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This is a blur for Paul and I. It is just an extraordinary advantage of wonderful conversations. And then somebody will say something which sticks with me. I'm walking down the street six months later, I'm going damn that.
Nancy Lois.
She said something last year that made up my interview of the year of this American labor economy joining us now from Piper Sandler, their chief global economists. Truly iconic, Nancy Lazarre, you basically said the strong labor economy is a fiction, it's all government and healthcare supported, and that the private investment in private jobs formation is broken. What does a war do to that?
Well, that was a year ago, as you said, and I would actually argue that you're starting to see a healing in the private sector labor market now, to be sure, will curb business confidence. But wait a second, I just got a bunch of business confidence surveys, a group of manufacturing surveys through March which captured the war and the increase of the price of oil and their employment in
disease actually rose. So I think you have to look at the economy broader than just a war and increase in the price of oil.
I look at the Guadalcanal Low how miserable we were in forty one, forty two into that battle in the South Pacific that we didn't want to talk about at the time. And then up, up, and away we went for a year, basically for years into the deflationary fifties. I guess is it the same thing as well, that this work could be a stimulus of sorts.
I'm not sure the war itself is a stimulus other than the backbone of the US economy is indeed strong. We've had surges in the price of oil several times over the past thirty forty years. Obviously, in the nineteen ninety Golf War, the economy wasn't as strong then as it is today, but boy, as that thing ended, oil prices came down strong. Obviously, the next leg was the US tech Revolution, and then after two thousand and eight you also had a surge in the price of price
of oil. Then you had almost a decade prior to COVID, a decade of a stronger US economy supported by domestic capital spending. We had, even more recently a surge in the price of oil Obviously, back in twenty one, you went from fifty to one hundred and twenty dollars. The US economy stumbled slightly in the first part of twenty two, but then we took off again, supported by supported by
capital spending. So the thing that I keep reminding myself is that the economy is not just driven by one variable. It's not just oil. It's a function of monetary physical policy in general. And physical policy right now is underappreciated as a support what I would call the right way, not through a boom in government spending, but companies have just seen one hundred and eighty billion decline in their tax cash tax payments because they're incentivized to do capital spending.
Deregulation is underway, and that's beneficial to small medium sized businesses. I hear particularly from the banking banking system. Banks are easing lending lending standards. So right now, we for sure are at risk of the US economy slowing stalling out depends upon how long sure surgeon the price of oil goes on. But this is a pretty strong economy.
How's the US consumer doing with this backdrop here?
So the consumer is a little bit in a tug of war. On one hand, they obviously consumer confidence is down. We have a daily survey of consumer confidence, which is a little nuts but it works, and it is down about fifteen points. But it's still above where it was during the government shutdown, way above where it was during the COVID low, way above where it was during the GF during the GFC, So confidence, consumer confidence has gotten hit.
But at the same time, we monitor your weekly retail sales data and actually they through mid March we're on the stronger side. That is, again, consumer is driven by more than just gasoline. We have these tax refunds, to be sure, some of them are being eaten up by
the higher gasoline prices. But the labor market, as I mentioned, if you look at unemployment claims, and I'm seeing more and more commentary on Bloomberg on other news programs that, wow, the labor market may not be as weak as I thought. Claims are indeed in a declining trends. That's helping the consumer.
So how do we think about inflation here? Because you did mention consumers are seeing it at the pump, a big increase, and we'll probably see it in other parts of the economy. As it higher energy costs flow through to you know, fertilizers and food and all that type of stuff. How do you think better inflation?
So first, energy spikes are a tax on the US economy unless the Fed monetizes them, as they did during the nineteen seventies.
So we do that bike just cutting rates.
Cutting rates, putting liquidity in the economy. You had double digit money growth in the seventies, very very and you had double digit money growth twenty one twenty two, which is why inflation was indeed more sticky. But similar to a year ago when you had the tariffs. Almost a year ago you had the tariffs. Our point then was it was a tax and you did see one price went up, other prices went down, And so I think you're going to see the same thing today. Energy takes
time to flow through to overall GDP consumer spending. It very quickly impacts the CPI. So the March CPI will be bad zero point six, zero point seven percent, But again it's a tax. I. Think as you go through the year, you can see other prices go down.
What's the state of American capitalism? Now you've done so much thinking about the arc of the larger picture, now, how do we incentivize ourselves to better productivity, better prosperity.
So I was actually in Europe last week and I have a chart of US productivity relative to Europe and the rest of the world. Yeah, no, it's it's we.
Just worked longer hours. As I look at Alexis Christopher's over there, and we French have the same productivity we do. They just worked less hours.
Yeah, they're smarter than we are.
