Daily
May 12, 2023
.@tylercowen argues that countries will increasingly find themselves competing for immigrants as global fertility rates fall.
A less obvious problem is that once nations enter the lower-population-higher-tax cycle, it may be very difficult for them to attract new migrants. If you were thinking of leaving your country, would you rather go to a wealthy country with higher tax rates, or one with lower tax rates? Especially if the country with higher taxes has a long tradition of not welcoming migrants, and you would be less likely to find any expatriates there? Besides which, due to their aging population, those countries may simply be boring, at least for young people. The danger is that countries with more restrictionist immigration policies will get locked into low-migration outcomes for the foreseeable future, whether they like it or not.
Gun homicides in the US are being driven not by an increase in gun ownership but a decline in local trust levels. @jburnmurdoch
Levels of trust in the US have been eroding for decades and the share of Americans who say they do not trust other people in their neighbourhood is now roughly double what you would expect based on US socio-economic development. Few appreciate that at country and state level, the statistical relationship between gun availability and gun deaths is driven almost entirely by suicides. The more people who have access to guns, the more who use them to take their own lives. And since the vast majority of all gun deaths are suicides, this dynamic dominates the overall guns-deaths link. Look only at gun homicides instead, and the link with the number of guns is much weaker, whether the unit of analysis is different countries or US states. But add in interpersonal trust as well as gun ownership, and the relationship returns. In other words, it’s the interplay between guns and fear that sends homicide rates climbing.
May 11, 2023
The post pandemic expansion was much less dependent on consumer and business borrowing than previous expansions. @M_C_Klein argues this should insulate the economy from tightening US bank credit standards.
With the temporary exception of the Paycheck Protection Program (PPP) emergency loans, bank credit has not been a significant source of financing for either consumer or business spending. That is a notable contrast from pre-2007 cycles—and should help insulate the real economy from the disruptions in the banking sector. Despite the housing boomlet, Americans borrowed remarkably little over the past few years relative to their income, especially when compared to previous expansions—and only some of that borrowing came from banks. Moreover, household borrowing had already been retrenching in the second half of 2022 as mortgage rates normalized, with little impact on overall economic activity.
In the aftermath of SVB collapse, bank deposit outflows have been concentrated in a relatively narrow segment of “super-regional” banks with assets between $50-$250B. @NewYorkFed
The banking system has seen a considerable decline in deposit funding since the start of the current monetary policy tightening cycle in March 2022. The speed of deposit outflows increased during March 2023, following the run on SVB, with the most acute outflows concentrated in a relatively narrow segment of the banking system, super-regional banks (those with $50 to $250 billion in total assets). Notably, deposit funding amongst the cohort often referred to as community and smaller regional banks (that is, institutions with less than $50 billion in assets) were relatively stable by comparison. Large banks (those with more than $250 billion in assets), which had been subject to the largest deposit outflows before March 2023, received deposit inflows throughout March 2023. Throughout, banks were able to replace deposit outflows by making use of alternative funding sources.
China and the United States economies are likely to be near parity going forward. Goldman Sachs estimates at peak China will be 14% larger than the US whereas Capital Economics estimates China’s economy will peak at 90% of the US. @TheEconomist
In 2011 Goldman Sachs projected that China’s GDP would surpass America’s in 2026 and become over 50% larger by mid-century. No peak was in sight. At the end of last year, the bank revisited its calculations. It now thinks China’s economy will not overtake America’s until 2035 and at its high point will be only 14% bigger. Capital Economics, a research firm, argues that China’s economy will never be number one. It will reach 90% of America’s size in 2035 and then lose ground. Even if China’s economy does become the biggest in the world, its lead is likely to remain small. It is unlikely to establish an edge over America equivalent to the 40% lead America now enjoys over it. It also seems safe to say that China and America will remain in a position of near-parity for decades.
Ed Glaser argues that New York needs to transition from “a city dedicated to productivity to one built around pleasure” by changing zoning to create mixed use neighborhoods that are less dependent on daily commuting crowds.
