According to my calculations, the real (inflation-adjusted) interest rate is around 1.5%, which is one percentage point higher than the Fed’s estimate of the neutral real policy rate (which neither stimulates nor reduces economic activity). Prior to previous recessions, the real rate has been higher. While current market pricing suggests that the Fed will increase the federal funds rate once more this cycle, I think that is optimistic. Between stubborn and high underlying inflation, financial conditions that aren’t tightening, and real interest rates that are lower than is typical before a significant economic slowdown, there are ample reasons for the Fed to raise rates more than economists and investors currently seem to expect. If that happens, the risk of recession will increase. Related: Furman On CPI Report and A Default Cycle Has Started
The last time there was a major slowdown in the mighty network of ocean currents that shapes the climate around the North Atlantic, it seems to have plunged Europe into a deep cold for over a millennium. That was roughly 12,800 years ago when not many people were around to experience it. But in recent decades, human-driven warming could be causing the currents to slow once more. New research published in Nature Communications [projects] the Atlantic Meridional Overturning Circulation, or AMOC could collapse around midcentury. Were the circulation to tip into a much weaker state, the effects on the climate would be far-reaching, though scientists are still examining their potential magnitude. Much of the Northern Hemisphere could cool. The coastlines of North America and Europe could see faster sea-level rise. Northern Europe could experience stormier winters, while the Sahel in Africa and the monsoon regions of Asia would most likely get less rain. Related: Antarctic Sea Ice Has Shrunk By An Area Nine Times The Size Of Britain and Florida Ocean Temperatures At ‘Downright Shocking’ Levels
“No one noticed—but we noticed,” said Ford CEO James Farley on an earnings call last month, “something monumental happened in our industry, where China became the number one exporter of vehicles globally. It had always been the Germans or the Japanese.” Despite the record-setting rise in gross exports and China’s newfound motor vehicle trade surplus, net exports still remain below Japanese and German levels. The per-car value of Chinese vehicles still tends to be lower than their foreign competitors, and a lot of the rise in exports has been matched by a rise in imports. Related: China’s Auto Export Wave Echoes Japan's in the ’70s and The Chinese Carmakers Planning to Shake Up The European Market
The energy price shock also generates a fall in production and employment: a 10% increase in electricity price translates into a 1.6% fall in production and a 1.5% fall in employment. Energy efficiency increases at the firm level. Profits fall but modestly or only for the most gas-intensive firms. However, these negative impacts wane over time. Our interpretation is that during 1995–2019, firms adapted their technology and production processes to higher energy prices and a selection process eliminated those not able to adjust. All in all, these results suggest that firms are able to adjust and adapt strongly to energy shocks but that the competitiveness impact is significant.
Seven major automakers announced a plan on Wednesday to nearly double the number of fast chargers in the United States in an effort to address one of the main reasons that people hesitate to buy electric cars. The carmakers — BMW Group, General Motors, Honda, Hyundai, Kia, Mercedes-Benz Group,, and Stellantis — will initially invest at least $1 billion in a joint venture that will build 30,000 chargers on major highways and other locations in the United States and Canada. The United States has about 32,000 fast chargers — those that can replenish a drained battery in 10 to 30 minutes. The chargers will have plugs designed to use the connections used by most carmakers other than Tesla, as well as the standard developed by Tesla that Ford, G.M.,, and other companies have said they intend to switch to in 2025.
