WHEN: Today, Friday, April 26, 2019
WHERE: CNBC's "Squawk on the Street"
The following is the unofficial transcript of a FIRST ON CNBC interview with National Economic Council Director Larry Kudlow on CNBC's "Squawk on the Street" (M-F 9AM – 11AM) 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/watch-cnbcs-full-interview-with-larry-kudlow-on-q1-gdp-report.html.
All references must be sourced to CNBC.
DAVID FABER: One big interview to another. The economy, of course as we've told you, is growing at a strong base in the first quarter. GDP, 3.2%. That was well above what many economists had expected. Joining us now with what you may expect would be a very positive reaction, I would assume, National Economic Council Director, Larry Kudlow. Larry, nice to see you this morning.
LARRY KUDLOW: Morning, David. How are you? And good morning, Jimmy. How are you?
JIM CRAMER: Hey, buddy.
DAVID FABER: We're good.
JIM CRAMER: I'll just say that.
DAVID FABER: We're well. Let's just into the nuts and bolts. You know, it's kind of-- Rick Santelli was talking earlier about the ten-year is still 2.5, or below that, in terms of the yield. A somewhat surprising reaction this morning, Larry. Maybe people are already looking through this number. You know, give me your take, in terms of the bond market reaction and in terms of, well, consumer banking was up 1.2% but maybe business investment slowed. Because the market perhaps someone unexpectedly kind of just taking this and moving on.
LARRY KUDLOW: Well, look, it's a blowout number. And I'll just say that President Trump's policies are rebuilding the economy. And actually, the prosperity cycle we're in is gaining momentum, not losing it. It's gaining momentum. So, I think that's extremely positive. Let me also add, the inflation rate continues to slip lower and lower. And actually, by the Fed's own measure, the PCE deflator for inflation has dropped from 2.2% last summer to 1.4% this winter. Even according to the Fed's own spokespeople from the Chairman on down, that could open the door to a target rate reduction in the months ahead. The Fed is independent. I am just expressing my own view. The President happens to agree with that view. So, I'll just put that in there.
DAVID FABER: Larry, Larry, Larry. How can you be talking about a rate cut after a 3.2% GDP print for the first quarter?
LARRY KUDLOW: Well, because look, this is again by the Fed's own lights, David. They are now targeting inflation, which is coming in way below their own benchmark metric of 2%. So, I am just saying -- look, here is a point, supply-side—
DAVID FABER: They do have a dual mandate, Larry. They do have a dual mandate.
LARRY KUDLOW: Right, but it is not growth that we worry about. As inflation has come down, growth is actually improving or at least sustaining a 3% growth rate. So, I basically like that story. Look, supply-side tax cuts, deregulation, opening the energy sector, pro-growth trade reform, that's improving the supply side, the production and investment side of the economy. One stat that's very interesting from the durable goods yesterday: from December through March, core capital goods spending, core cap ex as it is called, is actually growing at a 10% annual rate. That's a terrific pickup. And at the same time, we saw huge retail sales number in April. So, what I am saying is we are clicking on all cylinders. The inflation rate is coming down. The Federal Reserve will be looking at that. I know old style analysis says fast growth means higher inflation. You know I have never bought into that. I still do not buy into the that. What you are getting now is more goods, more goods, and more production and more output, 3.2% in Q1. That actually is chasing less money and so therefore, the inflation rate is coming off. I think that's very significant.
JIM CRAMER: Larry, great to see you. You taught me a great deal in the time we had "Kudlow & Cramer." One of them is, when you get great numbers, don't look through them. Great numbers are great numbers. They put people to work. They make every worker do much better. But they also do something else internationally that I need you to tell me where we stand. Doesn't this strong GDP number give us an upper hand against the Chinese, who are trying to tell us that, 'Look, you need us more than we need you.' Isn't a 3 plus GDP number the end of that narrative?
LARRY KUDLOW: I agree. I think it's a key point. We are negotiating with China. As you know, we've made a lot of progress but the deal is not done. Secretary Mnuchin and Ambassador Lighthizer are going over there next week. After that, Liu He, China's top trade negotiator, is coming here the following week. I hope additional progress will be made. I am cautiously optimistic about the outcome for a deal. But, but, but, but— your point is well taken. China's economy is slumping and has been for quite some time. The U.S. economy as I say is in this prosperity cycle with no end in sight. So, we believe that does give us some leverage, if you will. But we believe also that China may be open to a lot of good trade reforms. We'll see. I don't want to make a clear forecast, as I say, headway looks pretty good but you know, I guess and I think the President would agree with this, they need a good deal even more than we need a good deal but, we would like a deal that works for both countries and increases economic growth for both countries and hence around the world. So, let's keep an open mind. I think we are moving in the right direction on that one.
JIM CRAMER: Alright, that's interesting.
DAVID FABER: Yeah--
JIM CRAMER: Just quickly—
DAVID FABER: Yeah, of course.
