First Trust ROI Podcast

Ep 59 | Strider Elass | What Moved the Needle for the US Economy in 2025? | ROI Podcast

• First Trust Portfolios • Season 1 • Episode 59

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Strider Elass, Senior Economist at First Trust, joins the ROI Podcast to discuss tariff turbulence, DOGE’s spending purge, AI’s productivity potential, and what drove (and dragged) the US economy in 2025.

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Ryan:

Well, here we are as we approach the end of 2025. Thanksgiving's right around the corner, and the economy uh seems like maybe it's outperformed compared to what some of our expectations were coming into this year. The stock market has had some new volatility that's been introduced. We've got tariff policies that have caused tremendous amounts of volatility in the market, and in some of the economic data, we're looking at government shutdowns that were just recently relaxed. People are focused on artificial intelligence. There's a lot going on right now. In today's episode of the First Trust ROI Podcast, I'm joined by senior economist Strider Las to help me make sense of some of what's happening, especially with respect to the U.S. economy. Thanks for joining us on this episode of the First Trust ROI Podcast. So, Strider, this is, I think, the official first time that we've done the podcast virtually. And I'm not sure how I feel about it, to be honest. I I really enjoy a face-to-face conversation, so we will definitely have you on again where we can do this face-to-face. Um, but at the same time, you know, you're on the West Coast, I'm on the East Coast. Um in this particular instance, I was just glad to get you uh on the podcast. So um forgive me for uh forcing this to be virtual, but uh we'll do it in person next time.

Strider:

Oh, I'm so glad it worked out. It's great to be with you. I I would rather be with you in person too. It's always fun. But uh virtual, we'll do it.

Ryan:

We're recording this right before Thanksgiving. Um we've all got a lot to be thankful for. Um and we're also recording at post NVIDIA earnings, which um, you know, it seems like Jensen Wang has a lot to be thankful for as well, um, although we've we've had a lot of volatility. So I want to talk about a lot of the things that are happening around the world, including AI. Um, but one of the things that just ended as we're recording this, maybe within the last week, was the government shutdown. And uh I've been wondering about this from an economist standpoint. Um how is this just one of those narratives that everyone thinks is bigger than it is? I know your your data flow is less because of um the government shutdown, but you know, how how does that impact your ability as an economist to understand what's going on in the economy? Does it have a big impact or a small impact? Um, maybe you could talk about that for a moment.

Strider:

Sure. Yeah, I mean, with with the government shutdown, a lot of obviously the government data stopped. The Fed was still providing some data, and then there's a lot of other private industries that provide data as well. So you can still get a general idea of where the economy is heading, where things are going. I would say if the government shutdown lasted six months or a year and we weren't getting any of that data, which everybody was so used to getting for uh years and years and years and years and years, uh that would start to put a wrench in things in a big way. But uh it made things a little bit more interesting, uh, to say the least. But you can get a general idea of where things are, and and now since the government's reopened, we are starting to get some reports that weren't released that have just been released uh late, and some just won't even get released ever, uh, which is is kind of interesting in itself. But in terms of where the economy is today relative to where it was before the government shutdown, I don't think things look really too different from the data that we continue to get through the government shutdown and even some of the data that's come in since.

Ryan:

Yeah, it seems like the one thing that people were mainly um talking about anyway was you know, the what the Fed was gonna do without all this information that they were, you know, they're missing out on. And I think that even snuck into um some of the market pricing for what uh Feds was what the Fed was gonna do with with respect to rate cuts throughout this year. Um it seems like there has been uh well, maybe a full cut taken out of what might happen between now and the end of next year. Um do you have a sense of where the Fed is going? Um are we still in a cutting cycle? And and do you think it is likely that the Fed is gonna turn more hawkish or will they be as dovish as the market has priced in?

Strider:

Yeah, I I still believe we're in a rate cutting cycle for sure. Now the question is, will the Fed cut in December or not? Uh I'm starting to lean more towards they're not. The market as well is definitely leaning towards their they're no longer going to cut in December, which is a dramatic change from just where things were uh a week or two ago. And I think it does make it a little bit harder. I mean, when when Chairman Powell spoke at that last press conference, he he made it clear that the room was pretty much split between whether it was a good idea to cut or not in December. And with the government shutdown, I think the stream of data, as we just talked about, was less. And so we're not getting a lot of the inflation reports that they're used to seeing, and we're not getting the employment reports like we were. Um, and so they're gonna have less data available to them for that December meeting. And if I think if they do want to punt and uh push it into next year, they they have enough arsenal uh to be able to do that to say that, hey, we just are are data dependent and we don't have enough data, or we haven't been able to see enough that makes us feel comfortable that we need to cut. Uh I generally think they should continue to be cutting here. I think on the employment side, especially, things are continuing to weaken. And yes, inflation's hovering around 3% and is ticked back up a little bit, but uh I don't believe that's going to last. I think we will continue to move closer towards 2% in the coming year.

