The U.S. Economic Review: A Pre-Midterm Analysis

The title is a bit trite – especially in the current political atmosphere. I know! But the endless political slander on mainstream media, seeping into the economic debate and verging misinformation, warrants an impartial appraisal of facts and details – not that I am claiming dispassion of opinion or political apathy (I highly doubt anyone could be that sanctimonious). But I want to base an understanding of the present-day American economy without any partisan bias or preconceived notions. And hopefully, I might succeed in aligning historical patterns and credible evidence to explain the economic picture of the United States without actually blaming the incumbent or opposition fractions. 

It is a known phenomenon that the sitting government tends to lose standing in Congress in Midterm elections. While there is no standard explanation, I believe that Presidents usually seek to make unpopular political and economic decisions at the inception point of their presidential tenures. The reason is somewhat straightforward: They are in a much more comfortable position to fend off backlash and appease industrial lobbying without incurring political damage to their congregational standing. However, by the time midterms arrive, the cumulative effect – both political and economic – weighs heavily on public sentiment, leading favors to shift to the de facto opposition. However, the ongoing tussle between the Democrats and the GOP involves an economic blame game – something I always take with a grain of salt. 

The Republicans repeatedly claim that the US economy is in terrible shape. They draw bizarre comparisons with January 2021 to justify their absurd rhetoric that the American population is in dire straits. Yet, reviewing the political coverage extensively over the past few months, I have not witnessed a single substantive economic plan from any Republican lawmaker. Not one strategy to lower inflation overnight (something they pretend to protest that the incumbent government is somehow forestalling). And no alternative to avoid ballooning interest rates and mortgage payments without risking long-term inflation and a recession. That is because such a strategy is virtually utopian.

I can attest to the painful price moves here in New York City: mounting house rent, growing grocery bills, and skyrocketing gasoline prices. Yes, I know it is agonizing. But do I agree that the economy is in shambles? Absolutely not!

In September, the Consumer Price Index (CPI) measured inflation clocked at 8.2% – more than four times the Fed’s inflation target of 2%. The Federal Reserve imposed another 75 basis points rate hike earlier this week – the fourth consecutive three-quarters of a percentage point increase this year (sixth overall). Inflation is running at a generation high. And thus, the general perception among voters is that the Fed has lost control; we are heading toward a repeat of the 80s – when inflation blazed into double digits; interest rates rose to 20% in response. But many voters overlook that the economy is relatively resilient. Despite a persistent bear market, the latest government figures patently show that the American economy grew at an annual rate of 2.6% in the third quarter – after contracting in both preceding quarters this year. They forget that despite the sharpest monetary tightening schedule in 4 decades, the unemployment rate shows no sign of trouble at 3.5% – the lowest in almost 50 years. 

Yes, the food and gas prices are abnormally elevated, impacting the opinion of voters around the country. But we need to understand: Policy decisions in America have little impact on these metrics in a broader context. Because of global supply chains’ pivotal nature, regardless of the political reality in the United States. Gas prices are inflating because – as much as America boasts otherwise – global instability does impact American consumers in a globalized world – though not as sharply as European counterparts. The Russian factor, alongside the Saudi oil betrayal, has spiraled the global oil market – hurting American consumers despite a record discharge from the US Strategic Petroleum Reserves (SPRs). The global food shortage due to the chaos in Ukraine – one of the world’s top agricultural producers and exporters – has exported food insecurity even across the Atlantic.

Unfortunately, like the rest of the world, the United States cannot magically conjure additional energy sources and grain supply. However, as far as inflation goes, I reckon the situation is not as bad as depicted on television. 

Compared to the eve of the pandemic – since that is when things stopped making sense – consumer prices are 15% higher. Yet, average wages have grown by 14% since then. In 2020, gas prices bottomed around $2/gallon. Yet, it was not a marvel of any government policy but plummeting demand in global transportation leading to an oil price war between Russia and Saudi Arabia. Rising unemployment in America was also a corollary of the subsequent economic slump. So a comparison based on headline inflation is not only skewed – based on the preferential bias for specific measures – it is also unfair to the incumbent government, having no influence or insight by default. 

But I agree that in the face of stubborn inflation and the aggressive policy response on display by the Federal Reserve, a soft landing seems highly unlikely. Nonetheless, political outcomes post-election could either extinguish or exacerbate the economic peril circling the US economy.

Based on pre-election projections, the Republican Party could gain control of the House of Representatives. Even the Senate could slip away from the Biden administration. In the case of a split government, the gridlock over the federal debt ceiling would destabilize the US capital markets. Economies like India and Japan – holding massive reserves of US treasures – have recently indulged in selling US securities to pump local currencies against the US dollar. A mass sellout could plunge the value of the US debt, while an enforced debt ceiling would further dent the demand for US treasuries in the global market. However, as I discussed in my previous article, the US dollar and treasuries are favored by institutional investors worldwide in uncertain times. Yet, while a debt default might be a farfetched outcome, the Republicans could use this issue as leverage to push Biden to cut federal spending and even repeal the Inflation Reduction Act (IRA). Therefore, based on electoral predictions and recent hawkish statements made by the GOP lawmakers, a squeeze in Social Security and infrastructure spending is not unlikely in 2023.

However, if Democrats somehow trump the projections (pun not intended!), increased spending is probable – though expansionary fiscal policies are unlikely as long as the Fed continues to raise interest rates. Ultimately, while the political commotion would subside in a few weeks, the American public desperately needs a reality check. (1) Inflation stings, but it is partly also the cost of generous stimulus cheques furnished to ride out the pandemic. (2) It takes time for the monetary policy results to reflect in grocery bills and gas stations. (3) Even globalization has costs; some commodities are beyond the scope of national policy control. And even if these pointers do not spur relief, get a peek at Great Britain to realize the value of economic well-being and responsible decision-making that you might have taken for granted.

Syed Zain Abbas Rizvi
Syed Zain Abbas Rizvi
The author is a political and economic analyst. He focuses on geopolitical policymaking and international affairs. Syed has written extensively on fintech economy, foreign policy, and economic decision making of the Indo-Pacific and Asian region.