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%, so it was above the consensus estimate. What was a surprise to a lot of people was that the consensus estimate was so high. You have something called the Atlanta Fed GDP Tracker, where they're using certain real time inputs to estimate what it will end up being. 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 trackers that are less known that were running a little lower, but, again, there was never really any indication that the consumer activity had been slowing down. I just don't think that many of the people who have been assuming a recession is coming have really looked at the data.

This particular number, Nick, had one thing pretty embedded, which is high amount of consumer activity. Another thing that was probably a bit more transitory and subject to reversal is the inventories figure. 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 if 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: I think that in 15 years we haven't had four quarters where the business investment number was what I wanted it to be. Shortly after the corporate tax cuts and the deregulation of 2017, during the calendar year of 2018, we were starting to see a pickup in non-residential fixed investment, which is what we call business investment. That was 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 when you get greater business investment, because ultimately it leads to 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—that 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. That's a methodological problem that is admittedly 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. I don't think anybody believes that we're not in the twos, and that's with goods inflation that is zero or negative. Looking at core figure that strips out the energy side (which is going way up and down quite rapidly) I think that you essentially see radical disinflation.

Getting to that 2% as long while that shelter lag is still in will be an issue. When I look at year-over-year data compared to where things were a year ago, however, I predict we're going to start seeing that shelter number—which is staying at 7 to 7.5% right now—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: I think you have to divide up the coverage into two categories, Nick. There's economic coverage, which I'd be more used to reading in the research community and in the economic community. It's talked about all the time. All of the reports that are part of my daily feed of research—which includes very expensive institutional research, but also more common level information—falls under this category.

Then you look at mass media, where The New York Times and Washington Post are well aware that it is not something people are going to easily digest or understand. If they wait a few months, it's going to be baked in. They'd rather print it as this amazing work of Biden’s 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 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. I provide this nuance about the shelter lag as far as its 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: I'm really surprised at the fact of who they settled on. I think it speaks to the exhaustion that everybody has had with that process. It really did significant damage to the Republican House. I am sad to say, I will not be surprised at all if this incident costs three or four seats next year. I think it did significant reputational damage to their overall image of competence and seriousness and ability to do governance.

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. I'm hopeful that him not having a lot of connections and relationships and experience can help there be a clean slate for him to try to go in and get some things done and not be a total bomb thrower who gets a lot of interviews without getting a lot of things done. But then also I’m hoping for him to not be a squishy compromiser. I mean there's a happy medium between being principled and tough and being effective.

It's very possible that we got a good speaker here. 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. This really comes down to the midterms of 2022. That's what caused this is: That the House 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.

WORLD Radio transcripts are created on a rush deadline. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of WORLD Radio programming is the audio record.