When Gary Cohn was chief economics adviser to US President Donald Trump in 2017 and 2018 he was an unabashed (and seemingly uncritical) cheerleader for the American economy.
These days, however, his outlook has become more nuanced — and more interesting for investors. Consider his remarks at a US Securities and Exchange Commission event last week.
Mr Cohn started by pointing out that, in America, “the consumer part of the economy looks pretty good.” Quite so: the so-called “consumer comfort” index (a sentiment and financial indicators indicator) has been running above 60 per cent, a near historic high.
Consumer spending has risen for eight straight months and 266,000 new jobs were created in November, pushing unemployment down to 3.5 per cent, a half-century low. “Bottom line: America is working!” Larry Kudlow, Mr Cohn’s successor, crowed about the jobs report.
But there is a catch: chief executives appear to have a different view. “Companies are not spending money in America,” Mr Cohn said at the SEC. More specifically, chief executive plans for capital investment dropped 8.9 points in the third quarter to 64.5, well below the historical average of 76.7, according to the Business Roundtable. Meanwhile, industrial production has slid, and the Institute for Supply Management survey of factory activity has been below 50 per cent for four months, a level which normally signals contraction. This is “disappointing”, Mr Cohn added, particularly since he had championed tax cuts in 2017 “to get companies to spend money in the US.”
Moreover, Mr Cohn thinks he knows what and who to blame: trade wars, geopolitical uncertainty and 2020 election fears are sapping business confidence, offsetting the benefit of the tax cuts. “If I was a CEO, I wouldn’t be spending either,” he confessed. “Why would you buy steel and aluminium with current prices plus tariffs? Or [with] the geopolitical turmoil and a [possible] change in presidency? A prudent CEO would wait a couple of years — or worse [invest] it in another country.” Ouch.
I have heard other business executives make the same points, and a Duke University survey released this week found that US chief financial officers are expecting a recession.
But the really interesting thing about Mr Cohn’s point is that it highlights a bigger mystery and question: are consumers or CEOs creating the most momentum in America now? After all, it is unusual to see such a stark split. So will upbeat shoppers fuel corporate cheer in 2020? Or will nervy executives ultimately drag consumption down?
The current occupants of the White House insist that the consumer is king of momentum: they project strong growth in 2020, not least because consumer activity accounts for two-thirds of overall gross domestic product. The Federal Reserve governors seem to partly agree: after they left rates on hold at 1.5-1.75 per cent on Wednesday, they released a statement highlighting labour market strength. They also lowered unemployment rate predictions for the next three years, predicting that the economy would grow about 2 per cent.
That is remarkable in the 11th year of a recovery. Some Fed officials and business leaders think even this data might understate productivity and consumer spending given the difficulty of measuring internet-linked activity. “It could just be that we are not measuring the economy correctly,” Glenn Hutchins, co-founder of Silver Lake investment group, argued at the SEC event. Indeed, one theory being tossed around to explain weak capex is that companies are spending their money on hard-to-measure information technology.
I think that last argument may be correct, given that corporate spending on intellectual property continues to surge. But it would be foolish to ignore Mr Cohn’s point about sentiment, particularly given that the White House is weighing imposing tariffs on another $156bn of Chinese imports this weekend. After all, as Jamie Dimon, head of JPMorgan, pointed out on Wednesday, the real risk from tariffs is “what happens to people’s psyche and confidence and businesses”.
Josh Bolten, head of the Business Roundtable, added: “There’s no question that the imposition of additional tariffs [against China] will have a dampening effect on economic activity and a further dampening effect on CEO optimism.” Ponder that, if (or when) a new round of upbeat data on festive retail sales rolls in. By historical standards, this split between consumers and executives is striking; it will be astonishing if it continues through 2020. For better or worse, something is likely to give.