Moneybeat - Weighing the federal debt and deficit

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

NICK EICHER, HOST: Grab bag of economic data this week: retail sales up for June, second straight month, and so that’s almost fully recovered, with spending now about the same as before the shutdown. 

Industrial production up more than expected, but that remains a long way off. The COVID drop-off was much bigger for the months of April, May, and June, it fell at an annual rate exceeding 40 percent. That hasn’t happened since World War II. 

New claims for unemployment benefits—they’d been tapering off fairly consistently—but the rate of decline seems to have halted. Ongoing unemployment claims much better, back to the level they were in early April. 

Financial analyst and adviser David Bahnsen is back. David, good morning.

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

EICHER: As I say, lots of news. Where do we start?

BAHNSEN: It was a mixed bag of data this week. 

The continuing claims was a positive just because it dropped more than expected and it hasn’t really been doing that. But I think that the initial weekly claims were once again a disappointment. They’re staying so stubbornly high. 

By the way, much like a lot of the COVID health data, it’s impossible to read too much into it because of data anomalies and reporting issues. On the weekly jobless claims, there’s hundreds of thousands of claims from March and April that have still not been processed. And yet you just want to see that number drop to feel that we’re in a better place.

And the reason I make an analogy there, Nick, to the COVID data is it’s a huge part of why the market is shrugging off a lot of the COVID health data because you’re seeing the headline number of 10-, 12-, 13,000 new cases in Florida. But the market knows that thousands of those per day are coming from very old reporting, and even on the mortalities in Arizona, Texas, Florida, there’s a significant backlog of data. So whether it’s economics or health, it’s really hard for data analysts like myself right now to be able do our job.

EICHER: I mentioned at the top the recovery in retail sales. It basically snapped back to where it was before the COVID lockdown. But you have said before don’t read too much into it. People will spend in a bad economy.

BAHNSEN: Well, they’ll spend as long as they have access to money to spend.

EICHER: And we do have access to money to spend.

BAHNSEN: And, by the way, when it comes to the things that are rate-sensitive, like one of the most encouraging data numbers we’ve seen in the economy—auto sales this week were way higher than expected and then new home sales, new home mortgage applications have risen week over week over week, compared to year over year data they’re higher. So, we’re in the middle of a COVID recession, we still have significant parts of the economy either closed or somewhat closed, and yet you have more people wanting to buy homes and buy cars. 

Those are rate-sensitive things and that’s a direct byproduct of the monetary policy making the cost of money so low. 

But, I will tell you the most encouraging data of the week. NFIB, small business optimism, was through the roof. And I was absolutely not expecting that. But small business optimism is not generally a data point that is filled with Pollyanna or excessive optimism. It’s filled with very realistic assessment from people who have skin in the game. 

The bad news, I believe, is that we’re very likely to see some of the joblessness issues continue because I’m now so convinced that the overwhelming concentration of it is in lower wage jobs that just don’t have to come back right away. And I believe that with the pauses and stuttering and in a lot of cases just a lot of excessive response from government, I think you’re going to see some of those jobs really continue to delay coming back on. 

So, if someone’s looking for clarity about is the economy doing well or not, I can’t help because the answer is yes.

EICHER: Let’s talk about the government. A couple of different measures. If we look at last June (June 2019) to this June (June 2020) for an annualized deficit number, it’s an eye-popping $3 trillion. Biggest deficit-to-GDP ratio since World War II—14 percent of GDP, that June to June number. When do you start worrying about that?

BAHNSEN: Well, you started worrying about it when they passed the legislation that was going to ensure it. All they’re doing now is reporting the numbers that we already knew were coming, right? And this is the mistake people make when they get concerned is they think this is going to be devastating in two months or in two years. That’s not really where the greatest liability is. The greatest liability is in the growth that they suck out of the economy for decades with artificially low rates and this sort of deflationary spiral the deficits represent, the government crowding out the private sector. 

You said a really important thing. The issue is the debt as a percentage of GDP, OK? And so just think of it as a household because it’s the same thing. A household with $50,000 of debt but $2 billion of assets, no one would blink at. A household with $10,000 of debt but $100,000 of assets, that all of a sudden is a different concern. It’s not the absolute level of debt, it’s as a percentage of the economy. And because we’re now in a deflationary spiral, we’re not able to grow our way out of it, it’s going to force more grown-up conversations as to how we deal with this debt going forward. 

And the one thing I know we’re not going to do is austerity. They’re not going to shrink the cost of government to get out of it. The public has no appetite for that, let alone the politicians.

EICHER: I’m going to leave it right there. David Bahnsen, financial analyst and adviser. Thank you for your continuing service to us. Appreciate it.

BAHNSEN: Thanks, Nick. Enjoyed being with you.

(AP Photo/Mark Lennihan) United States flags decorate the New York Stock Exchange, Thursday, July 9, 2020, in New York. 

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