The Dividend Cafe - Economic Forecasting for Non-Astrologers

Episode Date: August 8, 2025

Today's Post - https://bahnsen.co/4lnsaSr The Futility of Economic Forecasting and the Current State of the Economy In this week's Dividend Cafe, host David Bahnsen, Managing Partner and Chief Investment Officer at The Bahnsen Group, discusses the limitations and challenges of economic forecasting, especially for investors. He underscores the difficulty of making accurate economic predictions and linking them to investment outcomes. Bahnsen critiques economic forecasting through various perspectives, including a quote from economist John Kenneth Galbraith, and highlights the complexities of interpreting present economic conditions, such as jobs data, trade levels, and corporate profits. The discussion touches on current challenges such as the impact of trade tariffs and the mixed signals from various economic indicators. Bahnsen aims to provide a clearer understanding of the present economic landscape without making bold predictions about the future. 00:00 Introduction to Dividend Cafe 00:38 The Futility of Economic Forecasting 03:13 Current Economic Conditions 07:49 The Jobs Market Analysis 14:30 Trade and Tariff Impacts 21:18 Conclusion and Final Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividing Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to this Friday's Dividend Cafe. I am your host, David Bonson, the managing partner, chief investment officer, here at the Bonson Group. And I want to discuss today the economy, which is kind of, in a sense, what we discuss all the time. Dividend Cafe. So you might be thinking, why are we doing a whole Dividendant Cafe to talk about the economy if we're pretty regularly looking at various macroeconomic impact conditions, circumstances, forecasts, what have you? Well, let me first start with what we're not doing

in the Dividend Cafe today and something that I am very critical of anyone doing. And that is actually the overall world of economic forecasting. As much as I talk about macroeconomics in Diven Cafe, as much as the study of economics is largely connected to the great passions of my life, I do not believe that economic forecasting is a particularly useful thing to do for anyone, but especially for investors. And before you scratch your head to try to figure out what I'm getting at, there's a long tradition of self-aware economists denigrating the concept of economic forecasting. And in today's written dividend cafe.com, I start off with a quote from one of my least favorite 20th century economist John Kenneth Galbraith, who is very well-known,

famous, highly regarded, and for a variety of reasons, someone philosophically I'm not aligned with in economic worldview, who famously said that economic forecast. existed to make astrology look respectable. So sort of a self-deprecating humorous comment on the challenges of economic forecasting. And yet this is nothing new for me in the Dividend Cafe to point out, not only that I find forecasting about the future difficult and that most people are not very good at it, But in the investment world itself, I find the notion of attaching an investment narrative a thesis to a particular forward-looking view of something particular in the economy

to be doubly problematic. And what I mean by doubly is that first one has to be right on an economic forecast of some particularity and nuance. And then they have to attach an investment conclusion to that that also proves to be well-founded. And I not only think the first is very difficult, but the second is by no means a logical outflow of the first. It's entirely possible that one could say X will happen in the economy, and X will happen in the economy, and that what one does about X with action Y will not prove to be a profitable decision. So there is this sense in which

economic forecasting as a means of investment planning is counterproductive, dangerous, and bizarre. The Divencafe exists to provide information perspective analysis along the lines of public policy, financial markets, and of course, there is a sense in which the economy is a part of it. But there is a very big difference between saying, here is what is going on in the economy and here is what is going to go on in the economy. And if you believe that it is difficult to come to consensus about what is happening in the economy now, as I'm about to establish, has clearly become difficult, meaning not forecasting

the future, but merely describing what actually is right now in the present, then how someone could then go on to believe that there is great merit and high probability of success. in forecasting the future is beyond me. We are literally an environment right now where the present tense interpretations are impossible to form a consensus on. Part of that is very likely related to the political tribalism of our day, that people are seeking conclusions that are convenient with their own analysis of the political world and their political aspirations and hopes and beliefs, but also a lot of it is that there is difficulty in interpreting data, and that is when the data is right in front of us, let alone forward-looking.

So I'm going to talk about some of that today, not for the purpose of asking where the economy is going, but to try to formulate a little bit of clarity just where we are now. And out of that establishment, establishing a better view of where we are now, a more sober assessment, then being able to make the case even more persuasively for why firm, bold predictions about the future become all the more troublesome. I say this in the context of what I tried to lay out last week in the Dividy Cafe about why I believe the tariff and trade policies being announced over the last several months and will continue to be announced need to have some barometer by which we can look at down the line to establish a read on how they have done, what the impact

has been. And I suggested then a week ago that total trade flows will be very, very important and because of what they would do to total capital flows, which will really dictate a lot of the conditions of liquidity, which have a lot to do with financial markets, that essentially our current account deficit has been funded by a high foreign savings, foreign investment into our country, which has been very useful in productivity and investment into productivity. And that should the current tariff policies erode demand and erode profits to a point where then we get disinflationary forces, such as declined labor, decline production, decline capital investment, that then leads to declining trade, which leads to declining capital flows,

