The economy might just be taking off. Uh-oh.

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Feb 15, 2023 View in browser   By Ben White With additional reporting from Ari Hawkins President Joe Biden delivers remarks at the International Brotherhood of Electrical Workers Union Local 26 today. | Chip Somodevilla/Getty Images SKIPPING THE RUNWAY — Don’t look now but the conversation in nerdy economic circles — and at the White House and Federal Reserve — is that the U.S. economy not only appears to be avoiding recession with a gentle and rarely executed “soft landing,” it may actually be gaining altitude. That’s certainly what you would think looking at the (on the surface) robust retail sales numbers out today, a still red-hot jobs market and surging factory production. Theoretically, that should all be great. In some ways, it is. Recessions are … What’s the word? Bad. Sometimes awful. But the U.S. economy skipping the runway all together (to stick with airplane metaphors) and soaring off into the blue again is also a potentially bad thing. Here’s why: The Federal Reserve’s preeminent goal — over which it will sacrifice all else — is to take inflation from where it was in June (over 9 percent) closer to 2 percent, the central bank’s long-term target. Chair Jerome Powell and his colleagues have made some progress with all their rate hikes. But not that much. While it is in fact declining, inflation is still super high by historical standards. And Tuesday’s consumer price data showed that while ticking down a touch on an annual basis to 6.4 percent in January, prices actually rose 0.5 percent last month. The retail sales number looked hot. But it may actually be mostly the result of (too tedious to explain here) seasonal adjustment issues. And unusually warm weather. That could reverse in February. A very similar case can be made that January’s blockbuster 517,000 jobs number (double the Wall Street consensus) suffered from heavy seasonal adjustment, weather and other issues that made it appear larger than it really was. Despite these questionable numbers, economists are tripping over themselves to crumple up forecasts of a near-term economic slowdown. JPMorgan just doubled its first quarter growth forecast from 1 percent to 2 percent. Goldman Sachs recently reduced its recession odds for the year to 25 percent. The Atlanta Fed’s closely watched “GDP Now” forecast sits at 2.4 percent, quite a healthy figure. The combination of some inflation success and reduced fears of inflation have also unleashed big gains on Wall Street the last couple months as investors gain faith that the Fed won’t crash the plane. And that’s actually a really big problem. One of the things the Fed wants to do in its inflation fighting campaign is to tighten financial conditions by raising rates. The opposite is happening. Wall Street is celebrating. The Fed is not happy about it. That probably means more rate hikes. “There are more and more signs of the market pricing the no landing scenario,” Torsten Slok, economist at investment firm Apollo Management wrote in a note today. The Fed is already dissatisfied with its progress bringing down wage inflation. And it won’t love the latest inflation, retail sales or jobs data as much as Wall Street does. As a result, the Fed may look at positive economic data as likely to drive inflation higher while it also has to do more to keep Wall Street in check. That would mean even higher rates at the end of the current hiking cycle than the bank’s current consensus of 5.1 percent. The result could be that the current numbers only kind of look good but will still lead to more rate hikes that stay in place longer. That would mean a much bigger risk of a crash landing and significant recession. This much should be clear — the Fed does not believe the economy can run with inflation anywhere near where it is now for very long. That kind of economy, the bank believes, will turn into a nightmare of prices spiraling higher and outpacing wage gains. The Biden White House and Democrats in general should probably hope for gentler economic data and less exuberance on Wall Street. There’s nothing wrong with a soft landing, after all. Welcome to POLITICO Nightly. Reach out with news, tips and ideas at nightly@politico.com. Or contact tonight’s author at bwhite@politico.com or on Twitter at @morningmoneyben.   STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president’s ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.     What'd I Miss? — Deficit set to hit $1.4T this year amid persistent inflation: Inflation is unlikely to cool to the Federal Reserve’s target of 2 percent until 2026, the Congressional Budget Office predicted in its annual fiscal outlook. Additionally, nonpartisan analysts at the agency said the federal deficit under President Joe Biden will hit $1.4 trillion this year, with the gap between the amount of money the federal government spends and how much revenue it brings in widening by $3 trillion more over the next decade than the independent budget office originally predicted last May. — Club for Growth endorses Scott and dings McConnell: Sen. Rick Scott (R-Fla.) has nabbed an early endorsement in his bid for reelection, with the conservative Club for Growth, one of the top-spending GOP super PACs, offering its support. The Club’s endorsement of the Florida Republican also comes with a rebuke of Senate Minority Leader Mitch McConnell, a further sign that the party’s fissures remain deep and unresolved as it enters the 2024 cycle. During the 2022 midterms, Scott chaired the National Republican Senatorial Committee, clashing with McConnell throughout the cycle on matters of strategy. After the midterms, Scott announced he would challenge McConnell as GOP leader — which he did unsuccessfully. — Nikki Haley calls for competency tests for politicians over 75 during campaign launch: Former South Carolina Gov. Nikki Haley highlighted the need for generational change and called for mandatory competency tests for politicians over 75 years old during a speech announcing her 2024 presidential campaign today. “In the America I see, the permanent politician will finally retire,” Haley, who served as U.N. ambassador during Donald Trump’s presidency, said. “We’ll have term limits for Congress. And mandatory mental competency tests for politicians over 75 years old.” Trump is 76 and Biden is 80. AROUND THE WORLD Nicola Sturgeon announced she will stand down as First Minister of Scotland. | Jane Barlow/Getty Images SCOTTISH EXIT — Scotland’s First Minister Nicola Sturgeon