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The Morning Dispatch: Shrinking GDP Sparks Recession Fears
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The Morning Dispatch: Shrinking GDP Sparks Recession Fears

Plus: A new book highlights tensions within the Democratic Party.

Happy Friday! We almost took today off in observance of Arbor Day, but we ultimately decided  the weekend is for rest, not Friday.

Get it? For rest? Forest? Arbor Day?

Quick Hits: Today’s Top Stories

  • The Bureau of Economic Analysis reported Thursday that real gross domestic product (GDP) decreased at an annual rate of 1.4 percent in the first quarter of 2022, a steep decline from the annual 6.9 percent growth of Q4 2021 and the weakest growth figure since early 2020.

  • President Joe Biden on Thursday formally requested from Congress an additional $33 billion in security, economic, and humanitarian aid for Ukraine, telling reporters his administration has “almost exhausted” the drawdown authority Congress provided for Ukraine last month. The administration believes the aid as requested would be enough to support Ukraine for five months, and demonstrate to Russian President Vladimir Putin American support for Ukraine is not waning. Democrats and Republicans signaled an openness to some form of the package yesterday, but had questions about specific provisions and language that will likely be hashed out in the coming weeks.

  • The Department of Education announced Thursday it will cancel approximately $238 million in loans for 28,000 students who attended Marinello Schools of Beauty—for-profit cosmetology schools—between 2009 and 2016. “Marinello preyed on students who dreamed of careers in the beauty industry, misled them about the quality of their programs, and left them buried in unaffordable debt they could not repay,” Education Secretary Miguel Cardona said. President Joe Biden told reporters yesterday he’s “taking a hard look” at providing “some” additional student loan debt forgiveness, but shot down the $50,000 figure repeatedly promoted by Senate Majority Leader Chuck Schumer.

  • The average number of daily confirmed COVID-19 cases in the United States has continued to increase, up 43 percent over the past two weeks but still lower than it’s been throughout most of the pandemic. The average number of daily deaths attributed to COVID-19, however, continue to fall, down 36 percent over the same time period.

  • The Labor Department reported Thursday that initial jobless claims decreased by 5,000 week-over-week to 180,000 last week, remaining near all-time lows.

You, Me, and the GDP (Which Shrank This Quarter)

Customers at a supermarket in San Mateo, California. (Photograph by Liu Guanguan/China News Service/Getty Images.)

America’s economy contracted in the first quarter of 2022. But we’re not in a recession—yet.

The real gross domestic product shrank by 1.4 percent year-over-year this quarter, the Bureau of Economic Analysis estimated Thursday, well down from last quarter’s hearty 6.9 percent growth. It’s the weakest report since spring 2020, when the onset of COVID-19 triggered a brief but deep recession.

The report lists a few reasons for that contraction, starting with sluggish inventory growth. Late last year, businesses stocked up to avoid holiday shortages, producing the largest inventory growth on record. It’s hard to top that kind of stockpiling, so inventory purchases dropped in early 2021, bringing down the GDP with them. Plus, federal, state, and local governments all spent less as more COVID-19 relief programs expired. The report also notes that the federal government spent less on intermediate goods and services for defense products.

America’s economy felt the shock of Russia’s attack on Ukraine, China’s COVID-19 shutdowns, and accompanying supply chain disruptions—but those shocks had an even greater impact on economies overseas, driving down demand for our exports. Our imports rose 11.7 percent year-over-year compared to exports’ 3.7 percent growth, widening the trade deficit. Analysts cautioned that doesn’t necessarily mean a weaker economy. “If imports were a drag on growth, we should expect to see some connection in the real world between the change in imports and economic growth,” Cato Institute trade experts Scott Lincicome and Daniel Giswold wrote. “[Instead,] in recent decades, stronger economic growth has tended to correlate with a rising U.S. trade deficit.”

President Joe Biden tried to downplay the significance of the topline number. “Last quarter’s growth estimate was affected by technical factors,” he said in a statement. “[But] the American economy—powered by working families—continues to be resilient in the face of historic challenges.”

Biden’s statement also touted the stronger numbers in the report: consumer and business spending. Consumer spending, a primary economic driver, rose 2.7 percent annually, and businesses shelled out for equipment and research and development, driving business spending up 9.2 percent. ”The most important aspects of the domestic economy held up better than they did at the end of 2021, when growth was soaring,” wrote Diane Swonk, chief economist at financial services company Grant Thornton. “Robust employment gains (a stunning 1.7 million jobs in the first quarter alone) and the savings and wealth amassed during the pandemic enabled consumers to continue spending, despite the surge in prices at the gas pump. Housing held up.”

Those encouraging numbers undercut immediate alarm about this GDP report, but they’ve been buoyed by high government spending and low interest rates. “The government has been giving the consumer a huge amount of money over the last two years,” American Enterprise Institute economist Desmond Lachman told The Dispatch. “The Biden administration, together with the Federal Reserve, created a very big boom in 2021. People haven’t had the chance to spend all of that. That is a big support to the economy.” And it’s helped drive inflation that has outpaced wage growth—consumer prices climbed 8.5 percent year over year in March, while average hourly earnings shrank 2.7 percent in that time once adjusted for inflation.

