Catch the full episode: https://www.wealthformula.com/podcast/258-whats-next-for-the-us-economy-boom-or-bust/
Buck: Welcome back to the show everyone today my guest on Wealth Formula Podcast is Taylor St. Germain. Taylor is with ITR Economics. We’ve had on the show members of that team Taylor’s an economic analyst for ITR and ITR as you know is unique in that they keep track of their accuracy unlike a lot of economists and they are showing an accuracy rating of 94.7 over well gosh I remember I think it was something like 70 years but we’ll get that clarity in a minute anyway, Taylor, welcome to Wealth Formula Podcast.
Taylor: Thanks so much for having me.
Buck: So ninety-four point seven percent over how long?
Taylor: We’ve been around since 1948. We were founded by a man named Chapin Hoskins back in the 1940s who developed our business cycle theory that we still use today.
Buck: Yeah and you know I do think it’s interesting you know I pointed out the fact that most economic firms and economists don’t really keep track of their calls
Taylor: But yeah even being a private firm we know that’s what our clients are most interested in. It’s never something we’re trying to hide.
Buck: Yeah exactly because you know even a broken clock it can be right twice every day right so and we’ve seen that a lot especially when you know things go south and all the doom and gloomers all of a sudden say I told you so although they told us so about 10 times in the last three years. So anyway listen the last time we got to speak with someone from ITR we were a month into this whole Covid 19 lockdown which you know which was obviously unexpected and I think even when it started happening the full impact and the full you know sense of how long this thing was going to be around we just didn’t get it. Can you give me a sense of you know I know this is a big question but what happened to the economy over the past year and where are we right now in the big picture?
Taylor: Sure as you know we identify different phases of the business cycle so I’ll just talk in terms of GDP since I think that’s more everyone’s general economic benchmark. So what happened with GDP is during the first quarter of the year we saw a mild decline in GDP. It takes two consecutive quarters of GDP to climb for a recession and the second quarter was actually the low point for us in terms of overall GDP that was the draconian shutdown time frame for us so what happened in the first half of 2020 was the percent change from the first to second quarter was the worst percent change we’ve seen since the great depression. So really just terrible worse than that wasn’t it the worst ever or something incorrect yeah so that’s exactly in again that’s just quarter to quarter and but what we saw in the third and fourth quarter was that we started that recovery trend for overall GDP. So we saw the cyclical low point really hold up being the second quarter and we saw GDP build momentum in the third and fourth quarter obviously not back to the pre-pandemic levels but starting that recovery process
Buck: Yeah so we’re technically right now it doesn’t seem that we are in any kind well I mean it’s actually kind of hard to be in a recession after going through that kind of dip right I mean anything is positive anything a little bit better than the previous quarter. So a lot of people during this time especially when it was pretty clear what was happening including myself frankly we’re bracing ourselves you know really for an absolute bloodbath in the financial markets and in real estate and whereas you did show you know it was clearly bloodbath for GDP it really wasn’t for the markets nearly as bad as you might expect what do you think kept this from being as bad as it really could have been perhaps should have been?
Taylor: Sure I guess two points start with the financial markets. First, it is very clear that asset prices are overvalued at this point. You can understand that relationship by just looking at the S&P versus corporate profits and right now we’re seeing a deviation where the S&P500 is significantly higher than what corporate profits suggest it should be. So to me, it seems clear that the market’s overvalued. So the question becomes well then why did the market continue to do so well right when profits don’t support the valuations and ultimately what that comes down to from my perspective is the money supply and whether it’s you know our fiscal policies here in the united states or the stimulus money that’s been injected into the economy if you look at all the metrics related to the stock market that is clearly one that suggests we should continue to see equities perform quite well.
Buck: Yeah you know and what’s interesting about that to me is that usually if for better or for worse we tend to I think historically look at you know recession and link that with you know A is correlated you know equity market right and we really didn’t see that and I’m just wondering you know I’m sure you can’t predict the future on this especially in the market side because you’re really focusing on GDP but it’s almost like you had a recession but you didn’t really correct your equity market so how is that you know how does that play out I mean because really then it’s just the equity market just continues to go up and it goes up at a higher rate presumably when there’s not a recession and then a recession happens and you know nothing happens to the market so you know how do you look at that?
Taylor: Yeah absolutely the first thing to note is that if you look at the correlation between the stock market and GDP historically just because there’s a reset a recession or a correction does not mean the other is going to occur so we and that’s why we like to utilize this business cycle methodology because you can very clearly see those things when they overlap so I think that’s one of the myths that needs to go away immediately is that if we have a recession the stock market’s going to correct.
Buck: Did that happen last couple times though I mean because I mean you know again I’m just basing it as a non-economist on like you know what I remember right you know is that his story when you say his story so last couple times it didn’t it did correlate though didn’t it?