announced her resignation this morning amid a storm of controversy that threatens to complicate the Scottish National Party’s push for independence from the United Kingdom, Ari Hawkins reports for Nightly. “There is a much greater intensity, dare I say brutality, to life as a politician than in years gone by … It takes its toll on you and on those around you,” Sturgeon said during a news conference in Edinburgh. Sturgeon said that the SNP’s national executive was asked to begin the process of electing new leadership, which has not happened since 2004. Scottish officials voiced concerns that her unexpected departure could have implications for the fight over Scottish independence in the U.K. and the next national election. Alex Salmond, the former FM of Scotland, responded to Sturgeon’s resignation by saying “the movement has been left with no clear strategy for independence” before adding “there is no obvious successor.” At the same time, senior figures in Scottish Labor have said Sturgeon’s resignation is an unexpected opportunity to regain ground. “There is a real opportunity for the Scottish Labour party here, but they have to be adept enough to take it,” Jim Murphy, the former leader of Scottish Labour, told The Guardian. Sturgeon, who has served as the head of government for the last eight years, became leader of the pro-independence Scottish National Party after a 2014 referendum when Scotland voted 55 percent to 45 percent to remain part of the U.K. After the U.K. voted to leave the European Union in 2016, Sturgeon called for another referendum, but was shut down after a ruling by the U.K. Supreme Court said the Scottish parliament doesn’t have the authority to call for a vote. Sturgeon vowed to use the next general British election to expand support for independence-minded political parties. Sturgeon’s position in polls started to falter after she pushed legislation to make it easier for members of the transgender community, as young as 16, to receive documentation that matches their gender identity without requiring a medical diagnosis of gender dysphoria. The policy received backlash when it passed in December and was eventually reversed by the U.K. amid claims the law could be used by predatory men to self-declare themselves transgender and put women at risk. In recent weeks, the controversies appeared to come to a head after a transgender woman convicted of rape was initially placed in a women’s prison — before being placed in a male facility, though the incident occurred under legislation already in effect. Sturgeon refuted claims that her resignation was the result of recent controversy, but conceded that public perception, as well as the “almost irrationally” contentious nature of political debate played a role in her departure. Sturgeon gave no indication as to who she would like to lead the battle over Scottish independence and said she would remain in her role until a successor is named.   DOWNLOAD THE POLITICO MOBILE APP: Stay up to speed with the newly updated POLITICO mobile app, featuring timely political news, insights and analysis from the best journalists in the business. The sleek and navigable design offers a convenient way to access POLITICO's scoops and groundbreaking reporting. Don’t miss out on the app you can rely on for the news you need, reimagined. DOWNLOAD FOR iOS– DOWNLOAD FOR ANDROID.     Nightly Number 50 percent The percentage of Americans who said they believe that national news organizations intend to mislead, compared to only 25 percent who think they don’t, according to a new poll from Gallup and the Knight Foundation. Similarly, only 23 percent of respondents agreed that journalists were acting in the best interests of the public. Radar Sweep INSIDE INDIA’S AMAZON — Flipkart, India’s largest e-commerce company, was on top of the world in 2018. The corporation’s target audience of young, well-off urbanites, bought up a range of items that included books, clothing, electronics that exceeded expectations. And sales were noticed by the American corporation Walmart, which paid $16 billion for a 77 percent stake that would help solidify Flipkart’s role as the country’s most valuable startup. Now, Flipkart is facing the aftermath of a series of internal missteps that allowed competitors to catch up. That includes Amazon, the online retail company owned by Jeff Bezos, which some analysts have quipped is so powerful it will swallow Flipkart’s consumer base with ease. Read Mihir Dalal’s investigation into Flipkart and its fight to maintain its e-commerce crown in Rest of World. Parting Words There are signs that Iowa might not take the loss of its early caucuses lying down. “It’s a war,” former Rep. Dave Nagle said. | Photos by David Siders IOWA GOES TO WAR — On the day the Democratic National Committee voted to strip Iowa of its first-in-the-nation presidential caucuses, a former congressman named Dave Nagle thumbed through a Rolodex full of faded contact cards at his desk on the seventh floor of an old department store building, writes David Siders. Frost clung to the windows. Nagle knew what was coming. In Philadelphia, where the DNC met, everyone was writing Iowa’s obituary. And when the vote went as expected, his wife, Debi, who was following the proceedings on Twitter from the next room over, came to the door. Nagle sighed. “So,” he said, looking up from his desk. “It’s a war.” At first glance, the war looked like it had already been lost. The DNC voted out Iowa as an early caucus state after a botched process that made it impossible for the Associated Press to declare a winner, and after midterm elections swept aside much of the remaining Democratic power in the state. But Iowa Democrats have been signaling that moving Iowa will reduce support for national Democrats among white working class voters in the broader Midwest — who they lost in droves to Trump in 2016 and who are still essential to winning the presidency. And now, in carefully worded statements, Iowa Democratic Party officials expressed an openness to hosting an unsanctioned caucus in the state, ignoring the national party calendar and pressing forward on their own. Nagle was suggesting exactly that. Read about the internal fight in Iowa over their caucuses, and why the DNC vote might be just the beginning of the saga. Did someone forward this email to you? Sign up here.   Follow us on Twitter Charlie Mahtesian @PoliticoCharlie Calder McHugh @calder_mchugh Katherine Long @katherinealong Ari Hawkins @_AriHawkins   Follow us

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