Inflation Meets AI, Navy Buildout Challenges, Tariff Refund Fight

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1:49This is Wall Street Week. I'm David Weston bringing you stories of capitalism. President Trump wants to build what he calls a golden fleet to transform the U.S. Navy. What will it take to get it done? Are U.S. shipbuilders up to the task? And can the government stay the course this time? Plus, it's one thing to charge$166 billion in tariffs. It's quite another to give it all back. The continuing saga of President Trump's IEPA tariffs and whether Humpty Dumpty can ever really be put back together again. And Blair Efron of Centerview Partners takes us through what the AI rush is doing to American companies and the deals they are trying to make.

2:29Is there anything left for the rest of us? But we start with the global concern over inflation in a week that gave us new CPI numbers and Chair Warsh's first testimony on Capitol Hill. Are we facing higher long-term interest rates? How much of it comes from that AI rush? And what does it mean for Western economies if we can't get back to that magical 2 % target? Loretta Mester was president of the Federal Reserve Bank of Cleveland and now holds positions at both Penn's Wharton School and Princeton. We got new inflation numbers out this week, which were not as bad as they had been in the past. But there has been a growing concern, I think, about longer-term inflation.

3:10Where are we? Well, inflation's been above the 2 % goal of the Fed for over five years. So we do have an inflation problem. I think it remains to be seen whether where interest rates are today are enough to actually move inflation back down. I think the question that FOMC is going to have to ask itself is, do we need to raise interest rates a bit in order to add restrictiveness to the economy to bring inflation down? And I think they don't know that yet. I think the tone is getting more that we're impatient with this inflation. but I think they're going to wait for some more data before they make up their mind that they're going to need to raise rates.

3:50I think there's a good case for saying we need higher interest rates because it's hard to argue that where we are today is very restrictive on the economy. And particularly maybe because the headline number came down really largely because of fuel. Yeah, that's right. I would say, though, that overall the report was a pretty good report, even when you look at the components. I mean, one of the things that have been, I think troubling me is if you look at core services, excluding housing, and I think that's a key indicator to look at, that's been moving up, right? We had the inflation coming down last year, even before the war in Iran, we saw that indicator of the services component, excluding housing, starting to move back up.

4:33And I think that's got to be a concern for the FOMC. You know, They've been forecasting inflation is going to come down. And even without oil prices pushing it back up, you still see that inflation has been pretty sticky. And so it raises the question for some of us, why? I mean, it's good to have the numbers and know where the numbers are. But then you want to know what is really driving that because you have some sense of where it's going to go next. Well, I think that's the question about how restrictive really is policy, right? monetary policy is what's going to determine whether demand is outpacing supply and therefore putting upward pressure on prices or right whether it's restricted enough and it's going to bring demand more into balance with supply the one place where we know demand is up is in ai and all that comes with it all the investments being made are really to me at least stunning does that in and of itself suggest that we're probably going to have continued inflation pressure for the foreseeable future?

5:29Well, you certainly see prices for components that go into AI being elevated, and that is a source of pressure, upward pressure on inflation. I think the question, and this is something that the new chair, Kevin Warsh, has been talking about, is eventually he believes that AI will increase productivity enough that it becomes sort of a disinflationary force. I don't think the timing really suggests that we're going to get there soon. I do think right Right now, it's an inflationary issue. And the question is, how long will that last and whether, again, that'll feed into other parts of the inflation and the consumption basket and therefore become a more of a broader inflation problem.

6:11And this week we had not just the CPI numbers, but also Chair Warsh with his first appearance on Capitol Hill, where, to my hearing, said, we really are serious about this inflation. And he recognized what you said, which is, we've had it over 2 percent for a long time now. we've got to do something like that. At the same time, maybe, as you said, eventually it might come back down. How does he balance those two things? And how long is eventually? Well, this is always a question for the Fed. And certainly, I think it was great that he reiterated the commitment that the FOMC and the Fed has to 2 % price stability.

6:45I would say, as someone who was at the Fed, we were always committed to the 2 % inflation target. That's not, and price stability, and maximum employment, which are the goals that we've been given by Congress. So that isn't new. And the real question is, in making those tradeoffs between the two goals, when there are tradeoffs, right? And I think they're going to have to take seriously whether their policy rate right now is in the right place or whether they're going to have to recalibrate that a bit higher to get inflation down. As you say, there's a dual mandate. It's both about price stability as well as employment.