New York is undergoing a metamorphosis from a city dedicated to productivity to one built around pleasure. Many office buildings still feel eerily empty, with occupancy around 50%of prepandemic levels, harming landlords and the local economy. But 56 million people visited New York last year, making Fifth Avenue in December feel as crowded as Ipanema Beach during Carnival. The economic future of the city that never sleeps depends on embracing this shift from vocation to recreation and ensuring that New Yorkers with a wide range of talents want to spend their nights downtown, even if they are spending their days on Zoom. We are witnessing the dawn of a new kind of urban area: the Playground City. To create a city vibrant enough to compete with the convenience of the internet, we need to end the era of single-use zoning and create mixed-use, mixed-income neighborhoods that bring libraries, offices, movie theaters, grocery stores, schools, parks, restaurants and bars closer together. We must reconfigure the city into an experience worth leaving the house for.
From 2019-2022 students in the mean school district fell half a year behind in math and a third of a year behind in reading. The learning losses were more significant in poorer school districts.
According to our calculations, the average student was half a year behind in math and a third of a year behind in reading. In 2019, the typical student in the poorest 10 percent of districts scored one and a half years behind the national average for his or her year – and almost four years behind students in the richest 10 percent of districts – in both math and reading. By 2022, the typical student in the poorest districts had lost three-quarters of a year in math, more than double the decline of students in the richest districts. The declines in reading scores were half as large as in math and were similarly much larger in poor districts than rich districts. The pandemic left students in low-income and predominantly minority communities even further behind their peers in richer, whiter districts than they were.
Most American parents pass along both their religious beliefs and politics to their children. @pewresearch
Roughly eight-in-ten parents who were Republican or leaned toward the Republican Party (81%) had teens who also identified as Republicans or leaned that way. And about nine-in-ten parents who were Democratic or leaned Democratic (89%) had teens who described themselves the same way. 82% of Protestant parents had teens who also identified as Protestant, 81% of Catholic parents had Catholic teens, and 86% of religiously unaffiliated parents – those who described themselves as atheist, agnostic or nothing in particular – had teens who were also “nones.”
May 10, 2023
April’s core CPI of 5.0% annualized remains well above target. @jasonfurman
Inflation coming in high again, despite a continued slowdown in shelter growth but because of a (temporary?) rebound in goods prices. The core CPI at an annual rate: 1 month: 5.0% 3 months: 5.1% 6 months: 4.8% 12 months: 5.5%. The favorable interpretation of the April data is that it was temporarily elevated due to an unusually large increase in goods prices--which had been flat or negative recently. A lot of this was a 4.4% (not annualized) increase in used cars and trucks. Housing looms large in the CPI. Shelter cost growth slowed again this month, although that was because hotel prices fell 3.4%. But even excluding that rent and owner's equivalent rent were slower than they generally have been. But more slowing likely ahead. "Supercore", which excludes food, energy, shelter and used cars, was up at only a 1.9% annual rate in April. That is the slowest rate since the takeoff of inflation in early 2021.
Productivity declined in 2022. This was driven by the goods-producing sector, where output was up 1% versus payrolls increasing 3%. @NewYorkFed
Productivity, measured here by GDP per worker, can be used to evaluate how well employment tracked output during the pandemic period. Productivity was flat for the whole economy in 2021 as both payrolls and the economy grew at fast rates. Specifically, output rose 6% over the four quarters and payrolls rose 5% over the same period. By sector, services output was up 8% versus payrolls up 6% (higher productivity), goods-producing output was up 1% versus payrolls increasing 3% (lower), and government output was up 1% versus payrolls up 2% (lower). In 2022, overall productivity finally fell as GDP growth slowed to 1% while payrolls rose 3%. By sector, services GDP grew 2% versus payrolls up 4%, goods-producing output fell 3% versus payrolls up 4%, and government output and payrolls both grew 1%. The depressed productivity for the goods-producing sectors was broad based, with low readings for mining, construction, and manufacturing.
