Moneybeat: Tariff tangle, tepid growth

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LINDSAY MAST, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

MARY REICHARD, HOST: Time now to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. David heads up the wealth management firm The Bahnsen Group. He is here now. Good morning to you, David.

DAVID BAHNSEN: Good morning, Mary, Good to be with you.

REICHARD: The Wall Street Journal this week mapped out where the Trump administration’s tariff strategy currently stands: threats, carveouts, exemptions, and still more deadlines looming, with China, Mexico, and Canada, all in flux. Businesses complain that this uncertainty is making it difficult to plan.

David, you’ve long argued tariffs are an economic tax that drags on growth—and you made that point in your latest Dividend Café. With so many moving targets in this tariff policy, what should we expect in the weeks and months ahead?

BAHNSEN: It is continually uncertain because there are still other pieces that are out there, and even the impact of the policies that we now do have clarity on—some of the policies are more clear, but the impact from some of those policies remains a bit unclear. It is actually hard for me to remember a point in which there were so many balls in the air, if you will, around the state of the labor market, around the state of business investment, what the appetite for trade will be.

Small business activity is of particular concern to me, not only because I do think it is highly relevant to total economic growth and productivity, but because it is narrowly important to those small businesses who I think represent an underappreciated part of our economy and, candidly, have really not been a big concern in the new administration’s policy portfolio. I have been surprised that small business has sort of gotten the shaft so far.

I do believe that there will be a bit of a tug of war in an economic push-pull of forces. One of the things I expect to be beneficial is the pro-growth aspects of the new tax bill stimulating some element of capital investment—the 100% business expensing, bonus depreciation for putting new real estate into play for productive purpose. I think you are going to see some activity there. That will be good. But then it is in a bit of a tug of war with an additional expense, a tax, a cost out of the tariff element. The way all of this affects total global trade will affect demand in the economy, and that will affect how businesses respond. In the meantime, a lot of people will be looking at what it does to inflation and prices as well. I think there are six or seven things I said there, and some of them are connected to one another, but all of them have a certain independent characteristic to them as well.

REICHARD: The July jobs report was pretty rough: around 70,000 new jobs, not great, and big downward revisions to May and June cut earlier job gains by more than a quarter of a million. And, I know this one is near and dear to you, the labor-force participation rate fell to 62.2%, the lowest in a year. How much of this slowdown do you think comes from tariffs and trade uncertainty versus other factors in the labor market?

BAHNSEN: I will be the first to admit that some of this is very hard to say with certainty, but there are things you have to do as an economist around what your logical intuition would be. Even if correlation and causation are never exactly the same thing, it is extremely unlikely that we are sitting here running at about 35,000 jobs per month over the last several months—as bad a number as we have seen since COVID—and that it has no correlation at all to the tariff policies. I find that simply impossible to believe.

We have to see where things go in the months ahead. There is a bit more clarity now than there was when some of these jobs reports were coming out. But I do think, as a matter of narrative, that this is a very big deal—far bigger than the July report, where the revisions in May and June, because the administration sort of trafficked all summer off of the “Hey, we did all this tariff stuff in April, and look how good jobs were, the economy’s humming along.” And now to see that the jobs numbers were not just as good as thought, but actually atrocious, is really undermining of that narrative.

I am not sure that it spirals worse from here. I do not see GDP going into a negative print. But if we end up the year where we are now—that real GDP growth is right now 1.25% annualized—then that really puts us in a very precarious position: a very low, slow, nearly no growth in the economy. That would be very concerning all the while we are expecting corporate profits to keep doing all the lifting, and corporate profits surely cannot keep growing with 1% economic growth.

REICHARD: The second-quarter GDP report looked strong at first glance, 3% growth. The Wall Street Journal editorial page called it “the weirdest GDP report ever”—making the point that the gain came almost entirely from collapsing imports. Again, not my area of expertise, but I read that one component of GDP growth is exports minus imports, and with imports falling 30 percent, that net export figure was alone responsible for fully 5 percentage points of the GDP. So what do you make of this GDP report, and what does it tell you about the real state of the economy right now?

