Now that the Big Beautiful Bill has passed, attention will turn first to the path forward on tariffs and then to second quarter earnings that will start to be reported within the next two weeks. But before looking ahead, I want to discuss the implications of the new bill just signed into law.
White House economists offer differing views from those of private economists. To be fair, there are lots of moving parts. Let me list just a few.
1. What will be tariff income over the next several years?
2. What is the right number for GDP growth over the next decade?
3. Will artificial intelligence provide meaningful gains in productivity?
4. What are the projections for population growth?
5. How big will the Federal deficit be and what will be the average interest cost over the next decade?
Since 2000, GDP growth has vacillated above and below 2.5%. There was no discernable difference during the Trump years. His 2017 tax bill neither resulted in accelerating or decelerating growth. The White House espouses the belief that the new law will accelerate growth to 3% or more on a persistent basis. The Congressional Budget Office (CBO) uses 1.8% in its modeling. One seems too high, the other too low.
Turning to population growth, it had been in steady decline from 1990 until 2021 falling from 1.4% per year to less than 0.2% during the immediate aftermath of the pandemic. It then rebounded sharply to just under 1% in 2024, a function of fewer Covid deaths and a spike in immigration during the Biden years. With borders now virtually closed to those seeking entry to the U.S. other than through traditional channels, population growth is likely to fall back half a percentage point or less, where it was tracking before the flood gates were opened along our southern border. Can that be reversed? Unlikely. Birth rates have been falling steadily and the country is aging. In 1966 the average age for Americans was 29.5 years. Today, it has risen to over 39. The number of Americans age 65 and older is currently about 58 million or 17% of the population. By 2050 over 82 million or 23% will be over 65. No wonder the labor participation rate has been in steady decline. Barring a sudden surge in births or massive immigration of young people, the trend is irreversible.
Next look at productivity. While it often spikes to 5% or more in the immediate aftermath of recessions, it has rarely sustained growth of over 2% during this century. The most recent reading for Q1 of 2025 was a gain of 1.3%. Maybe AI can be a boost over time. But there are few indications that it is moving the needle yet. What has really boosted productivity in the past has been inventions like the car and air freight or infrastructure development like the Interstate Highway system. Robotics and other obvious productivity improvements do move the needle. That is why we get 2% annual growth. But the promise that AI is suddenly going to do the same is more a future hope than a present reality. A measure of GDP is population growth multiplied by the pace of productivity improvement. If population growth is 0.5%, achieving 3% GDP growth would require a sustained increase in productivity. That may happen but it won’t be due to anything in the budget bill just passed.
After the Trump tax cuts of 2017, supporters and detractors made both rosy and dire predictions of how the law would impact Federal revenues. But the trajectory hasn’t changed much. Lower tax rates were offset by higher incomes and corporate earnings that generated greater tax receipts.
Finally, as to tariffs, we may learn a lot more this week, even as Trump delays the date for implementation to August 1st. Tariff rates are likely to rise but tariff receipts won’t rise at the same pace because higher tariffs will shift supply chains and production sources as importers try to minimize the impact.
So, where does that leave us? Federal deficits this year are estimated at $1.9 trillion. The bill itself makes cuts in Federal Medicaid funding and SNAP program support but increases funding for border security and defense outlays. Meanwhile, Federal debt levels rise, meaning more interest to be paid, and Social Security outlays, indexed to inflation are also going to increase. Assuming sustained overall growth, most forecasts believe fiscal 2026 deficits might decline slightly. Treasury Secretary Bessent talks of 3% growth, 3% inflation, and 3% deficits to GDP over time. On a short-term basis, 3% growth is achievable but history suggests it will be hard to sustain without significant and steady improvements in productivity. 3% inflation is above current levels. But given the likely stimulative impact of the new law, it isn’t likely to be far off assuming the Fed doesn’t hold interest rates at restrictive levels for a sustained period. With that said, while 3% is only a percentage point above the Fed’s long-term target, a one percentage point difference over a long period of time (a decade or more) is meaningful. One way to get out from under our large and growing debt burden is to inflate our way out. 3% is above the Fed’s stated target. If 3% or less could be controlled, that might offer a solution. But the huge risk is that 3% leads to 4% which leads to a return of the stagflation that we all experienced in the 1970s.
This is what worries people from Jamie Dimon to Ray Dalio to Stanley Druckenmiller. I am reminded of seeing white-haired John Neff on CNBC in the late 1990s offering a doom scenario of the pending bursting of the Internet bubble. The young Turks getting rich riding the wave of the time scoffed at the white-haired has been just as many scoff at Dimon, Dalio and Druckenmiller today. Time will tell who is right. But there is reason to believe that the answers to the five questions I posited at the start of this letter are that GDP growth averaging 3% or greater will require a significant and sustained increase in productivity against a backdrop of an aging population. Deficits could moderate if growth reaches the upper end of White House expectations but even if they do moderate, getting deficits to GDP anywhere near 3% by 2030 will be a real stretch. That means more debt, more debt service costs, and higher long-term interest rates over time. As I have noted previously, bond market cycles tend to be very long. Rates rose from the early 1950s to a peak around 1981 and then receded to reach a low during Covid. A new cycle appears in place that will lead to a slow steady climb until the overall dynamics of slowing population growth and deficit spending can be stabilized or reversed.
This paints a long-term picture, one filled with long-term concerns. But near-term lower taxes and other stimulus from the reconciliation bill could lead to higher growth near-term. At the same time, the dollar has been in decline as a result of political and economic concerns. The weak dollar makes our exports less expensive and translates foreign earnings into more dollars, good for reported corporate profits. We will see the start of that benefit when companies start reporting second quarter earnings in a couple of weeks. Unless and until longer rates break out from their narrow range of the past six months, higher earnings should lead to a continued buoyant stock market. Hopefully not too buoyant as in 2021 when SPACs and meme stocks created a speculative froth that required correction in 2022. But the bottom line is that earnings when reported should be good news.
That assumes the fly in the ointment, tariffs, don’t interfere. Hopefully the 90-day reprieve from Trump’s Liberation Day reciprocal tariffs doesn’t end with a disruptive redo. The July 9 date for implementation has been delayed until August 1st. I wouldn’t write that date in ink. I have no way to predict the saber rattling likely this month. Almost certainly we will see some. If Trump’s goal is reshoring, the starting point should be to focus on what can be reshored and what is in our nation’s best interest to be reshored. Taxing cocoa or coffee beans will be nothing more than a tax, an economic burden. No coffee trees planted in North Dakota. On the other hand, attempting to get more critical high-tech components made here makes logical sense. It won’t happen tomorrow but it is in the nation’s best interest for it to happen. At the same time pure isolation doesn’t work. Witness the spat over rare earth materials and their processing. We are a nation blessed with great natural resources but not all natural resources. We also have needs that won’t be solved via tariffs. We need more electrical capacity, we have to rebuild and modernize our defense systems. With all the noise of the past six months, our government bureaucracy is still bloated. Hopefully, future appropriations bills will attempt to control spending a lot more effectively than a mammoth reconciliation bill.
All this suggests equities will continue to have a near-term tailwind as long as the bond market cooperates, meaning 10-year Treasury yields stay below 5%. So far, so good.
Today, Ringo Starr turns 85, figure skater Michelle Kwan turns 45, and comedian Jim Gaffigan turns 59.
James M. Meyer, CFA 610-260-2220