The reduction in interest and corporate tax rates was responsible for over 40% of the growth in real corporate profits from 1989 to 2019. Moreover, the decline in risk-free rates over this period explains the entirety of the expansion in price-to-earnings (P/E) multiples. These two factors therefore account for the majority of this period’s exceptional stock market performance. From 1989 to 2019, real corporate profits grew at the robust rate of 3.8% per year. This was almost double the pace seen from 1962 to 1989. The difference in profit growth between these two periods is entirely due to the decline in interest and corporate tax rates from 1989 to 2019. One way to see this is to compare the growth of earnings before subtracting interest and tax expenses (EBIT). In fact, real EBIT growth was slightly lower from 1989 to 2019 compared to 1962 to 1989: 2.2% versus 2.4% per year. The outlook for stock price growth is bleak. Related: The Curious Incident of the Elevated Profit Margins and Charlie Munger: US Banks Are ‘Full of’ Bad Commercial Property Loans
The Bank for International Settlements (BIS) measure of China’s inflation-adjusted trade-weighted exchange rate (based on differences in consumer prices) is down by roughly 14% since the recent peak last March, which is the largest decline out of 64 countries tracked by the BIS. This appears to be a policy choice. While China’s official foreign reserves are substantially lower now than at the peak in 2014, the consolidated position of the PBOC and the state-run banks looks a bit different. As I suggested two years ago, there are good reasons to think that the PBOC has deliberately outsourced reserve management to Chinese banks (which among other things helps explain the continued reductions in reserve requirements). After the PBOC mostly stopped buying foreign currency reserves, it switched to lending increasingly large sums to the domestic banking system. Related: Setser On China's Trade Surplus and China's Surplus Again Topped 10% Of GDP
A wide range of banks have reported a squeeze on net interest margins as deposit funding costs have surprised to the upside. In a typical rate hiking cycle, interest income on bank assets tend to rise more quickly than interest paid on deposits. This led to a steady expansion of net interest margins over the past quarters that is suddenly reversing. Banks now see customers both shifting out of non interest bearing deposits and demanding higher interest for interest bearing deposits. This was widely reported in recent earnings calls by all but the largest banks. Related: All Clear and Bank Funding during the Current Monetary Policy Tightening Cycle
Markets are not taking the ongoing rise in default rates for HY and loans seriously. The reality is that more and more companies are defaulting because the cost of capital is higher, and Fed Chair Powell says that interest rates will stay at these levels “for a couple of years,” so tight monetary policy will continue to have a greater negative effect on the economy and capital markets. In fact, higher costs of capital is precisely how monetary policy works: By making it more difficult to get financing. Once there is a default by some household name in credit, we will likely see an overnight change in market sentiment from bullish to bearish. Related: Small Bank Thoughts John Cochrane and Credit Allocation and Macroeconomic Fluctuations
In the last decade, fentanyl has become the leading cause of death for young adults in the US. Fentanyl now causes most of the more than 85,000 annual opioid overdose deaths in the US and Canada. All the fentanyl needed to supply the US for one year weighs the equivalent of 5 tonnes and would easily fit into one lorry, according to researchers at Rand Corporation. That compares with about 125 tonnes for heroin and even more for cocaine. Related: Only One Thing Will Solve the Fentanyl Crisis and Drug Overdose Deaths Topped 100,000 Again in 2022
Chipmakers are on course to add about 115,000 jobs by 2030 [according to] Semiconductor Industry Association (SIA). Based on a study of current degree completion rates, though, about 58% of those projected positions could remain unfilled. Not enough Americans are studying science, engineering, math and technology-related subjects, according to the SIA. And people from other countries who are acquiring those skills are leaving, the group said. At US colleges and universities, more than 50% of master’s engineering graduates and 60% of those with a Ph.D. in engineering are citizens of other countries. About 80% of those master’s graduates and 25% of those who earn doctorates depart the US — either by choice or because immigration policy doesn’t allow them to stay. Related: The Extreme Shortage of High IQ Workers and TSMC To Send Hundreds More Workers To Speed U.S. Plant Construction
The sea ice around Antarctica is in sharp decline, scientists observed an all-time low in the amount of sea ice around the icy continent, following all-time lows in 2016, 2017 and 2022. Usually, the ice has been able to recover in winter but this year is different. For the first time, the sea ice extent has been unable to substantially recover this winter, leaving scientists baffled. Physical oceanographer Edward Doddridge said vast regions of the Antarctic coastline were ice free for the first time in the observational record. "To say unprecedented isn't strong enough, for those of you who are interested in statistics, this is a five-sigma event. So it's five standard deviations beyond the mean. Which means that if nothing had changed, we'd expect to see a winter like this about once every 7.5 million years." Antarctic Sea Ice Has Shrunk By An Area Nine Times The Size Of Britain and Earth Keeps Breaking Temperature Records Due to Global Warming
Normally there is a fairly close inverse relationship between unemployment and quits, a quit-rate version of the famous Beveridge Curve linking unemployment to vacancies. During the pandemic and its aftermath, however, quits were much higher than the normal relationship to the unemployment rate would have predicted, presumably reflecting the dislocation of labor markets in a time of wild and crazy changes. Here too we see recombobulation, with the relationship of quits to unemployment moving back toward the historical norm, which is probably the main reason wage growth appears to be slowing. Stories about recombobulation — the fading away of pandemic-era distortions — driving disinflation are clearly supported by the data. Claims that Fed tightening drove it are sketchier and much more speculative. Which is not to say that the Fed was wrong to raise rates. Related: When Should We Declare Victory Over Inflation? and The Second Great Experiment Update and Fiscal Arithmetic and the Global Inflation Outlook
Adjusted durables remain volatile, of course, but over 3 months are now close to typical pre-pandemic lows. Services remain elevated, about 2ppts above pre-pandemic norms. Overall, the Fed can be encouraged by the disinflation of underlying core inflation—though the reading is still well above 2%. There may be two risks ahead. The first would be if durables goods begin to show even sharper deflation, perhaps portending more general price pressures. The second is if service inflation becomes entrenched at current levels—lower than a year ago, but well above a rate consistent with the Fed’s target.