JIM CRAMER: Larry made a point that I think is very valuable. There are a lot of lies being told that the money saved from the tax cut just went to buying back stock. Larry, you and I both know that's not true. We listen to conference call after conference call. And what's happened is that people are being put to work and more importantly, there is a tremendous spending on capital equipment in our country. And in China, they just try to pump up the economy by printing money. Companies that are, you and I know, are bankrupt. The only way that make money is to dump in this country. Is it not true, Larry, that a sizable portion of that money went to exactly where it was supposed to go?
LARRY KUDLOW: Yes. Yes. Absolutely. You are so spot on. And you know, the cap numbers are very important. That's your supply side push. That gets you more investment, more productivity, productivity by the way, the last 12 months or so is rising 1.8% so it's close to 2% -- that's a big improvement from years past. You're getting 2% growth in employment. The jobs story is absolutely terrific. The wage story is terrific. I mean, all private wages are about 4.5% increase. The non-supervisory wages from the job reports, 3.2%, so you're getting good productivity, good job increases, mainly because capital is being invested into the economy. That's the key. And this is just the beginning. I give you my view. Take it or not. It takes a while for these big companies to turn the ships around, but they are shifting now to a huge capital expansion. And that means better technology, better plans and equipment, modernization. It also means better training and reskilling, as my colleague Ivanka Trump would say, reskilling of the workforce. And the workforce is come out of the woodwork back in, so they will be counted and the unemployment rate will probably continue to fall. I think this is a very ideal situation.
DAVID FABER: Larry, I want to come back to China for a minute. Because it was interesting listening to you answering Jim's question you seem to imply, you know, when Lighthizer is in there and he got his checklist, that he can go tougher on the Chinese with this kind of wind at the back of the U.S. economy. Is that a fair statement?
LARRY KUDLOW: Yes, I agree. And that is our position, by the way. And we'll see this, look, you've got sort of two areas here. And again, I'm not forecasting an outcome, because deal is not done yet, it has to be a great deal for the U.S. But, to your point, which I agree, really Jimmy's point: first, on the structural issues, we are hanging very tough. There must be enforcement, we have to shift the I.P. theft, we have stop the forced transfer of technology, we have to open up the cloud there, so we can use it from our production here in the United States. From the commodity standpoint, both farm and industrial, you've got to have lower tariffs and non tariff barriers, and that's an area where our team is going to be particularly tough. We love exports. And in fact, in today's report, net exports was a driver of the 3.2% GDP. That's terrific. That's a Trump policy that continues. But, because of our strength and because I think China needs to open their economy to better growth outlook, we will be strong, this number helps that a lot. We will be very aggressive in these trade talks. Very aggressive.
DAVID FABER: And, Larry, finally on the subject of trade, there are those who look at the report and say, 'Well, listen, there was an inventory build. People were trying to get ahead of higher tariffs before they were sort of put off.' Is there a concern or question at least that trade and inventories drove higher growth than was anticipated by some but won't be there in future quarters?
LARRY KUDLOW: Well, look, inventory swing around, as you guys know, I think about two-thirds of the inventory build came from the auto sector, which was sluggish in recent months. Now, let me make this point to the -- I don't think it is particularly a trade-related thing, David, though you may be right, there may be some of that in there. It looks to us like it's mostly autos. So, here is my point on this. Consumer spending soared in March, okay. You have big job growth which means wages and incomes give consumers a lot of power. So, looking forward to the second quarter and the third quarter, I think you'll see a pickup in car sales, because of the resources consumers have. I also think you're going to see a steady increase in housing. Housing is starting to rebound again. I think that's a big positive for the economy. So, I think that the GDP report will continue. We will stay with our 3% growth rate estimate. That's been our view all along. I know some people disagree. I respect that disagreement. But frankly, I think the prosperity cycle is intact. And frankly I think the Trump policies are working to rebuild America. And people are getting happier and happier, David. I'm sure you're happy about this.
DAVID FABER: I am.
LARRY KUDLOW: I know Jimmy is happy about this. People like prosperity.
JIM CRAMER: Larry, you always make me happy.
DAVID FABER: You know, I'm generally-- everybody who knows me knows I'm Mr. Happiness. I mean, you know that.
LARRY KUDLOW: You are, man. You, and I, look—
DAVID FABER: Yeah.
LARRY KUDLOW: I love happiness. I want America to be optimistic again. I think that's exactly where we are going. You know, numbers are numbers and GDP is GDP. But I think the morale of the country is picking up. But I do love these numbers. I just think they're beating what everybody else thinks is happening.
DAVID FABER: Well, Larry, we appreciate your sharing some time with us this morning. Thank you.
JIM CRAMER: Congratulations, Larry.
LARRY KUDLOW: My pleasure. Thank you.
DAVID FABER: Larry Kudlow.
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