BAHNSEN: It was not a good report. Let me clarify, have a little fun for WORLD listeners. The net exports, which is the fourth ingredient in how they measure GDP—the reason why it is exports minus imports—is to avoid double counting imports. GDP is trying to measure gross domestic product, and the other two ingredients include consumption. Somebody has already consumed an import in the consumption number and production, the things that get produced that become part of that process. By subtracting out imports, it is just a way to avoid double counting.

The imports were skyrocketing in the first quarter in advance of tariffs—it is what we call front running. That had the mathematical effect of dramatically lowering GDP. People like me were saying on Moneybeat three months ago, yes, we technically contracted one quarter, by 0.5%, but the consumption and production numbers were high enough that it was not really a sustainable contraction.

What happened instead was the import number reversed, and all you did was trade one quarter for the other. It resulted in the annualized number of 3% in Q2, which sounds good, negative 0.5 in Q1, which sounds bad, and then averaging them together gets you an annualized growth of 1.25%, which is not good. The big swing in imports are one-time events that are related to uncertainty around tariff policy. They matter, but it is one of the reasons I am a supply-sider who really believes that business investment, production, drives what is going to happen with the rest of economic growth. The business investment side is clearly very muted right now, and the small business optimism that is a pretty good leading indicator to certain production is extremely muted.

Will getting clarity on trade deals help improve this even if there are certain parts of the trade deals that the markets or that businesses do not like, but just merely having clarity, will that help? I hope so. But there is no way around the fact that there is a higher tariff level than there was a year ago. Now it is true, it is much lower than the President had threatened. But that real-life number is a cost, and when we talk about it as money coming into us, it is money coming out from us. It is money being paid by our business community. They are all going to debate whether it pushes prices higher. I think there are some cases where prices may go higher and some cases where they will not. The real question is, does it push demand lower, does it push corporate profits lower, does it push total trade lower? Ultimately, if trade goes lower, that means there is less capital coming into the country, and that creates a vicious cycle where less capital will mean less productive activity. This is not something we are measuring next week or next quarter. This is a 6, 12, 18-month thing that has to play out if we are going to do it honestly.

REICHARD: David, I’m no economist, but I’ve heard of this thing called the Laffer Curve—and it makes sense to me. If tax rates are 0%, the government collects nothing. If tax rates are 100% and the government takes every penny, nobody works, and the government also collects nothing. So cutting very high tax rates can actually bring in more money because it gets people working and investing again. Makes perfect sense.

Since tariffs are basically a tax, is there anything like a “Laffer Curve” for tariffs? Is there a point where they can actually make sense, or are they just harmful to economic activity at any rate?

BAHNSEN: There is certainly a Laffer Curve where the knob is turned up and down for how the impact is relative to the revenue they generate versus the impact they have on productivity. In this case, we are talking about the impact they have on trade, which becomes an impact on productivity. But when we say, could they be a good thing, I assume that is because we are talking about it being a good thing to generate more revenue for the government. This is an additive tax. It is not being used to replace capital gains tax, taxes on capital. It is not being used to replace corporate income tax or personal income tax. So all it is, in total, is some level of money leaving the private sector to go to the governmental sector. We are already in an aggregate Laffer Curve whereby that number has already pushed to the unproductive, inefficient side. But I certainly agree that a micro Laffer Curve exists for tariffs, and higher tariff rates do more damage than lower ones. Where we are at 15 or 12, it is all higher than where it had been, and therefore is pushing the demand curve down and pushing economic productivity down.

REICHARD: All right, David Bahnsen is founder, managing partner, and chief investment officer at The Bahnsen Group. He writes regularly for WORLD Opinions, and at dividend-cafe.com. David, thank you so much. We’ll see you next week.

BAHNSEN: Thanks so much, Mary.

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