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- [00:01]
A
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B
Hi, I'm Josh Christensen, executive producer of Inc. Podcasts, and this is from the ground up's fall programming. @ this year's year's Inc. Founder House event in Philadelphia, Editor in Chief Mike Hoffman spoke to Joao Gomez, senior vice dean of research and professor of Finance at the Wharton School, about the future of capitalism, tariffs, growth and markets. They delve into topics like consumer outlook, the decreasing trend of extravagant spending, the hiring slowdown in various job markets, and the negative impact of Trump's tariffs. All right, here's that conversation.
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C
Hello everybody. We're really excited to be here to close out Inc. Founders House and we have a really great conversation planned. Joel Gomez is a professor of finance at the Wharton School and an expert on all things to do with macroeconomics. And as you've heard throughout the panels today, and certainly if you've been talking to your neighbors at different events and thinking about what's going on in the world, we know that the world of macroeconomics is up for grabs in a way that's really unprecedented, really dynamic and exciting, but also an area that's like, scary. And we wanted to have this conversation to think about what can you as a business owner and a founder do to prepare yourself and your company and your customers for what's ahead? And the bad news is we don't know exactly what's ahead, but we're here to at least begin to parse some of it. So Joel, welcome.
- [01:54]
D
Thank you, Mike. Thank you for having me.
- [01:57]
C
That's right. We know that GDP for Q1 comes out tomorrow. The conference board Consumer Outlook came out today. The conference board's data was not great. It was the lowest level recorded, I think, since in the past 13 years. And it was the fifth consecutive month of dropping. So there are a mix of companies represented here, some that are consumer focused, some that are business to business, some that live in the liminal space in between. Is there anything that you would say just straight off the bat, knowing that consumer sentiment seems to be really softening and souring? How should companies be thinking about that?
- [02:39]
D
I split the consumers in two big groups. One is people that are relatively well off. 50% of what is consumed in the US is done by the top 20%. So if you are in that sector, sort of what we call consumer discretionary, you have to worry about things like the stock market is down 10%. So maybe vacations, luxury, those kinds of things are going to be difficult for folks to spend money on in the coming year or so. And frankly, for entrepreneurs, for innovators, that's what we're hoping for. Allocate part of your extra income to my new product, right? The staples, the food, the clothing, the school for the kids. Those things you'll pay for anyway. But you want people to have a little bit of disposable income to try new things. And I think that's going to be a little challenging. Then the other statistic that I worry a little bit about, the consumer, is at the bottom end, defaults and delinquent payments on credit cards are really going up. They've gone up the last two or three months and they're really at a very high level, close to what they were, say, 10, 12 years ago. So that's a big concern at the bottom end of the income distribution. Those are hard data. We have lots of soft data, consumer sentiment surveys, people worrying about inflation. But in terms of hard facts, those two are pretty inescapable. The stock market is down 10%. That is going to eat into people's willingness to be extravagant in their spending. And at the bottom end of the distribution, there's a lot of credit card delinquencies that we see already.
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C
And apart from GDP growth, which we'll see tomorrow, fingers crossed. What about. There's also an ADP survey that comes out tomorrow around hiring and what are some of the things that you are looking for? So far the job market has held up, but the question is, how long will that continue?
- [04:28]
D
That's the big one to me, not so much gdp. I'm a little curious about gdp. It's been really complicated, but I sort of dismiss it a little bit because a lot of people have been buying things in advance of tariffs. A lot of firms have imported goods. That's going to distort the data on GDP for a while. So I'm going to ignore it. The employment numbers. These are the first employment numbers after Liberation Day when a lot of uncertainty came into play. And we're going to see, I think, a lot of firms in this data reflecting a lot of firms not hiring or putting hiring on hold. Not a lot of job losses, which would have a big impact on consumers. But I think we'll see a slowdown in hiring and that will continue. I think through Q2 and for how long this uncertainty lasts. So to me, that's the biggest release. Both the AVP number and then the full employment report that the Bureau of Labor Statistics puts up on Friday. That's ultimately the big one.
- [05:24]
C
And are you surprised by the speed with which things seem to have swung? You know, if you were looking at the numbers in December, January, February, it seemed like things were pretty good. There was energy certainly around the second Trump term that there might be a boost in M and A and that we might see like a sort of unprecedented unleashing of, you know, private companies and other companies being acquired. Are you surprised that the swing has been so quick?
- [05:51]
D
I'm very disappointed, I have to say, and I think a lot of people in the business community are in that level. I think we knew the tariff discussion could lead here. We could have found ourselves in this position. I think we always thought that common sense would prevail in the sense that the folks that are more sensible to the cost of tariffs would have held sway with the president. They didn't, and we got to this point. So in that sense, I am disappointed. I think a lot of people are disappointed.