The unemployment rates in 25 states are currently at or within 0.1 percentage point of a record low [according to] Bureau of Labor Statistics data. In a dozen states and DC, the number of people on payrolls remains below pre-pandemic levels. That includes New York and Hawaii. Idaho, Utah, Texas, and Florida were among the states with the biggest gains in employment since February 2020. Related: Labor Inelasticity and Unions’ Inflation Warning? and America Is Barreling Toward a Summer of Strikes
American prime age 25-54 labor force participation is at a two decade high of 83.5% as an uptick in prime age female LFP has offset a decline in male prime age LFP since 2000. In the first months of the pandemic, nearly four million prime-age workers left the labor market, pushing participation in early 2020 to the lowest level since 1983—before women had become as much of a force in the workplace. Prime-age workers now exceed prepandemic levels by almost 2.2 million. The resurgence of midcareer workers is driven by women taking jobs. The labor-force participation rate for prime-age women was the highest on record, 77.8% in June. That is well up from 73.5% in April 2020. Related: The Labor Supply Rebound from the Pandemic and Where Are the Missing Gen Z Workers
Children from families in the top 1% are more than twice as likely to attend an Ivy-Plus college (Ivy League, Stanford, MIT, Duke, and Chicago) as those from middle-class families with comparable SAT/ACT scores. Two-thirds of this gap is due to higher admissions rates for students with comparable test scores from high-income families; the remaining third is due to differences in rates of application and matriculation. The high-income admissions advantage at private colleges is driven by three factors: (1) preferences for children of alumni, (2) weight placed on non-academic credentials, which tend to be stronger for students applying from private high schools that have affluent student bodies, and (3) recruitment of athletes, who tend to come from higher-income families. Highly selective public colleges that follow more standardized processes to evaluate applications exhibit smaller disparities in admissions rates by parental income than private colleges that use more holistic evaluations. Related: Why Do Wages Grow Faster for Educated Workers? and Multidimensional Human Capital and the Wage Structure and The Economics of Inequality in High-Wage Economies
The biggest recipient of Chinese investment so far this year is nickel-rich Indonesia, according to a preliminary estimate of Chinese investments compiled by the American Enterprise Institute. Direct overseas investment from China to the rest of the world fell by 18% from a year earlier by one new measure released recently. The latest level marks a decline of 25% from a peak in 2016, as overseas mergers and acquisitions have plummeted and Beijing has tightened rules to curb capital flight. Related: Exodus of Wealthy Chinese Accelerates with End of Covid Zero and Singapore Asks Banks to Keep Quiet on Wealth Inflows During China Boom and The Mysterious $300 Billion Flow Out of China
A marked change in the occupational structure of jobs has meant that the proportion of low pay, low skill, informal sector jobs has been rising at the expense of higher paid, high skill jobs in manufacturing and construction. According to Stanford University professor Scott Rozelle, the ratio of informal to formal sector jobs 15 years ago was 40:60, but has now flipped. This is a particular problem for younger workers who are over-represented in low pay sectors and the gig economy. Related: China’s Youth Left Behind As Jobs Crisis Mounts and Why Has Youth Unemployment Risen So Much in China? and Can China Fix Youth Unemployment Woes With Military Recruitment Drive?
More than a century of long-term population growth in California could be over, according to new projections that show the state will have about the same number of people in 2060 as it does now. The California Department of Finance predicts that there’ll be 39.5 million people in the state by 2060. Just three years ago, forecasters were expecting the number to be 45 million — and a decade ago, the population was seen surging to almost 53 million. If there’s a bright spot in the forecast, the state is at least expected to recoup its pandemic population decline in the coming years — returning to its 2020 population level in the 2030s, before peaking in 2044. Related: Taxes, Revenues, and Net Migration In California and The Population of California Declined, Again
The sharp, secular decline in the world real interest rate of the past thirty years suggests that the surge in global demand for financial assets outpaced the growth in their supply. This phenomenon was driven by faster growth in emerging markets, changes in the financial structure of both emerging and advanced economies, and changes in demand and supply of public debt issued by advanced economies. The net foreign liabilities of advanced economies grew massively. The net foreign assets of advanced economies, as a share of their collective GDP, fell from close to zero at the beginning of the 1990s to about -20 percent in 2020.
