March 27, 2023
Surrender Your Desk Job to the AI Productivity Miracle, Says Goldman Sachs
.@FTAlphaville reports on a @GoldmanSachs note forecasting that AI could add 1.5pp to annual US labor productivity growth, or double the current pace, and that the “AI growth bonus” could add almost $7T to global GDP over 10 years.
Goldman’s base case is for 7 percent of workers to lose their jobs entirely in the decade after generative AI reaches half of employers, but that most will find something nearly as productive to do. That’s set against broad improvements in workforce efficiency that can add around 1.5 percentage points to US labour productivity — which would be about double the current rate. The AI growth bonus globally may be 1.4 percentage points, representing almost $7tn in extra annual global GDP over 10 years, it estimates.
Real Wage Growth at the Individual Level in 2022
.@stlouisfed finds that nominal wage growth did not keep pace with inflation for 54% of US workers.
Both the mean and median worker experienced negative real wage growth in 2022, meaning the growth of their wages did not keep up with the growth of prices in their consumption baskets. Altogether, this was the case for 54% of workers. Workers younger than 25 years old experienced a positive real wage growth rate of 4.3%, while other age groups experienced negative real wage growth rates. In fact, the older the age group, the lower the real wage growth. Similarly, individuals with less than a high school diploma experienced smaller declines in their real wages than those in all other education groups.
Online Daters Are Less Open-Minded Than Their Filters Suggest
.@TheEconomist examines data from an American dating site aimed at educated professionals. They find that, when users do apply filters, they mostly reflect familiar dating preferences that long predate the internet.
The League’s data cover 80,000 users across ten cities in January 2023. The site chooses pairs of users who pass each other’s filters and present them as “prospects”. If these users both “like” each other, they can chat. Users see a fixed number of candidates per day. This makes it possible to distinguish explicit dating desires (filters) from implicit ones, revealed by how often users like their prospects. Filtering choices follow demographic patterns. Women block 70% of potential matches, compared with 55% for men, mostly because they tend to exclude users who are shorter or younger. Because users with strict filters weed out most unsuitable people pre-emptively, you might expect them to like many of the remaining candidates. But the data show the opposite. For both sexes, the share of prospects liked by the 10% of users with the tightest filters is 11-13 percentage points lower than by the 10% with the broadest ones.
America Pulls Back From Values That Once Defined It, WSJ-NORC Poll Finds
Over the past 25 years the number of Americans reporting “patriotism” was “very important” to them declined from 70% to 38% and “having children” declined from 59% to 30%. The number reporting “money” climbed from 31% to 43%. @WSJ
Patriotism, religious faith, having children and other priorities that helped define the national character for generations are receding in importance to Americans, a new Wall Street Journal-NORC poll finds. Some 38% of respondents said patriotism was very important to them, and 39% said religion was very important. That was down sharply from when the Journal first asked the question in 1998, when 70% deemed patriotism to be very important, and 62% said so of religion. The only priority the Journal tested that has grown in importance in the past quarter-century is money, which was cited as very important by 43% in the new survey, up from 31% in 1998.
European Private Equity Funds Scout for Defence Deals
Between 2015-19 private equity and venture capital investment into aerospace and defence averaged $10.4B annually. Investment reached $20B in 2022 after peaking at $34B in 2021. @FT
Global deal activity in aerospace and defence companies by private equity and venture capital investors stood at $20bn in 2022 and $34bn in 2021, according to data compiled by PitchBook for the FT. That represents an uplift from before the pandemic when money flowing into the sector averaged $10.4bn annually from 2015 to 2019. European private equity deal activity in defence-focused companies reached €3.8bn in 2021, according to data from PitchBook, the second highest over the past decade after €5.3bn in 2019. The two top PE defence deals by value were done by Advent International, which bought UK-listed groups Cobham for £4bn in 2019 and Ultra Electronics for £2.8bn in 2022.
From Rockets to Ball Bearings, Pentagon Struggles to Feed War Machine
The Pentagon has abandoned some of the cost-cutting changes embraced at the end of the Cold War, and President Biden has invoked the Defense Production Act to accelerate development of several hypersonic weapons systems. @NYT
Procurement budgets are growing. The military is offering suppliers multiyear contracts to encourage companies to invest more in their manufacturing capacity and is dispatching teams to help solve supply bottlenecks. More generally, the Pentagon is abandoning some of the cost-cutting changes embraced after the end of the Cold War, including corporate-style just-in-time delivery systems and a drive to shrink the industry. President Biden has also turned to the Defense Production Act — used during the pandemic to speed up the manufacturing of respirators and vaccines — to move ahead with new missile programs faster, including a number of hypersonic weapons being developed for the Air Force, the Army and the Navy.
The Characteristics and Geographic Distribution of Robot Hubs in U.S. Manufacturing Establishments
Evidence from investment in robots suggests robots are complementary to production workers and their adaptation is concentrated in hubs. @erikbryn @CathyBuffington @ngoldschlag @jmirandal
We present results on the distribution of robots in U.S. manufacturing by establishment characteristics and geography using new establishment-level data collected by the U.S. Census Bureau’s Annual Survey of Manufacturers for reference year 2018. This is the first establishment-level analysis of the use of robots in U.S. manufacturing, leveraging data on approximately 35,000 establishments. We find that establishments with robots tend to be larger, have higher earnings per worker, have a larger share of production workers, and spend more on capital expenditures, including IT, than establishments without robots. We also find that the distribution of robots is highly skewed across locations, even after accounting for the different mix of industry and manufacturing employment across locations. Some locations, which we call Robot Hubs, have far more robots than one would expect after accounting for industry mix.
March 24, 2023
Brad Sester On The Balance Of Payments
.@Brad_Setser notes that in 2022 foreign demand for American Treasury and Agency bonds was strong, though official demand fell off in Q4.
On a trailing 4q basis (so for the full year 2022) foreign demand for “safe” US bonds remained strong … Bondmageddon (the mark to market losses on low yielding bonds) didn’t seem to impede total foreign demand for US bonds (new inflows get the new higher rate.) Official demand (from foreign central banks and SWFs) did fall off in 2022 — and clearly shifted toward Agencies (cough, China) But foreign demand for US bonds decoupled from reserve growth … and that is reflected on the US side of the global data as well. Overall foreign demand for US bonds (which has been surprisingly strong in 2022 when judged relative to global reserve growth) from both public and private sources tailed off in q4 as well. It does seem that demand for US assets fell a bit faster than the goods deficit in q4 … so a potential source of dollar weakness (then) is in the data.
Companies Big and Small Lose Access to Credit Amid Bank Stress
Capital markets have been closed since the SVB failure with the highest rated borrowers issuing debt at only 33% of the 5-year avg for March. Goldman Sachs estimates that tighter lending standards will reduce US growth by 25 to 50 basis points in 2023.
The capital markets have been on ice since the collapse of Silicon Valley Bank two weeks ago. No companies with investment-grade credit ratings sold new bonds over the seven business days from March 9 through March 17, the first week in March without a new high-grade bond sale since 2013. The market for new junk-bond sales has largely stalled this month. Those with the highest ratings have sold $59.9 billion in new bonds this month, compared with March’s five-year average of $179 billion. Companies have raised some $5 billion of junk bonds this month versus the five-year average of $24 billion. In the base case for Goldman Sachs Group Inc., tighter lending standards will subtract one-quarter to one-half of a percentage point from U.S. GDP growth in 2023, equivalent to the impact of Fed rate increases of the same size.
No, It's Not Like 15 Years Ago. What Matters Is 25
.@johnauthers notes declines in the KBW Bank index are historically associated with broader market declines and argues that “the combination of deeply troubled banks and strong performance for the rest of the stock market cannot persist much longer.”
The following chart, from the terminal, shows banks’ performance on one axis, and the S&P 500 on the other, both on a log scale. When banks fall badly relative to everyone else, the broader market tends to decline, as I’ve tried to mark with the colored rectangles. That’s because banks matter to the economy. When they’re in trouble, it’s much harder for anyone else to make a profit. So how to justify the continued strength of the market while bank investors are so obviously worried? Maybe there’s hope for a bailout in some form that will hurt banks’ shareholders but rescue everyone else. That’s not outlandish. Or possibly, everyone else thinks that the investors are unnecessarily panicking — in which case we should expect a banking rebound pretty quickly.
The Employment Effects of Generous and Unconditional Cash Support
A Spanish antipoverty program that gave recipients a cash transfer equivalent to almost 50% of the national minimum wage had strong negative labor market effects, with primary recipients 20% less likely to work relative to the control group. @iza_bonn
In this paper, we studied the employment effects of an antipoverty program that does not include any such conditions. The two-year program, implemented in Barcelona (Spain), consisted of a monthly cash transfer to households with income below the subsistence level. The benefit level depended on the household income, size, and composition. On average, households received roughly e500 ($792 PPP) per month, equivalent to nearly 50 percent of the national minimum wage. Although the benefit was household-based, transfers were made to the account of a designated household member, the main recipient. Our findings for overall impacts can be summarized in four parts. First, we find strong evidence for sizeable negative labor supply effects. After two years, households assigned to the cash transfer were 14 percent less likely to have at least one member working compared to households assigned to the control group; main recipients were 20 percent less likely to work. Second, negative employment effects persisted until at least six months after the last payment. Third, we find tentative evidence that effects are mainly driven by households with care responsibilities. Fourth, there is no evidence of effects on social participation and education-related activities.
China's Aging Population Threatens a Japan-Style Lost Decade
.@NikkeiAsia notes demographic parallels between China and Japan. Japan’s population peaked in 2008, relative to 2022 in China.
Experts point out a lag of only 15-20 years between Japan and China in terms of demographic maturation: the working-age population started falling in 2015 in China vs. in 1995 in Japan; the population decline began in 2022 in China vs. 2008 in Japan. At the time the population began moving toward decline, the median age of the Japanese population was 37, the same median age as China’s population in 2020. “China’s population structure [now] is similar to Japan’s around 1990, when Japan entered a long-term decline,” points out Chi Hung Kwan, senior fellow at Nomura Institute of Capital Markets Research.
Conservatives Win Some Culture Battles, But They Are Losing the War
.@jburnmurdoch argues the leftward swing of Anglophone millennials relative to their peers in other advanced economies suggest culture war issues will only benefit the right in the short term.
Across continental Europe, millennials continue to follow their ancestors gradually rightward, but from the UK and US to Canada, Australia and New Zealand, they have veered away from the traditional path. This is a smoking gun. Continental multi-party systems allow voters to switch their allegiances away from anti-immigrant parties while still staying within the right or leftwing bloc in a way that the predominantly two-party Anglosphere system does not. If millennials were being alienated solely by economic injustice, we might see the same desertion of the right in Europe as in the English-speaking world. A growing cultural disillusionment makes more sense. In 2009, views on immigration were not delineated according to party or age divides. But 10 years and several culture battles later, younger adults are now far more pro-immigration than their elders, and those on the left are far less anti-immigration than the right. The same is true with attitudes to LGBT issues, where a divide between progressives and conservatives now neatly maps on to age. In both cases, conservatives successfully drove a wedge between one generation and the rest — but the cohort they discarded is growing steadily larger.
Most Americans Doubt Their Children Will Be Better Off, WSJ-NORC Poll Finds
In a recent @WSJ poll, 78% of adults said they don’t feel confident that their kid’s generation will be better off than they had been, the highest share since the survey began asking the question in 1990.
The WSJ-NORC poll surveyed 1,019 adults from March 1 to 13, largely before the collapse of Silicon Valley Bank and subsequent turmoil in the financial industry. A plurality of respondents, 44%, said their finances are in worse condition than they expected for this stage in life, and more than a third said they are not at all satisfied with how they are getting along financially. Fewer than 3 in 10 agreed that people like them and their family have a good chance of improving their standard of living. For more than three decades, NORC has asked Americans whether life for their children’s generation will be better than it has been for their own using its General Social Survey. White respondents were more likely to say they are not confident than Black and Hispanic respondents.
Looking For Flynn Effects on a Recent Online U.S. Adult Sample: Examining Shifts Within The SAPA Project
Evidence from an online personality test suggests that the Flynn effect reversed in the United States between 2006-2018 for all levels of education attainment, with the most significant decline for individuals without a college degree.
Thirteen years of cross-sectional data from a subsample of adults (n = 394,378) were obtained from the Synthetic Aperture Personality Assessment Project (SAPA Project) to examine if cognitive ability scores changed within the United States from 2006 to 2018. Regardless of education, gender, and age, lower annual scores were observed for composite cognitive ability measured by 35 items, and the matrix reasoning and letter and number series scores measured across the 13 years of assessment. A reverse Flynn effect was also present across all levels of educational attainment, with the rate of decreasing scores being steeper for those with less than a 4-year college degree.
March 23, 2023
The Geography of Work
Nicholas Eberstadt and Peter Van Ness @AEIecon find significant variation in labor force participation across metropolitan areas. Notably, they find no correlation between local LFP and the change in manufacturing jobs’ share of employment since 2000.
For many years, a stylized fact floating in the economic policy ether (on both the left and the right) has been the now widely accepted notion that deindustrialization has driven down post-war LFPRs for American men. The figure above squarely challenges that assumption. Less ephemerally, careful studies by David Autor of the Massachusetts Institute of Technology and his colleagues have detailed the devastating impact of the “China shock” — the shift in worldwide trade patterns that followed China’s accession into the World Trade Organization in 2001 — on the U.S. manufacturing sector. That immediate shock was, alas, very real, but our chart suggests it was also temporary. This figure, we believe, should be taken as an invitation to reexamine a matter many scholars and policymakers consider settled.
‘Master of clocks’: Can Macron Wait Out a Crisis of His Own Making?
Though not yet at the scale of the 2018 gilets jaunes protest, France is facing widespread protest after President Macron pushed through an unpopular pension reform without a parliamentary vote. @FinancialTimes
In his first public statement since ramming through his unpopular pensions reform without a parliamentary vote, Macron defended both the policy and the method and tried to calm public anger that has sparked spontaneous nightly protests from Paris to Rennes. “We must move forward,” he said in a televised interview on Wednesday. “We have to restore calm and rebuild a parliamentary and reform agenda by re-engaging with labor unions and any political parties who are ready to do so.” Macron’s approval ratings have fallen 4 percentage points in the past month to 28%, according to an IFOP poll, their lowest since the gilets jaunes crisis.
Commercial Property Risks Rise Up Bank Investors’ Worry List
Commercial property loans are an increasing risk for American banks with the stress falling on smaller banks, commercial real estate lending makes up 43% of small banks total lending versus 13% for large banks. @FinancialTimes
Strains in the $5.6tn market for commercial real estate (CRE) loans have deepened in recent months as the Federal Reserve’s year-long series of interest rate rises leads to sharply higher borrowing costs and weakening property valuations. Thousands of small and medium-sized banks that make up the bulk of US lenders account for about 70 per cent of so-called CRE loans, according to JPMorgan analysts. Most of the products are not repackaged for the asset-backed securitization markets so remain on banks’ books. CRE loans make up 43 per cent of small banks’ total lending, against just 13 per cent for the biggest banks. About 17 per cent of office loans are held in CMBS, according to Goldman Sachs, making the market joint-top funder alongside regional and local banks.
The Americas Face A Historic Opportunity. Will The Region Grasp It?
North American trade in goods and services has quadrupled in nominal value since the North American Free Trade Agreement went into force in 1994. @TheEconomist argues that as the US pulls away from China, it needs its neighbors more than ever.
North America’s trade in goods and services has quadrupled in nominal value since the North American Free Trade Agreement (NAFTA) went into force in 1994, to more than $7trn, or roughly 30% of GDP. As tensions between the United States and China increase, companies that had come to rely on China for manufacturing are shifting to other bases. Production snafus during the covid-19 pandemic illustrated the fragility of globally dispersed supply chains. And the embrace by President Joe Biden’s administration of industrial policy, fueled by generous subsidies for electric vehicles (EVs) and clean energy, has super-charged investment in the United States. That inevitably is spilling over into Canada and Mexico.
The Shape Of Polarization in America
Citing data from Echelon Insights @PatrickRuffini argues political polarization is largely a white phenomenon particularly pronounced across college graduates and non-college republicans.
Here, we’re measuring policy views on a granular 0-100 scale based on how people answered more than 50 different policy questions on the 2020 CES. A score of 100 means that one gave the most conservative possible answer on all questions, and a score of zero would mean the same thing for the most liberal possible answer. The index itself was calibrated to reflect a rough 50-50 balance between right- and left-leaning voters, reflecting the reality of a closely divided politics. The original questions selected by the academic team behind the CES tended to yield more liberal-leaning responses. In spite of that, the CES is a very good survey for this kind of analysis, with 60,000 interviews that allow for robust subgroup analysis. Another way to boil this down is to bucket people into different ideological camps based on a 75-percent cutoff for ideological consistency. So, giving the conservative or liberal answer more than 75 percent of the time places you in each of those camps. Otherwise, you’re in a non-ideological middle ground. The 75 percent cutoff is an important one. Above we find Assad-like margins for Donald Trump or Joe Biden in 2020 of more than 98 percent. If you’re above this threshold, you’re not persuadable in the slightest. In the middle, your vote is basically up-for-grabs, progressing from one candidate to other in sliding scale fashion according to your policy views.
March 22, 2023
JPMorgan Says Treasuries Coping Amid Worst Liquidity Since 2020
.@jpmorgan reports Treasury liquidity is at the lowest level since 2020; maturities between 7 and 10 years have been most impacted. However, JPM concludes “we do not see the low level of liquidity as a source of concern for financial stability.”
The Federal Reserve can look past low liquidity in the Treasuries market and continue with its rate hikes, according to strategists at JPMorgan Chase & Co. “The footprint of each trade in the market, as measured by price impact, has been elevated for the past year but has not risen appreciably in recent weeks and remains below crisis levels,” the analysts wrote. “Dislocations have increased but are far from distressed levels.” Treasuries with maturities between 7 and 10 years have seen the largest liquidity dislocations, suggesting that is where the bulk of liquidations are occurring. “Treasury market liquidity has deteriorated amid high volatility, but we do not see the low level of liquidity as a source of concern for financial stability,” they said.
How Big a Deal Is the Banking Mess?
.@paulkrugman argues the Fed should pause its rate hikes, citing estimates from Goldman Sachs and Apollo Global Management that banking turmoil is equivalent to a hike of .25 to 1.5pp.
In effect, banking turmoil will act a lot like a rate hike by the Fed. But how big an effective rate hike? I’m seeing smart, well-informed people produce numbers that are all over the place. Goldman Sachs says we’ll see the equivalent of a rate hike of 0.25 to 0.5 percentage points; Torsten Slok of Apollo Global Management says 1.5 percentage points. I have no idea who’s right. What this probably means in practice is that the Fed should pause its rate hikes until there’s more clarity about both the inflation picture and the effects of the banking mess — and it should be clear that that’s what it is doing.
The Fed Must Not Flinch
.@MichaelRStrain argues that, while tighter financial conditions might bring down the ultimate terminal rate, the Fed should still hike 50bps today to signal that “its resolve in fighting inflation is unshakable.”
While the failures of Silicon Valley Bank (SVB) and Signature Bank are significant market events, they should not knock the Fed off course. Tighter financial conditions might reduce the terminal federal funds rate. But the terminal rate was likely around 6% before SVB failed. The Fed still has some way to go. A lower terminal rate is no reason to avoid a 25 or 50 bps increase at this week’s meeting. By raising rates this week, the Fed has the opportunity to send two important signals: first, that it has confidence in the stability of the financial system, and second, that its resolve in fighting inflation is unshakable.
Only One Thing Will Solve the Fentanyl Crisis
.@samquinones7 argues that the drug cartels’ shift to synthetics such as fentanyl and methamphetamine is allowing them to drive down prices, which has led to increased usage.
“Two-thirds of the 107,000 overdose deaths in 2021 involved fentanyl or synthetic opioids like it. Agents seized more than 50 million fentanyl-laced pills in 2022, the Drug Enforcement Administration announced in December, and over 10,000 pounds of fentanyl powder — enough to kill a quarter of the world’s entire population. The quantities of meth coming out of Mexico, spurred by easy access to ingredients from world chemical markets, have driven prices for the drug to historic lows. In Fresno, Calif., a wholesale pound of meth went for $20,000 in 2008; now it goes for $800. In Nashville six years ago, a pound wholesale sold for $16,000; today, it’s $2,000.
The Unsettling Truth About Trump’s First Great Victory
.@Edsall reports on new research disproving the conventional “basket of deplorables” narrative of Trump’s 2016 win: his supporters were “less xenophobic, less sexist, and [had] lower levels of racial resentment” than prior Republican candidates’.
We find that lottery wealth increases the short- and medium-run probabilities of marriage. The overall wealth effect on marriage formation is driven by male winners. While the overall average treatment effect on marriage dissolution is not statistically distinguishable from zero, there is a consistent pattern of divergence between the estimated effects for husbands and wives. Specifically, when the winning player is a married woman, our estimates suggest that a 1M-SEK windfall almost doubles the baseline short-run divorce rate. This estimated effect appears to fade away in the long-run. We speculate that the positive wealth shock accelerates the exit from marriages whose dissolution was already underway.
Fortunate Families? The Effects of Wealth on Marriage and Fertility
In Sweden men who won the lottery saw an increase in marriage formation and lower divorce risk. Female winners saw a near doubling of short-term divorce rates. @eriklindqvist1 @robertostling @Asia_terskaya
We find that lottery wealth increases the short- and medium-run probabilities of marriage. The overall wealth effect on marriage formation is driven by male winners. While the overall average treatment effect on marriage dissolution is not statistically distinguishable from zero, there is a consistent pattern of divergence between the estimated effects for husbands and wives. Specifically, when the winning player is a married woman, our estimates suggest that a 1M-SEK windfall almost doubles the baseline short-run divorce rate. This estimated effect appears to fade away in the long-run. We speculate that the positive wealth shock accelerates the exit from marriages whose dissolution was already underway.
March 21, 2023
Society's Technical Debt and Software's Gutenberg Moment
.@pkedrosky argues that AI like ChatGPT is going to bend the cost curve on software production allowing us to run off “immense, society-wide technical debt,” resulting in significant consumer surplus as better software diffuses through the economy.
There is immense hyperbole about recent developments in artificial intelligence, especially Large Language Models like ChatGPT. Observers are missing two very important things. Every wave of technological innovation has been unleashed by something costly becoming cheap enough to waste. Software production has been too complex and expensive for too long, which has caused us to underproduce software for decades, resulting in immense, society-wide technical debt. This technical debt is about to contract in a dramatic, economy-wide fashion as the cost and complexity of software production collapses, releasing a wave of innovation What if the cost of software production is following similar curves, perhaps even steeper curves, and is on its way to falling to something like zero?
Markets Go Calm: A Lehman Pause or the Real Thing?
.@johnauthers cites work by @willdenyer of Gavekal Research whose gauge of financial conditions suggests that financial conditions are now extremely tight.
How exactly should financial conditions be measured? It proves to be a difficult issue. The most widely cited benchmarks incorporating a range of market indicators, produced by Goldman Sachs and by Bloomberg, both suggest that conditions were relatively easy until very recently, and then tightened rapidly. Neither is particularly extreme. But what exactly are we (and Goldman) measuring? Will Denyer of Gavekal Research suggests that these indexes are of limited use. Discussing the Bloomberg index, he said: “It comprises credit spreads in the money and bond markets, the S&P 500, and volatility measures including the VIX index. As a result, it is probably better thought of as an indicator of financial market risk appetite, rather than as a measure of whether or not conditions in the real economy are conducive to credit growth.” He offers his own gauge, which he dubs the “true financial conditions index,” an ambitious undertaking that incorporates money supply growth, the yield curve, metrics of vitality in the banking sector, the spread between the rate of return on corporate investments in real assets and the real cost of financing those investments, and measures of housing affordability (using real mortgage rates, deflated by inflation expectations). Put all of this together, and it looks like money was already very tight last week, ahead of the Credit Suisse weekend, when this chart was produced.
SVB-Fueled Turmoil Junks Lessons of the Global Financial Crisis
.@greg_ip notes that between 2007 and 2022 the share of Treasurys as a percentage of banks total assets went from 12% to 20% over the same period the uninsured share of domestic deposits rose from 28% to 45%.
Between 2007 and 2022, banks boosted their holdings of Treasurys and federally backed mortgage securities to 20% from 12% of total assets, while the uninsured share of domestic deposits rose to 45% from 38%. SVB and Signature Bank went to extremes, with uninsured deposits at 94% and 90%, respectively, according to S&P Global Market Intelligence.
Four Ways To Fix The Bank Problem
Chart from @martinwolf_ shows in nominal terms bank failures in 2023 at $330b are on par with 2008’s $374b if you net out Bear Stearns and Lehman’s assets.
Banks are designed to fail. And so they do. Governments want them to be both safe places for the public to keep their money and profit-seeking takers of risk. They are at one and the same time regulated utilities and risk-taking enterprises. The result is costly instability. Yes, leverage of banking systems has fallen since the crisis. But it remains dangerously high. According to the Federal Reserve, on March 8 2023, the difference between the book value of the assets and debt liabilities of US commercial banks was $2,137bn. This slice of equity backed assets that were notionally worth $22,800bn. At this stage, it is still not clear how bad this crisis is going to be. But it is already evident that the reforms after the last one, though vastly better than nothing, were not enough. They have not guaranteed a crisis-proof system. They have not provided a smooth way to resolve a bank in crisis, especially if the latter risks becoming systemic.
Unemployment Is Low, Welfare High. What Gives?
Matt Weidinger @AEIecon highlights how continued extension of Covid-era emergency declarations, and not counting pandemic payments against means tests, allowed the Biden administration to expand welfare rolls despite very tight labor markets.
Welfare rolls are supposed to grow in bad times and shrink when jobs and incomes recover. Instead, they’ve recently continued growing even as unemployment plunged to historic lows. One major reason is that welfare programs didn’t count as “income” more than $1 trillion in stimulus checks and other pandemic benefits. That allowed people who weren’t poor and wouldn’t normally qualify to end up on welfare. That includes three rounds of stimulus checks ($869 billion), expanded child-tax-credit checks ($110 billion), and unprecedented expansions in unemployment checks ($449 billion). The federal government turned a blind eye to all $1.4 trillion in determining eligibility for Medicaid and to more than $1 trillion of it in calculating eligibility for food stamps. The nationwide unemployment rate peaked at 14.7% in April 2020 and had fallen to 3.7% by October 2022 (the most recent month for which benefit data are available). During the same period, the number of food-stamp recipients rose by 1.4 million and the number of Medicaid recipients by 18.5 million.
The Colorado River Is Running Dry, but Nobody Wants to Talk About the Mud
.@DaleMaharidge reports on silt that has been settling in Lake Powell. He argues that Lake Powell should be returned to its natural state and the water stored in Lake Mead.
In 1963, humans stopped time, when the brand new Glen Canyon Dam on the Utah-Arizona border cut off the reddish sediment that naturally eroded the Grand Canyon. Today the river runs vodka clear from the base of the dam. But the silt never ceased arriving in Lake Powell, the reservoir above the dam. Each day on average for the past 60 years, the equivalent of 61 supersize Mississippi River barge-loads of sand and mud have been deposited there. The total accumulation would bury the length of Manhattan to a depth of 126 feet — close to the height of a 12-story building. With Lake Powell just 23 percent full, and Lake Mead, outside of Las Vegas, at 28 percent capacity, it’s time to stop trying to “save” Lake Powell. It should be abandoned and its water stored in Lake Mead.
March 20, 2023
Things Are Only Getting Harder For The Fed
.@krogoff argues that we can’t count on the low borrowing rates associated with secular stagnation to reassert themselves. Given inflation near 5% and extreme stress in the banking system, Rogoff thinks the Fed decision on Mar 21-22 is especially tough.
Ultra-low borrowing rates are not something that can be counted on this time around. If one looks at long-term historical patterns in real interest rates major shocks — for example, the big drop after the 2008 financial crisis — tend to fade over time. There are also structural reasons: for one thing, global debt (public and private) exploded after 2008, partly as an endogenous response to the low rates, partly as a necessary response to the pandemic. Other factors that are pushing up long-term real rates include the massive costs of the green transition and the coming increase in defence expenditure around the world. The rise of populism will presumably help alleviate inequality, but higher taxes will lower trend growth even as higher spending adds to upwards pressure on rates. What this means is that even after inflation abates, central banks may need to keep the general level of interest rates higher over the next decade than they did in the last one, just to keep inflation stable.
This Is Not QE!
The Fed’s balance sheet expansion through March 15th offset fifteen weeks of quantitative tightening but doesn’t signal a return to quantitative easing. @GeneralTheorist
Following a week of turmoil in the banking system, starting with the tension around Silicon Valley Bank, this week (through Weds. 15th) the Federal Reserve’s balance sheet expanded USD297bn (though still falling USD315bn over the past year). This is equivalent to offsetting 15 weeks of quantitative tightening (QT) in about half a week. It is tempting to conclude that the resumption of balance sheet expansion reflects a return of QE. A brief inspection of the transactions involved reveals this is not the case. In the case of QE, asset purchases and reserves created can be expected to remain in place for an extended period, at the discretion of the central bank. It represents outside money for the private sector, an asset with no associated liability, which cannot be disposed of in the aggregate but to which all must adjust.
Central Banks Announce Dollar Liquidity Measures To Ease Banking Crisis
The Federal Reserve has set up swap lines with other major central banks to improve dollar liquidity, running daily dollar auctions for the first time since the 2020 Covid crisis @FinancialTimes.
The Federal Reserve and five other leading central banks have taken fresh measures to improve global access to dollar liquidity as financial markets reel from the turmoil hitting the banking sector. In a joint statement on Sunday, the central banks said that from Monday, they would switch from weekly to daily auctions of dollars in an effort to “ease strains in global funding markets”. The daily swap lines between the Fed and the European Central Bank, Bank of England, Swiss National Bank, Bank of Canada and Bank of Japan would run at least until the end of April, the officials said. The Fed’s swap line network, first set up in 2007, has provided an important funding backstop for global banks during periods of acute market stress. Lenders outside the US can use the swap lines to access dollars in exchange for their domestic currencies by pledging collateral at their respective central banks.
The Banking Sector Turmoil in Charts
Banks unrealized losses increased in 2022 as the Fed continued its hiking cycle. @WSJecon
One way to understand what is happening in the financial sector is to look at banks’ unrealized gains and losses, or how much their securities holdings have risen or fallen in value. In 2021, it was a mix of gains and losses, and interest rates were relatively low. Last year, as the Federal Reserve raised interest rates, the value of banks’ bind portfolios declined. Unrealized losses are shown as a share of each bank’s total assets.
Are Western Companies Becoming Less Global?
The foreign sales of American firms have grown 2% a year since 2010 relative to 8% annually in the previous decade. American multinational’s sales were flat in China btw 2017-2020 during the same period they grew 6% annually in India. @TheEconomist
Since 2010 the foreign sales of listed American and European companies have grown by a meager 2% per year, down from 8% in the 2000s and 10% in the 1990s. Look across all industries, and China is responsible for less than one-eighth of Western firms’ foreign revenues, according to Morgan Stanley, an investment bank—a much smaller share than American and European sales across the Atlantic or to the rest of the emerging world. Only 8% of European companies’ total revenues come from China. For their American counterparts, the figure is 4%. According to bea figures, American multinationals’ sales in China were flat between 2017 and 2020. In India they grew by 6% a year in the same period. Western multinationals are, then, becoming somewhat less Chinese. Between 1990 and 2021 the average return on equity of American and European listed companies with less than $1bn in sales fell from 8% to 4%. That for firms with revenues of $10bn or more rose from 12% to 18%. And being big is easier if you are international. In 2021 American and European listed companies with $10bn-plus in revenue generated 43% of their sales abroad on average, compared with just 32% for those with sales below $1bn. Global reach is, in other words, more important than ever.
Understanding The Missing Millions
New @BankofAmerica research shows 7% fewer customers were spending money on child care relative to the start of 2020 suggesting the higher cost of childcare is keeping lower earning workers out of labor force.
Caregiving responsibilities have prevented some from returning to the workforce. In the latest Household Pulse Survey with data as of January 17, 2023, a combined 7% of respondents not working reported caregiving as the reason. This was broken down further: 5% were looking after children and 2% elderly relatives. The lack of affordable and quality childcare has forced some parents to stay at home instead of returning to work. According to the Consumer Price Index, daycare and preschool costs have increased by more than 10% since the start of the pandemic. This is an even bigger burden for lower-income households, which could partly explain the larger labor force exits at the lower end of the income spectrum. However, across the board, it seems that fewer parents are sending their kids to daycare relative to prepandemic days. Bank of America internal data shows that the number of customers making childcare payments as of December 2022 was 7% lower than at the beginning of 2020
A Better AEI Graphic of Inflation Over the Past 20 Years
.@mtkonczal updates @Mark_J_Perry price changes graph and argues the implication isn’t government regulation drives price shifts but that goods have deflated and services have inflated.
In our version of the AEI chart the number one item isn’t health care but ‘delivery services,’ which is “fees for delivery of items such as letters, documents, and packages at non-US Postal Services facilities.” Think UPS or FedEx. This is pretty far from a government monopoly, indeed it’s the private sector alternative to a government program. But it is services and it is labor intensive. The biggest thing, to me, isn’t “regulations” but whether it’s a service or a good. This is academically well known, check out The Missing Inflation Puzzle: The Role of the Wage-Price Pass-Through, which finds that the low inflation of pre-pandemic era “can be traced to a growing disconnect between unemployment and core goods inflation” and that “increased import competition and rising market concentration reduce pass-through from wages to prices” when it comes to goods.
Nuclear power generation capacity will increase in the US for the first time since 2016 as Georgia’s Vogtle plant comes online. @GregorMacdonald
Nuclear power generation in the United States will finally bump up a little this year, as 2.2 GW of new capacity comes online at Georgia’s Vogtle. The last new nuclear capacity to come online in the US was the second phase of Watts Bar, in 2016; and then twenty years prior with the first phase of Watts Bar, in 1996, and before then the second phase of Comanche Peak in 1993. The US has of course lost a great deal of nuclear capacity as plants like Pilgrim in Massachusetts and San Onofre in California simply got too old, and retired. Accordingly, US power generation from nuclear has been on a treadmill of no-growth for decades. To set the context, compare nuclear’s output since 2010 with combined wind and solar. Vogtle is currently ramping up, and achieved initial criticality earlier this month. By summer, output will be flowing and will produce about 17-18 new TWh per year. You can visit the interactive version of the above chart and roughly see that these new 17-18 TWh per year will likely push total US output back towards 800 TWh per year, without quite getting there.
March 17, 2023
Fed Action Could Have Prevented SVB’s Collapse
.@HalScott_HLS argues the Federal Reserve failed to stem the on SVB by not serving as the lender of last resort early on, using its authority under Section 10B of the Federal Reserve Act via the discount window. #Federal Reserve #SVB
In February, the labor-force participation rate for Americans ages 25 to 54 hit 83.1%, surpassing its pre-pandemic, pre-recession peak — which never happened during the past two economic expansions. The 25-to-54 age group is the core of the labor force, often referred to as “prime age.” But there are 58 million working Americans outside of it, 21 million younger and 37 million older. Teenagers are now substantially more likely to be in the labor force than before the pandemic, so they’re not the issue. But participation rates for those ages 20 to 24 and above 55 are still well short of where they were in February 2020. The decline among young adults is a different story. As the second chart above makes clear, it’s not just the 20-to-24 group that’s affected, with those in their late 20s seeing even bigger declines in participation and employment. There haven’t been big shifts in the age distribution within either group, so composition effects aren’t to blame. It’s simply more than 400,000 Americans in their 20s missing from the labor force, people who should be at the beginning of long careers, not fading into the sunset.
Where Are the Missing Gen Z Workers?
Labor force participation for workers aged 25-54 hit 83% in Feb, surpassing its pre-pandemic peak. However, participation for those aged 20-24 remains well below pre-pandemic levels, with 400k Americans missing from the labor force. @foxjust
In February, the labor-force participation rate for Americans ages 25 to 54 hit 83.1%, surpassing its pre-pandemic, pre-recession peak — which never happened during the past two economic expansions. The 25-to-54 age group is the core of the labor force, often referred to as “prime age.” But there are 58 million working Americans outside of it, 21 million younger and 37 million older. Teenagers are now substantially more likely to be in the labor force than before the pandemic, so they’re not the issue. But participation rates for those ages 20 to 24 and above 55 are still well short of where they were in February 2020. The decline among young adults is a different story. As the second chart above makes clear, it’s not just the 20-to-24 group that’s affected, with those in their late 20s seeing even bigger declines in participation and employment. There haven’t been big shifts in the age distribution within either group, so composition effects aren’t to blame. It’s simply more than 400,000 Americans in their 20s missing from the labor force, people who should be at the beginning of long careers, not fading into the sunset.
The Anglosphere Needs to Learn to Love Apartment Living
Anglosphere countries have a strong preference for low density housing. This has led to much more expensive housing in Anglosphere countries and supply of 400 homes per 1k residence vs. 540 per 1k in western Europe.
Forty years ago, the UK, US, Canada, Australia, New Zealand, and Ireland had roughly 400 homes per 1,000 residents, level with developed continental European countries. Since then the two groups have diverged, the Anglosphere standing still while western Europe has pulled clear to 560 per 1,000. Unsurprisingly, the same pattern is reflected in house prices, which have risen further and faster in most anglophone countries since the global financial crisis than elsewhere. There appears to be a deep-seated aversion to urban density in anglophone culture that sets these countries apart from the rest.
U.S.-Bound Migrants Surge at Darien Jungle Crossing in Panama
Migrants, including a sharp increase in Chinese, are surging into Panama as they seek entry into the United States. Border Patrol agents have arrested 4,271 Chinese nationals since Oct, a 12-fold increase from the same period a year earlier. @WSJ
The number of migrants crossing into Panama after trudging through the treacherous Darien Gap jungle reached record levels in the first two months of the year, data from Panama showed, posing a fresh challenge to their destination country, the U.S. In January and February, 49,291 people from as near as Haiti and as far away as China have crossed the Darien, a span of rainforest separating Panama from Colombia. That is more than a fivefold increase from the 8,964 migrants in the same period last year, according to Panama’s immigration office. About 2,200 Chinese migrants were among those crossing the Darien Gap in the first two months of 2023, a sharp increase in a group that usually has made up a much smaller proportion of migrants through the area. During the same period last year, 71 Chinese migrants were recorded passing through Panama.
Texas’s Latest Boom is its Biggest Yet
Texas’ population grew 18% from 2010-2021. If trends continue, it may surpass California’s population in the 2040s. With a $2tn 2022 GDP, Texas would rank as the world’s 9th largest economy if independent. @TheEconomist
The population of Texas as a whole grew by 18% from 2010 to 2021. The state’s economy grew by 39%, one and a half times faster than the national one. The first boom, in people, is remarkable by any standard. In the 12 months starting in July 2021 Texas added a net 471,000 residents, the most of any state. That is equivalent to 1,290 new Texans each day, or around 9,000 a week. Only a quarter of those came from natural increase (the difference between births and deaths). Another quarter were immigrants from abroad. But roughly half were arrivals from elsewhere in America. California still has more people than Texas, although, if current trends persist, Texas will eclipse it as the most populous state at some point in the 2040s
A Very Wet Winter Has Eased California’s Drought, but Water Woes Remain
Recent rain and snowfall in California have replenished reservoirs, helping the state better manage its long-term drought. @nytimes
Torrential rain and snow have again drenched California in recent weeks, amplifying an already wet winter season. The extreme precipitation has begun to ease the state’s long-term drought, the driest three-year stretch on record. The recent storms have quickly refilled many of California’s reservoirs. A number of them have returned to or even surpassed average levels for this time of year, compared with previous years where reservoir levels remained below the historical average.
March 16, 2023
Move Along, There’s No Crisis to See Here
.@johnauthers points to the relative stability of the gap between the rate of inter-bank loans and Treasury bills and argues that broad stress in the banking system is limited.
The “TED Spread” — the gap between the rate at which banks lend to each other, traditionally captured by Libor (the London Interbank Offer Rate) and the equivalent Treasury bill yield. The higher the spread, the greater the distrust between banks. There is no particular evidence that confidence has broken down at present, and certainly nothing remotely comparable to the GFC.