- [06:22]
C
It's a very 2025 vibe, by the way, that the phrase common sense will prevail is a laugh line.
- [06:28]
D
It is true. It is true.
- [06:31]
C
Well, tariffs. Let's talk about that a little bit. I was Talking to an Inc. 5000 CEO at lunch earlier who was saying that he imports from overseas and every new shipment that comes in and they've been trying to get as many shipments in as they can, it's $17,000. And that he suspects that he'll be raising prices in the next couple. Obviously, when you think about that writ large across the entire economy, that seems like it could put us back into an inflationary posture, which we just got ourselves dug out of the soft landing and all that. So what do you expect to see in terms of companies raising prices? And frankly, like, what would you advise the founders and companies in this room to think about as they think about their pricing strategy?
- [07:15]
D
Well, my biggest concern is actually inventory. These shipments that get delayed or actually canceled, and the fact that we're not going to get so many goods, particularly out of China, are going to put pressure on. And I would be very careful about planning anything around there that depends on a steady supply chain. I think that's the biggest unknown we'll find out. But I think inventory is going to be a real problem in the next two, three months. Prices, sure. If things are not available Prices will go up. I think on top of what you said, we have the dollar sliding and that's going to add to inflation. That's going to be a problem that's going to again, eat into the consumer's purchasing power. No question. Right. But in the next three months, I think I'm really concerned about lack of invent and that could be in itself impact consumer confidence, disrupt how people feel about spending money. So we'll have better sense in I think April, not April, I'm sorry, May, June. But it's a concern already. Looking at the decline in shipments and a lot of the soft data that.
- [08:18]
C
We have from it seems like ships are stuck in ports in China because people aren't ready for them to come and that sort of thing. Right.
- [08:25]
D
Not paying that kind of price, hoping the tariffs will go away. Right. And that's where the uncertainty, uncertainty is a problem. Right. We just don't know how long this is going to last. If it's only going to last two more months, why would you buy anything right now? Right. And I think we'll see that until we sign something with some country that makes any of any importance.
- [08:45]
C
You also have framed tariffs, obviously are a big immediate problem for global business that has just occurred. But beyond that, immigration's another issue that you think is kind of a sleeper economic issue or maybe not such a sleeper. Can you talk about that?
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D
I think if you're in the entrepreneurship space, what might be coming on the immigration front is far more important. I think tariffs are a solution in search of a problem. When people sit down and they think through it, we're going to settle down, we'll have more tariffs than we used to, but it's not going to be a big deal two, three years down. I think immigration is a much bigger problem. So much of entrepreneurship is either because immigrants start business, those immigrants play a big role, key employee at various positions in the development. And this is a statement of just statistics. Right? It's not a statement, it's not a philosophical statement. Just you can look at the data and I think what we're doing on the immigration front will have longer term consequences for this country's ability to innovate and the culture of entrepreneurship and the success of a lot of small businesses 20, 30 years down. And I think that starts with people not coming here to get degrees because they, they don't really feel comfortable coming to the US and exposing themselves to the uncertainty of being deported. But literally us having more difficult, raising more difficulties in having those people come in and Staying. So I worry about that a lot more. I worry also because I see this, there's more of a consensus on that front about the fact that we might have had too much immigration in the last few years. It felt a little like this. The way people express themselves and I think the way people worried about some issues, I don't see that on the tariffs front. I think tariffs will come and go, will be annoying for two months, two years. But immigration for small businesses and entrepreneurship I think is a much bigger concern for me.
- [10:40]
C
And I'm curious, at a time when the US is taking this really aggressive posture to the rest of the world through tariffs, through things like threatening to annex Greenland or Canada, and as well through a very nativist approach to immigration, what do you see other major economic powers doing?