Taylor: So there are times like you know before the financial crisis of 08 where we did see a correction and then back to the early 2000s recession we did but we did have market corrections in between those time frames not this last 10 years but earlier in the in those previous two decades where the market’s correct and GDP did not have a recession.
Buck: Got it well anyway yeah so I did interrupt you there but go ahead we were talking about whatever I’d asked you.
Taylor: Sure yeah so ultimately really what happened during this recession is because of the money supply and the action that the fed was continuing to take by pumping money into the markets we saw that money supply keep the stock market elevated. Now obviously it seems with the market being overpriced that we are in a bubble so I think that where we’re going with this is when does that bubble ultimately burst and so we look at when the next business cycle downturn for the economy is likely to occur the next business cycle downturn for us is in late 22 early 2023 in terms of the next cyclical low point we’ll experience. So given that we just passed through another extraordinary stimulus bill, it’s likely the stock market will continue to perform quite well but as we look out to that next downturn which again I don’t want to make it sound like a recession but when the rates have changed peak and slow down in 2023 for GDP that could be a time that we’re watching for that potential correction in the stock market now again I’m not a financial advisor based on what I’m saying but with again I think it’s important to note that as long as that money supply stays relatively high it’s likely equities do quite well so I think one metric people should pay attention to is when we start to see that money supply decline significantly and that’s likely to be a year or two down the road.
Buck: Yeah makes sense did anything about this pandemic you know economy and what came through from it surprised you guys over at ITR
Taylor: Sure did I think the biggest one for us was the inverse relationship that developed with disposable personal income and GDP so if you look at GDP and disposable personal income we call it dpi historically they correlate with one another so when we’re in a recession disposable personal income contracts as well what we saw in this in the pandemic was the exact opposite which is where you know GDP declined but savings rates and disposable personal income actually improve compared to one because you couldn’t go out and spend it right I do think it’s important to note that there’s likely an imbalance between some of the the lower wage income individuals and in the higher income you know I think of what I use myself as an example all the time I’m you know a white-collar individual through and through and really all that changed for me as I was traveling less but and saving money behind the desk so I think there’s a lot of people like me out there and like many other people I actually decided to build a home throughout the pandemic
Buck: There you go and then and then the other element of the other side effect of that with you know household you know income reserves going up is further stimulus to the economy when you know when things open up right
Taylor: Yeah exactly you know the consumer is such an important part of our economy especially talking GDP you know two-thirds of GDP is personal consumption at the end of the day so coming out of this recession will likely get back to those pre recession levels quicker than we did coming out of historical recessions like oh 809 because that consumer is so strong right now
Buck: So you know along that line so what is next you do you guys look at right now what are you looking at for the US economy obviously you’ve alluded to it a little bit but you know obviously those who predicted a v-shape recovery a year ago were you know they were off they I mean things kind of went up at least in the markets but not a certainly not a v-shaped recovery in GDP now I mean I guess we’re shooting for a u-shape is that what we’re gonna see as vaccinations take foot and things normalize I mean are you or what kind of GDP growth are you thinking about you know before this late 2022 potential slowdown?
Taylor: Yeah so a couple of points that I’ll make here. First our GDP forecast year over year for the end of this year for three percent growth so we do expect 2021 to be up three percent compared to 2020. that growth rate stays positive through 2022. So 2022 we have 2.5 before it slows down to about 1.7 by 2023. So that is that slow down that I was talking about but still three years of very attractive GDP growth right I think it’s important to note that we expect the full recovery that’s what economists like to talk about right when will we see a new record high in GDP and recover from the pandemic from our perspective that’s mid-2022. So we do have some more I guess growth ahead of us but it’s going to take us a while to get back to where we were before the pandemic actually occurred with the peak in mid-2022. So peaking the growth rates yeah so growth rates will slow down but GDP for example by the end of 2022 we’re expecting about 19.4 in terms of the size trillion dollars for in terms of GDP 2023 it’ll grow to 19.7 19.8 but the pace of growth will slow down.
Buck: Got it so you know what I’ve always found compelling is when the first time the Beaulieu brothers I was ever exposed to them the guys who are basically the that you know I guess the chief economist the brothers they’re twins and the first time I met one of them I was at a Vistage meeting at my house in the northern suburbs of Chicago and what I found really compelling was this idea that you know about the roaring 20s and then the depression that ensues in the 30s obviously that whole thing you know was without knowing about sort of these verbal black swan events let’s talk about the 20s is it still a roaring 20s ahead has that prediction changed at all after the whole covid fiasco?
