Moneybeat: The basics of economic growth

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

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David, of course, is Head of the wealth management firm, the Bahnsen Group. He is here now. And good morning to you, David.

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

EICHER: All right, let's begin with a story out of The Wall Street Journal, jobless claims, we've got a story here from the Department of Labor. Worker filings for U.S. unemployment benefits increased sharply last week, rose by 28,000 to a seasonally adjusted 261,000 for the week ending June 3rd. According to the Labor Department, this is, according to the paper the highest level since fall of 2021. So what does that tell you? Is that a sign of cooling in the labor market? Is this something to be concerned about? What do you say?

BAHNSEN: Well, certainly not when it's one week. If it were to persist for three to four weeks, then it would be because it was the first time there had been a spike. Now, it's important to point out that for about a year and a half now, all of those that have been predicting that unemployment is about to worsen have been just dumbfounded by how low the weekly claims have stayed. And they did go about 20, 25,000, higher last week, than had been expected. And then the kind of trendline level they've been sitting at. And yet that was with the first week they had done that. And so we learned a long time ago that this data point has so much potential lumpiness in it, that it's much better to follow kind of rolling averages. And so we'll wait for the next three, if not four weeks to see if a trend is forming.

EICHER: Is there anything to say about where we are with the Fed? I know you watch these futures markets to see what the Fed may do, the kind of the predicting markets, I just wonder whether you've seen any change over the last couple of weeks since we talked about it?

BAHNSEN: Well, first, it is important to clarify that the futures are not merely predicting markets, they are predicting because they're showing what people are doing with real money. Okay, so it's a price discovery mechanism more than a prediction market. And at this time, it isn't actually 90% Or let alone 100%. And that's been kind of odd, that there's been a stubborn, let's call it 25 to 30% pricing the other way. But at this time, it's roughly 75% implied probability that in the meeting here that will take place this week that the Fed will do nothing, that they will neither cut nor increase rates. That number had been much lower a few weeks ago. And so the odds have moved dramatically, but not certainly, to a point of expecting a rate pause this week. But then inversely, the odds are nearly just as high, not quite, but 65%, that next month, the Fed will hike again. So if the predominant futures implied probability is accurate, you will have no rate hike for this month, and then another rate hike next month. Now, of course, there's still four to five weeks to go. It's actually I think, at this time, six weeks to go till the July Fed meeting. And a lot can happen in between there that causes the Fed to change their mind and perhaps not hike. But that is at least what futures are reflecting. And that's what we'd be expecting at this time.

EICHER: Okay, David, anything on the markets? Any trends you see developing just what's the market story this week? Would you say?

BAHNSEN: Yeah, for quite a while the market had been looking like it's acting okay when really, it's just been about six or seven big tech companies acting really well, and underneath the surface, it's actually been much more disruptive. For the last six, seven trading days, it's been quite a good move in markets and not just in some of the big tech names, if anything, some of these really overpriced AI, artificial intelligence names have actually come down a little in the last week. But financials have started to act a little better, and that's probably a good sign. But again, whether it's Dow, NASDAQ or S&P, none of it is acting like corporate profits are about to fall out of bed. And if corporate profits are not going to be dropping a lot, then that's an anti-recessionary move. So markets could be wrong here. But it does seem to me that markets have mostly hung in there, not with the breadth that we'd want to see, but nevertheless acted as if we either face a very shallow recession or no recession at all.

EICHER: David, I want to turn to a question from a listener, Jonathan White from North Carolina, he has a question for you on birth rates. Let me just read through how he sets this up. He says, First, we have heard a lot about birth rates, U.S. and Asia, and retirement ages, of course, in France in the news in recent months, in the April 538, it ran an article titled "Why An Aging Population Might Not Doom the American Economy." And one of the key points he notes is that even with all of the negative effects of a shrinking workforce, that the per capita wages may actually rise, and they imply this is very good news. So what Jonathan says is, he'd be very interested in your view of lower birth rates and the aging workforce in the economy in general, and maybe your view of the presuppositions of that 538 article in particular?

BAHNSEN: Well, I think that it's helpful for WORLD listeners to hit a kind of reset button and ask themselves, what is economic growth? And if you start with the premise that it is the production of goods and services that meet the needs of humanity, that we are economically growing when we are producing a higher quality of life for ourselves and those around us, and that, of course, there's a free exchange and mutual cooperation. We don't produce in a vacuum, we're producing because we're meeting needs, and then other people having their needs met, are producing and that there's this sort of virtuous cycle and robust economic activity. And you go, Where do your demographics fit into this? And so the argument is that when you have an aging population without a growing population at the younger end, I mean, I'll take all the 80 year olds we can get, I love it. But I don't want that at the expense of less 40 year olds, 30 year olds, right? the prime working age, where you get, and again, now I'm talking more economically, where you get the most production of goods and services. People are most capable of being productive economically, at age 35, than they are at age five, or at age 85. And this shouldn't be controversial. Now, the per capita income thing is the funniest argument I've ever heard. Because it is true that wages will go higher per capita, if there's only three people. I don't understand the notion that per -- wages are not and economic growth is not measured, per capita in that sense. What we're talking about is this type of society we want to be. And so what I think we look at Japan as a reference point, right, where they stopped having children. And yet there was already a fair amount of people that were middle aged, that became older aged, they suffered through the experience of declining productivity. And because 80-year-old, 75-year-olds still have consumption needs, but there was less ability to innovate new products and services and things like that. So nobody is going to get around this, that an aging population without more people coming up on the younger end is bad for economic growth. And that's a totally non-controversial assertion.

EICHER: Well, David, Jonathan actually had a second question in his email, so let me throw it at you and see what you have to say about this. But he is reading on CNN, an article saying contrary to conventional wisdom, the American economy is in strong shape with record low unemployment, rise in real wages, 10 months of inflation reduction. And according to Fareed Zakaria, he says the budget deficit, which was at 15.6%, compared with gross domestic product at the end of the Trump presidency, has dropped to 5.5% of GDP at the end of last year. And Jonathan is interested in your thoughts, David, on that quote, particularly regarding the budget deficit, compared to GDP. So what do you say on that?

BAHNSEN: Yeah, I mean, look, the fact of the matter is that I've been saying it over and over again, those who are basing all of their critique of the economy on inflation were setting themselves up for justice argument, because there's no question inflation has been coming way down. We most certainly do have record low unemployment, although there is a negative in that, in the sense that we also have a very high level of unfilled jobs. And that speaks to a different economic problem. Yet the issue of the budget deficit and the percentage of GDP it represents, this is a really hilarious argument, because they're taking a percentage at the point of the end of COVID, where we had very low revenue, and very, very, very high spending, some would argue perversely high, and and then taking that as a baseline and comparing a non-COVID world that we're in now, to where we were there. So the percentage of GDP for deficit now has come way down, of course, from that level, but that's not the way any serious person would look at it. The question is, without COVID and without us being engaged in a war, do we want to be running deficits over a trillion dollars a year when we have nearly 32 trillion in debt? It's an absolute dollar number here that matters and that is still perversely high.

EICHER: All right, David Bahnsen is founder Managing Partner and Chief Investment Officer at the Bahnsen Group, his personal website, you can reach at bahnsen.com Of course, you have to spell the last name correctly to get to the right spot, B-A-H-N-S-E-N, bahnsen.com and you can find his weekly Dividend Cafe, which you might want to read it is note to high school graduates. Well worth reading. You can find that at dividendcafe.com. David, thank you so much, and I hope you have a great week.

BAHNSEN: Thanks so much, 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.