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

election results.

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.