The US and Japanese armed forces are rapidly integrating their command structure and scaling up combined operations as Washington and its Asian allies prepare for a possible conflict with China. The two militaries have “seen exponential increases . . . just over the last year” in their operations on the territory they would have to defend in case of a war, Lieutenant General James Bierman, commanding general of Marine Forces Japan, told the Financial Times in an interview. “Why have we achieved the level of success we’ve achieved in Ukraine? A big part of that has been because after Russian aggression in 2014 and 2015, we earnestly got after preparing for future conflict: training for the Ukrainians, pre-positioning of supplies, identification of sites from which we could operate support, sustain operations,” he said. “We call that setting the theatre. And we are setting the theatre in Japan, in the Philippines, in other locations.”
The negative impact of the Great Recession on aggregate hours worked and the ensuing slow recovery through 2019 materialized almost exclusively along the extensive margin. However, of the 3% decline in annual hours worked per person (including those who do not work) between 2019 and 2022, more than half is accounted for by the intensive margin. That is, focusing only on the extensive margin (lower employment and participation rates) will underestimate the total decline in labor supply by more than half. The most striking fact is the lower participation of young male cohorts without a bachelor's degree, whose participation rate is up to 7pp below that of older cohorts at the same age. The Great Recession seems to be casting a very long shadow, even on those who were in their teens when it happened.
From March 2020 to August 2021, consumers amassed a peak $2.1 trillion in excess savings relative to the pre-pandemic trend. Since August 2021, consumers have drawn down on these excess savings. Household debt payments were 9.8% of disposable personal income in Q4 ’22 vs. a peak of 13.2% in Q4 of ’04.
For first time in four decades, wage inequality falling, due to rising lower tail. Despite inflation, real wages rising among young HS grads, 1st quartile workers. It’s tempting to attribute this change to ‘tight’ labor markets—but what does this mean in practice? The simplest explanation is that labor markets are operating on a higher point on the labor demand curve. Evidence indicates this explanation too simple: Competition has intensified. Distinction is critical: Rising competition means higher wages that better reflect productivity and higher aggregate productivity — a double dividend.
In the decades before the pandemic, the wages of lower-paid, less skilled hourly employees steadily lost ground to those of skilled workers, college graduates, managers, and professionals. In the two years since, those trends have sharply reversed. We don’t know if this narrowing in inequality will last. Perhaps it is a function of labor shortages that, like semiconductor shortages, will disappear as the pandemic recedes. Maybe it is the result of a tight labor market whose days are numbered as the Federal Reserve seeks to cool the economy. Some of this was catalyzed by the pandemic, which shrank the supply of people willing to do traditionally low-paid work. Many dropped out of the labor force, retired, or died from Covid-19. The college-educated labor force was 5% larger last month than in February 2020; the high school-educated and high school dropout labor force is 4% smaller. (Data between the two periods isn’t strictly comparable.)
The figure above plots the estimated average change in net worth per head of household age category during 2022. People between the ages of 55 and 74 lost, on average, over $100,000 in net worth due to falling asset returns between January and October 2022. This partly reverses some of the net worth gains in 2020-21, which were particularly high for these age groups. This is explained by the high exposure (in absolute terms) of people in these age groups to asset classes such as stocks and bonds, which performed reasonably well in 2020-21 but posted significant negative returns during 2022. Focusing on only people between the ages of 51 and 65, whose decision to participate in the labor force tends to be more sensitive to wealth effects, we find that the decline in asset values may have caused an extra 170,000 people to return to the labor force. This corresponds to an increase in the LFP rate of 0.06 percentage points, or about 16% of the total increase observed through October 2022.
Another big winner in the U.S.-China trade war could be Mexico. It has lower wages than China, an established manufacturing sector anchored by the automotive industry, and the perfect geographic position for serving the U.S. market—particularly since the rise of videoconferencing, which has increased the importance of being in the same time zone. Analysts at Bank of America already see some evidence that this is happening, with U.S. imports of Mexican manufactured goods roughly 60% higher than before the pandemic as of October. Interestingly, Mexico has gained share of U.S. imports in some low-tech industrial sectors such as plastics and textiles, while China has lost share.