Five Years Into the Trade War, China Continues Its Slow Decoupling from Us Exports
Chinese imports from the US have fallen far short of the $200B commitments in President Trump’s “Phase One” agreement in 2020 and are now 23% below the trend prior to the 2017 start of the trade war. @ChadBown
Newly released data from 2022 show that US exports are falling farther and farther behind foreign peers also selling into the Chinese market. Once major US manufacturing exports—like automobiles and Boeing jets—have all but disappeared. Even where US exports appear to be doing alright—US farm sales to China in 2022 hit record highs—worrying signs have emerged. Much of the agricultural gains were not the result of increased shipments but simply higher prices and concerns over global food insecurity associated with the Russia-Ukraine war. A useful comparison is to examine US exports to China relative to their projected levels had they grown at the same rate as China’s imports from the world each year over 2018–22. US exports to China in 2022 are now 23 percent lower than that trend.
Is The Global Investment Boom Turning to Bust
An @TheEconomist analysis notes slowing growth in capital investments in 2022, and forecasts that large, listed US and European firms will reduce capex by 1% in 2023.
In 2021 and 2022 firms in the S&P 500 index of large American firms spent $2.5trn, equivalent to 5% of the country’s GDP, on capex and R&D, a real-terms rise of around a fifth compared with 2018-19. An American capex “tracker” produced by Goldman Sachs, a bank, offers a picture of businesses’ outlays, as well as hinting at future intentions. It is currently registering close to zero growth, year on year. A global tracker produced by JPMorgan Chase, another bank, also points to a sharp deceleration. The Economist analysed capital-spending data from 33 OECD countries. In the fourth quarter of last year capex fell by 1% from the previous quarter. Our analysis of the plans of around 700 big, listed American and European firms suggests real-terms spending will fall by 1% in 2023.
‘The Era of Urban Supremacy Is Over’
.@Edsall highlights the risk of downward spirals for major American cities, as higher-income workers take advantage of hybrid work schedules to move to suburbs, leaving cities with declining populations that are both lower-income and more non-white.
The men and women most likely to move to the suburbs are among the highest-paid key sources of income and property tax revenues: workers with six-figure salaries in technology, finance, real estate and entertainment. Those least likely to move, in turn, are paid much less, working in service industries, health care, hospitality and food sales. There is a striking interaction between the Covid-driven exodus from the cities and changing racial and ethnic urban populations. From 2020 to 2021, the nation’s 56 largest metropolitan areas saw a cumulative decline of 900,000 in their white populations William Frey, a demographer and senior fellow at the Brookings Institution reported. The challenge facing cities is that dysfunction tends to engender dysfunction; downward spirals accelerate. Covid and remote work have transformed the face of urban America, just as the nation’s cities were becoming increasingly racially and ethnically diverse.
Remote Work Across Jobs, Companies, and Space
Over 10% of job listings in the Anglosphere countries now allow for remote work for at least one day a week. @I_Am_NickBloom @StephenEKHansen @pj_lambert @raffasadun @Bledi_Taska
The share of postings that say new employees can work remotely one or more days per week was tiny before the pandemic: 1% or less in Australia, Canada and New Zealand as of 2019, about 3% in the U.K., and about 4% in the U.S. From 2019 to 2022, this remote-work share rose more than three-fold in the U.S and five-fold or more in the other countries. As of January 2023, the remote-work share exceeds 10% of postings in Australia, Canada, the U.K, and the U.S., and it appears to be on an upward trajectory in all five countries. These developments are highly non-uniform across and within cities, industries, occupations, and companies. Even when zooming in on employers in the same industry competing for talent in the same occupations, we find large differences in the share of job postings that explicitly offer remote work.
March 15, 2023
A Major Shock Makes Prices More Flexible and May Result in a Burst of Inflation or Deflation
Robert Hall argues that a substantial rise in the volatility of costs can free the prices of a significant fraction of goods and services prices from the grip of New Keynesian “zone of inaction.” @NBERpubs
The basic idea of this paper is that a substantial rise in the volatility of costs and other determinants of prices can completely free the prices of a significant fraction of goods and services from the grip of New Keynesian stickiness, when the volatility of cost rises. There is a critical configuration of the model such that at lower values of the of the cost volatility, the price is a constant over time—resetting never occurs, except possibly to bring the price into the zone of indifference at the beginning of time. The surprising implication of this investigation is that an increase in the volatility of cost that leaves the average level of cost unchanged can trigger a near collapse of price stickiness. The next section of the paper presents an empirical analysis demonstrating a large increase in cost volatility around the time of a burst of inflation during and after the pandemic, followed by a reversal.
Treasuries Liquidity Dwindles as SVB Crisis Muddies Fed Outlook
Bid-ask spreads for treasuries are widening with the 10-year yield moving 34bps Monday, the largest gap since the start of the pandemic. @markets
Liquidity in the world’s largest bond market is evaporating as the US banking crisis muddies the outlook for the Federal Reserve’s monetary policy. Bid-ask spreads on two-, 10- and 30-year US government bonds jumped to the highest level in at least six months on Tuesday, according to data compiled by Bloomberg. The 10-year yield swung in a 34-basis point range on Monday, the biggest gap since the onset of the pandemic in 2020.
Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?
Mark-to-market losses in the banking system are concentrated in large banks but not the global systemically important banks. @EXjiang
The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent– unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs.
Fed Will Walk a Tightrope Between SVB, Inflation
.@johnauthers worries about the highly leveraged commercial real estate sector. Vornado’s market cap is back at its January 2000 level and Bloomberg Office Property REIT index has halved in the past year. @markets
The market cap of Vornado Realty Trust, one of the biggest developers of office property in New York City is now worth barely any more than it was at the turn of the millennium. Bloomberg’s index of office property real estate investment trusts (REITs) is still above its worst level from the GFC, but it’s halved in the last 12 months to a point it first reached in September of 1996. Few people are terribly bothered by the prospect of property developers losing money. The problem is that such developers tend to be heavily leveraged. If they’re not able to repay their loans, that could be a problem for everyone. Keep an eye on the skyscrapers.
Small Bank Thoughts John Cochrane
.@JohnHCochrane notes that SVB failure is a feature of Fed policy, not a bug as “constricting credit” and “tightening financial conditions” are the mechanisms through which monetary policy addresses inflation.
There is much commentary that bank troubles will interfere with the Fed’s plan to lower inflation by raising rates. Actually, this is a feature not a bug. The main mechanism by which, in the Fed’s view, raising interest rates slows the economy and lowers inflation is by “constricting credit,” “tightening financial conditions,” lowering borrowing that finances investment and consumer durables purchases. The Fed didn’t want runs, no, but it wants the result. If you don’t like that, well, we need to think of other ways to contain inflation, like taking the fiscal gasoline off the fire.
The Party Is Ending for French Retirees
Ruling out tax hikes, the French government is attempting to raise the retirement age to extend the viability of the country’s pay-as-you-go retirement system. France spends about 14.5% of economic output on pensions relative to 7.5% in the US. @WSJ
French President Emmanuel Macron has proposed an overhaul of the country’s pension system centered on raising the legal age of retirement by two years to 64. The legislation, which is currently before parliament, has triggered waves of protests and strikes that have taken a toll on France’s economy. Mr. Macron says the changes are necessary to save France’s pension system from collapse and maintain fiscal discipline. He wants to bring the national deficit—which was 5% of gross domestic product last year—back in line with the European Union’s 3% target while also boosting France’s military budget amid the war in Ukraine. France spends around 14.5% of its economic output on pensions, compared with 7.5% in the U.S. and 10.4% in Germany, according to the Organization for Economic Cooperation and Development, a club of rich nations. France ranked second out of 38 OECD countries in terms of tax-to-GDP ratio in 2021, according to the OECD, at 45.1%, compared with the OECD average of 34.1% and 26.6% in the U.S.
What I Think About the Silicon Valley Bank Situation
.@RayDalio argues that the SVB bank run is evidence we are in the early stage of the debt-contraction cycle.
[SVB] is a very classic event in the very classic bubble-bursting part of the short-term debt cycle (which lasts about seven years, give or take about three) in which the tight money to curtail credit growth and inflation leads to a self-reinforcing debt-credit contraction that takes place via a domino-falling-like contagion process that continues until central banks create easy money that negates the debt-credit contraction, thus producing more new credit and debt, which creates the seeds for the next big debt problem until these short-term cycles build up the debt assets and liabilities to the point that they are unsustainable and the whole thing collapses in a debt restructuring and debt monetization (which typically happens about once every 75 years, give or take about 25 years).
March 14, 2023
U.S. Inflation Cooled in February as Fed Faces Rising Prices, Bank Failures
CPI rose at the slowest rate since September 2021 in February increasing 6% y/y a decline from 6.4% in December. @WSJecon
The consumer-price index, a closely watched inflation gauge, rose 6% in February from a year earlier, versus a 6.4% gain the prior month, the Labor Department said Tuesday, the slowest pace since September 2021. When excluding volatile food and energy prices, consumer prices advanced 5.5% from a year earlier in February compared with 5.6% in January. Economists view so-called core prices as a better indicator of future inflation. Core prices increased by 0.5% in February compared with a 0.4% monthly gain in January.
Jason Furman On CPI Report
.@jasonfurman notes that by every measure CPI inflation has peaked but CPI is “still way too high and no sign of falling…But for the banking turmoil this would have been a lock for a 50bp increase at the next mtg.”
The broad story remains the same: goods prices are flat, but core services are rising strongly. (Overall CPI) has come down a lot from the scary times. Economists focus less on it because it is a poor indicator of the “signal” of what future inflation will look like. Every measure of CPI inflation is down from its peak over the summer, partly because some of that inflation was truly transitory and partly because the Fed’s rate hikes has kept the economy from getting much hotter and kept long-run inflation expectations anchored. That is good. But, still way too high and no sign of falling. But for the banking turmoil this would have been a lock for a 50bp increase at the next mtg. I don’t recommend or expect that to happen. But I would be surprised & disappointed if the Fed pauses after 2 hot CPI reports in a row.
Thoughts on the Bank Bailouts
.@M_C_Klein questions the policy of unlimited deposit insurance, and suggests that the public would be better off “If instead we maintain the $250,000 deposit insurance limit and let uninsured deposits migrate to money-market funds.”
For the FDIC-insured banking system as a whole, uninsured domestic deposits were worth $7.7 trillion at the end of 2022, while insured deposits were worth $10 trillion. Uninsured deposits have been leaving the banks since the end of 2021, down about 9% ($780 billion) whereas insured deposits continue to rise. As it happens, insured deposits in the banking system correspond almost perfectly to banks’ outstanding loans to the real economy. If, hypothetically, all of the uninsured deposits in the U.S. left the banks and went into money funds, the banks could still do the valuable work that they ostensibly do. Moreover, the holders of those uninsured deposits would end up with safer and higher-yielding assets that do not require implicit and explicit transfers to bankers and bank shareholders. The transition could be disruptive if it happened all at once, but there is no inherent reason to fear a world where the banking sector has shrunk substantially.
Biden Administration Approves Willow Oil-Drilling Project in Alaskan Arctic
The Biden administration has given a green light to an Alaskan oil drilling project that will eventually produce 180,000bpd which is about 40% of current Alaskan output. @WSJ
The Biden administration approved the massive Willow oil-drilling project in the Alaskan Arctic over the objections of environmentalists and many Democrats who wanted the project scuttled. The green light means Houston-based ConocoPhillips can start construction on its roughly $7 billion project in Alaska’s National Petroleum Reserve, which the company expects will produce about 180,000 barrels of oil a day at its peak—equivalent to about 40% of Alaska’s current crude production.
Aukus Allies Unveil Plan to Supply Australia With Nuclear-Powered Submarines
The US, Australia and the UK formally announced the Aukus agreement; in the short term American submarines will start operating out of Perth in 2027, with new submarines coming on line in the early 2040s. @FT
The US, UK and Australia have unveiled a decades-long project to supply Canberra with nuclear-powered submarines, entering a historic partnership that binds the allies more tightly as they counter China in the Indo-Pacific. Under the three-stage plan, Australia and Britain will co-build a new submarine. The UK and Australia each plan to build at least eight of the multibillion-dollar submarines. The first Australian boats will not enter service until the early 2040s, with the full fleets being built over the following two decades. Australia will also invest in the US and UK’s defense industrial base, an unprecedented move aimed at boosting manufacturing capacity at strained shipyards.
Changing Intensity of Hydroclimatic Extreme Events Revealed by GRACE and GRACE-FO
Both extreme droughts and periods of increased rainfall have increased in frequency over the 2002-2021 period. @Nature
Distortion of the water cycle, particularly of its extremes (droughts and pluvials), will be among the most conspicuous consequences of climate change. Here we applied a novel approach with terrestrial water storage observations from the GRACE and GRACE-FO satellites to delineate and characterize 1,056 extreme events during 2002–2021. Dwarfing all other events was an ongoing pluvial that began in 2019 and engulfed central Africa. Total intensity of extreme events was strongly correlated with global mean temperature, more so than with the El Niño Southern Oscillation or other climate indicators, suggesting that continued warming of the planet will cause more frequent, more severe, longer and/or larger droughts and pluvials. In three regions, including a vast swath extending from southern Europe to south-western China, the ratio of wet to dry extreme events decreased substantially over the study period, while the opposite was true in two regions, including sub-Saharan Africa from 5° N to 20° N.
March 13, 2023
The Future of Taxes
.@paulkrugman argues that higher marginal taxes rates won’t be enough to close the long-run fiscal gap. “We’ll eventually have to raise taxes, at least somewhat, on people making less than $400,000.”
Very high marginal tax rates create problematic incentives. Conservatives emphasize how taxes reduce the incentive to work and create wealth; this effect is surely overrated, but it does exist. More important, high tax rates encourage extraordinary efforts to avoid taxes (which is legal) or evade them (which isn’t). Estimates of the revenue-maximizing top tax rate tend to be in the range of 70 percent to 80 percent, well above the federal maximum of 37 percent — but bear in mind that many high earners also face state and local taxes that raise their effective marginal rate to something like 50 percent. So, the amount of additional revenue we can raise from taxing the rich, while substantial, is considerably less than their remaining untaxed income.
Silicon Valley Bank Failure
A research piece by Michael Cembalist @JPMorgan calculates capital ratios for key banks assuming that all unrealized securities losses were realized. Silicon Valley Bank (SIVB) was an outlier.
The irony of SIVB [Silicon Valley bank] is that most banks have historically failed due to credit risk issues. This is the first major one I recall where the primary issue was a duration mismatch between high quality assets and deposit liabilities. As shown below, being flooded with deposits from fast-money VC firms and other corporate accounts at a time of historically low-interest rates might have been more of a curse than a blessing. Between Q4 2019 and the first quarter of 2022, deposits at US banks rose by $5.4 trillion and due to weak loan demand, only ~15% was lent out; the rest was invested in securities portfolios or kept as cash.
Hidden to Market
.@Fedguy12 argues “there is little risk of a crisis in the banking sector” noting “SVB was particularly poorly run” but QT is set to pull over $1T of liquidity out of the banking system, challenging bank liquidity over the next two years.
The level of liquidity in the banking system is exceptionally high but is set to steadily decline from higher rates and QT. Higher interest rates reduce the market value of bank assets, which reduces the amount of cash that a bank can raise. A secular upward swing in interest rates can potentially impose huge losses on both the securities and loan portfolios of banks. At the same time, QT is set to steadily withdraw over a trillion in liquidity out of the banking system over the next two years. This is not a problem today, but it may be in the coming years.
Can The SVB Crisis Be Solved in the Longer Run?
.@tylercowen speculates that the SVB resolution will likely “push additional resources outside the formal banking system altogether,” as the formal banking system now has to accommodate increased regulations and higher deposit insurance premia.
Raising the FDIC protection limit from $250,000 to ??? raises political eyebrows in a dramatic manner. For one thing, the FDIC would then be seen as guaranteeing a much larger part of the financial system. Over time, the pressures for the government to protect yet additional parts of the financial system will grow, just as they did after the bailouts from the 2008-2009 financial crisis. Furthermore, if the FDIC keeps on increasing its protections in the quest for financial stability, that means a larger FDIC, a larger regulatory apparatus, perhaps higher capital requirements, and over time higher premia for banks to pay to the FDIC. As that scenario unfolds, there will be all the more incentives to supply more lending and also deposit-taking services outside the formal and more heavily regulated banking sector. Rather than pushing more resources into the larger banks, this policy would push additional resources outside the formal banking system altogether.
Silicon Valley Bank Blinders
.@JohnHCochrane writes, “The Silicon Valley Bank failure strikes me as a colossal failure of bank regulation,” and argues that duration risk at banks will now be an additional constraint on the Fed’s hiking cycle.
The Fed faces many headwinds in its interest rate-raising effort. For example, each point of higher real interest rates raises interest costs on the debt by about $250 billion (1 percent x 100% debt/GDP ratio). A rate rise that leads to recession will lead to more stimulus and bailout, which is what fed inflation in the first place. But now we have another. If the Fed has allowed duration risk to seep in to the too big to fail banking system, then interest rate rises will induce the hard choice between yet more bailouts and a financial storm.
March 10, 2023
Furman On Nonfarm Payrolls
.@jasonfurman argues that it’s “hard to believe that jobs 275K above steady state of 75K is compatible with inflation falling to 2% or even 3%.”
The American economy continues to create an extraordinary number of jobs–311,000 in February, an average of 351,000 over the last three months. This does not look like anomalous data. Average hourly earnings growth slowed a lot. Last month the three-month annualized average was 4.6%. Largely because of slow growth in February (but also small revisions) the 3-month growth rate is now 3.6%. The unemployment rate went up, but the participation rate also went up, so employment was unchanged. What does this mean? Hard to believe that jobs 275K above steady state of 75K is compatible with inflation falling to 2% or even 3%. My view was the default should be hiked by 50bp and the totality of this release should not change that. But the market disagrees with me with rates down on the news.
Early Remote Work Impacts on Family Formation
.@lymanstoneky @ModeledBehavior find that remote work has had a positive impact on the likelihood of near-term pregnancy for women, particularly for those >35 whose financials are improving.
We assess whether women are pregnant or trying to become pregnant. This question is a good indicator of very near-term fertility outlooks, since respondents generally have a pretty clear and stable idea whether they are pregnant or trying to conceive, or not. When looking directly at the impact of remote work on this variable with the same controls, we find that remote workers are indeed more likely to be pregnant or trying; however, the difference is not statistically significant. When we focus on the subset of workers who are doing relatively well, we see a larger and more statistically significant impact of remote work on fertility. Remote work seems to help women in improving circumstances to capitalize on those improvements and convert financial success into family life.
Smartphones and Social Media are Destroying Children's Mental Health
An increase in time spent on social media is associated with a decline in mental health, with the gradient steepest for girls. @jburnmurdoch.
Something is going very wrong for teenagers. Between 1994 and 2010, the share of British teens who do not consider themselves likable fell slightly from 6% to 4%; since 2010 it has more than doubled. The share who think of themselves as a failure, who worry a lot, and who are dissatisfied with their lives also kicked up sharply. The same trends are visible across the Atlantic. The number of US high school students who say their life often feels meaningless has rocketed in the past 12 years. And it’s not just the anglosphere. In France, rates of depression among 15- to 24-year-olds have quadrupled in the past decade. The more time teens spend on social media, the worse their mental health is. The gradient is steepest for girls, who also spend much more time on social media than boys, explaining the sharper deterioration among girls’ mental health than boys’.
A Revolution Is Coming for China’s Families
Nicholas Eberstadt and Ashton Verdery @AEIecon make the case that a “crisis of the Chinese family” is underway. They project by 2050 living parents and in-laws will outnumber children for middle aged Chinese.
China is now on the cusp of a severe and unavoidable “kin crash,” driven by prolonged sub-replacement fertility. The implosion of consanguineous family networks, by our reckoning, means that China’s rising generations will likely have fewer living relatives than ever before in Chinese history. A “kin famine” will thus unfold unforgivingly over the next 30 years—starting now. As it intensifies, the Chinese family—the most important institution protecting Chinese people against adversity in bad times and helping them seize opportunity in good times—will increasingly falter in both these crucial functions.
In California, a Race to Capture the Water Before It Escapes
California snowpack is nearly double average levels for this time of year and the state is racing to try to capture the precipitation to offset the record drought. @wsj
California is nearing record precipitation this winter after the three driest years on record left reservoirs drained all over the state. Landowners along with state and local water managers are rushing to harvest as much runoff as they can before it escapes into the Pacific Ocean. Gov. Gavin Newsom in February ordered the state to accelerate its efforts to corral storm runoff, such as by facilitating projects to inject more water in underground aquifers. Los Angeles city officials say they have diverted 25 billion gallons so far this winter, or enough to meet the annual needs of 308,000 households. That was made possible partly by improvements such as deepening a group of pool-like basins in the San Fernando Valley so they could hold more rainwater. Runoff was also collected in streets that have been redesigned to include swales of open ground alongside to give water a place to seep underground.
This Geothermal Startup Showed its Wells Can Be Used Like a Giant Underground Battery
Texas-based @fervoenergy has conducted an experiment suggesting that geothermal power plants could provide long-term energy storage and play a critical role in a carbon-free electrical grid. @techreview
Fervo Energy, a geothermal power startup, began conducting an experiment deep below the desert floor of northern Nevada. It pumped water thousands of feet underground and then held it there, watching for what would happen. The readings from gauges planted throughout the company’s twin wells showed that pressure quickly began to build, as water that had nowhere else to go actually flexed the rock itself. When they finally released the valve, the output of water surged, and it continued pumping out at higher-than-normal levels for hours. The results from the initial experiments suggest Fervo can create flexible geothermal power plants, capable of ramping electricity output up or down as needed. Potentially more important, the system can store up energy for hours or even days and deliver it back over similar periods, effectively acting as a giant and very long-lasting battery.
March 9, 2023
How ‘Excuseflation’ Is Keeping Prices — and Corporate Profits — High
Using the example of Coke and Pepsi, Samuel Rines argues that American firms still have a large degree of pricing power suggesting profit margins aren’t going to compress anytime soon. @tracyalloway @TheStalwart
Multidimensional Human Capital and the Wage Structure
The return to cognitive skills has declined since 2000 and there has been rising demand for “social skills.” “Jobs with the most employment and earnings growth are those where both types of skill are required.” @ProfDavidDeming
The return to cognitive skills has declined since 2000. A one standard deviation increase in the Armed Forces Qualifying Test (AFQT) score – a widely-used measure of cognitive skill – was associated with about 10 percent higher hourly wages in the 1980s and early 1990s but only 4.5 percent in the 2000s and early 2010s. In contrast, the economic return to a bachelor’s degree increased by 6 percentage points unconditionally and by nearly 15 percentage points after controlling directly for cognitive skills in both waves. What are the implications of the growing importance of social skills for the wage structure? Social skill-intensive occupations grew by nearly 12 percentage points as a share of all jobs in the U.S. economy between 1980 and 2012, and real hourly wages for these jobs grew around 25 percent compared to less than 10 percent for other occupations. This suggests growing relative demand for social skill, and flat or declining demand for cognitive skill. However, because these skills are complements, the jobs with the most employment and earnings growth are those where both types of skill are required. Evidence suggests that cognitive skills and social skills are conceptually distinct and that they work together in non-obvious ways to explain an important recent trend in the wage structure – rising returns to education and social skills, but declining returns to cognitive skills.
America’s $52 Billion Plan to Make Chips at Home Faces a Labor Shortage
Between 2017-2022 the American working age population grew by just 1.7mm people, an 86% decline from growth of 11.9mm between 2000-05. @markets
The ultratight labor market is often treated as a pandemic-driven aberration. But there’s a strong case to be made that it’s really the product of demographic trends that predated, and accelerated with, Covid-19. Experts say that without meaningful government intervention, America’s worker deficit could become a tax on growth and trigger a new wave of offshoring, like the one the Chips and Science Act of 2022 is trying to reverse. The US working-age population shrank in 2018 for the first time since at least 1960, as baby boomer retirements picked up and fewer young people entered the labor force. The cohort, which covers those aged 15 to 64, also contracted in the two years that followed and has edged up since only because of a bounce back in international immigration.
Data Update 7 for 2023: Dividends, Buybacks and Cash Flows
.@AswathDamodaran notes that firms that buy back stock have lower debt levels than firms that don’t, as measured by both the debt to capital ratio and the debt to EBITDA multiple.
I looked at companies in the US (because this critique seems to be directed primarily at them), broken down by whether they did buybacks in 2022, and then examined debt loads within each group. You can be the judge, using both the debt to capital ratio and the debt to EBITDA multiple, that companies that buy back stock have lower debt loads than companies that don’t buy back stock, at odds with the “debts fund buybacks” story. Are there firms that are using debt to buy back stock and putting their survival at risk? Of course, just as there are companies that choose other dysfunctional corporate finance choices. In the cross section, though, there is little evidence that you can point to that buybacks have precipitated a borrowing binge at US companies.
A Few Rich Firms Are Fueling Record US Buybacks
Announced buybacks are running at a record pace this year with 2/3 of them driven by five firms. @markets
US buyback announcements are running at a record pace this year, though more than two-thirds of the $261 billion in commitments are spread across only five companies, according to JPMorgan Chase & Co. strategists. Chevron Corp.’s $75 billion leads the way, followed by Meta Platforms Inc. with $40 billion, Goldman Sachs Group Inc. with $30 billion, and Booking Holdings Inc. and Salesforce Inc. with $20 billion each, a team led by Dubravko Lakos-Bujas wrote in a note.
The Scientific Breakthrough That Could Make Batteries Last Longer
Researchers at the University of Rochester report in @Nature that they have created a superconductor that can operate at room temperature, which would have significant implications for batteries and electrical transportation. @WSJ
A group of researchers at the University of Rochester report that they have created a new superconductor that can operate at room temperature and a much lower pressure than previously discovered superconducting materials. Superconductors demonstrate what physicists call the Meissner effect, when a material expels its magnetic field. If you put a superconductor near a magnet, it will levitate. For the new study, which was published Wednesday in the journal Nature, the researchers tweaked their superconductor recipe—adding nitrogen and a rare-earth metal known as lutetium to the hydrogen instead of sulfur and carbon—and once again heated and squeezed it in the diamond anvil cell. They named the resulting material “,” after observing how the material’s hue changed from blue to pink to red as it got compressed. The Rochester lab found that “reddmatter” could exist at 69 degrees Fahrenheit and 145,000 pounds per square inch, or psi, of pressure—about 1/360th of the pressure in Earth’s core. That is about a 10-degree Fahrenheit increase in temperature and a drop to about 1/1000th of pressure compared with its predecessor from 2020.
Room-Temperature Superconductor Discovery Meets with Resistance
Some researchers are suspect of the new University of Rochester “reddmatter” given previous retractions by the authors; however, others argue @Nature has a rigorous review process. @QuantaMagazine
Dias strongly denies all allegations of wrongdoing and continues to make efforts to rigorously establish his claims of finding superconductivity at everyday temperatures and what counts as almost-everyday pressures in the high-pressure physics community. He stresses that today’s paper describing low-pressure superconductivity in the lutetium material underwent an unusually rigorous peer review process involving multiple rounds of review over the better part of a year. Dias also said that he shared all of his raw data with Nature, and that it will be published alongside the new result. Multiple independent experts voiced confidence in Nature’s ability to make sure that the result was as rigorous as possible.
China Protests Dutch Plan to Cut Chip Access, as Netherlands Moves to Join US Curbs on Chinese Hi-Tech
China has logged a formal complaint with Dutch authorities as the Netherlands, home to ASML, introduces new export restrictions on semiconductor production equipment. @SCMPNews
The Netherlands, a key player in chipmaking technology, said it planned to introduce restrictions on exports of some semiconductor technology over national security concerns. Beijing has formally protested against Dutch plans to restrict semiconductor exports, with the Netherlands set to be the first country to join the US drive to hobble Chinese hi-tech development. In a statement, ASML said the new restrictions would require the company to apply for export licenses in order to ship its “most advanced” immersion DUV systems. Plans are also in the works to target other key sectors, such as 5G and artificial intelligence. Washington stopped issuing export licenses for US companies to sell to Huawei in January, moving towards a total ban on doing business with the Chinese tech giant.
March 8, 2023
Summers and Blanchard Debate the Future of Interest Rates
Larry Summers argues over the next decade “short rates will run in the four range on average and longer-term rates if traditional spreads reassert themselves running 100 basis points above that. So, four and five.” @LHSummers @ojblanchard1
Larry Summers, “I think today my expected value of inflation would be 2.5 or a bit larger given the tail risk of 4 or 5. And given that, I’d assign a very low likelihood to it being well below two. So, if you take a 1.5% to 2% real rate, a 2.5% inflation rate and some risk and term premium, you’re sort of looking at short rates running in the four range on average and longer-term rates if traditional spreads reassert themselves running 100 basis points above that. So, four and five.”
Women’s Return to the Workforce Piles Momentum On a Hot Economy
The share of mothers with school aged children who are in the labor force is above January 2020 levels, whereas their male counterparts are under the 2020 level. @WSJ
Women have gained more jobs than men for four straight months, including in January’s hiring surge, pushing them to hold more than 49.8% of all nonfarm jobs. The recent labor-force recovery has been particularly pronounced among mothers. The share of mothers with school-age children employed or seeking work surpassed January 2020 levels in November. The participation rate among fathers of school-age children retreated at the end of last year and is down from January 2020. Participation among women who don’t have children or who have children age 18 or above also remains depressed, in part reflecting early retirements during the pandemic.
U.S. Shale Boom Shows Signs of Peaking as Big Oil Wells Disappear
The rate of increase of shale production is slowing. Domestic oil output last year grew at one-third of the annual average pace seen in shale’s heyday from 2017-2019. @WSJ
Recent results out of the Permian, are mimicking the onset of a production plateau that has taken place at other, more mature U.S. shale plays. Oil production from the best 10% of wells drilled in the Delaware portion of the Permian was 15% lower last year, on average, than top 2017 wells, according to data from analytics firm FLOW Partners LLC. Meanwhile, the average well put out 6% less oil than the prior year, according to an analysis of data from analytics firm Novi Labs. Oil production in the U.S. rose from about 7.2 million barrels a day a decade ago to a high of about 13 million barrels a day before the pandemic. But domestic output last year grew at one-third of the annual average pace seen in shale’s heyday from 2017 to 2019, and hasn’t yet caught up with prepandemic levels. The slowdown was mostly because of investor pressure on companies to curtail spending and limit growth in favor of generating higher returns. At the same time, weaker well results in the Delaware basin contributed to flattening output.
Reconsidering the "2020s as 1940s" Analogy
.@M_C_Klein speculates that one reason we didn’t see a post pandemic boom was that the current reflation isn’t associated with private sector deleveraging.
The wartime reflation worked better because it was so much larger. Recall that private indebtedness fell by roughly 70 percentage points of NGDP between 1940 and 1945. The private debt stock fell somewhat during the war, but the real magic was the 122% increase in incomes. That gave the private sector a clean slate to spend the next six decades levering back up—until the global financial crisis. This time around, private indebtedness has been flat. The nominal income surge that we actually experienced was large enough to be inflationary, but too small to reset private borrowing capacity. Would we have enjoyed more investment and more productivity gains if the private sector had shed its legacy debt constraints? Or would that simply have made inflation even worse by allowing nominal spending to rise even faster relative to real output?
The Independent Contractor Workforce: New Evidence on Its Size and Composition and Ways to Improve Its Measurement in Household Surveys
15% of American workers are independent contractors, according to a Gallup survey that was carefully constructed to avoid data problems that had previously plagued the space. @kgahome @BHershbein @bethtruesdale
We find that, upon probing, roughly one in 10 workers who initially reports working for an employer on one or more jobs (and thus is coded as an employee) is in fact an independent contractor on at least one of those jobs. Incorporating these miscoded workers into estimates of work arrangement on the main job nearly doubles the share who are independent contractors, to about 15 percent of all workers. Young workers, less educated workers, workers of color, multiple-job holders, and those with low hours are more likely to be miscoded. Taking these workers into account substantively changes the demographic profile of the independent contractor workforce. Our research indicates that probing in household surveys to clarify a worker’s employment arrangement and identify all low-hours work is critical for accurately measuring independent contractor work.
The EU’s Future in a World of Deep Disorder
Over the past decade the EU’s economy has grown more inward facing: exports outside the EU as a share of all exports have declined from 43% in 2014 to 38% in 2022. @martinwolf_
Difficulties are only likely to grow in this more nationalist and more fragmented world economy. The open world markets on which Germany, in particular, depended are becoming less so. That is bound to be costly. Moreover, the US is moving towards an interventionist and protectionist industrial policy. For the EU, such a shift creates existential problems. Similar efforts there are bound to be more national than European. This would threaten the single market and give the whip hand to the member countries with the most resources. Germany will be the best positioned. At the same time, the higher costs of energy in Europe than in the US are a threat to its own heavy industry. (
March 7, 2023
Robots and Workers: Evidence from the Netherlands
Firms that adopted robots in the Netherlands between 2009-2020 increased output by 14.9% relative to non-adopting firms. Workers who were directly affected saw income reductions of about 1.5%. @DrDaronAcemoglu @nberpubs
Robot-adopting firms increase output by about 14.9%, increase employment (hours worked) by 4.3%, and reduce the labor share by 4.6 percentage points, relative to comparable non-adopting firms. The quantitative magnitudes of these estimates are very similar to those from France and Spain. As in these countries, we find negative effects on non-adopting rivals in the same industry. For example, a non-adopting firm experiences a 6.2% decline in hours worked when competitor robot adoption – that is, the share of sales by robot adopters in the same four-digit industry – increases by one standard deviation. The negative effects of robot adoption on workers employed in routine production work and replaceable occupations are predominantly through lower wages.
Don’t Fear An AI-induced Jobs Apocalypse Just Yet
The global stock of industrial robots is relatively low. In South Korea, there are ten manufacturing workers for every industrial robot whereas there are 25-40 manufacturing workers per robot in the US, China, Europe and Japan. @TheEconomist
As a result of better technology and lower prices, the global stock of industrial robots grew from 1m in 2011 to nearly 3.5m in 2021. Though down from the frothy peaks of 2021, when bosses sought alternatives to human workforces incapacitated by covid-19, robot-makers’ share prices remain a fifth higher than before the pandemic. For all that growth, however, absolute levels of adoption remain low, especially in the West. Even South Korean firms, by far the world’s keenest robot-adopters, employ ten manufacturing workers for every industrial robot. In America, China, Europe and Japan the figure is 25-40 to one. The $25bn that, according to consultants at Boston Consulting Group, the world spent on industrial robots in 2020 was less than 1% of global capital expenditure (excluding the energy and mining sectors). People spent more on sex toys.
Energy and the Presidents
.@GregorMacdonald argues policy has had little impact on US energy production, which is driven by price and technological change. Fossil fuels expanded under Biden despite his pivot towards green policy, and coal declined under Trump.
The big surprise however was that Trump was not able to do anything for the coal industry, a major reversal of expectations. US coal production continued to fall, from 774,609 thousand short tons in 2017 to 535,434 thousand short tons in 2020. The continued collapse of coal consumption was even more dramatic under Trump, falling over 33% from 716,856 thousand short tons in 2017 to 476,693 thousand short tons. Joe Biden came to office as the most vocal, aggressive US executive on the need to take action on climate change. And yet, there has been no meaningful federal legislation that curtails the output of US oil and gas—both of which just reached (again) all-time highs. That’s why the [flipping] in the US energy balance sheet, moving ever more deeply into the black in 2021 and 2022, will surely steamroll onward. And US petroleum production, which suffered a hit from the pandemic demand collapse globally, has taken a very standard 12-24 months to not just recover, but reach a new high. A classic example of the free market, not policy, in full control.
Where New York’s Asian Neighborhoods Shifted to the Right
Voters in Asian neighborhoods shifted their support towards Republicans by 23pp between 2018 and 2022. @NYTimes
In last year’s governor’s election, voters in Asian neighborhoods across New York City sharply increased their support for Republicans. Though these areas remained blue overall, they shifted to the right by 23 percentage points, compared with 2018, after more than a decade of reliably backing Democrats. It was the largest electoral shift in Asian neighborhoods in the period from 2006 to 2022, the longest available span of election results by precinct, according to a New York Times analysis.
Pandemic Murder Wave Has Crested. Here’s the Postmortem
The wave of murders associated with the pandemic has seemingly crested. Homicide rates are still well above the pre-pandemic level, but 2022 homicides were down 5% from 2021. @foxjust
The shocking rise in murders that began in the summer of 2020 looks as if it may have played out. In the nearly complete tally of 2022 homicide statistics from 93 US cities compiled by AH Datalytics, murder and non-negligent manslaughter was down 5% from the year before. There were still many more people murdered in the US in 2022 than before the pandemic in 2019 — going by the AH Datalytics estimates it was 4,764, or 28.7%, more. Murder rates are also much, much higher in the US than in other wealthy nations. But with weekly crime statistics from the three biggest US cities showing a continuing and possibly accelerating murder decline so far in 2023, it does look as if a return to the awful conditions of the 1970s through early 1990s probably isn’t in the cards.
China’s ‘Two Sessions’ 2023: Xi Jinping Directly Accuses US of Leading Western Suppression of China
Xi Jinping is accusing the United States of attempting to suppressing China’s development. @SCMPNews
Chinese President Xi Jinping has directly accused the United States of leading other Western nations to suppress China’s development. “Western countries, led by the United States, have implemented all-round containment and suppression of China, which has brought unprecedented severe challenges to the country’s development.” A key agenda for the ongoing legislative sessions in China is to provide a strategy to cut reliance on the US. As part of that plan, the central government proposed on Sunday to raise science and technology spending by 2 per cent in 2023 to 328 billion yuan (US$47 billion).To that end, China will overhaul its mechanisms for allocating and using government research funds and will “grant scientists a greater say when it comes to determining technological road maps and spending research funds”, according to a budget report released by the Ministry of Finance.
US TikTok Ban Shifts to Senate Bill That Biden Team May Support
Legislation is moving in Congress to give the government authorities that would enable it to restrict access to the TikTok app. @markets
The US is moving closer to restricting access to the popular video-sharing app TikTok, with Senate Intelligence Committee Chairman Mark Warner set to unveil a bill Tuesday that the Biden administration is poised to support, according to people familiar with the issue. The measure, one of many being proposed in Congress to restrict Bytedance Ltd.’s TikTok but isn’t expected to pinpoint the company by name, would give the US the power to ban or prohibit foreign technologies or companies when necessary, said one of the people, who asked not to be identified discussing private deliberations. Lawmakers say the measures are intended to counter security threats from apps like TikTok, which they say can be used to gather user data or as tools for propaganda. Last week, legislation authorizing the US to ban TikTok in the US advanced through the House Foreign Affairs Committee, led by Michael McCaul, a Texas Republican.
UK and Australia Urge Washington to Ease Secrecy Rules in Security Pact
.@Dimi reports that Washington is starting to reform security rules that would undercut the Aukus security pact. The US and Australia are expected to shortly announce the plan for production of Australian nuclear submarines.
President Joe Biden, Australia’s prime minister Anthony Albanese and UK PM Rishi Sunak are expected to reveal how and where the submarines will be built at a joint event in the US on March 13. Officials are optimistic the US has found ways to share closely guarded nuclear-propulsion secrets with Australia. But there is concern that the second pillar, which includes undersea capabilities and electronic warfare, faces obstacles that have slowed its momentum. These hurdles relate to technology transfer, licensing requirements under the International Traffic in Arms Regulations (ITAR), and a classification called “NoForn” that bars information sharing with non-US nationals.