Taylor: No it hasn’t at all and we still expect the 2020 decade to be one that symbolizes growth really in its entirety we do anticipate that we’ll have a bump in the road in 2025 2026 but it’ll be a very mild recession much more mild than what we certainly experienced this last year and that’s normal for business cycles so that’s part of normality but the trend over the 2020s will be generally up in I think the big winners of the 2020s is the equity market in real estate here in the united states in particular
Buck: And then obviously you have on the other end of that you have you know the depression. Talk about what goes into that why 2030s enter in and has that target changed it all because I remember talking to Brian Beaulieu like two years ago now at least and you know a lot of the message I took home on that was that it’s 20 30 because that’s you know that approximates the demographic cliff with the boomers along with the confluence of a lot of debt and that kind of thing now obviously the level of debt has significantly increased because of the pandemic does that change the timeline for any of this whether it’s you know roaring 20s the end of the roaring 20s into the depression or whether is it the same?
Taylor: It is the same really the way we view the increased levels of debt is just more support for this really coming to fruition for us. So for you know in inside of ITR we’re sort of jumping for joy to watch this happen because that means we’re more likely right right obviously not something we’re rooting for overall but that’s the way we viewed so the concept around the 2030 great depression is that right we we’re going to see higher levels of debt we’re going to see higher levels of inflation as we approach the second half of the decade and that’s really the concern when we talk about the debt levels because I think there’s a lot of modern monetary theorists out there right now that say well it doesn’t really matter the size of the debt as long as we can keep inflation low which I don’t know if I 100% subscribe to that but I can understand the thought process the the concern is that inflation is not going to stay this low especially with the demand pull on this next decade so as the inflation rises interest rates rise all of a sudden our debt becomes more costly to us so that’s that factor and then on top of that we have this demographic issue like you you mentioned which is that the baby boomer generation is supposed to is likely to be in the later years of their life at that point and what comes with that is higher health care costs and increased social security payouts
Buck: And they’re not working, right?
Taylor: Exactly and the other problem is a lot of the wealth that they’re sitting on they’re not spending they’re actually holding on to it so and this isn’t just a US problem you know China japan all have similar demographic issues certainly europe as well so it is expected to be a worldwide phenomenon where these demographics align up with very high levels of debt again not just a US problem and higher levels of inflation where we’re lifting interest rates significantly and that’s and then we also have to think as a result of all this happening you lose confidence in your in the global currency which of course is our us dollar still and as you see investors pull back from that due to concerns with what’s going on in the US that ultimately triggers this right and that target again is it’s 20 30 right on the I mean not I’m not saying that that’s exactly when it’s going to happen but that’s the projection is 23. everyone always wants a day where can you say June 2nd that’s right so we say 2029 2030 is when this is expected to well the reasoning for that is there is a 10-year business cycle theory in the US economy if you look back every 10 years since world war ii the US endured some major recession you even think about now you know rewind 10 years we were in the financial crisis then the early 2000s you know the early 90s so it holds up pretty true and that’s part of the long-term business cycle theory so this recession that’s occurring in 29 2030 is normal it’s the severity that’s not normal as a result of the factors we just mentioned
Buck: I’m curious about you know when we talk about these kinds of predictions and the accuracy the other over you know since 1948 what comes to mind for me is such major changes in in the economy and you know I think about if you’re talking about you know 48 I mean and then we’ve got you know you’ve got the 70s and coming off the gold standard and you’ve got hyperinflation in the 80s and you know the cranking up at the interest rates how I mean how do you guys in ITR look at the economy do you kind of avoid some of these I mean you can’t like look for a pandemic you can’t really you know in my mind what happens in the late 20s and maybe the early 30s if what you’re talking about is true is that there’ll be some sort of potential global reset but how do you take account of all of that or do you even bother is this just kind of you know it is what it is?
Taylor: Yeah you know I think the number one question we get is are there ways that we can avoid this and I think that’s ultimately what gets at your question and from our perspective it’s too late at this point even with major you know government intervention it’s likely too late especially given how much we just increased our levels of debt you know there’s often you know people talk about cutting spending and raising taxes as two possible ways to avoid this and that’s where we have to as much as we want to ignore politics and our analysis start to consider that in the political environment that we have in the united states either of those measures are going to be incredibly challenging. I think the current administration is seeing that already with their potential tax increase that being said I do expect that we will see higher levels of taxes throughout this decade because eventually this comes to light but again ultimately it’s too late to reverse that trend at this point from our perspective and on the other concept nobody’s going to run on for president on cutting spending here in the united states
Buck: For sure and so let me ask you this because now I know my audience and everybody’s like a depression. What is a depression exactly and how is it different from a recession?
