Moneybeat - An economic wash

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now for our regular conversation on business, markets, and the economy. Financial analyst and adviser David Bahnsen is here. Morning, David.

DAVID BAHNSEN, GUEST: Good morning, Nick. Good to be with you.

EICHER: Government closed the books on 2021 last week: fourth quarter gross domestic product figures are in, the one big economic number to follow if you’re keeping score at home, GDP representing growth in our economy. So for Q4, October, November, December—good news—the consensus expectation was a 5.5 percent rise in GDP and the reality was much better than that by almost a percentage point and a half, nearly 7 percent growth—6.9—you’ve got to like that.

BAHNSEN: Yeah, I think it's fine. It was primarily driven about 2% of it was from inventories. And so that's the one ingredient in GDP growth that isn't repeatable. And so it isn't as encouraging as if it had been you, let's say non residential fixed investment, which is business expenditures, business investment - that is the area that we think builds more productivity into the future where inventory accumulation does not. So all things being equal, it's better than if the number had been lower. But here's the part, Nick, that I detected that I think is very interesting. If you now annualize the GDP growth, since 2019 - so you factor in the big contraction of economic growth we had from COVID, and then the economic growth recovery - you get an average of 1.6% per year real GDP growth. Well, you know what the GDP growth number has been per year since 2008. 1.6%. So you both have the total elimination of COVID from the economic data as if it never happened, the bad year and good year, put together just wash each other out. That's good. But then you just get back to where we were before, which is stagnant economic growth, on average, since the financial crisis, equaling half of what our post World War Two economic growth has been. We had averaged 3.1%. And we're now sitting there just a snick over half of that level. I think that's probably the far more important story of economic growth that plays into this thesis I've had about deflation, about stagnation, the term we use economically, Japanification. This is the story for the next 10 years. But for the story of the last one year, there has been great economic recovery as you would have expected.

EICHER: You mention the financial crisis of 2007 and 2008 as the dividing line separating those years of solid growth versus our current years of anemic growth, but what happened, David? Seemed like pre-Covid, with a more supply side economic policy in place during the Trump years, your friend and colleague Larry Kudlow advising the president, that we seemed to have escaped what a lot of economists were describing what we had to expect as our new normal, that we just had to get used to low, slow, or no growth in the economy and we had gotten back to those pre-crisis growth rates near 3 before Covid hit. What happened to that?

BAHNSEN: Well, we did have one year during the Trump administration of getting 3% economic growth, basically getting almost back to trendline. It was the largest year of economic growth we've had since the financial crisis. I happen to believe part of the trade war, that was part of the President Trump's economic agenda did hurt some of the cause, it held back some of the business investment that could have pushed things further. But then you're right, by the time we were getting to see what some of the recovery of that would have looked like and some of the the new rounds of global trade agreements that were being worked out with Bob Lighthizer and Steve Mnuchin and others, then COVID came and so we don't necessarily know. I do think that the deregulation during the Trump administration, and I think that the tax cuts proved to be extremely productive. But they were not what all of us would have hoped for on the business side and corporate side. They were various supply side and they were very helpful towards stimulating economic growth, but there wasn't much supply side tax reform on the individual side. But the deregulation, the energy independence, and the corporate tax reform, those are the three planks of what I believe the Trump administration's tax platform ended up being. And it was very productive. But we need a lot more than Washington, DC’s help here. When I talk about the supply side, that is not a synonym for tax policy. And that's what people believe it is now - that's how the left portrays it, that's how the media portrays it. But I'm talking about this stuff you and I talked about sometimes - people going back to work, increase in productivity, a better education system, a better Christian theology about work. about economic growth. There is a lot of things that play into a society that becomes more productive and extracts more out of the natural creation that God has given us. Well, that's what supply side economics is - is a focus on productivity versus consumption. Consumption takes away economic growth, production builds economic growth. And my view is that the need of the hour, if we want to see 3.1% again, goes far beyond tax policy.

EICHER: All right, David Bahnsen—financial analyst and advisor—head of the financial planning firm The Bahnsen Group. He writes at DividendCafe.com, daily email newsletter on markets and the economy. David, see you next week.

BAHNSEN: Thanks for having me, Nick.

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