60% of outstanding US debt was issued when ten-year Treasury rates were below 3% according to a @BudgetHawks analysis. As the Treasury refinances this debt at rates between 4.5% and 5.6%, interest payments will soon exceed defense spending.
Most of the exploding interest costs resulted from borrowing when interest rates were low. We estimate that nearly 60% of our debt originated when the average interest rate on ten-year Treasury notes was less than 3%, while 75% of current debt originated when three-month Treasuries paid less than 3%. That debt, borrowed at low rates, is now being rolled over into Treasuries paying interest rates between 4.5 and 5.6%. Though borrowing seemed cheap during those periods, policymakers failed to account for rollover risk, and we are now facing the cost.
Recent revisions @BEA_News show US GDP is 1.7% higher than prior estimates. Real fixed investment was revised up 6.4%, increasing cumulative growth since 2019 from 5.8% to 8.7%. @JosephPolitano
A large chunk of the upward revisions to GDP data came from increases in real fixed investment, which was raised by more than 6.4% and saw its cumulative growth since early 2019 increase from 5.8% to 8.7%. That means the investment and construction boom we’ve seen over the last few years has actually been stronger than first reported—with manufacturing, housing, software, and power investments all being revised upward. The revisions to software data and methodologies, which included updates that now treat a portion of labor from an expanded pool of workers in various tech occupations as in-house investments, raised real private fixed software investment by 12%. This also spilled over into higher estimates of public-sector software investments, both inside and outside of the defense sector, and upward revisions to the real output of the US information industry.
Torsten Sløk @apolloglobal argues a recession will get underway when monthly non-farm payrolls start moving below 100,000, the level consistent with population growth.
Once nonfarm payrolls start moving below 100,000, credit spreads will widen because investors will take it as a sign that corporate earnings are about to slow down. But with core PCE inflation at 3.9%, the Fed cannot turn dovish. As a result, the Fed will continue to be hawkish even as the unemployment rate starts moving higher. Once the recession finally begins, the Fed can turn dovish and start to lower base rates. But the costs of capital will not decline because at that time corporate earnings will be slowing, and therefore, credit spreads will likely be widening further. The bottom line is that even if we get weak data and the Fed, after a few soft prints in nonfarm payrolls, starts turning dovish, the costs of capital will move higher. In short, the Fed controls the base rate but doesn’t control credit spreads, and that is the reason why a soft landing is unlikely.
75,000 Kaiser Permanente healthcare workers went on strike Wednesday, the largest healthcare sector strike since 1990. 50,000 Vegas hospitality workers might soon join them on the picket line as labor activity increases nationwide.
The three-day strike could stall services for nearly 13mm people in at least half a dozen states. The Kaiser strike is the latest in a string of high-profile labor disputes fueled by a tight labor market, high inflation, and record corporate profits that have left workers both resentful and emboldened. The United Auto Workers has steadily expanded a strike against the Detroit automakers that started Sept. 14, demanding raises as high as 40% and the end of job tiers. The Writers Guild of America last week reached a tentative agreement to end a five-month strike over artificial intelligence and streaming pay, while SAG-AFTRA actors remain on the picket line. And in Las Vegas, more than 50,000 hospitality workers could soon walk off the job over staff cuts and increased workloads—complaints that aren’t so different from the healthcare workers.
A @GoldmanSachs analysis notes that the rise in real interest expense as a percentage of US GDP requires primary (ex-interest) deficit reduction comparable to the 1993 fiscal adjustment to stabilize the debt-to-GDP ratio.
The greater challenge facing US fiscal policy is not new: the US is running a primary (ex-interest) deficit much larger than has been the case historically, and it is happening at a point in the business cycle when the deficit would normally be smaller than usual. When interest expense rose sharply in the 1980s, fiscal policymakers reacted by shrinking the primary (ex-interest) deficit. The largest fiscal adjustment from that period, enacted in 1993, would be sufficient if enacted now to offset the additional interest expense we project (relative to 2021) after 5 years. The average interest rate on federal debt is likely to remain at or below the rate of nominal GDP growth for the next decade, and this relationship is likely to be more benign than the historical average over the next five years.
