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Biden economy keeps defying predictions. Will it last?

The combination of a hiring boom and ebbing inflation has confounded forecasters, who’ve been warning of a recession

President Biden speaks about job creation on Friday. (Demetrius Freeman/The Washington Post)
8 min

As President Biden prepares to deliver the State of the Union address Tuesday night, he finds himself presiding over an economic puzzle.

The Federal Reserve has raised interest rates by 4½ percentage points over the past 11 months, one of its sharpest moves in several decades, in a bid to cool off the economy and ease rising prices.

Yet employers continue to hire as if the good times will never end. In January, they added 517,000 jobs — almost twice as many as in December — while the unemployment rate fell to its lowest mark since 1969.

Speaking in the Eisenhower Executive Office Building on Friday, the president took a victory lap, declaring the “state of the economy is strong.” His annual appearance before a joint session of Congress is almost certain to include an assertion that the economic rebound is no accident, that it’s the result of administration policies, including the $1.9 trillion American Rescue Plan and work to smooth snarled supply chains.

This Biden boom certainly is confounding skeptics who have been predicting for months that the Fed’s anti-inflation campaign would trigger an imminent recession. But the economy’s unexpected performance also is testing the ability of policymakers to keep the recovery going.

“This is not a standard business cycle. … It’s unique,” Fed Chair Jerome H. Powell said last week. “Certainty is not appropriate here.”

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Indeed, the post-pandemic economy is proving hard to fathom.

Growth has slowed from an annual rate of 7 percent in late 2021 to 2.9 percent in the most recent quarter, which the president anticipated in public statements one year ago.

That downshift was the first step along the path to a “soft landing” — curing inflation without a sharp jump in unemployment. But ebbing growth was expected to be followed by a similar moderation in job creation, and Friday’s blockbuster report, which included upward revisions for November and December, showed that hasn’t happened yet.

With jobs sprouting instead of shrinking, the Fed is likely to keep increasing the cost of borrowing for businesses and consumers. The danger is that, in trying to control inflation, the Fed will go too far and shove the economy into a recession.

Whether the United States can keep defying the recession odds may depend on what happens in industries such as leisure and hospitality, health care and entertainment. These service businesses are enjoying a boomlet as consumers return to their pre-pandemic lifestyles.

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Hotels, airlines and medical clinics all are hiring like mad. The Las Vegas Sands, a casino and resort company, lists 50 job openings on its website, including for cybersecurity specialists, attorneys and a corporate receptionist. HCA Healthcare, which operates medical facilities in 21 states and the United Kingdom, is hiring doctors in Texas, nurses in Kansas and lab assistants in Colorado.

Goods prices, a major contributor to inflation last year, have started to come down. Other major spending categories are expected to soon follow. Advertised apartment rents, for example, are cooling off. But it takes time for those changes to be reflected in official government data.

White House aides see signs that wages in the services portion of the economy are not rising as quickly as they did last year. If that moderation continues, it would take pressure off prices and allow the Fed to stop hiking rates, according to a senior administration official who spoke on the condition of anonymity to discuss internal deliberations.

“We don’t see it. It’s not happening yet,” Powell told reporters last week, referring to any reversal in services inflation.

The bigger problem is that Friday’s jobs report shows that it’s just not getting any easier to understand the economy. While the worst of the pandemic is in the past, businesses and consumers still bear its scars.

Americans behaved differently during the days of coronavirus restrictions, buying significantly more goods than they normally would and consuming fewer in-person services.

The economy responded. Transportation and warehousing companies bulked up and now employ roughly 1 million more workers than in February 2020, while companies in the leisure and hospitality sector are still 495,000 workers short, according to the Bureau of Labor Statistics.

They are almost 1.5 million short of the workers they would be expected to need now if they had grown over the past three years at their typical pace, according to Daleep Singh, chief global economist for PGIM Fixed Income.

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Friday’s jobs report provided a glimpse of key hiring trends. Goods-producing companies added 46,000 workers in January, according to seasonally adjusted Labor Department statistics. But services companies added almost nine times as many, or 397,000. Leisure and hospitality along with health care were among the most active industries.

After shedding tens of thousands of workers during the pandemic’s early months, major airlines have been scrambling to hire. American Airlines has added roughly 40,000 workers over the past two years and plans to add more this year, including about 2,000 pilots, executives told investors last month.

Robert Isom, the airline’s chief executive, described the hiring spree as “unprecedented.”

Likewise, United Airlines, which had never hired more than 900 pilots in a year before the pandemic, recruited 2,500 last year, CEO Scott Kirby told investors recently. “Pilots are and will remain a significant constraint on capacity,” he said.

Beneath the surface of the $25 trillion U.S. economy, industries and consumers are gradually establishing a new normal. Many pre-pandemic habits are gone. But the economy remains in the shadow of a once-in-a-century global calamity.

At auto parts maker Clips & Clamps Industries in Plymouth, Mich., Jeff Aznavorian senses the approach of a mild downturn. The firm’s president is hoping this year to hang on to his existing $15 million in annual revenue, before an anticipated surge of business in 2024.

So far, orders are holding up. Last year’s supply chain problems are just a memory. His biggest headache, he said, is uncertainty.

“I can see February and March pretty clearly. Beyond March, I can’t see at all,” he said.

The Fed and Wall Street analysts are having the same problem. Standard economic models that economists use to predict future developments are built on the experience of recent decades.

There is no playbook for navigating the aftermath of a global pandemic that included societal lockdowns, shuttered factories and staggered national reopenings. Standard relationships — such as the link between job gains and wages or between employment and inflation — are breaking down.

“We have a dismal understanding of how this post-pandemic economy works,” Bernard Baumohl, chief global economist for the Economic Outlook Group, wrote in a client note on Friday.

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The Fed should rethink conventional economic theory that says inflation must inevitably rise as the unemployment rate falls because employers competing for a dwindling pool of workers will bid up wages and, eventually, prices will follow, he said.

That theory doesn’t explain the past year when the annual rate of increase in average hourly earnings dropped from 5.9 percent in March to 4.4 percent last month — even as the job market grew increasingly tight, Baumohl said.

Further clouding the economic outlook: The pandemic’s wake coincides with a host of uncommon forces. Fallout from the war in Europe, unpredictable populist governments and the transition from fossil fuels to renewable energy all complicate the Fed’s task, said Singh, a former Biden aide.

Plus, the full effects of the central bank’s rate hikes over the past year have yet to be felt. And an expected fight between the president and House Republicans over raising the debt ceiling could spark further economic turmoil.

“The era of ‘the Great Moderation’ in the global economy is gone for now, and it’s not coming back soon,” Singh said. “We’re in a period of greater volatility. We’re in a period of adjustment.”

The median Fed forecast calls for the economy to barely grow this year, expanding by just 0.5 percent. Many Wall Street analysts call for a shallow recession starting in the spring.

“If we have a recession, it’s likely to be a very mild one by historical standards,” said Eric Winograd, senior economist with AllianceBernstein in New York.

Biden isn’t buying it.

“Here’s where we stand: the strongest job growth in history; the lowest unemployment rate in 54 years; manufacturing rebounding at a faster rate than in the last 40 years; inflation coming down; real wages going up — but moderately going up, not going through the roof; the economy growing at a solid clip,” he said. “Put simply, I would argue the Biden economic plan is working.”