7:21Does the nature of the employment situation in the United States right now actually give the Fed, if they wanted to use it, some room to raise rates up? Well, you know, if you look at the labor market, it's an interesting labor market in the sense that it does appear to be pretty steady and in balance. I think what troubles people is when you look at the rate of payroll employment growth, it's much slower than it had been in the past, right? It used to be that you'd say to keep the unemployment rate stable, you would need 150 ,000 jobs added per month. Now, right, that number is much, much lower, right?

7:55Many estimates are between 50 and 70 ,000 a month. So that's quite a bit lower. And that's because the supply side of the labor market has changed so much. So you don't need as much hiring to keep supply and demand in balance. So there's a lot of concern about the labor market in terms of those lower growth numbers, but actually it's been a pretty stable and the unemployment rate itself is low. That doesn't mean that there aren't problems in the labor market in terms of different aspects of it. As probably you know from, and your listeners know, right, young college graduates have had to struggle to get jobs.

8:31Part of it may be AI, part of it may be uncertainty about the economy. But a lot of what's happening in the labor market is on the supply side, not on the demand sides. And so, yes, if the key concern right now in the economy is the inflation part of the mandate, not the labor side. You mentioned the various task force, five I think there are, that Chair Warsh has named to deal with various aspects. I suppose it's sort of to be expected that when somebody comes in, they want to take a fresh look at things. Were you surprised at how quickly and how extensively he's looking at some basic things at the Fed?

9:05Well, not really, because he was very vocal before he became chair about some of the things that he thought could be rethought. Right. And so if you look at the task force, there's one on communications or one on the balance sheet. And he's been very vocal about the balance sheet and the use of quantitative easing. He's been very vocal about trying to find data sources that are more micro oriented data sources and more forward looking to help the Fed do its projections so that it can have a better sense of where the economy is going. And the last one, of course, we just talked about AI, the labor market.

9:38and he has particular views on that. What I was happy to see is that the people he's chosen as leaders of those five areas, they really are experts. And it's a combination of academics, central bankers, not only U.S. central bankers, but abroad, who have been central bank experience in terms of actually doing monetary policy, and some business leaders. So I think the combination of those people, right? And with the staff help from the Fed, as he said, right? I think we're going to get some very thoughtful results from that. And, of course, then the FOMC will have to take up some of those recommendations and debate them among themselves because they are the policymakers.

10:22Recently, the projections based on the markets have changed a fair amount about the likelihood of a rate increase. For example, in July, it really has moved around a lot. You've dealt with this for a long time. Is that typical? Have you seen that before? Is this unusual that the expectations are changing fairly rapidly? Well, I think the economy has been changing, right? It's hard to read an economy where you had the tariff shock, right? Then we had the Iran war and the oil price shock. So there's a lot of uncertainty about what the trajectory of the economy is going to be. And, of course, the on again, off again, you know, Iran war, the ceasefire, right?

11:01that adds to sort of uncertainty because oil prices are a significant input into a lot of parts of the economy. So I'm not sure that I would say that it's more volatility than what should be expected given the uncertainty we've been facing in the economy. And then layered on top of that, of course, you have a new Fed chair coming in. As you say, for several years now, we've had an inflation problem. And one question is, will it solve itself or do they have to get more restrictive. But from your perspective, do you think that the degree of that problem has changed over the last six months, nine months?

11:35Is it a bigger problem today than it was six months ago? I think it's a different problem, right? I think six months ago, the focus was on how much of the tariffs we're going to feed through to inflation. And remember, there was also some concern on some of the committee members, right, about the labor market. I think the labor market is stabilized. And I think they have a much better view of sort of the low payroll numbers, not necessarily meaning the labor market is weakening appreciably. I think there's recognition now that probably the tariff part of the inflation story is stabilized, right?

12:12There's not going to be much more pass through of that. We do have the oil price shock now, which is a new shock. But I think there's more recognition of the accumulation of bad readings in terms of inflation moving in the wrong direction, that I think that's really what's changed the narrative about inflation. I think there's better recognition that even though we're hoping that we're at a point where interest rates are enough to get inflation back down to 2%, that projection may not come to pass. And I think that's what's changed. Coming up, we go to Pascagou in Mississippi to see firsthand what it will take for President Trump to get all those ships he needs for his so-called golden fleet.