Torsten Sløk suggests that slowing growth in China might be the dominant cause of the recent weakness in Treasuries. @apolloglobal
Maybe China is behind the rise in US long rates. Growth in China is slowing for cyclical and structural reasons, and Chinese exports to the US are lower. As a result, China has fewer dollars to recycle into Treasuries. In fact, China has been selling $300 billion in Treasuries since 2021, and the pace of Chinese selling has been faster in recent months. If slowing growth in China is a source of higher US rates—together with the US sovereign downgrade, Fed QT, Japan YCC exit, and rising US Treasury issuance—then a bad US employment report on Friday may not result in dramatically lower rates. The bottom line is that the cost of capital will likely stay permanently higher for reasons that have little to do with the business cycle, and it was the period with essentially zero interest rates from 2008 to 2020 that was unusual.
.@Brad_Setser argues that Torsten Sløk’s analysis of Chinese sales of Treasuries is misleading as it excludes Chinese offshore custodians and rotation into agencies.
Sløk's charts of the day are generally great but he forgot to adjust the major foreign holdings table for valuation changes, Euroclear, and Agencies. The available data shows purchases for most of last year, sales in Q1, and a moderation of those sales in the last few months. Nothing dramatic. The Chinese data doesn't suggest informal PBOC reserves sales to date -- all the action has been through the state banks, and the sums there have been modest/the state banks wouldn't need to use their bonds to fund intervention. Has the Chinese bid for Treasuries stopped? No. But China has shifted toward Agencies and holds more of its Treasuries in offshore custodians. This should be the definitive flow chart --not a chart changing the valuation of US custodied Treasuries!
The weakening of the yen relative to the dollar will likely force an intervention that will put additional upward pressure on yields. @johnauthers
In currencies, the US dollar continued its recent rampaging strength, with the yen coming within a whisker of dropping below the level of Y150/$, at which many assume the Japanese authorities would feel obliged to step in to prop up the currency, as they did when it briefly topped that level a year ago. Any intervention by Japanese authorities would likely send yields further upward, so this is a reason for caution about betting on them to fall in short order. The logic is that the Federal Reserve will be happy for yields to rise until they “break something,” at which point bonds’ prices would rise as their yields fell. That makes sense, but if the first thing to break is the patience of the Ministry of Finance in Tokyo, then such a bet on buying bonds would lose money.
US petroleum product exports hit a new record of nearly 6 million barrels per day in the first half of this year, 2% up vs. 2022. @EIAgov
U.S. petroleum product exports totaled nearly 6.0 million barrels per day (b/d) in the first half of 2023, 2% more than during the same period in 2022. The first half of 2023 saw the most U.S. petroleum product exports during the first six months of any year in our Petroleum Supply Monthly data, which date back to 1981. U.S. petroleum product exports increased significantly in the 2000s and 2010s because of a number of factors, including the increasing competitiveness and efficiency of production at U.S. refineries along the U.S. Gulf Coast and increasing hydrocarbon gas liquids (HGLs) production associated with rising U.S. upstream oil and natural gas production.
According to new BLS numbers, 19.5% of American workers worked remotely during August 2023 with the majority of those workers, 53%, being fully remote. Among college graduates, nearly 20% are fully remote. @ModeledBehavior and Eric Carlson
A new estimate of remote work from the Bureau of Labor Statistics (BLS) suggests that remote work is less common than previously thought. While the new BLS data reveals hybrid remote work to be substantially lower than other surveys estimated, fully remote work is close to where other surveys show, at around one out of ten workers. As a result, fully remote work appears slightly more common than hybrid remote work. Looking at the college-educated, nearly one in five are fully remote. Among advanced degree holders, nearly 40% are hybrid or fully remote. Among skilled workers, remote working is now a substantial share of the labor force, including fully remote.
