U.S. GDP Growth Not Heading in the Right Direction: Chief Strategist

And now on to GDP. The US economy grew faster than expected in the second quarter. Gross domestic product increased at a 2.4% annualized rate, according to the Commerce Department. This is as labor resilience held up consumer spending. Now, outside the housing and manufacturing sectors, the economy has largely withstand the interest rate hikes from the Federal Reserve. And here to talk to me about the GDP number is Lance Roberts, Chief Investment Strategist at RIA Advisors. So Lance, US economy expanded at 2.4% rate. I mean, tell us how should we feel about it? Well, so first of all, the 2.4% rate, obviously a good number. We were running about 2% in the first quarter, 2.4% in the second quarter. So now that is inclusive of the GDP deflator. Now, I don't wanna get too complicated, but that's basically the inflation adjustment for GDP. And that number was a lot lower than what was previously expected. So having the lower inflation rate boosted the real GDP number. So had the deflator come in line with expectations, we would have been closer to 2% versus 2.4. So pretty much the economy's doing exactly kind of what it's been doing, growing at 2%. So I wanna put this into perspective. Historically, 2%, I mean, is that good? Well, no. Historically, if we go back to the 1990s, whenever we were growing at 2%, the worry was is that we were heading into a recession. What with 2% growth used to be considered pre-recessionary. Post 2000, really, because of the increases in debt, because of what's been going on within the kind of federal policies, et cetera, we've just been hoping to get 2% growth. We've been excited to have 2% growth. And no, it's not growing fast. 2% economic growth is not strong enough to create economic prosperity. It basically just kind of maintains the economy based on new entrance into the economy. Make sure that new people coming into the workforce can get a job, but it's not strong enough economic growth to create a broader base of economic prosperity, which is why we talk a lot about wealth inequality and these types of things. So no, it's not great that we're running at 2%. We need 4%, 5%, 6% economic growth, but that would also entail 4%, 5%, 6% rates of inflation because inflation and economic growth are tied at the hip. And of course, with 32 trillion in debt and record household debt, you just can't sustain higher rates. So the reason that we have to have low rates of growth and the reason that we need low rates of inflation is because of the massive amount of debt that has been supporting economic growth over the last 30 years. And just a side question, why are we now just happy with 2%? Whereas before we used to have much higher GDP. Well, we're happy about it because the economy is not in recession, right? And again, like I said, it gets you to have people that have jobs, it gets politicians reelected, but we need to be thinking about the issues going forward because the more debt that we continue to tack on and the longer that we run deep deficits in the economy, and every time we spend $1.7 trillion on this or $2 trillion on that or 3 trillion on this, that's just adding to the debt run, which is going to continue to slow economic growth. So in the future, we're gonna be happy to have 1% economic growth, right? In the future, we're gonna be happy to just be flat on economic growth because of the debt. So no, we're not heading in a good direction. This is obviously the same trajectory that Japan has been on for a long time. Demographics are an issue. We've got the lowest child birth rate since the 1940s. That's continuing to trend lower, which means you have less workers paying into social security. And it's interesting, I have these conversations with people about social security and they're like, oh, well, social security will never go away because people want it and everybody's got to... And the problem is, is you've got less than two workers paying into social security. And if you keep having fewer workers into the workforce because you have a lower birth rate, the math just doesn't work long-term. And so as more and more people move onto the social security welfare, it just gonna require increased levels of debt to continue to fund it. And eventually that's just not possible. But Lance, how can we have such a historically low unemployment rate and yet we don't have economic prosperity? Well, again, we have to go back and look at what's been going on for the last 30 years, right? You have low unemployment, no doubt about that, but you also have to consider what do we consider people employed, right? You've got 190 million people that are in the labor force globally. You've got about 50 million Americans that just simply aren't counted, right? So where are they, right? That includes, yes, that includes students, that includes people on disability insurance and those types of things. But yeah, there's a whole bunch of people that aren't in the workforce that aren't working. And the rate of things that we require to live because we continue to suppress interest rates lower, that has increased housing prices, it's increased the cost of living, it's increased all these other things over time. And the wages and the wage growth has not kept up with that suppression of economics. And this is why when we take a look at the