Take Five with Elliot Eisenberg: National economy to slow down

Thanks in part to his entertaining style, economist and humorist Elliot Eisenberg of GraphsandLaughs has become a regular feature during State Bank of Cross Plain’s annual economic forecast. His presentations are much anticipated because he takes the so-called “dismal science” of economics and explains it in delightful fashion. Just prior to this year’s presentation, titled “The Economy in 2019: Terrific, Turbulent, or Tepid,” we spoke to Eisenberg about the economy during the past year and his thoughts about the year ahead.

IB: In the past year, what pleased you the most about the economic performance of the United States?

Eisenberg: Oh my gosh, we’ve done really well. Q1 wasn’t a particularly good quarter. We were ramping up yet. I think we had 2.2 percent growth that quarter, but Q2 was spectacular with 4.2 percent growth. Q3 was very strong. We can argue about why, but the U.S. has been a very strong performer. The unemployment rate is remarkably low. Wage growth is starting to go up. This is a strong economy. Now, it’s going to slow down, but it’s been a very strong economy. It has performed very well.

IB: Other than the stock market volatility, do you see any negatives from the past year?

Eisenberg: Oh sure. There have been a couple of negatives. One of them is trade. The trade war, the fear — no one knows where it’s going. No one knows how to get the cat out of the tree. We have no strategic out here, so that makes me nervous. It could metastasize. The tariffs could go up and the breadth of tariffs could widen. That’s number one.

Number two is corporate debt. It’s high with these low interest rates that we’ve had for a decade. That has a consequence. Firms have loaded up on cheap debt, rates are going up now, and we’re going to pay a bit of a price. Is that going to drive us into recession by itself? Probably not. Is it one of my worries? It sure is.

IB: Is debt service going to be shockingly more expensive or is that baked in to projections?

Eisenberg: Debt service for corporations will get worse. We haven’t fully appreciated how much corporate debt has been building. The other thing is that corporate debt quality is really crappy. Forty-nine percent of all corporate debt is one grade above junk. There is a lot of bad corporate debt out there. Covenant-Lite deals are going on because they are chasing yield. Yields have been so low for so long that investors are looking for better returns. So, oh yeah, let’s go buy $10 million of Mozambique debt. I mean, what are we, crazy? Or think of Sears. What the heck was Sears doing? They should have disappeared years ago. They haven’t been contributing anything to society, but because rates were cheap, they could survive. So there has been mismanagement of cheap rates and corporate debt fears, and emerging markets could go down. Europe is always a problem.

IB: Is that what worries you the most about next year, the corporate debt?

Eisenberg: Corporate debt is a bigger problem. Europe will muddle through. They always seem to muddle through. China is also a concern. They cannot keep going the way they have. Their growth has been pretty good, but their growth is slowing. They now want to do more fiscal stimulus, to some extent, and their debt-to-GDP ratio is very high, but you can’t keep on stimulating to prosperity because the debt keeps going up. They are going to pay the piper here, and when they do, we will. We want China to slow down properly and not go down sharply. That’s the big fear.

IB: Does that make them more likely to strike a trade deal with President Trump? [Editor’s note: China and the U.S. have agreed to a truce, during which no additional tariffs will go into effect while the two nations attempt to work out a trade deal.]

Eisenberg: Your guess is as good as mine. I don’t think it will. My feeling is that we were able to make deals with Mexico, Canada, and South Korea because they are allies and we are much bigger than they are. Europe, we’ll see, but I think we’ll be able to make a deal with them, too. They are allies. They may not like Trump but they like America. We’re basically allies here. But with China, we’re asking them to do a lot of different things. We’re asking them to no longer hack into our technology or prevent our leaders from competing in China — like Facebook and LinkedIn. I mean, it’s a fundamental sea change in our whole approach to trade, and they are an enemy and a military adversary in the South China Sea and Taiwan. So, a trade deal is going to be harder.

The Democrats, I don’t think, are going to make Trump make a deal with them. The Democrats are happy to ride along on this one and act tough on the Chinese. So, I don’t see an on ramp all that easily here. How do you save face? How do you make a deal and save face? Trump’s going to say at the end, ‘See, I screwed them into making a deal.’ You can see [Chinese President] Xi Jinping looking like an idiot, and if he thinks Trump is going to do that to him, he’ll never make a deal.

“You can see [Chinese President] Xi Jinping looking like an idiot, and if he thinks Trump is going to do that to him, he’ll never make a deal.”

IB: Do you think the Democratically controlled House of Representatives will pass a trade deal that Trump negotiates, or find a reason to argue it’s simply not good enough?

Eisenberg: They certainly don’t have to pass a deal. I actually thought that if I were [Senate Majority Leader] Mitch McConnell and [outgoing House Speaker] Paul Ryan, I’d do it now in the lame duck session and get it over with because it’s more of a risk in the new session of Congress. I hope they pass. We need those to pass. For us, it’s a tenth of a point to two tenths of a point of GDP, but for Canada and Mexico, it’s two percentage points of GDP. It’s a big deal for them, but we also need it to be over with.

IB: Have we done a better job, in these new deals, to level the playing field with them in the new North American Free Trade Agreement (officially called the United States-Mexico-Canada Agreement, or USMCA)?

