A look at economy's strengths, weaknesses as Biden sets to boast of record job growth in State of Union

In his State of the Union address Tuesday, President Joe Biden is expected to hail the economy’s resilience and booming labor market while omitting – or glossing over – some of its trouble spots.

“Put simply, I would argue the Biden economic plan is working,” Biden said Friday after January’s blockbuster 517,000 job gains were announced.

While inflation has eased somewhat and the labor market has remained remarkably sturdy, price increases are still historically high, the housing market is in a tailspin and most economists are forecasting a recession this year.

“The economy is solid but inflation is too high and recession risks are elevated,” says Gus Faucher, chief economist of PNC Financial Services Group.

Here's a look at the economy's strengths and weak spots ahead of Biden's address to Congress:

Strengths:

Unemployment fell to 54-year low

Job growth has slowed but stayed astonishingly strong despite the Federal Reserve’s aggressive interest rate hikes aimed at discouraging business hiring and investment to curtail inflation.

Average monthly job growth downshifted to 291,000 in the last three months of 2022 from 423,000 the previous quarter but that’s still a robust performance. For all of last year, U.S. employers added 4.8 million jobs, second most behind the 7.3 million added in 2021.

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And unemployment fell to a 54-year low of 3.4% in January.

“That means we have created more jobs in two years than any (four-year) presidential term, than any time, in two years,” Biden said Friday.

Biden deserves credit for spearheading the $1.9 trillion American Rescue Plan, which further juiced the economy as the U.S. was still emerging from the COVID-19 pandemic in March 2021, Faucher says.

But the massive job gains can also be traced to the nation’s 22 million job losses in the spring of 2020 during the pandemic's early days. Businesses such as restaurants, bars, shops, and hotels laid off so many workers they had lots of room for a comeback as Americans resumed dining out, traveling and other activities.

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Inflation rate is slowing

Annual inflation eased to 6.5% in December from 7.1% the previous month and a 40-year high of 9.1% in June.

Economists largely cite easing supply chain bottlenecks and product shortages, as well as the declining price of commodities such as oil, corn, and wheat amid global recession fears.

Yet Biden gets kudos for drawing down 180 million barrels of oil from the Strategic Petroleum Reserve when gasoline prices were topping out at a record $5 a gallon in June, Faucher says.

“We did see energy prices start to descend after the president decided” to tap the reserve, he says.

Consumer spending has held up

Consumer spending slowed last year after a sizzling 2021. But it still grew a solid 2.8% despite soaring inflation and the Fed's largest bump in interest rates in four decades, which was aimed at damping household outlays to curb price increases.

Faucher partly credits Biden’s American Rescue Plan, which sent $1,400 checks to most individuals in March 2021. COVID-19 stimulus checks, which began under the Trump administration, along with savings amassed during COVID-19 lockdowns, bolstered Americans’ pandemic-related cash reserves to $2.6 trillion.

Their finances, though, already were in good shape. Household debt was at a historically low 9.7% of disposable personal income in the third quarter.

Business investment has been solid

Business spending on computers, factory machines, trucks, and other goods was also solid last year, growing 3.6%, despite rising interest rates as companies responded to healthy consumer demand.

Weaknesses:

Inflation is still high

Although inflation has eased to 6.5%, that’s still the highest level since 1982, excluding the current bout of price run-ups that began in spring 2021.

Fed Chair Jerome Powell has noted that while goods price increases have moderated, lowering inflation for the long term will mean slowing wage growth in service industries such as health and education – which could be a thornier challenge.

If Biden gets praise for giving consumers a financial cushion, he also gets some blame for contributing to inflation in the first place with the $1.9 trillion American Rescue Plan, Faucher says. The extra cash, he says, helped set off a consumer spending spree that likely contributed to inflation, along with the supply troubles and high commodity prices.

Housing market is in a deep slump

In December, the number of homes that builders started to construct fell for the fourth straight month and existing home sales declined for the 11th consecutive month to the lowest level since 2010.

Economists trace the slump to Fed rate increases that drove up mortgage rates from 3% in early 2022 to 7% before a recent pullback to 6.1%. The Fed’s hiking campaign was triggered by high inflation spurred partly by Biden’s stimulus bill.

Home prices, meanwhile, likely have peaked and economists expect declines of up to 15% this year.

Less housing construction means fewer jobs for workers and less investment in the economy. And lower home prices reduce household wealth, hurting consumer spending.

Manufacturing is contracting

High-interest rates have similarly hurt manufacturing as businesses buy goods when borrowing costs are high.

Manufacturing activity declined for a third straight month in January.

Part of the reason for the industry's troubles is unrelated to Biden's policies. As the pandemic eased, consumers who bought TVs, appliances, and furniture while stuck at home during the pandemic have shifted their purchases to services such as traveling and going to the theater.

Most economists say a recession is likely

Although consumer spending and business investment grew solidly in 2022, they began to weaken late last year as inflation and Fed rate hikes took a growing toll. Most economists expect a mild recession this year, according to those surveyed by Wolters Kluwer Blue Chip Economic Indicators.

After the nation’s gross domestic product grew 2.8% in 2022 – based on averaging the four quarters –— Faucher expects GDP to be flat this year as the nation loses about 2 million jobs.

This article originally appeared on USA TODAY: Economy's strengths and weaknesses as Biden prepares State of Union