wealth disparity in the economy, 80% of Americans are basically living paycheck to paycheck, the top 10% of income earners own about 80% of the stock market wealth. So that's where that disparity really comes in. This is why you see a lot of people kind of upset about the wealth gap and how we compensate CEOs versus how we compensate workers. All fair arguments, right? But this is all directly tied back federal policy, fiscal policy, monetary policy, low interest rates, and basically providing more and more debt at cheaper levels. Let me give you a real quick example. Everybody complains about the cost of housing. Housing is unaffordable for the average American. You hear this all the time. That is directly tied back to federal policy. When you got rid of 20% down payments, when you got rid of the ability of people to have to actually qualify to get a mortgage, right? When you started giving subprime loans and all these to people with poor credit that really shouldn't be buying a house, then all of a sudden you started inflating asset prices because there can only be so many houses built at a time. You have more and more people coming in as simple economics, supply and demand. And then you continue to lower the interest rate for acquiring a house and getting a mortgage. That only boosts prices higher because again, lower interest rates allows me to buy more house. So these policies that we've created to try to get more people into houses that probably shouldn't buy a house to start with because they're not financially and fiscally responsible yet, they will be eventually, but maybe not yet. Credit scores tell you that problem. If we had not done all these other things, then prices of houses would be more in line with economic growth and inflation and people would not be priced out of homes. So that's just one example of how these policies have created this economic disproportionate effect in the economy. And of course now it's really showing up and this is why we're getting people upset. Yeah, and let me follow up on your point about debt. You're saying it's weighing on economic growth, but on the other side of the coin, is the US economy also dependent on debt to sustain growth? Well, yeah, that's exactly what I meant, right? In order to keep 2% rates of economic growth or better, we've got to have lower rates of inflation and lower rates of interest so that people can take on more debt because it's the debt supported growth of the economy. And so when interest rates go up, people can't afford the debt. And this has been the big concern coming up for a lot of companies that have refinance, have debt that they're gonna have to refinance potentially at higher rates in the next year or two. This is going to be a problem for those companies. This is gonna be a problem for households because as those debt service payments go up, look, as a household, I only have so much income coming in. And if interest rates are going up, then more of that income coming in is going to service my debt, leaves me less discretionary income to go buy a new iPad, phone, or whatever it is. I've got less money to do that with. So yeah, interest rates being high is a problem. We have to have low interest rates so people can take on more debt to buy more stuff that keeps the economic growth at 2% or less. We had 2% GDP last quarter. How can Boeing and Cosby at their highest since the global financial crisis, and yet the economy grew from the first quarter to the second quarter? Well, this is just a function of the math right now. And again, like I said, when you take a look at some of the, first of all, GDP is a very lagging indicator. So we're talking about 70% of that being personal consumption expenditures. That's what people were spending in the last quarter. Those are guesstimates. And again, so it's 2.4% today. This is the first reading of the second quarter GDP that will likely be revised down in the second, third estimate over the next couple of months. It'll likely be revised lower again next year when we revise the annual data, because there's a lot of indications out there that consumers aren't spending as much in the economy. But again, the way we capture the data, it generally kind of skews things a bit higher. It's like the employment data. A lot of the employment data is skewed higher because of math, mathematical adjustments, like the birth, death adjustment, these types of things. They're just simply guesses of kind of what's going on. You know, in a year or so, we'll get a lot of the data, which I suspect will suggest the economy's growing at a bit slower rate than what we've got now. Probably not recessionary, but probably slower than what we think the numbers are right now. And speaking of recession, the Fed yesterday said it's no longer forecasting a recession. I mean, are the prospects of a downturn fading away now? What do you think? Well, you know, look, last year, I think you and I talked about this last year. I said that, you know, at that time, everybody was forecasting a recession. And I said, if we have a recession, it will be the most well-forecasted recession ever in history, and we haven't had a recession yet, even though everybody was forecasting it. Now, the good news is, if you're wanting to have a recession, the good news is, is nobody expects one to happen. So now we're kind of in that position to where no