Ryan:

You know, let's let's stay on that uh the employment and the strength of the U.S. consumer for a minute. Um, you know, that's something that um for those that that don't know you, you're you're the author of the Three on Thursday report that uh has become very, very popular at First Trust, where you take snapshots of three different data points and you kind of put them together and and talk about the narrative that that underlies that. Um and one of the recent ones you guys did was um looking at household debt and credit. Um and you know, I was looking at that report, and it just seems like we are at an all-time high in the level of debt, but you know, then again, it usually kind of climbs up and to the right. That's that's tends to be the pattern uh over many, many years. Um and I guess you know, we're we're talking about interest rates. Is there a concern that you know rates are gonna be too high for all those uh consumers that have a lot of debt? Um, or is that something that is maybe overblown?

Strider:

Yeah, so uh the three on Thursday is really fun to put together. It's a lot of just interesting information. And if anybody ever has ideas and they want to forward them along, I'm always happy to look at anything that's out there. Uh, but in in terms of that specific report, it is true household debts sitting at record or pretty much close to record highs. And I think every year people use this as almost a crutch to say the economy's not in good shape. Look at households, because in 2007-2008, I mean, we had a financial crisis and the consumer was over-levered. But what I'd say is so different this time around is really if you look at household debt, you take it back a hundred years, almost every year that measure is sitting at record highs. So just knowing the level of household debt doesn't really tell us too much. The only times it's really declining is is during recessions or pretty much flat, and then it starts to move higher again after in the recovery. But uh so you need to compare it to something else. And usually when households are taking out debt, they're taking out debt to purchase assets. And when you look at household debt relative to assets, it was very true from 2000, really to about 2009, household debt relative to assets was growing pretty rapidly, but it peaked around 2009, and since then uh it's actually plummeted. So household debt as a share of assets is actually sitting at some of the lowest shares that we have seen uh since the 1960s. So, although uh debt's at record highs, assets have grown so much faster than overall household debt. And to me, that's a key point. But number two, when what you're talking about with interest rates, I think is very important today because interest rates have gone up a lot. But when you actually zoom into what household debt's actually made up of, about 70% of household debt is just in mortgages. And so in 2006, 2007, that was a huge issue because about 40% of those mortgages outstanding were adjustable rates back then. And so people got into a lot of trouble, inventory skyrocketed, demand fell off a cliff, we had the housing collapse. But when you look at where things are today, with 70% of household debt and mortgages, of those mortgages outstanding, only about 4.8% of those mortgages are adjustable rate mortgages. 95.2% are fixed. And where it's even more interesting is well, what are they actually fixed at? And we have uh about 27% of mortgages outstanding today that are fixed at less than 3% on either a 15-year or a 30-year. We have another about 31% that are fixed between 3 and 4%. So we have more than 50% of mortgages outstanding that are actually fixed at less than 4%. I look at that as a huge, huge benefit uh to households. And uh, by far the biggest debt that most households have is that mortgage. And the fact that the average interest rate outstanding on that debt across all mortgages is 4.3% is amazing to me. And it's something that um I think is a massive benefit to households here.

Ryan:

Yeah, and that's also probably the reason why there's some weird dynamics that have happened with the housing market because nobody wants to refinance that really advantageous mortgage rate and when they have to buy a new home and pay six, seven percent. And so that has uh an impact on the level of supply that's hitting the market, right?

Strider:

Oh, definitely, yeah, definitely. I think a lot of people have kind of scratched their heads over the last couple of years and and thought, well, demand's falling off a cliff. Why aren't home why aren't home prices nationwide just collapsing? And I think a lot of people are still worried that that's to come. And home prices nationwide are pretty much flat. They're up maybe percent, uh, maybe percent and a half year over year. So nothing really to write home about, but they're not collapsing. And I think moving forward over the next couple of years, they they won't collapse either. Because, yes, although demand's very, very low, as you just said, supply is very, very low. People aren't willing to put their homes on the market to buy an equivalent priced home where all of a sudden they might be paying double or triple that mortgage payment that they're originally paying. It just does not make sense. And so uh, no matter if people are happy with their current home or not, what they are very happy with is the unbelievably low interest rates that maybe might be once-in-a-lifetime type of a deal that they have in place that they're not willing to give up whatsoever.

