Moneybeat: How to check the health of the economy

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

NICK EICHER, HOST: Time now for our weekly conversation on business, markets, and the economy with financial analyst and adviser David Bahnsen, head of the wealth management firm Bahnsen Group. Good morning!

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

EICHER: OK, so the numbers are in for Gross Domestic Product. GDP growth turned negative for a second straight quarter, so the economy is smaller than it was six months ago. The two-quarter contraction is a traditional signal of recession and if recessions are bad economic events, they are really bad political events, thus the argument over whether this is really a recession.

And there’s room to argue, because as you wrote for WORLD Opinions after the news broke last week, David—and I’ll link to your column in the program transcript today—there are other factors besides two straight negative GDP reports.

But let’s talk about the economic signal you pay closest attention to for telling how the economy is doing and that’s business investment

BAHNSEN: Well, Nick, let's back up for listeners to explain what GDP is: gross domestic product. And the growth of Gross Domestic Product is basically defined by a weighted combination of consumer activity, inventory built up, exports minus imports, and non-residential fixed investment, which is what I'm calling “business investment.”

Those are four broad categories that are weighted together to represent our formula for GDP.

My comment about business investment is that I believe what the consumer is going to do follows production. So therefore, if I think productivity is going higher, I assume that the consumer is going to do their best to eat well, dine well, travel well, shop, consume. It's part of natural human instinct, and particularly in American culture, we don't really suffer from an incentive to consume, in case you haven't noticed. Okay? So production is going to drive it.

And I think when you look at inventories, it's measuring what has been produced. When you look at trade, it has to do with two sides of the coin, because I think both imports and exports are important in the economy. And yet non-residential fixed investment, this business investment, to produce something and build upon the productivity of what the activity is, that's going to lead to more consumption activity, okay?

I don't think businesses put the accelerator down for more business investment when they feel economic times worsening. So, business investment is what I've been writing about since the financial crisis. During the years that President Obama happened to be president, our GDP growth averaged 1.6%. And every category went back to normal, except for business investment. It never got back up to its normal level, and the aggregates, therefore, were at half of what the real GDP number is.

So right now, business investment is basically flat in Q2. By the way, everything I said three months ago ended up being right, that the Import Export number was what hurt GDP in Q1, and it was the best part of GDP Q2, because we imported less from China and we exported more because of energy. We had our record quarter ever in exporting LNG, liquefied natural gas. It's just that that positive number of exports, the flat number of business investment, it wasn't enough to offset consumption decline and an inventory decline.

EICHER: I want to get your read on the big public policy development, David, and that’s the agreement with the elusive Democratic vote in the Senate and that’s Joe Manchin, the West Virginia moderate Democrat.

Manchin has agreed to support the tax, climate, and health bill—known as the Inflation Reduction Act of 2022—what’s your analysis of the substance and the politics?

BAHNSEN: Well, it's political, it allowed Republicans to be upset about something and it allowed Democrats to be happy about a headline. But when you unpack it, it is just a joke of a bill. The market was up huge a couple of days afterwards. And the companies that supposedly this thing goes after—they say it eliminates the carried interest tax for private equity—the private equity companies were up 5% in the last couple of days.

It does no such thing. It just simply changes the holding period of private equity from three years to five years. But the average holding period is closer to seven years anyway, so it doesn't do anything.

They assume they're going to raise revenue from that, which they won't. They assume they're gonna raise revenue from greater IRS enforcement, which is ridiculous. But the only real thing it does is allow Medicare to negotiate on prescription drug prices, which was going to pass as a standalone bill anyways. And then it does a bunch of crony giveaways on solar and electric power.

So the politics of it really kind of escape me in terms of Senator Manchin. Most people have been speculating that they traded for him a pipeline that will get done through West Virginia. And I suppose that's possibly why he did it. It's kind of ironic that everyone's heralding this as a big climate and environmental bill. And what got it done was that they're giving him an oil and gas pipeline in West Virginia. But all that to say, economically, it almost has nothing.

Now the one bad part on the tax side is a guaranteed minimum corporate tax -15% - and the current rate is at 21. And so you say, Well, how could that be bad? It's a lower rate. But right now what you have is 21% with certain deductions; what they're saying now is that you're going to pay 15, even if you have deductions that would make you go lower. Okay, so that's the negative part.

But I don't know if it gets altered further from here. And I don't even technically know that they'll have the votes. So this has been a very odd couple of days. But really, this thing almost says and does nothing. And it's quite a shame that we're in such a token period of American politics.

EICHER: All right, that's David Bahnsen. He's a financial analyst and advisor and head of the financial planning firm, the Bahnsen group. David’s daily writing is at DividendCafe.com. You can read him online or sign up there to receive his daily missive by email.

David, thanks again.

BAHNSEN: Thanks so much, Nick.

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