All of this adds up to an economy that, still disrupted by global events and coming off last year’s red hot growth, could be headed for a recession. Economists surveyed by the Wall Street Journal predicted 2.6 percent year-over-year GDP growth in the fourth quarter of 2022, far closer to 2019’s growth than last year’s 5.5 percent rise. But the Fed plans aggressive interest rate hikes to cool demand and bring down inflation—it raised rates 25 basis points in March and plans raises of 50 basis points, half a percent, at its meetings this summer. 

“Now we go into the stage where the party is over, where the economy will slow down fairly dramatically as the Fed raises interest rates to correct the excesses of last year,” Lachman said, predicting a recession in the next six to 24 months based on recent bond market changes of a type that in the past have preceded recessions. “The bond market would have to be wrong for the first time in the post-war period, and the Fed would have to be able to reduce inflation—by a lot—without causing a recession for the first time in the post-war period. I know which way I’d bet.”

A Behind-the-Scenes Peek at the Tensions Among Democrats

If you’ve paid attention to the news out of Washington over the last couple of weeks—or even if you haven’t—chances are you’ve encountered reporting from This Will Not Pass, a forthcoming book from New York Times correspondents Jonathan Martin and Alex Burns. They are responsible for revelations about Kevin McCarthy’s intention after the January 6 assault on the Capitol—quickly abandoned and falsely denied—to ask Donald Trump to resign. The book broke the news on Mitch McConnell’s view that Trump’s behavior was impeachable and his judgment that Republicans in the Senate had the votes to convict. Much of the early buzz about the book has focused on news about Republicans—and for good reason. But the book bridges the end of the Trump administration and the early part of the Biden administration, providing lots of well-sourced, in-the-room reporting on the tremendous difficulty the Democrats—who control the White House and both chambers of Congress—have had governing. The Dispatch obtained an advance copy.

Democrats’ “serious internal divisions” have stalled President Joe Biden’s domestic agenda, with centrists and progressives seeking to advance radically different priorities. The two factions brought “two different views on how to turn the page on the Trump era,” Martin and Burns write. “To the centrists, Trump represented a decisive turn into politics as a form of warfare, with every issue, every presidential action, and every congressional vote treated as combat. They believed that dealmaking and bipartisan cooperation would restore a mood of normalcy and calm in the capital, and eventually in the nation at large.” 

There were reasons to expect Biden might take such an approach. During the campaign, he frequently called for a return to a pre-Trump normal and he touted his long experience as a Senate dealmaker as one of the reasons to believe he could lead the country there. 

At the same time, however, he’d embraced a set of policies—forgiving student loan debt from public schools, free preschool for younger children, dramatically expanded Obamacare, among many others—that put him to the left of Hillary Clinton in 2016 and even Barack Obama in 2008 and 2012. In the context of his mano-a-mano battle with Bernie Sanders to end the Democratic nominating process, Biden looked like a relative moderate. But anyone looks like a moderate next to Bernie Sanders and in order to defeat Sanders, Biden adopted policy proposals that energized the base of the Democratic party. And the progressives weren’t buying the centrists’ case for bipartisanship. 

“From the perspective of the Congressional Progressive Caucus, that was a sucker’s view,” Burns and Martin continue. “Even if voters told pollsters they cared about bipartisanship, liberals believed Americans cared far more about tangible improvements to their lives—improvements like the funding for childcare and paid-leave programs in the reconciliation bill. To the left, purging Trump from the political system meant showing the electorate, including lower-income whites who supported the former president, that government could transform their lives for the better.”

The book then describes two meetings Biden had with the key Democratic groups on September 22, 2021. The centrists met with him first and it didn’t go well. Sens. Joe Manchin and Kyrsten Sinema, of West Virginia and Arizona respectively, had been pushing the White House to keep the price tag on the Democrats’ big reconciliation bill to something they could defend at home. Manchin set his limit at $1.5 trillion—a figure he memorialized in a document signed in secret by Senate Majority Leader Chuck Schumer “a tactic seemingly designed to shield Manchin against any claims later on that he had misled party leaders about what he would or would not be willing to support.” Sinema had been less specific in public about her topline number but, the book reports, had shared it with President Biden in direct conversations they’d had. 

In the meeting with the centrists, Biden

floated a budget number for the reconciliation bill that he hoped everyone present could accept. Perhaps, Biden said, it could end up around $2 trillion. He acknowledged that Sinema was pushing for a much smaller package. In fact, Biden told the group, the Arizona senator had set her limit at $1.1 trillion. The room froze …

The Arizona senator had refused to outline her negotiating parameters in public, as Manchin had done. That was partly because the White House had asked her not to. Biden aides believed her demands were not reasonable, and they feared that if Sinema drew a public red line at $1.1 trillion—a miserly sum by liberal standards—then the party would erupt in open war. 