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14:17This is a story about staying the course. As America marks 250 years of independence, President Trump has plans for a much bigger navy, what he calls a golden fleet. But to get from planning to doing requires more than just money. It requires workers, suppliers, shipyards, design discipline, and executing on the plan over the course of years, even as the very nature of naval combat faces disruption. Bloomberg's Scarlet Fu has the story. This is an America-class amphibious assault ship currently under construction for the U.S. Navy by Huntington Ingalls Industries, also known as HII. So we're the flight deck of LHA-8, which is really the ship that takes Marines into the fight.

15:01This deck will have between 12 and 20 F-35s, based on the configuration. They park here? Yeah, so it's a very capable ship. It's going to go to trials at the end of this year and deliver next year. It's just one of several complex naval ships being built at the Ingalls Shipyard in Pascagoula, Mississippi, where we got a tour from HII CEO Christopher Kastner. Shipbuilding gets in your blood. There's just something so rewarding about building a ship you know is going to go into service. Turning this steel into American naval power takes thousands of workers, millions of parts, and years of labor.

15:38Under President Donald Trump, Washington wants more ships fast. I have approved a plan for the Navy to begin the construction of two brand new, very large, largest we've ever built battleships. They'll be the fastest, the biggest, and by far 100 times more powerful than any battleship ever built. His administration's plan calls for new combatants, auxiliaries, unmanned vessels and a nuclear-powered battleship. Currently, the U.S. Navy operates roughly 290 Battle Force ships, well below the mandated 355 ships. The Navy is requesting$65.8 billion for their 2027 fiscal year. That's about$18 billion, or almost 40 % more, than it requested for 2026.

16:28For shipbuilders, that translates into years of expected revenue. The administration is investing in the right places. There's a lot of momentum behind shipbuilding. We see improvements across both of our shipyards, and we need to continue to improve to support their requirements. Momentum aside, can the industry build a fleet at the speed and scale that this White House wants, especially when construction of the most complex Navy vessels is split between two big players, General Dynamics and HII? HII provides 50 percent of the ships the United States fleet. We build nuclear vessels, aircraft carriers and submarines in Newport News, Virginia, and then we built four classes of surface combatants here.

17:11One of the biggest limitations is labor. Shipbuilding depends on skilled workers like welders, electricians, and pipe fitters. Today, more than a quarter of these maritime workers are approaching retirement age, which is a problem, according to Seamus Daniels of the Center for Strategic and International Studies. A major constraint is definitely the workforce challenge. As shipyards are losing some of their more experienced workers, and they're being replaced by workers who have less experience. So ultimately, that may contribute to some of the delays that the Navy is seeing in producing ships as you're trying to train this workforce and really get them up to speed.

17:51Again, I'm missing my 45 here. What's the takeout for that? Ned? To fill that gap, the Navy helps fund workforce initiatives, while shipbuilders develop their own pipelines. Both General Dynamics and HII have apprenticeship programs. HII's yard in Mississippi employs more than 11 ,000 people, making it one of the state's largest manufacturing employers. In this building at the MTA, we also teach sheet metal, joiners, pipe and hole insulators, and also a lot of electrician training. Being able to give some knowledge to them so that way they can take it with them out into the yard and better their career and also the company as well.

18:30The selling point for trainees are paid training, a path to higher wages, and a career that does not always require a four-year college degree. Solving for a steady stream of skilled laborers is not the only challenge. The industry also needs to address supply chain issues, on-time contracts, design changes, and overall bureaucracy. And that is after the money has come through. We need to get funding on time to get the suppliers started. What we're doing is working through a backlog that was put in place under really difficult conditions and under a different economic environment. Our two largest contracts were executed in 2019.

19:10And you think about what was going on in 2019, no inflation, a more stable supply base, and those were put under contract then COVID hit. And so we had the supply chain impacted, labor impacted, made it very challenging. So we're working through those, but the ships that are being put under contract now are putting under contract and schedule performance and schedule predictability, assuming what the supply chain can do right now, assuming the constraints we have in our shipyard. If you were advising policymakers, lawmakers, the Navy, what would be one policy recommendation that would increase U.S.

19:43ship output? Yeah, be on time, make sure the funding arrives on time, make sure the supply chain is safe and can meet the requirements and we don't get behind before we start. that happens from time to time in shipbuilding, where you get late orders, they hold the schedule consistent with what the initial contract said, you have no chance to meet it. Securing funding is just the beginning. There's also the sequence of how the money, contracts, and ship designs move through the system. Government shutdowns are a major hindrance to actual effective shipbuilding and making sure that contracts and programs themselves are getting started.