- [11:05]
D
Trying to become self sufficient, which is difficult, very difficult. I think the president did not misread, in my opinion, the world economy when he's playing this game of chicken. I do think most other countries are far more vulnerable to the economic damage of tariffs than we are. You said for us, these will be inflationary. For them, they'll be deflationary. They'll probably cause a recession. So as much as I don't like the strategy and a lot of the tactics, if it's a game of chicken and who's going to fold if we have patience, they're more likely to fold than we are. There'll be serious economic damage in the short term. The question is, are countries like Vietnam, Korea more likely to say we want to do business in Asia? We don't find Taiwan even. We don't find being dependent and tied to the US a reliable way of growing in the future. That's my concern, that we'll have these groups, coalitions, unions, Europeans, less so, but particularly in Asia, that were so vital to fund our growth and our economic success story in the last 20 years. And they will just say, you know what? We don't want to be tied to the US One dimension where I see this as a big concern is in terms of capital flowing into the U.S. one thing that has been really enabling our growth, our cheap mortgages, our plenty of funding for VCs and so on, has been the fact that we have half a trillion dollars come from the rest of the world to invest in the US to buy government bonds, to fund mortgages, to fund all sorts of things. That money was available to be deployed. And that is going the other way right now because people are starting to have some nervousness about do I want to have assets in dollars? Do I want to have exposure to this country and this economy and this government? And if that flips, the ability to fund whatever brilliant ideas we have in the future is going to be a lot more challenged. And so preserving capital, I think in the near term is a big deal.
- [13:11]
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We'll be right back after a quick break.
- [13:19]
A
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- [13:47]
C
The US being the global reserve currency, what benefits did we receive economically and in particular to the entrepreneurial sector virtue of having that be the case for the entire period from the end of World War II through February?
- [14:02]
D
It's a great thing to remember. I mean we talk a lot about how we're dependent to the rest of the world and they don't buy any of our things. Our most successful export is the US Government bond. They buy plenty of that. And by doing that they keep our rates at 3%, they kept our rates at 3%, at 2%, the mortgage rates of 4 and 5 and they allowed banks to take a lot of capital and funds, VCs and hedge funds and PE shops that went around and did all sorts of deals that helped fund our growth. If that capital evaporates or at least significantly reduced, we have a big concern about funding our growth as I said before. So to me it's probably of all the closed doors, make ourselves independent of the rest of the world that is the biggest threat. I'm not so worried about trade. I am worried about immigration. But the lack of access to foreign capital markets and that sort of half a trillion dollars a year, what will that do to interest rates and to the cost of funding anything? Think 15%. What's going to become 20%? Some of these things that we need capital that founders will want or something as compensation. So I worry about that more.
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C
And a part of the Inc audience is the Inc 5000. And these are very fast growing companies. And as we know, fast growing companies are terrific in many ways, but they consume capital, right?
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D
Consume capital and maybe a little bit.
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C
Less now with AI and with remote, fully remote companies. I mean there are some ways in which today's companies and startups can be less capital intensive than those even of 10 years ago. I'm sort of curious like what if this crisis, let's call it a crisis, or, you know, this disruption challenge. Challenge sure continues for two months, three months, four months, or even, you know, three years. What would you expect to see both among institutional capital and lenders and those groups? And what would you then advise people running fast growth companies to think about in terms of capital preservation?
- [16:13]
D
The most obvious place where I would think through my strategy is exit strategies. A lot of us are thinking, okay, I'm going to be successful, I'm going to work on this, I'm going to be successful. And then at some point, there's an exit plan that requires somebody with deep pockets to come and make you rich. That might take longer, significantly longer. That might not happen at all this year, forget this year, but it might take significantly longer if. If we go into a world where capital just doesn't flow as easily. So that's number one. I think if you're nimble, it's always, there's going to be plenty of opportunities. There's going to be people who are going to do a lot worse than you, and there's plenty of opportunities to think about, okay, that failed. So I don't have one competitor, I don't have two competitors. I don't have three competitors. So it is a story where the fittest will do very well, because in some ways your competition gets challenged and maybe not successful, but I would think, yeah, you need capital and you need to be nimble, and you need to just recognize that exit strategies are going to be much longer into the future than what you might have thought.
- [17:23]
C
If someone here has a term sheet today or is on the precipice of raising a lot of money from friends and family or from an angel or whomever, what questions would you advise them to ask themselves before they sign on the dotted line? How should they think about that? Should they be like, yes, let me grab the money right now, or should they be more wary and wait and see?
- [17:45]
D
Do I need to do this right now? Can I wait six months? That's number one. And number two, do I have the funding secure? If I do, fine, fine. I mean, you convince yourself, this is fine, go ahead and do it. But do I really need to do it? Can I wait six months? I mean, we just absolutely don't know so many things, right? But I think a lot of the uncertainty will be solved. We will know whether tariffs are here to stay in six months. We will know what the level is going to be. Who knows, going to have it. We'll know how much access to inventory. We have. We know what capital markets will look like. I think in six months we'll be in a better position in terms of clarity. It could be that rates will be way higher. It could be the inflation will be way higher. But I think we'll have a lot more clarity. So those would be the two things that I would say.