As the baby boomers start to die their children are poised to inherit $16T over the next decade.
Of the 73 million baby boomers, the youngest are turning 60. The oldest boomers are nearing 80. In 1989, total family wealth in the United States was about $38 trillion, adjusted for inflation. By 2022, that wealth had more than tripled, reaching $140 trillion. Of the $84 trillion projected to be passed down from older Americans to millennial and Gen X heirs through 2045, $16 trillion will be transferred within the next decade. Individuals with at least $5 million and $20 million in cash or easily cashable assets make up 1.5 percent of all households. Together, they constitute 42 percent of the volume of expected transfers through 2045, according to the financial research firm Cerulli Associates. That’s about $36 trillion as of 2020—numbers that have most likely increased since.
A new @BLS_gov analysis finds the number of employees of new firms was 2.7 in 2021, down from 6.4 in 1996. Firms that make it to 1, 3, and 5 year survival marks also employ fewer workers than their 1990s counterparts.
The increasing number of establishment births in combination with the decreasing number of jobs generated by those births suggests that the average size of new businesses has been shrinking in recent decades. This theory can be examined through a measure informally nicknamed “birth weight,” that is calculated as the level of gross job gains from establishment births divided by the level of establishment births. While the number of new business establishments tends to rise and fall with the business cycle of the overall economy, the decline in jobs created by establishment births raises questions regarding the changing nature of startups. The average “birth weight” has been steadily declining over the last 20 years from a high of 6.4 employees per establishment birth in 1996 to a low of 2.7 employees per establishment birth in 2021.
Prime age (here 21-64) college educated workers are now moving out of the 12 most expensive metropolitan areas in the US.
It appears in domestic migration data that, years after lower-wage residents have been priced out of expensive coastal metros, higher-paid workers are now turning away from them, too. For most of this century, large metros with a million residents or more have received all of the net gains from college-educated workers migrating around the country, at the expense of smaller places. But among those large urban areas, the dozen metros with the highest living costs — nearly all of them coastal — have had a uniquely bifurcated migration pattern: As they saw net gains from college graduates, they lost large numbers of workers without degrees. At least, that was true until recently. Now, large, expensive metros are shedding both kinds of workers.
The American labor force grew by 32.8M workers between 1995-2022, and 70% of that growth consisted of immigrants or children of immigrants. Immigrants and their children are 29% of the total American workforce.
From 1995 to 2022, the U.S. labor force increased from nearly 131.6 million workers to over 164.3 million—an increase of nearly 32.8 million workers: 16.1 million of that increase came from immigrant workers (49%) and 6.7 million were children of immigrants (21%), according to data from the Current Population Survey’s Annual Social and Economic Supplement. Just 9.9 million were U.S.-born citizens without a foreign‐born parent. The actual effect of cutting off all immigration would have been even greater since the working immigrant population would have declined without more immigration by about 4.5 million. Immigrants have increased from about 10% of the U.S. labor force in 1995 to 18% in 2022, and immigrants and their children have gone from 18% to 29%.
James Montier @GMOInsights notes that American firms’ profit margins have been supported by persistent fiscal deficits and argues that the current historically-high PE multiple “dooms investors to low returns in the long run.”
Between 1950 and 2011, the fiscal deficit averaged just less than 3% of GNP each year. In the period from 2012 to 2022, the fiscal deficit was more than double the previous average, at 6.6%. This isn’t just the impact of the pandemic: the same basic pattern holds even when I exclude the Covid years! The main sources of the increased deficit have been health spending and social security expenditure (again true even with Covid data excluded). Is this era of what Minsky would have called “Big Government” here to stay? Even if I take a very bullish view, that this is indeed a new era of permanent deficits and thus profit margins will remain elevated relative to history, I still cannot find any valuation attraction in U.S. equities in aggregate. The Shiller P/E naturally embodies the decade of higher-than-normal profit margins and yet still stands at 30x. Even without any valuation or margin mean reversion, this dooms investors to low returns in the long run.
