Surveillance: U.S. Economic Growth With Hooper

on economics hugely anticipated on Wall Street. Peter, I want to go to the heart and soul of your must read, and that is simply you look for upside risk to g d P and an unemployment rate that drives us down to a fully employed America. Balance that forest right now? Will that occur within market stability and national stability? Tom? That's uh, that could be a tall order. But look, there's an awful lot driving growth at this parent point.

We have the course, the normalization of demand coming out of COVID as people are being vaccinated. We have we have a tremendous fiscal support both behind us and ahead of us. Here. Uh. We we think that we're probably at least a half percentage point out of GDP on GDP, out of what's still to come. But but the the household income support that we've gotten so far, building up a war chest of household saving that's going to get to something like ten percent of g d P waiting

in the wings to be spent um. There's there's no way we're going to see less than six seven percent growth this year. Our own forecast is above the census at seven and a half percent, so that that that's certainly enough to get the labor market by that can happen next year back down to the three and a half percent unemployment rate that we saw pre crisis. In the dynamics that Matthew Lozetti work through for you. You took your coin of phrase and you talk about the

amazon Ization. I hope I got that right, the Amazonization of the American economy. Do we underestimate the cardboard boxes and the cloud that's out there from Mr Bezos? Well, I mean the good thing. Amazonization has a number of facets, but one very important for the FED is despite this very rapid growth and a tightening of the labor market, unlikely what we've seen for quite some time Amazonization is a factor that we think is going to keep inflation

from getting out of control. Uh. Certainly, the vast increase improvement in information flow about about supply and demand of all kinds of commodities and services price information now globally is going to keep we think after some some initial disruptions as as bottlenecks appeared during this normalization process, amazonization

working in the background is certainly going to be there. Uh, Peter, great, to catch up, he said, Let's just run things out with a couple of thoughts on this for the Federal Reserve at the moment, the difference between transitory and persistent. You know, we talk and Joe call morning about this and Tom has a drink because the drinking game we play, and I think vice check cloud had joined in recently too. What is the difference for you? What defines that as

the year goes on? Okay, Well, one thing the feeds been wanting to see is a string of good information on the labor market. I think that's four or five months of something approaching a million on on payrolls before before they give us any indication they're going to be uh giving us a hint about apring to come. Uh, there's another another issue here is transitory versus persistent on inflation. Yes, we're gonna get some We are going to get a bulge in in price increases the middle of this year

as growth normalizes, as the economy normalizes. But another thing to keep in mind here, going back to this amazonization is we've been above well above trend in consumption of goods. Uh COVID meant people who dropped back sharply on their demands or services. I think as things normalize, you're gonna see a shift back towards services, and that means taking some of the pressure off the good sector. So, yes,

we're seeing a lot of shortages. Yes, we're gonna see some some real disruptions as these demand patterns shift and things normalized. But we've been encouraged by the extent to which labor supply in in the hospitality sector for example, has picked up. Hiring is picked up, there's a lot of there's an awful lot of unemployed people that need

to get jobs. Still, so um, there'll be some disruption, we will see some transitory price increases, but our expectation is on inflation, which could get to two and a half percent in the middle of this year, maybe a little higher. We'll be back to or below two percent by next year. That's not a persistent problem, Peter, what's the economic effect of higher taxes? Economics? So, I mean, looking looking ahead at what we're what we we might get.

Obviously from listening to semi earlier discussion, a lot of uncertainty about just what's going to go through Congress here. But if Biden gets the program, if we get if we get this UH to and a quarter trillion UH jobs plan with the corporate texts um UH package to

go with it, UH, that's worth about one percent. I mean, assuming roughly ten percent is the SPA then comes in the first year, and that the tax program goes through as planned, we're seeing about a percentage point of GDP growth out of the spending side, and roughly a half a percentage point offset from tax increases. The total tax increase over the next year something on the order of by next year or something on or of nine billion dollars,

