Moneybeat - Business confidence falters

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

NICK EICHER, HOST: Financial analyst and adviser David Bahnsen joins us now for our weekly conversation and commentary on business, markets, and the economy. David, good morning.

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

EICHER: The government released the quarter-three economic growth report—in the form of Gross Domestic Product—the economic report card for July, August, and September takes a good month to count it all up. But on Friday, we did get to read the Q3 GDP and the figure is two percent growth—what’s to say about that? Was it in line with what you expected?

BAHNSEN: No, there's three things to say. It's not what I expected, I expected it to be higher, that is not the quarterly move. But that's how we say it. It's the quarterly move, annualized. And it is the real number, not the nominal number, meaning it is net of inflation. So the nominal number was actually much higher. But we generally want to talk about these things consistently. So we're always looking at apples to apples comparisons. And it can be tricky. Sometimes you recall, the third quarter of last year, when people were referring to this huge GDP increase. And of course, that was also a quarterly move that was being annualized. And it was the recovery coming out of the lockdowns. And similarly, the second quarter move was this just violent drop. And again, the annualization of moves that have a really big quarterly event can kind of misstate it. Now, the numbers of the numbers, I'm just saying, we can sometimes extract a lesson that may not necessarily be there. So I do believe that this number should have been and would have been higher. You already know my opinion’s that the delta variant’s impact on GDP growth, as well as most economic metrics is massively overstated and overthought. I don't see any anecdotal or empirical evidence that delta was a major impact. It obviously was a marginal one. But effectively, I think that there's a significant part of economic activity that is not taking place that otherwise would be taking place, if it were not for the labor shortages, the labor distortions that took place in the third, second and third quarters, and of course, supply chain disruptions. And so across the board, I think all those things are impacting economic growth. And then you look to the ingredients of why GDP growth was less than expected, and the impact is not primarily at the consumer level, and is primarily at non-residential fixed investment, which is a fancy term for business investment. And that business investment number was muted, I believe in the supply chain disruption, anticipation of what was going to be happening at a tax code changes. And still the sort of uncertainty that lingers as to what business confidence is going to be on the other side of COVID.

EICHER: Looking at a GDP growth chart, over time, long time, there’s a trajectory and it’s basically up—with recession dips and recovery spikes. But the COVID dip and spike you can see from space—a very pronounced “V”—deep drop, dramatic rise.

The big question was when do we get back on the trendline, and my memory is that you were thinking probably 2022 when we’re back on trendline, so you think this is all still on schedule?

BAHNSEN: It is, but it's subject to interruption, and it's subject to acceleration, right? There's things that could outperform on the upside, and there's things that could underperform. And it's very interesting, because you look to the real GDP number. And we've recovered what was contracted, but we haven't got back to trendline level. And by trendline here, this is important. I mean the post financial crisis trendline. If we're talking about pre-financial crisis, meaning the 50 year trend line, we've been off of that for 13 years. We've averaged - post World War II - 3.1% Real GDP growth. And we haven't had a single year of that number since the financial crisis, which has so much to do with a lot of the economic angst that I think has impacted much of the middle class and even in other countries around the world that have not got back to their trendline growth. But since your question is more specific to the pre and post COVID activity, I do think it's interesting that so many economic metrics have gotten already back to their pre COVID levels, and then some. And yet there are certain ones that are still held back, you know, they maybe have recovered 80 or 90% of their activity, they had been down to 20 to 50% of economic activity. So they've made huge progress. We talk each week about those initial jobless claims. We talk about the unemployment figures. But then, you know, the housing side - things that are not benefiting from low interest rates - those are the things that have not gotten back to full, pre COVID levels. If it's something highly rate sensitive with all of the liquidity and the low cost of capital the Fed has thrown at it, it's already well past its pre COVID levels. And that seems to be the big distinction. And so I think that, yeah, I certainly agree that by this time next year, we would have to have had a major problem to not be back to pre COVID levels economically. But I will candidly say that I think it should be happening much sooner.

EICHER: I’d like to talk about the broader question, David, before we close this up, thinking of the quarterly GDP as a good moment to assess, how do we return to the post-World War II growth rates in the threes? Instead of this blah, blah, 2 percent, sluggish, not spectacular growth?

BAHNSEN: Well, Nick, it's a blessing because we've been getting one. I mean, the eight years of the Obama administration, and I'm not putting this all entirely on Obama policy, I'm just trying to put a timeline to it. We averaged 1.6% Real GDP growth. And that's when you're supposed to get the most violent recovery, because you're coming off of the crash. Most immediate recoveries after recessions average four and 5%, real GDP growth. So a two has actually been, you know, the the highest number we got was in 2018, after the Trump tax cuts, and we got to 2.9%. And and we've averaged 2.2%. So I think that right now, a lot of people would be very grateful to get to a trendline of two and a half. And I'm with you, I think you want to see a three handle and when you're coming out of recovery, you want to see a four or five. And we were getting a 5, 6, 7 coming out of COVID. But that was just such an anomaly because of the violence of the downturn. If you'll allow me to answer your bigger question, which is a resumption of real GDP growth, I do not believe we're getting back to real GDP growth that averages the post World War II, pre financial crisis trendline of 3.1%. And the reason I don't believe it is the government debt that has been taken on as a justification for dealing with other economic slowdowns. It's a fascinating thing about the present debt desires of the Democrat Party, that they are not being couched around, ‘The economy needs the help’. They are not being rationalized in a Keynesian context of, ‘ we need to now elevate government spending to help offset some other form of economic weakness’. They're being couched purely on the basis of social benefit. And again, that could be right or it could be wrong, I happen to think it's wrong. Some people could agree or not agree, but my point is, there's not even a pretense that it's to drive economic growth. And I believe that you cannot get to full economic growth when you limit productivity. And I don't believe you can be at full productivity when you don't have full investment. And that's what is limiting investment is excessive government spending, excessive government debt that replaces a significant part of private sector economic contribution.

EICHER: David Bahnsen, financial analyst and adviser. He writes at dividendcafe.com. You can sign up there for his good email newsletter, David, thanks!

BAHNSEN: Thanks so much, Nick.

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