As recession looms, who will Biden blame?

It’s the economy, stupid.

Those famous words from Democratic strategist James Carville must be haunting President Biden’s White House as the economy begins to slow — and just as the 2024 election moves into view.

Most recently, the job market appears to be faltering, with March gains pegged at 236,000, way down from February’s 311,000 and the 334,000 recorded on average over the past six months.

This is challenging for Biden, who hopes to run for reelection and has relied on solid employment gains to prove that his “economic plan is working.” It’s been a tough sell, seeing that inflation has caused real wages to decline for two years in a row; writing last fall, the Dallas Fed noted that the hit from inflation was “the most severe faced by employed workers over the past 25 years.”

Biden’s approval ratings on the economy, according to Real Clear Politics’ average of polls, is a disastrous 37 percent.

Of course, the downturn in growth – we are not yet in recession – has been engineered by and will be welcomed by the Federal Reserve, which slammed on the brakes a year ago as inflation soared to 40-year highs. Having dithered for more than a year as price increases gained steam, Chair Jerome Powell then jacked up rates at a historically aggressive pace and has also been reducing the size of the Fed balance sheet.

The Fed’s actions caused bond prices last year to suffer the worst losses in U.S. history. They also caused home prices to fall and led to increased stress in the banking system, producing two of the largest bank failures on record.

The one stubbornly strong pillar of our economic house has been the jobs market, but that has changed. It turns out that employment has been weakening for some time; we just didn’t know it. The Bureau of Labor Statistics just revised higher total weekly unemployment claims for the past few months, changing the manner in which it calculates seasonal adjustments.

The new figures bumped up initial unemployment claims by 48,000 for the week ending March 25, from 198,000 to 246,000, a development ISI Evercore economist Ed Hyman describes as “stunning.” In the most recent week, claims came in at 228,000; economists had been predicting 200,000.

The revisions make sense since many other indicators have showed demand for labor softening. Almost daily we have seen headlines of major companies announcing layoffs. The firings started in the tech industry but have more recently spread throughout the economy, including such names as Disney, Walmart and Amazon.

A report from the Challenger Group, a private consultancy, shows job cuts rose 15 percent in March compared to the prior month and were more than triple the number from a year earlier. The first-quarter total of 270,416 cuts was almost four times as many as in last year’s first quarter and was the highest quarterly total since the third quarter of 2020, when the economy was clobbered by COVID-19.     

A recent JOLTS report showed job openings falling to 9.9 million, from 10.6 million in January. A weakening jobs outlook was also contained in the most recent ISM manufacturing report, which showed the employment index “continued in contraction territory, registering 46.9 percent, down 2.2 percentage points from February’s reading of 49.1 percent.” Even the Services ISM report showed a weakening of hiring plans.

Investors will likely cheer the slowing in hiring, concluding that the Fed might decide a weaker jobs market allows for a pause in rate hikes. The next Fed meeting takes place the first week of May; if the economy, and most especially hiring, continue to soften, officials will likely decide to stand down. The market is now giving 60 percent odds to a pause.

Monetary policy works with about a year’s lag; since the first increase was March 2022, it is reasonable to think the sharp rate hikes of the past year (475 basis points over 12 months, a historic increase) will take hold even more visibly in the months ahead. With the banks under ongoing stress and growth deteriorating, a slowing jobs market was the last data point the Fed board wanted to see.

After all, there have been numerous signs that the economy is sputtering. The Atlanta Fed’s GDP estimate for the first quarter (ending March 31) in just a couple of weeks dropped from 3.5 percent to 1.5 percent growth, where it stands today.

The Atlanta estimate reflects numerous soft spots. We have seen sobering declines in manufacturing (the March ISM index came in at 46.3 for the month, indicating contraction, fell to its lowest reading since early 2020) and in the ISM for services, which dropped to 51.2 last month from 55.1 in February, considerably weaker than expected.

Meanwhile, ISI Evercore reports that its in-house trucking survey, which is highly correlated with real GDP, swooned to a new post-COVID low this week. ISI also reports that consumer net worth, which leads the economy by about six months, has plunged from growing to declining as housing and stock prices have headed lower.

Many economists are now anticipating a recession beginning in the third quarter of this year. The severity of that downturn is unknown, but we will likely see an even weaker job market.

Biden has been extremely critical of Donald Trump, blaming his predecessor for the sharp economic downturn and job losses brought on by the COVID shutdowns.

Who will he blame for the recession that is nearly upon us?

Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.