a little little lesson half a percentage GDP. So yes, it's I mean, there are all kinds of questions about what impacts the particular form at tax has across different parts of the of the corporate sectors as well as households. But but the broad the broad view macro view is we're looking at something like overall half percentage point stimulus to growth would be more if it weren't for this half point dragged from from the from the tax side. You know, Tom, it just strikes me the degree of

policy uncertainty right now for economists to factor in. You got that two point three trillion dollar stimulus plan that may or may not see the light of day, followed by a one and a half trillion dollar plan expected to be announced this week, followed by potentially tax hikes that could have a negative impact. How do you game this all out? I think you game it out with five seats in the House come November of two thousand and twenty two, I would suggest, Lisa, the politics is

going to take it over. Peter Hooper, You've got a fifty five page deck, and there is one page which describes the foolishness of this all. It is stunning how the savings of this fiscal strategy has gone to the wealthy. It's absolutely a breathtaking chart. Folks, We protect the copyright. Go to Deutsche Bank to get the chart, Peter, how

how far apart are the two America's right now? Uh? Tom, They've obviously grown ever further apart, certainly over the last decade and accelerating over the last four years with tax cuts with with into the last year with the asset very asset gains and stock and housing markets. So um, no question. Uh. Politically, something's got to be done about this.

It's going to be painful when it comes, but that is certainly one reason to be considering taxes more heavily at the at the upper income levels at this point going forward, Peter, We've got to leave it there, have Peter Hope of that Doute Bank globe ahead of economic research and chief economist. You want to bring in, James pev CL investment officer, James, you like the minus right now in Europe? Sure, I absolutely do. I think there

are some great quality opportunities. And what I was interesting me is the ratio between the copper price and the gold price suggests to me that ten U s treasury yield should now be it around two and a half cent. Now we know it's not that principally because Japanese investors have been buying fantasy almost r yields within their own market. But I would have a side bet with you that we will see the tenure yield at two by the

end of the calendar year. And that's a reglisively big move, given that we only got through one on the first trading day of the current calendar year. Is that a move that looks like the movie saw in Q one? A move that's accompanied by better banks, better bank stock performance, better cyclical performance, better small camp performance. To the cygnicals perform in line with that move higher on two on tens to too during I don't think they do. I

think interesting and have a very difficult time. I would observe that the banks are now awash with overnight deposits. That's extremely bad news. The banks seeking to lend on what they want our time deposits. They want long term deposits. They don't want all the money, and I think therefore that the banks have had their day in the side. I would only in the case of the States, wants to be invested in JPMorgan and Bank America, both of which I think have excellent opportunity cut off support long

term returns. The middle bank ranking banks However, again a really struggle, and that I would say is going to be one of the challenges for fixnicals writ large, they discount a lot of bad news. When I'm looking at circles today, I'm looking at the better quality, defensive circles to some of the telecommunication companies, some of the drinks companies like the Age, which I still think looks too cheap. James Bevan, I want you to rationalize thirty five times earnings.

My one estimate of Microsoft is the twelve months forward view is thirty five times earnings. Justify owning Microsoft right now.

Let's let me rationalize it by talking about the earning zeald rather than the price earnings multiple, because of course, the earning zeal is the price ownings multiple reversed, and an earning zeal of three percent needs to be considered in the context of where cash rates currently are exter risk premier payment for taking everty risk relative to to cash as the three race of return does remain relatively elevated, and that puts all of the focus on whether or

not we are going to get real growth. And I am in the camp that says we will get a short term acceleration and inflation that seems for me absolutely

baked in the cake. Nothing we can do that. But I do also believe that inflation is going to come down again, and I would say that that is driven by the demographic changes, disruptive technologies, high levels of embedded indebtedness, and the continuing globalization and notwithstanding the trade tensions does mean that there is a lid put on the capacity

for domestic businesses to raise costs and prices generally. And that allows me to believe that a three and earning zeal coupled with long term growth still leaves a company like Microsoft offering premium returns to corporate and also very much to government. That if you're listening to markets, though, James, I'm looking right now at earnings that have beaten expectations by twenty six percent, even if you strip out financials versus the average of five percent during earning seasons. This

from UBS is Mark Hathlet. How do you explain the fact that you have not seen a cheer from equity traders. You haven't seen this excitement about this growth that's beating expectations in what is expected to be a low rate world for a long time because of what you just said, Lisa.

