Tuesday Results and the 2022 Economic Outlook
Post from First Trust Economics Blog
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist
Nov. 8th 2021
In spite of what listening to the mainstream media might
make you think, the voting public doesn’t change much from
year to year or election to election. As a result, when leaders try
to take policy too far in one direction, without enough public
support, they often get punished at the polls. That’s our
takeaway from the Virginia and New Jersey gubernatorial and
down-ballot state legislative elections last week.
Here are five key political lessons from Tuesday. First, if
former President Trump isn’t running, (or in office) it’s hard for
Democrats to use him as a bogeyman to scare voters. Second,
white working class and rural voters will turn out in high
numbers without Trump on the ballot and in favor of more
conventional GOP candidates.
Third, early signs suggest the GOP continues to make
headway with Hispanic voters. One of the counties in New
Jersey that shifted the most toward the GOP was Passaic County,
with some towns with heavy concentrations of Hispanic voters
leading the way. As a result, according to at least one political
betting market, Republicans are now favored to win the Senate
seats in Arizona and Nevada, even though both seats will have
incumbent Democrats running for re-election.
Fourth, Republicans may have won in Virginia this year,
but it is still a blue state. Four years ago, when Trump was in
office, the Democrats won Virginia by nine points; this year the
GOP won by two points. The party that wins by nine and loses
by two is still the majority party.
And last, the GOP is in excellent position to win the House
next year and probably the Senate, as well. Usually, the Virginia
governor’s race is a harbinger of which way the mid-terms will
go. If Republicans see nationwide gains that are equivalent to
the gains they made in Virginia, they’d easily win the House.
However, the mid-term elections are still a year away. The
Congress and the President still have plenty of time to enact
legislation they agree on, before submitting themselves to the
voters. That happened late last week when the House rubberstamped
a “bipartisan” $1 trillion infrastructure spending bill
passed this summer by the Senate, sending it to President Biden’s
desk. This bill will generate extra spending for highways, mass
transit, airports, water systems, Amtrak, broadband, electricvehicle
charging, and “renewable” energy.
This spending shifts resources from the private sector to the
public sector, and to the extent that this is paid for by Federal
Reserve money printing, it will push inflation higher. However,
this bill did not create new entitlements, and is a small part of
total nominal GDP over the next 10 years – which the Office of
Management and Budget pegs at $282 trillion. In spite of this
spending, the budget deficit should be substantially smaller in
Meanwhile, the larger, fully partisan plan to raise taxes and
create new entitlements has lost momentum. Right now, we put
the odds of passage of this much more economically harmful
legislation at less than 50%, in part because of last week’s
However, this legislation remains a threat to the forecast for
2022 and beyond. As does monetary policy. The financial
markets appear to expect two or three rate hikes in 2022. But
personnel changes, and political pressure, at the Federal Reserve
will make it less hawkish. As a result, we are looking at one rate
hike very late next year, but no more than that.
In addition, businesses across the country must be
wondering what’s going to happen with the Biden
Administration’s draconian COVID-related OSHA rules, which
mandate vaccines for “private” companies of over 100
employees. This would deter some workers from seeking jobs
while making it much more costly for many businesses to hire.
Oddly, these new rules coincide with the arrival of new
treatments that should make the vaccine debate obsolete. A
federal court has temporarily put the rules on hold. Hopefully,
for the job market’s sake, policymakers rethink the rules and
decide to withdraw them.
From a forecasting point of view, 2021 was simple. Solid
economic growth, higher inflation, and a bull market in stocks
have been our mantra all year along. As we focus on 2022, the
Fed is still pumping money, interest rates remain low, and the
economy continues to add back the jobs it lost during lockdowns.
At the same time, election results show a backlash against bigger
government. For 2022, we watch with cautious optimism.