2025 Economic Outlook | Rob Kaplan, Vice Chairman of Goldman Sachs | January 21, 2025“Let's produce more. Let's allow pipelines. Let's make permitting easier. Let's make it easier to run a refinery. Let's improve the whole U.S. ecosystem. And I think it'll ensure that we don't do this transition on the backs of low, moderate-income families.”“2025 Economic Outlook” Rob Kaplan, Vice Chairman of Goldman Sachs, provides a 2025 forecast for the U.S. economy and the financial markets, including the impact of tariffs, before a January 21, 2025 meeting of The Economic Club of Florida.
Show notesMr. Kaplan discussed the economy of the past few years, what he thinks the future might bring, and how Florida is one of the states leading the way. “The economy over the last four years,” he said, “whether we like it or not, has been government spending led. If you go back to 2019, net debt of the U.S. government divided by GDP, was about in the mid-70s. Today we're pushing up near 100% debt to GDP.” Part of the problem was that COVID happened. The government estimated that the economy would lose $2-trillion, so Congress passed a bill to fill that gap called the Cares Act. Mr. Kaplan said the Federal Reserve printed every dollar of that Act. Because, during the lockdown, spending went up but services did not, 2020 was the first recession in modern history where GDP went down while consumer spending went up. “I would argue that if the excess fiscal spending stopped right there, I don't think we would have had the extent of the inflation issues that we've ultimately had,” he said. However, the Biden administration passed new legislation – the American Rescue Act. “In 2019, we ran a budget deficit in the United States of around 4% of GDP. In 2020, we ran a budget deficit around 15% of GDP, historically high. What people don't focus on is, in 2021 we ran another monster deficit, around 12% or 13% of GDP. Historic. It was not to fill the COVID gap. The American rescue Act money got spent in 2021, 22, 23, and 24.” Following that was passage of the Inflation Reduction Act, for another trillion dollars. Kaplan said that fostered a whole range of public-private partnerships all through the United States. About 25% of the money is from the government and 75% private, but he said the projects would not happen without the government money. He cited, as examples:
These projects cause disruption in the workforce. “When you announce a project like that (Kansas battery plant), every restaurant in the state tells me they can't find workers. Every service sector establishment just lost workers because they're going to make $35-$37.50 an hour at the lithium battery plant in DeSoto, Kansas. This is going on all through the country, and it’s not done yet.” Mr. Kaplan said the Fed probably should have stopped buying bonds in 2021, but waited until mid-2022. The net effect was that inflation got away from the regulators. That inflation has had drastically different effects on two groups of Americans – each of about 60-70 million people. The first group, which makes around $55,000 a year or less, has lost purchasing power. “This loss of purchasing power that we had in 2021, 22, 23, and 24 has meant they can't make ends meet today. So, $55,000 a year may sound like a lot. That's $25 plus an hour. They cannot make ends meet. They have to often work a second job in at-risk areas.” Kaplan says kids are dropping out of high school to go to work to help their families. The second group are homeowners with fixed mortgages and financial assets. “This period has been pretty good and those folks are spending. Yes, there's inflation for them, but their earnings growth has far outstripped it. They have been insulated from interest rate increases because their mortgage is fixed.” He said the disparity is why you see such mixed consumer reports and so much dissatisfaction with the economy. Kaplan said the government is having trouble selling Treasury securities. While investors, both here and abroad, want to invest in the U.S., they are afraid of longer-term bonds, which he refers to as duration. He points to Silicon Vally Bank which went under in 2023. During low interest rates, the bank bought long term bonds, but when the rates went up, the bond prices fell and eroded the value of the bank’s bond folio. As a result, people will buy five-year bonds, but not 20- or 30-year bonds. One big structural factor in the economy is the U.S. labor force, which is decelerating because of aging. Kaplan said that’s important, because he defines GDP growth as growth in the labor force plus growth in productivity. Only immigration, he said, has grown the labor force. “That's actually helped GDP growth. It's helped rebalance the workforce. It's helped the Fed get more sanguine about supply and demand of workers. But that phase is going to end. We are now officially sealing the border. What’s going to happen to labor force growth?” He then went on to discuss where the economy is going. He thinks the government will:
“Will we deport people who are not criminals? Will we ramp up legal immigration?” he posed to the Economic Club members. “There’s going to be a big effort to bend the deficit down from 6-and-a-half or 7 percent. You don’t need to get down to three or four (percent), but do need to show we’re headed in the right direction. It’s going to be very painful and challenging,” he argued. He said that Congress must cut spending, and that private philanthropists will have to step in. The Inflation Reduction Act will need to be slowed or repurposed to get the debt situation under control. Then there’s the question of tariffs. “Are you going to use tariffs as a negotiating lever? Are you going to use it because you think it generates tax revenue? Are you going to use it because you want to induce more manufacturing here, rather than importing?” he offered. Mr. Kaplan pointed out that 40% of imports from Mexico are intermediate goods, not finished products. American CEOs, he said, can operate plants in the U.S. only because they can import the cheaper intermediate goods from Mexico. “If you put tariffs on China and Mexico and Canada, most CEOs are not sure what they’re going to do,” Kaplan said. “They’re nervous about locating a plant here that’s 100% U.S. because it’s too expensive and not globally competitive.” Mr. Kaplan thinks an open North American strategy would serve the U.S. economy well. He also predicts the new Donald Trump administration will produce more fossil fuel because we don’t yet have enough wind and solar, nor good enough battery storage capability. “Let's produce more. Let's allow pipelines. Let's make permitting easier. Let's make it easier to run a refinery. Let's improve the whole U.S. ecosystem. And I think it'll ensure that we don't do this transition on the backs of low, moderate-income families, this first group that can't make ends meet,” he argued. Mr. Kaplan said that Florida, Texas and a few other states are doing much better because people are moving into those states. Workforce growth here in Florida is very good. As long as the national workforce growth is sluggish, Florida will outperform everyone else. He also addressed the economic effects of Artificial Intelligence (AI). “There are a small number of companies who know exactly how to spend on AI and exactly which use cases are going to work, but there are not that many of them. For the rest of us, and I include my own firm, we know we have to do it. We're going to do it. It's probably going to lower margins in the short run, and we'll know 10 years from now, or five years from now, which use cases worked and which didn't. So, I would say my prediction is, overall, we look back 10 years from now, we're going to say, boy, AI just made an enormous improvement in our productivity, but businesses are going to have a hard time predicting exactly which one works.” He ended his presentation to the Economic Club by addressing China, which he said is in worse shape than the U.S. It has demographic labor force problems, is highly leveraged, “and they’re not the magnet for talent that we are.” (You can also view the entire Club meeting on YouTube.) Links and Resources Mentioned in this Episode
Date of recording January 21, 2025 |