Biden is spending to stave off a recession — until after the election

The Nobel Prize-winning economist Robert Solow said in the 1980s, “You can see the computer age everywhere but in the productivity statistics.”

The same could be said of American economic growth under President Joe Biden.

Since January 2021, when Biden entered office, the economy has grown around 6.1%.

While this is not stellar growth, it is still growth in a world economy mired in stagnation.

Biden’s real trick, however, is not economic growth but employment.

In the past few months, we’ve seen unemployment rates as low as 3.4% — these sorts of rates haven’t been seen since America’s golden age of economic growth in the late 1960s.

Yet apart from the growth and unemployment figures, almost every other major indicator is signaling the economy is either close to or in a recession.

The Purchasing Managers’ Index, which publishes surveys of manufacturing orders, has been showing the sector contracting almost continuously since October 2022.

The services PMI has fared somewhat better but is once again showing slowdown.

Economists often look at the structure of Treasury yields to determine if the economy is tipping into recession.

This metric is now at a level seen in 1928, right before the great Wall Street crash and the Great Depression.

The housing market is also looking weak. Since April, house prices have been declining on an annual basis for the first time since March 2007, just prior to the financial crisis and Great Recession.

Then there is the government deficit. Usually when an economy is growing and unemployment is low, the government deficit shrinks or even produces a surplus.

This is because solid economic activity produces high tax revenue and low unemployment rates ensure people are working rather than collecting welfare.

Yet the government deficit today is projected to reach record levels.

This week the Committee for a Responsible Budget projected the deficit would reach around $2 trillion or 8% of gross domestic product in 2023, roughly doubling since 2022.

Outside of the pandemic, when the government had to pay people to stay at home, this size government deficit was last seen during the depths of the Great Recession in 2009.

Taking all these figures together leads one to believe something is amiss.

And it may be the deficit numbers that give us some clue as to what this something might be.

The extremely high federal-deficit number, together with the awful numbers in other sectors, might lead an economist to believe the Biden administration is overspending on purpose to ensure the American economy does not fall into recession before the 2024 election.

With all the normal indicators flashing red and signaling an imminent recession, would it really be so surprising if the administration used Uncle Sam’s spending power to keep the show on the road until Americans hit the ballot box?

Digging a little deeper, we find plenty of supporting evidence.

The smoking gun is a policy note the Treasury Department released at the end of June: “Unpacking the Boom in U.S. Construction of Manufacturing Facilities.”

In this document, Treasury argues that the wave of spending the Biden administration’s Inflation Reduction Act unleashed has led to an enormous increase in the construction of manufacturing plants.

Could it be that the IRA subsidies are encouraging construction companies to build manufacturing plants at the very moment when homebuilding is starting to slow and the commercial real-estate market is looking into the abyss?

Running the numbers we find that since the IRA’s passage, construction investment has been boosted by around $180.7 billion.

Annual construction investment growth has been running at 6.2% since the IRA was signed into law. But if we remove the additional manufacturing construction growth the IRA subsidized, this falls to 3.2%.

More striking, in 2023’s second quarter total construction investment growth was running at 3.1% with the additional subsidies — but without the subsidies it was contracting by 1.5%.

Using these numbers, we can model the employment growth of construction workers.

With the subsidies, construction employment is growing at around 2.6% per year in the second quarter of 2023 — without the subsidies we see a fall of just under 1%.

If we started to see a fall in construction employment growth, considering the weakness of the rest of the economy, it would almost certainly signal a recession.

The numbers do not lie. It appears the IRA-provided subsidies are ensuring construction growth keeps the American economy ticking over.

Will this manufactured growth last until the 2024 election?

It all depends on whether there is any juice left in the lemon. Can the IRA subsidies continue to buttress the construction sector?

Or will the IRA effect run out in the coming months and construction workers start to be laid off?

Only time will tell. But the answer to this question could end up determining the outcome of the 2024 election.

Philip Pilkington is a macroeconomist and investment professional.