In a Fed survey of large bank loan officers completed after the SVB collapse but prior to First Republic finds lending standards have tightened to 2008 levels. Torsten Sløk @apolloglobal
The survey asks banks if they have tightened lending standards for firms and households relative to last quarter, and across all indicators for demand for loans and supply of loans, we are now at or close to 2008 levels. In addition, the first sentence in the notes to the Fed’s Senior Loan Officer Survey shows that it only covers large banks out of the roughly 4,000 banks in the US, so credit conditions in small and medium-sized banks are likely tightening even more than seen in the charts below. The bottom line for markets is that with inflation still at 5%, well above the FOMC’s 2% inflation target, and the Fed not cutting rates anytime soon, credit conditions will continue to tighten, and as a result, a recession is coming that could be deeper or longer than the consensus currently expects.
American CDS spreads are currently more expensive than insurance against a Mexican or Greek default. @markets.
Mounting investor anxiety about the prospect of a first-ever US default has made it more expensive to insure Treasuries than the bonds of — among others — Greece, Mexico and Brazil, which have defaulted multiple times and have credit ratings many rungs below that of the US’s AAA. The imbroglio has fueled a surge in demand for euro-denominated US credit default swaps, the most actively traded. These contracts against a default over the next year traded at 166 basis points Wednesday, near a record high and surpassing the levels during previous debt-ceiling standoffs in 2011 and 2013. The trade has taken off due to a derivatives market quirk that will allow holders to reap handsome returns in the event of default. Their payoff will equal the difference between the market value and par value of the underlying asset, an attractive proposition when long-dated Treasury bonds are trading particularly cheap. The potential payout could exceed 2,400%, according to Bloomberg calculations.
The fast food chain Wendy’s is automating its drive-through service with an AI powered chatbot using natural-language software developed by Google.
Wendy’s is automating its drive-through service using an artificial-intelligence chatbot powered by natural-language software developed by Google and trained to understand the myriad ways customers order off the menu. The Dublin, Ohio-based fast-food chain’s chatbot will be officially rolled out in June at a company-owned restaurant in Columbus, Ohio, Wendy’s said.
Citing a Goldman Sachs research note, @martinwolf_ argues that AI diffusion is likely to be associated with an increase in productivity.
An analysis by Goldman Sachs argues that the “combination of significant labour cost savings, new job creation, and a productivity boost for non-displaced workers raises the possibility of a labour productivity boom”. This would be similar to what ultimately followed the emergence of the electric motor and personal computer. The study estimates that generative AI, in particular, might raise annual growth of labour productivity in the US by 1.5 percentage points. The surge would be bigger in high-income countries than developing ones, though timing is uncertain.
Microsoft has signed a contract with Helion to buy at least 50 megawatts of electricity generated by fusion starting in 2028.
Many experts believe fusion power remains decades away. Microsoft thinks it could be just around the corner. In a deal that is believed to be the first commercial agreement for fusion power, the tech giant has agreed to purchase electricity from startup Helion Energy within about five years. Helion, which is backed by OpenAI founder Sam Altman, committed to start producing electricity through fusion by 2028 and target power generation for Microsoft of at least 50 megawatts after a year or pay financial penalties.
Physicists have created objects that retain a memory of their past, a step towards “error-tolerant quantum computers.” @QuantaMagazine
Physicists working with the company Quantinuum announced that they had used the company’s newly unveiled, next-generation H2 processor to synthesize and manipulate non-abelian anyons in a novel phase of quantum matter. Their work follows a preprint posted last fall in which researchers with Google celebrated the first clear intertwining of non-abelian objects, a proof of concept that information can be stored and manipulated in their shared memory. Together, the experiments flex the growing muscle of quantum devices while offering a potential glimpse into the future of computing: By maintaining nearly indestructible records of their journeys through space and time, non-abelian anyons could offer the most promising platform for building error-tolerant quantum computers.
May 9, 2023
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.
According to new Financial Stability Report the private sector is deleveraging relative to GDP.
At the end of Q4 2022 total outstanding private credit was split about evenly between businesses and households, with businesses owing $19.9 trillion and households owing $19.0 trillion. The combined total debt of nonfinancial businesses and households grew more slowly than nominal GDP since the November report, leading to a modest decline in the debt-to-GDP ratio, which moved back closer to the level that had prevailed for much of the decade before the pandemic. The decline in the overall ratio was driven by a larger decline in household debt-to-GDP ratio compared to the business debt-to- GDP ratio.
