For the 27th consecutive year, business’s brightest minds gathered in Beverly Hills in early May for the Milken Institute’s Global Conference.
But while speculation grabbed the headlines, Milken’s speakers spent much of their time obsessing over the current state of the U.S. economy. Below is a breakdown of the economic context and its key risks from business leaders, including the CEOs of Wells Fargo and Franklin Templeton.
Despite slowing growth, recession is unexpected
Contrary to the predictions of investment managers at Milken last year, the U.S. economy is still expanding. GDP growth soared in the third and fourth quarters of 2023, blowing away expectations. This, combined with a steady decline in inflation, fueled a massive market rally.
While March’s inflation numbers were strong, this nirvana story was put to the test in April when first-quarter GDP growth was weaker than expected. Meanwhile, U.S. stocks fell 4.2% last month.
But despite continuing concerns about stagflation, Milken speakers expressed overwhelming confidence in economic growth in a May 6 session called “Global Markets in Transition.”
The so-called “S-word,” as Wall Street Journal panel moderator Gerald Baker referred to it, is characterized by economic stagnation and persistently high inflation. Neither adequately explains this context: growth is slowing but not lackluster, and inflation is slowly trending down.
“What we are experiencing is not stagflation,” said Andre Estevez, chairman of Brazil-based investment bank BTG Pactual. “The United States is experiencing modest but healthy growth and inflation is slightly above target.”
Consumers drive more than two-thirds of U.S. GDP growth, so a recession is unlikely unless they drastically cut spending. McDonald’s and Starbucks’ recent earnings reports suggest consumers may be nervous, but Milken’s panelists said they saw no red flags.
Jenny Johnson, CEO of Franklin Templeton, said: “I may be in a bubble, but you get out. Every plane you take is full, restaurants are still pretty full.” , wages are still rising.”
Johnson’s upbeat sentiment was echoed by Wells Fargo’s fellow CEO Charlie Scharf.
“The economy is still very strong, consumers are still very strong, businesses are still very strong,” Scharf said. “If you look at their respective financial positions, they’re not in a great position considering everything we’ve been through, but they’re very strong and very stable.”
Scharf continued, “We’re always looking at different portfolios, looking at spending patterns, whether it’s on the credit or consumer side, and looking for weaknesses. And to find the weaknesses, we go really deep. We need to look into it, but we haven’t found it yet.” It hasn’t changed. ”
‘Unprecedented’ debt burden could ultimately lead to catastrophe
Although the U.S. economy is healthy, many business leaders expressed serious concerns about a looming long-term risk: a sharp rise in the national debt.
Uncle Sam’s losses have reached $34.7 trillion and continue to rise. While it took nearly a decade to reach the first trillion, it took just 106 days, or three and a half months, to collect the latest trillion.
Joshua Friedman, co-founder and co-CEO of investment management firm Canyon Partners, will speak on May 6th, “From Common Sense Uncommon Investors.”
“The level of U.S. deficit spending is quite unprecedented in history, especially given that the U.S. unemployment rate is less than 4%,” said Anne Walsh, chief investment officer at Guggenheim Investments. Ta. session. “We’re literally seeing levels of government spending that we haven’t seen outside of world wars.”
With debt servicing costs expected to reach tens of trillions of dollars over the next few decades, there is now significant pressure on national governments to refinance their debt.
“It’s hard to have a lot of freedom when you have inflationary, slow federal spending, low unemployment, debt that’s constantly coming due, and huge gaps in the federal balance sheet,” Friedman said. Ta.
If the U.S. doesn’t balance its budget, it will have a hard time convincing households, businesses and other countries to buy government bonds. Although it may seem unlikely now, U.S. Treasuries may eventually come to be considered risky, rather than the virtually risk-free investments they currently are.
“The dollar is the world’s reserve currency, but there are always limits to printing, even if you own a printer,” Estevez said.
However, there is a reason why the United States has not run a budget surplus for decades. Congress has been able to agree on little except that raising taxes is a non-starter, except for the very wealthy. It’s nearly impossible to get Democrats and Republicans to agree on where to rein in spending, and you can’t win by calling for spending cuts and tax increases.
Moreover, while government bonds are clearly a long-term risk, they are not a short-term priority.
“There’s a lot of agenda in Washington, and they’re reacting to things that need to be addressed in the short term,” Schaaf said. “So to stand up and say deficits are the problem we have to deal with today means someone is putting political capital into something, and that’s a very difficult thing to accomplish. It will be.”
Experts say a deep recession will occur if the U.S. debt burden becomes unsustainable. No one knows exactly when that will be, but barring some miraculous frugality on the part of Congress, that day is getting closer by the day.
“In the long run, the United States has to deal with this problem,” Johnson said. “We can’t keep spending at the rate we’re spending.”
Although far from perfect, the US remains a great place to invest
Despite the $34.7 trillion anvil hanging over the economy, Milken’s speakers broadly agreed that the United States remains the best place to invest and run companies.
“This is a combination of many things in the United States,” Estevez said. “Free markets, functioning democracy, the best education in the world, the best universities in the world, innovation, and a well-functioning capital market. When you combine all of these things, you get outperformance.”
Wells Fargo’s Scharf echoed that point, emphasizing the relatively friendly business environment.
“Look at all the positives that will come for this country going forward, whether it’s innovation, whether it’s education, whether it’s our financial system, whether it’s our markets, whether it’s the strength of our banks,” Scharf said. “And we’re starting to see the benefits of all of that coming together.”
Although the United States is in an enviable financial position, its economic strength is unparalleled, and its bonds are considered the safest in the world, and the same applies to its currency. It may not say much, but at least for now, the United States seems to be the best home in a bad region.