March 6, 2023
The Unexpected Compression: Competition at Work in the Low Wage Labor Market
In the aftermath of the pandemic, real hourly wage gains for non-college workers have reversed a quarter of the rise in wage inequality since 1980. @davidautor @nberpubs
Labor market tightness following the height of the Covid-19 pandemic led to an unexpected compression in the US wage distribution that reflects, in part, an increase in labor market competition. Rapid relative wage growth at the bottom of the distribution reduced the college wage premium and counteracted approximately one-quarter of the four-decade increase in aggregate 90-10 log wage inequality. Wage compression was accompanied by rapid nominal wage growth and rising job-to-job separations—especially among young non-college (high school or less) workers. Seen through the lens of a canonical job ladder model, the pandemic increased the elasticity of labor supply to firms in the low-wage labor market, reducing employer market power and spurring rapid relative wage growth among young non-college workers who disproportionately moved from lower-paying to higher-paying and potentially more-productive jobs.
Peering Through the Fog of Inflation
.@paulkrugman weighs the evidence of the direction of inflation in light of recent revisions (red line on chart) concluding underlying inflation “probably” has come down since early 2022 but “we don’t know how much it has come down.”
Underlying inflation probably has come down since early 2022 — you really have to work hard to find measures that don’t say that. But we don’t know how much it has come down. Inflation is still, however, running significantly above the Fed’s 2 percent target. Elevated inflation isn’t a mystery: The economy still seems to be running hot, despite a series of interest rate hikes from the Fed. So far there is no evidence that inflation is becoming entrenched, such that we would have to go through an extended period of high unemployment to get it back down. I’m not saying that it can’t happen, but as far as I can tell, there is no evidence supporting fears of ’70s-style stagflation. Given this picture, I don’t see how the Fed can avoid continuing to raise interest rates until it’s more or less unmistakable that inflation is coming under control.
US Banks Are Finally Being Forced to Raise Rates on Deposits
American commercial bank deposits fell in 2022 for the first time since 1948 as depositors seek yield. CD rates are starting to rise in response. @markets
After years of earning next to nothing, depositors are discovering a trove of higher-yielding options like Treasury bills and money market funds as the Federal Reserve ratchets up benchmark interest rates. The shift has been so pronounced that commercial bank deposits fell last year for the first time since 1948 as net withdrawals hit $278 billion. The very biggest banks can afford to slow-walk their rate increases, simply because they still have relatively high deposit levels. Overall, the average rate on a one-year CD is roughly 1.5%. That’s up from 0.25% a week before the Fed began raising rates a year ago, but still well below inflation.
Loose Monetary Policy and Financial Instability
Persistently loose monetary policies are associated with financial crises. A 1pp lower mean in a five-year window increases the probability of a financial crisis in the next 5 to 7 years by 5.5pp and by 15.5 in the following 7-9 years. @MSchularick @sffed
We are the first to show that, as a causal matter, a loose stance has strong implications for medium-term financial instability. The sample consists of 18 advanced economies over the period from 1870 until 2020. Since the unconditional probability of experiencing a crisis in a 3-year window is 10.5%, these effects are big. Moreover, these results are robust to alternative measures of stance and alternative definitions of financial stability. Lower interest rates in general and loose monetary policy in particular imply, ceteris paribus, higher asset valuations. This opens the door for collateral-driven credit booms. Such credit and asset price booms, in turn, have been identified by the literature as harbingers of financial turmoil.
Russia’s Population Nightmare is Going to Get Even Worse
.@TheEconomist estimates that between the pandemic, war and emigration Russia has lost more than 2m people relative to the pre-2020 baseline with the life expectancy of Russian males aged 15 falling by almost five years to the same level as Haiti.
Over the past three years Russia has lost around 2m more people than it would ordinarily have done, as a result of war, disease and exodus. The life expectancy of Russian males aged 15 fell by almost five years, to the same level as in Haiti. The number of Russians born in April 2022 was no higher than it had been in the months of Hitler’s occupation. And because so many men of fighting age are dead or in exile, women outnumber men by at least 10m. According to Western estimates, 175,000-200,000 Russian soldiers have been killed or wounded over the past year. Somewhere between 500,000 and 1m mostly young, educated people have evaded the meat grinder by fleeing abroad. If you add pandemic mortality to the casualties of war and the flight from mobilization, Russia lost between 1.9m and 2.8m people in 2020-23 on top of its normal demographic deterioration.
India, Wary of China, Expands Trade Ties with the West
.@greg_ip argues that Indian policy is pivoting towards the United States and is seeking to reduce trade friction with Europe, America, Canada, Japan, and Korea.
India’s trade barriers have long been among the highest of major economies. Its average “most favored nation” [MFN] applied tariff in 2021 stood at 18.3%, one of the highest among major economies. That’s actually up from 2014, a result of Mr. Modi’s efforts to encourage domestic and foreign companies to manufacture more in India. The high MFN tariff is aimed at “nontransparent economies who are dumping really low-quality, substandard goods at really low prices, which is hurting the Indian economy and Indian manufacturing,” Piyush Goyal, India’s minister of commerce and industry, said in an interview, in a reference to China. “The tariffs are not meant to be a detriment, ideally, to…Europe or America or Canada or Japan or Korea. We are looking at having more trading relationships, bilaterally or collectively, with the developed world with whom we want more and more open borders.” India wants more protection from China, and freer trade with everyone else.
In his annual letter @danwwang notes a change in animal spirits in China in the aftermath of 2022’s Covid policy and regulatory attacks on business “I perceive a fading sense of enthusiasm among businesspeople and youths.”
What I did not sufficiently appreciate is that a state that would so casually decapitate a sector like online tutoring would also have the will to visit catastrophe upon whole cities. And fear of those moves is wearing on people. I perceive a fading sense of enthusiasm among businesspeople and youths. The residue of resentment won’t wear on their faces; and I expect that the state will keep a lid on wide-scale protests. But there will be more foot-dragging and less self-initiative in response to Beijing’s centralized campaigns of inspiration. The picture I see for the next few years however is that growth will slow further. The economy won’t return to the 2019 mid-single digit levels of growth, but something closer to US levels. I believe that China is likely to succeed on many technological endeavors, but these bright spots can’t compensate for broad deceleration. The major source of risk is that the political system is more likely to squash growth in the longer run.
China’s Military Budget Outpaces Other Spending In Shift To Security
China is increasing military spending by 7.2% in 2023, 2.2 percentage points above the government’s 5% growth target. @FT
China’s military spending will grow at its fastest pace in four years in 2023 and outpace other categories of expenditure, underscoring Beijing’s reweighting towards security over development. Defense expenditure will increase by 7.2 per cent in 2023, well ahead of the 5.7 per cent increase in general public expenditure, according to a draft budget presented to the National People’s Congress, the country’s rubber-stamp legislature. China’s proposed rise in 2023 defense expenditure is 2.2 percentage points above the government’s 5 per cent economic growth target.
March 3, 2023
To Fight Inflation, Fed Tightening Should Go Faster and Further
.@jasonfurman argues that January’s inflation data suggests the Fed should raise rates by 50bps at the next meeting and “shift expectations toward a terminal rate of around 6%.”
Wage growth is currently running at an annual rate of about 5%. Sustaining such wage growth with 2% inflation would require a large increase in productivity growth or continually falling profit margins. I’d root for either outcome, but I wouldn’t bet on them. Falling wage growth could bring down inflation, but in an economy with nearly two job openings for every person looking for work, don’t expect it to happen. Instead, the most probable outcome is that if the unemployment rate doesn’t rise, wages will continue to grow at that pace, which historically is associated with about 4% inflation. Monetary policy operates with long and variable lags. Given that most of the tightening in financial conditions was already in place 10 months ago and, if anything, the real economy and demand have strengthened in recent months, it would be foolish to sit and wait for the medicine to work. In fact, lags are precisely why the Fed should do more now —considering it will take months for whatever the central bank does next to have a meaningful effect on inflation.
Insular India’s Exporters Will Struggle to Fill Chinese Shoes
.@alanbeattie writes that Indian trade policy drifts towards “protectionism and import substitution,” and therefore India is poorly positioned to take advantage of decoupling from China. Manufacturing value added as a % of Indian GDP has been declining.
Arvind Subramanian, an academic at Brown University in the US and former chief economic adviser to the Indian government calculates that in the decade or so since the global financial crisis, China gave up about $150bn of global market share in labor-intensive goods, of which India attracted no more than 10 per cent. The share of manufacturing in the Indian economy actually declined over that period. Calling yourself a globalizer doesn’t make you one. Modi sounds a lot more ambitious about competing in the world economy than many of his predecessors. But despite his government’s professed outward-looking export policy, it’s still too allergic to two-way trade to take full advantage of the huge space in global supply networks that is being opened up as China moves on.
Top Apple Supplier Foxconn Plans Major India Expansion
Apple’s primary manufacturer Foxconn is considering a major expansion in India, potentially assembling 20M units in 2024. Apple shipped 225M iPhones globally in 2022. @WSJ
Apple’ main manufacturer, Foxconn is considering a major expansion in India, including possibly assembling millions more iPhones and setting up new production sites as it seeks to further diversify beyond China. Foxconn is set to expand production of iPhones at its existing plant near Chennai, in the southern Indian state of Tamil Nadu, people familiar with the matter said. It aims to boost iPhone production to around 20 million units annually by 2024, and roughly triple the number of workers to as many as 100,000, said the people, including a senior Indian government official. In addition, Foxconn is considering building a new production site in the southern city of Hyderabad as well as a silicon carbide fabrication plant and packaging facility in India for its semiconductor business, some of the people said.
Private Equity Outlook in 2023: Anatomy of a Slowdown
Between 2012 and Q2 2022 the private equity sector has grown by ~ 15% a year to $12.8T total assets under management. @BainAlerts
The number of US public companies has declined by about a third over the last 25 years, and the remaining pool is dominated by a handful of large tech firms that hold disproportionate sway over the indexes. That makes it increasingly difficult to find adequate diversification in the public markets. Private market returns, meanwhile, are outpacing public returns over every time horizon, while alternative funds provide access to the broad global economy and the fullest range of asset classes. These advantages explain why private markets continue to grow relative to the public markets.
Inflation Adjusted House Prices 3.9% Below Peak
.@calculatedrisk reports affordability is at it’s lowest point since 1982 when 30-year mortgage rates were over 14%. On his chart, lower is more affordable.
I’ve put together my own affordability index using median income from the Census Bureau (estimated 2021 and 2022), assuming a 15% down payment, and used a 2% estimate for property taxes, insurance and maintenance. This is probably low for high property tax states like New Jersey and Texas, and too high for lower property tax states. For house prices, I used the Case-Shiller National Index, Seasonally Adjusted (SA). Here is what the index looks like (lower is more affordable like the FirstAm index): Affordability improved slightly in December as both mortgage rates and house prices declined. In October, houses were the least “affordable” since 1982 when 30-year mortgage rates were over 14%. Note that by this index, during the early ‘80s, homes were very unaffordable due to the very high mortgage rates. During the housing bubble, houses were at about the same level of unaffordability using 30-year mortgage rates, however, during the bubble, there were many “affordability products” that allowed borrowers to be qualified at the teaser rate (usually around 1%) that made houses seem more affordable.
March 2, 2023
Checking In On the U.S. Housing Market
.@M_C_Klein reports that construction spending by the computer and electronics industry is running at 6x its pace in mid-2021.
Construction spending on manufacturing facilities has been surging. In dollar terms, spending as of January 2023 was double what it was as recently as mid-2021. Moreover, this growth is entirely attributable to surging spending by the computers and electronics industry, which is currently running 6x the recent average. These numbers are not large relative to total U.S. construction spending ($152 billion January on a seasonally-adjusted basis) but they are worth paying attention to. Ideally, this investment should eventually lead to more domestic productive capacity that will boost long-term growth and reduce inflationary constraints on spending.
40 Percent of Liberal Professors Are Afraid They'll Lose Their Jobs Over a Misunderstanding
.@SamuelAbramsAEI notes a recent survey that found over half of college professors are concerned about losing their job over a misunderstanding or something they said in the past.
As the academy gets younger it grows more authoritarian, according to a new survey of over 1,400 faculty members conducted by the Foundation for Individual Rights and Expression (FIRE). More than half of faculty—52 percent—say they’re afraid they’ll lose their job or reputation over a misunderstanding of something they said or did, or because someone posted something from their past online. While almost three-quarters of conservative faculty expressed this year, 40 percent of even liberal faculty agree. That’s staggering: two in five professors who are a part of the prevailing orthodoxy on campus are fearful of losing their jobs over a misunderstanding.
Honestly, It's Probably the Phones
.@Noahpinion argues that smartphones and social media are increasing social isolation and driving the rise in teenage unhappiness.
The first reason smartphones should be our prior is that the timing just lines up really well. The smartphone was invented in 2007, but it didn’t really become commonplace until the 2010s, exactly when teen happiness fell off a cliff: Younger Americans adopted the technology more quickly than older ones; 2010-11 seems to have been an especially important moment. And of course, the “killer app” for smartphones was social media. When you had to go to a computer to check Facebook or Twitter, you could only experience it intermittently; now, with a smartphone in your pocket and notifications enabled, you were on every app all the time. Why would that make us unhappy? There’s an obvious reason: social isolation.
The Fed and the Secular Decline in Interest Rates
.@seba_hill documents that almost all the decline in real interest rates since 1980 occurred in a 3-day window around Fed announcements.
A narrow window around Fed meetings fully captures the secular decline in U.S. Treasury yields since 1980. By contrast, yield movements outside this window are transitory and wash out over time. This is surprising because the forces behind the secular decline are thought to be independent of monetary policy. Why did the secular decline in interest rates occur around FOMC meetings? While the Fed might have no direct control of long-term yields, it seems possible that the Fed provides information to the market about the long-run level of interest rates. This long-run Fed information effect might therefore explain why long-term interest rates move around FOMC meetings. In recent decades, this would imply that the market learned about secular interest rate decline – including the trend in r∗– from the Fed.
China’s Collapsing Birth and Marriage Rates Reflect a People’s Deep Pessimism
Nicholas Eberstadt @AEIecon argues that the 46% plunge in China’s birth rate over the last six years is driven by a new national pessimism among young people.
In 2022, China had only about half as many births as just six years earlier (9.6 million vs. 17.9 million). We see millions of young people joining spontaneous movements expressing alienation from work — tang ping (lying flat) — and from Chinese society itself — bai lan (let it rot). Last year, during one of the regime’s innumerable, drastic pandemic lockdowns, a video went viral in China before authorities could memory hole it. In the video, faceless hazmat-clad health police try to bully a young man out of his apartment and off to a quarantine camp, even though he has tested negative for the coronavirus. He refuses to leave. “Don’t you understand,” they warn, “if you don’t comply, bad things can happen to your family for three generations.” “Sorry” he replies mildly. “We are the last generation. Thank you.” That moment prompted the spread in China of a despairing social media hashtag: #Lastgeneration.
China Warns ‘Hedonistic’ Bankers to Toe the Communist Party Line
The Communist Party is warning Chinese bankers to “abandon pretensions of being the ’financial elite.’” @markets
Bankers in China are being told to rectify their mindsets, clean up their “hedonistic” lifestyles and stop copying Western ways. The directives, part of a 3,500-word commentary last week from the country’s top anti-graft watchdog, are just the latest sign that President Xi Jinping’s campaign to tighten the Communist Party’s grip on the financial system has a long way to go. China’s Central Commission for Discipline Inspection said bankers should abandon pretensions of being the “financial elite.”
March 1, 2023
A new @ChicagoBooth paper suggests that “raising the inflation target today would be a serious mistake.” The authors estimate that sustaining a disinflation will require unemployment to rise to 5% from January’s 3.4%.
We start by analyzing the large disinflations that occurred since 1950 in the United States and several other major economies. We estimate and simulate a standard model over several time periods, using various linear and nonlinear measures of labor market slack. We draw three main lessons from the analysis: (1) there is no post-1950 precedent for a sizable central-bank-induced disinflation that does not entail substantial economic sacrifice or recession; (2) regardless of the Phillips curve specification, models estimated over a historical period that includes episodes of high and variable inflation do a better job of predicting the post-pandemic inflation surge than those estimated over the stable inflation period from 1985 to 2019; and (3) simulations of our baseline model suggest that the Fed will need to tighten policy significantly further to achieve its inflation objective by the end of 2025. We see that the model using the full historical period (1962-2022; red line in the graphic above,) implies that inflation will fall only gradually to 3.7 percent by the end of 2025. By contrast, the model estimated over the stable inflation period (1985-2019; blue line in the graphic above,) has inflation falling quickly to the 2 percent target in the first quarter of 2024.
.@GregObenshain notes that for the first time in 30 years the trailing 3yr correlation between stocks and long-term government bonds turned positive. Regimes in which the correlation btw stocks and bonds were high have been good for equities and oil.
For the past 30 years, the correlation between stocks and bonds has been negative. But last year, the trailing three-year correlation turned positive for the first time since November 2000. We classify regimes by the standard deviation of the trailing stock-bond correlation, measured with a 30-day half-life, with an absolute deviation of 0.5 or greater needed to mark a positive or negative correlation regime. While the effect is not the strongest, it shows that neutral and positive-correlation environments tend to be good for equities and oil, while Treasurys and gold benefit from negative-correlation environments.
Why Are Young Liberals So Depressed?
.@mattyglesias notes that young liberals’ depression rates have increased compared to younger conservatives’ and suggests that this may be caused by a progressive tendency to “catastrophize” political issues.
A 2021 paper by Catherine Gimbrone, Lisa Bates, Seth Prins, and Katherine Keyes titled “The politics of depression: Diverging trends in internalizing symptoms among US adolescents by political beliefs.” The CDC survey doesn’t ask teens about their political beliefs, but Gimbrone et. al. find not only divergence by gender, but divergence by political ideology. Breaking things down by gender and ideology, they find that liberal girls have the highest increase in depressive affect and conservative boys have the least. But liberal boys are more depressed than conservative girls, suggesting an important independent role for political ideology. Mentally processing ambiguous events with a negative spin is just what depression is. And while the finding that liberals are disproportionately likely to do it is interesting and important, it’s not sound practice to celebrate that or tell them that they are right to do it. Progressive institutional leaders have specifically taught young progressives that catastrophizing is a good way to get what they want. Leaning into the language of “harm” creates and reinforces feelings of harm, and while using that language may give a person some short-term power in progressive spaces, It’s pretty bad for most people’s long-term ability to regulate their emotions, to manage inevitable adversity, and to navigate a complicated world.
Girl Who Died of Bird Flu Did Not Have Widely-Circulating Variant
The Cambodian girl who died of the bird flu last week had been infected with a different strain than the one that is circulating globally. @Nature
An 11-year-old girl in southern Cambodia who died last week after being infected with avian influenza A (H5N1) had a different strain than the one causing mass deaths in wild and domestic birds globally, says the scientist who led the effort to sequence viral samples from the girl. Scientists were initially concerned that the girl might have been infected with the widely circulating virus that is now spreading in some mammal species and has infected a handful of people since 2020.
February 28, 2023
The Role of Immigration in U.S. Labor Market Tightness
A strong rebound in immigration in 2022 helped offset tight U.S. labor markets, contributing to a 6-percentage point reduction in the ratio of job vacancies to unemployed workers. @sffed
Immigration flows into the United States slowed significantly following immigration policy changes from 2017 to 2020 and the onset of the COVID-19 pandemic. Analysis of state-level data shows that this migration slowdown tightened local labor markets modestly, raising the ratio of job vacancies to unemployed workers (V-U) 5.5 percentage points between 2017 and 2021. More recent data show immigration has rebounded strongly, helping to close the shortfall in foreign-born labor and ease tight labor markets. Data for 2022 show a strong rebound in immigration that has helped offset tight U.S. labor markets by contributing a 6-percentage point reduction in the V–U ratio.
Americans Don’t Save Much, But Their Companies Do
.@tylercowen notes that America’s low personal savings rate of 4.7% in January 2023 is offset by higher corporate savings which results in a gross savings rate of 17-18% of GDP.
At the household level, Americans have long been poor savers. Are such low savings rates unsustainable for an advanced economy? Not in view of America’s business saving. Looking at the US Federal Reserve’s series on undistributed business profits, it starts to rise significantly in the 1970s, and takes off around 2000 (with a dip for the financial crisis), and currently stands a bit above $1.2 trillion. There are other ways to measure business savings rates, but generally they show a significant upward move over the last few decades. On net, gross US savings rates are hovering between 17% and 18% of GDP. This asymmetric distribution of the savings burden can lead to wealth distribution problems over time.
BoJ Finally Corners 10-Year JGB Market
.@RobinWigg notes a Deutsche Bank report that the Bank of Japan may have purchased “more than 100 per cent of some Japanese government bonds” after accounting for bonds the bank lends to short sellers and subsequently repurchases.
Deutsche Bank’s tidbit that the BoJ “may” have bought more than 100 per cent of some Japanese government bonds, as it buys the JGBs, lends them out again to ensure the market still has some supply, short sellers borrow it and dump them in the market, only for the BoJ to buy it once more. Here is a killer chart from Oxford Economics’ Norihiro Yamaguchi that puts more flesh on the bone. After buying a record ¥20tn of JBGs last month, the BoJ now owns more than 100 per cent of all on-the-run 10-year Japanese government bonds. In fact, it owns almost 140 per cent of the most recent issue.
China’s Hidden Tech Revolution
.@danwwang argues that US technological competitiveness depends on mass production, “an activity that depends on the kinds of deep process knowledge that can only come from the better training and integration of workers, engineers, and scientists.”
To get better at scaling up, the United States will also have to learn to think differently about the value of manufacturing work. Policymakers must resist the urge to scorn manufacturing as a mere “commoditized activity” that can be done overseas. Instead, the mass production of new technologies needs to be seen as equal in importance to the innovations themselves. For the United States to regain its lead in emerging technologies, it will have to treat manufacturing as an integral part of technological advancement, not a mere sideshow to the more thrilling acts of invention and R & D.
America Is Trying to Electrify. There Aren’t Enough Electricians
A shortage of electricians is likely to be a headwind to the energy transition. 30% of union electricians are btw 50-70 years old and close to retirement. The average annual electrician salary rose from $50k to $60k btw 2018 and 2022. @WSJ
The current total of more than 700,000 electricians in the U.S. is expected to grow about 7% over the next decade, slightly faster than the nationwide average of 5%, according to the Bureau of Labor Statistics. The climate law will put several hundred billion dollars’ worth of incentives into the economy designed to accelerate the energy transition and boost clean-energy supply chains in the U.S. Electricians say they are booked several months out and struggling to find enough workers to keep up with demand. Many are raising wages and prices and worried that they won’t be able to keep up as government climate incentives kick in. “I’m tired of telling people I can’t help them,” said Brian LaMorte, co-owner of LaMorte Electric Heating and Cooling in Ithaca, N.Y., which does residential heat-pump installations and electric-service upgrades.
Apple Suppliers Are Racing to Exit China, AirPods Maker Says
Apple’s suppliers are likely to move capacity out of China faster than Bloomberg Intelligence currently projects, according to a senior executive at GoerTek who manufactures AirPods for Apple. @markets
Apple Inc.’s Chinese suppliers are likely to move capacity out of the country far faster than many observers anticipate to preempt fallout from escalating Beijing-Washington tensions, according to one of the US company’s most important partners. AirPods maker GoerTek is one of the many manufacturers exploring locations beyond its native China. It’s investing an initial $280 million in a new Vietnam plant while considering an India expansion, Deputy Chairman Kazuyoshi Yoshinaga said in an interview. Behind the scenes, 9 out of 10 of Apple’s most important suppliers may be preparing large-scale moves to countries like India, which is dangling incentives to drive Narendra Modi’s Make in India initiative. Bloomberg Intelligence estimates it could take eight years to move just 10% of Apple’s capacity outside of China. The GoerTek executive argues it’ll be far quicker.
As China Reopens, Flight of Wealthy Chinese to Singapore Set to Accelerate
.@WSJ reports an expected increase this year over the 10,800 wealthy Chinese who left the country in 2022. A recent expatriate noted, “We thought if we don’t leave sooner, we may never be able to.”
Around 10,800 wealthy Chinese left the country in 2022, according to estimates from New World Wealth, a research firm that tracks the movements and spending habits of the world’s high-net-worth citizens. The company expects around 125,000 people with net assets of more than $1 million to move this year, exceeding the 2019 record of 110,000. Chinese nationals usually account for 8% to 10% of the total. New World Wealth tracks the behavior of around 150,000 individuals in a database to derive its estimates for total migration.
February 27, 2023
United States' January Inflation Shock
.@GeneralTheorist writes, “The ‘Great Reflation’ in the US has not yet run its course.” He notes of rent, owners’ equivalent rent, and adjusted services (2/3 of the Core CPI basket collectively): “None has definitely peaked.”
Another way of looking at the Fed’s predicament is by showing the YoY% inflation of Rent (9% weight in Core), Owner Equivalent Rent of Primary Residence (weight 30%), and our Adjusted Services (that is, ex. OER, Rent, Medical services, hotels and airfares; 28% weight.) These three items represent two-thirds of Core CPI and none has definitely peaked in YoY% terms—and all are running above 7.5%YoY, as in the chart below. Of course, a sequential read on these might be different. But the experience in the Jan. CPI print is that if disinflation has begun, the run rate is not yet materially lower than that recorded last summer or the YoY% print.
Americans' Incomes Are Rising Too Fast for 2% Inflation
. @M_C_Klein notes, “The average American’s disposable income has been rising 10%/yr since last summer thanks to falling tax payments (lower cap gains obligations), huge increases in Social Security benefits, and—most importantly—soaring employment income.”
Worker pay matters for inflation because it is the largest and least volatile source of financing for consumer spending. The old data implied that wages and salaries paid to private sector workers were rising about 6% a year throughout 2022. The new data imply that wage and salary income has been rising 10% annualized since June. But this mostly seems to reflect upward revisions to estimates of the number of people working (and the length of their workweeks), rather than how much each worker is getting paid. That should mute the potential impact on inflation—assuming the extra employees are doing useful things with their time.
War in Ukraine Drives New Surge of U.S. Oil Exports to Europe
As American energy exports to Europe surge, @DanielYergin notes that, “America is back in the most predominant position it has been in world energy since the 1950s.” @WSJ
Since February 2022, when Russia invaded Ukraine, average monthly seaborne cargoes to the continent jumped 38% compared with the previous 12-month period, according to ship-tracking firm Kpler. According to the White House, U.S. natural gas shipments to Europe more than doubled last year, cushioning the continent’s households and manufacturers after Russia throttled supplies. A fleet of skyscraper-size tankers carried more crude to Germany, France and Italy—the European Union’s largest economies—as well as Spain, which alone boosted purchases by about 88% over the period. The pull of oil shipments from the Gulf Coast to Europe, which Kpler pegged at 1.53 million barrels a day in January, has in recent months made the continent a larger destination for U.S. crude than Asia.
How The Titans of Tech Investing Are Staying Warm Over The VC Winter
Money flowing into startups globally fell by a third in 2022 as valuations declined; however, there is still $300B of VC dry powder in the US alone. @TheEconomist
The tech-heavy Nasdaq index fell by a third in 2022, making it one of the worst years on record and drawing comparisons with the dotcom bust of 2000-01. According to the Silicon Valley Bank, a tech-focused lender, between the fourth quarters of 2021 and 2022, the average value of recently listed tech stocks in America dropped by 63%. And the plunging public valuations dragged down private ones. The value of older, larger private firms (“late-stage” in the lingo) fell by 56% after funds marked down their assets or the firms raised new capital at lower valuations. What new VC funding there is increasingly flows into mega-funds. Data from PitchBook, a research firm, show that in America in 2022 funds worth more than $1bn accounted for 57% of all capital, up from 20% in 2018.
Mulligan And The Demand For Opioids
.@JohnHCochrane reports on a @caseybmulligan presentation that explains how opioid consumption increased despite higher prices.
There are two ways to buy opioids, 1) legally or semi-legally; i.e. get opioids that come from pharmaceutical companies and are prescribed to someone by a doctor or 2) illegally. There is a fixed cost of entering the illegal market. So, imagine a drug user starting at B. At that price for legal (red) and illegal (black) drugs, the user chooses legal drugs at point B. Now raise the price of legal drugs, as shown by the arrow. If the user stayed with legal drugs, he or she would use less. But now there is an option, incur the fixed cost and buy illegal drugs on the black line. At the higher price for legal drugs that makes sense. But since the marginal cost of illegal drugs is lower, once the user has overcome the fixed cost, he or she uses more. Raise the price, and they consume more (of a substitute).
Covid-Era Savings Are Crucial to China’s Economic Recovery
China’s household savings rate was 33% in 2022, 3pp above the pre-pandemic trend, and big industrial companies added $1.1 trillion in liquid assets on average each year, more than double the $467 billion annual increase in the five years before Covid. @WSJ
Chinese families, constrained by Covid lockdowns, hoarded cash and pushed up the country’s household saving rate to a multiyear high of 33% in 2022. Economists from HSBC and Morgan Stanley say the end of China’s strict zero-Covid policies will at minimum fuel a strong recovery in services spending, lifting consumption growth to at least its prepandemic rate of around 8% a year. A large portion of new deposits accumulated by Chinese households last year was locked up in three-year to five-year deposit instruments, which can’t as easily be converted into spending as short-term deposits can, according to a study by research firm Rhodium Group.
China’s Economy Is Looking At A New Wave Of Japanification
A Citigroup analysis highlights parallels between the late ‘80s Japanese investment bubble and recent investment trends in China: capital formation as an outsized proportion of GDP and a development strategy reliant on large current account surpluses.
Citigroup identifies several areas of similarity. Both countries entered extended phases of strong GDP growth via investment in infrastructure and the encouragement of exports. Between 2010 and 2020, capital formation represented an average 43% of Chinese GDP growth, according to the World Bank. When its bubble burst in 1990, Japan’s capital formation proportion was at roughly 36%, and considered very high. Japan and China also financed their growth in a similar way. Japan’s bubble era was fuelled by indirect financing provided by commercial banks, which were nudged by the authorities into funnelling soft loans towards favoured industrial sectors. Similarly, says Citigroup, China has developed a financial system mainly dependent on indirect financing. As well as the tools available to the People’s Bank of China, the government can direct the lending activities of commercial banks via a series of mechanisms.
February 24, 2023
Fed’s Preferred Inflation Gauge Accelerates, Adding Pressure for More Rate Hikes
Core-PCE rose to 4.7% y/y up from 4.6% in December. Consumer spending rose just over 1% from the prior month, the most in two years. @markets
The Federal Reserve’s preferred inflation gauges unexpectedly accelerated in January and consumer spending surged after a year-end slump, adding pressure on policymakers to keep ratcheting up interest rates. The personal consumption expenditures price index rose 5.4% from a year earlier and the core metric was up 4.7%, both marking pickups after several months of declines. Consumer spending, adjusted for prices, jumped 1.1% from the prior month, the most in nearly two years, after consecutive declines.
Jason Furman On PCE Release
.@jasonfurman thinks that the tight labor market means that “6% inflation is much more likely than 2% inflation,” and concludes, “If I were the FOMC I would be raising rates by 50bp at the next meeting and signaling a terminal rate around 6%.”
The economy is very overheated. We have made little if any progress on inflation. There is little if any reason to expect a large slowdown going forward. Core PCE at an annual rate: 1 month: 7.1% 3 months: 4.7% 6 months: 5.1% 12 months: 4.7%. In some ways it is cleaner just to exclude housing and used cars. Which gives [approximately] the same story as core inflation. We still have lagged rent but that is probably only worth about 0.5 to 1pp off the rate. Possibly lagged monetary policy effects coming too. So yes, more likely than not that inflation falls from its 4.7% pace. Maybe even into the 3’s. But there are still forces going in the direction of high inflation. In recent months goods prices have fallen, but that likely won’t continue. And the extremely tight labor market has lagged effects on inflation. 6% inflation is much more likely than 2% inflation. If I were the FOMC I would be raising rates by 50bp at the next meeting and signaling a terminal rate around 6%.
Private Debt, Monetary Policy Tightening and Aggregate Demand
.@BIS_org argues aggregate global demand might be more sensitive to higher rates given elevated debt levels.
Monetary policy is tightening globally while private debt levels stand at historical highs. When private debt to GDP is high, aggregate demand may be more sensitive to interest rate hikes. Yet, after a decade of low rates, the maturity of private debt has generally lengthened, the prevalence of variable rates has fallen, and household net worth has increased. This should counteract the higher demand sensitivity stemming from elevated debt. Both the level and composition of private debt are important factors, although not the only ones, for the calibration of monetary policy in the current economic environment.
New York’s Millionaire Exodus
.@DailyMail reports that 8% of very wealthy New Yorkers (those earning >$25 million per year) left the state during 2021.
The number of those earning more than $25 million that fled the state in 2021 is 1,453, just 520 less than the amount that left at the height of lockdowns and intense social distancing [implying 17% of this cohort over two years]. The top one percent of earners in New York account for close to half of the state’s income tax revenue. Between 2019 and 2020, New York City lost six percent of those earning between $150,000 and $750,000. EJ McMahon of the Empire Center for Public Policy claimed the data showed a 1.3 percent decline in the number of New Yorkers with adjusted gross annual income of more than $1 million. The precise figure fell from 55,100 to 54,370 – 730 individuals, while the national number climbed from 554,340 to 608,549 – a nearly 10 percent jump. According to new Census Bureau data, New York experienced the largest population decline of any US state this year – losing 0.9 percent of its residents.
America’s Obsession with Big Cars Has Fatal Consequences
Pedestrians’ deaths in America have risen 57%, in part because Americans prefer larger cars (fully half a ton larger than the European average). @jburnmurdoch
43,000 people died on America’s roads in 2021, the highest mortality rate in the developed world by some margin. The average new American car purchased in 2021 weighed 1.94 tons, fully half a ton more than the European average. Purchases of SUVs and “light” trucks together now account for four out of every five new vehicles bought in the US, up from one in five 50 years ago. This would all be a mere curiosity except that these vehicles have a variety of lethal qualities. As American cars have bulked up, the number of fatalities for the drivers and passengers inside these rolling fortresses has fallen by 22 per cent. But the number of pedestrians killed has risen by 57 per cent. According to an estimate by Justin Tyndall, assistant professor of economics at the University of Hawaii, the lives of 8,000 pedestrians could have been saved between 2000 and 2018 if Americans had stuck to smaller vehicles.
The Slow Diffusion of Earnings Inequality
A new @NBERpubs paper shows that newer firms have more earnings dispersion than older firms, and that this pattern accounts for a large fraction of the aggregate rise in between-firm earnings inequality. @WallskogMelanie
We plot the between-firm variance of earnings within a cohort over time. We find two striking patterns. First, within a cohort, between-firm earnings inequality declines as the cohort ages. Second, each subsequent cohort of firms enters with a higher level of between-firm earnings inequality before declining on a path approximately parallel to previous cohorts. We find that between-firm pay dispersion declines within a cohort. Second, there are striking cohort patterns: more recent cohorts are more dispersed than older cohorts. This pattern accounts for a large fraction of the aggregate rise in between-firm earnings inequality. As older cohorts are replaced with cohorts with inequality “technology” of the more recent vintage, we expect inequality to continue to rise, even without a change in that underlying technology.
February 23, 2023
A Turning Point in Wage Growth?
.@NewYorkFed presents evidence that services inflation leads wage growth. The model suggests that services inflation peaked in the early months of 2022 and then started to decline.
We inspect how the trend in wage growth relates to the trend in price inflation in core services (excluding housing) recovered from PCE data. Both trends are estimated using the methodology described earlier, so their timing can be compared as they are both expressed in terms of annualized monthly growth. Our results not only suggest that the persistent component of core services inflation started to increase before trend wage growth did, but also show that it has come down faster, despite the fact that both trends peaked around the beginning of 2022. Persistent services inflation markedly slowed down between June and October, although it seems to have levelled off since. A further deceleration in trend wage growth may ease inflationary pressures, but considerable uncertainty about the speed of this decline remains.
The Tightening Cycle Is Approaching Stage 3: Guideposts We’re Watching
Bob Prince and Aaron Goone @Bridgewater argue that earnings have not yet fallen enough to stabilize inflation at target suggesting either “continued rise in short-term interest rates or at least a period of sustained higher interest rates.”
Earnings need to fall in order to induce the layoffs needed to cool the labor market and bring down wage growth, which is a prerequisite for a sustainable 2% inflation rate. After cooling late last year, our weekly reading of earnings growth has bounced rather than accelerating downward. Given current conditions and the cause/effect linkages, odds favor that there will be a third stage and that it will mostly likely take the form of an economic downturn. And if that doesn’t happen, inflation is likely to remain above central bank targets, prompting a continued rise in short-term interest rates or at least a period of sustained higher interest rates than what the markets are now discounting.
Michael Cembalest @JPMorgan thinks that the likely severity of a future recession is decreasing, despite continued weakness in their favorite leading indicator (ISM new orders minus inventories).
Despite the fastest Fed tightening cycle on record, real US 3-month and 10-year yields are still negative when based on trailing inflation measures. Consumer and producer price increases are falling as we expected they would but it’s too soon for the Fed to pause here. It also seems unlikely that the Fed or ECB will be able to cut rates later this year, unless they overshoot first. Will economic resilience prompt the Fed to tighten even more than markets expect? I think it would take more than a couple of months of positive surprises for the Fed to hike by 50 bps. We still see weakness ahead in our preferred leading indicator (new orders vs inventories) and deflation in the housing pipeline. Bottom line: 2-3 more Fed hikes ahead, and a mild US recession whose likelihood and possible severity may be shrinking.
The World’s Interest Bill Is $13trn—And Rising
An @EconUS analysis suggests that if rates follow their current trajectory, total interest costs globally will rise from 12% of GDP in 2021 to 17% by 2027. Their analysis covered 58 countries representing 90% of global GDP.
The Economist has estimated the interest bill for companies, households and governments across 58 countries. Together these economies account for more than 90% of global GDP. In 2021 their interest bill stood at $10.4T, or 12% of combined GDP. By 2022 it had reached a whopping $13T, or 14.5% of GDP. Our analysis suggests that, if rates follow the path priced into government-bond markets, the interest tab will hit around 17% of GDP by 2027.Interest costs in America exceeded 20% of GDP during the global financial crisis of 2007-09, the economic boom of the late 1990s and the last proper burst of inflation in the 1980s. Yet an average bill of this size would mask big differences between industries and countries.
US Housing Market Posts $2.3 Trillion Drop, Biggest Since 2008
The value of American homes declined by $2.3T or 4.9% in the second half of 2022 the largest decline since the second half of 2008 when homes were down 5.8%. Notably home values are still up ~ $13T since February 2020. @Markets
After peaking at $47.7 trillion in June, the total value of US homes declined by $2.3 trillion, or 4.9%, in the second half of 2022, according to real estate brokerage Redfin. That’s the largest drop in percentage terms since the 2008 housing crisis, when home values slumped by 5.8% from June to December. “The housing market has shed some of its value, but most homeowners will still reap big rewards from the pandemic housing boom,” said Redfin economics research lead Chen Zhao, adding that the total value of homes remains roughly $13 trillion higher than it was in February 2020.
The Chinese Century Is Already Over
.@fuxianyi reviews declining birth rates and increasing old-age dependency ratios and concludes that Chinese GDP growth rate will be below the US in 2031-35. “If the US is overtaken as the world’s largest economy, it will be by India, not China.”
Assuming that China is lucky enough to stabilize its fertility rate at 1.1 children per woman, its population in 2049 will be just 2.9 times that of the US, and all its key indicators of demographic and economic vitality will be much worse. In 1980, China’s median age was 21, eight years younger than America’s, and from 1979 to 2011, its GDP grew at an average annual rate of 10%. But China’s prime-age labor force (15-59) began to shrink in 2012, and by 2015, GDP growth had decelerated to 7% before slowing further, to 3%, as of 2022. An average of 23.4 million births per year from 1962 to 1990 made China “the world’s factory.” But even China’s own exaggerated official figures put last year’s births at just 9.56 million. By 2030, China’s median age will already be 5.5 years above that of the US, and by 2033, its old-age dependency ratio will begin to exceed America’s. Its GDP growth rate will begin to fall below America’s in 2031-35, at which point its per capita GDP will hardly have reached 30% of its rival’s – let alone the 50-75% predicted by Chinese official economists. If the US is overtaken as the world’s largest economy, it will be by India, not China.
