economy and politics

The US economy presents a complicated outlook as the elections approach

The US economy presents a complicated outlook as the elections approach

With less than three months to go until the US presidential election, Americans are being bombarded by wildly contradictory statements about the health and direction of the country’s economy.

Former President Donald Trump, the Republican nominee, frequently declares that the country is approaching economic Armageddon. In recent appearances, he has warned that the country is on the brink of a depression, described the economy as “broken” and claimed that rising prices are making the average American miserable.

Allies of Vice President Kamala Harris, the Democratic presidential nominee, have pointed to falling inflation, low unemployment and rising wages to tell a story that portrays the U.S. economy as strong and getting stronger in the wake of the COVID-19 pandemic.

For pundits and economists who follow economic data, the picture is more complicated than the description offered by either campaign, with real strengths tempered by some troubling potential problems.

“Generally speaking, a politician is the last person you would ask for an accurate assessment of the state of the U.S. economy,” said Mark Hamrick, head of Bankrate’s Washington office. “It’s peak season for trying to convince voters, so we have to take it with a grain of salt.”

But he noted that the candidates’ contrasting descriptions of the economy reflect “the highly polarized views of the economy held by Americans themselves.”

Coming out of the pandemic

In the years following the pandemic, the U.S. economy recovered more quickly than most other developed economies in the world. Job growth soared, pushing the unemployment rate to a 55-year low of 3.4% in January and April 2023. Investors were encouraged by continued positive economic data, and the stock market began a long run to record highs.

At the same time, Americans faced punishing inflation that, at its worst, approached 10% per year. To curb price growth to acceptable levels, the Federal Reserve began raising its benchmark interest rate from near zero in early 2022 to the current rate of over 5%.

Although there were concerns that the Fed’s actions could trigger a recession, job growth remained strong and inflation began to fall in 2023 and 2024. The latest report released this week showed it has fallen below 3%, which is close to the Fed’s target range of about 2%.

Recent data is mixed

Data released earlier this month showed that job growth appears to have slowed significantly, but with inflation back near normal levels, the Fed is expected to begin cutting interest rates as early as next month, which could have the effect of boosting hiring.

And while consumer goods prices remain significantly elevated, the low unemployment rate has boosted wage increases, particularly among low-wage Americans. Over the past year, the rate of wage growth has outpaced the rate of inflation, helping to restore some of Americans’ lost purchasing power.

While the stock market is not a reliable indicator of the state of the economy on any given day, volatility has spiked in recent weeks, and many investors are nervous that months of relatively steady gains will make some kind of correction inevitable. Stocks took a major tumble two weeks ago, only to soar again to near-record levels this week.

Positive outlook, with caveats

“The economy has been very strong for a couple of years, both in terms of economic growth, employment status, labor force participation, real wage growth, basically any indicator that we care about,” said Kimberly Clausing, a nonresident senior fellow at the Peterson Institute for International Economics.

“With any economy, there is a high degree of uncertainty and there are factors that are beyond our control, but I think there is no reason to suspect that next year will not be a good year,” Clausing told VOA.

In an email exchange with VOA, economist Desmond Lachman, a senior fellow at the American Enterprise Institute, agreed that the economy has been performing well recently.

“The economy has responded better than expected to the Federal Reserve’s monetary policy tightening, although it is now showing clear signs of slowing,” he said.

“Inflation has eased noticeably toward the Fed’s 2% inflation target, but output growth has held up and the unemployment rate remains near its postwar low,” Lachman said. “It appears the Fed now has room to begin cutting interest rates as early as September.”

Lachman also pointed out some potential areas of concern.

“Two issues clouding the long-term outlook are the country’s poor public finances and its apparent drift towards protectionism,” he said. “It is worrying that on the campaign trail neither candidate is addressing the question of how to put the country’s public finances on a more sustainable path. In fact, they appear to be making promises that could worsen an already worrying fiscal position: Kamala Harris through public spending promises and Donald Trump through tax cuts.”

Both Clausing and Lachman cautioned that a major imponderable factor is trade policy. Trump has threatened to impose steep tariffs on imports. Economists fear that doing so could cause a new surge in inflation and trigger retaliatory tariffs by U.S. trading partners.

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