America Has Been In Recession for Years

The guest commentary below was written by written by Daniel Lacalle. This piece does not necessarily reflect the opinions of Hedgeye.

Many commentators cannot understand why Trump won the elections despite a robust economy. The reality is far more complex. I have repeatedly stated in my articles and TV appearances that the U.S. economy was significantly weaker than the official headlines suggested. I called it a “private sector recession.”

Anyone who has delved into the supposedly solid headline figures can clearly see the real weakness of the U.S. economy. An unsustainable increase in government spending and federal debt bloated the official GDP, making gross domestic income significantly weaker than headline GDP. Additionally, the Conference Board and University of Michigan consumer confidence readings, well below 2019 and 2021 levels, indicated a stagnant economy. Significant negative revisions and concerning elements were evident in the job reports.

The entire improvement of the labor force since 2021 came from foreign workers, and the employment-to-population and labor force participation ratios remained significantly below 2019 levels. Real wages were stagnant in the past four years using official figures. Investment was weak, and the Russell 2000 index, which includes the top small-cap companies generating most of their business in the US, reflected an insignificant 1.8% sales growth and no real earnings growth between 2021 and November 2024.

Professors EJ Antony and Peter St Onge recently published an excellent study, “Recession Since 2022: US Economic Income and Output Have Fallen Overall for Four Years,” through the Brownstone Institute. It perfectly summarizes why Americans have not responded favorably to Bidenomics and his assessment of his economic legacy as the “best economy in the world” or “the best economy ever.” The study concludes that adjustments reflecting a more realistic measure of average price increases in the period have understated cumulative inflation by nearly half since 2019. An enormous divergence between reported CPI and adjusted inflation led to an overstatement of cumulative GDP growth by roughly 15%. Furthermore, these adjustments indicate that the American economy has been in recession since 2022.

The study reveals that understating the CPI and GDP deflator measures of inflation has boosted GDP and real disposable income, resulting in figures that no American who pays bills and receives a wage can relate to. Once adjusted, the harsh reality arrives. The U.S. economy has been in recession for years. Interestingly, Keynesian economists spent these past two years trying to explain why the disaggregated macroeconomic figures I mentioned before did not match the strong headline GDP and disposable income. Despite their numerous justifications, the underlying issue was the government’s overstatement of the growth in disposable income and real GDP.

Americans are not stupid. You cannot tell them that the economy is marvelous and stronger than ever when they do not see it in their daily finances. Such ludicrous propaganda may work in France or Spain, but not in America. Thus, the optimism, publicity, and complacency of a government that constantly repeats that the economy is great backfires.

Governments create inflation, a hidden tax that erodes the purchasing power of the currency through increased spending and money printing. People often mistakenly report inflation and CPI as identical. CPI is just a measure of the loss of purchasing power of the currency.

Economists often criticize the CPI and GDP deflator measures of inflation for their inadequate reflection of real inflationary pressures. Indeed, there have been numerous studies that show how CPI calculation understates real inflation. “Underweighting of rising food prices and overweighting of falling transport prices are the main causes of the underestimation of inflation,” according to the IMF’s Marshall Reinsdorf (COVID-19 and the CPI: Is Inflation Underestimated?). Peter Schiff also explains it perfectly: “If you run today’s price data through the old formula, you will find that the CPI is nearly double the number the government reports.

So, when the Bureau of Labor Statistics reported a 9.2% CPI in June 2021, it was closer to 18% when calculated using the 1970s formula.” Why Do You Say the Consumer Price Index (CPI) Understates Inflation?). Vahan P. Roth also comments that, “One of the most important effects that an inaccurate and possibly biased measure of inflation has on the consumer and taxpayer is that it directly influences and justifies monetary and fiscal policy decisions” (How CPI calculations misrepresent real inflation, GIS). Indeed, “the CPI is a government statistic, and since the government’s expansionary monetary policy creates the inflation, officials have an incentive to underestimate it” (Mark Brandly at Mises).

According to Professor Joseph Salerno, author of the excellent book “Money, Sound Unsound” (Ludwig von Mises Institute, 2015), the current method of calculating the annual inflation rate is backward-looking, as the previous eleven months’ rates significantly outweigh the most recent monthly rate. In contrast, calculating the annual inflation rate by compounding and annualizing the most recent monthly or quarterly rate of change in the CPI gives a better idea of what inflation currently is and how it may be trending.” Thus, after the recent figures, no one would declare victory over inflation, and the Federal Reserve’s policy would be completely altered.

Bloated government spending has disguised a private sector recession and the real decline in real disposable income, real wages, and margins of SMEs (small and medium enterprises). We can now see that real GDP has been in contraction for the past two years, even after accounting for real inflationary pressures. Furthermore, the temporary and exogenous factor of widespread weaker commodities boosted the external contribution of gross domestic product.

The issue is that attempts to lessen the impact of currency destruction have repeatedly compromised the reliability of official data. As the government’s influence in the economy increases, technical recessions may not show up in official data, but they still affect citizens. Furthermore, deficit spending and money printing now result in both higher taxes and lower real wages in the future. Therefore, the unintended consequence of an official recession is an increase in government debt, an increase in taxes, and a decrease in the purchasing power of the currency.

Biden and Harris believed that strong official headline figures would reward them, leading them to implement an ultra-Keynesian approach: the most aggressive government expenditure and debt increase plan in decades. They also thought that citizens would fall for the trick of blaming corporations and shops for inflation. They were wrong. They engineered a recession, and families and businesses suffered as a result. However, many people mistakenly believe that Bidenomics was a miscalculation that ultimately backfired. The objective was to advance the stealth nationalization of the economy by increasing the public sector size and dissolving the wealth of the private sector, making it impossible for the next administration to undo the damage. That is what all socialist parties do. They leave a mess that is difficult to unravel, then return in the next election to continue raising taxes and expanding the role of government in the economy.

The United States should steer clear of these impoverishing Keynesian policies and instead adopt a private sector-driven pro-growth strategy, coupled with a sound money policy, to stabilize public sector finances and restore prosperity to America. It has successfully achieved this in the past and can continue to do so in the present.

ABOUT DANIEL LACALLE This is a Hedgeye guest contributor piece written by Daniel Lacalle and reposted from his website. Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap." Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE. View all posts by Lacalle on his website.  Twitter handle: @dlacalle_IA LinkedIn: Daniel Lacalle