one, you know, on the economic side or the Federal Reserve side are expecting a recession, which now potentially allows that recession to occur. It's about psychology. When everybody expects something to occur, they tend to brace for it, and they tend to make adjustments. So whatever you're expecting to happen tends not to happen. And now that nobody kind of expects it to happen, you know, there is this big lag effect to the Fed rate hikes. There's a big lag effect to what's happening with the tightening of policy across the board. Markets are well ahead of, you know, kind of what's going on in the real economy. The rally this year, while it's been great for stocks, is all on valuation increases, nothing to do with earnings, not really increasing corporate profit margins, actually declining over the last two quarters. So I would suspect that, you know, probably not going to have a recession, you know, this year for sure, probably not in the first half of next year. I think the real risk of recession is going to be probably latter half of 24, first half of 25. And the reason for that is, is all that monetary stimulus that we flooded into the economy in 2021 is still there. We still have a lot of that M2 money supply circulating through the economy. Plus you have the $1.7 trillion in fiscal stimulus from the government and the Inflation Reduction Act. Plus you still don't have 44 million Americans making student loan payments, which may restart later this year. So it's just that lag effect of there's a lot of money in the system that hasn't come out yet. And so that liquidity drain is going to continue. But by the time we go from, you know, 12% nominal growth to 4% nominal growth, to 0% nominal growth, to negative growth, where you have your recession, that's going to take some time. And so that's why probably the recession is still coming, is probably just later 24, early 25. So then theoretically speaking, the Fed's benchmark interest rate is high enough at the current level to slow the economy. Yeah, absolutely. You know, they've probably done enough here. I suspect though, that they'll probably hike again, you know, later this year, they'll probably do one more rate hike. Particularly if we start to see inflation begin to tick up a bit. And the reason that inflation will likely increase a bit is simply just the way we measure inflation, because we measure inflation on a year over year basis. So just quick example, if gasoline prices are $4 in January of last year, and they're $4 in January of this year, the price didn't change, but inflation is now zero because of the way we measure inflation. So now we're going to get into this series of numbers on these year over year comparisons, where we could start to physically see inflation begin to tick back up. Not because prices are really rising, it's just because of the year over year comparisons. And if that occurs, then that's going to put the Fed in a tough position of not having to raise rates again. All right, I see. I just thought of something on the debt question. If we cut our borrowing in half right now, what's the economy going to look like? You'll be in a recession almost immediately. Look, I mean, the majority of economic growth is driven now by debt. Here's a fun fact for you. If you take a look at GDP growth going back to 1980, when we started running a deficit, and you subtract out all the deficit spending, we would have had negative economic growth in that last 25 years. So that's how much debt is being consumed in the economy. Okay. So right now the labor market is still quite tight. So here's a question maybe you can comment on. So the number of migrants crossing the Southern border has nearly tripled in the past two months. Now, I would assume these people eventually participate in the economy. Does that contribute to economic growth and GDP? Yeah, and the problem becomes also, look, there's two, as we talked about earlier, you have to have demographic growth, right? You've got to have more people contributing into the economic system in order to make the economy grow. And you have to have more people paying taxes and doing those types of things to support things like Social Security. So there's two ways to do that. One is to have natural birth, where you have a natural growth of your economy through just natural birth rates. Very important for that. And the difference between that type of birth rate, which is you're bringing people into the economy, they tend to go to high school, they tend to go to college, they tend to go out, get higher paying jobs, or through merit-based immigration, where you're now immigrating individuals that have capital or they're coming here, we're immigrating doctors or lawyers or high income earners. That's a very different type of demographic growth that will contribute to stronger economic growth versus the immigration we have on the Southern border, which that is what it is. But most of those workers are going to fade into the economy into the lower wage earning tiers of the economy. In other words, they're not going to be, they're unlike, I shouldn't say they won't be, that would be a false statement. They're unlikely to become high income earners in the economy. Doesn't mean they can't, but most of them are going to fade into basically the lower, the kind of the lower thresholds, that bottom 50% of income earners