- [18:31]
C
Now, obviously, if folks in this room have been running companies for more than a few years, they've probably managed through and lived through and survived the COVID pandemic and the financial crisis. Are there lessons to be learned from those two, which felt like once in a lifetime, you can't believe it. Generational crises that we now have every two years. But there are lessons to learn for how companies responded and in particular how smart companies and then maybe the that were not so smart responded to those crises and things that we can take from that moment.
- [19:09]
D
A little bit outside my expertise, to be honest, at this level of sort of small business entrepreneurs. But I would say one thing is going to be different. The federal government does not have the financial resources or the will to bail out the economy this time. So let's just be really clear. Those were two big differences in Covid. There was a lot of stimulus checks. A lot of consumers was effectively income was replaced. This is not going to happen this time. So I mean, if anything, we're seeing cuts on the federal spending that will only increase in the coming years. And I don't want to be too negative. I think there'll be plenty of opportunity, but you'll have to make it yourselves. And that's going to be a big difference. I think the idea the federal government's going to bail banks or it's going to bail the consumer side, that's just not going to happen. That made things a lot more manageable. Now, I don't think this, whatever comes in terms of economic doom and gloom, going to be of anywhere near the same magnitude. It could, but that's not what I'm forecasting. I think will be some sort of a contraction. We'll have some problems. The unemployment rate will go up. It's going to be damaging to new and young and small businesses for sure. But I would not expect the federal government to help very much at this point.
- [20:23]
C
And you've, I mean, going back a year ago and beyond a year ago, one of the things that you've been very worried about and very vocal about is the sort of debt that the US Government has and sort of deficit spending year after year, creating an environment where if the Rug is pulled out from under us. If we lose the game of chicken, if something else happens, we're actually not positioned in a way that we were even five years ago. Can you talk about what you see now and the conversation at a sort of economic and policy making level? Do you see that as being constructive in this moment, or is it still more of the same?
- [21:05]
D
That's the one silver lining of the tariffs, I would say. I said tariffs, to me are a solution in search of a problem. But there's one dimension in which they help. They bring potentially a significant amount of revenue to the federal government. Potentially, depending on the levels we settled in, we could be talking about 200 billion a year extra. This is a government that is currently borrowing $1.8 trillion a year. That's just new money. New money. Not rollover, just new money. This Federal government needs $1.8 trillion every year. That's money that is not available for mortgages to fund you guys, to fund other small businesses, even other corporate investment. It's this giant sucking machine that just takes all sorts of resources out of capital markets that will not last forever. And we will see some adjustment at some point. I've been worried about that. My preferred analogy is we have this little. If I was a doctor, I would say we have this little patient that's getting fatter and older and at some point they will have a heart attack. I'm not sure it's next year, two years, 10 years, 20 years. But I can forecast all the fundamentals look really bad. So I am worried about this. Tariffs mitigate that a little bit, which is why I don't think they will go away even if this president is replaced in four years with somebody from the opposite color. I do think tariffs and $200 billion, a lot of money, become addictive. And I think we'll live with that. I think we'll live with that. But it's only 200 out of 1.8 trillion. We have a big discussion about tax cuts coming up. That can cost a lot of money. There's still tax cuts, so they're stimulative to the economy. That helps, but it's going to make this problem worse.
- [23:04]
C
Are you surprised at this reaction in this moment, given that the Trans Pacific Trade Pact was something we were talking about not that long ago? NAFTA certainly, and other free trade agreements were things that were bipartisan, had bipartisan support very recently. It's interesting to see an economic issue and an economic policy swing so far, so fast. Maybe it's for Every reaction, there's an equal and opposite reaction. But I'm curious, as somebody who studies this, what do you see?
- [23:40]
D
As an economist, I say this. The trade deficit to me is not a problem. It's an obsession. It's not a problem. But I understand enough about politics and political economy to understand that it's an issue that attracts a lot of votes, and that's because a lot of people care about it. I just don't think we, as an economist have explained really well why it's not a problem. It really isn't. You can worry about a few things, about national sovereignty and so on, but fundamentally the trade deficit is not a problem. So in that sense, as an economist, I am very disappointed that we have not done a very good job explaining this to people and explaining that whatever hardships they have in their lives are not being caused because of this. We have not done a very good job. And politicians haven't helped either. And so it's become a really easy thing to correlate the two things and say your life is not going very well and the blame is of these foreigners out there. It's a very easy story. And very. And so in that sense, I'm not surprised, but I am saddened that we haven't fixed that. And so we're trying to deal with this now in a very bad way, in my opinion. But it's addictive, right? Once you recognize, wow, this is a great source of funds, any politician is going to say, great, take it.