Bird Flu Kills 11-Year-Old Girl in Cambodia, Officials Say
An 11-year-old girl in Cambodia died from H5N1 after falling ill February 16. The WHO reports there have been at least 870 human infections from the H5N1 avian flu strain, with a 52% mortality rate. @markets
An 11-year-old girl in Cambodia has died from bird flu in the country’s first known human H5N1 infection since 2014, health officials said. The girl from the rural southeastern province of Prey Veng became ill Feb. 16 and was sent to be treated at hospital in the capital, Phnom Penh. She was diagnosed Wednesday after suffering a fever up to 39 Celsius (102 Fahrenheit) with coughing and throat pain and died shortly afterward, the Health Ministry said in a statement Wednesday night. Globally, about 870 human infections and 457 deaths have been reported to the WHO in 21 countries. But the pace has slowed, and there have been about 170 infections and 50 deaths in the last seven years.
How Likely Is a Human Bird Flu Pandemic?
The incoming chief scientist of the WHO tells the @FinancialTimes “If there was an outbreak tomorrow of H5N1 in humans, we wouldn’t be able to vaccinate the world within 2023.”
Infectious disease experts say the risk remains largely contained to the animal population — 50mn birds, including poultry, have been killed by the virus or culled in this outbreak, according to the European Centre for Disease Prevention. Large-scale culling has been carried out in dozens of countries including Japan, France and the US. H5N1 is “a big worry,” said Jeremy Farrar, flu expert and outgoing director of the Wellcome Trust. “You would hate to look back in the midst of an H5N1 pandemic and say: ‘Hold on, didn’t we watch this avian population die all over the world and we started to see mammals dying and what did we do about it?’” He said more vigorous action was needed both to build up H5N1 vaccine stocks and prevent circulation of the virus among mammals. “If there was an outbreak tomorrow of H5N1 in humans, we wouldn’t be able to vaccinate the world within 2023,” added Farrar, who will become chief scientist at the World Health Organization in May.
U.S. to Expand Troop Presence in Taiwan for Training Against China Threat
The United States plans to deploy 100-200 troops in Taiwan to expand military training programs, up from 30 a year ago. Taiwanese military personnel are also participating in training programs in the US. @WSJ
The U.S. is markedly increasing the number of troops deployed to Taiwan, more than quadrupling the current number to bolster a training program for the island’s military amid a rising threat from China. The U.S. plans to deploy between 100 and 200 troops to the island in the coming months, up from roughly 30 there a year ago, according to U.S. officials. The larger force will expand a training program the Pentagon has taken pains not to publicize as the U.S. works to provide Taipei with the capabilities it needs to defend itself without provoking Beijing. Beyond training on Taiwan, the Michigan National Guard is also training a contingent of the Taiwanese military according to people familiar with the training.
February 22, 2023
Why Medicare and Social Security Are Sustainable
.@paulkrugman argues that Medicare financing is on stable ground as health spending is leveling off: “since 2010 we’ve already done quite a lot to ‘bend the curve.’”
Historically health spending has risen faster than GDP. Excess cost growth has slowed considerably since around 2010 the leveling off is unmistakable. Here’s national health spending as a percent of G.D.P. C.B.O. projections now show social insurance spending as a percentage of G.D.P. eventually rising by about 5 points, which is still a lot but not unimaginably large. And here’s the thing: Half of that is still the assumed rise in health care costs. Since 2010 we’ve already done quite a lot to “bend the curve.” It’s not at all hard to imagine that improving the incentives to focus on medically effective care could limit cost growth to well below what the C.B.O. is projecting, even now.
Your Side Hustle Is Another Sign of a Tight US Job Market
After plunging during the pandemic, the number of Americans working a second job is climbing with 5% of workers now working two jobs. @markets
The number of multiple jobholders spiked at the end of last year to more than 8 million, with the share reaching 5% of all employed for the first time since the start of pandemic, according to US Labor Department data.
Biden Administration Announces New Border Crackdown
Under a new proposed rule which will take effect in 30 days, migrants will be ineligible for asylum if they enter the country unlawfully. @nytimes
In a bid to prevent a surge of migrants at the southern border when a pandemic measure is lifted in May, the Biden administration on Tuesday announced its toughest policy yet to crack down on unlawful entries. The proposed rule, which has been opened for 30 days of public comment before taking effect, would presume that migrants are ineligible for asylum if they entered the country unlawfully, a significant rollback in the country’s traditional policy toward those fleeing persecution in other countries. It would allow rapid deportation of anyone who had failed to request protection from another country while en route to the United States or who did not notify border authorities through a mobile app of their plans to seek asylum.
Global Firms Are Eyeing Asian Alternatives to Chinese Manufacturing
.@Birdyword reports that Asian alternatives to China (including India, Indonesia, Bangladesh, and Vietnam) have larger working age populations and exported more goods to the United States in the 12 months ending Q3 ‘22: $634B vs. China’s $614B.
Chinese labor is no longer that cheap: between 2013 and 2022 manufacturing wages doubled, to an average of $8.27 per hour. More important, the deepening techno-decoupling between Beijing and Washington is forcing manufacturers of high-tech products, especially those involving advanced semiconductors, to reconsider their reliance on China. Alternative Asian supply chain—call it Altasia—looks evenly matched with China in heft, or better. Its collective working-age population of 1.4bn dwarfs even China’s 980m. Altasia is home to 154m people aged between 25 and 54 with a tertiary education, compared with 145m in China—and, in contrast to ageing China, their ranks look poised to expand. In many parts of Altasia wages are considerably lower than in China: hourly manufacturing wages in India, Malaysia, the Philippines, Thailand, and Vietnam are below $3.
Missing Chinese Banker Was Working to Set Up Singapore Family Office
The billionaire founder of investment bank China Renaissance was in the process of setting up a family office in Singapore when he disappeared in February. @FT
Missing Chinese investment banker Bao Fan was preparing to move some of his fortune from China and Hong Kong to Singapore in the months leading up to his disappearance, according to four people with knowledge of his plans. The billionaire founder and chair of investment bank China Renaissance, who brokered some of China’s biggest tech deals, was establishing a family office in the city-state to manage his personal wealth in the final months of 2022, the people said. The number of family offices has grown from a handful in 2018 to an estimated 1,500 by the end of last year, according to Singaporean data analysis firm Handshakes.
US Can’t Keep Up with China’s Warship Building, Navy Secretary Says
US Navy Secretary Carlos Del Toro argues that the US lacks the capacity to keep up with China’s plan to field up to 400 ships vs. the US fleet’s 300. “One [Chinese] shipyard has more capacity than all of our shipyards combined.” @CNN
Speaking at the National Press Club in Washington, DC, US Navy Secretary Carlos Del Toro said China’s People’s Liberation Army Navy could be fielding up to 400 ships in the coming years, up from about 340 now. Meanwhile, the US fleet sits at under 300 ships. Del Toro said Tuesday that US naval shipyards can’t match the output of Chinese ones. As with fleet size, it’s about numbers. “They have 13 shipyards, in some cases their shipyard has more capacity – one shipyard has more capacity than all of our shipyards combined.”
South Korea Again Smashes Own Record for World’s Lowest Fertility Rate in 2022
South Korea’s fertility rate, the world’s lowest for years, has fallen again. The number of babies expected per woman fell to 0.78 last year, from .81 in 2021. @bloomberg
South Korea’s fertility rate, the world’s lowest for years, has fallen again the number of babies expected per woman fell to 0.78 last year, according to data released by the statistics office on Wednesday. At 0.81 in 2021, it was already the lowest among more than 260 nations tracked by the World Bank. The working-age population peaked at 37.3 million in 2020 and is set to fall by almost half by 2070, according to Statistics Korea. The number of newborns declined last year to 249,000 from 260,600 a year earlier, the statistics office said. That’s less than 5% of the population. In contrast, about 373,000 people died last year, extending what one policymaker called a “death cross.”
Closing the Gaps in the Sanctions on Russia
.@M_C_Klein sees signs of stress in Russian government financing: federal spending up 67% year-over-year in December ’22, and the government withdrew $47B from the national wealth fund in Q4 ‘22, leaving assets worth $155B.
Russian government spending is soaring. Federal spending was 40% higher in 2022 than in 2021 in U.S. dollars, while spending by subnational governments was up at least 32% as of November. Federal spending in December 2022 was 67% higher than in December 2021. In practice, this additional spending has been (and will continue to be) financed by seizing resources from the Russian private sector, which will become increasingly painful as the economy continues to stagnate. Conscription—forced labor at below-market rates—is holding down some of the fiscal costs of the war. But forced labor cannot care for Russia’s rapidly growing population of widows, orphans, and the disabled, nor can it be employed to build the machinery and equipment the military will need to keep fighting against the motivated and heavily-armed Ukrainians. And forced labor cannot compensate for the long-term costs of emigration.
The Inflationary Effects of Sectoral Reallocation
A “demand reallocation shock” associated with the pandemic was responsible for 3.5 percentage points of the rise in inflation. @FedResearch
Our main finding is that the shift in consumption demand from services towards goods can explain a large proportion of the rise in U.S. inflation between 2019:Q4 and 2021:Q4. This demand reallocation shock is inflationary due to the costs of increasing production in goods-producing sectors and because such sectors tend to have more flexible prices than those producing services. The aggregate labor supply shock provides a smaller inflationary impulse, despite the fact that it explains the majority of the decline in employment. The sectoral productivity shocks actually lower inflation slightly, as average productivity grew strongly over this period. Our confidence in the model and its predictions is boosted by the fact that it provides an excellent description of cross-sectional developments in prices and quantities
February 21, 2023
Fentanyl: America’s Struggle to Contain a Deadly Drug
Drug overdoses are now the leading cause of death for Americans under age 45, driven by illicit fentanyl. There is now one overdose fatality every five minutes in the US. @FinancialTimes
Tens of thousands of American parents are mourning the deaths of their children amid an unprecedented drugs crisis, which has claimed 107,000 lives in the year to August 2022. About two-thirds of those deaths were caused by fentanyl. Illicit fentanyl has displaced legally prescribed painkillers as the main cause of overdoses in the US. The skyrocketing death rate — equivalent to one American overdosing every five minutes alongside Covid-19, has helped drive US life expectancy down to a 25-year low of 76.4 years. Unintentional overdose deaths among 15- to 19-year-olds surged by 150% between 2018 and 2021. Overdoses have replaced suicide as the leading cause of death for Americans under 45 years of age, according to Centers for Disease Control and Prevention data.
Workers’ Pay Globally Hasn’t Kept Up with Inflation
Labor’s share of output is shrinking across advanced economies as inflation continues to outpace wage gains. US average hourly earnings growth in the 12 months ending January was 4.4% vs. consumer price inflation of 6.4%. @WSJecon
Workers’ purchasing power—their average inflation-adjusted wage—was lower last year than in 2019, before the pandemic, according to the report. So, despite strong demand for workers and ultralow unemployment, labor’s share of economic output shrank in many advanced economies. Average hourly earnings for private-sector nonfarm workers rose 4.4% in the 12 months through January, down from 5.6% last March and less than the 6.4% rise in consumer prices in the year through January.
“Soft Landing”? More Like “No Landing”
.@M_C_Klein notes that, relative to pre-pandemic, there are more Americans in higher wage jobs and fewer in lower paid jobs. This helps explain strong wage growth, but “the puzzle is why productivity has not increased commensurately.”
In theory, the shifting mix of employment towards higher-value jobs and industries should be supporting more production and help attenuate the link between aggregate pay growth and inflation. But that has not happened yet, even if overall productivity growth remains broadly on trend, despite the volatility attributable to the pandemic. The net result is that the U.S. economy is growing briskly, adding millions of jobs, and producing more goods and services—but with persistently faster inflation (about 1-2pp) than recent generations are used to. That could be a sustainable outcome, if Fed officials are willing to tolerate it, but it is probably not sustainable with the set of interest rates and asset price multiples we became accustomed to in the 2010s.
Lake Powell Drops To A New Record Low As Feds Scramble To Prop It Up
Lake Powell, the second largest US reservoir, dropped to a new record low, raising the risk for 40M people who depend on the reservoir for water and 5M who depend on its hydroelectric power. @Sltrib
Water levels in Lake Powell dropped to a record low last week, with continued pressure from climate change and steady demand pushing the nation’s second-largest reservoir to the lowest level since it was first filled in the 1960s. The lake fell to 3,522 feet above sea level, just below the previous record set in April 2022. The reservoir is currently about 22% full, and is expected to keep declining until around May, when mountain snowmelt rushes into the streams that flow into the lake. At 3,490 feet, the “minimum power pool” level, the bureau may be unable to generate hydropower from the dam. At 3,370 feet, the reservoir hits “dead pool,” at which point water is no longer able to pass through the dam through gravity.
How Have Swings in Demand Affected Global Supply Chain Pressures?
The @NewYorkFed introduces the Net Global Supply Chain Pressure Index (Net GSPCI), which shows that global supply chain pressure is now lower than pre-pandemic levels.
In a January 2022 post, we first presented the Global Supply Chain Pressure Index (GSCPI), a parsimonious global measure designed to capture supply chain disruptions using a range of indicators. The spirit of our index was to isolate supply factors, such as shutdowns in response to the pandemic, that put pressure on the global supply chain. Here we describe an auxiliary index, the Net GSCPI, which differs from the GSCPI by not filtering out demand factors. This “net” index is meant to capture global supply chain stress from both the supply and demand sides. Currently, a mix of supply and demand forces is driving the easing of net pressure at the level of the global supply chain.
.@MichaelRStrain argues that if Biden’s reelection campaign follows the roadmap laid out in his State of the Union address his campaign will share “much, in both contour and tone, with Trump’s brand of economic nationalism.”
Biden’s re-election roadmap shares much, in both contour and tone, with Trump’s brand of economic nationalism. First, he advocated “buy American” policies for government contracts, championed domestic manufacturing workers, and criticized previous administrations for not doing enough on this front. Second, Biden championed the “record number of personnel working to secure the border, arresting 8,000 human smugglers and seizing over 23,000 pounds of fentanyl in just the last several months.” Third, he took a hawkish tone on China, arguing that the US is now “in the strongest position in decades to compete with” the Chinese. Lastly, Biden criticized Republicans for allegedly wanting to cut spending on Medicare and Social Security, thus positioning himself as the protector of those programs.
White House To Hold Secret Talks With Taiwan Officials In Washington
.@Dimi reports that senior Taiwanese security officials are in Washington this week holding secret talks with American officials. @ft
The White House will hold secret talks this week with Taiwan’s foreign minister Joseph Wu and national security adviser Wellington Koo as part of a special diplomatic dialogue intended to remain private to avoid sparking an angry reaction from China. The special channel meeting also comes just days after Michael Chase, the top Pentagon China official, traveled to Taiwan in what was only the second visit to the country by a senior US defense policymaker since 1979 when Washington switched its diplomatic recognition for China from Taipei to Beijing.
Do Stocks Always Outperform Bonds?
.@GregObenshain highlights Edward McQuarrie research showing that, after a full account of survivorship bias, stocks only modestly outperform bonds, with most of the outperformance concentrated in 1943-1982 (where stocks outperformed bonds by 8.4%/yr).
For stocks, McQuarrie made major revisions to the pre-1871 data by including more stocks, cap-weighting returns, and, most importantly, correcting significant survivorship bias in the original data. According to McQuarrie, “Banks failed during panics, turnpikes and canals succumbed to railroads, and struggling railroads went bust in the 1840s and 1850s to an extent not previously understood. In short, Jeremy Siegel’s sources had left out the bad parts, producing an overly rosy picture of antebellum stock returns.” For bonds, McQuarrie engages in an impressive forensic effort to build a new and more accurate data set of investment-grade bonds available to the public. The first observation is that [geometric real] stock returns are lower (5.9% versus Siegel’s 6.6%) and bond returns are higher (4.1% versus 3.6%) in the revised data.
February 17, 2023
It’s a Richcession, Not a Recession. Here’s Your Investing Playbook
Households earning under $50,000 a year expect to increase their spending by 8% next year, while households earning $100,000 a year are expecting their spending to increase by only 5%. @wsj
Early in the pandemic, several rounds of government relief allowed Americans in general, and lower-income Americans in particular, to build up their finances. Then the job market came roaring back and poorer workers found they could get paid a lot more than they did before. Many white-collar professionals haven’t seen their wages outstrip inflation, but people doing lower-paying work have, and the latter group’s wealth has risen more, too.
Data Update 5 for 2023: Pathways to Profitability
The median return on capital for an American firm in January 2023 is 7.4%, which is above the 5.6% cost of capital at the start of 2022, but below the 9.6% cost of capital at the start of 2023. @AswathDamodaran
The after-tax returns on capital, at least in the aggregate, are unimpressive, with the median return on capital of a US (global) firm being 7.44% (5.19%). There are a significant number of outliers in both directions, with about 10% of all firms having returns on capital that exceed 50% and 10% of all firms delivering returns that are worse than -50%. A combination of rising risk-free rates and surging risk premiums (equity risk premiums and default spreads) has conspired to push the cost of capital of both US and global companies more than any year in my recorded history (which goes back to 1960). A company generating a 7.44% return on capital (the median value at the start of 2023) in the US, would have comfortably cleared the 5.60% cost of capital that prevailed at the start of 2022, but not the 9.63% cost of capital at the start of 2023.
China Is Dying Out
.@fuxianyi estimates that the Chinese population is currently 1.28 billion (vs 1.43 billion estimated by World Population Prospects).
While the United Nations’ 2022 World Population Prospects puts the Chinese population at 1.43 billion people, I estimate that it is now smaller than 1.28 billion. Even if China succeeds in increasing its fertility rate to 1.1 and prevents it from declining, its population will likely fall to 1.08 billion by 2050 and 440 million by 2100. The country’s share of the world’s population, which declined from 37% in 1820 to 22% in 1950-80, will fall to 11% in 2050 and 4% by 2100. The share of Chinese people aged 65 and older will rise from 14% in 2020 to 35% in 2050. Whereas five workers aged 20-64 supported every senior citizen aged 65 and older in 2020, the ratio will continue to decline to 2.4 workers in 2035 and 1.6 in 2050.
The US Plan to Become the World’s Cleantech Superpower
Credit Suisse forecasts that the Inflation Reduction Act could generate investments of $800B in public spending and another $900B of private spending generated by loans and grants by 2031. @FinancialTimes
Last year’s colossal Inflation Reduction Act [IRA] and its hundreds of billions of dollars in cleantech subsidies are designed to spur private-sector investment and accelerate the country’s decarbonization effort. All told, the IRA offers $369bn of tax credits, grants, loans, and subsidies, many of them guaranteed past 2030. The credits can be sold, too, allowing deep-pocketed investors with enough tax liability to buy the credit — a way to get more capital to developers, quickly. Credit Suisse thinks the public spending enabled by the IRA could eventually reach $800bn, and $1.7tn once the private spending generated by the loans and grants is included.
The US Geological Survey finds evidence of large stores of natural hydrogen, a source of carbon-free energy which might be enough to meet global demand for thousands of years. @erichand @ScienceMagazine
Contrary to conventional wisdom, large stores of natural hydrogen may exist all over the world, like oil and gas—but not in the same places. These researchers say water-rock reactions deep within the Earth continuously generate hydrogen, which percolates up through the crust and sometimes accumulates in underground traps. Critically, natural hydrogen may be not only clean, but also renewable. It takes millions of years for buried and compressed organic deposits to turn into oil and gas. By contrast, natural hydrogen is always being made afresh, when underground water reacts with iron minerals at elevated temperatures and pressures. There might be enough natural hydrogen to meet burgeoning global demand for thousands of years, according to a U.S. Geological Survey (USGS) model that was presented in October 2022 at a meeting of the Geological Society of America.
The Road to Disinflation
.@JosephPolitano notes that short term inflationary expectations are still largely consistent with the Fed’s target despite the Intercontinental Exchange’s inflation expectations index rising to almost 3% relative to 2.5% at the start of the year.
Market-based measures of 5-year inflation expectations are nearly square in the midrange of what would be consistent with the Fed’s target, and longer-run expectations actually remain below target. But the path to disinflation now looks longer and a bit bumpier than before. Revisions to seasonal adjustments have made recent inflation data look stronger than we thought, nominal income and spending growth remain elevated, and nearly all of the rate cuts previously expected for 2023 have been priced out by financial markets. Intercontinental Exchange’s inflation expectations index, derived from a variety of market data, now expects CPI inflation to end the year at nearly 3% instead of the 2.5% it expected in early January. Inflation may still not look permanent and structural, but it looks a bit more common and persistent.
Can Monetary Policy Tame Rent Inflation?
The @sffed estimates that historically a 1pp increase in the federal funds rate reduced rent inflation by 3.2pp over two and a half years suggesting the current tightening will bring rent inflation down.
We estimate that, during the period from 1988 to 2019, a policy tightening equivalent to a 1 percentage point increase in the federal funds rate can reduce rent inflation—measured by 12-month percentage changes in the personal consumption expenditures (PCE) housing price index—by about 3.2 percentage points, but the full impact takes about 2½ years to materialize. Based on housing costs’ share in total PCE, this translates to a reduction in headline PCE inflation of about 0.5 percentage point over the same time horizon. Although average rents are slow to respond to policy changes, growth of asking rents on new leases has started to slow following recent monetary policy tightening. Our finding suggests that this tightening will gradually bring rent inflation down over time, thereby helping to reduce overall inflation.
February 16, 2023
The Budget and Economic Outlook: 2023 to 2033
The @USCBO now projects the 2023 deficit to be $1.4T (vs $1T in the 2022 forecast) and revises the ten-year deficit projection (2023-2032) to $18.8T, $3.1T higher than was projected in 2022.
In CBO’s projections, the deficit amounts to 5.3% of gross domestic product (GDP) in 2023. Deficits fluctuate over the next four years, averaging 5.8% of GDP. Starting in 2028, they grow steadily; the projected shortfall in 2033 is 6.9% of GDP—significantly larger than the 3.6% of GDP that deficits have averaged over the past 50 years. In CBO’s projections, net interest outlays increase by 1.2% of GDP from 2023 to 2033 and are a major contributor to the growth of total deficits. Primary deficits (that is, revenues minus noninterest outlays) increase by 0.4% of GDP over that period. Federal debt held by the public is projected to rise from 98% of GDP in 2023 to 118% in 2033. Over that period, the growth of interest costs and mandatory spending outpaces the growth of revenues and the economy, driving up debt. Those factors persist beyond 2033, pushing federal debt higher still, to 195% of GDP in 2053.
Pettis On CBO Numbers
.@michaelxpettis argues that “rising income inequality pushes up the savings of the rich, and if this cannot be matched with higher investment or a lower trade deficit, it must be matched with either higher unemployment or higher debt.”
While there are many reasons for the surge in US debt over the past four decades, one of the main reasons has to do with the economic impact of the rise in US income inequality during this period. Rising debt was the nearly automatic consequence of rising income inequality. Because the rich save a larger share of their income, rising income inequality tends to force up ex-ante savings. But this increase in the savings of the rich must be balanced. Today what mainly drives investment are increases in expected demand, and rising income inequality normally reduces expected demand by reducing the share of income that goes to consumption (all income is either consumed or saved). If the higher savings of the rich cannot be balanced by higher investment or lower trade deficits, they must be balanced by lower savings elsewhere in the economy. Policymakers don’t want to see higher unemployment, so either the Fed will respond by encouraging a surge in household borrowing, or Washington will respond by increasing the fiscal deficit.
"Quantitative Tightening" and the U.S. Banking System
The quantity of reserves held by banks on deposit at the Fed is 30% lower than the pandemic era peak of ~$4.3T as savers move money out of banks in favor of higher yielding assets. @M_C_Klein
The end of 2021 was also when the quantity of reserves held by banks on deposit at the Fed began to shrink from the pandemic-era peak of ~$4.3 trillion. As of this writing, reserves are about $1.2 trillion (30%) lower now than then. The underlying explanation for all this seems to be that U.S.-based banks are refusing to raise the rates they offer on deposits. As savers move cash from zero-yielding deposits to higher-yielding money funds, banks have to sell assets (mainly reserves, apparently) and/or find alternative sources of financing to replace the lost deposits. Since the start of 2022, U.S. commercial banks have lost almost $400 billion in deposits and replaced them with about $400 billion of “borrowings”.
Younger Borrowers Are Struggling with Credit Card and Auto Loan Payments
Researchers at @NewYorkFed report that delinquencies rates for credit card borrowers under age 50 are now above the pre-pandemic level, and they suggest that this may be driven by higher prices and higher interest rates.
Total debt balances grew by $394 billion in the fourth quarter of 2022, the largest nominal quarterly increase in twenty years. As borrower-level delinquency rates approach or surpass pre-COVID norms, many look to the historical culprit: the labor market. However, employment and income gaps are not likely triggers for this recent trend. The Bureau of Labor Statistics reported that there were just under 6 million unemployed in the fourth quarter of 2022, roughly unchanged from the previous quarter and near a fifty-year low (even as the population and labor force have grown). Meanwhile, there were 18.3 million borrowers behind on a credit card at the end of 2022 compared to 15.8 million at the end of 2019. Instead, the evidence suggests that higher prices and higher interest rates are the more likely culprits driving delinquencies. While person-level delinquencies are high, we do not anticipate widespread stress for lender portfolios as balance weighted delinquencies remain at or below pre-pandemic levels. But, on a person-level, this financial distress is real, and the delinquent marks will impact their access to credit for years to come.
Booming Oil Exports Boost U.S. Role as Global Price Maker
As American crude exports hit new records West Texas Intermediate “has become the most important marginal pricing barrel on the globe,” said Peter Keavey, CME Group’s global head of energy. @WSJecon
Crude exports hit a record of 5.1 million barrels a day the week that ended Oct. 21, according to the U.S. Energy Information Administration, a roughly 10-fold increase since President Barack Obama signed a bill opening the door to such shipments. West Texas Intermediate crude, or WTI, “has become the most important marginal pricing barrel on the globe,” said Peter Keavey, CME Group’s global head of energy and environmental products. “We have gone from a very domestically focused market into an international powerhouse,” he added.
Saudi Aramco Doesn’t Believe Its Own Rhetoric on Oil Demand
.@davidfickling notes that Saudi Aramco drilling activity is 30% below pre-Covid levels and argues that the company’s reduced capex spend is consistent with an internal forecast of declining global oil consumption by 2030. @bloomberg
Saudi Aramco’s operating cashflows in the 12 months through September came to $181 billion — more than was posted in the same period by Exxon Mobil, Shell and Chevron put together. Saudi Aramco could never do anything but paint a bright future for oil consumption — but its revealed preference is more cautious. If it invests too aggressively now, it risks flooding a market that is gradually turning its back on petroleum, driving down prices and the kingdom’s own oil revenues. Its warning that oil supply will fall to about 80 million daily barrels in 2030 without more capex is pretty much in line with the levels of demand that BP expects at that point, in a world which manages to keep global warming well below 2 degrees Celsius.
Ukraine War Pushes US to Review Arms Stockpiles
In an interview with the @ft, General Mark Milley noted one lesson from the Russo-Ukranian War is a “very high consumption rates of conventional munitions,” which may require increased spending to augment munitions stocks.
The Pentagon is reviewing its weapons stockpiles and may need to boost military spending after seeing how quickly ammunition has been used during the war in Ukraine. General Mark Milley said the return of 20th-century ground warfare tactics in Europe was forcing US planners to reconsider assumptions made in recent decades that had led military strategists to retool capabilities for counter-terrorism and irregular combat. “One of the lessons of this war is the very high consumption rates of conventional munitions, and we are re-examining our own stockages and our own plans to make sure that we got it right. We’re trying to do the analysis so that we can then estimate what we think the true requirement would be. And then we have to put that in the budget. Ammunition is very expensive.”
Language Models and Cognitive Automation for Economic Research
.@akorinek reports on how large language models (LLMs) such as ChatGPT could increase productivity in economics research by focusing human effort on posing questions and providing feedback and editing of drafts from LLMs.
LLMs have become useful research tools for tasks ranging from ideation, writing and background research to data analysis, coding, and mathematical derivations. In the short term, cognitive automation via LLMs will allow researchers to become significantly more productive. I expect that a growing number of researchers will incorporate LLMs into their workflow. This could help to increase the overall speed of progress in economics, although it risks leaving behind those who do not take advantage of LLMs. In the medium term, I anticipate that LLM-based assistants and tutors will become increasingly useful for generating the content that makes up research papers. Human researchers will focus on their comparative advantage by posing the questions, suggesting directions for obtaining answers, discriminating which parts of the produced content are useful, editing, and providing feedback, akin to an advisor.
February 15, 2023
The Inflation Boogeyman Now Hides in Services
.@johnauthers notes that net of food and energy, goods inflation is now under the Fed’s target, but services inflation remains high and disinflation in services has not yet started.
Disinflation is well under way for goods, but services inflation is looking obdurate. If we strip out food and energy, goods inflation surged and then plummeted. It’s now below the Fed target of 2%. Services inflation keeps rising. Goods inflation was indeed transitory, but that’s no longer what matters.
Real Wage Growth: A View from the Wage Growth Tracker
The @AtlantaFed Wage Growth Tracker shows that less than 50% of workers in the sample saw real wage growth relative to CPI during most of 2021 and 2022.
The Wage Growth Tracker in terms of median wage growth, has been below the average rate of inflation for most of 2021 and 2022. Prior to that period, the last time the real WGT had been negative was during 2011—a short period when CPI inflation reached 4 percent while the WGT was hovering around 2 percent. The fact that the real WGT is negative tells us that less than 50 percent of the people in the WGT sample had real wage increases, relative to the CPI.
OPEC+ Surpluses Likely Peaked in Q3
.@EtraAlex reports that the OPEC+ current account surpluses likely peaked in Q3 of 2022.
We think the current account surpluses of other major OPEC+ members likely peaked in Q3/Q4 as well. Obviously, the outlook is heavily dependent on oil prices remaining in their current range around $80/bbl. For now, however, the terms of trade have swung back against energy exporters. The chart below, which is based on Exante Data’s Trade Balance Nowcast shows the projected changed in countries’ annualized current account balance based on current commodity prices. For the first time in 18 months, it is net commodity importers that are seeing their external positions improving. Whether this remains the case will depend on the extent of the recovery in Chinese demand following reopening, recession (or lack thereof) in major advanced economies, and of course the production decisions of OPEC+.
Cost of Capital
.@mjmauboussin notes the mean weighted average cost of capital for companies in the Russell 3000 at the end of 2022 was 8.8%, up from the 1985-2022 average of 7.9%.
The average weighted average cost of capital for companies in the Russell 3000, a good proxy for the overall U.S. equity market, from 1985 to 2022 was 7.9 percent, and the estimate at the end of 2022 was 8.8 percent. Financial executives rely heavily on the capital asset pricing model (CAPM) but the investment community, led by quantitative funds, uses six factors widely. These include beta (stocks of companies with high betas earn higher returns than those with low betas), size (stocks of companies with small capitalizations generate higher returns than stocks of companies with large capitalizations), value (stocks with low multiples outperform those with high multiples), momentum (stocks that have done well continue to do well in the short term), quality (companies of high quality provide higher returns than companies of low quality), and asset growth (companies with low asset growth outperform those with high asset growth). Fama and French now recommend a five-factor model that includes all of the factors above except for momentum.
The Economic Opportunity Cost of Green Recovery Plans
.@caseybmulligan estimates that decarbonization in the US will result in recurring costs of up to $483Bper year, including $186B for auto fuel efficiency standards, and will lower real GDP by between 2-3% by 2035.
Advocates in several countries have promoted a “green recovery” from the pandemic, with an emphasis on measures to address climate objectives. We evaluate proposals for the United States and find that as stated, ambitious plans to further cut emissions from transportation and electricity will require more inputs to produce the same outputs, resulting in recurring costs of up to $483 billion per year. We forecast that real GDP and consumption will be 2-3 percent less in the long run if policies are implemented as stated, underscoring the opportunity costs of achieving green objectives when resources might be more efficiently deployed. We quantify the opportunity costs of four climate policies that are likely the most impactful among Biden’s proposals. The first would reduce fossil fuel consumption by light- and medium-duty vehicles by raising average fuel economy regulations, in an effort to erode the reliance of the transportation sector on petroleum and avoid associated emissions. The second would increase the share of electricity generation from renewable sources, displacing fossil generation in an effort to reduce emissions. The third would require additional renewable electricity generation to help satisfy the electrification of transport. A fourth, holding companies financially liable for historically emitted carbon and other pollutants, may help finance subsidies for renewables, but would impose additional opportunity costs, such as the impact of the implied higher uncertainty regarding future after-tax profits.
February 14, 2023
January CPI Report Shows Annual Inflation Cooled
CPI was up 6.4% year-over-year in January. Core CPI at 5.6% year-over-year is running well above the Fed’s target. @WSJ
The consumer-price index, a closely watched measure of inflation, climbed 6.4% in January from a year earlier, down from 6.5% in December. That marked the seventh straight month of cooling in annual inflation since peaking at 9.1% in June, the highest reading since 1981. January’s inflation rate was still much higher than the 2.1% average in the three years before the pandemic. Core CPI, which excludes volatile energy and food prices, rose 5.6% from a year earlier, down from 5.7% in December. Many economists see the core measure as a better predictor of future inflation. Core prices rose 0.4% on the month in January, the same as in December. Core prices increased at a 4.6% annualized rate in the three months ended in January, reversing a trend of steady decline at the end of the year.
Furman On CPI Report
.@jasonfurman notes, “Most anyway you look at it underlying inflation is well above 3%. And underlying inflation may not even be coming down.”
A month ago, 3-month-annualized supercore inflation (i.e., ex food, energy, shelter and used cars) was 1.8%. Now with new seasonal adjustment and an additional month of data it is 3.7%. Time to update your inflation views. Most anyway you look at it underlying inflation is well above 3%. And underlying inflation may not even be coming down. And that is even before you start to think about the upward pressure that could be exerted from the extremely tight labor market. I have a hard time seeing how the implied market breakeven of 2% inflation this year makes any sense. Absent a recession inflation below 3% is unlikely. And even with [a recession,] inflation below 3% is far from guaranteed.
China's Rising Holdings of U.S. Agency Bonds
.@Brad_Setser suggests that, while China is running down its Treasury portfolio, it is adding to its holdings from government-sponsored agencies.
China is on track to buy around $75 billion of Agencies—likely accounting for nearly all central bank demand for Agencies and for about half of all foreign demand for Agencies. In some deep sense, the relationship between China, the housing Agencies (U.S. policy banks, in effect), and the Federal Reserve has come full circle. In late 2008 and 2009, China sold Agencies and the Fed stepped in and bought them. Then in 2022, the Fed stopped buying Agencies and now is letting its portfolio run down—and China is buying many of them. A small irony of financial history.
Apple’s Manufacturing Shift to India Hits Stumbling Blocks
Bain, the global consultancy, estimates that manufacturing exports from India could more than double from $418bn in 2022 to more than $1tn in 2028. Bain expects electronics exports alone will grow at an annual rate of up to 40 percent. @ft
Apple is hitting stumbling blocks in its effort to increase production in India, as the US tech giant faces pressure to cut its manufacturing reliance on China. At a casings factory in Hosur run by Indian conglomerate Tata, one of Apple’s suppliers, just about one out of every two components coming off the production line is in good enough shape to eventually be sent to Foxconn, Apple’s assembly partner for building iPhones, according to a person familiar with the matter. This 50 per cent “yield” fares badly compared with Apple’s goal for zero defects. Two people that have worked in Apple’s offshore operations said the factory is on a plan towards improving proficiency but the road ahead is long.
Container Shipping Costs Plunge as Consumer Spending Declines
The price of shipping goods from eastern China to the west coast of the United States on a short-term basis has returned to pre-COVID levels, down 85% from the March 2022 peak. @FT
The price of shipping goods on vital global trade routes has fallen 85% below its peak as the cost of living crisis hits consumer spending and pandemic-related supply chain disruption eases. In the US, spending on goods is now down 5.4% in real terms from the March 2021 peak. This month it cost $1,444 to ship a standard 40ft steel container from eastern China to the US west coast at short notice, according to shipping data specialist Xeneta, down from a peak of $9,682 in March last year. The widespread delays and queues, which hit ports at the height of the pandemic, have also dissipated.
Hiking at $60b a Month
Quantitative tightening shifts investors into financial assets that are more sensitive to the Federal Funds rate. @FedGuy12
The Fed cannot force banks to offer depositors higher rates, but QT side steps them and does the job by brute force. Every month $60b in deposits yielding around 0% are replaced with $60b in Treasuries yielding around 4%, and deposit rates are also slowly rising. The sizable yield upgrade being forced onto the market may indicate a more impactful QT. When rates were low, Treasuries and deposits were plausible substitutes. But rates are not low anymore.
Youth Risk Behavior Survey
According to a @CDCgov survey, 57% of female high school students in 2021 experienced persistent feelings of sadness or hopelessness up from 36% in 2011. Male students saw only an 8 percentage point increase.
As we saw in the 10 years prior to the COVID-19 pandemic, mental health among students overall continues to worsen, with more than 40% of high school students feeling so sad or hopeless that they could not engage in their regular activities for at least two weeks during the previous year—a possible indication of the experience of depressive symptoms. We also saw significant increases in the percentage of youth who seriously considered suicide, made a suicide plan, and attempted suicide. Across almost all measures of substance use, experiences of violence, mental health, and suicidal thoughts and behaviors, female students are faring more poorly than male students. These differences, and the rates at which female students are reporting such negative experiences, are stark.
War and Subsidies Have Turbocharged the Green Transition
.@TheEconomist argues that “The crunch caused by the war in Ukraine may, in fact, have fast-tracked the green transition by an astonishing five to ten years” via increased subsidies.
The crunch caused by the war in Ukraine may, in fact, have fast-tracked the green transition by an astonishing five to ten years. Last year global capital expenditure on wind and solar assets grew from $357bn to $490bn, surpassing investment in new and existing oil and gas wells for the first time. America’s Inflation Reduction Act earmarks $369bn of subsidies for green tech; the European Commission has unveiled a “Net-Zero Industry Act”, which will provide at least €250bn ($270bn) to clean-tech companies. China’s 14th five-year plan for energy, released in June, for the first time sets a goal for the share of renewables in power generation (of 33% by 2025). All told, the IEA expects global renewable-energy capacity to rise by 2,400gw between 2022 and 2027, an amount equivalent to China’s entire installed power capacity today. That is almost 30% higher than the agency’s forecast in 2021, released before the war. Renewables are set to account for 90% of the increase in global generation capacity over the period. Carbon-dioxide emissions look set to fall considerably faster than expected just 12 months ago. S&PGlobal, a data firm, thinks emissions from energy combustion will peak in 2027, at a level the world would still be producing in 2028 had the war not happened.
Is the Green Transition Inflationary?
Analysts from the @NewYorkFed argue that while climate policies will assuredly impact the relative prices of clean and dirty energy, these policies will not cause a change in the general price level in the absence of price rigidities.
In terms of price developments, the outcome of these policies is to raise the price of dirty sectors such as oil and gas, and lower those of green sectors such as renewable energy, relative to those of the rest of the economy. But since these are adjustments in relative prices, not absolute ones, they can in principle take place with any level of overall inflation. In fact, if prices in the rest of the economy fall, and prices for green sectors fall even more, we could even have deflation for the economy as a whole and still achieve the required adjustment in relative prices.
February 13, 2023
Mortgage Interest Payments and the Policy Cycle
.@GeneralTheorist notes that the prevalence of 30-year fixed mortgages makes the US less sensitive to policy rate changes than peer economies.
The average maturity of household debt differs across countries due to structural characteristics. This is reflected in the share of fixed and flexible rate mortgages, for one. But the average maturity of fixed-rate mortgages also differs—being only 5 years in the UK, for example, but about 30 years in the US. The US shows limited sensitivity to the policy rate through mortgage payments historically—though the marginal buyer could be impacted still, impacting house prices through this channel.
How Inflation and Relative Price Increases Differ
.@stlouisfed researchers examined components of the CPI since 2000 and found wide differences by sector: the overall basket increased 1.8X from January 2000 to December 2022, while education prices grew to 2.6X and communication prices fell to 0.8X.
