“Joe Biden and America on a Tightrope.”

6 October 2023

Joe Biden entered the campaign in a deeply divided America. The legal twists and turns of Donald Trump, the removal of the Speaker of the House, and narrowly avoiding a Federal government shutdown are just a few examples. However, as Bill Clinton once said, everything will hinge on the state of the American economy in 2024.

In late September, Joe Biden raised the stakes by joining a strike organized by the UAW union in Michigan. Taking the megaphone on this occasion, he adopted an unprecedented position for a sitting President.

This extreme stance matches the high stakes for the forty-sixth President of the United States: in a context of budgetary confrontation, economic slowdown, and monetary tightening, the country’s economy may not turn out to be the asset hoped for in winning the rematch against Trump.

In any case, the Republicans have clearly understood this and are now positioning themselves firmly in a position of radical budgetary opposition to the current administration, fighting on every funding item for 2024, risking triggering a federal government shutdown. This was narrowly and temporarily avoided by a provisional agreement on September 30, 2023, just a few hours before the fiscal clock expired.

Because so far, Joe Biden, in this respect following in the footsteps of Donald Trump, has not hesitated to use the federal budget as a powerful tool to support the economy. Between July 2022 and August 2023, more than 5% of the country’s GDP was injected into the economy additionally through an expansion of the primary deficit.

Thanks to this very significant effort, activity has withstood the interest rate hikes. Our Montpensier Economic Momentum Indicator, at 48, is in stable territory, well above that of France or Germany.

Our MMS indicator for American economic growth momentum is much higher than that of France and Germany.

Source: Bloomberg / Montpensier Finance as of October 2, 2023

Entering the decisive phase of the campaign for the November 2024 presidential election signals the end of this period of budgetary stimulus. The Biden administration’s room for maneuver will be greatly reduced.

The first concrete consequence, beyond the probable slowdown in actual disbursements of the IRA (Infrastructure Investment) and CHIPS (Semiconductor) programs, will be the impossibility of somehow compensating for the billions of dollars that student loan subscribers now allocate monthly since August 1.

Once the Supreme Court’s decision putting an end to the extensive moratorium decided by the Democratic administration became known, monthly repayments of these loans, and thus the outstanding amount, which exceeds 1.5 trillion dollars, surpassed that of credit cards in the country – in fact, they skyrocketed, going from 2 billion to 10 billion dollars. This is money that no longer contributes to consumer spending.

Yet, it is this engine that remains the only one truly active in driving American, and even global, economic activity out of the recession that has been predicted. But the combination of the halt in budgetary support, the drying up of excess Post-Covid savings – from over 2 trillion dollars at the end of 2021 to less than 200 billion now – and the rapid normalization of the labor market, threaten to stall the machine.

It is on this last point that all eyes are converging. Because beyond occasional setbacks like with student loans, or windfall effects from savings stocks, the key to the resilience of the American consumer lies in their confidence in the prospects for an increase in their income.

Yet, the dynamics seem to be clearly headed downward. In August, the increase was only 0.2% for the month, the lowest since February 2021. Admittedly, on an annual basis, the differential is still +4.3% but the deceleration has been strong and continuous since the +5% recorded in November 2022. The September figures, which will be known on October 6, are eagerly awaited to see if the trend is confirmed.

In the meantime, there is real concern because restaurant reservations on OpenTable, as well as the “new car search” section on Google Trends, have seen marked declines for two months. And if we add the rise in default rates on consumer credit beyond 2019 levels, anxiety is not far away.

To this very uncertain economic context, we add a monetary environment that is now very restrictive. After the fastest rate hike in history, the financing conditions for the economy have tightened to the point that the index calculated monthly by the Fed to assess lending criteria for industrial and commercial companies is comparable to that of the second quarter of 2020, in the heart of the pandemic.

The Fed, in its recent communications after the meeting on September 20, which confirmed a pause in its monetary policy, seems to have taken note of the risks of this situation.

Austan Golsbee, the president of the Chicago Fed and a member of the monetary policy committee of the Washington institution, stated on Thursday, September 28, that the sharp rise in long-term rates, particularly striking over the month, constituted a form of additional monetary tightening that the Fed had to take into account before any further decision.

Following his example, John Williams, of the New York Fed, the Fed’s strong arm in the markets, added the next day in an interview with the Wall Street Journal that the risks associated with these monetary policies were now symmetrical, particularly given the rapid normalization of the labor market.

Nevertheless, the violent rise in US long-term interest rates and the uncertainty about the terminal point of the Fed Funds rate weigh on the markets. They also raise questions about the risks of financial instability.

Given the country’s tense budgetary and political context, the hope of Joe Biden and America therefore primarily relies on a rapid easing of the Fed’s rhetoric and actions. And the evolution of the financial markets too!

By Wilfrid Galand & Guillaume Dard