Contrasting Demark’s Novo Nordisk and China’s car exporters, @M_C_Klein distinguishes “positive-sum” trade which is driven by something new and valuable from “negative-sum” trade which is driven by overcapacity.
The positive-sum vision of global economic integration is that rising production in one place does not need to displace existing production elsewhere because demand and living standards will rise commensurately. Novo Nordisk’s scientists invented something new and valuable, simultaneously creating both supply and demand. They did not pivot from selling to Danes to selling to Americans. The negative-sum vision is the one of businesses burdened by persistent “overcapacity” (really, underconsumption) are forced to fight for market share in a world without growth. The U.S. effectively preempted the influx of Chinese-made electric vehicles with the Inflation Reduction Act, which boosts total demand while reserving a share for local producers. Europe is far more exposed and has yet to formulate a response. The common belief in certain circles that Europeans are more “open to trade” than Americans may not survive this experience.
China is facing a choice between low GDP growth or encouraging more domestic consumption. @michaelxpettis calculates that transferring 1.5% of GDP to the household sector annually might enable a 4-5% growth rate.
By my calculations, if the government could directly or indirectly transfer roughly 1.5% of GDP every year to households, it could drive growth in household income – and with it, household consumption – to around 7% annually. This, in turn, could generate GDP growth of 4-5% even as investment growth dropped sharply. The arithmetic of rebalancing is unassailable. Given its status as the world’s second-largest economy, and by far the world’s largest investor, China simply cannot maintain its current investment share of GDP while continuing to grow relative to the rest of the world.
For the first time, Apple is selling a new generation iPhone manufactured in India on launch day. Apple is trying to move at least 25% of its iPhone production out of China by next year.
For the first time, the new iPhone model you buy on the launch day could be made in India. Apple plans to make the India-built iPhone 15 available in the South Asian country and some other regions on the global sales debut day, people familiar with the matter said. While the vast majority of iPhone 15s will come from China, that would be the first time the latest generation, India-assembled device is available on the first day of sale, they said, asking not to be identified as the matter is private.
According to @USCBO, the federal budget deficit grew by $600B for the first 11 months of fiscal 2023 vs. fiscal 2022. Revenues were down 10% and outlays were up 3%.
The federal budget deficit was $1.5 trillion in the first 11 months of fiscal year 2023, the Congressional Budget Office estimates—$0.6 trillion more than the shortfall recorded during the same period last year. Revenues were 10% lower and outlays were 3% higher from October through August than they were during the same period in fiscal year 2022. Receipts collected through August 2023, net of refunds, were about $350 billion less than CBO projected, mainly because of smaller-than-anticipated collections of individual and corporate income taxes. Net outlays for interest on the public debt rose by $149 billion (or 30 percent), mainly because interest rates are significantly higher than they were in the first 11 months of fiscal year 2022.
The prevalence of long-dated mortgages, and a reliance on capital markets financing, has made the US relatively immune to rate increases. @FedGuy12 writes that the dollar is likely to strengthen as foreign central banks cut rates before the Fed.
While the vast majority of U.S. mortgages are 30 year fixed rate, many other countries rely on either variable rate or short dated fixed rate mortgages. U.S. mortgage debt servicing ratios have thus remained around historical lows due to robust wage growth and a large existing stock of mortgages taken out at low rates. In contrast, households in many other countries are beginning to see their disposable income disappear. The dollar strengthened significantly in 2022 as the Fed moved more aggressively than other major central banks, but sold off when other countries caught up. The scenario may replay in a slightly different way as interest rate differentials widen because other central banks retreat first.
New @federalreserve research demonstrates elevated corporate profit margins during the pandemic period were a function of government spending and lower interest expenses.