The figure below shows the U.S. consumer price index (CPI) for various expenditure types, as computed by the Bureau of Labor Statistics. For each series, the units are chosen to equal $1 in January 2000 so that their evolution over time can be compared. The “All” line (solid red) increased from $1 in January 2000 to about $1.80 in December 2022. This means that a person needed about $1.80 in December 2022 to purchase the same basket as he or she could have purchased with $1 in January 2000. One extreme case is that of education-related expenditures (solid gray line): Their prices have multiplied by 2.6 since January 2000. Another extreme case is communication-related expenditures (solid blue line): Their prices have decreased from $1 to about $0.80.
From Stagflation to ‘Immaculate Disinflation’
.@paulkrugman argues that while he’s “cautious… about fully embracing the doctrine of immaculate disinflation, inflation does seem to be coming down as quickly and easily as it went up, and without too much economic pain.”
A lot of effort has been going into estimating how many angels can dance on the head of a pin — I mean, “true” underlying inflation. Everyone working with the data these days knows that traditional core has become problematic in the plague years. The numbers have been buffeted by new sources of volatility, such as used car prices; the official measure of shelter prices, which mostly reflect rents but with a long lag, has been distorted by a huge rent surge in 2021-22 that ended months ago but is still filtering into the published numbers. The bigger picture is the speed with which inflation, however one imperfectly defines it, first soared, then plunged. My point is that we obviously aren’t rerunning the ’70s. While I’m cautious, on the other hand, about fully embracing the doctrine of immaculate disinflation, inflation does seem to be coming down as quickly and easily as it went up, and without too much economic pain.
The Teen Mental Illness Epidemic Began Around 2012
.@JonHaidt cites the percent of undergraduates diagnosed with a mental illness and argues that an epidemic of anxiety and depression started impacting young Americans in 2012.
There was no sign of a problem before 2010, and the epidemic is well underway by 2015. You can also see that the rate of depression is much higher in girls, as is the absolute increase (since 2010 an additional 18% of girls suffered from depression in 2021, compared to an additional 6% of boys), however, the relative increase is similar in both sexes: around 150%. The rate had more than doubled before the covid epidemic. The 2020 data were collected in early 2020, just before covid restrictions, and the 2021 data were collected a year later before vaccines were widely available. You can see that covid accelerated the rise in depression in that last year, but it was already rising really fast.
The Mysterious $300 Billion Flow Out of China
.@M_C_Klein argues about $300B may have left China in the past two years that isn’t reflected in the balance of payments statistics, suggesting capital flight possibly to the UK.
One possibility is that the “net errors and omissions” in the balance of payments have been understated. These unexplained financial flows, generally corresponding to capital flight and other surreptitious efforts to get money out of the country, have been relatively low in recent years, but that could be an illusion caused by SAFE’s reporting. Official NEO estimates only go through 2022Q3, but the picture is illustrative. It is not easy to find corresponding unexplained financial flows in other countries that would line up with these numbers. But there is one intriguing case: the U.K. has experienced a surge in net errors and omissions in 2022.
A Huge, Uncharted Experiment on the U.S. Economy Is About to Begin
.@robinsonmeyer argues that Biden’s decarbonization based industrial policy faces three significant challenges: spending money efficiently, coordinating across multiple government agencies, and making policy adjustments over time.
The U.S. financial system persistently struggles to fund projects that take a long time to turn a profit and that can expect to have only modest returns. Unfortunately, the biggest and most important physical infrastructure—factories, transmission lines—often fall under that category. Second, the government may lack the ability to coordinate its own actions. Late last year, the Biden administration declined to help reopen a “green” aluminum factory in Ferndale, Wash., that was exactly the kind of low-carbon industry it wants to champion. Never mind the right hand not knowing what the left hand is doing: The right hand couldn’t get the left hand to plug the cord in. Finally, the government may not understand enough about the companies it’s trying to help. In Taiwan and South Korea, industrial-policy agencies… constantly gather information from the private sector and use it to adjust goals and policies over time. The I.R.A.’s main incentives are tax credits, which are hard to repeal once they’re in place and hard to fix if they’re not working. They are an unusually mindless way to incentivize companies to change their behavior.
Taiwan Reveals Chinese Military Balloons Fly ‘Very Frequently’ Into its Airspace
The Taiwanese military has tracked dozens of Chinese military balloon flights in its airspace in recent years likely used for optimizing “radar and missile systems.” @FinancialTimes
Taiwan has observed dozens of Chinese military balloon flights in its airspace in recent years. “Some of the balloons are fielded by the PLA Air Force and some by the Rocket Force,” said one Taiwanese official, adding that military aircraft were regularly sent up to observe the balloons. According to people briefed on the matter in Taiwan and one US ally, the balloons have been collecting atmospheric data for use in radar and missile systems.
Paying Moms to Stay Home: Short and Long Run Effects on Parents and Children
Evidence from Finland suggests that expansion of a home care allowance decreases maternal employment in both the short and long term and results in lower educational attainment and increased youth crime for impacted children. @nberpubs
We study the impacts of a policy designed to reward mothers who stay at home rather than join the labor force when their children are under age three. We use regional and over time variation to show that the Finnish Home Care Allowance (HCA) decreases maternal employment in both the short and long term. The effects are large enough for the existence of home care benefit system to explain the higher short-term child penalty in Finland than comparable nations. Home care benefits also negatively affect the early childhood cognitive test results of children, decrease the likelihood of choosing academic high school, and increase youth crimes. [Our analysis shows a] dynamic DiD for two key long term outcomes, enrolling to academic high school (instead of vocational high school or dropping out completely) at ages 15 to 17 years old, and committing a youth crime between ages 15 to 18 years old. The two outcomes occur at similar ages, although those who respond in the margin may be very different individuals. The pre-trend for high school enrollment is relatively flat, but there are some deviations from zero for youth crime, although not statistically significant. After an increase in supplement when one year old, enrolling to academic high school declines and committing a youth crime increases. There is some decline in the effect of enrolling to academic high school three years after the supplement change which we cannot fully explain but may be due to consequent change in supplement policies. For youth crime there is a clear upward shift at year 0; the noise in pre-trends likely reflects the much smaller incidence of this outcome, with a baseline youth crime rate of only 4%. We confirm that the mechanism of action is changing work/home care arrangements by studying a day care fee reform that had the opposite effect of raising incentives to work – with corresponding opposite effects on mothers and children compared to HCA. Our findings suggest that shifting childcare from the home to the market increases labor force participation and improves child outcomes.
February 10, 2023
U.S. Government Borrowing Costs Rise as Debt Ceiling Fuels Partisan Clash
Treasury’s spending on the interest on the debt is up 41% year-over-year (to $198 billion from $140 billion) for the first four months of the fiscal year. CBO will update their estimate of net interest on the debt as a percentage of U.S. GDP next week. @wsj
The Treasury’s spending on interest on the debt is up 41% to $198 billion in the first four months of this fiscal year compared with $140 billion in the same period last year, according to a Congressional Budget Office estimate of spending through January. In projections last year, the CBO said that spending on net interest on the debt as a percentage of U.S. gross domestic product would roughly double from 1.6% in 2022 to 3.3% in 2032. Those estimates, which the nonpartisan agency will update next week, assumed that the Fed would raise the federal-funds rate to 1.9% by the end of 2022 and reach 2.6% by the end of 2023.
Putting America’s Debt in Its Place
.@B_Eichengreen argues that projected debt levels are sustainable, noting that CBO’s real GDP growth rate of 1.7% over the next ten years exceeds their 1.2% real interest rate forecast (3.6% ten-year bond rate less 2.4% inflation forecast).
Interest costs are not exploding. To be sure, inflation remains elevated, which pushes up short-term interest rates. But, because the US Treasury issues long-term bonds, debt-servicing costs depend on long-term rates, which have risen by less. Currently, the interest rate on ten-year government bonds is 3.6%, while the CBO’s inflation forecast for that horizon is 2.4%, so the real (inflation-adjusted) interest rate relevant for calculating the interest burden is still only 1.2%. What matters is the difference between the real interest rate and the growth rate of the economy. If the real interest rate is lower than the growth rate of inflation-adjusted GDP, then the debt ratio can fall even when the government runs budget deficits. The CBO’s forecast for growth over the next ten years is 1.7% – higher than the real interest rate. This is not a license to engage in unlimited spending. But it implies that, given a debt-to-GDP ratio of 100%, the federal government can run deficits of 0.5% of GDP (the difference between 1.7% and 1.2%) over and above its interest payments without causing the debt ratio to rise.
Is Google’s 20-Year Dominance of Search in Peril?
Since 2011 Google has generated $300B in cash, but their dominant position in search under threat as Microsoft announced plans to supplement Bing search results with an AI-generated side box summarizing pertinent information. @TheEconomist
The revenue of Google’s parent company, now called Alphabet, has grown at an average annual rate of over 20% since 2011. In that period, it has generated more than $300bn in cash after operating expenses. On February 7th Microsoft, which recently announced an investment of $10bn in OpenAI, showed off how it plans to go after those profits. Results from the software giant’s search engine, Bing, will now be accompanied by an ai-generated side box summarizing pertinent information. Alphabet this week unveiled its own chatbot, Bard, and has reportedly invested $300m in Anthropic, a generative-ai startup. On February 8th, while presenting some non-chatty ai search features, it confirmed that Bard will be integrated into search within weeks. Investors were unimpressed; Alphabet’s share price tumbled by 8% after the announcement. Google’s share of revenue from search advertising in America will fall to 54% this year, down from 67% in 2016, according to eMarketer, a research firm.
Marc Andreessen - AI, Crypto, 1000 Elon Musks, Regrets, Vulnerabilities, & Managerial Revolution
.@pmarca argues there’s a “massive supply-demand imbalance between the amount of capital that needs to generate a return and the actual number of viable investable projects and great entrepreneurs to actually create those projects.”
Andreessen: “The nature of the modern economy is we have what Ben Bernanke called the global savings glut. We’ve just got this massive oversupply of capital that was generated by the last few hundred years of economic activity, and there’s only one Elon. There’s just this massive supply-demand imbalance between the amount of capital that needs to generate a return and the actual number of viable investable projects and great entrepreneurs to actually create those projects We certainly don’t have enough flying car startups, we also don’t have enough art startups. We need more of all of this. I don’t think there’s a trade-off, we need more of all of it.”
China Pulls Back From Global Subsea Cable Project as US Tensions Mount
China has withdrawn from a new cable project linking Asia to Europe after an American firm was selected to lay the Sea-Me-We 6 pipeline. @ft
China has cut its participation in an internet cable project to link Asia with Europe. Two of China’s biggest telecoms groups, China Telecom and China Mobile, withdrew their combined investment of roughly 20 per cent from the subsea cable project last year after a US company was selected to build the line over Hengtong Marine, the country’s biggest provider in the sector. Their exit from the Sea-Me-We 6 pipeline — which is estimated to cost around $500mn to lay 19,200km of cables connecting south-east Asia to western Europe. Since 2020, the US has denied permission for several subsea telecoms cables that involved Chinese companies or directly connected the US to mainland China or Hong Kong, citing national security concerns.
February 9, 2023
A New Wage Measure for Core Non-Housing Services
.@ernietedeschi builds a new measure of average hourly earnings (AHE) gains in non-housing services (NHS) sectors. The measure suggests that wage growth is coming down rapidly, contributing to declining overall inflation.
This blog post presents a wage measure that Council of Economic Advisors has constructed to be specific to NHS industries, called “NHS AHE.” To summarize, NHS AHE [non-housing services average hourly earnings] is a weighted average of the hourly wage in 175 detailed nonfarm payroll sectors from the monthly Establishment Survey, weighted by each sector’s share of 2019 labor costs in final demand consumption of services excluding food, energy, and housing. Because the weights are based on NHS labor costs, the index better reflects the dynamics of wages serving as inputs into NHS production than commonly-cited wage measures like AHE and ECI. And because the weights are fixed to 2019 levels, the index is less sensitive to compositional shifts than unadjusted average measures like AHE. Figure 2 plots the yearly percent change in the NHS wage series for production and nonsupervisory workers and NHS inflation.
New White House Wage Data Show Slowing Pressure on ‘Supercore’ Inflation
.@greg_ip reports on @ernietedeschi new wage tracking measure which finds “supercore” wage growth has declined from 9.7%, annualized in the three months ended October 2021 to 4% in January 2023.
CEA economists constructed a wage series tracking only wages that go into “supercore” prices. By this measure, supercore wage growth for nonmanagement workers has ebbed significantly in the past year, from 8% on a 12-month basis last March to 5.2% in January, the CEA calculates. That is much steeper than the drop in wage growth for all private-sector workers from 5.9% to 4.4%, in the same period, and for nonmanagement workers, from 7% to 5.1%. The drop is even sharper looking at shorter periods. According to the CEA’s measure, such wages were growing at 9.7%, annualized, in the three months ended October 2021. By January, growth had slowed to 4%, below that for all private-sector workers, at 4.6%, and private production workers, at 4.4%, in the same period. (
Comeback in Factory Jobs Appears to Be for Real
The 13M Americans working in the manufacturing sector in January surpassed the peak set during the previous business cycle in February of 2020, a first since the 1970s. This growth has been accompanied by a decline in real output per hour worked. @foxjust
For the first time since the late 1970s, US employment in manufacturing has surpassed the peak set during the previous business cycle. This happened in May 2022, according to the revised 2022 payroll jobs data released last week by the US Bureau of Labor Statistics. As of January 2023, the sector employed just short of 13 million Americans on a seasonally adjusted basis, the biggest number since November 2008. The huge manufacturing productivity gains of the 1990s and 2000s appear to have given way to a situation where producing more stuff actually requires hiring more workers.
Spread of Bird Flu Worsens, Hitting Egg-Laying Hens Especially Hard
Between October ‘22 and February ‘23 over 100M chickens have died or been culled, more than 3X the rate in the previous season. The virus has spread to minks, sparking questions about potential transmission to humans. @bloomberg
Just over 100 million poultry died or were culled due to avian influenza between the start of October and Feb. 3, according to the World Organization for Animal Health. That’s more than triple the number in the same period in the previous season, which ended with record losses from the disease. There have also recently been signs of the virus adapting to different animal species, including minks in Spain — sparking questions of whether the outbreak could spread to humans.
For Valentine’s Day, 5 facts about single Americans
The share of single men who are looking for a relationship and/or casual dates has declined from 61% in 2019 to 50% in 2022. 32% of American men and 28% of women were single in 2022. @pewresearch
The percentage of single Americans who are looking for a relationship or casual dates is lower than in 2019, especially among men. Some 42% of single Americans say they’re looking for a committed romantic relationship and/or casual dates, down from 49% in 2019 (but similar to the proportion found in the Center’s February 2022 survey). This drop is largely driven by single men, who are now 11 percentage points less likely than in 2019 to say they are looking for a committed relationship and/or casual dates (50% in July 2022, down from 61% in 2019). During the same time frame, there has been no significant change in the share of single women who are looking for a relationship or casual dates: 35% said this in 2022, compared with 38% in 2019.
Boomerang Children and Parental Retirement Outcomes
A new @NBERpubs study finds that in 2020 ~ 1/3 of children between the ages of 18-34 lived with their parents, but found no clear evidence that this impacts parents’ current or future labor market choices, or their wealth, health, or life satisfaction.
The share of U.S. adult children living with their parents has increased since the 1960s. Figure 1 shows that in 2020, approximately one-third of children between ages 18 and 34 lived with their parents, with men and 18-24 year-olds, respectively, more likely to co-reside than women and 25-34 year-olds. We examine the relationship between adult children returning home and parental retirement outcomes using data from the Health and Retirement Study (HRS), a nationally representative panel of individuals over the age of 50 and their spouses; the HRS also tracks children of respondents. Our child-level analysis suggests that a boomerang event is likely associated with negative shocks to a child’s marriage, income, and employment. The event study analysis suggests that many of these shocks are temporary, and correspondingly most boomerang events are transitory. At the parent level, we find no clear, statistically significant association between boomerang children and parental health, wealth, probability of working, hours worked, or well-being. However, we do find an increase in the self-reported probability of working full-time after age 65. That increase is concentrated among men, those under the age of 62, and those in the top half of the initial wealth distribution. Overall, our results provide evidence that parents may delay their anticipated retirement when children return home.
February 8, 2023
Financial Market Conditions During Monetary Tightening
According to @sffed, the pace of the current tightening cycle has been unprecedented, and the magnitude of the tightening cycle ranks second in the postwar era (as proxied by the increase in the 10-year Treasury rate), with possibly more to run.
The current increase in the 10-year Treasury rate is the second largest increase of all tightening cycles, shown by the blue bars. Moreover, the green bars show that the speed of this increase has been unprecedented. Current increases in the federal funds rate are expected to reverse a historically large negative real funds rate gap at the beginning of the cycle. We compute the real funds rate gap by subtracting the inflation rate and the real neutral rate from the nominal federal funds rate. The smaller or more negative the real funds rate gap is, the more monetary accommodation is in the economy. Successfully closing the real funds rate gap will hinge on substantially reducing the inflation rate.
Financial Conditions Are Tight, But Maybe Easing
.@JosephPolitano argues that financial conditions might be loosening, citing the decline in the Chicago Fed’s National Financial Conditions Index since October 2022.
Over the last four months, the Chicago Fed’s National Financial Conditions Index has eased considerably from its very tight readings in early October. While there have been some improvements in credit conditions, thanks in part to improvements in mortgage rates and bond spreads—the bigger contributor has been the improvements in risk sentiment. Longer-term real interest rates have fallen slowly over the last couple of months, and are now only a bit above early-2019 levels. The real yield curve is still very flat, with 5-year real yields moving alongside 30-year real yields, indicating weak growth expectations and relatively tight short-run monetary policy, but the fact that real rates are declining alongside corporate bond spreads suggests a partial easing of financial conditions.
Whither Globalization? And What Would that Even Mean, Anyway?
.@M_C_Klein notes that China has been pursuing successful import substitution for some time. As of 2018 (the last year with comprehensive data), China could domestically produce 81% of critical manufactured goods, up from 67% in 2004.
As of 2018—the last year for which we have comprehensive data—Chinese production of critical manufactured goods is now sufficient to cover more than 81% of its domestic demand, up from 67% in 2004. The Chinese shift towards self-sufficiency since 2004 was unmatched by any of the other major economies, developing or advanced. China’s transition was achieved via forced technology transfer (including theft), massive subsidies for domestic producers, and a range of (often hidden) restrictions on imports. Combined, China’s investment slowdown and its push for self-sufficiency have driven down total trade (exports plus imports) from nearly 65% of Chinese GDP in 2007 to less than 40% as of 2022.
U.S. Business Owners Pay Premium to Hire Migrant Workers in Extremely Tight Labor Market
Tight labor markets are causing employers to pay premium wages for migrant workers. The World Bank estimates that remittances to Latin America from workers in the United States grew by more than 9% in 2022. @WSJ
The Biden administration has also vastly expanded a program known as Temporary Protected Status, which protects people from countries destabilized by wars or natural disasters from being deported, and gives them work permits. The administration has granted such protection to more than 700,000 immigrants already in the country illegally, primarily from Venezuela and Haiti, according to an analysis by the Migration Policy Institute. The U.S. has increased the number of H-2B visas, which allow employers to hire low-wage foreign workers for seasonal positions, in recent years because of the shortage of workers, but the numbers are still vastly below the demand by employers.
Taiwan Weapons Firm Test-Fires Cruise Missile Believed to be Capable of Striking Central and Eastern Mainland China
Taiwan is testing a domestically developed cruise missile with the capacity to hit targets in mainland China. @SCMPNews
Taiwan’s top weapons builder has test-fired a missile believed to be capable of hitting mainland China, as cross-strait tensions show no sign of abating. The surface-to-surface missile is an extended-range version of the Hsiung Feng IIE, which is able to hit targets up to 1,200km (746 miles) – far enough to reach major mainland cities such as Qingdao on the east coast or Wuhan in the center.
Distorted Innovation: Does the Market Get the Direction of Technology Right?
.@DrDaronAcemoglu finds that negative externalities and excessive focus on high-margin technologies can distort the path of innovation and reduce welfare gains by 10-50%. @nberpubs
In the presence of markup differences, externalities and other social considerations, the equilibrium direction of innovation can be systematically distorted. This paper builds a simple model of endogenous technology, which generalizes existing comparative static results and characterizes potential distortions in the direction of innovation. From a positive perspective, the framework links the direction of technology to relevant market sizes (supplies of factors of production working with these technologies and consumer demand), the price of other inputs into the production process (for example, natural resources used in different sectors), markups and regulations. I show that empirical findings across a number of different areas are consistent with this framework’s predictions and I use data from several studies to estimate its key parameters. Combining these numbers with rough estimates of differential externalities and markups, I provide suggestive evidence that equilibrium distortions in the direction of technology can be substantial in the context of industrial automation, health care, and energy, and correcting these distortions could have sizable welfare benefits.
February 7, 2023
U.S. Imports Rose in December, Partially Offsetting Weakening Global Trade
The US trade deficit hit a record $948.1B in 2022 as a strong dollar hurt American exporters and encouraged Americans to buy more imported goods. @WSJ
The U.S. trade deficit for all of 2022 rose 12.2% to $948.1 billion, the widest gap on record, as the U.S. continued to depend heavily on imports from other countries to meet domestic demand. Exports also rose last year as global demand for U.S.-made products picked up. A U.S. dollar rally last year drove up the cost of U.S. goods and helped widen the annual deficit. A wider trade deficit is consistent with a U.S. economy growing faster than other parts of the world, as people with higher incomes in the U.S. buy more imported goods.
Brad Sester On Trade Deficit
.@Brad_Setser notes while measured imports have shifted towards other Asian trading partners, US trade with China is “basically unchanged (in aggregate) despite the pandemic and trade war.”
The persistence of the pandemic distortions makes assessing broad structural shifts – notably with respect to China – difficult. There is no doubt that measured imported (on the US side) have shifted toward other Asian trade partners. There is no doubt that the increase in imports from Asia (setting China aside) is actually pretty broad based. Vietnam has outperformed but it is far from alone. On the other hand I don‘t think anyone would have forecast back in early 2019 that the intensification of Trump‘s tariffs and a global pandemic would leave US trade with China basically unchanged (in aggregate). So while there is no doubt that the post-pandemic surge in US goods demand (which is now fading) led to a large increase US demand for a host of imports, I at least am not convinced that there has (yet) been a significant shift away from the Chinese supply chain. And I do expect the traditional drives of US trade — including the (still) strong dollar — to reassert themselves in 2023.
The Internet, Search Frictions and Aggregate Unemployment
Evidence from Norway shows internet expansion reduced friction associated with finding a job and reduced the steady state unemployment rate by 14%. @AndreasKostol @nberpubs
We found that the internet led more firms to recruit online. It further caused a 9% decline in the duration of posted vacancies and 13% fewer unsuccessful hiring attempts. Next, we showed that the expansion increased job finding rates by 2.4% and starting wages by 6% among the unemployed. However, we found no evidence of changes in job-to-job mobility or wage growth for the employed. Through the lens of the calibrated model, we found that search technology is the primary mechanism behind the quasi-experimental evidence. Our calculations indicated that the broadband internet expansion may have caused a 14% decline in the steady-state unemployment rate. Our paper sheds light on two recent macroeconomic trends. First, the falling rates of worker mobility in the US have fueled a concern about the causes and consequences of declining labor market mobility. Our results suggest that online job search and recruitment may have improved match quality by providing more information about potential jobs and better tools to screen potential candidates. In turn, this improvement may have reduced the need to switch employers in search for a better match – consistent with a more optimistic view of recent trends in job mobility. Second, our evidence helps explain the inward shift in the Beveridge curve observed in Norway and in other countries from the 1990s to the early 2000s. Our evidence suggests that without the near-universal internet adoption rates, the unemployment rate after the Great Recession would have reached even higher levels.
Households Burn Through What’s Left of Their Pandemic Savings
Goldman Sachs estimates that American’s monthly savings rate will rise to 4.5% by end of year from 2022’s 3.3%. Wage gains and declining inflation will reduce pressure to tap savings to maintain real consumption levels @wsj
Early in the pandemic, Americans were socking away money at unprecedented rates. In 2020, they collectively saved 16.8% of their disposable income, well above the 8.8% they saved in 2019. But in 2022, the saving rate fell to 3.3%. Americans have spent down about 35% of the extra savings they accumulated during the pandemic as of mid-January, according to an estimate from Goldman Sachs. By the end of the year, the company forecasts that they will have exhausted roughly 65% of that money. “At the exact same moment you lost the government transfer payments, you got hit with very high inflation, which made your real spending power lower,” said David Mericle, Goldman Sachs’s chief U.S. economist.“ You shouldn’t need to tap your wealth as much, hopefully, in 2023 as you needed to in 2022 in order to avoid a big decline in your real consumption level,” he said. His team at Goldman Sachs estimates that the monthly saving rate will rise modestly by the end of the year, to about 4.5%.
Lessons From The Great Reflation
.@martinwolf_ notes that M2 is now 2.5% under its March 2022 peak which suggests inflation could soon fall – but notes by most measures core inflation remains “sticky” and suggests a “monetary overhang.”
Measures of US broad money are now actually falling. In December 2022, for example, US M2 was 2.5 per cent below its peak in March. Data on broader measures provided by the Center for Financial Stability show the same picture. This suggests that inflation might fall faster than expected. It is even possible that if the aim is only to stabilize inflation rather than make the price level fall back, policy is too tight. Yet there still seems to be a monetary overhang. Inflation might also prove stickier downwards than hoped. Whatever happens, do not repeat what happened in the 1970s: get inflation down and then keep it down.
In China’s Covid Fog, Deaths of Scholars Offer a Clue
An analysis of obituaries of elite Chinese scientists and engineers finds that during December 2022 and January 2023 they were dying at 4x the rate of the previous four years, giving a glimpse into the scale of Chinese covid surge. @nytimes
We examined the obituaries published over the past four years by the state-backed Chinese Academy of Engineering and the Chinese Academy of Sciences. The academies’ members, who are drawn from research institutions across the country, help shape national policy and steer research priorities. The engineering academy currently has about 900 members, and the science academy about 800, according to their websites. The obituaries did not specify the scholars’ causes of death beyond “illness,” and the academies did not answer requests for more specifics. But the spike late last year coincided with the coronavirus’s rapid spread across the country. From 2019 to 2021, the Harbin Institute of Technology, one of the top engineering schools in the world, had published between one and three obituaries for professors and staff members in those months. Between December and last month, it announced 29 deaths.
February 6, 2023
The Plateauing of Cognitive Ability Among Top Earners
Evidence from Sweden finds a strong relationship between cognitive ability and earnings up to annual earnings of ~$64k. There are no significant differences among the top three income percentiles. @ECSR_Soc
The figure above shows cognitive ability levels expressed with annual wage on the horizontal axis. Cognitive ability plateaus at high levels of occupational success. Precisely in the part of the wage distribution where cognitive ability can make the biggest difference, its right tail, cognitive ability ceases to play any role. Cognitive ability plateaus around €60,000 [$64,200] at under a standard deviation above the mean. There are no significant differences in ability between the three top income percentiles, despite there being 594 cases in each percentile bin and despite those in the 100th percentile earning more than double the wage of those in the 98th percentile. Past a certain wage threshold, having a higher wage is no longer telling of cognitive ability. The average score individuals in the top percentile achieved as adolescents on the cognitive-ability test is 7.15 ± 0.11 (95% confidence interval). On a stanine scale this amounts to less than a standard deviation (+0.86) above average.
Lessons from the Great Reflation
.@generaltheorist notes that during the pandemic for every additional $1T in currency and deposits, American households saw $6T in non-monetary wealth driven by equities and real estate.
Household net worth expanded by USD34 trillion from end-2019 through end-2021, an increase of >150% of end-2019 GDP in only 2 years. This wealth increase was mainly due to the increase in financial and non-financial assets (housing). The chart below shows the change in the value of outstanding assets held by households for select items from end-2019. Currency and deposits held by households began the sharp increase in the first quarter of 2020, during the initial lockdowns, and increased by about USD4½ trillion in total. The increase in equity and real estate assets, mainly due to valuation adjustments, followed—and in value terms was a much larger influence on household net worth. At its peak, equity and investment fund shares, which fell in value by USD6 trillion by end-March 2020, increased nearly USD18 trillion by end-2021 on end-2019, or USD24 trillion peak-to-trough. The declines experienced last year during the interest rate normalization have weighed on such wealth since, but the levels remained above pre-pandemic norms. Real estate assets continued to increase in value still in 2022Q3, though at a diminishing pace as housing feels the strain of higher rates. Still, nearly USD13 trillion was added to household wealth through real estate since end-2019. Put another way, at its peak, every additional USD1 trillion in monetary wealth during the pandemic came to be reflected in roughly USD6 trillion in non-monetary wealth, mainly equities and housing.
Inflation Usually Hits America’s Poor Hardest. Not This Time
.@TheEconomist reports that between mid-2020-2022 America’s lower earners saw cumulative inflation of 13.5% whereas middle earners saw 15.5%. The difference was largely driven by car prices and fuel expenditures. @XJaravel
Middle-income earners, not the poorest, appear to have borne the brunt of America’s current bout of inflation. Research by Xavier Jaravel of the London School of Economics has yielded a distinctive shape—an inverted-U curve—that illustrates the distributional effects of inflation in America from mid-2020 to mid-2022. For the lowest earners, inflation was about 13.5%. For those in the middle of the spectrum, inflation was closer to 15.5%. The wealthiest faced inflation of about 14%. Since 2020 nominal wages have increased at an average annual rate of about 4.2% for Americans as a whole. The lowest-earning quartile, however, has seen the biggest gains, with their wages up by 5.3% on average during the same period.
America’s Widening Productivity Gap
Michael Spence and Belinda Azenui note that labor productivity between the tradable and non-tradable sectors started to diverge in 1998, and by 2021 per-employee value-added in tradable sectors was nearly double the non-tradable sectors. @ProSyn
Value-added per employee is a measure of labor productivity. In America’s tradable sector, it has risen steadily over the last two decades in both manufacturing and services, reaching roughly $185,000 (in chained 2012 dollars) in 2021. Over the same period, productivity growth in this sector averaged nearly 3%. The non-tradable economy [net government] is just 0.57% per annum over the last 20 years. This reflects below-average productivity levels and, in most cases, low-to-moderate productivity growth in the large-employment sectors. There was not always a large gap between the tradable and non-tradable sectors. On the contrary, as the chart shows, labor productivity was about $100,000 across the economy in 1998. But by 2021, after more than two decades of steady divergence, per-employee value-added in the tradable sector was nearly double the level in the non-tradable sector.
An Even Deadlier Pandemic Could Soon Be Here
.@zeynep argues that given the increasing spread of the H5N1 bird flu, which has a 56% mortality rate, the United States and WHO should expand their influenza surveillance networks.
Bird flu — known more formally as avian influenza — has long hovered on the horizons of scientists’ fears. This pathogen, especially the H5N1 strain, hasn’t often infected humans, but when it has, 56 percent of those known to have contracted it have died. Its inability to spread easily, if at all, from one person to another has kept it from causing a pandemic. But things are changing. The virus, which has long caused outbreaks among poultry, is infecting more and more migratory birds, allowing it to spread more widely, even to various mammals, raising the risk that a new variant could spread to and among people.
China’s Military Keeps Rivals on Edge with Balloon Strategy
.@Dimi reports that one purpose of the Chinese balloon campaign is collecting data to improve the accuracy of their over-the-horizon radar systems that are used for long-range targeting for missile, air, and naval operations.
In February last year, four groups of high-altitude balloons were detected over northern Taiwan, home to most of the country’s population and some of its most important air defense sites. The same month, the US Air Force scrambled fighters to intercept an unmanned balloon off Kauai, a Hawaiian island that has a key missile-testing range. The PLA’s balloons have been doing much more than spy on whatever country they are flying over. According to a military official from another Asian country, one focus area in the Chinese military’s balloon flights in recent years is to collect data that can enhance the accuracy of over-the-horizon and other radar systems used for targeting in wartime. Military analysts said data points such as atmospheric density would help the PLA develop software tools known as advanced refractive effects prediction systems, which are critical for advanced radars that aid missile, air, and naval operations.
CIA Chief Warns Against Underestimating Xi's Ambitions Toward Taiwan
CIA Director William Burns notes that Xi ordered the Chinese military to be ready to conduct an invasion of Taiwan by 2027, “as a matter of intelligence.” @Reuters
U.S. Central Intelligence Agency Director William Burns said that Chinese President Xi Jinping’s ambitions toward Taiwan should not be underestimated, despite him likely being sobered by the performance of Russia’s military in Ukraine. Burns said that the United States knew “as a matter of intelligence” that Xi had ordered his military to be ready to conduct an invasion of self-governed Taiwan by 2027. “Now, that does not mean that he’s decided to conduct an invasion in 2027, or any other year, but it’s a reminder of the seriousness of his focus and his ambition,” Burns told an event at Georgetown University in Washington.
February 3, 2023
The Market for CEOs: Evidence from Private Equity
.@KaplAnalysis examines large US companies purchased in LBO transactions and finds that 71% of the companies hired new CEOs, and more than 75% of these were external hires. He concludes that “firm-specific human capital is relatively unimportant.”
We study the market for CEOs among larger U.S. companies (enterprise value greater than $1 billion) purchased by private equity firms between 2010 and 2016. More than 70% of those companies hire new CEOs. Of these, more than 75% are external hires with 67% being complete outsiders. These results are strikingly different from studies that look at public companies, who find that 72% of new CEOs are internal promotions while 80% are internal promotions, former executives, or board members. The most recent experience of 70% of the outside CEOs was at a public company with 32% at an S&P 500 company. Almost 50% of the external hires have some previous experience at an S&P 500 company. The median and average buyout in our sample earned roughly 2.5 times on its equity investment. This is interesting given that the public-to-private deals in our sample were not particularly poor performers before they were bought. Because private equity investors are paid strongly for performance (through their carried interest or profit share of 20% on most funds), private equity investors have strong incentives not to provide rents to their CEOs. The pay of CEOs in private-equity funded companies, therefore, should be relatively rent-free. Using the performance of the buyouts and survey evidence on buyout equity incentives, we estimate the compensation buyout CEOs earn and find that the magnitude is much higher than that for similar-sized public companies and comparable to or slightly lower than that of S&P 500 CEOs. The results that top executives move from public companies to private equity funded companies at competitive compensation levels suggest that the broader market for CEOs is quite active and that, at least for private equity-funded companies, firm-specific human capital is relatively unimportant.
Unemployment Falls to 3.4%, Lowest in 53 Years, Jobs Report Shows
The unemployment rate fell to a 53-year low at 3.4%, but nominal average hourly earnings slowed to 4.4% year-over-year down from 4.8% in December. @WSJ
U.S. hiring accelerated sharply to 517,000 jobs in January and the unemployment fell to 3.4%, the lowest rate in more than 53 years, the Labor Department said Friday. Average hourly earnings grew 4.4% in January from a year earlier, down from a revised 4.8% in December, the Labor Department said Friday. Wage increases have been gradually slowing, suggesting employers are finding it easier to recruit new workers.
Why the Fed Is Still Raising Rates
.@M_C_Klein notes that PCE is running at ~4.5% a year vs. 2% before the pandemic, and suggests that the Fed needs to do more if it is to reach its 2% target. There has been a reversal of temporary factors,” but services PCE inflation remains stubborn.
If excessive price increases were “transitory” on the way up, then they are also “transitory” on the way down. Monthly data suggest that the price impact of normalization in the production, distribution, and demand for manufactured goods may already have peaked. Fed officials have repeatedly said that they are now focusing on PCE services prices excluding energy and housing. This is a relatively broad swathe of the economy that should be relatively—although not completely—shielded from idiosyncratic forces and should therefore represent underlying inflationary conditions.
A Consumption Tax Is the Shock Our Broken System Needs
.@JohnHCochrane argues that our existing tax system of “high statutory rates with a Swiss cheese of exemptions, immense cost, unfairness and distortion” should be replaced; he thinks a consumption tax would be more transparent and efficient.
Our income and estate tax system is broken. It has high statutory rates with a Swiss cheese of exemptions, immense cost, unfairness, and distortion. A consumption tax, with none of the absurd complexity of our current taxes, is the answer. It funds the government with the least economic distortion. A consumption tax need not be regressive. It’s easy enough to exempt the first few thousand dollars of consumption or add to the rebate. Taxes overall must finance what the government spends. Collecting it in one tax rather than lots of smaller taxes doesn’t change the overall rate. It’s better for voters to see how much the government takes.
Blinken Cancels Trip to China Following Spy Balloon Allegations
US Secretary of State Antony Blinken has canceled a weekend visit to China after a Chinese spy balloon violated American airspace. @Dimi
US secretary of state Antony Blinken has canceled his weekend visit to China after the Pentagon said it discovered a Chinese spy balloon that has been flying over sensitive nuclear missile sites in the western state of Montana. China rejected suggestions that it was a spy balloon, saying it is rather a “civilian airship used for research, mainly meteorological, purposes” that deviated from its planned course because of winds and “limited self-steering capability” “The Chinese side regrets the unintended entry of the airship into US airspace due to force majeure,” it said in an unusual statement. American officials said China had previously flown spy balloons over the country but that this one spent more time overhead. Canada separately said it was monitoring a “potential second incident” without providing any details. Canada’s foreign ministry said it had summoned China’s ambassador to Ottawa to protest against the balloon and that it would “continue to vigorously express our position to Chinese officials through multiple channels.”
Chinese Military Announces YJ-21 Missile Abilities in Social Media Post Read as Warning to US Amid Tension in Taiwan Strait
The PLA used a social media post to announce the performance of its new anti-ship missile with a terminal speed of Mach 10, claiming the missile cannot be intercepted by any anti-missile weapons systems. @SCMPNews
For the first time, the PLA has officially revealed the performance of its advanced anti-ship hypersonic missile, sending a warning to the US amid high tensions in the Taiwan Strait, Chinese analysts said. China’s YJ-21, or Eagle Strike-21, has a terminal speed of Mach 10, cannot be intercepted by any anti-missile weapons system in the world, and can launch lethal strikes toward enemy ships, according to an article posted by the official Weibo account of the People’s Liberation Army Strategic Support Force.
February 2, 2023
The Trickling Up of Excess Savings
Matt Rognlie @ludwigstraub @a_auclert argue that it will take up to five years for excess savings to work though the systems as individuals with higher marginal propensity to consume generate income for individuals with higher savings rates.
Deficit-financed fiscal transfers generate excess savings. One person’s spending is another person’s income. As we show, taking this fact into account implies that excess savings from debt-financed transfers have much longer-lasting effects than a naive calculation would suggest. In a closed economy, unless the government pays down the debt used to finance the transfers, excess savings do not go away as households spend them down. Instead, the effect of excess savings on aggregate demand slowly dissipates as they “trickle up” the wealth distribution to agents with lower MPCs. Tight monetary policy speeds up this process, but this effect is likely to be quantitatively modest. The partial equilibrium scenario summarizes the conventional wisdom according to which the effect of excess savings will dissipate in a few quarters. By contrast, our benchmark scenario suggests that these effects will stick around for roughly 5 years.
Yes, Use the Debt Ceiling to Control Government Spending
Phil Gramm and Michael Solon argue that officially ending the pandemic emergency, clawing back unspent emergency funds, and eliminating eligibility expansions would save at least $255 billion in 2023-24 alone. @WSJ
The Covid health emergency, like a war, enabled the government to vastly expand its power and spending. Now that the “war” is over, government resists receding to its pre-pandemic level. The debt-limit amendment should not only claw back unspent funds from the $6 trillion pandemic spending orgy, which would save $255 billion in 2023-24 alone. By repeatedly extending the pandemic emergency every 90 days, the Biden administration has expanded the number of households eligible for food stamps and dramatically increased average benefits, more than doubling food-stamp spending. The administration has used the Covid emergency to add 20 million people to the Medicaid and State Children’s Health Insurance Program rolls, sending costs up by $135 billion. The administrative deadline for the moratorium on student-debt payments has been extended eight times, at a cost approaching $275 billion.
For Britain to Grow Faster it Needs Better Managers
.@TheEconomist cites World Management Survey data showing that American firms are better managed than their peers. @I_Am_NickBloom and @johnvanreenan argue that half of the productivity gap btw Britain and US can be attributed to poor management.
