He was referring to the latest figures from the US Commerce Department, which said the economy shrank 0.9% on an annualized basis in the second quarter. This follows an annual decline of 1.6% from January to March this year.
But a recession is not two consecutive quarters of declining GDP, Wesbury said at the event. “It’s a broad drop in a bunch of different variables and they’re not going down – the first being jobs data.”
The US economy added 528,000 jobs in July, easing recession fears.
Covid-19 closings and reopenings have skewed economic data, Wesbury said. For example, public health measures have resulted in restrictions on air travel, sporting events and theaters. This, in turn, meant that spending on services in the United States declined and shifted towards goods.
At one point, year-over-year spending on goods rose 40%, Wesbury said, a much larger increase than what would have happened (about 5% per year) in the absence of pandemic.
Now some businesses that sell goods have high inventories and major retailers are laying off staff.
“We’re going to have something of a storm in the economic data as we go back to the pre-Covid era,” Wesbury said.
It is also difficult to predict whether the Fed will continue to raise rates.
In July, the Fed raised its key rate by 0.75 points to a range of 2.25% to 2.5%.
“The market says it’s not going to continue like this. I think the market is probably wrong about that, but here’s the thing: we’ve never run monetary policy the way we do today,” Wesbury said of the Fed.
He said he would be “not shocked” if the US key interest rate rose another 300 to 387.5 basis points.
One of the reasons is the growth of the money supply during the pandemic. The Fed’s M2 measure – which represents all US money in circulation, including checking and savings accounts, money market accounts and certificates of deposit – has risen 40% in two years, a- he declared.
“I believe that 40% more money will lead to higher inflation for longer than most people realize,” Wesbury said.
The Fed is in “uncharted” territory in part because the money supply today, relative to the overall economy, is much larger than it was in 2007, Wesbury said.
Wesbury served as Chief Economist of the Joint Economic Committee of the United States Congress in 1995 and 1996.