20:20But I think there's a broader issue beyond the appropriations and funding process that comes down to the way that the Navy designs its ships as well. And this is about the requirements process that the Navy goes through. The U.S. naval vessels are incredibly complex with combat systems, radar, and other technology. And so that means that the ships themselves and their designs are incredibly complex. But given the timelines it takes to design and build these, the requirements may evolve as the threat environment evolves over time. What that ultimately means is that the Navy may start constructing ships before the design is finalized.

21:01And that can be a major issue, especially when you're changing the design as you're building the ship. Every time we change a requirement, change a design, it costs us a lot, both in dollars as well as in schedule. So that's got to stop. There isn't a day that I go to work that I'm not thinking about what's going on here and in other places around the world where you're certain. Retired Navy Admiral Mike Mullen served as chief of naval operations under President George W. Bush and chairman of the Joint Chiefs of Staff in the first few years of the Obama administration. I think the biggest challenge that the Trump administration is going to have is execution and staying, you know, within budget and staying on schedule and holding people accountable.

21:49So I think all the pieces are there. Now the question is, can we execute? One solution? Farm out the work. Today, only a tenth of Navy shipbuilding is done at distributed sites. The Navy wants to increase that to half by using qualified suppliers and smaller yards across the country to add capacity. We doubled our outsource capacity last year, another 30 percent this year, and we'll continue to increase that as the partners get qualified. We're very careful to do it correctly because if you don't do it correctly, there's significant challenges with quality and schedule performance. So you have to be mindful with how you do it, but we will continue to outsource.

22:28That plan also relies on building ships differently, using more modular digital designs that can be spread out across multiple yards. So this is thinking through how to design ships and submarines in a way that different parts, different major segments of the ship can be constructed in different parts of the country, and then they can be combined in one major shipyard. But what that'll ultimately allow the U.S. to do is to leverage areas in smaller, potentially commercial shipyards or repair yards that can focus on these modules, so then they can be combined. And what that would ultimately mean is being able to distribute shipbuilding need and capacity across other areas of the country.

23:10Then there's the contrast with how our global peers are building ships. China is achieving scale through a vast commercial and naval shipbuilding base, while South Korea and Japan are setting standards for their speed, process discipline, and production capacity of commercial ships. I think it's good to always compare yourself against the competition. There are different shipbuilding processes. Commercial ships are completely different from building a defense ship. If you were to go into a Korean shipyard for commercial, it looks very different than the shipyard here. If you go into the defense shipyard, it looks very similar to this.

23:42Actually, their defense shipyards look more alike than ours in their commercial shipyard. So I think it's a good comparison. You always need to know what the competition is doing. China's shipbuilding surge is a big reason U.S. yards expect demand to stay elevated for years. I think the growth in China and the growth in their shipbuilding programs means that we're going to be building ships for a while here and we need to continue to build. We need to concentrate on that because China's building a big fleet. And while China's fleet is significant in numbers, they've got ways to go from a quality standpoint, and we need to pay attention to that as well.

24:16Even if America can build more ships, another question hangs over the fleet. What kinds of ships should be built? The ongoing conflicts in Ukraine and the Middle East make clear how relatively cheap drones and missiles can threaten expensive traditional vessels. I think what the Navy needs to pursue is what is generally referred to as a high-low mix of capabilities. So having your larger vessels that can perform exquisite tasks that are large and may be expensive in some cases, and combining those with cheaper, more affordable forces that provide a different sort of effects, but you can actually buy them en masse.

24:55In the Red Sea, for literally months on end, we were shooting down cheap drones with very expensive missiles, which is a losing game in the long run. But we were able to protect the ships. We know this is coming out there in terms of the drones. There's also the risk to the Marines onboard these ships. To reduce that danger and extend the fleet's reach, the Navy is investing in autonomous, uncrewed vessels. We have a Romulus family of systems for surface vehicles. So we saw it coming. It's really a force multiplier. It leads into their strategy or their hedge strategy where they have manned and unmanned ships working together.

25:32And they've had that strategy for a while. The technology just hasn't been there to support it. Now the technology has. The autonomy technology has come into the place where the ships are more reliable and the integration between manned and unmanned is more reliable. But can the Navy learn from past mistakes and implement real changes to improve future fleets and sea warfare? What do companies like HII need from the government to be the premier shipbuilder? We just need predictable orders. We need a chance to be successful. We need to limit change and we need the orders on time. I'm going to build whatever they want me to build.