Since 2003 John Van Reenen and Nicholas Bloom have been developing and running the World Management Survey (WMS). To date, the WMS has carried out over 20,000 interviews with medium-sized firms, hospitals, and schools in 35 countries, some rich economies, and others emerging markets. The results allow for a ranking of countries based on differences in their firms’ management practices. Such differences are not just large; they also persist across borders. Among the WMS’s findings is the fact that companies’ offices abroad tend to be managed as well as those in their home country, meaning that the London branch of an American business, say, will typically be managed to the same standard as its offices in New York or Chicago. (Multinationals achieve higher management scores than domestic firms wherever they locate.)
Geo-Economic Fragmentation and the Future of Multilateralism
Noting that globalization has had ebbs and flows, @IMFNews argues that “geoeconomic fragmentation” (GEF) or policy-driven deglobalization is underway that could put an end to 2008-2021 “Slowbalization” period.
The “Slowbalization” that followed the global financial crisis (2008–10) has been characterized by a slower expansion of cross-border lending and trade. Globalization has plateaued. While fragmentation may entail strategic advantages for some countries in selected cases, it is very likely to involve significant economic costs in the aggregate. The costs would include higher import prices, segmented markets, diminished access to technology and to both skilled and unskilled labor, and ultimately reduced productivity which may result in lower living standards. GEF is likely to complicate multilateral cooperation in critical areas such as climate change mitigation and pandemic preparedness.
The Private Sector’s Share of China’s Largest Listed Companies Continued to Decline to 43 Percent in the Second Half of 2022
China’s private sector share of the top 100 firms’ market capitalization declined to 42.8% at the end of 2022, down from 55.4% in 2021. @PIIE
Latest data from PIIE’s semiannual tracker, “China’s state vs. private company tracker: Which sector dominates?”—which tracks market value of China’s top 100 listed companies (ranked by market value)—show a continued decline of the share of the private sector, from 44.5 percent at mid-2022 to 42.8 percent at year-end, continuing the downward trend of the previous two half-year periods from the 55.4 percent peak observed in mid-2021. Still, the private sector share remains higher than it was throughout the 2010s, when it rose dramatically from 8 percent at end-2010 to 36 percent at end-2019.
Inflation Adjusted House Prices 3.6% Below Peak
In real terms the Case-Shiller National Index is 3.6% below last year’s peak, but remains 14% above its prior peak level in 2006. @calculatedrisk
In real terms, the National index is 3.6% below the recent peak, and the Composite 20 index is 5.2% below the recent peak in 2022. In real terms, house prices are still above the bubble peak levels. There is an upward slope to real house prices, and it has been about 17 years since the previous peak. Affordability improved slightly in November as both mortgage rates and house prices declined. In October, houses were the least “affordable” since 1982 when 30-year mortgage rates were over 14%.
White House Optimistic On Tech Sharing for Aukus Security Pact
Officials are increasingly confident the technology transfer hurdles to the Australia/UK/US (Aukus) nuclear submarine deal will be overcome, and that the partners are “close to an announcement. @ft”
Australian deputy prime minister Richard Marles told the FT that the partners were “close to an announcement” following an 18-month planning phase to determine how and where to build the boats and what US technology and information would be required. But the planning has been complicated by longstanding US curbs on technology and information sharing, which apply to Australia and the UK even though the countries are members of the Washington-led Five Eyes intelligence sharing network that also includes Canada and New Zealand. Two crucial decisions will be the choice of submarine design and where the submarines will be built, given concerns that America’s shipyards do not have the capacity to take on more work.
February 1, 2023
Public firms’ returns on the book value of assets are down ~ 50% from 1980 and private firms’ returns have doubled. @EconTraina @ASollaci @CarterDavisFin
Why have US aggregate profit rates increased while financial market rates decreased since 1980? We propose a mismatch hypothesis: Profit rates in the national accounts track the return on capital for all firms, while financial market rates track the cost of capital for public firms only. We show public-firm profit rates halved since 1980, matching trends in financial markets and suggesting low market power. Mechanically, this residual private capital return series shows private capital returns had to have increased substantially to account for this secular break between aggregate and public firm profitability. The degree of this shift is significant: Private firms’ profit rates are on average 10% higher than public firms’ in the post-2000 period. Nonfinancial domestic private-firm profit rates doubled, suggesting high market power or risk. Size and sector differences cannot explain the divergence, though intangible-intensity might. Our results indicate substantial biases in extrapolating public-firm trends to the aggregate economy.
Fortunately, This Isn't the Volcker Disinflation
.@ScottSumnerTMI argues the employment cost index (ECI) running at 4% annualized is consistent with roughly 3% trend inflation. Scott thinks getting the ECI down another 1% will require “something closer to 4% or 5% unemployment.”
Once the public adjusts its expectations to the high trend inflation, the economy returns to the natural rate. This explains why the economy today is more overheated than before the Volcker disinflation. By the early 1980s, the public had adjusted to a long period of high inflation and unemployment had returned close to its natural rate. Each year, both wages and prices rose rapidly—but the economy was not in “disequilibrium”. In contrast, today’s economy has still not adjusted to the very fast NGDP growth of 2022. Thus, the labor market is more overheated than in early 1981, despite much less inflation. I still believe that some pain will be imposed on the labor market in bringing inflation down, but perhaps something closer to 4% or 5% unemployment, not the double-digit unemployment of late 1982.
America's 2022 Slowdown
.@JosephPolitano notes real fixed investments have dropped persistently throughout 2022 which raises the risk of a recession in 2023-2024. Recent data “raises the chances of a soft landing,” though “recession risks remain high.”
Over the last year aggregate real consumption growth has moderated, but real private fixed investment declined substantially. Housing was the big casualty with single-family residential investment falling to an 8-year low amidst rapid increases in mortgage rates, but fixed investment in nonresidential structures also sank while investment in equipment and R&D stagnated. Higher interest rates, macroeconomic uncertainty, global growth drags, and weakening US real consumption have hurt domestic investment the most—a worrying sign given how critical fixed investments are to increasing long-run economic capacity. Fixed investment is a key economic signal and an important growth indicator, but it is unfortunately not a be-all-end-all recession indicator.
Innovators Who Immigrate
.@mattsclancy highlights evidence that major productivity gains in research result from allowing scientists & researchers to cluster with other highly skilled inventors. Allowing more high-skilled immigration could boost per capita GDP growth rates by 9%.
Moving to the USA raises citations to math publications four-fold, or 2.5-fold if you restrict attention to people who become a math academic at home or abroad. Comparing New Zealander migrants who return or stay abroad – the ones who stay abroad get up to four times as many citations as those who return. PhD students who stay in the USA get 4-6 times as many citations to their work as their peers in the same program who end up moving back to a country with GDP per capita outside the top 25%. That’s a pretty consistently large effect. And we get similar kinds of results when we look at other proxies for scientific achievement, whether it’s counting publications, patents, or becoming an invited speaker to the International Congress of Mathematicians. A model of the innovation/immigration/trade economy between the US and EU…implies if the USA doubled the H-1B visa cap from 65,000 to 130,000, it would raise the real GDP per capita growth rate in each region by 9% in the long run.
Mexico’s Industrial Hubs Grow as Part of Trade Shift Toward Nearshoring
Foreign direct investment in Mexico reached $32B during the first 9 months of 2022 relative to $31B in 2021, suggesting that nearshoring might be underway. @WSJ
After a decline to $28.2 billion in 2020 during the pandemic, foreign direct investment in Mexico rose to $31.4 billion in 2021 and reached $32.1 billion during the first nine months of 2022, the most for the period since 2013. Of that amount, around $11.6 billion was in manufacturing, similar to 2021 levels. The Mexican government says more than 400 companies currently have shown interest in moving production from Asia to Mexico. “This is an enormous opportunity for Mexico, one that only happens once in a generation,” said Carlos Capistrán, chief economist for Mexico and Canada at Bank of America. “It’s starting to happen, but we don’t know if it will be a home run or just a hit.”
US and India Launch Ambitious Tech and Defence Initiatives
The US government is deepening security ties with India. Plans include joint weapons production in India, as well as cooperation in areas including quantum computing, artificial intelligence, 5G wireless networks, and semiconductors. @ft
The US is launching a series of ambitious technology, space and defense initiatives with India, in an effort designed to counter China in the Indo-Pacific and wean New Delhi off its reliance on Russia for weapons. The Initiative on Critical and Emerging Technologies marks the latest move by US President Joe Biden to work more closely with allies and partners to counter China. The two countries unveiled cooperation in a number of areas, including quantum computing, artificial intelligence, 5G wireless networks and semiconductors. They also created a mechanism to facilitate joint weapons production.
How Much Longer Can ‘Vote Blue No Matter Who!’ Last?
.@RyanDEnos argues the Democratic coalition is not stable as college-educated white’s interests diverge from the rest of their working class coalition. @Edsall
College-educated whites, especially those with higher incomes, are not clear coalitional partners for anyone — they don’t favor economic policies, such as increasing housing supply or even higher taxes on the rich, that are beneficial to the working class, of any race. And many college-educated whites are motivated by social issues that are also not largely supported by the working class, of any race. It’s not clear that, with their current ideological positions, socially liberal and economically centrist or rightist college-educated whites are natural coalition partners with anybody but themselves. My sense is that much of the college-educated liberal political rhetoric is focused on social signaling to satisfy their own psychological needs and improve their social standing with other college-educated liberals, rather than policies that would actually reduce racial gaps in economic well-being, civil rights protections, and other quality of life issues.
January 31, 2023
Jason Furman On Employer Cost Index
.@jasonfurman notes the new employment cost index numbers are not consistent with target inflation of 2%. “If the labor market stays in the same shape,…I would expect inflation to be 3.5% and likely drifting up from that.”
Good news for prospects for sustained lower inflation from the latest Employment Cost Index (ECI) data. But, the growth in Q4 was still higher than any quarter in the previous cycle. So still not likely to be compatible with 2% inflation and probably not even 3% inflation. In terms of the well-being of the average worker, ECI wages are 2% below their pre-COVID peak and 5% below their pre-COVID trend. This is an average–wages up more for lower-wage workers and down more for higher-wage workers. Real wages are lower today than they were in December 2019 for every industry except retail trade and leisure and hospitality. And they are below trend in every industry. If the labor market stays in similar shape (measured in terms of the unemployment rate, job openings and the quits rate) then I would expect inflation to be 3.5% and likely drifting up from that–nothing says this need to continue its monotonic decline.
Data Update 3 for 2023: Interest Rates and Bond Returns
.@AswathDamodaran estimates the cost of capital at the start of 2023 for the median American firm rose 3.86pp from 5.77% to 9.63% year over year, making it more difficult to fund new investments and acquisitions.
Bringing in the changes in both components, debt, and equity, into the assessment, we computed the costs of capital for US and global companies in US dollar terms. The cost of capital for a median US (global) company rose from 5.77% (6.33%) at the start of 2022 to 9.63% (10.60%) at the start of 2023. To understand the implications of a rising cost of capital, it is worth remembering that the cost of capital is the Swiss Army knife of corporate finance, affecting almost every decision within a business.
America's "Excess" Household Savings Are Going Away
.@M_C_Klein argues that the decline in excess savings has largely been driven by high-income households. In 2022, these households had above-normal spending, low interest and dividend receipts, and high tax payments for 2021 capital gains.
Americans liquidated more than $1Tof “excess” savings in 2022, eliminating more than half of the surplus accumulated since the pandemic began. If the current pace continues, the entire stock will vanish by the end of this year. The great dissaving of 2022 can be explained by the (relative) misfortunes afflicting high earners as society normalized. First, dividend and interest income were unusually weak. U.S. post-tax corporate profits in 2022 were roughly 40% higher than in 2019, but dividend payments to shareholders were up just 14% because companies opted for buybacks. Meanwhile, the combination of soaring asset values and the relative preference for buybacks has meant that wealthy Americans owed substantial taxes in 2022 based on 2021 capital gains. Personal income tax payments, which include capital gains, are currently running 26% above what would be expected based on the 2018-2019 trend. Employee pay is 2% above trend while payroll tax receipts are about 0.5% above trend.
The Race of the AI Labs Heats Up
The @economist notes that “almost all” recent AI breakthroughs have come from large firms, in large part due to their access to the computing power required to develop state-of-the-art AI models.
Almost all recent breakthroughs in artificial intelligence globally have come from large companies, in large part because they have the computing power. Amazon, whose AI powers its Alexa voice assistant, and Meta, which made waves recently when one of its models beat human players at “Diplomacy,” a strategy board game, respectively produce two-thirds and four-fifths as much AI research as Stanford University, a bastion of computer-science eggheads. Alphabet and Microsoft churn out considerably more, and that is not including DeepMind, Google Research’s sister lab which the parent company acquired in 2014, and the Microsoft-affiliated OpenAI.
‘Colossal’ Central Bank Buying Drives Gold Demand to Decade High
Central banks purchased the largest amount of gold since 1967 as Middle Eastern nations and China sought to diversify their reserves. @ft (130)
Annual gold demand increased 18 per cent last year to 4,741 tonnes, the largest amount since 2011, driven by a 55-year high in central bank purchases, according to the World Gold Council, an industry-backed group. Central bank purchases of gold hit 417 tonnes in the final three months of the year, roughly 12 times higher than the same quarter a year ago. It took the annual total to more than double of the previous year at 1,136 tonnes. Only about a quarter of the fourth-quarter central bank purchases were reported to the IMF. Reported purchases in 2022 were led by Turkey taking in almost 400 tonnes, China, which reported buying 62 tonnes in November and December, and Middle Eastern nations.
America’s Work Ethic Is Under Assault
.@adwooldridge worries that America’s work ethic can be destroyed by cultural change, pointing to the 11%, or 7M men 25-64 who have left the labor market and are not working or looking for a job.
Is that ubiquitous smell in America’s great cities the smell of sensible liberal drug policy? Or is it the smell of America’s work ethic going up in smoke? If the work ethic is the product of cultural change, it can be destroyed by cultural change. America is the world’s leading example of the power of the work ethic. “The US work ethic is really strong and healthy,” Nicholas Eberstadt of the American Enterprise Institute quipped to me in an interview, “except where it isn’t.” The post-work revolution was led by men without college degrees. Eberstadt produces some astonishing statistics on the number of prime-age men (25 to 64) who have fallen out of the labor market. More than 11% of these men — some seven million souls — are neither working nor looking for a job. Barely half of native-born prime-age men with no high school degree are in the job market. The “not in labor force” number has gone up by a percentage point every seven years since 1965 regardless of the state of the economy or the number of job vacancies.
U.S. Military Poised to Secure New Access to Key Philippine Bases
The United States is set to gain access to bases on Luzon in the Philippines which would be strategically important in a Sino-American conflict. @washingtonpost
The U.S. military is poised to secure expanded access to key bases in the Philippines. While negotiations are still ongoing, an announcement is expected as soon as this week when Defense Secretary Lloyd Austin meets in Manila with his counterpart and then with President Ferdinand Marcos Jr. The expansion involves access to Philippine military bases, likely including two on the northern island of Luzon — which, analysts said, could give U.S. forces a strategic position from which to mount operations in the event of a conflict in Taiwan or the South China Sea.
Astronomers Say They Have Spotted the Universe’s First Stars
The James Webb Space Telescope may have captured evidence of the universe’s first generation of stars. @QuantaMagazine
A group of astronomers poring over data from the James Webb Space Telescope (JWST) has glimpsed light from ionized helium in a distant galaxy, which could indicate the presence of the universe’s very first generation of stars. These long-sought, inaptly named “Population III” stars would have been very large balls of hydrogen and helium sculpted from the universe’s primordial gas. Theorists started imagining these first fireballs in the 1970s, hypothesizing that, after short lifetimes, they exploded as supernovas, forging heavier elements and spewing them into the cosmos. Xin Wang, an astronomer at the Chinese Academy of Sciences in Beijing, and his colleagues think they’ve found them. “It’s really surreal,” Wang said. Confirmation is still needed; the team’s paper, posted on the preprint server arxiv.org on December 8, is awaiting peer review at Nature.
January 30, 2023
The U.S. Consumer Is Starting to Freak Out
In 2022 consumer spending, which makes up about 70% of the American economy, has outpaced price increases by 2pp, but has fallen for three of the last four months. @WSJ
Retail purchases have fallen in three of the past four months. Spending on services, including rent, haircuts, and the bulk of bills, was flat in December, after adjusting for inflation, the worst monthly reading in nearly a year. The saving rate has fallen to roughly 3% of monthly income, from more than 30% at the start of lockdowns. In 2019, the year before the pandemic, the rate was 8.8%. Credit-card balances were up 15% on the year in the third quarter, according to the Federal Reserve Bank of New York, the largest increase in more than two decades.
Trading Places: Mobility Responses of Native and Foreign-Born Adults to the China Trade Shock
.@davidautor finds that foreign-born populations were more likely than native workers to leave commuting zones that were most impacted by the China Shock. However, the foreign-born population was concentrated in zones with low China trade exposure.
U.S. commuting zones (CZs) that were more exposed to the China trade shock had substantially larger net reductions in the population of foreign-born workers but not in the population of native-born workers. The small and insignificant native-born responses have narrow confidence intervals, which is suggestive of modest heterogeneity in native-born adjustment across places. For foreign-born workers, comparing CZs at the 75th versus 25th percentiles of exposure to the trade shock, the more exposed CZ would have seen 1.7 and 2.3 percentage-point larger [10 yr] reductions, respectively, in the foreign-born population with a high school education or less and in the foreign-born population with some college education or more. Within trade-exposed CZs, foreign-born and native-born workers had comparably sized reductions in employment-population ratios. These trade-induced reductions in employment rates were larger in CZ initial foreign-born population shares were above (relative to below) the nation median. At the time of the surge in import competition from China, foreign-born workers were in the wrong locations to contribute much to regional changes in labor supply.
Does Money Growth Help Explain the Recent Inflation Surge?
.@BIS_org finds that the relationship between money growth and inflation during periods of high inflation is close to “one to one” during periods of high inflation, but they find little relationship during non-inflationary periods.
The strength of the link between money growth and inflation depends on the inflation regime: it is one-to-one when inflation is high and virtually non-existent when it is low. Panel A illustrates the long-run relationship between inflation and “excess money growth” – the difference between money growth and real GDP growth. The graph displays the relationship between these two variables based on non-overlapping 10-year averages. When the observations from all countries are pooled, the standard relationship emerges clearly: there is a precisely estimated one-to-one link between excess money growth and inflation. But, as shown in panel B, if we split the observations into high- and low-inflation ones using different 10-year average inflation rate thresholds, we see that this relationship exists only when inflation is relatively high. As expected, the difference narrows noticeably as the inflation threshold increases.
Clean Energy Sets $1.1 Trillion Record That’s Bound to Be Broken
According to a @Bloomberg analysis, 2022 saw global investment in green energy sources equal investments in fossil fuels for the first time (both were $1.1T.)
2022 was the first year when investment in the energy transition equaled global investment in fossil fuels, according to the latest data released from clean energy research group BloombergNEF. The money flowing into the upstream, midstream, and downstream segments of oil and gas, and into fossil fuel-fired power generation without emissions reduction technology, was $1.1 trillion last year. Likewise, annual investment in renewable energy, electrified transport and heat, energy storage and other technologies reached $1.1 trillion.
Commodity Trade Costs Surge as Industry Seeks Up to $500bn in Extra Finance
The commodity sector will require an investment of $300-$500B in working capital going forward due to higher interest rates and volatility related to the Russo-Ukrainian War, according to @McKinsey. @ft
Changing trade patterns have made the global flow of raw materials less efficient and more costly to finance and are also likely to push up the price of commodities for consumers, according to a new study by consultancy McKinsey. “Since the end of 2020, we have seen a doubling of the working capital requirements in the commodity trading sector,” said Roland Rechtsteiner, McKinsey partner and lead author of the report. The McKinsey report predicts average shipping times will increase by 8%, energy prices will rise three-fold, and interest costs will rise seven-fold, between the end of 2020 and 2024, and that working capital requirements for commodity trading globally will increase between $300bn and $500bn as a result.
US Air Force General Predicts China Conflict in 2025
A four-star American air force general fears that the US and China may go to war in 2025. In a leaked memo to his top commanders, he wrote, “I hope I am wrong. My gut tells me we will fight in 2025.“ @ft @dimi
General Mike Minihan, head of US Air Mobility Command, said the two military powers were likely to end up at war because of a series of circumstances that would embolden Chinese president Xi Jinping. “I hope I am wrong. My gut tells me we will fight in 2025,” Minihan wrote in a private memo to his top commanders. As head of Air Mobility Command, Minihan oversees air-related logistics across the US military. The four-star general previously served as deputy head of Indo-Pacific Command, which would be directly responsible for commanding US forces in any conflict with China.
January 27, 2023
Americans Fall Behind on Car Payments at Higher Rate Than in 2009
As rates rise the percentage of subprime auto borrowers who are delinquent on their bills rose to 5.7%, higher than the Great Recession peak of 5.0% in January 2009. Though repossessions are still under pre-pandemic levels. @Bloomberg
In December, the percentage of subprime auto borrowers who were at least 60 days late on their bills rose to 5.67%, up from a seven-year low of 2.58% in April 2021, according to Fitch Ratings. That compares to 5.04% in January 2009, the peak during the Great Recession. Higher interest rates are making it even more difficult to make the monthly payments. The average new auto loan rate was 8.02% in December, up from 5.15% a year earlier, according to Cox Automotive. The rate can be much higher for subprime borrowers. While the number of vehicle repossessions is rising, it’s still below pre-pandemic levels. At Manheim, an auto auction company, the number of repossessed cars increased 11% in 2022 compared to the prior year, but that was still down 26% from 2019.
Has Housing "Bottomed"?
.@calculatedrisk argues housing prices in real terms will be under pressure for some time as the bottom in prices can lag the bottom in investment by years. He expects at least 10% decline in nominal prices from peak with 2.4% already having occurred.
My expectation is residential investment will decline further in 2023, although the largest percentage decline was in 2022. If we look at the most comparable period to the current cycle, the 1978 to 1982 period, we see that real house prices bottomed several years after activity bottomed. Activity bottomed in 1981 or early 1982, but house prices didn’t return to the previous peak (inflation adjusted) until mid-1986. The timing and extent of nominal price declines is difficult to predict. I’ve guessed that we will see 10%+ in nominal price declines nationally. We’ve already seen national price declines of 2.4% seasonally adjusted (Case-Shiller National Index) as sellers appear to be willing to give back some of the extraordinary gains over the last two years (not completely “sticky”). The bottom line is that there will be two bottoms for housing: one for activity and the other for prices. Existing home sales may have already bottomed, but we will see further declines in residential investment. Prices – especially in real terms – will be under pressure for some time.
As the Colorado River Shrinks, Washington Prepares to Spread the Pain
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.
Japan, Netherlands to Join US in Chip Controls on China
Japan and the Netherlands are finalizing plans to join American exports controls designed to limit Chinese semiconductor production. @Bloomberg
Japan and the Netherlands are poised to join the US in limiting China’s access to advanced semiconductor machinery. The Netherlands will expand restrictions on ASML Holding NV, which will prevent it from selling at least some of its so-called deep ultraviolet lithography machines, crucial to making some types of advanced chips and without which attempts to set up production lines may be impossible. Japan will set similar limits on Nikon Corp.
China’s Singles Fight Family Pressure to Get Married as Population Declines
Between 2010 and 2010 the share of Chinese women 20-24 who were unmarried rose from 67.5% to 80.4% as young Chinese delay marriage. @ft
This week, an estimated 200mn unmarried Chinese returned home to celebrate the lunar new year greeted by relatives brimming with questions about when they plan to get married and start a family. The annual inquisition is such a predictable part of life for young Chinese that social media channels are filled with viral how-to guides coaching people on how to bat away pushy parents. “Everyone has their own technique,” said a Beijing teacher in her late 20s, who has been keeping her boyfriend a secret from her family for years as a pre-emptive strategy against demands for marriage. Young people who do get married are doing so later, while the total pool of China’s marriageable youth continues to shrink annually. The number of women of childbearing age, defined as those between 15 and 49 years old, fell by more than 4mn last year.
How Fiscal Conservatives Should Approach the Debt Limit
.@Brian_Riedl notes that the eight largest deficit reduction bills since 1985 were attached to debt-limit bills and offers some plausible goals for the negotiation such as ending all pandemic related emergency spending.
There are several plausible policy goals. Conservatives could seek to end the Covid-emergency designation and end all pandemic-related emergency spending (a chance for Democrats to declare victory over the pandemic, too). Several Democrats have also expressed openness to the TRUST Act, which would create a congressional commission to extend Social Security and Medicare solvency. Conservatives could seek to freeze discretionary spending for the year (which may mean trimming domestic programs to accommodate any defense or veterans’ health hikes). If progressives want to eliminate the debt limit, they can make a deal to provide other tools to address unrestrained mandatory spending, such as statutory fiscal targets.
January 26, 2023
Jason Furman On US GDP Report
.@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.
The Forever Labour Shortage
.@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.
Exodus of Wealthy Chinese Accelerates with End of Covid Zero
The cost of moving money out of China has surged to 12 cents on the dollar relative to 1 cent prior to the pandemic. Nevertheless, Natixis SA estimates capital flight in 2023 will be greater than the pre-pandemic level of $150B per year. @Bloomberg
Before the pandemic, China faced capital flight of about $150 billion annually from people going overseas, but the amount is likely to be higher in 2023 since they haven’t been able to travel for the last three years, according to Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA. Her calculation — worked out by looking at unexplained differentials in global tourism data — is an estimate of funds left abroad permanently by Chinese nationals who travel. About 10,800 rich Chinese migrated in 2022, the most since 2019 according to New World Wealth, a global data intelligence partner of investment migration consultant Henley & Partners. According to one private banker, wealthy individuals told him the cost of moving money offshore has risen to 12 cents on the dollar late last year from 1 cent in the years before the pandemic, as the government clamped down on money transfers.
Can Democrats Survive the Looming Crisis in New York City’s Outer Boroughs?
.@MattThomasNYC argues the GOP’s performance in New York in last year wasn’t driven by suburban voters but by minority voters in NYC who accounted for 2/3 of the decline in democratic margins btw 2018-2022.
The suburbs account for just over a third of the decline in the Democratic margin of victory between 2018 and 2022. The people of New York City, through a combination of defection and abstention, account for most of the rest. Narrowing our focus to only those precincts where at least three-quarters of residents share the same racial identity – which I’ll refer to as racial enclaves – the trends are even more pronounced. Between 2018 and 2022, Hispanic and Asian enclaves swung fifty-eight and fifty-two points toward the GOP, respectively. Their turn to the right was far more decisive than that of white enclaves, which swung thirty-two points toward the GOP. For their part, black enclaves moved just eight points to the right over the same period. Between 2014 and 2022, the swings were as follows: six points in black enclaves, forty-two points in white enclaves, fifty-six points in Hispanic enclaves, and fifty-eight points in Asian enclaves. Now that’s what I call a revolt.
Monetary Policy and Home Buying Inequality
New @FedResearch finds that a 1pp policy-induced increase in mortgage rates lowers the presence of low-income households in the population of home buyers by 16%, and of low- and moderate-income households by 7.5%.
I identify the effects of monetary policy by exploiting the timing of high-frequency observations of mortgage rate locks around unanticipated monetary policy shocks conveyed in Federal Open Market Committee (FOMC) announcements. I find that a contractionary policy shock which increases mortgage rates by 1 percentage point would reduce the share of home purchase loans going to low- and moderate-income (LMI) borrowers by 2.1 percentage points (or 7.5%) in the weeks following the announcement. The share going to low-income borrowers alone would fall by 1.1 percentage points (16%). While low-wealth households may not experience an immediate appreciation of financial assets when the stance of monetary policy is expansionary, that stance can allow them to get their foot in the door of homeownership.
January 25, 2023
Startup Surge Stood Firm Against Economic Headwinds in 2022
In 2022 there were 1.7M applications for new businesses that are likely to hire workers. These applications – labeled “high propensity applications” by the Census Bureau – were up 28% over the pre-pandemic baseline. @kenanfikri
Americans filed nearly 1.7 million applications to start new likely employer businesses in 2022. These applications—labeled “high propensity applications” by the Census Bureau—make up a subset of total business applications, capturing those with a higher likelihood of hiring employees in the future based on their industry or other information in the filing. Over the course of the year, there were 359,000 more filings from likely employers in 2022 than in 2019—a 27.8 percent increase over the pre-pandemic baseline. While 2022’s count was 6.5 percent lower than 2021’s, it still ranked as the second-largest haul of the series. These applications are particularly noteworthy because they represent the businesses most likely to lead to lasting job growth and innovation, if and when they become operational.
Does America Have Too Much Debt?
.@paulkrugman argues that the run-up in debt in the aftermath of the financial crisis and pandemic is likely a better outcome than the counterfactual where debt wasn’t incurred.
My preferred measure — because it avoids some distortions associated with recessions — is debt as a percentage of potential G.D.P., an estimate of what the economy could produce at full employment. The big rise in debt from 2007 to the late 2010s was actually justified by economic events, and any attempt to avoid that rise would have done more harm than good by slowing our recovery even further. Did we borrow too much money? Probably not. During the economic crises of Covid and the Great Recession, adding to the debt was more than justified.
Retirements and Short Work Weeks Explain America’s Labour Shortage
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%).
Immigration to Drive All US Population Growth Within Two Decades
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.
The Resentment Fueling the Republican Party Is Not Coming from the Suburbs
.@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.
January 24, 2023
Secular Stagnation is Not Over
.@ojblanchard1 argues that the secular stagnation environment – where real interest rates were low, often negative, and much lower than the economy’s rate of growth – will soon reassert itself and will then be the “prevalent regime for some time to come.”
Summers has argued that the increase in public debt due to the fiscal response to COVID will lead, other things equal, to an increase in r [real return on capital]. He is right about the sign of the increase in public debt’s impact on r, but the effect is likely to be quite small. The debt-to-GDP ratio in advanced economies has increased only from 75 percent in 2019 to 82 percent in 2022; under standard assumptions, this implies an increase in r of no more than 15–30 basis points. That would be insufficient to offset the pre-COVID downward trend in safe rates, let alone to close the gap between r and g [growth rate of output.]
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.
Biggest Pay Raises Went to Black Workers, Young People and Low-Wage Earners
.@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.
.@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%.
Time Savings When Working from Home
A @nberpubs analysis finds workers who are working from home in the US save an average of 55 minutes with 39% of those time savings being devoted to a primary or secondary jobs and 33% for leisure activities. @I_Am_NickBloom
The pandemic-induced shift to work from home yielded large private benefits in the form of commute time savings. To gauge the magnitude of these benefits, we turn to the Global Survey of Working Arrangements and consider data on commute times and the extent of work from home in 27 countries. We estimate that work from home saved about two hours per week per worker in 2021 and 2022, and that it will save about one hour per week per worker after the pandemic ends. That amounts to 2.2 percent of a 46-hour workweek, with 40 paid hours plus six hours of commuting. As we discussed, the after-tax wage rate is a reasonable benchmark for the private value of commute time savings. Thus, we estimate that the private value of the commute time savings associated with work from home will be about 2.2 percent of after-tax earnings in the post-pandemic economy.
After a Timeout, Back to the Meat Grinder!
Jeremy Grantham predicts that the S&P 500 will likely hit 3,200 at some point this year, noting that “valuations are still nowhere near their long-term averages.” @GMOInsights
The first and easiest leg of the bursting of the bubble we called for a year ago is complete. While the most extreme froth has been wiped off the market, valuations are still nowhere near their long-term averages. Further, in the past, they have usually overcorrected to below trend as fundamentals deteriorated. My calculations of trendline value of the S&P 500, adjusted upwards for trendline growth and for expected inflation, is about 3200 by the end of 2023. I believe it is likely (3 to 1) to reach that trend and spend at least some time below it this year or next. Not the end of the world but compared to the Goldilocks pattern of the last 20 years, pretty brutal.
January 23, 2023
U.S. Weapons Industry Unprepared for a China Conflict, Report Says
A new @CSIS study warns that the Russo-Ukrainian conflict has stressed the American defense industrial base and argues that the surge capacity needed for a potential Taiwan conflict is lacking. @SethGJones
“The bottom line is the defense industrial base, in my judgment, is not prepared for the security environment that now exists,” said Seth Jones, a senior vice president at the Center for Strategic and International Studies. Industry now is operating in a manner “better suited to a peacetime environment.” Mr. Jones recommends that the U.S. reassess its total munition requirements, urging Congress to hold hearings on the matter. Chairman of the Joint Chiefs of Staff Army Gen. Mark Milley said in November that such an effort is already underway. The study also suggests reassessing American requirements for replenishing its stockpiles, creating a strategic munitions reserve, and determining a sustainable munitions procurement plan to meet current and future requirements.
Brad Setser On Deglobalization
.@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.
US Daily: The Immigration Rebound
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.
How the U.S. Government Amassed $31 Trillion in Debt
.@jimtankersley notes that “America’s debt is now six times what it was at the start of the 21st century” and outlines how America added $25 trillion in debt over the past two decades.
In just two decades, America has added $25 trillion in debt. The biggest — and often bipartisan — drivers of debt have been the federal responses to two sharp economic downturns: the 2008 financial crisis and the 2020 pandemic recession. Shortly after Mr. Obama took office in 2009, inheriting a recession, he pushed Congress to approve a nearly $800 billion package of tax cuts and stimulus spending. Safety-net spending continued at high levels for the next several years as the economy recovered sluggishly. Mr. Trump approved a much larger collection of aid packages, totaling more than $3 trillion after Covid-19 swept the world in 2020. Mr. Biden took office the next year and signed a $1.9 trillion stimulus plan soon after.
Why We Have Federal Deficits: An Updated Analysis
Charles Blahous @mercatus notes that America’s long-term Federal fiscal imbalance was largely set between 1965-72. The cost of programs enacted during that period is growing faster than economic output and neither party has made an effort to address this.
Over two-thirds of the structural fiscal imbalance derives from the unsustainable growth rates of federal health programs, most especially Medicare and Medicaid. Irrespective of future policy decisions in other areas such as tax policy, income security, and annually appropriated domestic and defense spending, federal finances will not be stabilized until Medicare and Medicaid’s growth rates are moderated. A survey of fiscal stewardship records produces the unsurprising result that more recent officeholders have tended to run far higher federal deficits than those countenanced by previously elected officials. The largest average federal deficits were operated during the Trump administration, followed, in turn, by the Obama, Ronald W. Reagan, and George H. W. Bush administrations.
How Republicans Can Get Serious on Spending
.@Brian_Riedl offers practical suggestions on how Republicans could permanently stabilize the American debt at 95% of GDP, a goal that would start with running deficits at 3% of GDP relative to the current baseline of 6% over the next decade.
Fiscal conservatives should aim to permanently stabilize the debt at 95 percent of GDP. This goal would mean keeping deficits near 3 percent of GDP, compared to the baseline deficits rising past 6 percent of GDP over the next decade and 11 percent of GDP in three decades. In the short run, this means: Freezing annual discretionary appropriations. Building momentum for mandatory spending reforms with a modest package of savings (perhaps $400 billion over the decade) that address lower-hanging fruit such as leftover pandemic spending, program overpayments, and federal spending benefits for upper-income families. Begin working toward Social Security and Medicare reform—which drive nearly 100 percent of long-term deficits—by building bipartisan working groups behind the scenes.
Trump’s Fiscal Legacy: A Comprehensive Overview of Spending, Taxes, and Deficits
Last year @Brian_Riedl compared Trump, Obama, and George W. Bush’s fiscal records and found that Trump’s policies in one term cost $7.8T over a decade, relative to $5T for Obama and $6.9T for Bush.
President Trump’s record on fiscal responsibility does not compare favorably to his immediate predecessors. Surely, it would not be fair to judge President Trump simply by the total budget deficits under his watch, however, as the $10 trillion 10-year baseline deficit that he inherited dwarfed the $4 trillion projected baseline deficit inherited by President Obama and the $6 trillion projected baseline surplus inherited by President Bush. That is far from a level playing field. On the other hand, President Trump also received the largest automatic deficit reductions from his inherited baseline. During his presidency, economic and technical factors that fall mostly outside of political control produced $3.9 trillion in 10-year deficit reduction, mainly through falling interest rates on the federal debt.
Data Update 2 for 2023: A Rocky Year for Equities
.@AswathDamodaran writes that, if analyst earnings forecasts are correct, the equity risk premium has increased from 4.2% at the start of 2022 to 5.9% today, and equity markets are now priced to earn the highest expected return since 1996.
I note the increase in equity risk premiums during 2022 from 4.24% at the start of 2022 to 5.94% at the start of 2023. I posited that any debate about whether the market, as it stands now, is fair, under or overvalued is really one about whether the equity risk premium at the start of 2023 is too high (in which case, the market is undervalued) or too low (in which case, it is overvalued). To answer that question, and address the question of where the expected return of 9.82% stands in historical context, I report the expected returns and equity risk premiums for the S&P 500 from 1960 to 2022: At 5.94%, the implied equity risk premium is closer to top of the range of historical risk premiums, but the most striking feature of 2022 is that the expected return on stocks, at 9.82%, is now at its highest level since 1995.
January 20, 2023
Where'd All the Workers Go?
.@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.
How Job Risk and Human Capital Shape Male Lifetime Earnings Disparities
.@stlouisfed finds that for workers in the bottom 65% of lifetime earnings, an additional year of work experience increases wages by 2-3% versus 8% for workers in the top 35%.
Bottom earners are employed about 25% less than those at the median, underscoring a less stable job ladder for them with fewer opportunities to learn on the job and to switch to better-paying firms. The average returns to each additional year of work experience across the lifetime earnings (LE) distribution; the returns are relatively flatter in the bottom half of LE distribution and increase steeply toward the top. An additional year of work experience increases male workers’ wages by around 2% to 3% for workers below the 65th percentile of the income distribution, versus 8% for those at the top.
What Drives Innovation?
.@billjaneway argues that the procurement power of government can play an important role in reducing innovators’ and investors’ market risk. @ProSyn
One recurring feature of that history has been the procurement power of governments. Freed from the necessity of abiding by a neat cost-benefit calculation, the state has repeatedly helped overcome market risk by pulling innovative suppliers down the learning curve to the point where they can offer low-cost and reliable products to commercial markets. In these cases, “product-market fit” results from a state-initiated dynamic process that succeeds in aligning an immature “product” with a nascent “market.”
Russia Sanctions Update: CIS-picious Trading Patterns
According to @M_C_Klein, Russian imports have recovered as exports of goods delivered to Russia’s friendly neighbors have increased beyond pre-war levels suggesting export restrictions are being evaded.
The pressure on Russia from sanctions is fading. Exports of manufactured goods to Russia have been rising rapidly in recent months, while exports of goods delivered to Russia’s friendly neighbors are soaring far beyond pre-invasion norms. If export restrictions and sanctions enforcement cannot be tightened further, the Russians may be able to restock some of their lost military equipment—and prolong the war. The overall trend is that exports of dual-use goods are rising, including from Europe. Moreover, the Chinese data show that exports of dual-use goods continued to jump in December, even if Korean exports of dual-use goods has retreated somewhat from the surge in October. The detailed data from Turkey are not yet available, but it is possible that their exports of dual-use goods also jumped in December.
Great Power Conflict Puts the Dollar’s Exorbitant Privilege Under Threat
Zoltan Pozsar of @CreditSuisse argues that the American dollar’s global role is under threat as the rise in Chinese, Russian and Saudi Arabian current account surpluses are not flowing into Treasuries as they have historically.
The current account surpluses of China, Russia, and Saudi Arabia are at a record. Yet these surpluses are largely not being recycled into traditional reserve assets like Treasuries, which offer negative real returns at current inflation rates. Instead, we have seen more demand for gold, commodities, and geopolitical investments such as funding the [Belt and Road Initiative.] Leftover surpluses are held increasingly in bank deposits in liquid form to retain much-needed options in a changing world. If less trade is invoiced in US dollars and there is a dwindling recycling of dollar surpluses into traditional reserve assets such as Treasuries, the “exorbitant privilege” that the dollar holds as the international reserve currency could be under assault.
