Moneybeat: No slowing down

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

NICK EICHER, HOST: All right time now to talk business markets and the economy with financial analyst and advisor David Bahnson. David is head of the wealth management firm, the Bahnson group, and he joins us now from New York. Good morning, David.

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

EICHER: All right, so where did that come from? 4.9% annualized GDP growth in the third quarter of the year? Was that a big surprise?

BAHNSEN: Well, the consensus had been for 4.7. And so it was above the consensus estimate. But what was a surprise to a lot of people is that the consensus estimate was so high. And you have something called the Atlanta Fed GDP Tracker, where they're using certain real time inputs to try to do an estimate of what they believe it will end up being. And it is definitely fallible. It is not always a great predictive indicator, but it had been running quite high all quarter. There's a couple other ones that are less known that we're running a little lower. But again, there was really never any indication that the consumer had been slowing down. And I just don't think that many people who have been assuming a recession is coming have really looked at the data. But this particular number, Nick, had one thing that I think is pretty embedded, which is high amount of consumer activity. And one thing that was probably a bit more to use that word, again, transitory is subject to reversal. And that's the inventories. So a build up of inventories can be a positive input to GDP one quarter, but the depletion of those inventories can be a negative input the next quarter. I wouldn't be surprised that that happens this time.

EICHER: So on the components of it, I did note that the business investment component was really non existent in this GDP report. So it just doesn't have the staying power that one would want from a number as robust as 4.9.

BAHNSEN: Yeah, I think that in 15 years we haven't had four quarters where the business investment number was what I want it to be. Shortly after the corporate tax cuts, and a lot of the deregulation in 2017, so the calendar year of 2018, we were starting to see a pickup in non residential fixed investment, which is what we call business investment. And that is the only year that GDP growth got to 3%— real GDP net of inflation—and so that is definitely what I would call staying power. Yes, when you get greater business investment, because ultimately, even consumer activity. Consumers try and try and try. They do not generally stop consuming merely because they're trying to be more responsible. But at some point, new consumption requires new production.

EICHER: Speaking of the consumer, we did get that better metric, the personal consumption expenditures, which is some indicator of inflation. And that number for September came in at 3.4%. And of course, the goal is 2%. So how do you appraise that figure? Well, I mean, what do you think the signal is?

BAHNSEN: No, because the problem is the shelter number in there is that the 3.4 really goes down to 2% if it was not looking at a lag effect of shelter. They're still looking at rents that were done a year ago, and counting it as inflation now. And that's a methodology problem that admittedly is much worse in the CPI number. PCE has a lower weighting to shelter. But I think that getting to a 2% print may take a little while, but I don't think anybody believes that we're not in the twos. And that's with goods inflation that is zero or negative. And so looking at core that strips out the energy side, which is going way up and way down quite a bit, I think that you more or less see radical disinflation. But yeah, getting to that 2% as long as that shelter lag is still in, there will be an issue. But when we look at year over year data, compared to where things were a year ago, I think you're going to start seeing that shelter number, which is staying at seven to seven and a half right now. It had been saying it was at eight to eight and a half. I think it's going to start showing 4% in a few months. So that will bring the blended rate down quite a bit.

EICHER: Now all of that information is available in those government reports. And what I'm struck by David, I don't really understand why you're the only one who talks about this. I mean, I look at The New York Times I look at The Wall Street Journal. None of their PCE stories has anything about this overweighted or not overweighted but this overstated shelter number.

BAHNSEN: Well, I think you have to divide up into two categories the coverage, Nick. There's economic coverage, which I'd be more used to reading in the research community, in the economic community. It's talked about all the time. I mean, all of the reports that are sort of part of my daily feed of research, which includes very expensive institutional research, but also more common level. But then you're looking at mass media, where my own take on that is that The New York Times and Washington Post are well aware that it is not something people are going to easily digest or understand. And then if they wait a few months, it's going to be baked in. And they'd rather print it as this amazing job of Biden and economics to bring down this inflation, rather than explaining the lag effect now, and then it being anticlimactic later. I guess that might sound a little cynical on my part, but I do think that really large and experienced mainstream news operators are aware of what things they can cover that are going to cause their readers to have their eyes glaze over, and what things are not. And so I provide this nuance about the shelter lag, as far as the input into inflation data, I provide it to our people like world listeners, because I tried to be a little less condescending.

EICHER: Well, David, you mentioned last week that the chaos in the House of Representatives, by which we mean no speaker of the house, and no ability to take action was going to start to weigh on the confidence in the economy. And now they settled on someone does that mean that things are looking up?

BAHNSEN: Well, I'm really surprised at the fact of who they settled on. I think it speaks to the exhaustion that everybody had had with that process. And it really did significant damage to the Republican House. And I am sad to say, I will not be surprised at all, if this incident cost three or four seats next year. I think it did significant reputational damage around just the overall competence and seriousness and ability to do governance. But with that said, I really do think the speaker they landed on is a very heartfelt believer. He's someone I've spoken with at events before. And I'm hopeful that him not having a lot of connections and relationships and experience can help there be a clean slate to try to go in and get some things done and, and not be a total bomb thrower who gets a lot of interviews, but doesn't get a lot of things done. But then also not be a squishy compromiser. I mean there's a happy medium there to being effective, but also being principled and tough. And so it's very possible that we got a good speaker here. But a lot of it just speaks to the reality of electoral logic. When you have a four vote majority, there's things like this that are going to happen. And when you have a 20 vote or 30 vote majority, you have more of a cushion. And so this really comes down to the midterms of 2022. That's what caused this is that the house the red wave did not happen. And it caused the Republican House to be really in a kind of rudderless position.

EICHER: David Bunsen is founder managing partner and chief investment officer of the Bahnson group. You can keep up with David at his personal website. That is bahnsen.com You have to spell it right to get to the right place, B-a-h-n-s-e-n, bahnsen.com. You can find his weekly dividend cafe at dividend cafe.com. David, thanks so much.

BAHNSEN: Great to be with you, Nick.

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