within the economy, which yes, they'll be paying into the system. That will certainly help economic growth, but because they're in that lower echelon of wage earners, they're not going to create a big boost to economic growth. Okay, I just want to go back to the debt question again, one more time. Okay. So we talk about wanting to fix the problem, but the people have to elect politicians who will do that. And it seems like, you know, people like handouts, right? I mean, if people like handouts, then we can't fix the problem. Yeah, and this is, look, when you start delving into the world of politics, you've got big problems there, right? You know, first of all, legislation, you know, you can elect politicians all day long, right? And that's, they come and they tell you what you want to hear to get them elected. But as soon as they go to Washington, they are bought and paid for by corporations. Corporations control Washington, corporations write most of the bills, these lobby groups that are out there that raise millions upon millions of dollars for politicians. You think that the politicians are sitting around writing these bills? No, these are written by lobby groups and corporate interests. And this is why we always see these laws passed that favor a certain group. It's like, why on earth are we doing that? It's because they paid for the research and the lobbying efforts to get that bill passed, which is beneficial to them. That's just the way, don't hate the system, that's just the way the system works. You know, so the problem is, is that we have politicians elected in the office. First of all, they stay too long. You need term limits on politicians, which would reduce the effect of lobby efforts and PACs and these types of things. But more importantly is that you've got to get the corporate interest out of politics, right? So eventually you've got to start thinking about, if I want my elected official who I'm voting for to go vote for my best interest, then I've got to get the corporations out of politics. But again, that's not going to happen. We hear talk about it from time to time, but just about five, six, seven years ago, they increased the limits to which corporations can contribute to a political campaign. So it's just really kind of getting worse over time. But this is why we get so frustrated with why nothing gets done in Washington. We have a very, very partisan government right now between right and left. Nobody's willing to come to the middle to pass laws or to pass regulations that are good for the economy. It's all about trying to pass and appease a certain group of individuals, both right and left. It's not one or the other, but we're all trying to appease a very small group of people on kind of the radical right and left ends of this. And we're ignoring the massive majority of people in the middle who are just slightly right or slightly left of center. Most people that you talk to will say, oh yeah, I'm a conservative, but I believe in pro-choice. Or I'm a liberal, but I'm anti-abortion. People kind of go, people have their own views and opinions. And most people live right there in the middle, slightly left or slightly right of center. But we don't address those on politics. We only address the squeaky wheel. And this is why media in general, they love, whatever bleeds, leads, right? So you want, you know, recession's coming, right? Headlines, that's what gets people's attention. But unfortunately it doesn't address the core problems in economy, which are keeping us from growing at a stronger rate and having better economic prosperity across the board. Yeah, and I can see that firsthand. The stories that stimulate people's emotions, those are the ones that give views. If you just talk about normal things, you don't get as much attention. Yeah, it's boring. Exactly, exactly. I'm seeing that firsthand. Okay, just one final question. Is this my Jeopardy question? Sure, sure, why not? Final answer. Okay, when are fundamentals gonna matter in the stock market? So I actually said this on my radio show the other day. So I was like, you know, I'm a big believer in fundamentals of companies. I think you should invest based on fundamentals because what you pay for matter. If I overpay for earnings today, I'm gonna have a lower rate of return in the future. Unfortunately, the market just doesn't care about fundamentals right now. And I said on my radio program, I said, you know, my tombstone may read, you know, here lies Lance Roberts, who still believes fundamentals matter. You know, because of all the Fed interventions, because of, you know, the stuff that we've done to markets, you know, zero day to option exploration, option trading, and, you know, just, you know, Robin Hood programs, all this other stuff that where we really turn the markets into a casino. Yes, fundamentals are a matter eventually. I just don't know when they're gonna matter. So we have to really just, you know, manage the risk of the markets right now. We have, the markets are bullish. We need to be bullish. We need to trade the markets for what they are. But I do think honestly that we have to keep an eye on fundamentals. I do believe fundamentals will eventually matter. I may die first, but I do believe that fundamentals will eventually matter. All right, on that note, thanks for your time today, Lance. Appreciate it, thank you.