Using a measure of nonfinancial corporate profits from the national income accounts [before tax profits with capital consumption adjustment] we find that nonfinancial corporate profit margins, or profits over gross value added, increased sharply to about 19% in 2021 Q2 and slipped back to 15% in 2022 Q4, compared to about 13% in 2019 Q4. Our analysis shows that much of the increase in aggregate profit margins following the COVID-19 pandemic can be attributed to (i) the unprecedented large and direct government intervention to support U.S. small and medium-sized businesses and (ii) a large reduction in net interest expenses due to accommodative monetary policy. Without the historically outsized government fiscal intervention and accommodative monetary policy, non-financial profit margins during 2020-2021 would have been more in line with past episodes of large economic downturns.
China is set to become the world’s largest car exporter, shipping 2.8mm vehicles through July. An industry analyst suggests that Chinese EV and legacy ICE manufacturers have excess capacity that may be as large as 25mm units/year.
China is set to become the world’s biggest car exporter this year, overtaking Japan. Driving China’s global ascendancy are deep structural problems in the domestic auto industry, which threaten to upend car markets across the world. A stark mismatch between production at Chinese factories and local demand has been caused, in part, by industry executives mis-forecasting three key trends: the rapid decline of internal combustion engine car sales, the explosion in popularity of electric vehicles and the declining need for privately owned vehicles as shared mobility booms among an increasingly urbanised Chinese population. The result has been “massive overcapacity” in the number of vehicles produced in factories across the country, said Bill Russo, former head of Chrysler in China and founder of advisory firm Automobility. “We have an overhang of 25mn units not being used.”
Stock-bond correlation is positive when core inflation averages above 4%. @GregObenshain notes that, in high inflation environments, inflation shocks tend to suggest a policy response that sends stock and bond prices in the same direction.
When the core inflation rate averages above 4%, the stock-bond correlation has been positive with few exceptions. Core inflation has averaged 4.5% for the past three years and is currently 4.7%. Even in periods of high stock-bond correlations, stocks, and bonds can be negatively correlated over shorter periods. In fact, over the first eight months of this year, stocks and bonds moved opposite one another in May, June, and July. This also helps explain how in the 1970s during a period of sustained positive stock-bond correlations, Treasurys still had positive returns in recessions. The stock-bond correlation can be seen as an indicator of what is the dominant risk—inflation or growth—and how it is changing.
Trump’s edge in the electoral college is fading as polling shows Trump’s improved margins with non-white voters may have minimal impact in battleground states. @Nate_Cohn
Mr. Trump’s made huge gains among white voters without a college degree in 2016, a group that was overrepresented in the key Northern battleground states. The polls so far this cycle suggest that the demographic foundations of Mr. Trump’s advantage in the Electoral College might be eroding. Mr. Biden is relatively resilient among white voters, who are generally overrepresented in the battleground states. Mr. Trump, meanwhile, shows surprising strength among nonwhite voters, who are generally underrepresented in the most critical battleground states. As a consequence, Mr. Trump’s gains among nonwhite voters nationwide would tend to do more to improve his standing in the national vote than in the battleground states. Overall, 83% of voters in Wisconsin, Michigan, and Pennsylvania were white in the 2020 election compared with 69% of voters elsewhere in the nation.
In Louisiana the mean home insurance premium rose 6.7% in 2021 and 18.5% in 2022 as insurers reprice their risk.
Twelve insurers that write homeowners coverage in Louisiana were declared insolvent between July 2021 and February 2022, according to the Insurance Information Institute. Those closures sent insurance prices spiraling out of control, in both absolute terms and also in prices relative to local median incomes that are among the lowest in the nation. The average premium rose 6.7% in 2021 and then 18.5% in 2022, according to the Louisiana Department of Insurance. Louisiana Citizens Property Insurance Corp., the state-backed insurer of last resort, went from 45,000 policies in 2020 to 130,000 currently. That’s despite the fact that, by law, it charges 10% above market rate and raised rates 65% at the beginning of this year.
.@jan_eeckhout suggests that, when the underlying inflation data is not especially noisy, it might be appropriate to use “instantaneous” measures of inflation, which consider only very recent data. “Instantaneous inflation” hit 2% in Dec ‘22.