Ryan:

There's another interesting chart on that same report where you looked at delinquency rates, um, especially the one that I found really interesting was uh delinquency rates for student loan debt. And um, you know, that's that's another weird dynamic because we went through COVID where the government essentially paused people's uh payments. They said you don't have to make payments on your student loan debt, so there were no delinquencies, and then more recently the chart shows that it surged. So, what do you think's what's behind that? What's going on there?

Strider:

Yeah, I I think really what happened was during COVID, especially when it was completely paused, and people thought maybe we'll get these actually um forgiven by the government that they weren't paying them, and they weren't paying them for a couple of years, and then they're supposed to start paying them, and the government said, Well, we're gonna give you another year of leniency where you're not gonna technically be in default, but uh we'd like it if you start paying us. But if you don't, it's not a big deal. And people decided to still not pay those back. And I think what's happened is people, especially with all the inflation that we've seen, people just got very comfortable not making those payments anymore and in fact started to spend that money that they'd be putting away to make those payments. And so when eventually this came due, uh, all of a sudden what we saw was a massive spike in defaults. And in fact, if you look at those loans that are uh 90 days plus delinquent, um, they've skyrocketed to about 14%, which is the highest that we've seen uh really going back in history for student loans to at least 2,000. Um but what's interesting is you can break it out by, excuse me, you can break it out by age as well. And it's really those that are 50 years and older um that are really struggling with delinquencies right now, that are uh 90 days plus delinquent. And and that uh level is almost around 20% of loans outstanding that are delinquent 90 days plus right now.

Ryan:

So 50 years and older, that means that I mean maybe all those people didn't graduate when they were 22 or something like that, and maybe there's some grad school debt and some you know doctoral work or something like that. But if you were if you're just talking about undergrad debt, if you're over fifty, you've had that debt outstanding for 30 years? Is is there a big chunk of people that are 50 plus that still have college loans?

Strider:

I I I assume I guess so. I uh you know, I haven't I haven't dug through the exact numbers of them, and I'm not sure if we can actually get that number from the Fed. But uh yeah, I mean it's it's pretty uh eye-opening, I think, that it's that category of everybody uh that's the most delinquent right now.

Ryan:

Okay, so um I wanna I want to pivot a little bit towards um one of the things that has been talked about all year, and that is tariffs. Um we we've you know had a lot of discussions on the podcast about tariffs, on the news cycle. Tariffs have you know come and gone and come and gone and come and gone. Um as the discussion on tariffs has evolved this year. It seems to me that the Trump administration seems like it's become more and more kind of all in. Like they've pushed the chips in. You know, early on it seemed like the the rationale for tariffs was that uh we were gonna equalize the playing field with trading partners. And you know, my my optimistic take was maybe that this would be a tool that could be used to you know put tariffs on, so everyone says, okay, we're gonna eliminate tariffs. But you know, the rhetoric doesn't seem to favor my optimistic view. Um maybe I'm wrong on that, but I'm curious what your take is. You know, what's the ultimate goal here? Um, and and you know, what's the impact been and in any any, I don't know, what's your outlook going forward?

Strider:

