Columbia Business School Professor Abby Joseph Cohen Talks Consumer Data

Abby Joseph Cohen, Columbia Business School professor and former partner at Goldman Sachs, says recent consumer spending patterns are signaling issues with the US economy. Speaking on "Bloomberg The Close," she also warns AI investing may not be sustainable and previews the Jackson Hole Federal Reserve meeting. She talks to Bloomberg's Romaine Bostick.

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Speaker 1: Bloomberg Audio Studios, podcasts, radio, news. People are feeling confident

Speaker 1: about the here and now, but not so confident about

Speaker 1: what's around the corner. And that is actually the similar

Speaker 1: backdrop that we're seeing actually play out in the markets.

Speaker 1: You see that in the price action. A lot of euphoria,

Speaker 1: or at least a lot of optimism about the short term,

Speaker 1: but a lot more trepidation about the long term. Abby

Speaker 1: Joseph Cohen has seen quite a few economic and business cycles,

Speaker 1: a legendary economist and financial analyst. now a professor at

Speaker 1: the Columbia Business School, also, of course, former partner and

Speaker 1: chief U.S. strategist over at Goldman Sachs. And, Abby, I

Speaker 1: do want to start off talking about what the market

Speaker 1: is kind of telling us, because we talk about equities,

Speaker 1: of course, right now still camped out near record highs.

Speaker 1: But then you look at some of the moves that

Speaker 1: we've seen in Treasury yields, which seems to suggest, at

Speaker 1: least among bond investors, that they're a little less sanguine

Speaker 1: about the longer-term picture. What do we pay most attention to?

Speaker 1: What should we?

Speaker 2: Well, Romain, you've laid it out quite well in your

Speaker 2: introductory comments. Basically, this is an equity market that is

Speaker 2: being driven, at least for now, by very favorable earnings outlook.

Speaker 2: We've had great reports, and the expectation is that many

Speaker 2: of the leading companies will continue to be very profitable,

Speaker 2: strong margins, strong returns on equity. However, when we look

Speaker 2: at the rest of the economy, things are looking okay,

Speaker 2: but not great. And that's what those consumer confidence numbers

Speaker 2: are saying to you. We basically see, for example, that

Speaker 2: middle-income consumers are not feeling all that great about either

Speaker 2: their own financial situation or prospective employment and wage gains.

Speaker 2: And that's something that's quite telling. Among the things to

Speaker 2: be looking at, by the way, will be a real-time

Speaker 2: metric of consumer confidence. And that, of course, is consumer spending.

Speaker 2: Back-to-school sales will be important, but let's keep in mind

Speaker 2: that many of the retailers are trying to juice up

Speaker 2: those sales by doing their Halloween offerings very early. So

Speaker 2: that's something that will make the year-on-year comparisons a little

Speaker 2: bit difficult to read. We're also looking at a situation

Speaker 2: where the consumer balance sheet is looking more awkward than

Speaker 2: it has in the past. We see an uptick, for example,

Speaker 2: in subprime borrowing for autos, for example. And let's not forget,

Speaker 2: we're now seeing the pinch from some of those changes

Speaker 2: that were made in that big omnibus bill that was

Speaker 2: passed in January 2025. We know that many middle-income and

Speaker 2: lower middle-income households have lost their medical insurance coverage. And that,

Speaker 2: of course, says something about whether they can afford to

Speaker 2: be spending on other items.

Speaker 1: I do want to go back to the consumer spending thing.

Speaker 1: And this also gets to a lot of questions about

Speaker 1: the economic data we get and how reliable it is

Speaker 1: in the moment. I was looking through a lot of

Speaker 1: the corporate earnings that we've had, particularly among some of

Speaker 1: the folks in the retail space. And they have not

Speaker 1: necessarily been good. I mean, we're going to talk a

Speaker 1: little bit later in the show about Dick's Sporting Goods,

Speaker 1: which I missed because of higher promotions that it had

Speaker 1: to make. to get people back in the store. Last week,

Speaker 1: Walmart posted its slowest comp sales growth in about six

Speaker 1: years on holding Under Armour, Nike, you name it. A

Speaker 1: lot of these companies in their most recent earnings report

Speaker 1: seem to have suggested a choosier consumer and a consumer

Speaker 1: for some of them that isn't choosing at all. Should

Speaker 1: we pay more attention to what we're hearing out of

Speaker 1: some of these companies rather than maybe what the official

Speaker 1: economic data says?