Current practice to measure inflation for monetary policy uses the average annual inflation rate. When inflation changes fast, whether increasing or decreasing, the annual average rate is biased towards data from too far in the past and conveys the true price level with six months delay. I propose to use instantaneous inflation as a more adequate measure of the price change. The measure trades off noise in the data with the precision of the instantaneous price change. Using the latest inflation numbers, it shows that instantaneous inflation in the US and the Eurozone is back to the target of 2% and that the high inflation period is over. Instantaneous core inflation, which excludes food and energy, is falling, but at 4%, it remains higher than the inflation target of 2%. The conventional measure of core inflation is at 5.7%.
According to a new @USCBO forecast, US population growth after 2033 will be driven by immigration, which will account for all American population growth in 2042. @Bloomberg
US population growth will be driven entirely by immigration within two decades, according to the latest forecasts by the Congressional Budget Office. The projections, published on Tuesday, show a population of 373 million by 2053 — about 3 million more than the CBO was expecting a year ago. That’s partly due to a sharp increase in the forecast for immigration in 2023 and the following two years, after pandemic travel restrictions eased — adding some 1 million to the population over that period. Much of the growth is projected to come in the so-called prime-age bracket, between 25 and 54, that is the core of the workforce. The CBO expects that cohort to increase by about 1.1 million people, or 0.9%, each year.
.@Edsall argues that a “white rural red wave” is the driving force of the Republican party today and cites shifts in Wisconsin suburban and rural voting patterns between 2016 and 2022.
In 2016, Ron Johnson rode Trump’s coattails and the Republican trail blazed by the former governor Scott Walker to a 3.4 point (50.2 to 46.8) victory and swept into office, in large part by running up huge margins in Milwaukee’s predominantly white suburbs. That changed in 2022. Craig Gilbert, a fellow at Marquette Law School conducted a detailed analysis of Wisconsin voting patterns and found that Johnson, "performed much worse in the red and blue suburbs of Milwaukee than he did six years earlier in 2016. So again, how did Johnson win? The simple answer: white rural Wisconsin. As recently as 17 years ago, rural Wisconsin was a battleground. In 2006, Jim Doyle, the Democratic candidate for governor, won rural Wisconsin, about 30 percent of the electorate, by 5.5 points. “Then came the rural red wave,” Gilbert writes. “Walker carried Wisconsin’s towns by 23 points in 2010 and by 25 points in 2014.” In 2016, Johnson won the rural vote by 25 points, but in 2022, he pushed his margin there to 29 points.
Value-added/full-time employee in the US construction sector was ~40% lower in 2020 than in 1970; had construction productivity grown at 1% a year, aggregate US labor productivity would have been 10% higher. @Austan_Goolsbee @ChadSyverson @nberpubs
Figure 1 shows indices of U.S. construction sector labor productivity and TFP from 1950 to 2020. For comparison, it also plots the same indices for the overall economy. Throughout the 1950s and well into the 1960s, both measures of construction sector productivity grew steadily. Indeed, they outpaced their whole-economy counterparts during that period. By 1970, however, the construction sector’s labor productivity and TFP had both begun to fall. By 2020, while aggregate labor productivity and TFP were 290 percent and 230 percent higher than in 1950, both measures of construction productivity had fallen below their 1950 values. This is stunningly bad productivity performance for a major sector. Construction labor productivity fell at an average rate of about 1% per year from 1970-2020. Had it instead grown at the (relatively modest) rate of 1%per year, aggregate labor productivity (and plausibly, income per capita) being about 10% higher than it actually was.
.@JBSay notes there have been at least 400,000 unexpected deaths among the US working-age population since 2020. Netting out Covid deaths and unnatural deaths (homicide, suicide, overdose, etc.) he finds a spike starting in 2021.
In 2021 group life [insurance] payments exploded by 20.7% over the five-year average and by 15% over the acute pandemic year of 2020. If we remove both Covid-19 and unnatural deaths (homicide, suicide, overdose, etc.), we see a dramatic spike of natural, non-Covid-19 deaths among working-age people beginning in the spring and summer of 2021. To overgeneralize: In 2020, the vulnerable died of Covid at unusually high rates. In 2021 and 2022, Covid continued its assault, but the young, middle-aged, and healthy also died in aberrantly high numbers of something else.