Yeah, you know, I think the thing that Trump and I have most in common more than anything else is that we both just don't know what he's gonna do tomorrow. So I I wish I knew what the ultimate outcome was going to be, uh, but I don't. Uh but but uh I will give you kind of my my thoughts on where things are. Uh I completely agree with you in the sense that I believe too when he came into office this time around that he was going to use the same kind of tactics that he used when he was president the first time around. And really those tactics were look, you look at all of our biggest trading partners, every single one of you charges higher tariffs on goods coming into your country on average than we do on goods coming into our country. So either you lower your tariffs to get more in line with us, or we're gonna raise our tariffs to get more in line with you. And that's the rhetoric that he used when he was president the first time around. And um, you know, what he did raising tariffs the first time around, I don't I don't agree with higher tariffs. But did it work? Yeah, you look at all of our major trading partners, and every single one of them has lower tariffs on average in place today than where they were uh when uh President Trump became president in 2016. And so when you think about it from that uh point of view, I would say, okay, he was going to do the exact same thing this time around. And if he didn't put that pressure on, tariffs would have been higher across the world for sure. So we come into this presidency and it seems like that's what he's doing. Uh, but I think pretty quickly, once he started to raise tariffs, he realized, wow, this can actually be quite a big revenue, a revenue generator for the United States. And um and I think the way he looks at it is, hey, or the way it's portrayed to the public is look, it's it's not U.S. companies, it's not U.S. citizens that are going to be paying these tariffs, it's the countries. China's paying this tariff, or uh Taiwan's paying this tariff, or Italy, whatever country it is, they're the ones who are paying the tariff. But the reality is, no, it falls majorly majority of it falls on uh the US uh companies or U.S. consumers that it's passed on through the companies. And and just to give you an idea of where things are today and why this has been such a good revenue generator, is if you look at our effective tariff rate in 2024, it was 2.3%. So that means, and that's across all countries. So that means if you imported something on average for a dollar, you paid a dollar and two to get that into the United States. Well, today that effective tariff rate's moved up to 9.8%. So instead of a dollar two to get it into the United States, you now have to pay $1.10. But across all of our trading partners, it looks very different. So for instance, you're looking at China, which we know is a big importer. They're now the third biggest importer into the United States. They they used to be number one and then they moved down to two, and now they're down to three. And a big reason is because of how large the tariffs are in the United States that are being put on Chinese goods. Last year in 2024, it was 11%. So a dollar's worth of goods that was purchased would cost $1.11 to get into the United States. Well, now it's up to 40%. So that's gone from $1.11 to $1.40, and that's across all goods from China. So that's an effect, that's the actual effective tariff rate that we're seeing on goods coming in. I mean, that that is that's high. Now, companies, some companies have been able to absorb that. Other companies are passing it on. Uh, but I think the bigger issue, and that's not talked about near enough, is really the the uncertainty around the tariffs. I've got four kids, as I know you. Do you have four or five? I can't remember. Four, yeah. We both have four kids, so we're doing our part, right? We're we're contributing to society. Four kids is a lot. Um, but my two oldest, I have a nine-year-old and a seven-year-old, they love to play the game Candyland. And uh every weekend we pull out the Candyland board. If you don't remember, pretty simple little board like this. All you do is you flip over a card. It either has one color on it, it's got two colors on it, or it's got a character, and you just do whatever the card tells you to do. Well, my oldest, uh, she is very rules-oriented. She would never cheat or break the rules. Um, you know, even if she's losing, doesn't matter. My second oldest, um, now she's she likes to, if she's not winning, she figures out a way to win. And uh, you know, so the rules start to change pretty quickly. She might turn over a card, she doesn't like it, she'll turn over another one. We say, hey, you can't do that. Well, she just keeps doing it. And anyway, the game gets so frustrating that we quit almost every time. If she's losing, uh, we just quit because she changes the rules all the time. It's no fun. Anyway, somehow we keep playing that game every single week. But the point of that is that if the rules are constantly changing, you just can't play the game. And it doesn't matter if the rules are good or bad. I mean, you obviously want good rules, not bad rules, but as long as the rules are consistent and people are able to play by those rules, then you can play the game. And the way that I look at the economy today, especially for small and medium-sized businesses, is that they're not looking for the next month for production. They're looking out three, six, nine months out right now for what they need to be bringing into the United States. And they don't have the luxuries like a lot of larger companies where they can switch manufacturing to different countries, so on and so forth. And so if they don't know whether the tariffs from China, let's just say, are going to be 40% three months from now, or if they're gonna be 80%, or if they're gonna be 20%, or 150%, and they're trying to make decisions three, six months out today because it takes months for that stuff to be produced and then another month for it to be shipped over on the sea, it makes it very hard to be able to run a business. And so I think no matter what happens with the tariffs, uh, are they are they hurting the economy? I'd say, yeah, they are hurting the economy. Isn't enough to take us into recession? No. But I think what's hurting the economy more is really the uncertainty around the tariffs. And so what I hope is that at some point here, hopefully in the near future, we just get certainty on where these tariff rates are going to stay and where they're gonna be for the foreseeable future.

Ryan:

Does that need to be this may be a question for Bob Stein, uh, but but is that uh something that has to be passed into legislation for it to be more permanent? Or is this because it seems like you know, some some of the ways that tariffs have been um have been introduced and put on to trading partners, you know, it's kind of executive order, but that doesn't tend to be permanent. That tends to be, you know, the next guy could come and take it away, and maybe the courts will take it away. Um but it it does seem that the Trump administration wants to make a lot of these tariffs and the policies to be to be permanent, right?

Strider:

And that that actually would be a great question for for Bob. I I don't I don't know whether or not they can be permanent, permanent, uh, but I think they could be at least permanent for the next couple of years under under President Trump. And that alone I think would be helpful to just have some certainty. Right now it's day-to-day, right? Like think about just a couple weeks ago where the president was threatening on putting an extra 100% on on uh China uh in terms of already the onerous tariffs that are there. Um so that that's what's concerning to me. But I I do I do believe that a lot of these tariffs that are in place that have been put in place for national security purposes by the president that really have no reason, there's no national security threat, will be removed. I think the Supreme Court will uh vote just like every other court has voted so far so far, that they're just not constitutional. But with that, I mean, the Trump administration is is very, very smart. They've had lots of time to prepare for this, and so they already have other ways to implement tariffs in the wing. So although we might see a little bit of tariff relief, I think it's still gonna be um a lot higher than what most people expect.

