For the 27th straight year, some of the brightest minds from across the business world descended on Beverly Hills in early May to attend the Milken Institute Global Conference.
But while speculation stole headlines, Milken speakers spent much of their time fixated on the state of the US economy. Below is a breakdown of the economic backdrop and key risks to it from business leaders, including the CEOs of Wells Fargo and Franklin Templeton.
A recession is off the table in spite of slowing growth
Contrary to what investment chiefs predicted at Milken last year, the US economic expansion is alive and well. GDP growth blew expectations out of the water by surging in the third and fourth quarters of 2023, which — coupled with steadily falling inflation — fueled a massive market rally.
The nirvana narrative was tested in April, as Q1 GDP growth was weaker than expected, while March inflation data came in hot. In turn, US stocks took a 4.2% hit last month.
But despite continued concerns about stagflation, Milken speakers overwhelmingly expressed confidence about economic growth at a May 6 session called “Global Markets at Inflection.”
The so-called “S word,” as panel moderator Gerard Baker of The Wall Street Journal referred to it, is marked by a stagnant economy and persistently high price growth. Neither aptly describes this backdrop, as growth is cooling but far from lackluster, while inflation is slowly heading lower.
“Stagflation is not what we are going through,” said Andre Esteves, the chairman of Brazil-based investment bank BTG Pactual. “We have healthy growth in the US — even moderating — and inflation is slightly above the targets.”
Consumers drive over two-thirds of US GDP growth, so a recession is unlikely unless they significantly cut back on spending. Recent earnings reports from McDonald’s and Starbucks suggest that consumers may be stretched, but Milken panelists said they don’t see red flags.
“Maybe I’m a bubble, but you go out — every airplane you get on is full, the restaurants are still pretty full, wages are still increasing,” said Jenny Johnson, the CEO of Franklin Templeton.
Johnson’s upbeat sentiment was seconded by fellow CEO Charlie Scharf of Wells Fargo.
“The economy is still extremely strong, consumers are still doing really well, businesses are still doing really well,” Scharf said. “When you look at the financial position of each — all things considered, given all that we’ve been through — it’s not as good as it can get, but it’s really strong and very, very consistent.”
Scharf continued: “We’re always looking at our different portfolios — whether it’s credit or on the consumer side — looking at spending patterns, looking for weakness. And you’ve got to look really deeply to find anything that’s weak, and that hasn’t changed.”
An ‘unprecedented’ debt load could eventually lead to disaster
Although the US economy is healthy, a litany of business leaders expressed serious concern about a looming long-term risk: the nation’s skyrocketing national debt balance.
Uncle Sam is $34.7 trillion in the hole, and counting. It took just 106 days, or three and a half months, to rack up the latest trillion versus nearly a dozen years to reach the first trillion.
Milken Institute Global Conference
The US’s debt load is nearly as large as its GDP output and is at its highest relative level since World War II, noted Joshua Friedman, the cofounder and co-CEO of investment management firm Canyon Partners, in a May 6 talk titled “Common Sense from Uncommon Investors.”
“The level of fiscal deficit spending in the US is really quite unprecedented relative to history, especially when you think about the US being at a sub-4% unemployment rate,” said Anne Walsh, the chief investment officer at Guggenheim Investments, in that session. “We are seeing the government spending literally at a level that you wouldn’t see outside of world wars.”
Milken Institute Global Conference
There’s now tremendous pressure on the national government to refinance its debt, given that debt-servicing costs are projected to be tens of trillions of dollars in the coming decades.
“It’s hard to have a lot of degrees of freedom when you have pent-up federal spending, which is inflationary; you have low unemployment; and you have debt constantly coming due and big gaps in the federal balance sheet,” Friedman said.
Unless the US balances its budget, it will be harder to convince households, companies, and other countries to buy its bonds. As unlikely as it may seem today, Treasuries may eventually be seen as risky instead of the virtually risk-free investment they’re considered to be now.
“Though the dollar is the global reserve currency of the world, there is always a limit to print — even if you are the owner of the printer,” Esteves said.
But there’s a reason the US hasn’t run a budget surplus in decades. Congress can barely agree on anything except that raising taxes — with the possible exception of the ultra-wealthy — is a non-starter. It’s almost impossible to get Democrats and Republicans to agree on where to rein in spending, and anyone who campaigns on spending cuts and tax hikes won’t win.
Besides, while the national debt is clearly a long-term risk, it’s not a near-term priority.
“Washington has a lot of things on their agenda, and they react to the things that they’ve got to deal with in the short term,” Scharf said. “And so to stand up and say that the deficit is the issue we have to deal with today is someone putting political capital into something which is going to be very hard for them to get done.”
When the US’s debt load becomes unsustainable, experts say a serious recession will ensue. No one knows exactly when that will be, but barring miraculous frugality from Congress, it’s getting nearer by the day.
“Longer term, the US has got to deal with this issue,” Johnson said. “You cannot continue to spend at the pace that we spend.”
Though far from perfect, the US is still the best place to invest
Despite the $34.7 trillion anvil hanging over the economy, Milken speakers widely agreed that the US is still the best place to invest and operate a company.
“It’s the harvest of a combination of a lot of things in the US,” Esteves said. “It’s a free market, functional democracy, best education in the world, best universities in the world, innovation, and functional and deep capital markets. If you put all of that together, you have outperformance.”
Scharf of Wells Fargo echoed that point, emphasizing the relatively friendly business climate.
“Look at all the pluses that the country has going forward — whether it’s innovation, whether it’s the education, whether it’s the financial system, our markets, the strength of banks,” Scharf said. “And so those have all come together, and you see the benefits of that.”
The US has an unenviable fiscal situation, but its economic strength is unrivaled and its bonds are seen as the safest in the world, and the same is true of its currency. While it may not be saying much, the US seems to be the best house in a bad neighborhood — at least for now.