Actually, actually they don't. But we also invest in technology. I'm just sitting in this beautiful room and again I heard over and over again that Europe is indeed way behind from an investment perspective, from a technological innovation, embracing it, allowing creative destruction which they don't allow, which we do. And so productivity has been in an accelerating trend for about ten years. We're back up to something close to
two two and a half percent. And given all the R and D that's going on right now within corporate America and being incentivized to do more R and D through the tax to the tax legislation, we think productivity growth can move up towards three percent. So the state of American capitalism with these capex incentives, with deregulation, we think is pretty healthy.
There's little to no population growth in this country these days. So for this economy to grow, can it grow because of increased productivity? Maybe AI enhancing that bingo?
I mean so much. I hear from Wall Street, Oh, the fantastic cut rates because there's no labor force growth, and it's like, wait, potential GDP growth is two has two components. One is labor force growth population growth, and the other is productivity growth. And they seem to forget about that, and productivity growth is boosting. All you have
to do is look at the CBO data. CBO has data on potential GDP growth and it has moved up to about two and a half percent, which I don't hear anybody talking about, which suggests that real interest rates are about right. We don't need cuts and interostrates obviously, now the community is talking about higher rates. We don't think that either, simply because this is a tax on the economy. FED policy is not overly aggressive. So at the end of the day, we think rates are about right.
So I mean again, if you look at the w I RP function on the Bloomberg criminal the market kind of agrees with you. I mean to get some people looking for a little bit because I don't.
Know how to look up to help you, Paul, where are we on that we're looking at no rate, nothing out.
Yeah, I mean kind of just got that we have problem.
It is. We had that call before the oil shot, before the war. Because again, we have a fiscal policy which is stimulative to growth, so that about one and a half percent of GDP. It's again it's the right stimulus, it's tax and center of its capex incentives. Second, the Fed has already cut rates one hundred and seventy five bases points. They're below nominal GDP growth. And then and then third, banks are easing lending standards, and so there is liquidity in the economy.
What do you think about this whole AI thing? How do you put that into context? Because you know, prior to this war, that was it for the market. It was all AI. It's all we talked about. How do you think about it in terms of how big is it going to be for this economy?
So, as Tom often reminds views, I've been in the business a long time and I started in the nineteen in the nineteen eighties when there were computers.
Yes, for the first calculator, Yeah.
That was in the seventies, in the eighties. I remember that too. In high school in the in the eighties, we went from a typewriter and a terminal to a computer and it was IBM at the time. And that was very, very disruptive. I mean, accounts, et cetera. All of a sudden you could do things very quickly on computers. And the productivity that created, or the for I worked at C. J. Lawrence, was tremendous. It didn't it did
make a huge difference. And over the past forty five years, every every level of technological innovation has gotten smarter and smarter and more and more and more productive. And I'm excited about AI as far as again we're making these leaps and bounds. And other other countries.
Are Richard mentioned worldwide? It was Heimen Lazaar. It was like a thing, you know, it was like red Sox pitching. There were two pictures. So and then you go on to Edgeyard Denny. Does Nancy Lazzar believe in Yard Denny's bond Vigilantes? Is this a market that's going to tell the President what to do.
But I do believe in the bond market vigilante, a big, big, big, big time. And I don't believe that the Fed's going to do financial market repression. And yeah, I think I think the bond market, bond deals have moved up some. I think that's quite frankly, not the right call. I don't think inflation is a problem. I don't think the FED has to raise rates. But at the margin, are these higher yields a little bit of a of a signal to to to Washington and to be careful, What.
Is your biggest concern about this economy these days?
Well, it has to be on the uncertainty about what's going on in the Middle in in in the Middle East. That is my h to be sure, my single the.
Companies are holding back either like on capital spending or M and A or I don't see it.
I don't either. I mean, we just got these manufacturing surveys for the month of March from the regional FED districts, and their CAPEX components are like moonshots. And I think again it takes a step back that there's incentives to do CAPEX and companies are doing it.
Are they Are you concerned about the way that the mag seven, the data centers and all are doing the capex? Or can they just do it like we learned in school, take it out of a bond investment and instead of using all cash, go to the bond market, get cash and build this out.
Well, that's tough.
We've built the railroad truth.
And that's classic. And there is also incentives that these companies can write off with the one big beautiful Act. They can write off all of their investment software, R and D. They can't write off the box of the data center itself, but everything they put in it they can, and then they can then they can borrow. But that's you know, classic business li likele stuff.
Have you ever been pessimistic?
Oh?
Yeah, I was too pessimistic in twenty three, I quite frankly, Am, is some of the stuff that I've just talked about, and so.
Yeah, I just my answer was no. Nancy Blizzar, thank you, thank you, thank you so much for coming in this morning. I just can't say enough about her effort, folks. She's a Piper Sandler