Pettis On Pozsar
.@michaelxpettis argues that Zoltan Pozsar is wrong about the dollar’s global role. Chronic surplus countries’ dependence on American deficits, and in turn the dollar’s global role, is growing.
The irony is that while Pozsar correctly notes that China’s trade surplus is bigger than ever, he doesn’t realize that this makes China even more dependent, and not less dependent, on the willingness of China and the rest of the world to hold dollars. The key to global currency “domination” is not how excited the political elite say they are about having their currency dominate. It is how willing they are to allow clear and transparent foreign ownership of domestic assets and, even more importantly, how willing and able they are to give up control of their capital and trade accounts. Can we at least agree that China is reducing the dollar component of its reserves? Even that is questionable. China’s reserve accumulation since 2017 has occurred indirectly, through state-bank purchases of dollars. We have no idea whether or not the amount of dollars China is holding has increased or decreased, but simple B-o-P arithmetic tells us that China’s rising accumulation of foreign assets was mostly matched by rising foreign accumulation of US assets.
Supply Chain Disruptions, Trade Costs, and Labor Markets
Researchers at @sffed argue that higher transportation costs related to supply chain issues have had a negative impact on American labor force participation with the impact peaking this year.
Our model suggests that overall U.S. labor supply declines during the years when trade costs are elevated and then begins to recover. The biggest cumulative drop of 0.7% occurs in 2022 and the recovery is slow. By 2027, labor supply is projected to still be 0.2% lower than its pre-shock level. The fall in labor supply occurs because, while trade costs are higher, focusing on home production activities that are not reliant on the labor market temporarily becomes more attractive for some people than working in industries that are affected by the trade disruption. The blue line in Figure 2 for the cumulative change in employment since 2019 combines the separate effects from labor force participation and unemployment (green and red lines). Even though the low point for labor supply occurs in 2022, our model does not project that the low point for employment will happen until 2023, due to the additional unemployment that is generated when the trade-cost shock dissipates.
January 19, 2023
Job Market’s 2.6 Million Missing People Unnerves Star Harvard Economist
Raj Chetty and his @OppInsights team find that America’s workforce earning <$29k/year is down about 20% relative to its January 2020 level. Adjusting for workers now earning over $29k, the low-wage workforce was 13.5% under its pre-pandemic level. @BSteverman
The US is missing about a fifth of its pre-pandemic low-income workforce. At least some of those workers moved to higher-paying jobs, but, after adjusting for wage growth, researchers found employment for the poorest quarter of the workforce was still 13.5% below pre-pandemic levels at the end of 2021. Analyzing local trends, researchers found an important clue to where those missing workers went: Low-wage workers are scarcest where 2020’s devastation was worst. “It is clear there are large swaths of the population who are still not employed, and these are low-wage workers who lost their jobs in precisely the places where high-income people cut back on spending so sharply a couple of years ago,” Chetty said.
United States' Disinflation Continues Money: Inside and Out
.@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.
Young, Less Educated Faced Higher Inflation in 2021—But Gaps Now Closed
During 2021 and 2022, inflation disproportionately impacted young people and those without a college degree (largely driven by used car and fuel expenses), though inflation for those groups has now converged with older and college workers. @NYFedResearch
During the inflationary period of 2021-22, younger people and people without a college degree faced the highest inflation, with steadily widening gaps relative to the overall average between early 2021 and June 2022, followed by a rapid narrowing of the gaps and a reversal of some of them by December 2022. This pattern arises primarily from a greater share of the expenditures of younger people and people without a college degree being devoted to transportation—particularly used cars and motor fuel—which led the 2021 inflationary episode but has since converged to general inflation. As of December 2022, the disparity has reversed, with no-college households experiencing lower inflation over the last twelve months than college households did. The reversal of the earlier rise in inflation disparities can be explained by 1) transportation inflation, which affects no-college households relatively more, declining back to the headline CPI, and 2) housing inflation, which affects college households relatively more, rising faster than headline CPI.
The Eurozone's Unique Inflation Crisis
.@JosephPolitano notes differences in wage growth in the US and EU, and argues that Eurozone inflation is largely being driven by shocks related to the Russo-Ukrainian War, while inflation in the US is broader.
American inflation is now largely driven by cyclical or demand-sensitive components like housing and labor-intensive services. Eurozone inflation is still driven mainly by rapid price increases in components like food, energy, and manufactured goods that are more representative of supply shocks than excess demand. Fundamentally, the biggest difference between Europe’s and America’s inflation situation comes from wage growth. Measured through negotiated wage growth or the labor cost index, Euro area wage growth has remained tempered, below 4%, and in line with pre-COVID levels as American wage growth set new records. Growth in listed wages on job postings in the Euro Area was 5.1% over the last year and less than 2% the year before. The comparable number in the US has grown by over 6%/yr for the past two years.
More Young Americans Are Dying, But Not from Vaccines
The mortality rate for Americans aged 15-34 in 2021 was the highest since 1973. Deaths due to accidents (including drug overdoses,) suicides, and homicides were up 32% percent from 2019. @foxjust
The 2021 mortality rate for those 15 to 34 was the highest since 1973, and for those 25 to 34, it was the highest since 1950. That something, it should be clear from the chart, is mostly external causes such as accidents (including accidental drug overdoses), suicides and homicides. Covid itself has been found to cause myocarditis, pericarditis and other heart troubles at a higher rate than the vaccines do, and given that the initial increase in heart-disease deaths coincided with the arrival of Covid, the simplest explanation is that Covid is chiefly to blame. There certainly was no big increase in heart-disease deaths after the vaccines arrived: in the 12 months starting in July 2021, there were 106 fewer heart-disease deaths among 15-to-34-year-olds than in the previous 12.
Fighting Global Protection: Why the Economist is Mistaken
.@michaelxpettis notes that policies to reduce the American trade deficit would in fact “improve the efficiency of global trade by reducing the imbalances” driven by Chinese and other chronic surplus countries’ beggar-thy-neighbor policies.
Large, persistent trade surpluses exist only because businesses in certain countries are able directly and indirectly to underpay domestic workers and households in order to become more competitive internationally and to grow more rapidly. It is especially absurd to criticize the United States, the country that typically absorbs 40–50 percent of global trade surpluses, as “protectionist.” If countries like the United States were to implement policies deemed “protectionist” and these were able even partly to reverse the trade imbalances (a big “if”), they would actually improve the efficiency of global trade by reducing the imbalances.
January 18, 2023
The Recent Rise in Discount Window Borrowing
2022 saw an uptick in banks accessing the Fed’s discount window, likely driven by declining reserve balances in the banking system. @NewYorkFed
The notable decline in the total level of reserves in the banking system this year may have been an important factor for the rise in DW [discount window] borrowing. Indeed, as the Fed has gradually shrunk its balance sheet, the cash balances of smaller institutions, particularly those with total assets less than $10 billion, have in aggregate declined sharply relative to their asset size, reducing their liquidity positions. Smaller banks are generally more willing to come to the DW than their larger counterparts, as they are usually not publicly traded companies and are less subject to public scrutiny. Banks smaller than $3 billion in assets on average visited the DW twice as much as other banks in 2019, just prior to the pandemic.
Job Mobility Patterns and Lifetime Earnings Disparities among Male Workers
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.
Over 5 Million New US Startups Show Covid-Era Boom Has
Americans are filing new business applications at higher levels in the aftermath of the pandemic; between 2019 and 2022, new business applications rose by 44%. Business applications are up the most in Florida and Texas. @bloomberg
New business applications rose by 44% from 2019 to 2022, with the sharpest increases in Southern states, according to US Census Bureau figures released Tuesday. About 5.1 million applications were filed last year, down from the record 5.4 million in 2021, but up from 3.5 million in 2019.
The Complication of Concentration in Global Trade
A @McKinsey_MGI analysis finds that 40% of global trade value is concentrated, in that the importer relies on three or fewer countries for their supply.
For many products, countries rely on a diversified pool of trade partners. This is particularly true for larger economies. For example, China imports crude oil from more than 40 economies, and the United States imports cars from more than 25 nations. A significant portion of global trade is concentrated in the sense that an economy relies on only a handful of nations to source almost all of its imports of a specific product. Indeed, 40% of the value of global goods trade corresponds to cases where the importing economy relies on three or fewer nations for the supply of a given manufactured good or resource. Narrowing the focus further, about 15 percent of global goods trade corresponds to cases where the importing economy relies on only two or fewer nations. Most concentration is due not to a lack of supplier economies. Instead, concentration arises because of specific choices to source products from only a few countries despite the fact that other potential supplying countries are available. In this research, this type of concentration is described as “economy-specific concentration.” Of the 40% of global trade value that relies on three or fewer supplier economies, about three-quarters corresponds to economy-specific concentration.
What it Would Take for Apple to Disentangle itself from China
The iPhone makes up 80% of smartphone operating profits on less than 20% of handset shipments. The sophistication of the product will be a challenge to moving more than 10-20% of manufacturing to countries like India and Vietnam by 2030. @ft
Some supply chain experts argue that the growth numbers in iPhone “manufacturing” in India are more hype than reality. Although 200M phones were made in India last year, they are not in the same league as Apple’s products. The most popular models typically sell for $250 or less, while average iPhones cost nearly $1,000 and require more sophisticated automation and labor intensity. Woo-Jin Ho, hardware analyst at Bloomberg Intelligence, projects that Apple will shift just 10% of iPhone production outside of China by 2030, or at most 20% if it moves aggressively.
How SNAP Expenditures Now Exceed $100 Billion Annually
.@AngelaRachidi notes that over the past two decades SNAP has grown from a $20B a year program to $100B a year. @AEIecon
In the past two decades, SNAP has transformed from a $20 billion per year safety net program, to upwards of $100 billion per year. Increased economic need cannot explain the upward trend in the SNAP caseload, though. Unemployment rates fluctuated over the past 20 years, but rates were lower in 2017–2019 than they were in the previous economic peak of 2000–2001, yet millions more people received SNAP in 2019 than in the early 2000s.
Opiates of the Masses? Deaths of Despair and the Decline of American Religion
The uptick in so-called “deaths of despair” was preceded by a decline in religious participation. @econburner @D_Hungerman @TamarOostrom offer evidence that the repeal of blue laws is associated with the rise of such deaths.
Put differently, a 10-percentage-point effect on religious attendance implies that following the blue law repeals, about 10,000 out of every 100,000 middle-aged adults stopped attending services weekly. If mortality grew by 2 per 100,000 as a result, and assuming that the subsequent increase in middle-aged deaths came from this group, about 1 out of 5,000 of these of “marginal attenders” would consequently die from suicide, liver disease, or poisoning annually. Our back-of-the-envelope calculations suggest that declines in religious attendance can explain an important part of the initial increase in mortality due to deaths of despair. Of course, since the introduction of OxyContin in 1996, deaths of despair for middle-aged white Americans have increased dramatically both overall and relative to trend. The impact that we witness seems to be driven by the decline in formal religious participation rather than in belief or personal activities like prayer.
January 17, 2023
The Strange and Awful Path of Productivity in the U.S. Construction Sector
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.
The Disappearing Japanese Bid for Global Bonds
.@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.
How Was the U.S. Current Account Deficit Financed In 2022?
.@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”.
What the End of the US Shale Revolution Would Mean for the World
As shale fracking costs surge and firms face demands to return capital to shareholders, American shale is no longer the world’s swing producer despite record American oil exports. @ft
High costs and labor shortages now bedevil the shale patch. Wall Street wants profits paid back to investors, not reinvested in new rigs. Even with crude prices at $80 a barrel, a price far above the long-term average, shale producers still fear to splurge capital. To top it off, new wells are yielding less oil. “The aggressive growth era of US shale is over,” says Scott Sheffield, chief executive of Pioneer Natural Resources, the country’s biggest shale producer. “The shale model definitely is no longer a swing producer.” Output today remains well below the pre-Covid highs, and is now growing glacially by shale standards despite 18 months of strong oil prices.
Globalization Isn’t Dead. But It’s Changing
“Friendshoring” is underway: China’s share of US imports falling from 22% in 2017 to < 17% in 2022. Vietnamese exports to the US went from $10B in 2007 to $120B last year. From 2008 to 2022, Mexican exports to the US have doubled to $400B annually. @wsj
The result is that China’s share of U.S. imports dropped from a peak of 22% in 2017 to less than 17% last year. Other Asian economies and Mexico are gaining share—most notably Vietnam, whose exports to the U.S. rose from less than $10 billion before 2007 to more than $120 billion in 2022. The Philippines, Taiwan, Thailand, India, and Malaysia have also enjoyed rapid export growth to the U.S., while also increasing their exports to China. Mexico’s annual exports to the U.S. have roughly doubled since 2008 to more than $400 billion, and they have increased to China, too.
US-China Trade is Close to a Record, Defying Talk of Decoupling
In absolute terms US-China trade is on track to reach an all-time high in 2022 of just under $700B despite decoupling. @bloomberg
Trade between the US and China is on track to break records, a signal of resilient links between the world’s top economies amid the heated national security rhetoric in Washington and fears of “decoupling.” US government data through November suggest that imports and exports in 2022 will add up to an all-time high, or at least come very close, when the final report comes out Feb. 7. Beijing just published its own full-year figures that show record trade of around $760 billion.
Inside the High-Yield Spread
.@GregObenshain of Verdad Capital argues that narrow high-yield spreads suggest investors are not yet pricing in a recession.
Below we show our historical measure of the high-yield spread. The thin line is where the high-yield spread is today. The current value of 4.3% is just above the long-term median of 4.2%. Right now, credit spreads are suggesting default risk is about normal in the high-yield market.
Workers Lose Ground to Inflation Despite Big Wage Gains
Real wages fell over the past year, declining 1.7% year-over-year in December. In 2021, real wages had declined 2.1% through December. @WSJ
Worker pay actually fell in the past two years after accounting for inflation. Inflation-adjusted average hourly earnings—or real earnings—were down 1.7% in December 2022 from a year earlier, following a 2.1% decline in December 2021 [from a year earlier].
Waning Inflation, Supply and Demand
.@JohnHCochrane argues that cumulative inflation has raised the price level by something like 10-20%. His fiscal theory or “demand” view suggests this price shock is permanent, not “transitory.”
Inflation seems to be waning. Is this not a victory lap for “team transitory,” the view that inflation is just “supply shocks” that go away on their own? No. A “supply shock” would raise prices temporarily, and then prices would fall back down to normal once the supply shock is over. A supply shock all on its own cannot permanently raise the price level. How is the price level doing? The cumulative inflation has shifted up the price level by something like 10-20%, depending on what you think about the earlier trend. The fiscal theory or “demand” view says that this price level shock is permanent, or at least until something else comes along; a fiscal retrenchment would be necessary to lower the price level back to where it was.
It’s Getting Harder to Be a Pessimist on Inflation
.@paulkrugman argues last week’s CPI release was “really, really good news.” While both traditional core and wage core are elevated, fewer sectors are showing >10% inflation. @mtkonczal
Traditional core and wage core still suggest inflation running hotter than the Fed’s 2 percent target, but not by all that much. Until mid-2022, inflation just kept getting more widespread, and you had to work ever harder to claim that at some fundamental level it wasn’t that bad. If you want a broader view, Mike Konczal of the Roosevelt Institute has an incredibly cool graphic showing the distribution of price changes across the economy.
Striking Similarities (and Differences) Between Inflation Today and In the 1970s
Jesper Rangvid from Copenhagen Business School argues that inflation is on track to normalize over the next 18 months, but the Fed should keep rates elevated while inflation comes down given persistent core inflation. @CBScph
The behavior of US inflation during the past 5-10 years has been strikingly similar to the behavior of inflation during the early 1970s. If this continues, inflation should be back on target in mid-2024. Core inflation followed headline inflation during the early 1970s, both when inflation rose and when it fell. Today, headline inflation has been falling for the past six months, while core inflation has not. This is worrying. It indicates that underlying inflationary pressures are more pronounced today than in the early 1970s. If correct, which I think it is, it will be more difficult to get inflation under control than in the early 1970s. Consequently, I believe the Fed should keep interest rates elevated for at least one more year.
China’s Population Faces ‘Endless Period of Decline’, With Demographic Shift Far from Finished
China’s National Bureau of Statistics confirmed that China’s population dropped by 850,000 in 2022. With 9.56M births, the national birth rate fell to 6.77 per 1,000 people. @scmpeconomy
The National Bureau of Statistics confirmed on Tuesday that China’s overall population dropped by 850,000 people to 1.4118 billion in 2022, down from 1.4126 billion a year earlier. The national birth rate fell to a record low of 6.77 for every 1,000 people as Chinese mothers had only 9.56 million babies – the nation’s lowest total in modern history and the first time the figure fell below 10 million.
Pettis On Chinese Demographics
.@michaelxpettis argues that China’s demographic decline can be offset in the medium term by raising the household share of income.
It is also really a long-term problem whose effect will be overwhelmed by the near-term adjustment process. If Beijing succeeds in redistributing income to households in a non-disruptive way, a declining working population can drive more than enough growth in domestic demand. What is more, as direct and indirect wages rise, this will put pressure on China to invest in increasing worker productivity rather than invest in expanding economic activity and the building of railroads to nowhere. On the other hand, if Beijing doesn’t redistribute income to households in a non-disruptive way, China will anyway suffer a brutally difficult transition once unsustainable debt levels force it to cut back on non-productive investment.
The Housing Bubble and Mortgage Debt as a Percent of GDP
.@calculatedrisk notes that, despite the runup in home prices, household mortgage debt as a percent of GDP isn’t at the elevated levels we saw during the housing bubble.
The graph shows household mortgage debt as a percent of GDP through Q3 2022 (based on the Fed’s Flow of Funds report). The “bubble” is pretty obvious on this graph, and the sharp increase in mortgage debt was one of the warning signs. The blip up in Q2 2020 was related to the collapse in GDP rather than an increase in mortgage debt. The bottom line is there will be an increase in foreclosures over the next year (from record low levels), but there will not be a huge wave of distressed sales as happened following the housing bubble. Most homeowners have significant equity, were well qualified, and have a mortgage with low rates that they can afford. The distressed sales during the housing bust led to cascading price declines, and that will not happen this time.
January 13, 2023
JPMorgan Warns It Will Have to Pay More for Deposits In ‘Warning Shot’ For Industry
JP Morgan reported deposits in Q4 2022 were down 4% from a year earlier, the first year-on-year decline since 2016. Investors and analysts anticipate that banks will have to pay more for deposits going forward. @ft
JPMorgan Chase said it might be forced to pay more for deposits this year in what analysts called “a warning shot for the entire industry”. JPMorgan said deposits in the fourth quarter were $2.4T, down 4% from a year earlier. This was the bank’s first year-on-year decline since 2016. Investors and analysts anticipate that banks will eventually have to reward deposit holders with better rates to retain their business and JPMorgan said it expected that would be the case in 2023.
Great News on Inflation! Will It Last?
.@M_C_Klein notes a broad-based slowdown in wage growth. He highlights that “12-month median wage change is now back to where it was in the second half of the 1990s” He thinks a soft landing is “increasingly likely.”
The 12-month median wage change is now back to where it was in the second half of the 1990s—not exactly a period of excessive price increases outside of Beanie Babies and stocks. That could soon be corroborated by the Employment Cost Index (ECI), which Fed officials and others regularly view as the single best indicator of wages. The ECI only comes out once a quarter, and the latest data right now are from 2022Q3. If the Q4 number were to move in line with the most recent hourly earnings numbers and the Atlanta Fed’s median wage change tracker, then the job market would no longer a worrying source of inflationary pressure. This could be noise, but it is looking increasingly likely that inflation may in fact normalize without policymakers having to push the economy into a downturn.
Inflation Is Turning the Corner
.@greg_ip argues yesterday’s CPI release is consistent with recent inflation being largely transitory in nature, but with consumer expectations of 4.6% inflation in the coming year, “the Fed can’t signal an end to interest rate increases yet.”
Still, even if a lot of wage and price growth does prove transitory, that won’t necessarily comfort the Fed. When officials began using the term “transitory” in March 2021, the unemployment rate was 6% and consumers expected about 3% inflation in the coming year. In other words, the main determinants of underlying inflation—aggregate supply and demand and expectations—justified a sanguine outlook. Not anymore. Unemployment is now 3.5% and consumers expect 4.6% inflation in the coming year, according to the University of Michigan. This is why the Fed can’t signal an end to interest rate increases yet and the risk of a recession can’t be dismissed.
Unstable Prosperity: How Globalization Made the World Economy More Volatile
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.
Recent Waning Snowpack in the Alps Is Unprecedented in the Last Six Centuries
A new @nature study finds that over the past 50 years the snowpack in the Alps has been drawing back 5.6% per decade. The current snowpack cover is 36 days shorter than the long-term mean, a decline that is unprecedented over the last six centuries.
Over the last 50 years, the Alps experienced a 5.6% reduction per decade in snow cover duration, which already affects a region where economy and culture revolve, to a large extent, around winter. Here we present evidence from 572 ring-width series extracted from a prostrate shrub (Juniperus communis) growing at high elevation in the Val Ventina, Italy. These ring-width records show that the duration of current snowpack cover is 36 days shorter than the long-term mean, a decline that is unprecedented over the last six centuries.
January 12, 2023
Inflation Slowed to 6.5% in December
Inflation is decelerating with Core CPI rising 5.7% y/y, down from 6% in November. Core CPI rose at 3.1% annualized in the three months ending in December, well above the Fed’s 2% target. Headline inflation is running at 6.5%. @wsj
The consumer-price index, a measurement of what consumers pay for goods and services, rose 6.5% last month from a year earlier, down from 7.1% in November and well below a 9.1% peak in June. Core CPI, which excludes volatile energy and food prices, climbed 5.7% in December from a year earlier, easing from a 6% gain in November. Core prices increased at a 3.1% annualized rate in the three months that ended in December, the slowest pace in more than a year.
Jason Furman On CPI Release
.@Jasonfurman argues that while core CPI excluding housing and used cars has moderated it still isn’t consistent with the Fed’s target, “the job of getting inflation to 2% or even 3% is still not done.”
The broad story continues to be that goods prices have gone from unusually large increases to unusually large decreases. And services prices have slowed a little from their rapid summer pace but continue to grow very quickly. Excluding housing (which is ~40% of core) and used cars, super-core inflation was consistently modest for the last three months at a 1.8% annual rate over this period. That is the lowest since February 2021. Overall, 3 consecutive months of relatively moderate core inflation. And some positive developments yet to happen, like future shelter slowdown. But a bit less moderation than hoped & the job of getting inflation to 2% or even 3% is still not done.
Averting a Debt-Ceiling Disaster
.@MichaelRStrain warns the White House that House firebrands are not bluffing and that the Administration should start working on a package of spending cuts to try to avoid a default. @AEI
The first step is to throw out any plans that depend on the House firebrands playing ball. They aren’t bluffing. Biden and congressional Democrats need to accept this reality and start working on a deal today. They should acknowledge the more widely shared Republican argument that federal spending has reached problematic levels – a conviction founded at least partly on the American Rescue Plan’s role in sparking inflation – and they should then find some spending that can be cut. In exchange, the debt ceiling should be raised high enough that it will be many years before it can again be used as a weapon. Second, responsible members of Congress must make plans to avoid a default. One idea worth exploring is to use a discharge petition to force a debt-ceiling increase to the floor of the House in the event that McCarthy is unwilling to do so.
How Europe is Decoupling from Russian Energy
The EU now imports more natural gas from the United States than Russia, a trend that is likely to get more pronounced as more American LNG export capacity comes online. @josephPolitano
In fact, the massive buildout of US LNG export capacity (America became the world’s number one LNG exporter last year) combined with the total collapse in Russian natural gas supplies to Europe has meant that the EU now gets more gas from the US than the Russian Federation. In Euro terms, the EU now actually imports slightly more total energy (including oil, petroleum products, coal, etc.) from the US than Russia. Barring a rapid about-face in Russian energy politics, this gap will likely only continue to grow—American LNG export capacity is expected to increase in 2023, especially as the Freeport LNG facility in Texas recovers from its accident last year, and the EU already banned further imports of Russian crude just over a month ago.
China Eases Curbs on Property Developers to Counter Downturn
China is rolling back efforts to limit leverage in the real estate sector. @ft
China is moving away from its “three red lines” policy of limiting leverage in the property sector, after its effort to reduce risky lending and real estate speculation helped fuel a wave of defaults and triggered a slump in the property market. Beijing is now easing constraints on developer credit and even rolling out potential loans following a severe downturn that saw housing and land sales collapse, threatening a major pillar of an economy already ailing from coronavirus lockdowns. Officials at multiple state-owned banks said they had effectively shelved the leverage curbs — whose three red lines refer to targets for debt, equity, and assets for individual companies — in their assessment of borrowers. Late last year, state-owned banks announced hundreds of billions of dollars of potential new lending to property developers.
Painful As It Is, China Must Rid Its Economy of an Ever-Rising Property Market
.@michaelxpettis warns that there is likely no way to stabilize the Chinese property sector without prices falling and a significant increase in financial distress.
For now, Beijing seems to want to stabilize the property sector and slow the pace of adjustment to reduce financial distress. It is not clear, however, that this is a realistic goal. In a speculative market, it is the expectations of rising prices that generate the demand for more rising prices, and once these expectations are reversed, it is very hard to prevent prices from falling. With real demand expected to fall sharply in the next few years, it will be impossible to wring speculation out of the property market without much lower prices and a significant increase in the spread of financial distress.
US and Japan Agree to Expand Security Alliance Into Space
Japan and the United States are expanding their security cooperation to space pledging to defend each other’s satellites from Chinese attacks. @ft
The US and Japan have announced they are extending their security alliance to space in a push to defend against attacks on satellites amid growing concern about the threat from China. “We agree that attacks to, from or within space present a clear challenge,” said US secretary of state Antony Blinken after he and US defense secretary Lloyd Austin met their Japanese counterparts in Washington on Wednesday. “We affirm that, depending on the nature of those attacks, this could lead to the invocation of Article 5 of our Japan-US security treaty,” Blinken added, pointing to the section of the treaty stipulating that an attack on either party would prompt the other to “act to meet the common danger.”
January 11, 2023
How Technology Is Redrawing the Boundaries of the Firm
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.
Taxes, Revenues, and Net Migration In California
.@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.
In 2022 banks and credit unions made $1.5T in loans, an annual rate that’s three times higher than the 2018 to 2021 period. High net interest margins have increased the desire of banks to lend. @fedguy12
The total size of the banking sector was little changed over 2022, but the static surface obscures a boom in lending of epic proportions. Banks changed the composition of their assets by replacing their cash and security holdings with loans to the real economy. Around $1.2T in loans were made in 2022, a level around three times higher than that of recent years. The same explosive growth is also seen in credit unions, which are functionally similar to small banks. Credit union loans outstanding grew $0.23T from 2021Q3 to 2022Q3 (Q4 data not available), a level also there times higher than in recent years. Loan growth was strong across categories and appeared to persist despite rising rates. The huge credit growth in 2022 can be likened to the prior fiscal stimulus, with the exception that the money must one day be repaid. Borrowers have $1.5T more in purchasing power that they did not have before. The need to repay the money may affect their spending decisions and willingness to take on additional debt, but credit cycles can last for years.
China’s Population Likely Fell in 2022 as Births Hit New Low
Deaths likely outpaced births in China in 2022 with births falling to 10M, down from 10.6M in 2021. The UN expects China to lose 110 million people by 2050 and fall to about half its current size by the end of the century. @Bloomberg
The government’s official data for the total number of births in 2022 — expected to be released next week — will probably show a record low of 10 million, according to independent demographer He Yafu. That would be less than the 10.6 million babies born in 2021, which was already the sixth straight year of decline and the lowest since the founding of the People’s Republic of China in 1949. He added that the country likely recorded more deaths last year than the 10.1 million people who died in 2021, in part because of the spread of Covid infections.
January 10, 2023
The Debt Ceiling Is Scarier This Time
.@rbrtrmstrng cites @DanCliftonStrat, who notes that fiscal hawks who won three seats on the Rules Committee as part of the McCarthy fight will likely demand spending cuts as a condition of raising the debt ceiling.
The debt ceiling of $31.3 trillion is expected to be hit sometime early in the autumn. Daniel Clifton of Strategas notes: “McCarthy agreed to allow three House Freedom Caucus members to sit on the Rules Committee and these members are likely going to demand spending cuts, which do not have the support of a majority of House Republicans, let alone Democrats, as a condition of raising the debt ceiling. The importance of this cannot be overstated. Legislation has to go through the Rules Committee to be placed on the floor under regular order in the House. Conservatives have weakened the Speaker and have leverage.”
Brad Setser On Global Balance of Payments
.@Brad_Setser notes how closely the East Asian and oil-exporter surplus lines up with American deficits.
The global balance of payments has to add up (at least in theory). But it is still surprising how well the surplus of East Asia and main oil exporters lines up with the deficits of the US and a few others — (excluding the EU makes everything line up better). To make sure I don’t completely bury the lede — the surplus of the Asia + oil block has doubled since 2020 … so there have to be some offsetting adjustments in the global deficit. The recycling is taking place in rather complex ways, as the big surplus countries aren’t just adding to their reserves/ it isn’t flowing directly into bonds.
Data Update 1 for 2023: Setting the Table
In January 2023 @AswathDamodaran found the market capitalization of EU and UK-based firms was 41% of American firms, and Chinese firms represented 38% of American firms.
In my sample, I include all publicly traded firms with market capitalizations that exceed zero, traded anywhere in the world. While there are risks in bringing in very small and lightly-traded companies, with shaky data, into the sample, I include them to avoid the biases that will be created in industry averages by looking at just larger publicly traded companies or just US-listed companies. In January 2023, I ended up with 47,913 publicly traded firms in my sample, with the pie chart above providing a geographic breakdown.
Revisiting the Connection Between State Medicaid Expansions and Adult Mortality
New @nberpubs finds that Medicaid expansion between 1994 and 2005 had no impact on mortality rates: “we find no evidence that Medicaid expansions affect any of the outcomes in any of the treated states or all of them combined.”
This paper examines the impact of Medicaid expansions to parents and childless adults on adult mortality. Specifically, we evaluate the long-run effects of eight state Medicaid expansions from 1994 through 2005 on all-cause, healthcare-amenable, non-healthcare-amenable, and HIV-related mortality rates using state-level data. We utilize the synthetic control method to estimate effects for each treated state separately and the generalized synthetic control method to estimate average effects across all treated states. Using a 5% significance level, we find no evidence that Medicaid expansions affect any of the outcomes in any of the treated states or all of them combined. Moreover, there is no clear pattern in the signs of the estimated treatment effects. These findings imply that evidence that pre-ACA Medicaid expansions to adults saved lives is not as clear as previously suggested.
Restoration of the Ozone Layer Is Back on Track, Scientists Say
According to a @UN report the Earth’s ozone layer, which protects the Earth from the majority of the Sun’s ultraviolet radiation, is on track to reach pre-1980 levels by 2040.
The weakened ozone layer, which is vital to protecting life on Earth, is on track to be restored to full strength within decades — the latest success of a global effort by nations to stop using chemicals that had been destroying the critical layer in the upper atmosphere. In a report for the United Nations, scientists said Monday that if countries continue to maintain the bans on chlorofluorocarbons and other chemicals, ozone levels between the polar regions should reach pre-1980 levels by 2040. Ozone holes, or regions of greater depletion that appear regularly near the South Pole and, less frequently, near the North Pole, should also recover, by 2045 in the Arctic and about 2066 in Antarctica.
January 9, 2023
Is The U.S. Job Market Disinflationary Now?
.@M_C_Klein reports that the latest revisions show that annualized average hourly pay growth was less than 4% in December, down from the 7.5% average from March-Sept. 2022. Klein argues that the high quit rate makes further near-term reductions unlikely.
Total weekly wages paid to employees—the number of workers on payroll times the average workweek times average hourly pay—is now rising at a yearly rate of less than 4%. That is a dramatic deceleration from March-September 2022, when aggregate wage income was still rising about 7.5% annualized. If this holds up, even the most persistent components of inflation should quickly come back into line. The number of people quitting rose so much in November—the latest month for which we have data—that the proportion of workers quitting their jobs for better prospects elsewhere rose for the first time since the spring. Until that changes, it is hard for me to imagine (nominal) wage growth slowing down much more than it already has, even if nominal labor income growth has already decelerated sharply thanks to the slowdown in hours worked.
Upward Mobility Is Alive and Well in America
Phil Gramm and John Early report on @MichaelRStrain analysis that found robust absolute mobility in America. Only 28% of children raised in the bottom quintile had adult incomes that were in the same quintile and 26% reached the top quintile. @AEIecon
When the income of the children is compared with the inflation-adjusted income of their parents using the real income quintiles of their childhood in 1982-86 rather than the income quintiles of 2013-17, measured mobility is dramatically greater. Only 28% of children reared in the bottom quintile had adult incomes that would put them in the bottom childhood quintile, and 26% rose all the way to the childhood top quintile, which required a minimum income of only $111,416 (in 2016 dollars) for a family of four in 1982-86. A family of four with that income in 2013-17 would have been in the middle quintile based on 2013-17 income distribution.
Signs of Progress
The United States has been a net exporter of energy since 2019, a trend that is poised to accelerate with increasing LNG exports. @GregorMacdonald
In recent years, however, the amount of energy that the US exports has actually started to blot out the energy it still imports. Enough so, that the US has finally moved out of its post-war energy deficit, into a small surplus. In other words, from a trade balance perspective, its current account in energy terms is now positive. Here, we examine this trade balance not in dollar terms, but in energy content terms. And as you can see, after running in the red for a long time (certainly longer than is covered in the chart) the US has now moved into the black. Net imports, which used to be positive, are now negative. That’s a powerful position to be in, and we saw an example of this power just this year, when American LNG started making its way to Europe, during Putin’s war of aggression.
The Extreme Shortage of High IQ Workers
.@ATabarrok uses semiconductor manufacturing to argue that properly trained talent is the limiting constraint to growth at the technological frontier. He notes that only 164,000 potential American workers have the IQ needed to manage the process.
Although not everyone in semiconductor manufacturing requires a PhD, pretty much everyone has to be of above-average intelligence, and many will need to be in the top echelons of IQ. At the very top of semiconductor manufacturing, you are going to need workers with IQs at or higher than 1 in a 1000 people and there are only 164,000 of these workers in the United States, and US might be able to place only say 100,000 high-IQ workers in high-IQ professions. It’s very difficult to run a high-IQ civilization of 330 million on just 100,000 high-IQ workers. To some extent, we can economize on high-IQ workers by giving lower-IQ workers smarter tools and drawing on non-human intelligence. But we also need to draw on high-IQ workers throughout the world–which explains why some of the linchpins of our civilization end up in places like Eindhoven or Taiwan.
US Military Deepens Ties With Japan and Philippines to Prepare For China Threat
The US and Japanese armed forces have “seen exponential increases…just over the past year” in their joint preparations for a possible conflict with China, according to Lieutenant General James Bierman, the commanding general of Marine Forces Japan. @ft
The US and Japanese armed forces are rapidly integrating their command structure and scaling up combined operations as Washington and its Asian allies prepare for a possible conflict with China. The two militaries have “seen exponential increases . . . just over the last year” in their operations on the territory they would have to defend in case of a war, Lieutenant General James Bierman, commanding general of Marine Forces Japan, told the Financial Times in an interview. “Why have we achieved the level of success we’ve achieved in Ukraine? A big part of that has been because after Russian aggression in 2014 and 2015, we earnestly got after preparing for future conflict: training for the Ukrainians, pre-positioning of supplies, identification of sites from which we could operate support, sustain operations,” he said. “We call that setting the theatre. And we are setting the theatre in Japan, in the Philippines, in other locations.”
Here’s One Possible Answer to the Puzzle of the Mystery Gold Buyer
A TD Securities analysis suggests that the recent uptick in gold price has been driven by buying by the Chinese official sector. @tracyalloway @TheStalwart
Commodities strategists at TD Securities are on the case, speculating in a note published on Monday that the gold whale could be the Chinese official sector. “Armed with a flows-based approach, we present strong evidence that behemoth Chinese and official sector purchases may have single-handedly catalyzed a $150/oz mispricing in gold markets. What is less clear is what has driven these massive purchases.” While TD might be able to trace buying to China, it’s not entirely clear to them what’s driving those purchases. Here, the strategists theorize about a number of possibilities stretching from extra demand stemming from recent reopening measures as well as restocking ahead of China’s Lunar New Year. But there’s also the possibility that China is purchasing gold for strategic, rather than strictly economic factors.
Papers and Patents Are Becoming Less Disruptive Over Time
A new @nature study documents a decline in the average “disruptiveness” of science and technology across both papers and patents, but notes that the absolute number of highly disruptive works remains stable. @michae1park
Across fields, we find that science and technology are becoming less disruptive. Figure 2 plots the average CD5 [an index that characterizes how papers and patents change networks of citations in science and technology] over time for papers (Fig. 2a) and patents (Fig. 2b). For papers, the decrease between 1945 and 2010 ranges from 91.9% (where the average CD5 dropped from 0.52 in 1945 to 0.04 in 2010 for ‘social sciences’) to 100% (where the average CD5 decreased from 0.36 in 1945 to 0 in 2010 for ‘physical sciences’); for patents, the decrease between 1980 and 2010 ranges from 78.7% (where the average CD5 decreased from 0.30 in 1980 to 0.06 in 2010 for ‘computers and communications’) to 91.5% (where the average CD5 decreased from 0.38 in 1980 to 0.03 in 2010 for ‘drugs and medical’). For both papers and patents, the rates of decline are greatest in the earlier parts of the time series, and for patents, they appear to begin stabilizing between the years 2000 and 2005. For papers, since about 1980, the rate of decline has been more modest in ‘life sciences and biomedicine’ and physical sciences, and most marked and persistent in social sciences and ‘technology’.
Where Are the Workers? From Great Resignation to Quiet Quitting
New @nberpubs research finds that Americans are working 3% fewer hours annually in the aftermath of the pandemic. This reduction in hours worked means labor markets are even tighter than LFP would imply.
The negative impact of the Great Recession on aggregate hours worked and the ensuing slow recovery through 2019 materialized almost exclusively along the extensive margin. However, of the 3% decline in annual hours worked per person (including those who do not work) between 2019 and 2022, more than half is accounted for by the intensive margin. That is, focusing only on the extensive margin (lower employment and participation rates) will underestimate the total decline in labor supply by more than half. The most striking fact is the lower participation of young male cohorts without a bachelor’s degree, whose participation rate is up to 7pp below that of older cohorts at the same age. The Great Recession seems to be casting a very long shadow, even on those who were in their teens when it happened.
January 6, 2023
US Hiring Solid While Wages Cool, Giving Fed Room to Slow Hikes
Nonfarm payrolls increased by 223,000 in December and the unemployment rate declined to 3.5%, matching a five-decade low. @Bloomberg
Nonfarm payrolls increased 223,000 in December, capping a near-record year for job growth, a Labor Department report showed Friday. The advance followed a 256,000 gain in November. Average hourly earnings rose 0.3% from a month earlier and 4.6% from December 2021 after November’s previously eye-popping gain was revised lower. The unemployment rate decreased by 0.1 percentage point to 3.5%, matching a five-decade low, as participation inched higher. The labor force participation rate — the share of the population that is working or looking for work — ticked up to 62.3%, and the rate for workers ages 25-54 rose.
What if Inflation Suddenly Dropped and No One Noticed?
Alan Blinder notes that November’s 12-month CPI was 7.1%, however, between June-November 2022 CPI inflation ran at only a 2.5% annualized rate. Blinder concludes, “the inflation future does indeed look brighter than the inflation past.
The CPI inflation rate over the past 12 months has been an alarming 7.1%. But the U.S. economy got there by averaging an appalling 10.6% annualized inflation rate over the first seven months and a mere 2.5% over the last five. The PCE price index tells a similar story, though a somewhat less dramatic one. The 5.5% inflation rate over the past 12 months came from a 7.8% rate over the first seven months followed by a 2.4% rate over the last five. If you concentrate instead on “core” inflation, which excludes food and energy prices, annual inflation over the past five months has run higher: a 4.7% annual rate for the CPI and 3.7% for the PCE. So the Fed’s fight against inflation isn’t over.