John Williams announces @NewYorkFed research that finds “there is no evidence that the era of very low natural rates of interest has ended.”
Based on the new r-star estimates for Canada, the Euro Area, and the United States, we see no signs of a significant reversal of the decline in r-star estimates evident in prior decades. In fact, in all three economies, the r-star estimates in 2022 are within two-tenths of a percentage point of the corresponding estimate in 2019. The current Holston-Laubach-Williams model estimates of r-star in the United States are shown in Figure 3. For comparison, the figure also shows estimates using a version of the model that is not adjusted to take into account COVID or outliers and holds the parameter values fixed at estimates using data through the end of 2019. The two sets of estimates are very similar through 2019. They differ sharply during the acute period of the pandemic, however, when the estimates from the unmodified model exhibit large swings due to the presence of sizeable outliers. Interestingly, the two estimates are very close to each other at the end of the sample.
.@AswathDamodaran suggests that the “stickiness” of a bank’s deposit base has strong explanatory power for overall resiliency. Banks with the highest deposit growth in the past five years (suggesting low stickiness) have tended to see big declines.
It is banks with the least stick deposits that should have seen the biggest declines in market capitalization. My proxies for deposit stickiness are limited, given the data that I have access to, but I used deposit growth over the last five years (2017-2022) as my measure of stickiness (with higher deposit growth translating into less stickiness): The results are surprisingly decisive, with the biggest market capitalization losses, in percentage terms, in banks that have seen the most growth in deposits in the last five years. To the extent that this is correlated with bank size (smaller banks should be more likely to see deposit growth), it is by no means conclusive evidence, but it is consistent with the argument that the stickiness of deposits is the key to unlocking this crisis.
American public debt as a % of GDP is now higher than Portugal and Spain and on track to be higher than Italy by 2028 and Greece by 2030 @ChrisGiles_
The US federal budget is haemorrhaging money. The non-partisan Congressional Budget Office calculates that in the first seven months of the 2023 fiscal year, underlying government revenues are down 10% with spending up 12%. This leaves the federal budget deficit more than three times larger than in the same months of the 2022 fiscal year. The CBO’s latest forecasts show the level of federal debt held by the public as a share of national income to be 98% in 2023, just 7.6% below its wartime peak in 1946 and on track to exceed it in 2028. For comparison, UK public debt, also at a multi-decade high relative to gross domestic product, is still less than half the level it was at the end of the second world war. To make a comparison with eurozone countries that required support in the 2010s, Portugal, Ireland and Spain already have lower gross debt levels than the US, IMF forecasts show US debt set to exceed that in Italy by 2028 and Greece by the end of the decade.
According to a new analysis from the @sffed there is still $500B of excess personal savings in the economy which could support consumer spending through Q4 of this year.
We estimate that accumulated excess savings, in nominal terms, totaled around $2.1 trillion through August 2021, when it peaked (green area). After August 2021, aggregate personal savings dipped below the pre-pandemic trend, signaling an overall drawdown of pandemic-related excess savings. The drawdown to on household savings was initially slow, averaging $34 billion per month from September to December 2021. It then accelerated, averaging about $100 billion per month throughout 2022, before moderating slightly to $85 billion per month in the first quarter of 2023. Cumulative drawdowns reached $1.6 trillion as of March 2023 (red area), implying there is approximately $500 billion of excess savings remaining in the aggregate economy. Should the recent pace of drawdowns persist—for example, at average rates from the past 3, 6, or 12 months—aggregate excess savings would likely continue to support household spending at least into the fourth quarter of 2023.
