US Economy Hits the Brakes: Recession Ahead?

US Economy Hits the Brakes: Recession Ahead?

McCarthy took a victory lap Wednesday
By Yuval Rosenberg and Michael Rainey
Thursday, April 27, 2023

It’s almost Friday! As you look ahead to the weekend, we’ll just drop this tweet from CNN’s Manu Raju here: “The Senate came into session Tuesday for a 5:30p vote this week. Had six votes in total this week. And senators all left after lunch today as the Senate closed up shop for the week. Back Monday for a 5:30p vote.”

We’ve still got some business to take care of, though, so read on.

Takeaways From the House GOP’s Debt Ceiling Success

“We’ve done our job,” House Speaker Kevin McCarthy (R-CA) told reporters yesterday after 217 Republicans votes to pass legislation that would increase the debt limit into next year, cut trillions in federal spending and enact a number of other conservative policy changes.

Only the job isn’t done. The House bill will go nowhere in the Senate and still leaves massive uncertainty over how the debt limit ultimately gets raised, as it must before long.

What Republicans are celebrating: “Since the bill in question is absolutely dead on arrival in the Senate and at the White House, the celebrating is actually about Kevin McCarthy’s Speakership surviving for another day, and right-wing members flexing their power,” writes Ed Kilgore at New York.

There may be just a bit more to it. “McCarthy also secured an extremely useful talking point,” write Jake Sherman and John Bresnahan at Punchbowl News. “No matter how right-leaning and unrealistic the 320-page package is, House Republicans are the only ones to have passed legislation to lift the nation’s borrowing cap. McCarthy plans now to sit, pat and slam Senate Majority Leader Chuck Schumer for doing nothing and President Joe Biden for refusing to negotiate.”

Biden faces a big decision: It’s not clear that Biden will change his tune on debt talks. The president has insisted that he will not negotiate over raising the debt limit, though he is willing to talk to McCarthy about spending in the context of the federal budget. But he will face increasing pressure, including some from within his own party, to engage with McCarthy now.

“He will need to find what, if any, common ground on spending cuts he has with Republicans, who do not share his preference for reducing the nation’s debt path largely by raising taxes on corporations and the rich. He will need to determine if he is prepared to sign any debt limit increase that is attached to conditions demanded by House conservatives,” Jim Tankersley writes at The New York Times.

There’s a principle, and politics, involved: “Mr. Biden and his aides do not want to encourage Republicans to habitually threaten economic collapse under Democratic presidents — and only under Democratic presidents — by allowing them to extract concessions to raise the limit now,” Tankersley adds. “They also recognize that a recession set off by default would hammer American families just as Mr. Biden is ramping up his re-election campaign, a dangerous scenario for an unpopular incumbent no matter which party voters blame for the default.”

So Biden may have to agree to talks: “Mr. Biden’s insistence that House Republicans pass a clean debt limit increase without any strings attached is the morally and economically correct course of action,” The Washington Post’s editorial board says. “But reality has to sink in. It would be wise for Mr. Biden to start talking seriously with Mr. McCarthy. Budget talks can remain on a separate path, but they need to commence.”

What a deal could look like: Tankersley reports that some administration officials privately suggest that spending caps lasting for just a few years rather than the decade in the GOP bill could maybe, possibly form the core of an agreement that would raise the debt limit and fund the government. And Punchbowl notes that McCarthy wants spending caps, energy permitting reform and stricter work requirements for federal benefit programs in a final deal with the White House and Senate. “That’s going to be very tricky if the California Republican ever gets into a real negotiation with Biden and Schumer,” Sherman and Bresnahan suggest. “Did House GOP leaders raise the bar too high by passing this package? Only time will tell.”

Given that some House Republicans won’t accept any plan other than the one they just voted for, a potential deal with smaller spending cuts and a shorter timeframe would require bipartisan support to pass — and it could mean trouble for McCarthy.

McCarthy is still in a perilous position: The speaker may have gotten a big win this week, but he remains at the mercy of his members. “Any bloc of at least five members has the leverage to extract concessions from McCarthy, who can only afford to lose four votes on most bills,” Juliegrace Brufke notes at Axios. “Freedom Caucus firebrands created this template during the speaker election, and McCarthy cut deals that showed his vulnerability and pragmatism in one swoop. … But those promises may come back to haunt him.”

Time is running short: Goldman Sachs economist Alec Phillips told clients Wednesday evening that surprisingly strong tax receipts for the Treasury Department mean that the probability of an early June deadline to raise the debt limit has been reduced. The most likely deadline is now in late July, Phillips said. That’s not as far away as it may seem, given that the House is out of session next week and Biden is scheduled to travel to Australia and Japan after that.


