interest rate hikes, to take a bit of money out of the economy and curtail spending. That’s how it brings inflation down. Inflation may be moderating, yet job growth is heating up. So the Fed might have to hike rates even more aggressively for the next 6 to 12 months. Or, it may be apparent in a few months that the economy is enjoying a so-called soft landing, with inflation cooling but everything else remaining strong. For now, we can stop worrying about a recession and maybe look forward to the economy getting better instead of worse.