White House chief economic adviser Larry Kudlow speaks with reporters at the White House, Friday, July 26, 2019, in Washington. (AP Photo/Alex Brandon)

White House Economic Adviser Larry Kudlow spoke with Brian Kilmeade about the need to pass the bi-partisan spending bill to avoid throwing a monkey wrench into the economy, holding China accountable for unfair trade practices, Speaker Pelosi being very accommodating with him and Robert Lighthizer on the USMCA, something he is hopeful will be put up for a vote in September. When asked about a Washington Post article on the Federal Reserve saying we are in a technical recession in the first half of 2019, Kudlow responded that we are not in a recession and manufacturing production has increased in the last two months and is one of the reasons he is looking for a strong comeback for business investment in the second half of the year.

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Transcript:

BRIAN KILMEADE, FOX HOST: The second quarter the GDP grew at 2.1 percent. A little bit disappointing, I imagine. Larry Kudlow, you were hoping for three. What happened? And thanks so much for joining us.

LARRY KUDLOW, DIRECTOR, U.S. NATIONAL ECONOMIC COUNCIL: Thanks, Brian. Well, 2.1 was above the consensus, way above the consensus, so it wasn't a bad number. The consumers were the big heroes. Consumer spending was up 4.3 percent annual rate, that's a gigantic number.

So they're spending. And I think a lot of that comes from tremendous job creation, and wages are rising, and unemployment is very low and, by the way, they're saving a lot while they're spending. It's fascinating (ph).

So they're the cushion for the economy, they did very, very well. The rest of it, you know, I -- I think we're going to step into Q3 in a good way, because we've had recent data -- things like capital goods, core CapEx has been rising in May and June. That's been a laggard and it's starting to pick up steam. So I'm kind of optimistic about the second half, where I think we can get ourselves back on the three percent growth trend.

KILMEADE: So do you -- so the president's reaction is he blamed the Fed. Do you?

KUDLOW: I do. I mean, I think -- look, as I said, I was out and about this morning and we've had severe monetary tightening. I mean, you've had seven Fed rate hikes in 2017 and 2018. And you know, go figure, there's no inflation. So I just think that's been very difficult. And in some sense it's remarkable the economy has done as well as it's done in the face of that severe monetary tightening.

Now, they're going to change their stripes. The market is expecting rate cuts, probably three of them, between now and the end of the year. That's what the market is signaling, and I hope that is correct, and I think that will help.

But you know, coming back to consumers, Brian, and their -- and their spiffy performance -- you know, tax cuts, deregulation, energy openings, trade reform -- all these things have really boosted jobs and wages and that's so vital to our economy. So if we get the Fed out of the way, I think we'll be in very good shape.

KILMEADE: So -- so Larry, when you look at the numbers -- and I know it's easy for you to spin it because you get numbers I'll never get or -- or probably not understand. So we wanted to get these corporations to come back home. So you dropped the rate from the 30s to the 20s, you've -- some people even want it less. Have they come back in -- this happened before you got there, right? So did they comeback in the speed in which you thought it (ph) should?

KUDLOW: Well, you know, remember I helped author this tax cut plan way back in the campaign in 2015 and 2016.

KILMEADE: Yes, I do remember.

KUDLOW: And yes, we are -- we're seeing a lot of movement, production returning to the United States for a 21 percent corporate tax rate. And by the way, easy terms to repatriate corporate cash that was overseas, so they're bringing money home -- almost $1 trillion --

KILMEADE: Are they, though? Are they like you thought?

KUDLOW: --Yes, I mean, it's --

KILMEADE: There's no excuse now.

KUDLOW: -- it's exceeding. The repatriation, the last numbers I saw for Q1 was about $750 billion, which I think, Brian, was about three times what the CBO and the Joint Tax Committee were expecting, so that's a really good sign.

And you know, we've seen a big pickup in manufacturing jobs and manufacturing plants, which I think is part and parcel of the, both the corporate tax cut and the rollback of regulations. And don't forget, the energy sector has been a gigantic contributor to all this. So yes, I think it's there.

Again, I think we had to face this monetary tightening which made things much harder. But now, perhaps we're going to see even faster economic growth. That's my guess.

KILMEADE: Who benefits most from the USMCA passing, and what have you heard realistically about it happening?

