WHEN: Today, Friday, April 26, 2019
WHERE: CNBC's "The Exchange"
The following is the unofficial transcript of a FIRST ON CNBC interview with Council of Economic Advisers chairman Kevin Hassett and CNBC's Kelly Evans on CNBC's "The Exchange" today, Friday, April 26th. The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2019/04/26/cea-chair-kevin-hassett-could-see-q1-gdp-be-revised-higher.html.
All references must be sourced to CNBC.
KELLY EVANS: The economy in the U.S., powering ahead in the first quarter, growing at the 3.2% rate. It was better than expected, despite concerns about global weakness, a trade war, a partial government shutdown. Joining me now is Kevin Hassett. He's Chairman of the Council of Economic Advisers. Welcome, sir. It's good to see you.
KEVIN HASSETT: Yeah, thanks, Kelly. It's great to be here.
KELLY EVANS: You know, we can go through this line by line and maybe if you'll indulge me, we will.
KEVIN HASSETT: Of course, yeah.
KELLY EVANS: The headline number, though, and if you look at the last four or five quarters, we are at a higher run rate than we were in the previous few years. Is it sustainable?
KEVIN HASSETT: Yeah, absolutely. You know, our forecast for the year-- wait for it, was 3.2% for the year. And the first quarter was 3.2%. And so, if you ask me, gee, given the news of the first quarter, you can revise your forecast. You know, I have a hard time, you know, thinking of why. Except for maybe we can revise it up. Because, you know, the number was three times slower because of the government shutdown. And as you've covered a lot over the years, the first quarter tends to be low because the winter weather isn't accounted for, right, in the statistics. So, I think you add that all together, this is really blockbuster news, and suggests that the risks on the upside are very high for GDP this year.
KELLY EVANS: Yeah. And -- so, let's go through— the market reaction was interesting, Kevin. They kind of shrugged it off. You saw treasury bond rate -- yields falling a little bit on the back of this. The reason why is the boost from exports, the boost from inventories. Morgan Stanley is out there saying: because those were temporary gains in the first quarter, it thinks second quarter GDP will be only 1.1%. Do you have a better explanation for what's going on there?
KEVIN HASSETT: Sure. And you know, that's kind of what everybody was saying about the first quarter, you might recall if we go back to the beginning of it. And the fact is that the inventory story is correct. You know those guys are real pros. And when you get a lot of growth from inventories, it should give you pause about the next quarter because inventories tend to go up-and-down from quarter to quarter. But the fact is that incomes are growing at a high rate and consumption has not been. And so, our expectations is that the shells are being filled but they're going to be emptied out and production isn't going to go down the way it normally does when you see an inventory spike. And you can see that in the latest retail sales number which really skyrocketed, right? And so, I think the consumers are having their consumption catch up with income. That's going to be like the story for the next couple of quarters.
KELLY EVANS: Okay, sure. Let's talk about business investment for a second, because last year it was blockbuster. Obviously, a lot of incentives in the tax bill. But it has slowed lately. And I'll quote Strategas, who has been on the correct side in terms of being more bullish on the economy, but even they are saying that business investment is slowing. Despite all of those incentives, trade policy is weighing on investment and resolution of a deal with China would be better sooner rather than later. What can you tell the business community?
KEVIN HASSETT: Right. Well, the fact is that in our model that gives us the 3.2% growth this year, investment doesn't grow as fast as last year. Because what happened is like we got a jump to a much higher level. That's really good news. And if you can sustain that level, then you can sustain higher growth for a while. It's like if your income went from $50,000 to $100,000, and then you grew from $100,000 to 105 then the five wouldn't be bad news, because the good news is you didn't go back $50,000. And so, we had a big boom in investment last year and if it had gone back down then it would have been inconsistent with our models. But just sort of going up a little slower from here. It's exactly what we expect because what happens is that people, you know, built new factories last year. This year, they're turning them on—
KELLY EVANS: Right.
KEVIN HASSETT: They're beginning to produce output. In the first quarter, I think a lot of that new output from the new factories went into inventories. But I expect it will all be sold in the second quarter.