Counterpoint Technology Market Research projects that India will manufacture 19% of the world’s smartphones this year, up from 9% in 2016. Overall Indian electronic exports have tripled since 2018 to $23B through March of this year.
Nonetheless, after decades of disappointment, India is making progress. Its manufactured exports were barely a tenth of China’s in 2021, but they exceeded all other emerging markets except Mexico’s and Vietnam’s, according to World Bank data. The biggest gains have been in electronics, where exports have tripled since 2018 to $23 billion in the year through March. India has gone from making 9% of the world’s smartphone handsets in 2016 to a projected 19% this year, according to Counterpoint Technology Market Research. Foreign direct investment into India averaged $42 billion annually from 2020 to 2022, a doubling in under a decade, according to central bank figures.
China’s BYD has overtaken VW as the top-selling brand in China, and Chinese carmakers are outselling foreign rivals with 52% share of total sales 2023, up from 47% in 2022. @FT
Volkswagen depends on China for at least half of its annual profits, which last year reached €22bn. While the sprawling German group, which today includes Porsche and Audi, sells more cars in China than any other company, its flagship VW brand was recently dethroned as the country’s best-selling car by BYD, the Shenzhen-based conglomerate backed by Warren Buffett. The German company is falling behind in the fast-growing electric car segment, where the VW brand sits in ninth place with a market share of just 2 per cent. BYD, which holds the top spot, has nearly 40 percent and Elon Musk’s Tesla, in second, has more than 10 per cent. Chinese makers of electric vehicles, which include plug-in hybrid and battery-powered cars, dominate in their own market and are also expanding aggressively overseas. China overtook Germany in auto exports in 2022 and is set to eclipse Japan as the world’s biggest car exporter this year.
Weekly
Week of January 23, 2023
.@Jasonfurman notes GDP is “basically at CBO’s pre-pandemic forecast.” Consumer spending, which has enjoyed “huge fiscal support in 2020 and 2021,” is running well ahead of the CBO’s pre-pandemic forecast, while residential investment declined by 26.7%/yr.
Overall GDP is basically at CBO's pre-pandemic forecast. The big story for economic growth was the consistent strength of consumer spending, which is more than two-thirds of the economy. It has been consistently running well ahead of CBO's pre-pandemic forecast. Likely continued impact of huge fiscal support in 2020 and 2021. The countervailing story is the collapse of residential investment. It has fallen for 7 straight quarters, fell 19.3% over the last four quarters, with a decline of 26.7% (annual rate) in Q4. Biggest since the financial crisis. And the third story is that over the pandemic recovery the huge increase in US demand was partly accommodated by rising imports and production shifted from exports to domestic consumption. But the large increase in the trade deficit has been narrowing.
.@Brad_Setser shows that Chinese exports are still at a record level relative to global output and concludes, “Graph is clear; China never deglobalized.”
It is hard to “reglobalize” when there hasn’t yet been any real deglobalization. The world will start deglobalizing when Chinese exports of global manufactures are no longer at a record level relative to global output and when China no longer needs to draw a record amount of net demand from the world to sustain its unbalanced economy. The graph is clear; China never deglobalized.
Michael Cembalest @jpmorgan notes that it has been difficult for legislators to increase tax receipts beyond 19% of GDP, and yet entitlement spending plus interest is likely to exceed that level by 2032.
The above chart plots the history of US tax increases since 1950 (as % of GDP and vs Federal receipts as a % of GDP). While there have been tax increases of 2% of GDP or more, they occurred when overall tax receipts were much lower. The red square shows the required increases in taxes, which if spent entirely on increasing discretionary spending, would reduce the ratio of entitlements to non-defense discretionary spending back to 2.2x (its 2006 level). The Sanders high net worth income and capital gains tax plan and the Warren wealth tax plan appear as well.
.@EthanYWu offers support to the Charles Goodhart and Manoj Pradhan view that population aging is inflationary as retirees create more demand than supply.
An ageing population, and the dependency it creates, will hamper supply and stoke inflation. Mikael Juselius and Elod Takats of BIS’s core insight: “The young and the old are inflationary, while the working-age cohort is disinflationary.” That is, prime-age workers create more supply than demand, while their elders and juniors do just the opposite.
