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The gap between Americans' perception of the economy and reality
As the candidates make their final arguments in the 2024 US Presidential Election, the economy is front and center on the minds of voters. Despite all signs indicating stable and above-trend growth in the US, many Americans feel uncertain about how well the economy is doing, said Robert Kahn, Managing Director of Global Macro-Geoeconomics at Eurasia Group. He discussed the gap in US economic perception versus reality with GZERO’s Tony Maciulis at the IMF and World Bank Annual Meetings in Washington, DC, in a Global Stage interview. Kahn noted that heightened political polarization has skewed views of economic performance while lingering geopolitical shocks and high prices add to concerns. Kahn emphasized that there is an element of worry around the “legacy of the pandemic…that Vice President Harris is just really struggling to overcome” even though underlying data proves otherwise. The two also discussed former President Trump's accusations that the Federal Reserve is "playing politics" with interest rates and what the impact would be globally if Trump were, as president, to assert a heavier hand in decision-making at the central bank.
A trader works on the trading floor at The New York Stock Exchange (NYSE) following the Federal Reserve rate announcement, in New York City, U.S., September 18, 2024.
The Fed goes big for its first rate cut since 2020
The Federal Reserve dropped interest rates by half of a percentage point on Wednesday, its first cut since 2020. The move – larger than the .25 bps that was also under consideration – is a show of confidence that inflation is moving sustainably toward 2%, and it aims to boost to the labor market. The cut will bring the benchmark federal-funds rate to a range between 4.75% and 5%.
The Fed decided that keeping rates high “was becoming restrictive and worried the labor market could turn sour quickly,” according to Robert Kahn, Eurasia Group’s managing director of macro-geoeconomics. “They didn't want to fall behind the curve and decided to get a quick start at easing.”
In the short term,anticipation of rate cuts boosted Wall Street, with the Dow Jones Industrial Average hitting a new record on Wednesday. Yields on the 10-year Treasury note stood at 3.64% on Tuesday, up slightly from a 52-week low recorded on Monday. It also bodes well for Kamala Harris’ campaign, since high interest rates had been souring voters’ views on the economy.
In the long term, the Fed “looks like they will move gradually from here,” says Kahn. “It's a quick start to a long journey.” Inflation expectations are also unlikely to be affected because “inflation has been coming down recently, so any new risks will take time to show themselves.”
Fed poised for 50 basis point rate cut
Breaking: Fed poised for 50 basis point rate cut
The Federal Reserve appears set to drop its benchmark interest rate by 50 base points today. That lending rate – which influences borrowing costs broadly – can put the economy in a chokehold when rates are high, or stimulate it when lowered.
According to Eurasia Group’s Managing Director of Global Macroeconomics Robert Kahn, “enough progress has been made on inflation to begin the process of easing financial conditions with a big first move to protect against recession.”
Lawmakers have repeatedly called on the Fed to lower rates over the past year. Still, the independent body has resisted, waiting for economic data to indicate that a soft landing – where inflation is tamed without a recession – appeared to be in sight. Inflation currently stands at 2.5%, down from its peak of 9.1% in 2022 and nearing the Fed’s 2% target.
Election effect: It takes time for monetary policy to make an impact, so any rate cut is unlikely to have a material effect on the economy before the election, but it will still have influence.
“It's possible that the cut, and the boost to markets that it could provide, gives a lift to sentiment surrounding the economy that helps the Harris campaign,” says Kahn. But, on the downside, “it will validate Donald Trump’s belief that the Fed is political and the move is being done to help his opponent.”US President Joe Biden waits to welcome President William Ruto of Kenya to the White House in Washington on May 22, 2024.
It’s Biden’s economy, stupid
The United States is plagued with a “vibecession” — where confidence in the economy is at stark odds with the actual data.
A new Harris poll forThe Guardian shows nearly three in five Americans believe the economy is shrinking and in recession. Nearly half of those polled also believe US unemployment is at a 50-year high.
But none of that is true.
So why the disconnect?
Much of the bad vibes are lingering from America’s post-COVID economic recovery. The US generally bounced backbetter than its peers, but inflation is still squeezing average Americans while the Federal Reserve is keeping interest rates high. Even if the stock market and GDP reachnewheights, so is Americans’ cost of living — and at a time when it costs more to borrow.
Another vibecession culprit: politics, baby. OneYouGov poll shows the percentage of Republican respondents who thought the economy was improving dropped from 64% in November 2020 to 6% after Biden’s inauguration in January 2021. Unsurprisingly, Democrats’ views on the economy also shot way up after Biden took office, without much changing economically.
If Americans’ perceptions of the economy are deeply entrenched with their political affiliation, is there anything Biden can do ahead of November’s election? His administration is working to bring downgas prices and slashstudent debt. But as long as prices and interest rates stay high, he may have a hard time swaying voters’ historically low confidence in his ability to do the right thing for the economy.A Russian Soyuz rocket is carried to the launching pad at Russia's Baikonur cosmodrome on the territory of the former Soviet Kazakhstan on December 18.