KELLY EVANS: Yeah, look, and Strategas takes all of that into account. I think the question here is tell us what is going on with these China talks. Kevin, give us, in the business community, some insight because we're now in late April, if I have the right month. But we were supposed to have, you know, this deal by now. We don't even have details on whether -- when the summit might be coming between the President and China's leader. It sounds like there's progress but then we've heard bupkis lately, so I can understand why the business community is going, 'Alright, we have to wait to see what is going on here.' What can you tell us?
KEVIN HASSETT: Right. Well, you know, I get briefed every Tuesday on the progress, and there's ample progress. There are discussions about the next round of talks ongoing. There's nothing to announce on that yet. But I can say the idea of uncertainty is pushing down capital spending in the U.S., it's actually probably if anything the other way. I think that if people are worried that we're going to keep our tariffs on China, then their new activity they would be more likely to locate in the U.S. than in China right now. And so, I don't think uncertainty on that is a negative. But that doesn't mean we want to deal. We sure do. And you might have noticed over the last few months I've been using a wedding analogy. And for the last weeks I've been saying we're at the point where you don't want the groom to see the bride. But now I think we're at the point where you don't want Dustin Hoffman to show up at the wedding. And so, right now I think it's getting close. But you know, there's still a lot of things to work out.
KELLY EVANS: Alright. We will take you at your word. Because again, it's been a little frustrating to follow all of this. It's obviously a big deal. We know a lot goes into it. These are delicate talks and hopefully all will turn out well. This then kind of brings into the summer period, Kevin, that starts to point into the fall where the debt ceiling looms with so many other issues. It's starting to get more focused today. "The Washington Post" is writing about it saying the White House is trying to avoid having all of these things kind of come to a head and hurt the economy. What is the plan for dealing with the debt ceiling?
KEVIN HASSETT: Well, I think that in the President's budget, you know, we actually are trying to get ahead of the curve on spending and that's the position that we're going to take into the fall. That I think our budget is a good guideline to, you know, what our belief is the right thing to do. The fact is that we came in, there were a lot of problems that had to be fixed like, you know, a defense that was sort of under tooled, that you saw like airplanes getting hit by hurricanes because they didn't have enough parts and so on. So, we had to spend more money on defense. We had to fix the tax system. But now I think getting ahead of the curve of the deficit is a high priority for us. And that's why the President is calling for 5% across the board spending cuts for cabinet agencies. And I think that, you know, you're right to look ahead to that and say that it's probably something that is going to be a focus of a lot of debate in the fall. And probably at times, uncertainty.
KELLY EVANS: So, who do we have to look towards for comprise on this? Nancy Pelosi? You know, 5% spending cuts might sound good to the President but not to the Congress.
KEVIN HASSETT: Well, I'm not a negotiator. But I can say that if we can get ahead of the curve on spending and reduce the deficit that given where we are, given the strong economy, it's a good time to do that and it would be very good for the long run outlook.
KELLY EVANS: Kevin, finally, I want to go back to the GDP number and ask if there's a way you guys have quantified the impact of deregulation, for example, on the economy. So, we know a lot of things going on behind the scenes everything from pipeline permitting processes to other things happening certainly that aren't in headlines every day could be contributing to the better growth rates we've seen lately. Do you have a way to quantify that and to tell us how sustainable that is?
KEVIN HASSETT: You know, it's funny you should ask that. Because, as a teaser, it's one of the things we've been working on, is a paper that's going to document and quantify all the gains from deregulation. You know, coming soon to a White House near you. But, you know, I can't give the numbers out yet. They haven't gone through fact checking and so on. But the fact is the deregulation effects are very large, and we're going document that soon in the thing that we're working on right now.
KELLY EVANS: Well, we look forward. Now, you have to give me the exclusive. I mean--
KEVIN HASSETT: There you go.
KELLY EVANS: Kevin, thanks very much. It's good to see you.
KEVIN HASSETT: Thank you.
KELLY EVANS: Kevin Hassett is Chair of the Council of Economic Advisers.
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