Now Biden had exposed to some of Sinema’s colleagues the very position his aides had asked her to conceal. The senator was visibly angry.

‘Mr. President,” she said, ‘that was a private conversation.’ Sinema began to stand up. She asked Biden: ‘Do you want me to leave?’”

A short time later, Biden sat down with the progressives for a meeting that was “considerably more agreeable.” The session with Vermont Sen. Bernie Sanders, House Progressive Caucus Chair Pramila Jayapal and others, went swimmingly. Biden signed for Jayapal a copy of an address he’d given to Congress outlining his agenda—one day after he’d “called her up to wish her a happy birthday and cheer her for an appearance on Rachel Maddow’s MSNBC show.” 

“The two most intransigent factions of Biden’s party were not getting closer together,” the authors conclude. “But after those meetings at the White House, it seemed that one of them was growing far closer to Biden than the other.”

Worth Your Time

  • For Law & Liberty, Andrew Lang reviews Jonathan White’s new book—A House Built by Slaves—on how black men and women used a series of visits to the White House during the Civil War to change former President Abraham Lincoln’s thinking on slavery. “Perceiving Lincoln as an ally in the cause of freedom, black lobbyists transformed the functioning assumptions of the American presidency,” Lang writes. “They viewed the White House as an equitable space from which to petition the government. Recognizing their innate humanity, Lincoln listened to his visitors’ concerns. ‘I am proud to say that I never was treated with more kindness and cordiality than I was by that great and good man,’ the renowned black abolitionist Sojourner Truth reflected in 1864 on her meetings with Lincoln. In White’s careful telling, emancipation was not a moment of white beneficence bestowed upon passive slaves. It was rather a personal and public negotiation between Lincoln and his black visitors to shape a new national order.”

  • Rep. Marjorie Taylor Greene “certainly isn’t a credit to Georgia or the House of Representatives,” National Review’s Rich Lowry writes for Politico. But a group attempting to exclude her from the ballot for supporting an insurrection, he argues, is just as undemocratic as Greene’s critics believe her to be. “Greene is a bomb-thrower drawn to lurid conspiracy theories, who is symptomatic of how Congress has become a platform for crowd-pleasing performance art, but whether she continues to serve in the House or not is, obviously, a decision that rightfully belongs to the voters of her district,” Lowry argues. “Greene’s real offense was being outrageous and irresponsible, which is not prohibited under the 14th Amendment. She referred to ‘our 1776 moment,’ and sent a misspelled and garbled text to then-White House chief of staff Mark Meadows saying that some House members were talking privately about the necessity of martial law. These idiocies should be held against her, but they aren’t grounds for preventing the voters from rendering their verdict.”

  • George Will’s latest Washington Post column is a provocative one, arguing the Constitution should be amended to bar any senator—current or former—from running for president. “As president-centric government has waxed, the Senate has waned, becoming increasingly a theater of performative behaviors by senators who are decreasingly interested in legislating, and are increasingly preoccupied with using social media for self-promotion,” he argues. “The constitutional equilibrium of checks and balances depends on a rivalrous relationship between the executive branch and houses of Congress that are mutually jealous of their powers. … Were all persons with presidential ambitions deterred from becoming senators, this probably would improve the caliber of senators, and of presidents, and the equilibrium between the political branches.”

Presented Without Comment

Also Presented Without Comment

Toeing the Company Line

  • In this week’s edition of The Current, Klon gives Elon Musk some ideas on how to improve Twitter, shares his concerns with the United States sending Ukraine certain advanced “strike drones,” and looks into claims by an open-source intelligence company in Virginia that it can monitor of billions of mobile phones using publicly available data. “The sad truth is that this data horse is so far outside of the barn that I’m not sure we’ll ever get it back,” he writes.

  • Thursday’s Stirewaltisms (🔒) looks at the political ramifications of a recession. “Democrats are heading for an electoral drubbing as inflation intensifies the midterm curse for President Biden. And it’s happening with a fast-growing economy,” he writes. “If the optimists who say that the first-quarter contraction was a mirage and that the Fed can curb inflation by intentionally slowing down the economy just maybe happen to be wrong, then imagine what a flogging Dems are in for.”

  • Political scientist Francis Fukuyama dropped by The Remnant for a conversation about his new book, Liberalism and its Discontents. He and Jonah discuss the origins of the liberal tradition, the state of liberalism in contemporary America, and the future of the free world. How did “neoliberal” become such a popular pejorative? What are the limits of federalism? And should we be optimistic about the political trajectory of the United States?

  • On the site today, Giselle Donelly applauds the Biden administration’s stronger rhetoric against Russia but is concerned that it will not translate into a broader commitment to increase our “hard power.”  And Andrew Fink details how China and Russia are both accusing the U.S. of “imperialism” for providing assistance to Ukraine and supporting Taiwan.

Let Us Know

With predictions of a coming recession increasing daily, is it beginning to feel like we’re headed there? How?

Esther Eaton is a former deputy editor of The Morning Dispatch.

Steve Hayes is the editor and CEO of The Dispatch.