Kevin Hassett: Economic Growth Going “According To Plan”

Kevin Hassett: Economic Growth Going “According To Plan”

CNBC Transcript: Chairman of the Council of Economic Advisers Kevin Hassett Speaks with CNBC’s Steve Liesman Today

WHEN: Today, Wednesday, December 12, 2018

WHERE: CNBC’s “Squawk Alley

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The following is the unofficial transcript of a CNBC interview with Chairman of the Council of Economic Advisers Kevin Hassett and CNBC’s Steve Liesman on CNBC’s “Squawk Alley” (M-F 11AM – 12PM) today, Wednesday, December 12th. The following is a link to video of the interview on

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Economic growth is going 'according to plan', says Kevin Hassett

CARL QUINTANILLA: Meantime ahead of next week’s Fed meeting, the president again reiterating his desire to have the Fed not raise rates. This time in an interview with Reuters saying the move would be, quote, “foolish.” Our Steve Liesman is here at post 9 and he has brought a special guest, the Chairman of the Council of Economic Advisers, Kevin Hassett. Steve.

STEVE LIESMAN: Carl, thanks very much. Let’s bring Kevin right in. Kevin, did the President know you were coming on the big show this morning so that you’d have to answer for his comments on the Fed?

KEVIN HASSETT: I spent the whole break thinking about “Squawk Valley.” You know, you could put Liesman in a cowboy hat and we could call you, “Hoss.” You’d look so much better.

STEVE LIESMAN: Alright. We don’t have time to fool around. Do you think --

KEVIN HASSETT: I know. We respect the independent of the Fed. But the President speaks his mind, you know. But of course we respect the independence of the Fed, that’s why we appointed such great independent guys.

STEVE LIESMAN: Alright, I’m going move off of the “Should he be doing it?” to whether or not you think he’s right. You have wages going up, 3.2%. You’re going to crow in just a minute, and I’m going to let you crow, about the 3% growth this year. Do you still think we should have a 0 real Fed funds rate?

KEVIN HASSETT: You know, I again, I don’t want to get out in front in giving the Fed advice. The thing that I can say is that when you and I were talking about the tax cuts last year at this time, I said if we passed them, we’d get a capital spending boom, and that a capital spending boom puts downward pressure on prices because it’s a supply shift. Right? And that’s exactly what we’re seeing in the data. So we’ve had a capital spending boom for independent business, is up 16% this year. If you give us the fourth quarter, which was related to the tax cuts, we’re up about 10% nationwide. And that’s the kind of thing that puts downward pressure on prices. And so I think the Keynesians thought that if we got 3% growth this year, then you’d get all this Phillips Curve stuff and inflation would accelerate. It’s clear that we’ve had the growth, with inflation actually maybe in the last three months decelerating, which is what our model said would happen. So it’s going really according to plan for us.

STEVE LIESMAN: Kevin, let’s talk about your model, which -- the 3% growth is a given this year. But there’s so many doubters about next year. The Street doesn’t appear to believe you. The Fed doesn’t believe you. The World Bank, everybody is below that, some more substantially than others. Do they all have it wrong or is there some other thing they’re missing here?

KEVIN HASSETT: Yeah, it’s just like -- it’s just like last year. And there are really two factors I want to point to. The first is that there has this capital spending boom which you’ve talked about, we’ve talked about. And the thing about capital spending, it gives to GDP twice. You get it when you give to the machine and then the machine starts to have output. And so we’re going to get that output next year. The second things is the capital spending boom you might have noticed in the third quarter it kind of leveled off a little bit. We were looking at the data a lot to try to figure out what was going on. And if you look there were a lot of capacity utilization problems. So, for example, in computers and peripherals, capacity utilization was almost 90% and you know, that’s not a sustainable rate, that’s way above normal capacity. So those guys have to buy machines, thought. That’s the second part.

STEVE LIESMAN: I’ve got to cut you off only because the graphics being put up are not working out with what you’re saying. What we’re looking at are business spending numbers year over year that are -- the growth rate is quite a bit down. And if you look at the month over month guys, which is the bar chart, it looks pretty squirrely the last three months. So it’s a little hard -- and the Street is a little pessimistic about this, quote unquote, capital spending boom that you’re counting on.

KEVIN HASSETT: You know, I’m happy to e-mail you the sources for all of this. I was referencing the GDP data mostly. But the fact is that the latest advanced herbals number, you’re right, was a surprisingly low number. And my guess is it’s going to reverse itself next month. But again, with capacity utilization so high and everything having gone up so much this year that it seems like the people making machines are going to have to buy machines themselves. So that’s going to help feed this positive cycle. And so we’re definitely going to be you know, at 3 or above 3 for next year as well.

CARL QUINTANILLA: Kevin, does it bother you that stock buybacks have been surpassing Cap Ex, or there is a certain fungibility to buyback dollars versus Cap Ex dollars?