I think that one of the problems we have with earnings numbers is year on your comparisons are flattered by the extraordinary down draft that we saw in March and April last year, and what investors are looking at is the trend growth rather than the one off growth for the period. And looking forward, I think that we are going to see well over a hundred and eighty dollars of earnings for the SMP five hundreds. That allows me to project and in X will stoundints by the end

of this year. And my greater concern is we get to that level earlier on the back of this extraordinary liquiditcy environment engineered by the Federal Reserve and Treasury, and that would be the moment to take money off the table. But now I think that index earnings on trend our game well, I think the year on your comparisons, so that will get to be ignored. James, it's gonna see You're gonna catch up as always, Thank you, mate, James.

Bob and c C l A Chief Investment Officer. Right now on the President's speech on infrastructure, John Lieber joins us with your RAISIA group and his important experience with Senator McConnell in Kentucky. John, I want to go down to the reality which I'm sure you faced years ago a Senator McConnell, which is a bridge over the Ohio River. It is the Brent Spence Bridge, and it says all about how we can't fix our infrastructure in America. How do we fix the Brent Spence the Brent Spence Bridge

given the President's initiative. Yeah, that's a great example of really important piece of interstate of infrastructure that carries quite a bit of interstate commerce and should be oppressing national issue that Congress wants to try to fix that's really non neglected for far too long. So, you know, I think the reality is Biden's guts the party in the alignment,

he needs to pass a very large infrastructure bill. UM. One of the biggest challenging challenges of the last ten years has been the declining revenues in the Highway Trust Fund. That's made paying for these types of repairs extremely difficult. But right now we're in an environment where the Democrats are basically united and around increasing taxes on corporations and

wealthy Americans to get this stuff done. And probably by the end of the year, you know they're going to have the authority to start the money flowing over the next five to ten years to fix these kind of things. Do you look for a compromise of focuses on projects like the Brent Spence Bridge or are we going to look for a more omnibus bill. I'd be surprised to see Republicans even being really relevant in this process. Frankly,

I think that they have. You know, the Democrats have the votes probably to do most of the infrastructure projects. They've got big ambitions beyond physical infrastructure with this human infrastructure side, focused on childcare and subsidies for education and healthcare. And you know, Republicans just aren't going to play ball for that. And most importantly, they don't want to raise taxes to pay for it, and that's going to be

the biggest stumbling block. I think that makes this a basically a partisan exercise, and I want to go a little bit deeper into that. Given your work with Senate Majority Leader Mitch McConnell or a former Senate Majority leader, there is a question of whether they would be open the Republicans to any tax hikes. When you were working for him. Did he talk about the necessity for paying for different projects or did he believe that things would

pay for themselves if you had the right projects. I think I'd say that the kind of your your average Republican manager member believes in the in the user pay no shan when it comes to infrastructure. So for a long time, that user pay idea was embodied in the Highway Trust Fund, where gas tax fueled the Highway Trust Fund and then the highly trust pumps used to pay

for service transportation projects. And now you've got people driving less cars and coming more fuel efficient, and the gas bax hasn't gone up in in generation, so those revenues are declining. But if you ask, you know, your average Republican if they want to raise taxes on incorporations there or a small business owner to pay for infrastructure, the answer is going to be no um. And this dynamic is just making it really difficult to get even done.