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C
Yeah, you can dial it up and you can dial it down, but then you're just going to dial it up. So then what if we move into a world where there are higher tariffs and there is less free trade? What is that look like? If we go back to a period when that was the policy in the past, what trends did we see?
- [25:20]
D
It's a really good question. It's a big unknown. This president and this administration strongly believes that the world at large, the great corporate entities of the world, want to do business in the US that we have the best institutions. In short, we have the best institutions. You know what you'll get when you do business in America? That's. That's a strong core ideological belief. And so they'll say, look, and frankly, other countries have the same things, or other politicians or other colors would say the same. We have the best worker protection laws, we have the best environmental protection, whatever it is. So people want to do business here. So closing the borders, in some sense, tariffs, we'll just have a lot of People that want to sell to Americans come and produce in the US and that will create jobs. That's a core belief. I don't think as economists we can say he's wrong. I mean, we just have not had this experiment in seven years. I can't possibly look at that and say the President is wrong in that view. I'm skeptical that he's right, but I can't say that he's wrong. But that's the big unknown. Will we have a big relocation of, I won't say manufacturing, but a lot of other service jobs in particular, we outsource significantly back to the US or not over time? Not next year, not in two years? I think that, I don't know, Obviously we'll have problems with China. Those won't go away. That just is a long term thing.
- [26:46]
C
And all of this, whether you're thinking about trying to sell a business in this environment or where is the workforce going to come from? Who's going to fill those jobs that are repatriated? In theory, all this is against the backdrop of an aging population and especially an accelerated aging population if immigration remains as it is now. So I'm sort of curious, so then what, right? Like we have fewer people, hopefully AI fills some of those jobs, but by no means is that a guarantee what happens.
- [27:22]
D
That's always been the best argument for immigration. I think people dismiss too quickly the fact that an aging population does not need to stop working in this modern world of ours, right? You may not want to work five days a week, you may not work four days a week, but when you can take a bunch of meetings over zoom, it's not the old world where you have to show up at the factory and your back hurts and whatever. There's no reason why we don't encourage people in different ways and find ways to have people in their 60s and their 70s stay productive. I think there's all sorts of studies saying it's beneficial to health and all, but. So there's no reason why the aging of the population will create economic problems. Unless we continue to insist to this view, at 62, 65, you're done. Which is very, very old fashioned and in my opinion, very negative. But accepting that aging is an issue, of course, immigration, the fact that we're not willing to bring in more immigrants compounds it actually works on both sides. And I'll speak against myself as a dean of higher education institution, it's not clear that people should stay in school until they're 27, 28, doing masters in postgraduate studies. And the government should subsidize that. I think a college education, great, but does it make sense for the country as a whole to have these sorts of programs that subsidize these kinds of post credit? Short. I loved it. I would have done it anyway. But I'm not sure we're better off in a world where we have a real shortage of people. Is it really more valuable to have somebody in school until they're 27, 28 and hope that the productivity gains after that make a lot of sense? Maybe it is. I'm asking just a question. I don't know. And I think as universities, I think we have this very reflective please don't take our students away, please don't take our money away. But as a citizen of the country, I'm not sure that's the best thing for the country as a whole.
- [29:13]
C
This is always a very optimistic group, even during difficult and challenging times. And I'm curious, as someone who works in academia, I imagine that the students that you're surrounded by are sort of an ongoing natural resource of optimism. So when you talk to them, what from working with students and working with researchers makes you optimistic about our future, even given the major challenges that we face?
- [29:39]
D
I personally, I grew up in Portugal. I love this country. I love the people of this country. I'll stay and I'll continue to stay. I think both the energy, the intelligence, I think the culture and everything I love about the folks that I interact with, certainly the students, you can just see their drive and their motivation. So I'm really optimistic, I think, and I hope that you take what I. I say here is watch out for these things as you go about doing your business, because that's what I do. I make a list of the things I have to worry about, the things that could kill me, and then I want to avoid them. But I'm fundamentally very optimistic and I think I'm glad you are too. And certainly my students are. We're going to be great and always back ourselves and back this country. I think we're going to be great, we're going to be successful. They're just obstacles we have to navigate and we always should be aware of those.
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C
Joao Al Gomez, a professor of finance at Wharton. Thank you so much for helping us close out the program today.
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B
That's all for this episode of from the Ground Up. Our producers are Blake Odom and Avery Miles, with help from Sam Gabauer and Hawa Ottore. Editing by Matt Toder. Mix and sound design by Nicholas Torres. If you haven't already subscribe to All Ink podcasts on Apple Podcasts, Spotify or wherever you listen.
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D
Panoply.