.@Brad_Setser and @EtraAlex note Japanese investors are withdrawing from global debt markets, selling $200B of debt in 2022 relative to buying a mean of $100B a year over the previous decade.
The global economy has already adjusted to a slowdown in Japanese institutional fixed-income demand—Japanese investors have gone from buying about $100 billion a year of foreign bonds on average over the last ten years to selling close to $200 billion in 2022. The most likely outcome in 2023 is a continuation of the roll down in Japanese holdings of foreign bonds observed in 2022, as the large pool of hedged Japanese investors allow maturing bonds to roll off at par rather than reinvest abroad. That more mundane reality still implies the large flow into global fixed income from Japanese institutional investors over the last decade will dwindle to a relative trickle.
According to a new analysis from the @stlouisfed, job switching is associated with lower earnings growth for lower-earning prime-age male workers but higher earnings growth for their higher-income peers.
Let’s consider two male workers, one in the bottom (in the first two percentiles) and the other in the 65th percentile of the lifetime earnings distribution. Both experienced on average a 2% growth in annual earnings if they stayed with the same employer. However, if they changed employers, the bottom earner did not see any growth in his earnings, whereas the 65th-percentile earner enjoyed, on average, 3% growth. This large heterogeneity among switchers indicates that the nature of job switches is very different throughout the lifetime earnings distribution. More than 35% of job switches were a result of a significant unemployment spell for the bottom earners, compared with only around 15% in the top third of earners, suggesting a much higher unemployment risk for bottom earners. Finally, earnings growth for both job stayers and job switchers increases steeply in the top third, reaching around 10% for the highest earners.
.@GeneralTheorist notes that, while durable goods are deflating, service inflation has decelerated from 7.2% in the three months ending October to 4.7% in December, but remains well above the 2% pre-pandemic run-rate.
While underlying durables are now deflating, underlying services remain high—at about 5% over 3 months, accelerating to 7% month-over-month annualized in Dec. On the bright side, adjusted core service inflation has decelerated from 7.2% over 3 months (annualized) to Oct. to only 4.7% in Dec. This is clearly an improvement. But is that only because Oct. and Nov. prints were unusually soft, or was Dec. the outlier in an otherwise strong disinflation trend? The fear for the Fed then is super core services settling around 4-5% annualized instead of returning to the 2% run-rate that characterized the pre-pandemic norm. What will it be? It may take until March until we can be sure.
.@M_C_Klein notes the major buyer of Treasury debt has shifted from the Federal Reserve to US households and foreign buyers.
The Fed switched to “quantitative tightening”—an inelegant term for “letting some bonds mature”—which meant that new buyers needed to be found. State and local governments continued their purchases, but money-market funds shed Treasury bills and coupons for reverse repos with the Fed, while other buyers cut back on their purchases. The resulting mix of buyers in the first three quarters of 2022 looked a lot different than in prior periods. The entire net issuance was covered by the two most opaque sectors in the financial accounts: “households and nonprofit organizations” and “the rest of the world”.
Firms are using technology to shift work to remote employees and third-party subcontractors. Outsourcing intensity has doubled from 11% in 2005 to 22% in 2021, which may compress white-collar wages going forward. @TheEconomist
Pinning down just how much firms depend on outsiders is tricky—companies do not advertise this sort of thing. A measure, “outsourcing intensity,” [tracks] a firm’s external purchase commitments in the upcoming year as a share of its cost of sales. The Economist has calculated the measure using data from financial reports for a sample of large listed firms from America and Europe. Average outsourcing intensity across our sample has nearly doubled from 11% in 2005 to 22% in the most recent year of data (either 2021 or 2022). This growth is especially pronounced among tech titans such as Apple and Microsoft; businesses that grew little over the analyzed period, such as Unilever, a British consumer-goods giant, saw only small increases. This is consistent with research which finds that as firms grow ever larger and adopt more technologies, thus becoming more complex and unwieldy, they outsource more operations—precisely as Coase would have predicted.