that we will create a sort of knock-on effect. These are basically, not the first order effects. That's why I said six, 12, or 18 months. Everyone will be looking to next week whether or not, you know, coffee prices went up or chocolate prices went down. And others had a silly analysis to say, oh, look, the president's a winner or, oh, look, the president's a loser. It is unhelpful barometer to assess the tariffs economically. What I'm suggesting is something that will take longer, but nevertheless be more substantive and analyzing the impact to economic growth, be it positive or negative. So with that on the table, it does seem to me to be worthwhile to ask where we stand now

as we go about assessing what these impacts will be into the future. In other words, is this ongoing tension, I refer to, of potentially demand erosion from tariff impacts that bleeds into trade and capital flows, is that starting from a position of strength, whether it's a margin for error, or is it starting from a position of vulnerability? And what I have believed, the area by which we have assumed there was a pretty strong foundation in the economy that was leading to other strong metrics too has been the jobs market. And out of what we understand our jobs market to be, we get an understanding of personal income, which, of course, is a very key factor to personal

savings, to retail spending, to consumption, of course. But out of personal income, we also get gross domestic income and their national income and metrics that are obviously vital ingredients in the way that we formulate economic growth. But at the base of a lot of this, and this is something I conversed with Dr. Lacey Hunt about at great length this week. And Lacey is an economist who I hold in very high regard. This is apolitical assessment, but his sobering view is that there is a vulnerability in the jobs data now that does call into question our view of how strong some of these other components that are stood up by the jobs data may be, and that that becomes relevant when we

think about what the base effect is going forward into a new Trumpian tariff world. Now, out of this jobs issue, what we have basically understood for some time, time was we have an unemployment rate around 4%, which is really low. It's not the 3.4% that we had a couple years ago, but it is historically quite low, and it hasn't moved higher. And despite a period of pretty severe Fed tightening, it's hung in there in these low fours. Now, the revisions last week of May and June by 258,000 jobs, and a July report, what I believe was 73,000 jobs, are very, very low, very muted, are problematic. But you have to look at it and then say, okay, well, what else do we know?

And what Lacey is pointing out about the vulnerability in the BLS data is, look, there's plenty of anecdotal support for those numbers being weak, those numbers softening. And the ADP numbers have gone down by way of averages, the private payrolls, the household survey has been largely disconnected from Establishment survey, not in a positive way. The U6, the so-called under-employment rate, is creeped up from what I think was about 6.1 or 6.2% to 7.9, that is, including those who are working part-time for economic reasons. So there's these various anecdotal factors, and I have a chart of the U6 under employment rate in dividend cafe.com. You could look at it, and you could either be a half-full or half-glass, a half-empty glass kind of person. But there's some data there that's concerning regardless.

But I think that on the other side of it has been the data point that I've leaned on for some time, which is the weekly initial jobless claims that have just frankly not moved much higher. They've stayed somewhere between 210 and 240,000 for three, three and a half years. It's a long time. It's been a couple times it bled a little above 240 and a couple times it bled a little below 210, but it has stayed in that range, and that has not indicated to me growing unemployment, growing terminations that are not resulting in replaced jobs, which, of course, pushes unemployment higher substantively.

The area that I'm questioning now, and this is something that Lacey and I discussed this week, is the significant increase in long-term unemployment, meaning those have been unemployed for over 26 weeks, so they no longer on the unemployment rolls. That number has gone up by 380,000 since the beginning of the year, but the continuing claims, not the initial job was claims, with those still collecting unemployment within the first 26 weeks, there was an additional $150,000 since the beginning of the year. So you're talking about somewhere in the range of over 500,000 pretty extensive unemployment period, new this year. And that's very hard for me to square with only 200,000 initial jobless claims. Now, one theory, this is Lacey's theory. I don't

know that he's positing it as the case, but at least a potential explanation is that there's a backlog of states dealing with unemployment claims because of fraud prevention after had been a big increase in fraud post-COVID. I think another possibility is gig economy effect as well as the fact that there may be a lot of decline in small business employment where there wasn't necessarily immediate initial claims resulting. Either way, it seems to me that there is reason to not hold too tightly to the initial jobless claims, as reason to believe that the jobs market is as good as we had hoped. I don't believe that any of this lends itself to some view that the labor markets totally disintegrated,

nor that it is very, very strong. I think that essentially the hyper-rosy view or the hyper-catastrophic view are both a little outside the dataset right now, but somewhere between decent and, vulnerable is the right read. And I want to talk more about this. But again, I think that you probably have a small versus big business bifurcation that conditions are worse than small business than big. You probably have a delta between those that are looking for jobs. You know, the college graduate employment challenges have increased where I still think people that have been tenured in a job per while are mostly holding on to it. What you have

have is a pretty low firing rate, which is good, but a pretty low hiring rate, which is bad. And that's a nuanced view that is not good, but it is not catastrophic, but it puts us in a little weaker base effect than maybe we had hoped. Then you look to the trade levels. You see exports down 1.3 billion last month, but imports down 12.8 billion. And I recognize there was a lot of front running of imports earlier. It's going to distort the data. But when I see less oil, less autos, less pharmaceuticals being imported, less metal fabrications being exported, none of it is good. And I see employment in our goods producing businesses go down. So people cannot say, well, hey, this is good. Imports are dropping because it means we're ramping up more domestic