Tim Krupa from @GoldmanSachs reports that the foreign-born labor force is rebounding from 2.8M below trend in September 2020 to 1.2M below trend in March 2022.
Starting in 2019, tighter immigration policies under the Trump Administration followed by pandemic disruptions depressed the US foreign-born working-age population. The foreign-born labor force fell 2.8 million below its long-term trend level in April 2020 and remained 1.2 million below trend in March 2022. The foreign-born population has grown 137k per month in the past 18 months, compared to 68k per month from Jan. 2010 to Jan. 2019. The chart above shows the foreign-born labor force has grown 110k per month in the past 18 months, compared to 42k per month during the prior period.
.@WSJ reports that year-over-year wages for the bottom 10% of earners increased 9.8% relative to 7.4% for the median for all workers. Workers in the top 10% of earnings saw a 5.7% gain.
Median weekly earnings for all workers were 7.4% higher, year-over-year, at the end of 2022, according to an analysis of newly released Labor Department data. The bottom 10th of wage earners—those that make about $570 a week—saw their pay increase by nearly 10%. Better pay increases late last year went to workers who attended college, a reversal from earlier in the pandemic when those who hadn’t completed high school saw outsize gains. The annual rate of wage growth for workers with less than a high school diploma touched a recent peak in the second quarter of 2022, when it was up 11.1% over the prior year, higher than the 7.6% wage growth during that period for workers with a bachelor’s degree or higher. The median raise for Black Americans employed full-time was 11.3%, compared with the prior year.
The aging of the American population has left the US short 1.9M workers relative to 2019. A decline in labor force participation of older workers is responsible for a drop of another 500,000 workers. @gelliottmorris @S_Rabinovitch
The labor-force participation (LFP) rate of prime-age workers (aged 25-54) and the foreign-born workforce have almost fully recovered. Neither explains the current squeeze. The biggest shortfall comes from Americans getting older and leaving work behind. Since 2019 those aged at least 65 have gone from less than 16% of the population to nearly 17%. Moreover, unlike prime-age workers, many people who retired early as covid-19 struck have not come back to work. LFP among older Americans, which rose from 12.5% in 2000 to 20.7% in early 2020, has dipped to 19.3%, the same as in 2016. The aging of the population accounts for the loss of 1.9m workers (0.7% of people aged at least 16), while the overall drop in LFP, mainly among the old, is responsible for a further 0.5m (0.2%).
The Colorado’s River’s flow has averaged less than 10M acre-feet a year in the past three years vs. a long-term average of under 15M. The reduced flows may force the Federal government to impose water use restrictions affecting 40M Americans. @Cflav
The states that rely on water from the shrinking Colorado River are unlikely to agree to voluntarily make deep reductions in their water use which would force the federal government to impose cuts for the first time in the water supply for 40 million Americans. The Colorado River Compact apportioned the water among two groups of states. The so-called upper basin states would get 7.5 million acre-feet a year. The lower basin got a total of 8.5 million acre-feet. A later treaty guaranteed Mexico, where the river reaches the sea, 1.5 million acre-feet. The premise that the river’s flow would average 17.5 million acre-feet each year turned out to be faulty. Over the past century, the river’s actual flow has averaged less than 15 million acre-feet each year. From 2000 through 2022, the river’s annual flow averaged just over 12 million acre-feet; in each of the past three years, the total flow was less than 10 million.
.@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.
Week of January 16, 2023
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.
.@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.
.@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.
.@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”.
Week of January 9, 2023
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.
.@joshrauh of the Stanford Graduate School of Business presents evidence that migration from California is being driven by high taxes rates, suggesting California has limited ability to raise taxes without losing revenue.