Ryan:

I think uh maybe the the tool to win public sentiment is what uh the president uh introduced maybe last week or the week before, the the concept of paying everyone two thousand dollars in revenue that is um is said to have come from tariff revenue. And you know, two thousand dollars, I don't know how many uh how many taxpayers that actually would impact, but that that's a substantial amount of of money that you're that you're handing out.

Strider:

Yeah, it I mean it is. And uh the reality is it wouldn't go to every taxpayer, that's for sure. But but uh I mean if if you look at how much has been brought in so far in revenues for this year uh through customs duties, it's it's about $240 billion. We're probably gonna be close to when all said and done for the year, around $300 billion in customs duties for 2025. That's up from about $100 billion in 2024. And if the tariffs, the way they are, stay in place, you could bring in about $350 billion a year uh in customs duties. But the reality is who's paying those customs duties? And at the end of the day, uh it is the American citizen or the American company that's really paying those taxes.

Ryan:

One of the um one of the objectives, I think, of of tariffs, at least one of the stated objectives, and it becomes more difficult because of the sort of transitory nature of some of these tariffs, as we've been discussing, but is to bring manufacturing onshore, to incentivize semiconductor fabs to be built in the U.S. You know, the the Biden administration also wanted the same thing, but their tool was we're gonna introduce these spending plans like the CHIPS Act, and that's how we're gonna incentivize building these semiconductor fabs. Trump says we don't want to do that. Uh we want to do it through tariffs, and so it's just a different set of incentives. But either way, it seems like there's a lot of semiconductor plants that are either in the early planning stages or you know, well underway in terms of construction. Um, is that something that you think is going to continue for the next several years or is this a shorter-term phenomenon?

Strider:

No, I I I think it's gonna be going on for quite some time. I do believe we're gonna continue to see more and more manufacturing coming back to the United States, but it's really going to be more kind of semiconductors, those type of things, high-tech manufacturing that will be in the United States. It makes no sense to bring um you know textile manufacturing back to the United States, shoes, clothing. Those are very labor intensive. And it it you just it doesn't make sense. And so most of the factories that will be built will be very high-tech factories that are run by very few people, but mostly robots, robotics, and and other machinery that is very, very high-tech. And to give you an idea, though, in the United States, well, first off, the United States is still the world's second largest manufacturer, uh, which I think a lot of people forget. And it goes China, which they surpassed us, I think it was back in 2013, as becoming the world's largest manufacturer, and then it's the United States. And then there's a massive drop before you get to number three for manufacturing. Um, but when you look specifically at semiconductors, I think another thing that's that's pretty interesting too is that in the United States today, we have 95 semiconductor fabrication plants currently. And the only country that has more semi-plants than us is Japan. Japan has 103 of them. And the difference though in the United States is so many of our uh fab plants are basically built uh for research and development. We're the ones who are really creating uh the way that chips need to be manufactured and built. And so you look at a you look at a country like Taiwan, why it's so important, although Taiwan only has 80 fab plants, they're all built for uh high manufacturing capacity uh of chips and wafers. And so uh Taiwan itself and why it's so important to the world is 68% of all semiconductor output goes through Taiwan, comes out of Taiwan. That is a national security issue. And so for that reason alone, I think we will continue to see more and more semiconductors uh plants, especially being built in the United States. And the CHIPS Act did have a meaningful impact on that. I think about $53 billion worth of the CHIPS Act went directly to these new semi-plants that are being built. Um, but it wasn't just that. There's been another $600 billion since 2020 that's gone into uh manufacturing of semiconductor plants, uh, which is a massive amount of investment. And currently there's about 22 plants that are either under construction in the United States or being planned. So I still think we're in the early stages of this, and this is something that's going to continue for whether there's subsidies for it or not. I think it's something that is in high demand and that's not going to go away anytime soon.

Ryan:

It has been interesting because, you know, my hometown of Syracuse, New York, uh, Micron announced, I believe it was in 2022, that they were going to spend somewhere around $100 billion to build four chip fabs between maybe now and 2030, no, 2040, I think. Um, anyways, so here we are three years later, and they have yet to break ground. And some of that has to do with environmental regulation, some of it has to do with the migratory pattern of an endangered species of bats that are, you know, there's like 20 million acres of uh habitable land for bats in in New York State, but they're really focused on the you know 500 acres that Micron would have to clear. Um regardless, um they haven't broken ground yet, but it seems like it's a multi-year process once once they do. I just wonder, you know, it seems like you've got to make the regulatory efficiency better. And and you know, I know the Trump administration has only been in office. For less than a year now. But you would think that that would be really on on high on their list of priorities. I know they've focused on uh curtailing regulations in a lot of ways, but but it it seems like with some of these really um well these these building projects that have national security implications that they'd really want to make ways for that to move along more quickly.

