‘Silly season’ for evaluating economic data?

With less than three months left before the 2022 midterm elections, it is officially “silly season” when it comes to interpreting economic reports. For many analysts, it’s pretty much all politics all the time, with data seen through a political lens first, and with unbiased economic analysis coming maybe second, if ever.

It started with those saying we’re in a recession because, at least based on the most recent reports, real GDP declined in both the first and second quarters of the year. Never mind that the unemployment rate has dropped 0.4 percentage points so far this year. Never mind that payrolls are up an average of 471,000 per month, while industrial production is up at a 5.2% annual rate over the first six months of the year. Never mind that “real” (inflation-adjusted) gross domestic income was up in the first quarter (we’re still waiting for Q2 data) and has just as good of a track record as real GDP.

See Related Article: Recession unlikely in 2022​

Ultimately, those claiming a recession started already wanted to score political points against the president, and no other reports besides GDP would stand between them and that goal. Our view is that a recession is coming and that monetary policy will have to get unusually tight for the Federal Reserve to bring inflation back down to its 2.0% target. In turn, tighter money should induce a recession. But that takes time, and the recession hasn’t started yet.

And now it’s the president and his side of the political aisle who are abusing economic reports for their own political ends. It is entirely true that the consumer price index was unchanged in July, the first month without an increase since May 2020. Fair enough. But to use that to suggest the inflation problem is going away is nonsense on stilts.

Energy prices surged 7.5% in June and then dropped 4.6% in July. That’s it. That’s really all you need to know about inflation in the past two months. As a result, overall consumer prices soared 1.3% in June and then were unchanged in July. But a new trend this doesn’t make. Looking at both June and July, combined, consumer prices rose at an annualized 8.1% rate. That is no different from the 8.1% annualized increase in April and May, before the extra surge in energy prices in June and then the drop in July.

Sources: First Trust, U.S. Department of Labor

If you look at the unchanged CPI in July and think the Federal Reserve is nearly done, you’re in for a big surprise. The Fed isn’t close to done. Yes, if you follow consumer prices on a year-ago comparison basis, the inflation rate likely peaked at 9.1% in June. But getting from 9.1% down to the 5%–6% range by sometime next year is the relatively easy part. Getting from there back down near the Fed’s 2.0% target is the hard part. Rents have been increasing rapidly around the country, and we don’t see that ending anytime soon. That will make it very tough for the Fed to reach its stated goal.

You’re also deluding yourself if you think the “Inflation Reduction Act” is actually going to reduce inflation. Inflation is a monetary phenomenon; the bill isn’t going to have any noticeable impact at all.

The bottom line is that, for now, the economy continues to grow, and inflation remains a very serious problem. In the meantime, investors need to set aside their personal political preferences and follow economic reports as they are, not as they want them to be because of the political spin their side gets to put on them.

Editor’s note: Brian Wesbury is chief economist at First Trust Advisors LP. He and his team prepare a weekly market commentary titled “Monday Morning Outlook,” as well as frequent research reports. Proactive Advisor Magazine thanks First Trust for permission to republish an edited version of this commentary, which was first published on Aug. 15, 2022.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.