KUDLOW: Look, I can't -- it's hard to forecast the politics here. Speaker Pelosi has been very accommodative to us and our lead negotiator, Ambassador Bob Lighthizer. She's been very helpful.

And I think -- I think he would tell you that he's hopeful she'll give a green light for a vote in -- in -- in September, when they come back. And then we'll put our full package on the table for legislation and I think we have a very good chance of getting that passed. And that's a huge growth contributor -- estimated to add, by the way, about half a percent of GDP -- half of one percent of GDP per year with something like 180,000 jobs per year. So that's a -- that's a big, big positive development that may be just over the horizon. We'll see.

KILMEADE: Yes, I guess the USMCA has the backing of the Chamber of Commerce, they're supposed to do some work for our Democrats for you. When people see the Midwest, if the Democrats want to win that and yet the hold off on signing this, politically it doesn't make sense for them.

I want to bring you to something else in the "New York Times" today. They say the U.S. is preparing for round two of farm bailouts as soy growers urge trade truce. They -- so you're giving them another $16 billion in aid to prop them up while you guys square off. What could you tell the farmers listening right now?

KUDLOW: Well, look, that's not new news. We've, you know, made these arrangements. Secretary Sonny Perdue has been out front on this.

And the president has said that farmers are patriots. They've been with us, they support us. They -- they understand why we have to have fair trading with China and get them to stop breaking laws, which has damaged our economy. But we are helping them in the meantime.

Now, let's see what happens. We are very hopeful, we expect China to start buying farm imports from the United States. We expect them to start picking up with soybeans, and wheat and other commodities (ph) --

KILMEADE: Are they using Huawei as a leverage?

KUDLOW: -- No, I -- I don't want to link the two because that is not, in fact, what's happening. It's just part of the overall negotiations. It came up when the two leaders, you know, Xi and POTUS met in Osaka, Japan. And it's -- POTUS has said many times -- and I know our guys going over to Shanghai next week are going to be very firm on this -- that we expect to see China live up to their commitment to purchase.

And that will help the farmers. That will help quite a bit. It'll help crop prices and that's what they want. And we're doing the best we can for them. But look, we've got to stand up to China. This is the first president to do so.

I mean, I'm the free trade guy, but I'll tell you, China -- illegal, unlawful trading practices. You know the story; IP theft forced a transfer, cyber hacking, et cetera, et cetera. These are huge issues for us and we've got to work as hard as we can to make changes, we must.

KILMEADE: I agree. Larry Kudlow is with us right now, he's the president's economic advisor. A couple of things, Boeing 737s on the shelf now for the foreseeable future, how much does this hurt this stalwart company? And what do you tell people that are not only invested in it, but worried about it?

KUDLOW: Well, look, I don't want to -- I can't -- I'm not a Boeing analyst. It's a fine old company. They've got big problems here. Will they work their way through it? I -- I assume they will. But again, I'm not in the middle of the Boeing Corporation.

The Boeing problems cost us 4/10 of 1 percent of GDP, so that's unfortunate. But perhaps they'll get that back later on.

KILMEADE: Do --

KUDLOW: I can't say one way or another how they're going to handle this. I'm not, you know, I'm not engaged in -- that's -- that's -- those are their business decisions.

KILMEADE: -- I understand. But it does impact the economy, which is under your purview, if you -- that's the word of the week, by the way.

KUDLOW: Purview?

KILMEADE: Yes, purview.

KUDLOW: I like that, purview. That's a really good word --

KILMEADE: Thank you. Robert Mueller loved it, he kept saying it.

KUDLOW: -- very good. Oh, Mueller used that?

KILMEADE: Over and over again. So Larry, a couple of things, I'm --

KUDLOW: I've got to do better than Mueller. You've got to help me here.

KILMEADE: -- Well, yes, you're awake and you're answering questions. So right away, you're -- you're 80 percent better than him. So --

(LAUGHTER)

KUDLOW: Thank you, sir.

KILMEADE: -- Yes, all right. Hey, Larry, I'm reading the -- the Federal Reserve reported that the U.S. manufactures are in a "technical recession." Is that the term you would use?

KUDLOW: No. What report is that from the Fed?

KILMEADE: The Federal Reserve (ph), "The biggest warning sign arrived last week when the Federal Reserve reported that U.S. manufacturing was in a 'technical recession' in the first half of 2019."