Strider:

Yeah, I don't disagree. And I think regulation, cutting regulation is is one of uh the administration's biggest goals over the four years. And I think they've already done a fair amount of of cutting red tape, but there is a lot of red tape that that needs to be cut. I mean we're we're across the board, anything to do with construction in in any state, it seems like, uh, is very slow because of all the red tape that's involved. And and I think, yes, obviously some of that is needed because we want safety regulations and whatnot, but but a lot of it I think could be fixed and and just done away with.

Ryan:

Um that that brings to mind Doge. Um remember Doge? It seems like uh that was a big priority for a while, but I haven't heard much about Doge lately. The Department of Government efficiency, you know, the Trump administration was gonna come in, they were gonna um make some cuts to programs and make things more efficient. And um and it's really tough to. I mean, you heard a lot of things that were being cut, but I think the normal person every day doesn't really see it unless you're living in Virginia or maybe around DC. Um, do you have any sense on where Doge is today?

Strider:

Yeah, you know, I was I was so excited when the president was elected for the biggest reason that I really thought that we were going to see some pretty sizable changes to the size of government. And uh the Department of Government's efficiency got put in place and Elon Musk was running it, and we know anything that Elon Musk touches, uh he's able to accomplish uh even the impossible. I mean, everything he's done, he's taken that which is impossible and he's made it a reality. And uh so I thought, you know, government trying to shrink the size of government, that's an impossibility. But we have Elon Musk, and maybe he's gonna be able to do it. Well, it turns out that even for Elon Musk, I guess it was just too big of a task. And uh when you look at what's really going on with the Department of Government Efficiency, what they're actually able to cut on their own without Congress, it's just really not that significant. Any cuts to government are great. And I think they've done, you know, they've they've been making some cuts. But the reality is that majority of government spending is really mandatory spending uh that goes out to individuals, it's transfer payments to individuals. And when you look at Social Security, Medicare, Medicaid, um, you look at other mandatory spending, really about 87% of government spending, you could technically say it's not really mandatory, but you could technically almost put it in to the mandatory category if you include defense spending in there and you include net interest payments as well. And so that really only leaves about 13%. That's non uh non-defense discretionary spending. And even if you cut all of that spending tomorrow, um, so it's you know close to a trillion dollars, let's just say you cut all that spending tomorrow, um, it's less than a trillion, but around there, even if you cut all that tomorrow, within four years, all those other mandatory programs that have automatic growth rates to them will surpass all of that savings. So the reality is if you ever want to get government spending under control or even slow the growth rate of government spending, which that in itself makes a huge difference, I think you do need to start to go into some of these mandatory programs and figure out ways to make them a lot more efficient, get rid of the fraud and abuse. And I think that's something that the Department of Government Efficiency uh has looked into and could do. But the issue is that you need Congress to sign off on the majority of that. And to get anything through Congress these days just seems uh uh like uh a big, big uphill battle. Uh the same thing kind of happened back in the 1980s, too, with President Reagan. He wanted to cut government spending as well, and so he put together a commission. It was called the Grace Commission because it was headed by a guy named uh Peter Grace. And Peter Grace was a big fiscal conservative CEO of WR Grace, and and he, for 18 months, along with 160 other business executives, got together and combed through government spending. And at the end of it, they they put together an actual book. It was called the Grace Commission Report. They gave it to Congress and anybody else that wanted to look through it, and they found about $425 billion that they believed over the next three years, if if they cut that $423 billion, um, that by the year 2000, our debt outstanding would be about a trillion dollars. And they said, if we don't do this, though, by the year 2000, we think debt's gonna be more around $11 to $12 trillion. And so Congress took all this information and they said, oh my goodness, this is unbelievable work. I mean, you guys put your heart and soul into this, and and what did they do? Basically nothing, no cuts. And so here we sit today, kind of in the same situation, but about $38 trillion in debt, running $2 trillion deficits. And uh, I don't I don't think Congress is going to act any differently this time around, unfortunately.

Ryan:

You know, I I I suppose one of the optimistic takes that could happen with with respect to uh kind of how to get out of the large amounts of debt would be to grow the economy. I I mean that would be maybe the most um plausible way if you were able to use things like artificial intelligence or you know technology to be able to grow the uh grow the economy. Maybe that makes the share of debt a little bit smaller than it might otherwise be. Maybe that raises tax revenue. Um maybe that's overly optimistic, but um I do want to talk a little bit about AI because that's what everyone's talking about. Um so am I am I painting just a pie in the sky picture? Is AI uh does it have the capability? Does technology have the capability of helping to grow our way out of some of the debt problems we have?