Speaker 2: I think it's important to look at both You know,

Speaker 2: those retailers that you cite are very important because these

Speaker 2: are the large public companies. But one of the things

Speaker 2: that the aggregate data from the Commerce Department picks up

Speaker 2: is what's happening for mom-and-pop retailers. You know, what's happening

Speaker 2: for those retail companies that are not included in the

Speaker 2: market indices? And those numbers don't look particularly good either.

Speaker 2: You know, we see that personal consumption spending increase. is

Speaker 2: just about 2%, 1.8%. That's not as robust as we

Speaker 2: might like. In fact, when we look at aggregate GDP numbers,

Speaker 2: where is the vigor coming from? A lot of it

Speaker 2: is just coming from business fixed investment. And even there,

Speaker 2: it's primarily equipment, which is growing something on the order

Speaker 2: of 11% or 12% on an annualized rate. Business fixed

Speaker 2: expenditures for structures, buildings, is actually down 4%. So this

Speaker 2: is an economy that is very uneven in its growth,

Speaker 2: and the middle-income, lower-middle-income consumers are not where the vigor is,

Speaker 2: not at all.

Speaker 3: Well, this is also an economy, Abby, where we're seeing

Speaker 3: so much spending on the build-out of artificial intelligence infrastructure.

Speaker 3: How do you kind of see that weighing on pricing

Speaker 3: pressures and economic growth going forward?

Speaker 2: Well, there are so many different ways to slice and

Speaker 2: dice that. I'm glad that you asked that question. First

Speaker 2: of all, there is the accounting question that is very

Speaker 2: comparable to that cross holdings situation in Japan in the 1980s,

Speaker 2: where there's the circularity to a lot of the accounting,

Speaker 2: where different companies in the industry or related industry are

Speaker 2: basically borrowing and lending money to one another. And it

Speaker 2: shows up in some cases as earnings. and in other

Speaker 2: cases as a prospective revenue. So that's one thing to

Speaker 2: keep in mind. The second thing to keep in mind

Speaker 2: is whether there is, in fact, a sustainability to some

Speaker 2: of what we are seeing, particularly when it comes to

Speaker 2: growth in data centers and also growth in expenditures on

Speaker 2: some of the chips and so on. Now, look, I'm

Speaker 2: not at all... saying that there's not something very unique happening,

Speaker 2: a structural change as it relates to AI and so on. However,

Speaker 2: we also have to keep in mind that some of

Speaker 2: the spending that we're seeing and some of the accounting

Speaker 2: that we're seeing may not be sustainable.

Speaker 3: Yeah, talk a little bit more about that. Is it

Speaker 3: already clear to you what sectors, what companies are starting

Speaker 3: to become the winners versus the losers of this AI race?

Speaker 2: There are other people who are very close to this

Speaker 2: situation who have identified winners and losers. I think we

Speaker 2: look not just only at the companies, but we also

Speaker 2: have to look at the geographies, which are the communities

Speaker 2: and which are the countries that are likely to do

Speaker 2: quite well in this environment. AI has much promise to it.

Speaker 2: What we've not yet seen is whether there has been

Speaker 2: a boost in labor productivity. That certainly has not come through,

Speaker 2: at least to this point. Maybe it's too soon. So

Speaker 2: that's number one. Number two, we see that many of

Speaker 2: the companies that have invested heavily as customers in AI

Speaker 2: say that they are continuing to spend, but they have

Speaker 2: not yet seen the benefit to themselves. So to answer

Speaker 2: your question at this stage, which is pretty early still,

Speaker 2: when you talk about a technological change innovation that is

Speaker 2: hopefully going to have positive impact throughout the economy. The

Speaker 2: beneficiaries thus far have been the suppliers and the providers,

Speaker 2: and we have not yet seen it in terms of

Speaker 2: an economy-wide process.

Speaker 1: When do you think, though, we'll start to see that

Speaker 1: gap between the amount of AI investment and these productivity gains?

Speaker 1: I feel like past cycles, we've seen this before, where

Speaker 1: the spending far outpaces the gains, the returns, but eventually

Speaker 1: it catches up. I mean, what is the lag time historically?