KUDLOW: I don't know where that comes from. Industrial -- manufacturing had been falling for several months, so that's quite right. But the last two months, and this is very important, manufacturing production has jumped in the last two months.

That's one of the reasons why I'm looking forward to a strong comeback for business and business investment in the second half of the year. But we're not in a recession. There's no -- there's no -- there's no R-word out there. No way.

KILMEADE: Got you. All right, a couple of things. This whole spending bill, this compromise to stop the government from shutting down, Senator Ron Johnson weighed in on this, he's not happy.

(BEGIN AUDIO CLIP)

SEN. RON JOHNSON (R-WI): Well, that's what (ph) my concern is. Well, I've been here nine years now and, you know, we just see the deja vu over and over again, these deals being done. It doesn't include, really, Congress. There's just a few leaders that come up with these deals. They just either increase the debt ceiling or suspend it without putting forward any structured reforms.

In my own committee, we passed the Preventing Government Shutdown Act. If you don't pass appropriation bills, you just fund the government at last year's levels; you completely end government shutdowns. I'm calling on both chambers to take that bill up, pass it and we can put a lot of this to rest.

(END AUDIO CLIP)

KILMEADE: So he's frustrated. I know that there's other Congressmen frustrated, and a lot of Republicans didn't vote for it. Larry, this adds a lot to the debt, what's your answer to people who are concerned about this?

KUDLOW: Well, look, Senator Johnson is a friend. He's also a good man. I mean, we -- we just never quite seem to limit spending as much as we want, I get that. None of these bills are ever perfect.

But look, in terms of the big picture here, we have a two-year deal to restore the debt ceiling -- to increase the debt ceiling. We can't have a default, Brian. That would just a monkey wrench into the financial world and the economy. So that's out of the way.

We're not going to have any government shutdowns. And by the by, in terms of presidential priorities, we will preserve his defense buildup and also riders will not be permitted. So for example, he will be able to continue on the border, his various border security policies.

Look, no one argued it was perfect, no one argued it was a beautiful thing. You kind of have to -- you know, politics is the art of the possible and I think that's really the bigger story here. The deficit is going to come in, estimated, about 4.5 percent of GDP this year and next. Is that too high? It may be, but it's really a manageable number.

The marketplace -- the financial markets with a 2 percent, more or less, 2 percent 10-year bond is -- they're not panicked about any of this. So hopefully -- I know it's always manana, I get that. I -- I'm for limited government myself. And again, Senator Johnson is a wonderful man. He's a great American. But for the moment --

KILMEADE: Right.

KUDLOW: -- we're just going to -- you know, we did what we had to do to preserve some order and stability.

KILMEADE: Got you. And lastly, Larry, how are you?

KUDLOW: I'm great. I never see you anymore except through the TV lens. I love coming on -- I love coming on Fox & Friends, by the way. It's a great show.

You're the smartest interviewer in the history of television, there's no question about that. You're almost as good as when you came on the Kudlow Radio Show, almost as good --

KILMEADE: Almost (ph) -- I was at my peak then.

KUDLOW: -- and that's a high bar. Yes, -- well, no, but you may have another peak down the road. Who knows?

And by the way, I got a hip replacement. I'm on week -- finishing week seven. I've been without a cane for the last three or so weeks. I feel good, walking well. That's a blessing --

KILDMEADE: What the heck?

KUDLOW: -- Well, that's a blessing. And I'll probably start playing tennis next month, that's my hope.

KILMEADE: Unbelievable. While having one of the most impactful jobs in the country, you have had a heart procedure and you've had a new hip while still continuing. That is the American way, you fight through it.

KUDLOW: I do fight through it. You know I love my job. It's a gift -- I mean, really, this is a gift. I like -- I love serving President Trump. He's given me a lot of responsibility. I'm blessed, Brian, I feel blessed --

KILMEADE: Right.

KUDLOW: -- OK? And -- and the health thing is doing well, I'm working hard. I believe we're making progress, you know, to bring prosperity and security to the United States, I believe that.

KILMEADE: Well, I -- I think the country is better off with you in the White House by the president. And I wish you continued success. And good to know that --

KUDLOW: Thank you.

KILMEADE: -- you were back on WABC this entire time, because they are now carrying the show, so.

KUDLOW: That is very cool.

KILMEADE: Yes. Go get them, Larry, thanks so much.

KUDLOW: All right, thanks, Brian.