Figure 2 shows the net departure rates from the state by income tax bracket between 2003 and 2018. Since 2003, only middle-income earners in the 9.3 percent income tax bracket have entered California at higher rates than left during any year over the time period. The top bracket, and the highest earners within the top bracket in particular, display the highest net out-migration rate over the whole period. Higher-income earners who leave the state are not being replaced by other high earners at the same rate. California's top earners are particularly mobile, showing the highest rates of departure around tax policy changes such as Proposition 30 in 2012 and the Tax Cut and Jobs Act (TCJA) of 2017 as well as the COVID-19 pandemic in 2020. Consequently, potential net outflows of taxable income spiked to nearly $4 billion in the year TCJA was implemented and $10.7 billion around COVID-19. High-earning movers have been consistently more likely to leave California for zero-income tax states since 2012, and those who experienced larger tax increases under TCJA were more likely to depart.
New @nberpubs notes that the demand for safe assets from 1990-2020 grew even faster than the supply of safe assets, as rapidly growing emerging economies increasing desired to hold safe assets as FX reserves.
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.
Database
Week of December 5, 2022
In October 2022, the retired share of the American population was 1½ percentage points above its pre-pandemic trend. These 3.5 million workers account for essentially all of the shortfall in labor force participation rates. @federalreserve
Despite some improvement in the labor force participation rate for the working-age population since the early stages of the pandemic, the LFPR in October 2022 remained nearly 1½ percentage points below its pre-pandemic, February 2020 level (after making adjustments for changes in population weights introduced from the 2020 Census). The importance of retirements in accounting for this shortfall is illustrated in Figure 1, which shows the percentage of the working-age population that is not in the labor force for different reasons (black line) relative to February 2020, based on responses to the Current Population Survey. While earlier in the pandemic, factors other than retirements were an important contributor to elevated non-participation (such as non-participation while caregiving, the orange line), the percent of the population that was not in the labor force and retired (the[MRH1] “retired share”) has steadily increased and in October 2022 was almost 1½ percentage points above its pre-pandemic level, representing an increase of more than 3½ million retirees and accounting for essentially all of the total shortfall in the LFPR.
.@EthanYWu at @ft shares Blackrock analysis forecasting declining American labor force participation rates driven by aging. This implies that economic activity “will need to run at a lower level to avoid persistent wage and price inflation,”
The participation rate, or the share of people aged 16 and over that have or are looking for work, nosedived when the pandemic hit [orange line above]. Some of that sharp decline has been made up as people return. But we don’t see it recovering further because the effects of an aging population account for most of the remaining shortfall. More people have hit 64 years old, the age at which most retire. That’s taken 1.3M out of the workforce as of October, we find. Another 630,000 left as the pandemic caused fewer people to work past retirement age and hastened retirement for people coming up to 64. That implies the workforce will keep shrinking relative to the population. Economic activity will need to run at a lower level to avoid persistent wage and price inflation, especially in the labor-heavy services sector.
.@fuxianyi at @ProSyn argues that political transformations tend to occur during a “youth boom” when the share of the population aged 15-29 exceeds 28%. The proportion of youth aged 15-29 in China stood at just 17% last year, and the median age was 42.
A country can be said to be having a “youth boom” when the proportion of people aged 15-29 exceeds 28%. When a country is experiencing a youth boom, it may also find itself on the path to political change – including, potentially, democratization. That was the case in Taiwan and South Korea. As the share of young people increased – from 25% in each country in 1966 to a peak of 31% in the early 1980s – so did economic growth and pro-democratic fervor. Both economies became democracies in 1987 when their populations’ median age was 26. In April 1989 – when the proportion of youth was at its peak of 31%, and the median age was 25 – student-led demonstrators occupied Tiananmen Square in Beijing. It took a bloody crackdown that June to crush the movement. The proportion of youth aged 15-29 in China stood at just 17% last year when the median age was 42.
.@Noahpinion reviews the shift of American innovation from corporate labs to university research and startups but notes that Google’s AI divisions have been an important driver of research in the frontier of machine learning innovation.
The successes of Bell Labs and other big corporate labs in the mid 20th century has many people thinking that maybe this is an important missing piece of our modern innovation ecosystem. Google’s AI divisions have been an important driver of research in the machine learning space — an extremely important frontier. All told, the research output of Google AI, Google Brain, DeepMind, etc. has been truly staggering: Big private companies (especially IBM) are also very active in quantum computing research. And some “startups” like SpaceX are big enough to do research in-house that pushes the boundaries of general-purpose technology instead of just making a quick buck.