manufacturing, more domestic hiring. We're simply not doing that. And I think, think that we're importing more from Mexico, Canada, Vietnam, Korea over the last five to 10 years and little less from China, although a lot of the China imports are likely being routed through other countries. But my point being that there is this sort of weakness in trade, but then that's going into a period where I believe the tariff rate is going to end up settling somewhere around 15%. You know, Lacey makes a case using a mix. of different data points that it could be closer to 20%, the Yale Budget Lab. This week came out with the report, estimating it'll go to 18% and then settle somewhere

around 17 after consumption shifts adjust. Strategist research thinks it'll be more like 14 to 15%. So regardless of what range you end up in mid-teens, mid, maybe even upper teens, right now it's at about 9% because a lot of these tariffs are newly announced and there have been a lot of waivers over the summer, a lot hadn't kicked in yet, but that's coming off of a much, much lower number, something that had been around 3%. So there is a significant cost to the economy about to be paid by U.S. importers that will be added to the base effect of what seems right now to be a challenging trade environment. So when you take the murky picture of jobs,

the murky picture of trade, and then you look at where we're going forward, that base effect becomes relevant. You want as strong of a current place as possible when you look forward to where some of these challenging things may happen. Now, is it all negative? Of course not. For one thing, we know there's massive investment right now going on in high tech, you know, AI-oriented capital expenditures. We know that the Big Beautiful Bill Act provided a really good pro-growth supply side incentive for businesses to invest, whether it be the bonus depreciation, the benefits in putting productive property to work, or in buying inventories, buying factories, buying equipment, capital investment is pro-growth. The problem as I see it is that there's an incentive in one

end of the pool and water draining at the other end of the pool. What I'm not stating is, and here's how that will play out. We will have some complicated algebraic formula that tells you we're going to increase by five over here, but decrease by 6.3 over here, and it will be a negative, this and that. Anyone who does that type of thing, they can model whatever they want. It's all, you know what. It's just incalculable. And yet, these are the kind of factors or considerations without attaching a prediction and numbers to them that I believe are really going to drive things. This is also with, of course, an overhang of significant federal debt. That's a more secular cause of stagnation, but it isn't like we have all of a sudden a balanced budget that is going to drive economic growth, all the late 90s.

I actually did a podcast with former House Speaker Newt Gingrich this week where I said, look, when you guys balanced the budget in 98, 99, 2000, and the internet was kicking around, you know, we were at 50% debt to GDP and then got the boost of Internet. Right now, maybe there's a boost of AI coming. There's certainly a lot of CAPEX coming into it, but we're at over 100% debt to GDP. So it's not the same base effect. It's not the same milieu in which positive pro-growth things are happening, and I think that that matters. So I bring all this up to say that an honest assessment for people trying to think out

six, 12, 18 months, not to markets. but to the economic landscape. An honest assessment says we're in a less positive base than we thought we were with jobs, trade, capital goods, but there are positives too and some factors that can make things better than we thought, but there is this uncertainty around trade tariffs that's going to play itself out in terms of trade flows, demand erosion, and impact on corporate profits. And that, I guess, is where I'll go to get to my conclusion, that the silliest narrative I'm hearing out there today is, oh, don't worry, terrorists will not be inflationary. That's fine because companies will eat them. As if you think erosion of corporate profits is what this economy needs right now with a challenging jobs environment and challenging trade environment, challenging capital investment environment. You are not going to, to get the job growth, wage growth, and durable goods and so forth you need to drive economic

growth and productivity if we're consciously putting downward pressure on corporate profits and celebrating it. So corporate profits are the mother's milk of economic growth and certainly of markets. This is the big question in front of us. I will defer to last week's Diven Cafe for more specificity about what you. this means in the context of the trade and tariff policies. But what I will say to you is a present tense comment, not a futuristic one, is that the last thing this economy needs is any jeopardizing of robust corporate profits. And I think that when you are in a position

of tremendous excessive strength in your labor market, you have more slack. But when we're in the type of economy that we're seeing right now present tense, no forecast required. I think that becomes the challenge, putting undue pressure on what already is itself fueling pressure. I'm going to leave it there for the week. There's a lot of charts at divinyacethae.com. I encourage you to check it out. I find this message to be entirely apolitical, and I believe it's the only way to go about delivering it. I do not offer a forecast right now that this economy is about to fall apart. I do not have any way to say that, believe that, know that.

But nor do I say, oh, boy, things are about to be rolling on all cylinders. There are push-pull effects right now that as long as I have to humbly come tell you, I don't know how they're going to play out, I may as well do my best to at least tell you where I think things stand now. That's what we've tried to do today in the Dividon Cafe. Thank you for listening, reading, and watching the Dividon Cafe. I look forward to being with you again on Monday. Have a wonderful week.

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