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Rising risk of recession imperils Democratic midterm prospects

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An increasing number of economists expect a recession this year, a prospect that bodes ill for President Joe Biden and Democrats in the midterm elections.
Many fear that the Federal Reserve will accidentally cause a recession in its belated efforts to curb inflation by hiking interest rates to slow demand and spending.

Already, Biden and Democrats are paying a political price for inflation, which is the top economic problem in voters’ eyes and perhaps the top political issue overall.
Those problems would be compounded if the economy, which has featured low unemployment and relatively rapid growth up until now, slipped into a downturn.

HOUSING AFFORDABILITY NEAR WORST ON RECORD AS FED BATTLES INFLATION
“Political arguments only go so far when people are being affected directly in their wallets, that’s what really makes a difference,” said Todd Belt, professor and director of the political management program at George Washington University.
Consumer prices rose a staggering 8.5% for the 12 months ending in March, the fastest rate since 1981.

The economy contracted at a 1.4% annual rate in the first quarter. In the Wall Street Journal’s regular survey of economists, a growing number now expect that the Fed’s efforts to limit inflation will result in a hard landing. Nearly 30% of those queried predict a recession within the next year, up from 18% who said the same just months ago in January.
In general, economic contraction before an election hurts incumbents. Yale economics professor Ray Fair projects elections using a model that includes economic variables such as inflation and gross domestic product.
Fair’s latest forecast, which was released in late January, sees a slight edge for Democrats. He predicted the vote share for Democrats in the House would be 50.31%, up from his prediction of 48.99% last October. Fair attributed the difference to “one more strong growth quarter and slightly lower inflation.”

Since his last projection, inflation has increased, and real GDP growth has dropped from 6.9% in the last quarter of 2021 to a negative 1.4% in the first quarter of this year. Fair told the Washington Examiner that he would be making a new prediction in the coming days.
The stock market, too, can prove to be a bellwether for elections, said Matt Lampert, president of the Socionomics Institute, a think tank that publishes research and a regular magazine.
“We think that’s because the stock market’s fluctuations are a more immediate reflection of changes in social mood,” he told the Washington Examiner.

“When social mood is positive, society is generally optimistic and expresses that optimism by sending stock prices higher and being more inclined to reelect incumbents,” Lampert said. “When social mood is negative, society is generally pessimistic and expresses that pessimism by sending stock prices lower and being more inclined to oust incumbents.”
The Dow Jones Industrial Average peaked in early January and has fallen more than 7% since then as the economic outlook has deteriorated.

For his part, Fed Chairman Jerome Powell maintains that the country will not necessarily fall into a recession. A recession is defined by the National Bureau of Economic Research, a private academic group, as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
“There is a path to that,” Powell said Wednesday of bringing inflation down without pushing up unemployment. “Now, I would say I think we have a good chance to have a soft, or a softish, landing or outcome if you will.”
Still, Democrats’ chances have already been significantly diminished by the extremely high rate of inflation, which has soured voters on the economy, despite low unemployment.

Democrats have tried to pin the blame for high prices on oil companies and other big businesses. They’ve also argued that the high rate of inflation is primarily caused by global supply chain snarls and Russia’s invasion of Ukraine rather than by too much federal spending and loose money.

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