In a survey of 1,200 millennials aged 26-41, one in four are currently living with their parent, and half of these moved in with family within the past year. @bloomberg
About one in four millennials are living with their parents, according to the survey of 1,200 people by Pollfish for the website PropertyManagement.com. That’s equivalent to about 18 million people between the ages of 26 and 41. More than half said they moved back in with family in the past year. Among the latter group, the surge in rental costs was the main reason given for the move. About 15% of millennial renters say that they’re spending more than half their after-tax income on rent. In September of 2020, a survey by Pew found that for the first time since the Great Depression, a majority of Americans aged between 18 and 29 were living with their parents.
.@GoldmanSachs forecasts that by 2075 both India and China will have slightly larger GDP than the US, but US real per capita GDP will rise from $69k in 2021 to $132k, vs. 2075 forecasts of $55k for China and $31k for India.
Exhibit 17 sets out our 2075 GDP level projections, broken down by population and GDP per capita levels. Two points are notable: First, there is a large gap between the largest three economies (China, India, and then the US) and all other economies (although the Euro area represents a fourth economic superpower, if it is treated as a single economy). Second, while China and India are projected to be larger than the US by 2075, our projections imply that the US will remain more than twice as rich as both (and five times as rich as countries such as Nigeria and Pakistan).
Change in their relative earnings accounted for 44% of the growth in labor force exits among non-college men between 1980-2019, suggesting a decline in social status is a likely factor driving the decline in prime-age labor force participation. @BostonFed
This paper investigates whether prime-age non-college men are more inclined to leave the labor force when their expected earnings fall relative to the earnings of other workers in their labor market. The empirical model takes into account that a job not only provides economic security but also affirms a worker’s social status, which is tied to their position relative to their age range peers. According to [a regression analysis] estimate, a 10% growth in expected earnings has an associated 0.12 percentage point decrease in the exit rate. Contrarily, a 10% growth in reference earnings has an associated 0.13 percentage point increase in the exit rate, fully discounting the earnings effect. These coefficients offer suggestive evidence that non-college men’s labor market exit behavior is tied to the relative values of their earnings. Over the course of the study period, non-college men’s relative earnings declined 30% on average. Based on the estimates, this decline in relative earnings had an associated 49 percentage point increase in the exit rate, accounting for 44% of the total growth in the exit rate among non-college men over this period. In contrast, changes in real earnings alone account for only 18% of the total growth in exit rate.
Week of November 28, 2022
.@AEI’s @swinshi revisits Raj Chetty’s data and argues that contrary to Chetty’s findings, slower economic growth has been a much more important driver of the reduction of absolute mobility than the rise in inequality.
Higher growth would have raised absolute mobility from 50% to 81%, while lower inequality would have increased it to just 57%. This is almost the mirror image of the Chetty findings. Chetty also reported trends looking at absolute mobility for the 1970 cohort as of age 40 rather than for the 1980 cohort at age 30 (Figure S12 in their paper.) These analyses showed that in the “high growth” counterfactual, instead of 56% of the 1970 birth cohort experiencing absolute mobility, 67.5% would have. Meanwhile, in the “low inequality” counterfactual, the rate was 74%. However, using my approach, the “high growth” scenario produced an absolute mobility rate of 78.5%, while the “low inequality” scenario featured a rate of 63%. Again, the Chetty conclusion about the importance of growth versus inequality reverses.
.@PaulKrugman suggests that wage growth for lower-income families has more than offset inflation, even accounting for their higher food and energy consumption.
The labor economist Arindrajit Dube has estimated hourly wage changes — by decile rather than quartile — over a longer period since the beginning of the pandemic recession. He finds that real wages for the bottom 40 percent of workers have increased. Lower-income families spend a higher than average share of their income on food and energy, which are also the categories that have seen the most inflation recently. My rough calculations suggest that even when you take these food and energy costs into account, lower-income families have done better, not worse, than others, at least in terms of inflation’s effects. But it does lessen that difference somewhat.