About 79% of workers recently hired after a tech-company layoff or termination landed their new job within three months of starting their search, according to a ZipRecruiter survey of new hires. That was just below the 83% share of all laid-off workers who were re-employed in the same time frame. Nearly four in ten previously laid-off tech workers found jobs less than a month after they began searching, ZipRecruiter found in the survey.
By my calculations, members of Britain’s “silent generation”, born between 1928 and 1945, were five percentage points less conservative than the national average at age 35, but around five points more conservative by age 70. The “baby boomer” generation traced the same path, and “Gen X”, born between 1965 and 1980, are now following suit. Millennials — born between 1981 and 1996 — started out on the same trajectory, but then something changed. The most likely explanation is a cohort effect — that millennials have developed different values to previous generations. This is borne out by US survey data showing that, having reached political maturity in the aftermath of the global financial crisis, millennials are tacking much further to the left on economics than previous generations did, favoring greater redistribution from rich to poor.
American manufacturing firms are also citing materials and labor shortages as major constraints to production at the highest levels in decades. Everywhere you look, supply chains seem to be in disarray—and demand seems to be off the charts.
Millennials are roughly equal in wealth per capita to Baby Boomers and Gen X at the same age. Gen X is currently much wealthier than Boomers were at the same age: about $100,000 per capita or 18% greater. Wealth has declined significantly in 2022, but the hasn’t affected Millennials very much since they have very little wealth in the stock market (real estate is by far their largest wealth category.)
John Fetterman bettered Biden’s margin across almost the entire state on his way to defeating Republican Mehmet Oz by about 5 percentage points, his largest improvements over Biden tended to be in red-leaning counties with higher shares of white residents without a college degree. In counties with a population that’s at least 60 percent white without a college degree — which together produced about 36 percent of the state’s 2022 vote — Fetterman’s margin was 7 points better than Biden’s, on average, compared with just 3 points better elsewhere.
There is clear evidence that more people are drinking too much. Deaths from alcohol-induced causes rose from 39,043 in 2019 to 54,258 in 2021, according to the Centers for Disease Control and Prevention, and the population-adjusted death rate is now more than double what it was in the 2000s. Provisional data also show an encouraging decline in alcohol-induced deaths in the first half of 2022, although that trend could change as final numbers become available. Even after the big increases of the past couple of years, US alcohol consumption likely still lags that of many affluent countries, especially in Europe. And yes, Americans drank lots more back in the 1970s — not to mention the 1830s, when estimated per-capita consumption was nearly three times what it was in 2020.
Since January 2021, the Biden Administration has enacted policies through legislation and executive actions that will add more than $4.8 trillion to budget deficits between 2021 and 2031. The $4.8 trillion is the net result of roughly $4.6 trillion of new spending, about $500 billion of tax cuts and tax breaks, and $700 billion of additional interest costs that are partially offset by $400 billion of spending cuts and $600 billion of revenue increases.
Why has work collapsed in the bottom decile? Here we might have a big debate. $11.76 per hour (2017) isn't a lot. But the previous graphs certainly contain a suggestion worth pursuing: The effective marginal tax rate in the lowest three quintiles is effectively 100%. Earn a dollar and lose a dollar of benefits. Why work? Gramm Ekelund and Early are careful, and don't make any causal assertions here. They don't really even stress the fact popping from the table as much as I have. But the fact is a fact, a nearly 100% tax rate + an income effect isn't a positive for labor supply, and the amount of work in lower quintiles has plummeted. This is a book about facing facts and this one is undeniable.
60% of young men in America with less than high-school education have been arrested at least once by age 26. Strikingly, the report’s author James P. Smith found that the arrest rate has increased dramatically over time. Black men were significantly more likely to have been arrested. Of black men aged 26-35 in the study, 33% had been arrested by age 26 versus 23% for white men. Education plays an outsized role in explaining racial arrest differences, especially for men in the 26–35 age group. The overall higher rate of arrests by 26 among black adults in the 26–35 age group correlates with lower education levels. The study also found that having a more educated father was associated with lower rates of arrests and convictions by 26.
Figure 1 shows the cumulative total returns posted by the S&P 500 Index, the MSCI China Index, and the MSCI India Index from December 31, 1992, through April 20, 2022. Our clients have been uniformly surprised that China’s long-term performance has been so much lower than that of the US and India, especially given all the investor focus on China in recent years. And they’ve been even more surprised that India – a market many clients have more or less ignored – has fared so well over the long run.