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This week in Bidenomics: Too much holiday cheer

What’s everybody so happy about?

Oh, right: Gas prices are falling.

The Conference Board reported an unexpected jump in consumer confidence in its latest monthly survey, with confidence reaching the highest level in 8 months. The survey doesn’t ask specifically about gasoline prices, but economists figure that’s a big reason people rate the “present” situation better, and also why inflation expectations dropped to the lowest level since September 2021.

Gas prices have plunged during the last few months, from a high of $5.02 per gallon in June to $3.10 today. The national average could drop below $3 by New Year’s Day.

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The typical family spends less than 3% of its budget on gas, but gas prices nonetheless serve as a psychological proxy for how the entire economy is doing, since they’re advertised in billboard fashion all over the place. If gas prices are low, things must be okay.

Americans also think the job market is getting better, with more saying jobs are “plentiful” and fewer saying jobs are “hard to get.” The pace of hiring has actually been slowing, but the unemployment rate remains a very low 3.7%, so sure, the job market is solid.

Revised numbers for gross domestic product show the economy was stronger than expected in the third quarter. Remember when GDP growth in both the first and second quarter was slightly negative, and that might have met one definition of a recession? Nah. GDP growth of 3.2% in the third quarter more than made up for the weak start to the year. Economists think growth will slow in the fourth quarter but still be positive, with output growing by 1% or so.

Consumer spending is holding up as the year ends, even though inflation of 7.1% is eroding people’s buying power. It will be a decent holiday season for retailers.

[Follow Rick Newman on Twitter, sign up for his newsletter or sound off.]

U.S. President Joe Biden delivers a Christmas speech at the White House in Washington, U.S., December 22, 2022. REUTERS/Leah Millis
U.S. President Joe Biden delivers a Christmas speech at the White House in Washington, U.S., December 22, 2022. REUTERS/Leah Millis (Leah Millis / reuters)

So what’s the problem? Well, in the fun-house economy of lofty inflation and hyper aggressive monetary policy by the Federal Reserve, good news is bad news and vice versa. The Fed is trying to rapidly slow economic growth by hiking interest rates at the fastest pace ever. The sooner the Fed sees evidence that its strategy is working, the sooner it will chill out, let rates stabilize, and stop raising everybody's borrowing costs.

That evidence isn’t coming into view. What the Fed wants to see is a softening labor market, which sounds a bit crazy because people need jobs to survive. But people also need price stability, and a hot labor market pushes wages too high, with rising labor costs adding to inflationary pressures. So if the Fed could just cool the labor market, people would get more nervous about keeping their jobs, they’d spend less, inflation would disappear and happy days would be here again.

The ongoing strength of consumer spending is blunting the effect of the medicine. “The job market’s resilience suggests that a recession beginning before spring is unlikely,” economist Scott Hoyt of Moody’s Analytics wrote in a Dec. 22 report. “A more serious threat is that the job market continues to barrel along, pushing unemployment lower and wage growth and inflation higher. The Fed’s efforts to cool the job market and inflation would be stymied, forcing an even more aggressive monetary policy response than what financial markets currently anticipate. This is the fodder for a recession in 12 to 18 months.”

That means the Fed, contrary to some expectations, may not slow or stop its pace of rate hikes, but will keep hiking. That will depress an already ailing stock market, curtail corporate profits, push employment up and finally trigger a recession, which could end up being worse than necessary.

Should we worry about that now? The Biden White House says no. “A recession is not inevitable,” White House economist Jared Bernstein told Yahoo Finance this week. “There are reasons to be optimistic.”

The White House keeps sending out memos reminding reporters that gas prices have plunged and are now lower than they were a year ago. Biden is basking in a year of legislative wins and a capstone visit to Washington by Ukrainian President Volodymyr Zelenskyy, which was a bipartisan feel-good event. Biden will start 2023 with a less hospitable Congress but swelling status as a global leader indispensable among Ukraine’s allies in its existential fight against the barbaric Russian invaders.

So fill your car with a smile on your face and splurge a bit over the holidays. There’s always something to worry about in 6 or 12 months. Sometimes it doesn’t happen.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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