Strider:

I think it definitely will over time, but but I think just to go back first to your previous point, uh I'd say the issue uh is not so much the debt side of it that I'm concerned about, it's why we continue to accumulate all of this debt. And it's because we're spending so much more money than we're bringing in. And so many say, well, why don't we just raise more revenues? Why don't we have the rich pay their, you know, their fair share? Um but uh the reality is that if you look back over time, it doesn't matter what you've taxed people. We've seen marginal rates in the 90s, we've seen them in the 30s. Revenues as a share of the economy, as a share of GDP, come in right around 17.5%, all the way back to 1950. Kind of bounces around, but if you went from zero to 100 on a line, it looks just like a flat line at about 17.5%. Now, the problem is that on average, since 1950, we've been spending about 20% of GDP for government. And so that's why we always have a deficit. But the problem today, and really if you look over the last 15 years, very rarely has government spending even gotten close to 20% of GDP, not below it, just even close to it. Uh, it's been far, far, far above that. In fact, today it's still sitting around 24% of GDP. But you take a look at revenues today, revenues are sitting right at 17.5%, or basically where they need to be. And so to me, the issues on the spending side, and as you said, with AI and whatnot, maybe that does cause us to grow faster in the future. And so let's say nominal growth right now, nominal growth, let's just say it's between five and six percent. If you can get government spending, you can still grow government spending, but you just need to grow spending slower than the nominal GDP. And that means that spending as a share of the economy will start to come down. And the problem is that for for really the last 15 years or so, very rarely have we had government spending uh growing at a rate that was even close to how fast the economy is growing. It's been growing well above that. And that to me is the big concern. But looking at AI in general, I mean, I think it will have dramatic impacts on the economy, especially obviously from an investment standpoint, um, already it's having an incredibly meaningful impact on the economy. If you look just over the first two quarters of this year at GDP, at real GDP growth, um, business investment, but specifically business investment just in equipment, uh equipment and software has uh grown, uh has added, contributed to real GDP growth as much as consumption has. Now, what's unique about that is consumption makes up 70% of GDP in the calculation. This subcomponent of equipment and software spending uh basically makes up 4%. And yet it contributed the exact same to growth as consumption did. That's amazing to me and just shows you how much investment is going into uh uh AI right now. Uh I believe where we are in the situation today with AI and where we are in the markets uh really can be summed up uh you know pretty pretty clearly by a guy named Roy Amara. And uh Roy Amara, he passed away in 2007, but he was uh a researcher, an unbelievably bright guy, a futurist, um, just some some really interesting information. But he coined this phrase, I think it was back in the 1970s, where he said we tend to overestimate the effect of tech in the short run, but underestimate it in the long run. And uh he calls it Amara's law. And uh the reality is, I mean, this is back in the 70s that he coined that, but I think we go through these stages and AI, there's no doubt that AI is going to be, uh it already has been, but I think in the future, just absolutely game-changing for every single industry. I think we will see massive productivity gains, but it's not going to be tomorrow. I think it's gonna take at least five, 10, 15 years for people to really uh be able to realize the gains from this. So in the short run, just as Amara says, we tend to overestimate the effects of new technologies. And when I look at uh the stock market today, especially from a market cap-driven perspective, it just seems like things have gotten far too ahead of themselves by almost any metric that you look at. Uh, but I do believe the way that we think is in a linear fashion. It's very hard for us to understand exponential growth and in a big way, looking out especially over the future. And so that's why I think Amaro's also correct that we tend to underestimate uh the future, how good technology will be. And with artificial intelligence, especially, uh, as knowledge continues to build on itself like never before, I think the future's just unbelievably bright.

Ryan:

I think that's a good way to look at it. Um, you know, someday uh we need to have some sort of a like strider's law. And what do you need to be an economist and get your own law? Is that like do you make it up yourself and just put your name on it?

Strider:

That's exactly you just you just make it you just make it up yourself and call it after you and you hope it catches on.

Ryan:

Okay, so that's actually um that's that's uh one of the things I was gonna ask you about um is you know what what's on the one hand, what makes you what do you think are risks to the economy that most people are overlooking? And then I want you to offset that with uh maybe what makes you optimistic about the economy. And you know, I think you kind of laid out a case right there for uh for optimism. Is there anything that you kind of think is under the radar that people should be paying attention to that's a bit more risky that maybe they're that they're ignoring at this point?