Eisenberg: It’s a bad deal. It’s a bad deal for us; it’s worse for them. The only part that’s better is that it’s up to date. NAFTA was done in 1993, so it’s been 25 years. The internet arrived and evolved, so we had to deal with that. There are some prescription drug protections that are okay. The automobile provision isn’t particularly great. Cars will cost a bit more money. There’s a bit more managed trade in there than I would like, but just the resolution and knowing trade will continue is unequivocally a good thing.

IB: Didn’t they bring the agricultural tariffs down, which should benefit Wisconsin farmers?

Eisenberg: Yeah, Canada gave us access now to three-and-a-half percentage points or 3.75 percentage points more of their ag market [laughs]. It’s not that big a market. There are only 30 million people in Canada. This is excitement over nothing. It’s true there is more, but it’s like one centimeter more on a market that’s a meter. So, I’m not jumping for joy over this.

IB: So, our trading partners had little choice but to deal with Trump.

Eisenberg: Right, Canada sends two-thirds of their exports to America. It’s one-third of their GDP. They had no choice, but they fought hard. I give them credit. Chrystia Freeland, who is their Minister of Foreign Affairs, was tough as nails. They balked, they walked. I mean, they really fought us hard, and they got that Section 19, which they really wanted — that new dispute resolution mechanism. They got it, and Mexico doesn’t have it, and so Canada could walk out of it saying we did a pretty good job. We got a B- and we couldn’t get any better. We had to make a deal.

The Chinese don’t have to do anything. They need to trade, but it will take a while. They will rearrange. It’s a totalitarian country. There are no Sunday morning talk shows in Shanghai.

(Continued)

 

IB: What else concerns you about either the year in review or the year ahead? The stock market, perhaps?

Eisenberg: The stock market is much ado about nothing right now. It’s not that the stock market couldn’t go down a lot. It could, but right now the market is just looking around. All I see is flailing kids splashing in the pool. They don’t know if they are going to swim or stay in the wading pond area, but they’re just making noise. It’s hard to pay attention.

IB: Did baby boomers get too addicted to stocks after the Great Recession rocked the market because they had to make up for what they lost instead of shift money into safer investments as they approached retirement? In other words, are they overleveraged in stocks? Usually, by retirement age, they are told to move to safer investments.

Eisenberg: Yeah, as you get older, you’ve got to go into bonds. You have no choice. You’ve got to go into bonds, but we also live a lot longer now. So, if you were 65 about 20 years ago, your additional life span was 15 to 20 years. Now, it’s 30 years. So, you’ve got to hang in the stock market longer.

IB: What I didn’t understand about the stock market volatility is when investors cited rising interest rates as one of the factors. Aren’t savvy investors supposed to know that interest rates would be brought back up to historic norms once the economy recovered?

Eisenberg: Yeah, I am totally with you on this, and you keep reading these articles from six months ago and even now that speculate whether the economy will manage with these higher interest rates. Of course it will. I mean, think back 12 years ago, 25 years ago, and rates before the end of an economic cycle were around 6 or 7 percent, and we managed fine because the economy was chugging. Of course, the Fed is not going to raise rates too fast deliberately. They may do it accidentally, but that’s a whole different story.

IB: Have we seen enough evidence that cash that our corporations had parked overseas has been brought back and applied to business development here? The tax cut law was supposed to work as an incentive to do so.

Eisenberg: It’s not really happening. There is a little bit of it. Corporate investment was pretty good through June, July, and August of this year, but in the last couple of months it’s slowed down a lot. Total investment hasn’t been that high, so the answer is really no. A lot of it has gone to share buybacks, mergers and acquisitions, and so on. So, it’s gone to financial engineering and higher pay, but we haven’t seen this really wild spurt of corporate investment in plants and equipment that we need to see, that the Republicans hoped we would see, and economists don’t expect to see because the last couple of times we’ve done this, we haven’t seen it.

IB: Is there a value to those other things, such as the share buybacks?

Eisenberg: Very marginal. I mean, the answer is sure, there is something there, but in terms of repatriating money, it does more here than it does over there, wherever ‘there’ is. But ‘there’ can often be in treasuries here in the U.S., so ‘there’ is often a weird definition.

IB: I’m told the small business sector has been helped a little bit more.

Eisenberg: Yeah, the 20 percent tax cut will help them a little more, but those guys aren’t the ones who are going to do massive investments in plants and equipment. Even a Starbucks, they do some deep research, but let’s get real. It’s like a blender. So, you make a new latte, and don’t get me wrong because it’s an important service and I’m not banging on Starbucks here, but it’s the big multinational firms and the big tech companies that we need to spend a lot of money on capital development.

IB: They are hurting right now.

Eisenberg: Their stocks have been hit. I don’t follow the tech world so much and the FANG stocks — Facebook, Amazon, Netflix, and Google — or the big three tech companies in China, but how many more users can Facebook get? They’ve already got 2.3 billion. They’ve got almost half the world. So, well, growth will slow. Yeah, well, okay. Nothing is good forever. What’s going to lead the market next? I don’t know. Maybe it will still be these guys, but the market is always looking toward tomorrow, and the market could be starting to fear a recession somewhere down the line. I don’t think it will be next year, but that’s a little jittery, too.

IB: If you had to project growth for next year, what would it be?

Eisenberg: It starts the year at 3 percent and goes down to 2 percent, so 2.5. It’s going to slow down.

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