Given your experience in Washington, d C does a nine hundred billion dollar skinny infrastructure bill, and it is funny that we're calling a nine hundred billion dollar plan skinny. Does it seem feasible and likely to be the outcome of some of these negotiations. Yeah, you raised a good point. I mean it's absolutely while. Um, two years ago, the Senate Committee the Deals with Infrastructure put together a bipartis bill that was around four a billion dollars and it

was considered historic achievement. And now many of the Democrats that were involved in that process basically rolled their eyes at the Republicans six d billion dollar proposal. And it just shows you how how far the goalposts have moved. Um. But no, I think the challenge you're at the House and that even if there were a Senate compromise that ended up around nine under billion dollars, which I'm extremely

skeptical because of that. You know, the House sensers an opportunity here and Joe Biden sensers an opportunity here to go much much bigger in a in a way that's going to be really transformative for American's anti poverty programs and really change the game when it comes to green energy and sentence. And that's really what this is about. This isn't about repairing potholes, fixing the Branch Spence Bridge and doing a couple of projects on infrastructure. This is

about doing big things to accomplish the Biden agenda. It's why he ran, that's why he was. They think that's why he wants and that's their goal. How does the big thing's tone sold into the beginning of the run to November of two thousand twenty two. Well, remember two is an interesting year. I mean, the president, the president, the party in power almost always loses seats, really always. I mean there's very few exceptions as this rule that the party in power loses seats in the mid terms.

It's possible this cycle is a little different because the fact that Biden didn't have any cotails. So this isn't like the Democrats have an extra members in the House as some majorities do. But you know, the odds are and the historical trend would be that the Democrats lose probably the House and potentially the Senate as well, which means that Biden, like Obama and Trump, is going to lose his ability to do any legislation after his first

two years. So if you think that your elect came to Washington to get things done, this is your window to do it as a Democrat, and I think ultimately that drives them to a partisan deal by the end of the year, John, it's gonna say you're gonna hear from you John Labor there. So let's bring in Jennifer Lea. Shall we beat my capital market sen economists? Jen, can we start right there just on how you're reading some of the corporate guidance around cost pressures around the labor market. Well,

good morning everyone. So this is where as they're all saying, the the incertainty is lying how much inflation is really building built up through the system. Like if we were talking about this like say nine months ago, you know a lot of people were saying that inflation is going to be very slow to come back, but we all know that at some point when things open up, and they are opening up clearly, Um, it's difficult as some some companies are having it, but they are opening up.

Price pressures are turning to rise. And this is why I'm always interested in watching things like the I s M surveys. Data are obviously clearly important, but what people are saying, what companies are saying out of the ground

are is very key. Um. So again, one of the I SEN surveys, like the manufacturing ones that have always been talking about what the respondents have always been referring to higher price pressures and finding how labor is difficult to come by these days, and they're paying more for wages and all that. So those sorts of UM commented

those sorts of comments, Um, what companies are saying. I think it's very critical to our the inflation outlook, and we do see inflation inflation perking higher in the months ahead. Do you model in wage inflation is part of that

new inflation we do? I mean, wage inflation is obviously part of the entire inflation picture, not just goods and services which are also on the rise, but with labor shortages and people or companies struggling to meet this newfound demand, they need people to create these you know, to create these witches, to be on the factory floor for example,

to be at the restaurant floor. And so in order to get more people, obviously they're gonna have to start hiking, um, hiking wages and bringing in and introducing more benefits to lure people back into the labor force. Does it still feel transitory, Jennifer Um A little bit, yes, because they're not always there yet. UM. You know, this pandemic is still you know, front and foremost on everyone's minds and

everywhere in the world. So things are moving forward, but you know, obviously it's doing depend on what you know, which area, which country we're talking about. In the in the US has been you know, at the at the forefront and has been moving for very quickly thanks to the fast piece of vaccinations you know, the UK as well, So things are opening up. So it's it's looking better.

It's it's definitely looking a lot better, uh, this year than you have other countries who are not who are still struggling on vaccinages, like in Europe and an India of course, and that's where things are still you know, although thin were transitory yet we're still at the beginning stages. It's got to be the word of the year already. Jennifer A. Thank you be mal Capital Market Senior economists.

This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance Podcast on Apple Podcast SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom keene In. This is Bloomberg m