Hard Numbers: Russia shoots down space resolution, US economy sputters, Nigerian prisoners make slippery escape, Ecuador gets lifeline
13: A UN Security Council resolution reaffirming a long-standing prohibition on arms races in outer space got 13 votes in favor this week, but it was shot down by a single veto from UNSC permanent member Russia. Moscow says it wasn’t necessary to support a resolution that merely reaffirmed a 1967 treaty that Russia is already part of, but the US ambassador to the UN asked, “What could you possibly be hiding?” In recent months, the US has said it believes Russia is developing a new space-based, anti-satellite weapon.
1.6: The US economy expanded by just 1.6% in the first quarter of the year, lagging analyst forecasts by nearly a full percentage point, as consumer spending slowed. Normally that would create momentum for the Fed to cut interest rates to spur growth, but there’s no joy there either: Core inflation (which excludes food and energy) rose 3.7%, higher than economists expectations, limiting the scope for any near-term rate cuts.
118: Authorities in the Nigerian capital of Abuja are on high alert after a rainstorm destroyed a fence at a nearby penitentiary, allowing as many as 118 inmates to escape. A prison service spokesperson blamed “colonial era” facilities. Weak security and run-down buildings contribute to frequent prison-breaks in the West African nation.
4 billion: After months of talks, Ecuador and the IMF agreed to a $4 billion loan agreement meant to help stabilize the small Andean country’s finances as it grapples with a vicious cycle of economic hardship, rising poverty, and skyrocketing homicides. Just days earlier, Ecuadorians had voted yes in a referendum to boost the government’s ability to crack down on drug violence.Inflation sign going upwards
March inflation report threatens Biden campaign’s economic strategy
The S&P 500 dropped over 1% after consumer inflation rose 0.4% in March and 3.5% from the previous year, indicating that high inflation could be here to stay. The report surprised forecasters and poses a challenge to President Joe Biden's reelection chances, as persistent inflation means higher gas prices and bigger grocery bills for voters.
Energy prices continue to rise – 1.1% month over month and 2.1% year over year – thanks to wars in Ukraine and the Middle East driving up the price of oil and, as a result, inflation.
The latest figures have cast doubt on the Federal Reserve's progress toward its 2% inflation target, meaning it may reassess its interest rate plans. Investors now expect rate cuts to be pushed to later in the year, instead of earlier predictions of a March cut.
This is bad news for Biden, who has been anxious for inflation to fall even further to spur the Fed to cut interest rates — a move that would help drive down borrowing costs for mortgages, car loans, and other consumer credit.
Ian Explains: Will foreign policy decide the 2024 US election?
How much does foreign policy matter in a US presidential election? This year, more than usual.
When pollsters started asking Americans in 1948 what they viewed as the “most important problem” facing the country, foreign policy and international security dominated.
Looking ahead to the 2024 presidential election, Biden has managed to turn a Covid-ravaged economy around, with growth pegged at about three percent per quarter. Wages are going up, unemployment is at an all-time low and the stock market is coming on strongly. By every economic indicator, Biden should be surging. And yet, by every political indicator, he’s floundering.
Biden’s fate in November may hinge on whether he can convince a skeptical electorate that the economy is doing as well as it is...actually doing. But Americans’ views on the Ukraine war have shifted, with a plurality now saying the US is doing too much to help Ukraine. And half of US adults polled in February said that Israel has gone too far on its war with Gaza. Could Biden’s handling of these key foreign policy issues cost him the election in November?
It’s already clear that foreign policy will play an outsize role in this year’s election. So will immigration, which topped Gallup’s “most important problem” list in February and which is both a foreign policy issue and an economic one.
Catch GZERO World with Ian Bremmer every week at gzeromedia.com/gzeroworld or on US public television. Check local listings.
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Is the global economy finally on the right track?
How’s the global economy doing… really? When it comes to the world’s post-COVID recovery, it’s a tale of two economies: the United States and everyone else. On GZERO World, Ian Bremmer sits down with economist and author Dambisa Moyo for a hard look at the health of the world’s finances and the impact of geopolitical crises in Europe and the Middle East on trade flows and inflation.
Right now, US indicators are strong, but Germany and the UK are slipping into mild recessions, and China’s collapsing real estate sector, local government debt, and exodus of foreign investment is dragging the world’s second-largest economy into stagnation. Not to mention, Global South countries are holding record amounts of debt. So what does it all mean moving forward? Is the global economy still shaking off its post-Covid hangover or are some of these problems more entrenched?
“We need to be growing at 3% per year in order to double per capita incomes in a generation which is 25 years,” Moyo says, “Most of the global south is growing below that number, materially.”
Ian Bremmer and Dambisa Moyo unpack the confusing state of the global economy, China’s economic woes, and where they see the biggest potential for growth in developing economies during the next decade.
Catch GZERO World with Ian Bremmer every week at gzeromedia.com/gzeroworld or on US public television. Check local listings.
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