Recession or Resilience? Making Sense of a Slowing Economy

The U.S. economy cooled off during the first three months of 2023, as gross domestic product grew at a 1.1% annualized pace, down from the 2.6% pace recorded in the last quarter of 2022. The results announced by the Bureau of Economic Analysis Thursday were well below expectations. Economists surveyed by Bloomberg forecasted a 1.9% annualized growth rate for the first quarter.

The slowdown was driven by reduced spending by businesses, with nonresidential equipment investment falling by 7.3%. A drawdown in inventories also weighed on growth, led by lower investment in machinery, equipment and supplies. And the housing sector shrank again, marking eight consecutive negative quarters.

Consumer spending remained strong, however, helping offset decreased spending by businesses. Overall household consumption increased 3.7%, as spending on goods rose 6.5%, the most in nearly two years, while spending on services rose 2.3%.

The report also showed that inflation remains sticky, with the price index for gross domestic purchases increasing by 3.8%, up two-tenths of a percentage point from the quarter before. Worse, the core personal expenditure index — a measure of spending watched closely by the Federal Reserve that excludes volatile food and energy prices — also rose, hitting 4.9%, the fastest pace in a year.

Good news or bad? The report provides plenty of fodder for both optimists and pessimists. On the one hand, growth is clearly slowing, which could be a warning that the economy is approaching stall speed.

“This morning’s data was the worst of both worlds, with growth down and inflation up,” Chris Zaccarelli of Independent Advisor Alliance told Bloomberg.

Ellen Zentner, an economist at Morgan Stanley, said she expects the slowing to continue as the Fed’s monetary tightening campaign and banking woes drag on growth, pushing the economy into negative territory as soon as the second quarter.

Andrew Hunter of Capital Economics had a similar take. “The economy had less forward momentum at the start of this year than previously thought,” he wrote in a research note. “We continue to expect the drag from higher interest rates and tightening credit conditions to push the economy into a mild recession soon.”

On the other hand, the fact that the economy is still growing is seen by some analysts as a sign of strength that suggests a long-anticipated rescission may hold off for a few more months, if not longer. “The US economy is stronger than meets the eye, with consumers continuing to spend on both goods and services,” said Bloomberg economist Eliza Winger.

“The ‘R Word’ that one should use when discussing the American economy over the past two years should be resilient, not recession,” wrote RSM chief economist Joseph Brusuelas. “The shocks of inflation and interest rate increases and a tightening in lending that are now affecting small and midsize businesses have yet to put a material dent in consumption.”

Noting that the labor market remains strong and that businesses may have to ramp up production in the second quarter to make up for lost inventories in the first quarter, The Wall Street Journal’s Justin Lahart wrote: “A downturn might be coming. But not yet.”

What comes next: The Federal Open Market Committee meets next week, and most analysts expect the central bank to raise rates by 25 basis points. Nothing in the latest GDP report suggests they will alter the expected course.

More Stringent Work Requirements for Medicaid Would Have ‘Negligible’ Effect on Employment: CBO

In response to a request from Rep. Frank Pallone Jr. (D-NJ), the Congressional Budget Office evaluated the budgetary effects of work requirements for the Medicaid program included in the Limit, Save, Grow Act passed by House Republicans this week.

The Republican bill would require most Medicaid beneficiaries between the ages of 19 and 55 to work, perform community service or participate in an employment program for at least 80 hours per month. As we told you yesterday, the proposed rules would save about $109 billion over a decade while denying health insurance to about 600,000 people.

But some Republicans say the primary purpose of the work requirements is to push more people into the workforce, for both economic and moral reasons. “Incentives matter. And the incentives today are out of whack,” House Speaker Kevin McCarthy said last week. “It’s time to get Americans back to work.”

The CBO, however, says that goal is unlikely to be achieved. “As part of CBO’s estimate of the budgetary and enrollment effects of the bill, the agency concludes that the amendment would have a negligible effect on employment status or hours worked by people who would be subject to the work requirements,” CBO chief Phillip L. Swagel wrote in a response to Pallone Wednesday.

That conclusion squares with studies of similar rules enacted in Arkansas, where Medicaid recipients were subjected to work requirements starting in 2018. An analysis published in Health Affairs found that “work requirements did not increase employment over eighteen months of follow-up.”

Drew Altman, who leads the health care foundation KFF, said the Medicaid work requirements are ultimately more political than economic or fiscal. “Like skinny health plans, association plans, and buying insurance across state lines, Medicaid work requirements is a policy loser and a political winner,” Altman tweeted Thursday. “It won’t accomplish much, may hurt some people, and sounds good, especially to the Republican base.”


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