Strider:

Yeah, uh yeah, that's a that's a great question. I mean, to me, the biggest risk still is just the size of government. I I think something really does need to be done about just how big governments become uh because it is unsustainable. Um, maybe it's sustainable for a couple years, but it's really not sustainable to continue to be this size or bigger uh for the foreseeable future. And to me, that's the biggest concern. And I was hopeful that this administration was going to take it in the opposite direction. And we've seen a little bit of progress, so I do give them credit, but uh it's just there's a lot further that we need to go uh in that direction. The other thing I'd say is looking at interest rates in general, I think a lot of people are shielded, as I said, uh especially on the the middle income scale where their biggest asset is is uh um a home and they have a mortgage and they're locked in at this very low interest rate. But I I I just am a little still concerned about the commercial side of things, especially office buildings. We all know that that's been a huge issue, and many of those loans are continuing to come due, and they just they get kicked down, the can just keeps getting kicked down the road. But the reality is that they can't refinance these because they're worth 30 to 50 percent less than when they were purchased, and they have occupancy rates that aren't even close to where they were uh pre-COVID. And so that falls specifically on uh small and medium-sized banks in a big way. Um, they own the majority of commercial lending. And so uh to me, that's something that I just think is worth continuing to keep an eye on. I know people believe that if the Fed continues to cut, that means that interest rates are coming down, which uh is true. But again, we just don't know if the Fed is going to continue to cut in a meaningful fashion uh when they believe that we're getting close to neutral here at some point.

Ryan:

I I try to end the podcast episodes with a same question, especially for someone who's joining me for the first time, um, and that is is there anything that you've read recently? Um I'm looking mainly for book recommendations. And you know, if you want to give me an economics book recommendation, that's fine. But really, you know, I'm trying to figure out what else are you reading? Is there anything that you've read recently or that's on your reading list that you would recommend uh viewers and listeners of the ROI podcast to check out?

Strider:

Yeah, I'd say, let's see here. I think the first one that I'm I'm still reading it right now, but it's called Chip War. And it's it's written by a guy named Chris Miller, and uh it's it's all about semiconductors and really the whole history of semis. It's a very, very fascinating book. It's not dense, it's it's a real easy read, and it's um it's very entertaining and just amazing to see how things have gone through progression, where it started, everything. So I would definitely recommend that book. I think it's been a fun read. And again, I'm not all the way through it, but so far, so good. Um, the other one I'd say that I'd recommend that I finished a little while ago was a book that was called um, it's called the The Anxious Generation. And that was written by a guy named Jonathan Haidt. And uh The Anxious Generation um is really a data-driven book about um, you know, I have four kids, as you have four kids, my kids are nine and under. And it's really about social media and smartphones and how um really when those came on board, and I'm I mean, I, you know, I am, I think the smartphone is one of the most amazing pieces of technology that's ever been created because it allows us to consume information like never before. But at the same time, there's been a lot of negatives that have come about too, especially for the younger generation with depression and anxiety and and all these other um issues that have really been driven from the smoke from the phone. And and the the lack of research that's been done in a big way on this is kind of mind blowing. But he's been able to compile everything that's out there. And and the what he's found is that yes, phones have a massive impact on your child's ability to function and even to their minds to be able to grow. And so I think I couldn't recommend it enough for for really anybody to read because I think it's pretty eye-opening. I know it was extremely eye-opening for me, something I was already concerned about. I'm even more concerned about. But I what I love about it is he gives really concrete steps too that if this is something that worries you, how you can go about uh trying to fix this in your family or your child's life uh to help make them a better citizen as time goes on.

Ryan:

I think that's a really uh great recommendation. That's one that that uh I have read as well. And um yeah, there's there's a lot of great advice, not not least of which is let your kids be kids and let them play. And you know, he he recommends the concept of free-range kids where you don't have to be a helicopter parent all the time. Um, and and I think uh you know there's some there's some truth to that as well. I certainly remember when I was a kid, we just head out, and I think everyone who's about my age, the the parents got together and said, Okay, just tell the kids to be home when the street lights come on.

Strider:

Yeah, exactly, exactly, right? I missed that. And it's a great book.

Ryan:

Really good book. All right, well, great. Uh appreciate that recommendation, Strider. Thanks for coming on the podcast. Hopefully, next time we can do this in person, but uh do appreciate you joining us.

Strider:

It was such a pleasure to be with you, Ryan. Hope we can do this again soon.

Ryan:

And thanks to all of you as well for joining us on this episode of the First Trust ROI podcast. We'll see you next time.

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Ryan O. Issakainen, CFA | Senior Vice President | ETF Strategist

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