Fuzzy Facts and Other Political Fallacies

A common truism in election years: There will be efforts to politicize US economic growth. One side will say growth is too slow and that’s the current President’s fault. Others will say growth exists because of the President’s efforts but it would be better if many of the president’s efforts weren’t stonewalled by the pesky opposition. Or virtually any combination of those factors one can conjure up.

Our advice is beware politicized analyses of the US economy, which are often disconnected from facts. For example, take 1992’s presidential campaign, in which the eventual victor (Bill Clinton) ran largely on an “it’s the economy, stupid,” platform of ending the early 1990s recession. Meanwhile, his opponent, George HW Bush, argued growth had arrived—and he was skewered (and lost) for appearing out of touch. Mind you, GHW Bush was actually right—according to NBER the recession ended in March 1991. But few believed or felt it—a bit of a parallel to now, with the sitting president’s party reversed and many aiming to use economic growth (or perceived lack thereof) for political gain.

But the problem isn’t just the fuzzy facts, it’s also the outsized influence many presume presidents and governments have on economic growth. Today, criticism is widely accessible arguing the government has either done too much (darn Democrats!) or not nearly enough (those stick-in-the-mud Republicans!). And as a result, real GDP growth has annualized about 2.4% since growth resumed in mid-2009.

Many—on both the left and right—note 2.4% real annualized GDP since the June 2009 trough is “below trend” and suggest this implies bad policy since the economy is lagging what these commentators presume is normal. Maybe they’re right. But just maybe. Governments can influence the backdrop of growth, through things like the regulatory environment, taxes, spending and more. But caution! In forecasting capital markets, analyzing these factors from a non-ideological point of view is imperative. Since there is no counterfactual to compare to, it’s not truly possible to assign blame to any one factor beyond a reasonable doubt. There’s just very little way to argue conclusively US GDP would’ve been at or above trend if we’d had more stimulus or less, more regulation or less, etc. Economies are incredibly complex, and economic performance isn’t simply the product of governments pulling one lever while pushing another. Or pushing when they should’ve pulled. Or, or, or. Then, too, US policy impacts the US economy, primarily—but the far larger global economy also wields tremendous influence. With all the pressures, debate will nearly never be uniformly resolved about a policy’s impacts, making this fertile ground for politically motivated speculation. For investors, such biased ground is very often a minefield for forecasting.

In many ways, the debate whether GDP growth is below trend or not—and who’s to blame—has very little practical impact. It’s shoulda-been GDP based on averages. Average growth rates, to state the obvious, are really just an average—meaning we’ve frequently had faster and frequently slower. And GDP growth is volatile, even in the best expansions.

What’s more, recent expansions seemingly don’t support the notion there’s much unusual about this below-trend GDP. In the 2001-2007 expansion—in which the economy grew for six years and reached full employment—annual GDP growth exceeded the 3.4% long-term average in one year of six. Similarly, the 1991-2001 expansion began with two years of below-average growth and didn’t return to the CBO’s estimate of potential GDP until 1997. Current GDP growth, 10 quarters after recession, doesn’t look markedly different from either of those. However, those points are rarely raised, probably because they support no particular political party’s platform.

It seems to us most comparisons to way-back periods of faster growth aren’t really about hard and fast economic analysis, they’re about politics. And that’s fine, but it’s not very useful for investors. If it’s investing insight you want, the reality is GDP growth doesn’t directly dictate market returns. Longer term, market returns and corporate earnings have a much stronger relationship. While earnings broadly can be influenced by whether the economy is growing or not, earnings and domestic (or global) product are two wholly separate things. Which is why you can get big returns on below-average growth and the reverse. Then, too, the forces influencing markets and economies are fully global, not just local. And GDP, interesting and informative as the data may be, isn’t a direct window into all things economic.

Everyone is entitled to an opinion. But it’s important to recall—especially in an election year—political ideology is not an investing strategy.