A wealth effect from the rise in asset prices during the pandemic period can explain over 80% of the 2.2M “excess retirements” from 2019-21 among US workers aged 55+. @mfariacastro
The U.S. labor force participation rate (LFPR) experienced a record drop during the early pandemic. While it has since recovered to 62.2% as of December 2022, it was still 1.41 pp below its pre-pandemic peak. This gap is explained mostly by a permanent decline in the LFPR for workers older than 55. Table 2 shows that between 45% and 82% of the 2.2 million excess retirements can be explained by wealth effects for those aged 55-70 or 55 and older. For the entire 2019-2022 period, between 20% and 36% of the 3.3 million excess retirements can be explained by wealth effects.
Independent analyst @JosephPolitano notes that the primary driver of capacity under-utilization for American manufacturing firms has shifted from insufficient orders to insufficient supply of labor and materials.
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.
According to recent surveys, recently laid-off tech workers are quickly finding new employment with 40% accepting a new position within 30 days. @WSJ
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.
cording to @jmhorp Millennials are keeping pace with Baby Boomers and Gen X in terms of generational wealth per capita.
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.)
According to data from Insider Intelligence, Google and Facebook’s share of digital advertising was 48.4% in 2022, and is expected to decline to 44.9% in 2023, as Amazon, TikTok, and digital streamers gain share. @WSJ
For the first time in nearly a decade, the two largest players in online advertising are no longer raking in the majority of U.S. digital-ad dollars, a decline that industry insiders expect to continue in years to come. Alphabet Inc.’s; Google and Facebook parent Meta Platforms Inc. accounted for a combined 48.4% of U.S. digital-ad spending in 2022, according to estimates from research firm Insider Intelligence Inc. Their combined U.S. market share hadn’t been under 50% since 2014, said Insider Intelligence, which expects that number to drop to 44.9% this year.
Americans are drinking at elevated levels in the aftermath of the pandemic with inflation-adjusted spending up 15% in 2022 vs. just before the pandemic. @foxjust
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.
.@FiveThirtyEight analyst @geoffreyvs finds that Fetterman’s margin of victory was provided by non-college white voters: Fetterman polled 7pp better than Biden in counties dominated by non-college whites.
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.
During Biden’s first two years in office, he has approved at least $4.8T of new borrowing according to @BudgetHawks.
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.
.@JohnHCochrane reviews Phil Gramm, Robert Ekelund and John Early book and highlights their big finding, “The effective marginal tax rate in the lowest three quintiles is effectively 100%. Earn a dollar and lose a dollar of benefits. Why work?”
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.
A new BLS data series “New Tenant Repeat Rent Index” suggests that the highest housing inflation is behind us, and other indexes should see price deceleration soon, according to @JosephPolitano.
Researchers at the BLS and Cleveland Fed released a data series today that might be the single most important new inflation indicator. The New Tenant Repeat Rent Index uses the same microdata that goes into the official Consumer Price Index to select only samples with rental turnover and to assign price shifts to when they happened, not when the units were surveyed. The New Tenant Repeat Rent Index, therefore, leads official inflation data in the CPI by 1 year. The good news is that the New Tenant Repeat Rent Index suggests that the worst of housing inflation is likely behind us, and price decelerations should pass through to official inflation data soon. Critically, New Tenant Repeat Rent index also shows lower overall price growth than private data.
First generation immigrants make up 16% of American inventors, but are responsible for 23% of total innovation output. Including the spillover effects on native born collaborators, they drive 36% of aggregate innovation. @bibipousada @shaibrn @rebeccardiamond
We link patent records to a database containing the first five digits of more than 230mm of Social Security Numbers (SSN). By combining this part of the SSN together with year of birth, we identify whether individuals are immigrants based on the age at which their Social Security Number is assigned. We find immigrants represent 16% of all US inventors, but produced 23% of total innovation output, as measured by number of patents, patent citations, and the economic value of these patents. Immigrant inventors are more likely to rely on foreign technologies, to collaborate with foreign inventors, and to be cited in foreign markets, thus contributing to the importation and diffusion of ideas across borders. A simple decomposition illustrates that immigrants are responsible for 36% of aggregate innovation, two-thirds of which is due to their innovation externalities on their native-born collaborators.