Speaker 1: What does that tell us?

Speaker 2: Well, the most recent period, of course, was the 1990s

Speaker 2: with the so-called TMT, which was Internet telecom, media, communications,

Speaker 2: and so on. And there, the lag time was something

Speaker 2: on the order of two to three years. We also

Speaker 2: have to keep in mind that the economic data didn't

Speaker 2: keep up because many of the economic statistics were tracking

Speaker 2: some of the older companies that were not participating. But

Speaker 2: there's some fascinating work going back in economic history, looking

Speaker 2: at the canals of the 1820s or the railroads of

Speaker 2: the 1840s and 1850s electricity generation in the late 19th

Speaker 2: and early 20th century and so on. And there, very often,

Speaker 2: the lag was measured in terms of many, many years.

Speaker 2: I don't think it's going to take that long this time.

Speaker 2: I think we're looking in terms of one or two years.

Speaker 2: And if the heavy spending doesn't lead to propitious results

Speaker 2: for a particular company, one can assume that they will

Speaker 2: cut back or at least they'll try to rationalize the

Speaker 2: spending that they've been doing in this category.

Speaker 1: Professor, I do want to get your thoughts on the

Speaker 1: Jackson Hole meeting, which kicks off this week. Kevin Warsh's

Speaker 1: speech on Friday, ostensibly about financial innovation and payments. I

Speaker 1: assume people are going to be looking for something maybe

Speaker 1: a little bit different than just what that headline suggests.

Speaker 1: But you started your career inside the Federal Reserve. And

Speaker 1: I am curious that when a chair, new chair, I

Speaker 1: should say, steps up to that podium for the first time,

Speaker 1: who are they speaking to? Are they speaking to the

Speaker 1: audience in the room? Are they speaking to the market? Who?

Speaker 2: Hopefully, they're speaking to all of us. Mr. Walsh, as

Speaker 2: you know, did not get rave reviews from the markets

Speaker 2: when he did his first post-FOA meeting press conference. And

Speaker 2: the argument at that time on the part of many

Speaker 2: was he didn't really provide very much information or guidance.

Speaker 2: And the sort of guidance that the markets are looking

Speaker 2: for is not to be told gee, we're going to

Speaker 2: do this or that to interest rates in a very

Speaker 2: specific timeframe, but at least to understand what the variables

Speaker 2: are that he's most interested in looking at. And I

Speaker 2: do think that we will be hearing more of that,

Speaker 2: if not short-term, at least what he's looking at intermediate

Speaker 2: to long-term, number one. Number two, also structure. He has

Speaker 2: spent a good deal of time thus far at the

Speaker 2: Fed thinking in terms of whether the Fed is handling

Speaker 2: itself appropriately, when it comes to things like communications, regulatory oversight,

Speaker 2: data collection, and so on. And I hope that we

Speaker 2: hear more of that. And the third thing, too, is

Speaker 2: that the attendees at this meeting come from all over

Speaker 2: the world. And I'm hoping that he will have an opportunity,

Speaker 2: not just in that public speech, but of course behind

Speaker 2: the scenes in private meetings with other central bankers, for

Speaker 2: them to come to some understanding of what they're all

Speaker 2: looking at, what they're concerned about, and how they think

Speaker 2: they can do better moving forward. And when I say better,

Speaker 2: I'm talking in terms of coordination, communication, and also, dare

Speaker 2: I say it, risk control. One of the things that

Speaker 2: the central bank in any nation has as its responsibility

Speaker 2: is to think about what to do if things go wrong. Now,

Speaker 2: that might be a very low probability scenario But it's

Speaker 2: something that we expect central bankers to be prepared for,

Speaker 2: not just in their own countries, but also as they

Speaker 2: work with one another. As the Fed handles the central

Speaker 2: banking for the world's largest economy and largest banking system,

Speaker 2: what Mr. Walsh tells everyone, both behind the scenes and

Speaker 2: in front of the camera, in this regard is really

Speaker 2: quite important.

Speaker 1: All right, Abby, you have to leave it there. Really

Speaker 1: appreciate you joining us. Abby Joseph Cohen, of course, needs

Speaker 1: no introduction. One of the greatest minds in the world

Speaker 1: of business and finance, a professor now at the Columbia

Speaker 1: Business School here in New York.