Altman: In a Goldilocks Moment for US Economy

What's the relation with what the economy is doing right now and the markets are doing? Because as you said, the markets really are, I'll use my expression, shooting the lights out right at the moment. I think it's a pretty clear relationship, David. We're in a Goldilocks moment in terms of the economy. And in particular, we're seeing some modest slowing. Retail sales were actually down last month. There's some modest loosening in labor markets. Unemployment rate went up a touch, ratio of job vacancies to unemployed workers went down a bit and that's slowing. Is enabling or facilitating a lower inflation rate? As I mentioned earlier, Corp PCE is already below 2% CPI, core CPI just above 3, and inflation is headed toward the Fed's long term 2% target, which in turn will allow the Fed to cut. At the moment, it looks like once or twice during the remainder of 2024 with the final amount of cuts depending on the interim inflation data. And at the same time we're continuing and I think it's remarkable to show steady economic growth at this moment. It looks to looks to us at Evercore as though the US economy is growing about 2.7%. I don't see any sharp slowing of that, emphasize sharp in the offing. And parenthetically, corporate profits are doing well. The markets look at that and say this is exactly what we wanted. We wanted inflation to come down, which allows the Fed to cut the federal funds rate and turn toward monetary ease. That's now happening. Looks like a soft landing, which is so much desired and so much discussed, looks like it's playing out right in front of us. So it couldn't be better from a financial market point of view and open market interest rates apart from what the Fed controls have, have, have have fallen quite a bit. The yield on the 10 year treasury I mentioned in the earlier segment is at about 40 basis points in the last two weeks and that's a big move. So from a market point of view, it could be better from in terms of macroeconomics, which I think is why all the major indices are right around records. There's a whole separate question within the market. I mean, in terms of a sub segment of the market about the belief that artificial intelligence may be the third in a, in a certain sense the third, the third economic revolution and that it's going to be completely transformative. But that's not driving all stocks. That's just driving a component of them. I want to talk about AI. But before we do that, let me ask you about that. That growth rate, which is above historical trend lines, it's above what economists tell us is the potential of the economy. So ironically, the economy is generating more than what economists say is the potential. Can you have, heaven forbid, too much of a good thing? I mean, sooner or later, that has to come in line, does it not? A medium and longer term, yes. But there I think there are two factors that explain why the economy or at least above other factors is doing so well. One is there's been a surge, remarkable surge in private fixed investment during the Biden presidency, especially the last year, year and a half, it's way up. And I think from memory in this number might be wrong, but I think it's I think it's 800 billion above the trend that would have been established would have been normal prior to the last two years. In other words, what it what, what, what, what the trend would have been as compared to what it actually is today. A lot of that, by the way, is foreign investment, not just domestic, but coming into this country. And some of that's been triggered by the very major legislation that the Biden administration got passed, especially the Egyptian Science Act and the Inflation Reduction Act and the especially the green energy portions of the Inflation Reduction Act. But anyway, big surge in private fixed investment, which of course gives rise to a lot of jobs and growth. The second factor is immigration. Most of the rest of the world doesn't have much immigration. But the United States and people, of course, are very hotly debate whether they like the way it's playing out. But the United States historically and continuing right through this moment, is benefiting from consistent levels of immigration, which means that our labor force continues to grow, unlike, for example, Western Europe, unlike Japan, and before very long, unlike China. And you, you, it's very hard to grow your overall economy if your labor force is falling. So the United States has an extra advantage there, partly because our population is a bit younger than those other regions, but also because we have consistent immigration above levels that other countries have. And I think those two factors explain why we continue to grow for the moment above trend. Roger, let me come back to artificial intelligence, generative AI, as we call it here. You actually are working with corporations. You're seeing what's going on right now. It seems like every CEO has to invoke AI in their earnings call no matter what. And as soon as they do, their price goes up with their stock. How much of this is a proper reaction to the markets and how much it could be an overreaction of markets? I mean how real is this in your assessment? Well, two-part answer. I'm not smart enough to know whether valuing NVIDIA at 3.4 trillion, which is the current value is sensible or it isn't. I've done this or I've worked around finance in finance for a long time and valuations constantly change. And I've learned essentially that there's no such thing as the correct valuation because so much there's so much psychology that it's involved in valuations. So I don't know whether the market is overreacting to this or not. But as to whether from an industrial point of view, AI and generative AI is profound or not, the answer I think clearly is yes, it is profound. Yes, it is transformative. And some of the presentations I've listened to recently both from companies and more generally at conferences and the like are are stunning in terms of the anticipated transformative effect of this, including in the next few years. I think what a lot of people may not have internalized yet is how fast it's happening. So valuations, it beats me. But in terms of the the real economy and growth and industrial transformation, yes, it's real. We'll talk about that real economy because that's the question ultimately is has to show up in the real economy. It's going to last for us. Where will we see it? Is that productivity? I mean, what it when, when you deal with corporations day in and day out, what are they looking for out of AI that can actually improve their bottom line? Let's be frank, that's what they're after. Well, I think the answer is productivity, yes, but let's differentiate between the relatively few companies that are in the at the center of AI, in other words, actually developing it and each day taking it to a new level. And on the other hand, the vast majority of companies that are working on trying to deploy it, but they're not, but they're, they would be customers, so to speak, of AI rather than developers of it. And I think in the second category, it's still in its infancy, David. I mean, if you go around and talk to some of the most basic American companies, they're just beginning to implement this. But of course, if you're talking about Microsoft or NVIDIA or Alphabet, Google or Apple and so forth, you know they're spending colossal sums directly developing it. So I think the answer is productivity. And I I've personally become convinced that this will be truly transformative.