TRANSCRIPT
Dick Pryor: This is Capitol Insider - taking you inside politics, policy, and government in Oklahoma. I'm Dick Pryor with Quorum Call publisher, Shawn Ashley. Our guest is Dr. Robert Dauffenbach, Professor Emeritus at the Price College of Business at the University of Oklahoma. Bob, glad you're with us.
Dr. Robert Dauffenbach: Great to be here.
Shawn Ashley: Bob, last week we saw a torrent of data on the U.S. macroeconomy. Gross domestic product, inflation, jobs, and tariffs. Among those, which do you consider the most important?
Dr. Robert Dauffenbach: Well, the jobs report from the Department of Labor was a real stunner. Expectations were for 135,000 job growth for the month of July. The actual number came in at only 73,000 while the unemployment rate rose a tenth of a percentage point to 4.2%. Not a big change. The big news was revisions to gains in the prior two months, lopping off a quarter million job growth. This brought the three-month gain to just 35,000 per month. Gains were limited to private education and health wear sectors which has been typical. Manufacturing employment was down for the third month in a row. President Trump didn't much like the results and shot the messenger, firing the head of the statistical agency. This firing doesn't change the overall picture, however, that job growth is decelerating. Let us hope that we don't have continuing interference with federal data collection.
Dick Pryor: What about real output growth from the GDP report?
Dr. Robert Dauffenbach: Well, this is a little complicated because we had, in the second quarter, growth showing the 3% growth rate after inflation, which is very healthy, and one would certainly like to see, and this is versus a decline of a half percent for the first quarter.
So, what explains these wild swings? Well, it turns out it's a component of GDP called exports minus imports. So, what we had in the first corner is a number of firms front-running the tariffs and stocking up on foreign imports. And of course that made the exports minus imports number quite negative, taking us down to a negative 0.5% growth rate. But then come the next month, and the level of imports fell by 30%. And in consequence, we're showing a good contribution to GDP from that sector and we had this 3% growth rate.
Now we're looking at the problem of consumption growth. Household consumption growth, which is, you know, 70% of output in the U.S. is in that category was up a mere 1%. So, we're still in the positive range. We're not going to be growing substantially higher, but I still, that's no sign of recession. You have to have negative GDP numbers in order to say you're in a recession.
Shawn Ashley: You mentioned tariffs. Is the picture becoming clearer about their impact?
Dr. Robert Dauffenbach: Yes, I would say it's a little bit clearer, despite the fact that we don't have agreements between Mexico, Canada, China, and India, these negotiations remain in limbo, but it's becoming clear that the rest of the world is going to pay between 15-17%, 15% being the most likely. Now, get this, here's the biggie. That will generate $360 billion annually. Making the tariffs the largest increase in recent history, but the problem is, of course, with the sizable deficits we have at the federal level, once these revenues start coming in, they're gonna be hard to relinquish by any administration. The problem with tariffs is they are a consumption tax. Ultimately, in the short run, both firms and consumers will pay more. In the long run, consumers will bear the full incidence of the tax. And, of course, consumption taxes are regressive, hitting the lower income classes much more heavily.
Dick Pryor: How do you see tariffs affecting inflation?
Dr. Robert Dauffenbach: I'm thinking that that we don't know a whole lot about that yet. In fact, that's what's holding back the Fed. We are not looking at terribly great inflation numbers at present. In fact, by the Fed's core personal consumption expenditures, excluding food and energy, I don't quite know why they always do that, but we're looking at 2.8% on the population measure, their favorite measure. This is up from 2.6%, no big worries at present, and of course the issue is the Fed's wanting to see, you know, driving through the rear-view mirror, what the impact of tariffs will be, and they don't want that folding into a longer-term embedded rate of inflation. That's what they want to avoid. So, I suspect that with the weak jobs report we just had, and any continued indications of weakness, we'll see the Fed agreeing to lower interest rates a quarter percentage point in September. That's the thinking now. There's still a lot that's unknown, uncertainty squared, I call it, and we're certainly looking at volatile information coming to us on what the ultimate directions are going to be.
Shawn Ashley: How is the Oklahoma economy fairing, heading into the second half of the year?
Dr. Robert Dauffenbach: Well, I tell you, I finally have some good news to talk about. We're doing better than the nation in employment growth. Year over year in June numbers, the nation grew at 1%. The state grew at 1.8%. And more than that, we're looking at more balanced growth across the state. Oklahoma City was up 1.7%, Tulsa up 2.5%. So maybe they're kind of getting their act together there. In the balance of the state up 1.5%. A lot of numbers but essentially doing quite a bit better than the nation in job growth and more balanced growth across various sectors of the state.
In June, total state collections, or of course we certainly watched that, were flat year over year, sales tax collections were down 10.85, and oil and gas collections were down 7.3% in June. The major bright spot was individual income taxes up 7.8%. So since falling sales tax collections were by design, you know we've had continuing lower rates on food, I think the Oklahoma economy is doing really remarkably well at present. We'll hope it keeps up.
Dick Pryor: Looking ahead at the economy, what concerns you the most?
Dr. Robert Dauffenbach: Well, as in my previous talk, I'm very concerned about the federal debt and deficits. There doesn't seem to be much fear right now, but Trump's big, beautiful tax bill allows the federal debt to rise from $36 trillion to $41 trillion, $5 trillion. And I fully expect that we'll hit that level of $41 trillion within the next four years. And we're going to become more and more concerned about Social Security spending, social welfare spending, and I think that's going to be very much the headlines that we see later on in this decade.
I also worry about a shrinking labor force. The one beautiful tax bill allocates $350 billion for mass deportations, detention centers, and 10,000 new ICE hires and I think it's very little understood - how important immigration, both legal and undocumented, has been to labor force growth in the United States and how dependent we are on immigrant labor for our output levels in the U.S.
Shawn Ashley: You mentioned earlier the firing of the head of the Bureau of Labor Statistics, and economists like yourself rely on that data. Are you concerned about the quality of data coming from that agency and others as we go forward?
Dr. Robert Dauffenbach: Yes, I am and believe you me, Wall Street would very much hate to see federal data collection become politicized and that we just can't have. You have to have professionals. This is a very, the monthly jobs report, it's a very complicated system and it involves surveying some 650,000 establishments. It's a huge, huge data effort. They're doing the best they can. They've got, they've got problems with response bias, and that's what, as she says, they go through time, they get more responses to their old surveys, and they're able to realign their estimates. It's a highly professional statistical operation governed by real standards of how surveys are done. They've got some problems, they're wrestling with those, but Wall Street will not like it if federal data become politicized.
Dick Pryor: Bob, thank you for your insights.
Dr. Robert Dauffenbach: You're quite welcome.
Dick Pryor: That's Dr. Robert Dauffenbach, Professor Emeritus at the Price College of Business at the University of Oklahoma. For more information, go to quorumcall.online. You can find video of Capitol Insider segments on the KGOU You Tube channel. Audio and transcripts are at kgou.org and look for Capitol Insider where you get podcasts. Until next time, with Shawn Ashley, I'm Dick Pryor.
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