KEVIN HASSETT: Well I think that they’re – again, two things. One thing is that there is a big stock of cash that was overseas and people can bring it home now. And when they bring the cash home, one of the things they’re doing is repurchasing shares. Now if you repurchase shares, like say Apple is a company that’s done a lot of that, then what happens is you free up capital for new innovative companies. So what you would expect to see if you think the repurchases are a good thing because they reshuffle capital to the people who need it the most is a big surge in capital spending by independent businesses. And that’s up 16% this year. So it’s all working really the way it should be.

MORGAN BRENNAN: Kevin, looking at your economic forecasts into 2019, how are you modeling for China and trade policies between the U.S. and China?

KEVIN HASSETT: That’s a great question because right now that’s one of the places where our outlook has changed a lot. The European economy is clearly slowing. I think the European economy is slowing because capital spending is on hold as people wait to see what happens with Brexit, there’s a lot of financial distress in Italy, and of course Europe exports a lot to China, which itself I think is suffering a severe slowdown right now. And so the global economic outlook is a little bit lower than we had last year. But for the U.S., we’re really humming along.

JON FORTT: Kevin, what’s your expectation on how the slowdown in the housing market, particularly when it comes to equity growth, is going to affect the economy heading into 2019 with people perhaps feeling less wealthy than they might have?

KEVIN HASSETT: Right. Well, that is one factor that we’re watching closely. You’re right, the housing market has been one of the weak spots this year. And I think that if you’re wondering about the sustainability of the boom, then the fact that we don’t have this out of control housing sector with runaway price increases should give you comfort that we don’t have to worry about our financial institutions having another housing bust. Right? Because housing is really underperforming. But I think as we move forward and incomes continue to grow, you know we’ve got real wages are growing more than 1% at an annual rate, then those higher incomes will increase housing demand. And I expect that to turn around next year.

STEVE LIESMAN: Kevin, does labor represent a constraint on growth in this economy? If you look at the participation rate, which is something, by the way, the President complained a lot about as a candidate. And he also complained about the large number of Americans, 95 or 96 million people, who were out of the workforce or not in the labor force, and that number has actually grown under the President. Is there a constraint on the extent to which this economy can grow because we don’t seem to be able to grow the labor force much more?

KEVIN HASSETT: Well, hypothetically there is, Steve, but it’s one of the things we’ve been following the closest since I’ve been here. We just Tweeted a chart at the last jobs report that’s one of the most interesting charts I’ve seen since I’ve been at CEA. And what it is is we looked at all the people who got a job in the latest month of data and then asked ourselves “What percentage of them came from out of the labor force?” And so we’re basically getting people back in – they are re-participating in society. The answer is 73.5%. And that’s the highest percentage of new jobs going to people who were previously out of the labor force that we’ve seen in U.S. history, all the way back -- as far back as we’ve calculated. So I think people are coming pack. But you’re right, if that were to slow down, that would be one reason why we’d maybe have a less rosy scenario going forward.

MORGAN BRENNAN: Kevin, you sound like a man who thinks not only are we not at full employment but maybe there’s more slack in the labor market than expected.

KEVIN HASSETT: Well I think there’s more slack because we’re seeing it – the people are coming back into the labor market. And again, remember that when we took over, everybody was extrapolating a trend of really declining labor force participant. So even leveling it off and having flat is a serious accomplishment relative to trade. But, yes, I think that there’s that and the fact we have a capital spending boom going on, which means that you don’t have to get runaway inflation even though we have had unemployment rate very low because the supply shock is putting downward pressure on prices.

STEVE LIESMAN: Kevin, I am not going to ask you if you support the administration’s trade policies here, which is what everybody always wants to ask you because we know what you said before. Here’s what I want to ask you. Do you get to tell the President that he has done so much to help business spending and capital spending with the tax cuts, but that the uncertainty created by the trade and the tariff wars are taking away from confidence. We have seen some decline in some of the CEO Confidence Surveys we’re looking at, and that one policy of the administration is working against another. Do you get to advise the president on that problem?

KEVIN HASSETT: You know, I’m not going to talk about my conversations with the President, Steve, but I can tell you that I do support his trade policy because he’s trying to push tariffs and nontariff barriers lower all around the world. The OECD did a study of what happens if we reach the long run objective with fair and reciprocal trade and it’s a big increase in global growth and a disproportionate increase in U.S. growth because we’re relatively disadvantaged in these trade deals. But I agree with you that uncertainty over our progress is something that’s clearly having an impact on market that’s why I think it’s important we move forward quickly, for example with the China deal that is on actually like a running clock right now. And I think we all recognize that if we make positive progress as we have with Korea, as we have with USMCA, as we’re doing with Europe, if we make positive progress with China, that will be very, very positive news for markets.

STEVE LIESMAN: Kevin, I always enjoy talking about the numbers with you, both in office and out of office. Thanks for being coming today.

KEVIN HASSETT: Great to be here. Thanks for having me.

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