Taylor: Sure the reason we’re talking about depression is due to the length of the decline so most recessions that you look at most business cycles are typically two to three years from top to bottom of the cycle this is expected to be similar to the 1930s which is why we put the depression in there in terms of the severity because you know we do expect this to be more like a three to five-year phenomenon it will take us much longer than what we’ve seen in historical recessions to build back to those pre-recession levels so it’s really us utilizing that depression work because of this similarity between now and 1930. our IRC I believe it’s our CEO Brian who uses the quote the only difference between the 1930 depression and the 2030 depression is we’ll have an app that tells us where to get our food this time.
Buck: Oh no that’s terrible but yeah I guess that’s right yes that’s right so you know in terms of that so you’re looking at sort of essentially long-term economic you know recessionary activity you talked about the 1930s and obviously the the the depression there was really about what it was three different recessions right and in that scenario is there any way that markets stay inflated?
Taylor: From our perspective no there still are certainly financial markets that we expect to do better than others during this time the three areas we’ve identified are bonds in Australia, Switzerland and Canada those ten those money markets tend to perform quite well when the economies are in a complete catastrophe but other than that you know we really do expect this to be all-encompassing you know I think healthcare will continue to do quite well during this time because of those baby boomers. So there’s segments that we can look at for investment opportunities but this is very much stock market correction housing market correction GDP recession that we’re talking about.
Buck: So tell me one last thing I want to ask about is you know we one of the reasons I really like having representatives from ITR on is that you guys tend to tell us things that others aren’t telling us what’s the difference in terms of how ITR looks at economics versus others?
Taylor: I think really it’s understanding the phases of the business cycle and that’s what we have consultative programs with our clients and that’s really what we work with all the executive teams on is planning a business cycle ahead. So for us 2021 is you know we’re our plans are set in stone with our clients for 2021 we’re talking 22/23 at this point 2021’s already gone by from our perspective if you’re planning for 21 now you’re way too late so I think that that’s very beneficial the other in it’s the way that we look at the different business cycles so we can tell you know our clients which areas that we see significant opportunity on where to focus their time their energy their resources that others don’t and I think there’s a few important ones that are coming up in the near term and then certainly in the longer term the first thing to consider is you know the economy is recovering we keep talking about that but if you’re in the commercial construction space this is not going to be a fun year for you and that’s different from what I’ve seen in other firms forecasting. So if you’re a hospital construction medical construction office building construction all of those areas are projected to have very negative years this year the only really bright spot we see is warehouse construction because of e-commerce. So that’s been different from a lot of what I’ve been seeing out there the I guess the other thing that I would push people towards is now is a great time for MA and that’s another thing we identify by the position in the business cycle we are at the low point of the business cycle and we have growth ahead of us for the next three to five years really until 2025. So what are you doing to invest in this growth is that cap expenditures hiring more people buying other businesses we ask our clients all the time what do you wish you would have done in 08/09 that you can do now and the number one answer is always buy more businesses and so I think it’s important that we look at this decade in a similar light to the past one which is we have this entire decade of growth ahead of us to prepare for or to prepare for a significant collapse at the end so we really need to do everything we can to take advantage especially this first half in order to prepare for the second half and look at assets that are tied to inflation that’s the bright spot
Buck: Buy as many businesses and real estate as you can now and sell everything in 2029.
Taylor: yeah maybe a little earlier I’d say 2025 ish would be a good time to sell so you can still get those residuals for a few years.
Buck: Wery good well tell us a little bit more about how ITR works how people can get involved I know we’ve you know there’s a newsletter you know our my audience is a lot of you know business owners and you know professionals who are interested in the economy how can people get involved
Taylor: Absolutely so we characterize our services in the three different buckets the first I think will be very useful to your listeners which is our subscription which is our trends report that we have numerous different economic forecasts that we’ve talked about today we have construction manufacturing financial and core sections. So there’s over 30 forecasts and there’s just a great way to stay up with us month to month. We also are on every social media Linkedin, Twitter, we have our own TrendsTalk podcast where we just have a short podcast about current events so that’s a great way to stay up with us but we also have the ability to forecast companies’ data. So we’re not just vertical market forecasters we’ll actually forecast your company three years into the future as well which I know can be really helpful for planning. And then of course we have keynote speaking events if you have a group that’s interested in hearing what we have to say about this next decade that’s another great way to utilize us as well
Buck: Yep and we actually had one of your colleagues out to the last live event that we had so that was fun. What was the name of the podcast again? Just because we have a lot of podcast listeners.
Taylor: Sure it’s called TrendsTalk you can find it on whatever platform you listen to but yeah just short five to six minute podcast for the busy person that wants a quick update on what current events going on that week
Buck: That’s TrendsTalk and this is very good and this is Taylor St. Germain. Taylor thanks so much for being on Wealth Formula Podcast.
Taylor: Thanks so much for having me. Really appreciate it.
Buck: We’ll be right back.