There has been a sharp uptick in the number of men working as stay-at-home parents. Almost 5% of stay-at-home parents are men, compared to about 1% in the mid-1990s. @bloomberg @jordan_yadoo
[The Census Bureau defines stay-at-home males] as husbands in opposite-sex marriages with children under 15 who specifically say they’re not working so that they can care for family and whose wives are either working or looking for work. Under those terms, men accounted this year for 5% of the one-fifth of US families with a stay-at-home parent, up from about 1% in the mid-’90s and representing 239,000 fathers. According to a broader analysis by the Pew Research Center—which expands the pool to include any father of a child under 18 who hasn’t been working, regardless of reason or marital status, and also incorporates men in same-sex relationships—the number of stay-at-home dads had swelled to about 2.1M by 2021, equal to 18% of all stay-at-home parents, up from 10% in 1989.
Young adults in both the UK and US are spending more time alone and increasingly reporting feeling “lonely.” @ft
On average, 53% of Americans aged over 65 spend more than eight hours of waking time on their own every day, according to my analysis of data from the American Time Use Survey. The trend remains unchanged for people over 60. But compared with a decade ago, the rise in the number of young people who spend more than eight hours on their own is alarming. Time on your own is one thing; feeling lonely is quite another. And young people seem worse affected by the latter. A March 2022 ONS survey found that 40% of women aged 16 to 29 in the UK report “feeling lonely often, always or some of the time,” compared with 22% of women over 70. For men, some 22% of this age group report feeling lonely, compared with 13% of the over-70s. And, of course, the impact of Covid lockdowns cannot be ignored.
China’s trade surplus has continued to grow since the pandemic, with manufacturing exports ~ 14% of GDP. The trade surplus is poised to grow, as China’s bill for imported commodities falls. @Brad_Sester
The popular deglobalization narrative simply isn't in China's trade data -- manufacturing exports are up massively, and that has pushed the surplus up even as China's commodity import bill reached record levels (the commodity bill is poised to fall now, by the way.) China's currency is (still) managed (in my judgment, even if the PBOC's reported reserves don't change,) so movements reflect the interaction of market pressure and political decisions. But at some level, a weaker CNY, even with a massive trade surplus, reflects a judgment by China's policymakers that they need to sustain the rise in exports (relative to China's GDP) even as global demand for manufactures drops (to offset China's domestic weakness.)
2021 saw a record 48,953 gun deaths or 15 fatalities per 100,000 people. Black men aged 20-24 suffered 142 firearm homicides per 100,000 people in 2021, a 74% increase since 2014. @wsj
A record 48,953 deaths in the US, or about 15 fatalities per 100,000 people, were caused by guns last year, said the analysis published Tuesday in the journal JAMA Network Open. Since 1990, rates of gun-related homicide have been highest among Black men aged 20 to 24, the analysis said, with 142 fatalities per 100,000 people in this group in 2021—a 74% increase since 2014. Homicide rates are as much as 23 times higher among Black men, and as much as nearly four times higher among Hispanic men than among white men, the analysis said. Gun fatality rates from suicide were highest among white men aged 80 to 84 years, at 47 fatalities per 100,000 people in this group in 2021—a 41% increase since 2007, the analysis showed.
Companies with market capitalization of over $200B currently represent 30-35% of total capitalization, up from the 10-15% share that was normal until 2016. @policytensor
The polarization in favor of the biggest firms peaked at the end of last year. The megacap-to-midcap ratio of market cap has been cut from four to three in the course of 2022. But three is far from a collapse of the megacap boom. The 10-15% that was normal until 2016 has since given way to 30-35% of total capital controlled by the megacaps. I have used biweekly rolling averages for the graph. Note that this is a bottom-up census rather than an estimate. I am just adding up reliable third-party data at the granular level; every single ticker for which there is price and market cap data. This is the broadest possible universe of US equities for which I can find kosher data.
Week of November 21, 2022
A 2019 RAND study found 60% of American men in the 26-35 cohort who failed to graduate from high school had been arrested by age 26, and their arrest rate has been going up over time, reports @adam_tooze
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.
The MSCI India Index has outperformed the MSCI China Index through April 2022, according to @Wellington_Mgmt research, as noted by @tylercowen
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.