At this point, many people are probably dismissing all these forecasts and big numbers emanating from experts on the public payroll. They have been wrong about so much for so very long. And yet, Wall Street is moved by such data reports, even when the problems with them are so obvious. As they say, the numbers might be fake but they are all we have.
The basis on which this forecast is being made concerns construction spending, and it is truly hard to justify based on industry numbers showing no such thing.
Since those days, not much has made sense in macroeconomic data as conventionally collected and distributed.
There are many problems. Conventional output data counts government spending, even when it is based on debt finance that is ultimately financed by money printing, as positively contributing to GDP. These very years have seen the largest increase in government spending, by any measure, that we have on record in the history of recorded time.
Obviously, this has distorted GDP numbers for years.
There is another problem: much of the “growth” over four years has consisted in gradual and iterative repair of the damage done by lockdowns and supply-chain freezes. Breaking things and fixing them does not count as overall progress but in the way that GDP is collected, it necessarily does.
That factor skewed output data for years.
All GDP data has to be adjusted for inflation if it is to have any meaning. That much is commonly known. Less commonly known is that the same has to happen to retail spending, factory orders, and durable goods purchases. It makes no sense at all to count higher prices as meaningful increases in spending.
It matters which inflation measure you use against which the GDP is adjusted to generate real GDP. For years now, the CPI has been dramatically underestimated on whole classes of goods and the entire index as well. At this point, it is beyond dispute. How much it has been underestimated is a matter of debate. Conventional data show a 22 percent decline in purchasing power over four years but it could be closer to 30 percent or more, at points reaching much higher levels.
Even using a conservative measure of underestimating and mixing it with unadjusted GDP generates a macroeconomic environment in the red for three years—a technical recession.
When we published our study, I expected tremendous blowback from industry economists and others. What we saw instead was silence. This stunned me until I realized that most everyone knows that this is correct.
In other words, Trump has inherited an economic environment that has been called wonderful for years but in fact has been extremely weak and deeply damaged. It was a trap. Deny economic weakness for four years while it has been otherwise obvious, then once the new president comes to office, become transparent and truth-telling about how bad things are.
The trouble with U.S. culture is that there is a media overlay between economic conditions and whoever happens to be in office at the time. It is not at all a coincidence that the recession seems to be hitting exactly as Trump has taken power. It will be pinned on his policies: the tariffs, spending cuts, government disruptions, or just uncertainty in general.
This is akin to someone just noticing that the house is a mess once the cleaning crew arrives, and blaming the workers for all problems.
On the other hand, it is far too soon to declare that we are somehow out of the recessionary woods. There is a very long way to go, and Trump is right to urge patience and even suggest, as he did in his address to Congress, that there is going to be some pain along the way.
The soaring rhetoric about the dawn of a new Golden Age is thrilling but premature. The budget has to be fixed. The agencies have to be curbed and cut. The regulations must be repealed. The health agencies have to be defanged. All taxes need to be lowered or abolished.
On the tariffs, it is easy to follow the thinking here. Because it is cheaper to produce most things in most other countries than the United States, due mainly to the strength of the dollar, the deployment of tariffs is designed to even the score. It is an attempt to recreate the old-fashioned account settlement that we had before the end of the gold standard. The theory is that this proves some room for U.S. manufacturing to compete, possibly drawing in foreign capital for domestic investment.
This strikes me as a circuitous method of getting around a more fundamental problem that traces to a broken international monetary system. That said, there is no button to push to fix it, not one that I’ve seen, anyway. The most near-term effect of these tariffs, however, will simply be to increase costs for U.S. importers and U.S. consumers. They have many small businesses worried to the point of panic. In all, this is a risky gamble. I’m hardly alone in my concern that this hyper focus on tariffs long before we have reform in taxes and spending is strangely disproportionate, reflecting a personal idiosyncrasy of Trump rather than clear economic thinking.
The tariffs will also become a scapegoat. If a recession is suddenly announced, if the first quarter GDP really does come in as dramatically down, tariffs and therefore Trump will find itself targeted for blame. This should be a primary political concern for the Trump administration right now.
All that said, Trump is on the right track in pointing out that we have just lived through the worst inflation in 48 years and possibly in American history. He was fact-checked hard for that statement but it is entirely defensible. So too on all these economic indicators from inflation to the jobs market. The reality is far worse than the agencies have reported for many years now.
Just remember: there is strong reason to believe we’ve been in technical recession plus high inflation for years now. Admitting it now is simply a matter of political timing. The ticket surrounding economic data and messaging is getting ever more layered and complicated, and it requires real sophistication to see through it.
The hidden sufferings of the past four years have been largely untold and hence the suddenly announced tribulations of the present moment are likely exaggerated.