Recession Prediction On The Clock
.@sffed analysis of the jobless unemployment rate finds that it is an effective recession forecaster and that “the jobless rate does not currently signal an impending recession.”
[The above chart] plots the change in the smoothed jobless unemployment rate (first derivative) on the horizontal axis and the change in the change (second derivative) on the vertical axis. Recession months are depicted as red dots and expansion months as green dots. This predictor is almost as accurate as the slope of the yield curve but is more accurate at shorter horizons. The jobless rate does not currently signal an impending recession, nor do other macroeconomic time series analyzed using the same methodology. In general, however, examining these series suggests that the business cycle is at a maturing stage when expansions typically come to an end.
Global Supply Chain Pressure Index: The China Factor
.@NewYorkFed measure of supply chain stress was 1.18 in December, up from .94 in September, as deteriorating conditions in China have led to a pause to improvements.
The Global Supply Chain Pressure Index peaked at 4.3 standard deviations above its historical mean at the end of 2021, after which it declined substantially. The initial period of decline saw it drop to 2.8 by March 2022, after which it temporarily increased in April, primarily due to pandemic lockdowns in China and the Russia-Ukraine war. The GSCPI then experienced five consecutive months of declines, reaching a low of 0.9 in September. However, the past three months have witnessed a pause in the reversion to the historical average, with the index increasing by a total of 0.29 points in October and November before declining by 0.05 points last month, leaving the total three-month increase at about a quarter point. We can partly attribute the recent slowdown of the GSCPI’s return to its historical average to worsening supply conditions in China, which have also spilled over into its neighboring trade partners.
.@FedGuy12 questions the sustainability of the QT regime, noting that American households are the current marginal buyer of short-dated Treasuries. He thinks that this pattern cannot continue without bringing banking reserves to untenable levels.
A change in the underlying plumbing of the financial system is making it unlikely that QT can run its expected 2+ year course. An ideal QT would drain liquidity in the overall financial system while keeping liquidity in the banking sector above a minimum threshold. The marginal buyer of short-dated Treasuries over 2022 Q3 appears to surprisingly be U.S. households. Federal Reserve data show that household purchases of Treasuries surged to record levels on a seasonally adjusted annual basis as [money market funds] notably shrank their holdings. Households appear to have replaced money market funds as the marginal buyer of bills and are funding their purchases out of funds held in the banking sector.
January 5, 2023
Guide To The Markets
J.P. Morgan estimates consumers still have $900B of excess savings, down from a peak of $2.1B in August 2021.
From March 2020 to August 2021, consumers amassed a peak $2.1 trillion in excess savings relative to the pre-pandemic trend. Since August 2021, consumers have drawn down on these excess savings. Household debt payments were 9.8% of disposable personal income in Q4 ’22 vs. a peak of 13.2% in Q4 of ’04.
Retirements, Net Worth, and the Fall and Rise of Labor Force Participation
.@mfariacastro at @stlouisfed estimates that the decline in asset values in 2022 drove 170,000 workers aged 51-65 back into the labor force. This represents 16% of the increase in LFP from Jan through Oct 2022.
The figure above plots the estimated average change in net worth per head of household age category during 2022. People between the ages of 55 and 74 lost, on average, over $100,000 in net worth due to falling asset returns between January and October 2022. This partly reverses some of the net worth gains in 2020-21, which were particularly high for these age groups. This is explained by the high exposure (in absolute terms) of people in these age groups to asset classes such as stocks and bonds, which performed reasonably well in 2020-21 but posted significant negative returns during 2022. Focusing on only people between the ages of 51 and 65, whose decision to participate in the labor force tends to be more sensitive to wealth effects, we find that the decline in asset values may have caused an extra 170,000 people to return to the labor force. This corresponds to an increase in the LFP rate of 0.06 percentage points, or about 16% of the total increase observed through October 2022.
The Layers of Inflation Persistence
.@NewYorkFed notes evidence of an ongoing decline in core PCE inflation starting in September 2022, with the exception of housing costs.
We find evidence of a decline in the size of the persistent component of core PCE inflation starting in September 2022. The decline follows a long period of high and essentially constant inflation persistence. Dissecting the layers of aggregate inflation provides further insights: core goods and core services ex-housing have been moderating since early 2022, reflecting the evolution of the common component, while housing has continued to move up, driven by its own sector-specific trend. The chart below shows a sectoral decomposition of the increase in inflation from its pre-pandemic average. The chart shows that the persistent component of housing represents a fair amount of the overall increase in trend, comparable to the contribution of core goods and core services ex-housing.
Chinese Researchers Claim to Find Way to Break Encryption Using Quantum Computers
Chinese computer scientists claimed to have used quantum computing to break the RSA algorithm that underpins the vast majority of online encryption. However, the algorithm may not be fast enough to be relevant. @FT
Computer security experts were struggling this week to assess a startling claim by Chinese researchers that they have found a way to break the [RSA algorithm,] the most common form of online encryption, using the current generation of quantum computers, years before the technology was expected to pose a threat. Peter Shor, the Massachusetts Institute of Technology scientist whose 1994 algorithm proving that a quantum machine could defeat online encryption, noted that the Chinese researchers had “failed to address how fast the algorithm will run”, and said that it was possible it “will still take millions of years”. He said: “In the absence of any analysis showing that it will be faster, I suspect that the most likely scenario is that it’s not much of an improvement.”
Laid-Off Tech Workers Quickly Find New Jobs
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.
January 4, 2023
The End of the Affair
J.P. Morgan’s Michael Cembalest argues that there may be attractive investment opportunities following last year’s tech company repricing: ~50% of large-cap tech companies that were unprofitable in 2000 were eventually able to generate profits and healthy returns.
After last year’s selloff, we’re much closer to the end of the young unprofitable companies/mega-valued unprofitable companies repricing than the beginning. By the time Peloton is priced at 1x sales rather than its peak level of 19x sales at the end of 2020, it’s time to start thinking about whether unprofitable companies can become profitable or not. Many unprofitable companies are in that position since the market did not require them to be profitable. The aftermath of the 2000-2002 dot-com crash is interesting in this regard: The chart above shows the performance of tech companies from 2000 to 2004 based on their initial and subsequent profitability. Companies that remained unprofitable continued to languish. However, unprofitable companies that became profitable by 2004 rallied sharply, catching up to companies that had been profitable all along. This incorporates the benefit of perfect hindsight; still, it does indicate that for stock pickers that sift through the wreckage to try and identify survivors, there may be attractive opportunities. The size of [“unprofitable in 2000” cohort that became profitable by 2004] was roughly 50% of the “unprofitable in 2000” universe.
Silicon Valley Staff Rush to Offload Start-Up Shares as Valuations Plummet
Shares of privately held tech firms traded on secondary markets have collapsed in price. Platforms such as Rainmaker Securities have facilitated private security transactions and have made the price declines of private companies more transparent. @ft
Employees of embattled tech groups are flooding secondary markets — where stakeholders in a private company sell shares to third parties — as the industry’s former darlings such as Klarna and Stripe have been forced into aggressive cost-cutting measures, according to brokers and investors. For many workers who have lost their jobs, their shares vest within 60 days, forcing them to sell during the worst downturn in a decade. Some companies are offering an extension on this timeframe, according to brokers, although some sellers want to get out of their holdings over fears the market rout will get worse next year. However, trading in many of these companies showed a return to, or an improvement on, pre-pandemic prices, following a significant jump in valuations during a VC fundraising boom in 2021.
SPAC Boom Ends in Frenzy of Liquidation
Since the start of December over 70 SPACs have liquidated, generating losses for SPAC creators of over $600M for the month and driving total losses to $1.1B. @WSJ
Roughly 70 special-purpose acquisition companies have liquidated and returned money to investors since the start of December. That is more than the total number of SPAC liquidations in the market’s history, according to data provider SPAC Research. SPAC creators have lost more than $600 million on liquidations this month and more than $1.1 billion this year, the data show. There are still nearly 400 SPACs together holding about $100 billion that have yet to find deals, according to SPAC Research. There are another roughly 150 SPACs holding about $25 billion that have reached merger agreements but haven’t closed them.
The Relationship between Consumption Growth and Inflation
According to an analysis by @stlouisfed, tighter monetary policy did not impact consumption growth until November 2022.
The blue dots in the figure show three “normal” subperiods, in which [annualized PCE] inflation was between 1% to 3% and real consumption growth was about 2% to 3%. There is also a positive relationship between consumption growth and inflation. The red dots show two high inflation subperiods, from April 2021 to February 2022 and from March to July 2022. Although inflation was very high (about 6%) in both periods, consumption growth was average. This suggests the high inflation was because of something other than growing demand. In that case, inflation during these periods may be associated with supply disruptions, or other components of demand (e.g., government consumption), rather than high real consumption growth. Since March 2022, the Federal Reserve has raised interest rates, so the second period highlighted in red also corresponds to a period of tightening monetary policy. From March to July 2022, inflation continued at 6%, and consumption growth was slightly higher than in the previous months. This pattern suggests that monetary policy, at least during those months, didn’t yet reduce consumption growth. The last four months are depicted with green dots [with seasonally-adjusted monthly PCE and real consumption growth rates annualized.] Two patterns are clear. First, inflation is significantly lower in the four months and is now close to 1%. Second, real consumption growth was very high during August and October but finally decreased to an annual rate of just over 0% in November. Thus, only the data corresponding to November suggests that the monetary mechanism described above may be working.
Monetary Policy in a Shortage Economy
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.
Google and Meta’s Advertising Dominance Fades as TikTok, Streamers Emerge
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.
The Voters Who Helped Democrats Keep the Senate
.@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.
2022 Review: How Republicans Lost Despite Winning the Popular Vote
.@Nate_Cohn of @NYT notes that Republicans won the national House vote 51% to 48% but lost statewide in key Senate races where they won the statewide House vote, as candidates backed by former President Trump ran far behind mainstream Republicans in PA, AZ, GA, and NV.
Republicans won the national House popular vote by three percentage points — 51 percent to 48 percent. They still won by two points after adjusting for races in which only one major party was on the ballot. Republican candidates won the most votes for U.S. House in all four of the crucial Senate states where Republicans fell short: Pennsylvania, Arizona, Georgia, and Nevada. The “MAGA” Republicans — as characterized by The Cook Political Report, based on their backing from Mr. Trump in the primaries — ran far behind the mainstream Republicans.
January 3, 2023
The Unexpected Compression: Competition at Work in the Low Wage Economy
.@davidautor shows high school workers’ wage growth overtaking college wage growth in the aftermath of the pandemic and argues that higher wages better reflect rising productivity as companies compete more intensively for workers.
For first time in four decades, wage inequality falling, due to rising lower tail. Despite inflation, real wages rising among young HS grads, 1st quartile workers. It’s tempting to attribute this change to ‘tight’ labor markets—but what does this mean in practice? The simplest explanation is that labor markets are operating on a higher point on the labor demand curve. Evidence indicates this explanation too simple: Competition has intensified. Distinction is critical: Rising competition means higher wages that better reflect productivity and higher aggregate productivity — a double dividend.
Wage Inequality May Be Starting to Reverse
The American college workforce is 5% larger than in Feb 2022, whereas the high school workforce is 4% smaller. This has likely contributed to the decrease in earnings inequality in the post-pandemic period. @Greg_Ip
In the decades before the pandemic, the wages of lower-paid, less skilled hourly employees steadily lost ground to those of skilled workers, college graduates, managers, and professionals. In the two years since, those trends have sharply reversed. We don’t know if this narrowing in inequality will last. Perhaps it is a function of labor shortages that, like semiconductor shortages, will disappear as the pandemic recedes. Maybe it is the result of a tight labor market whose days are numbered as the Federal Reserve seeks to cool the economy. Some of this was catalyzed by the pandemic, which shrank the supply of people willing to do traditionally low-paid work. Many dropped out of the labor force, retired, or died from Covid-19. The college-educated labor force was 5% larger last month than in February 2020; the high school-educated and high school dropout labor force is 4% smaller. (Data between the two periods isn’t strictly comparable.)
Global Trade Is Shifting, Not Reversing
Bank of America notes evidence of reshoring to Mexico at the expense of China with imports of Mexican low-tech goods such as plastics and textiles up ~60% relative to pre-pandemic levels.
Another big winner in the U.S.-China trade war could be Mexico. It has lower wages than China, an established manufacturing sector anchored by the automotive industry, and the perfect geographic position for serving the U.S. market—particularly since the rise of videoconferencing, which has increased the importance of being in the same time zone. Analysts at Bank of America already see some evidence that this is happening, with U.S. imports of Mexican manufactured goods roughly 60% higher than before the pandemic as of October. Interestingly, Mexico has gained share of U.S. imports in some low-tech industrial sectors such as plastics and textiles, while China has lost share.
Pettis on “Friend-Shoring”
.@michaelxpettis argues that moving production away from chronic surplus countries like China to countries like Mexico will increase global demand as Mexican export revenues are converted to imports.
There is a stronger economic reason for Washington to encourage switching production from countries with large-persistent trade surpluses to countries, like Mexico, with balanced trade, or even trade deficits. Because wages and household income comprise a higher share of Mexican output, when an American business shifts production to Mexico, this will likely increase US imports from Mexico. This is not what happens when a US business relocates to a trade surplus country. In that case, because their workers receive a much lower share of what they produce, and their businesses a higher share, part of the country’s export revenues are converted into savings.
Millennials are Shattering the Oldest Rule in Politics
An analysis by @jburnmurdoch suggests millennials in the US and UK are breaking a historical pattern of becoming more conservative in their voting behavior as they age.
By my calculations, members of Britain’s “silent generation”, born between 1928 and 1945, were five percentage points less conservative than the national average at age 35, but around five points more conservative by age 70. The “baby boomer” generation traced the same path, and “Gen X”, born between 1965 and 1980, are now following suit. Millennials — born between 1981 and 1996 — started out on the same trajectory, but then something changed. The most likely explanation is a cohort effect — that millennials have developed different values to previous generations. This is borne out by US survey data showing that, having reached political maturity in the aftermath of the global financial crisis, millennials are tacking much further to the left on economics than previous generations did, favoring greater redistribution from rich to poor.
The Wealth of Generations: Latest Update
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.)
The Pandemic Drinking Binge Just Keeps Going
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.
22 Top Fiscal Charts of 2022
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.
Calomiris on Gramm Ekelund and Early on Income Distribution
.@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.
Russian Power in Decline
Nicholas Eberstadt @AEI notes that prior to the Russo-Ukrainian War life expectancy for a 15-year-old Russian male “was essentially indistinguishable from 15-year-old males in Haiti.”
According to World Health Organization estimates, life expectancy in 2019 for 15-year-old Russian males was essentially indistinguishable from 15-year-old males in Haiti. This is not a typo. The estimate for both Haiti and Russia was 53.7 years. That teenage Russian male stood worse survival chances in Russia than in 23 of the 46 countries the United Nations categorizes as “least developed” — among them Mali, Yemen, and even war-decimated Afghanistan. Projecting from 2019 survival trajectories, over one in four 20-year-old males will die before their 60th birthday. The corresponding risk in Europe is only half that high — and those European aggregates, remember, are distorted by including Russia in them.
December 20, 2022
Yen Surges as Kuroda’s Yield Cap Shock Sparks Normalization Bets
The Bank of Japan shocked analysts by letting Japanese 10-Year bonds yield rise from 0.25% to 0.5%. The yen strengthened to 132.28 per dollar, compared with 137.16 immediately before the announcement. @Bloomberg
Bank of Japan Governor Haruhiko Kuroda shocked markets by doubling a cap on 10-year yields, sparking a jump in the yen and a slide in government bonds in a move that helps pave the way for possible policy normalization under a new governor. The BOJ will now allow Japan’s 10-year bond yields to rise to around 0.5%, up from the previous limit of 0.25%, while keeping both short- and long-term interest rates unchanged, according to a policy statement Tuesday. “Whatever the BOJ calls this, it is a step toward an exit,” said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official. “This opens a door for a possible rate hike in 2023 under a new governorship.”
How the BOJ's Move Will Reverberate Across Global Markets
.@tracyalloway notes that the uptick in Japanese rates risks the cheap funding that has enabled the yen carry trade and could further reduce demand for Treasuries.
The move puts the yen’s role as a cheap funding currency in doubt and potentially sets in motion a mass reshuffling of global capital. With higher rates now on offer from Japanese government bonds, there’s a chance that money is pulled from foreign investments and plowed into domestic ones. That could potentially add to worries over who will be buying US government debt in the midst of higher inflation, new regulatory requirements for big investors, and perhaps new competition from Japanese government bonds.
Silicon Valley start-ups race for debt deals in funding crunch
With the total value of new venture capital funding down 42% to $286B for the first 11 months of 2022, many private technology companies are turning to debt markets to avoid writing down their equity valuations. @ft
A sharp decline in venture capital dealmaking, alongside a closed market for initial public offerings, has resulted in a funding crunch for many private technology companies over the past year. Company founders have entered into debt-focused deals such as bridge loans, structured equity, convertible notes, participating bonds and generous liquidation preferences. These moves are designed to avoid a dreaded “down round” — accepting funding at a far lower valuation than a company had previously secured. New VC deals fell 42% in the first 11 months of this year to $286bn, compared to the same period last year, according to investment data company Preqin. Silicon Valley law firm Cooley said the total value of late-stage VC deals it advised on had slumped almost 80% this year.
New Tenant Repeat Rent Index
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.
Apple to Start Making MacBooks in Vietnam by mid-2023
Apple will start MacBook production in Vietnam this spring as the company seeks to complete an “out of China” option for all major products. @NikkeiAsia
Apple plans to move some MacBook production to Vietnam for the first time next year as the U.S. tech group continues diversifying its production base away from China amid escalating tech tensions between Washington and Beijing. Apple has tapped its top supplier, Taiwan’s Foxconn, to start making MacBooks in the Southeast Asian nation as early as around May, sources briefed on the matter said. Apple has been working to add production sites outside of China for all of its major product lines, but doing so for the final one, the MacBook has taken longer due to the complex supply chain needed for making laptop computers. “After the MacBook production shifts, all of Apple’s flagship products basically will have one more production location beyond China … iPhones in India and MacBooks, the Apple Watch and iPads in Vietnam,” one person with direct knowledge of the matter told Nikkei Asia. “What Apple wants now is an ‘out of China’ option for at least part of production for all of its products.”
The Contribution of High-Skilled Immigrants to Innovation in the United States
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.
.@mjmauboussin shows capital expenditures net of depreciation as a percentage of sales peaked in 1988 at 6.9%. Over the past decade it has averaged 1.8% and fell to 0.5% in 2020 during the pandemic.
Exhibit 25 shows capital expenditures minus depreciation for the population we studied. Using this measure, investment as a percentage of sales peaked in 1988 at 6.9% and bottomed in 2020 at 0.5 percent of sales. The average of the past decade was 1.8%. The two substantial limitations to using depreciation as a proxy for maintenance capital expenditures include inflation and the risk of technological obsolescence. In periods of rising prices (such as 2022), the capital expenditures required to replace new equipment will exceed depreciation because new expenditures reflect inflation whereas depreciation is based on historical costs. Technological obsolescence introduces the likelihood that depreciation overestimates an asset’s useful life.
December 19, 2022
Britain’s Economic Record Since 2007 Ranks Near The Bottom Among Peer Countries
Britain has seen a relative decline in GDP per person, growing only 7% between 2007 and 2022 relative to 15% growth in the United States. UK GDP per hour worked productivity grew 4% during that period relative to 18% in the United States @Economist
On a per-person basis, Britain’s economy has grown by 7% in real terms since 2007. That is just ahead of Canada and France, both at 6%, but behind America, Australia, and Germany, which sit at 13-16%. Unfortunately, much of Britain’s meager growth has come not from working more efficiently but rather from working more. Over the past 15 years, British labor productivity has climbed by just 4%, slightly behind France’s 6% and far worse than the other countries’ double-digit gains.
Britain’s NHS faces huge challenges in 2023
Britain’s National Health Service is under increasing stress, with 6.8mm people on its waiting lists, up from 4.2mm prior to the pandemic. Britain has 2.9 doctors per thousand people, vs. 3.7 average for the OECD. @Economist
The NHS is in poor shape. It has 6.8m people on waiting lists, up from 4.2m before the pandemic. EU countries in the OECD, a club of mostly rich countries, have an average of 3.7 doctors per 1,000 people (Austria has 5.4). Britain has 2.9.
SCE Labor Market Survey Shows Average Reservation Wage Continues Upward Trend
According to the @NewYorkFed, the reservation wage continues to climb, with the average now $73,667. Since March 2020, that’s a 19.4% increase for employed workers and 12% for the unemployed.
When we look at the series for employed and non-employed (unemployed or out of the labor force) respondents separately, as in the chart below, we observe that the average reservation wage has been increasing for both groups since late 2017, but more so since the onset of the pandemic. In addition, the chart displays the increase since the onset of the pandemic (since March 2020) to be more pronounced for employed respondents. Specifically, while the average reservation wage increased by 19.4% between March 2020 and November 2022 for employed respondents, it increased by around 12 percent for non-employed respondents in the same time period. Among the employed respondents, we observe the highest rise in this time period for those without a college degree (a 27% increase).
What The Fed Says Versus What the Market Has Priced In
.@biancoresearch sees two scenarios for equities, both bad: either the stock market declines on weak recessionary earnings and the Fed pivots, or the economy stays hot, and the market declines on higher-than-expected rates.
As this chart shows, there is a big difference between what the market and the Fed thinks. And this divergence will define the first part of 2023 trading. What does the Fed see causing the funds rate to stay at 5.125% next year? Start with the labor market. The simple truth is the jobs market is NOT weakening. And the Fed is not changing unless it shows UNMISTAKABLE signs of weakening.
Lies, Damned Lies and ‘Underlying’ Inflation
.@paulkrugman notes that, despite high inflation, there is a continued absence of evidence that inflation has become entrenched, with median one, three, and five-year-ahead inflation expectations declining to 5.2%, 3.0%, and 2.3%, respectively.
We do, however, have some direct evidence on inflation expectations. For example, here are the results of an ongoing survey by the New York Fed. People do expect elevated inflation over the next year, probably because they’re extrapolating from elevated gas prices earlier this year. But medium-term inflation expectations are quite low. There’s just no sign of inflation getting entrenched.
The Fed Is Getting Less Sanguine About Inflation. Here’s Why
.@M_C_Klein argues that inflation is unlikely to decline until nominal wage growth slows, which it has not to this point.
There does seem to be a connection between the acceleration in wage growth over the past year or so and the acceleration in the inflation rate of services other than housing, electricity, and gas. One could reasonably quibble that “services excluding housing and energy services” is 32% health care prices charged by providers to insurers (including Medicare and Medicaid), 13% imputed financial and insurance services, plus 9% “social assistance” (excluding child care) and non-profits. None of those prices are necessarily linked to wages. But these problematic categories do not explain why inflation has accelerated. In fact, excluding those categories, along with other non-market PCE, makes core services inflation looks substantially worse, as can be seen in the difference between the green line and the orange line in the chart above.
New Year, New Congress, New Economic Risks
Michael Boskin notes that tight labor markets may cause firms to respond to declining demand with fewer layoffs than in a typical recessionary cycle. @AEIecon @ProjSyn
The single biggest factor in the 2023 outlook is how firms will respond to a likely reduction in demand. Will businesses announce substantial layoffs, as usual? Or will the difficulties in finding and retaining qualified workers lead them to sacrifice short-run profits to keep people on the payroll? (Many have already been laid off in the tech sector, but that is because those companies binge-hired in 2020 and 2021.)
Age and the Impact of Innovations
.@mattsclancy notes that American scientist are aging and notes research that found a sharp fall in productivity after 25 years.
Scientists are getting older. Above is the share of employed US PhD scientists and engineers in three different age ranges: early career (under 40), mid-career (ages 40-55), and late career (ages 55-75). The figure covers the 26 years from 1993-2019. Over this period, the share of mid-career scientists fell from about half to just under 40%. Most (but not all) of that decline has been offset by an increase in the share of late career scientists. And within the late career group, the share older than 65 has more than doubled to 27% over this time period. Yu and coauthors still find a sharp fall off in both productivity and citations to top papers after 25 years of career experience. For a scientist who first published at the age of 25, that’s 50 years old. The share of scientists who fall into this “late career” demographic has been on the rise.
Vietnam Boots UK Out of Top Seven US Trading Partners
Vietnam will displace Britain as one of the US’s top seven trading partners. Vietnam’s share of US goods trade is now 2.7%. The US’s largest trading partners are Canada at 15%, Mexico at 14.7%, and China at 13.2%. @Bloomberg
Vietnam is on track this year to bump Britain from its long-time place among the US’s top seven goods trading partners, which would be the first time the UK hasn’t been in that group in records going back at least to 2004. The UK’s share of the US merchandise trade slid to 2.6% through the first 10 months of this year, while Vietnam’s rose to 2.7%, according to Census Bureau data. The numbers reflect trends that both predate the pandemic and were accelerated by it. China’s share of US goods trade, which stood at 13.2% in October, has been edging down since it peaked on a full-year basis at 16.4% in 2017.
Germany Opens Floating Gas Terminal at North Sea Port
Germany has opened the first of five floating storage and regasification units, each with a capacity of 5B cubic meters per year of gas. Overall, Germany will soon have LNG import capacity of half the total volume of Russian gas imported last year. @FT
Germany has opened its floating liquefied natural gas terminal in the North Sea port of Wilhelmshaven, marking a crucial milestone in its quest for energy independence from Russia. Since the start of the year, the government contracted five floating storage and regasification unit, each with a capacity of 5bn cubic meters a year of gas. It also pushed through the construction of new permanent LNG import terminals, one of which will be built in Wilhelmshaven. Germany would soon have an LNG import capacity of 30B cubic meters per year on its northern coasts. “That is equivalent to more than half of the entire volume of pipeline gas that flowed to Germany from Russia last year,” Olaf Scholz, the chancellor, said.
December 16, 2022
China Isn't Selling Treasuries
China’s visible holdings of US bonds have stayed constant over the past 5 years at ~ $1.6T, according to an analysis by @Brad_Setser. However, he notes that Japan’s holdings have dropped by $226B since December 2021.
The most important thing to know about the US data on foreign holdings of US Treasury securities is that the US doesn’t really know who holds US Treasuries. US Treasury holders, in rank order, Japan, China, the UK, Belgium, the Caymans, Luxembourg, Switzerland, and Ireland Only Japan and China (and, to a degree Switzerland) are real holders; the rest are financial and custodial centers. The second most important thing to know — apart from the continued (apparent) purchases of Treasuries from private investors abroad (even if the buyers are the Caymans and the UK in the transactional data) — is that China isn’t selling. It is, in fact, rather remarkable that after adjusting for the Belgian holdings (a euroclear account used by the PBOC it seems), China’s visible holdings of US bonds have stayed constant for the last 5ys (at ~ $1.6 trillion).
The Increased Tradability of Natural Gas
Until recently, international trade of natural gas had been largely restricted to the use of cross-country pipelines, but recent investments in liquefied natural gas infrastructure will increase the global tradability of natural gas. @stlouisfed
Liquefaction capacity has been below fleet capacity for the past 18 years or so, with a growing gap that is projected to widen through 2027. These patterns suggest that liquefaction will likely be an important bottleneck for the future growth of LNG trade. Figure 3 shows that, after Russia’s invasion of Ukraine, there have been increased investments in LNG fleets (new orders in Panel A) and LNG liquefaction terminals (number of terminals expected to be completed in Panel B).
Rich Norwegians Flee to Low-Tax Switzerland as Wealth Levy Bites
In 2022, 30 Norwegians with a net worth of $3B have expatriated themselves to Switzerland to avoid Norway’s wealth tax of 1.1% on net worth annually, including unrealized capital gains. @ft
Public filings to Norway’s population registry show that at least 30 billionaires and millionaires swapped the prosperous Scandinavian nation for the lower-tax Alpine jurisdiction in 2022. The group of rich Norwegians who left for Switzerland this year had a combined fortune of NKr29B [$3B] and paid NKr550M in tax [$550M], according to the country’s open-access annual tax returns. The 2022 exodus is greater than in the previous 13 years combined, newspaper Dagens Naeringsliv calculated. At the heart of the debate is Norway’s wealth tax which is levied on all net fortunes greater than NKr1.7M ($173,000) at a rate of 1.1 per cent for the richest. Switzerland also has a wealth tax but offers deals for foreigners.
Japan Scraps Pacifist Post-War Defence Strategy to Counter China Threat
Scraping its “pacifist” post-Second World War defense strategy, Japan plans to spend $313B over the next five years to bring military expenditure to roughly 2% of GDP. @ft
Over the next five years, Tokyo plans to spend ¥43tn ($313bn) to strengthen its defense capabilities, bringing military expenditure to roughly 2% of its current gross domestic product. The budget includes ¥5tn to buy Tomahawk cruise missiles from the US, expand the range of its domestic surface-to-ship cruise missiles and develop hypersonic weapons, according to the medium-term Defence program. Another ¥3tn will be spent on enhancing integrated air and missile defense capabilities, including a radar upgrade for the Patriot missile system to counter hypersonic weapons. The largest portion of the military spending, ¥15tn, will be designated to strengthening the SDF’s basic needs, including ammunition stockpiles and fuel tanks, reflecting concerns that Japan’s armed forces will not have the capability to persevere in a prolonged conflict such as one over Taiwan.
Is the Fed Broke?
From 2011 through early 2022, the Fed remitted $1 trillion in QE portfolio earnings to the US Treasury. Current rate mismatches mean these remittances will no longer be available, putting further stress the Treasury market. @LastBearStandng
First, remittances are a one-way street. If the Fed has positive earnings, it remits the earnings to the Treasury. But if the Fed incurs losses, the Treasury isn’t required to cut a check to the Fed to cover those losses. Instead, the Fed “prints” the difference. It simply pays the excess interest expense with newly created dollars, in the same way that it prints dollars to buy bonds in QE. The Fed keeps track of its cumulative losses, and when the Fed starts earning money again in the future, it will first go to recoup those losses before remittances to the Treasury resume. In other words, the positive balances shown in the graph above are in-period (since earnings are constantly swept to the Treasury), while the losses over the past several months are cumulative, since they accrue over time.
The 6,670-Vote Majority: How Republicans Barely Won the House
House races are getting more competitive according to an analysis by @JacobRubashkin. The Republican house majority rests on 6,670 votes, the cumulative margin of the 5 closest seats the Democrats lost that would have allowed them to hold the house.
The historical narrowness of the incoming GOP majority becomes clear when comparing this cycle to previous elections over the past decade. House Republicans won the majority by 6,670 votes, or 0.006 percent of the nationwide popular vote. Had Democrats won an additional 6,671 votes across five districts, they would have maintained their majority. In 2020, Democrats won 222 seats. But their majority rested on the 34,734-vote combined margin of victory in their five closest victories. Those decisive votes were just 0.023 percent of the 152,576,055 ballots cast nationwide.
When Will Fusion Be Ready for Prime Time? Watch These Three Numbers
According to the chief research officer at Princeton Plasma Physics Laboratory “If you gain a factor of 10 on the fusion and 10 on the efficiency,” fusion achieves energy breakeven. With government support, this could be achieved in 10-20 years. @WSJ
A simple ratio known as Q provides an easy and intuitive way to understand if scientists are making progress: It’s energy released divided by energy used. A Q below one means the reaction consumed more energy than it produced. A Q above one means more energy was produced than consumed. In this latest experiment, scientists put in 2.05 megajoules of energy and got 3.15 megajoules out. Q was 3.15 divided by 2.05, or about 1.5. To generate 3.15 megajoules of energy, the lab consumed about 300 megajoules of energy to fire its laser. The Q value for the entire reactor is about 0.01—roughly 1% of break-even. “If you gain a factor of 10 on the fusion and 10 on the efficiency, that gives you a factor of 100 roughly,” said Jonathan Menard, chief research officer at Princeton Plasma Physics Laboratory. “That would be in the ballpark of break-even. Both of those are theoretically possible.” With government support that could take one to two decades, he said.
December 15, 2022
The Myth of Income Stagnation
Citing CBO data, @MichaelRStrain finds that market income for the median household grew by 26% from 1990 through 2019 after adjusting for inflation. Including transfer payments and federal taxes, real median household income grew 55%. @AEIecon
Median household income from market activities – labor, business, and capital income, as well as retirement income from past services – was not stagnant from 1990 to 2019. Instead, after adjusting for inflation, it grew by 26%. This is in line with wage growth. By my calculations using Bureau of Labor Statistics (BLS) data, inflation-adjusted average wages for nonsupervisory workers grew by around one-third over this period. After factoring in social insurance benefits (from Social Security and unemployment insurance, for example), government safety-net benefits (such as food stamps), and federal taxes, the CBO finds that median household income increased by 55% from 1990 to 2019, which is significantly faster than wage growth and certainly not stagnate. The bottom 20% of households enjoyed even greater gains, with market income growth of 51% and after-tax-and-transfer income growth of 74%.
Cooling Economy Is Giving US Workers a Lift
Investor @conorsen argues that worker’s prospects will improve dramatically going forward as earnings growth will be coupled with lower gas prices, easing rents, falling car prices, and fully stocked shelves. @bloomberg
While nominal levels of growth might be slowing, inflation-adjusted growth is rising as the economy slowly gets back to normal from the many disruptions that wreaked havoc during the pandemic. So even though the labor market is softer, worker fortunes are looking brighter. We normally think about real economic growth as a function of employment growth and productivity growth. What we’re now experiencing — supply chains healing, companies’ labor needs easing, and workers reaping the benefits of lower prices with a boost to their inflation-adjusted wages — could be called productivity growth.
US Adds 36 Chinese Companies to Trade Blacklist
The United States added 36 Chinese firms to a trade blacklist as it expands export controls targeted at slowing Chinese development of advanced chips and technologies for military uses such as hypersonic weapons. @FT
The US has placed three dozen Chinese companies on a trade blacklist, in another escalation of its effort to slow China’s development of advanced chips and technologies for military uses such as hypersonic weapons. The commerce department put 36 Chinese groups on the “entity list”, a move that means American companies will require extremely hard-to-obtain licenses to export critical technologies to those customers in China.
At Least Four-In-Ten U.S. Adults Have Faced High Levels of Psychological Distress During COVID-19 Pandemic
Young Americans are experiencing high levels of psychological distress relative to other adults; 58% of 18 to 29 year old’s reported being distressed in surveys conducted between March 2020 and September 2022, relative to 41% of the 50 to 64 cohort. @pewresearch
About four-in-ten U.S. adults (41%) have experienced high levels of psychological distress at least once since the early stages of the coronavirus outbreak, according to a new Pew Research Center analysis that examines survey responses from the same Americans over time. Experiences of high psychological distress are especially widespread among young adults. A 58% majority of those ages 18 to 29 have experienced high levels of psychological distress at least once across four Center surveys conducted between March 2020 and September 2022.
December 14, 2022
Second Great Experiment Second Update
.@JohnHCochrane argues that the current trajectory of inflation is coming in on the “rational expectations” side, inflation is stable. He also notes that 1975 might be good precedent – inflation did fade – but took off again with new shocks.
The November CPI is in, and inflation continues to moderate despite interest rates that, while rising, are still below current inflation. In the conventional “adaptive expectations” view, inflation is unstable unless the Fed moves interest rates quickly, and inflation will spiral away unless interest rates rise above the current rate of inflation. In the more radical “rational expectations” view, inflation is stable and will eventually go away on its own even if the Fed does nothing. (So long as fiscal policy doesn’t add fuel to the fire. Also, it allows for more dynamics; inflation can go up before coming back, and the long run can take a long time.)
U.S. Inflation Reprieve?
.@M_C_Klein argues that this week’s CPI release is consistent with inflation holding steady at 4-5% a year. “The basic problem is that the prices of services other than energy and shelter are still rising relatively quickly.”
Total CPI inflation does not look that different from CPI inflation, excluding food, energy, shelter (which weirdly includes hotels and dorms in addition to housing), and used vehicles. In both cases, the near-term picture is that prices are rising around 4-5%, which is substantially slower than in the first half of 2022 but still faster than before the pandemic. The basic problem is that the prices of services other than energy and shelter are still rising relatively quickly.
The Real Risk of Higher Inflation Is Lower Wages
Citing the fall in labor force participation and anecdotes of “quiet quitting,” @tylercowen worries that letting inflation run at higher rates and driving down real wages will shrink the labor force and decrease productivity. @bloomberg
There is a widespread labor shortage, as evidenced by the “Help Wanted” signs everywhere, yet there are also falling after-inflation wages. We economists cannot fully explain these circumstances. But they may suggest that employers simply are not willing to agree to higher wages, perhaps due to business uncertainty. And if a labor shortage won’t push them to increase real wages, perhaps a higher rate of inflation won’t either. In short, one of the main effects of a permanently higher inflation target may be lower real wages. A lot of workers may not be too happy with their situation. There remains a risk that these workers, in lieu of bargaining for higher wages, will quit the labor force entirely, or perhaps just further disengage from their jobs.
Bringing Home the Bacon: Have Trends in Men’s Pay Weakened the Traditional Family?
.@swinshi argues that the changes in family formation have not been driven by changes in men’s relative earnings, as the percent of all men aged 25-29 earning at least the post-tax comp of the 25th percentile of young married fathers falls only from 63% in 1979 to 58% in 2021.
I use, as a marriageability threshold, the 25th percentile of pretax earnings among married fathers aged 25–29 who were sole breadwinners. The other choice involves what year to use as a reference point for “the past.” [The available data] is poorly suited for [estimating the tax burdens of young male sole breadwinners] before 1979. For that reason, I use 1979 as my reference point. Rather than [the share of single men earning pretax incomes less than the 25th percentile of married men] falling from 72% to 57% from 1969 to 2019, marriageability [only] falls … from 63% to 58% [from 1979 to 2019].
Flanked by Union Allies, Biden Touts $36 Billion Pension Bailout
The White House announced a $36B bailout for the Central States Pension Fund, which will avoid benefit cuts for 40,000 workers and retirees in Michigan, 40,000 in Ohio and 22,000 in Wisconsin. Biden won WI by a 20,682 margin. @bloomberg
President Joe Biden announced a $36 billion bailout for the Central States Pension Fund, one of the nation’s biggest multi-employer plans, touting the help for union workers and retirees as he looks to mend ties with organized labor after a contentious rail deal. Biden said the aid would help 350,000 union workers and retirees, who would have faced benefit cuts estimated at 60% over the next few years. The Central States bailout would help 40,000 workers and retirees in Michigan, 40,000 in Ohio and 22,000 in Wisconsin.
Howard Marks notes the S&P 500 delivered a 10.3% compound return from August 1982 through the start of 2022. Marks suspects that the 2000 basis point decrease in interest rates over the past forty years is the primary driver of this performance.
We’ve gone from the low-return world of 2009-21 to a full-return world, and it may become more so in the near term. Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets. Here’s one example: In the low-return world of just one year ago, high-yield bonds offered yields of 4-5%. A lot of issuances was at yields in the 3s, and at least one new bond came to the market with a “handle” of 2. Today these securities yield roughly 8%.
How US Scientists Moved One Step Closer to Dream of Fusion Power
The fusion reaction achieved at Lawrence Livermore energy gain of 150% was greater than initially reported by the @FT, though they note that 330 MJ of electrical energy was used to produce 3.15 MJ of fusion energy.
The reaction produced about 3.15 megajoules of energy, which was about 150 percent of the 2.05MJ of energy in the lasers. Does this mean they have cracked fusion power? No. Achieving energy gain has been seen for decades as a crucial step in proving that commercial fusion power stations are possible. However, there are still several hurdles to overcome. First, energy gain in this context only compares the energy out to the energy in the lasers, not to the total amount of energy pulled off the grid to power the system. In fact, each shot requires 330MJ of electrical energy, delivered in a 400-microsecond burst. Scientists estimate that commercial fusion will require fusion reactions that generate between 30 and 100 times the energy going in.
Seawater Electrolysis Ignites New Hope for Affordable Green Hydrogen
The @FT reports a claim by Chinese researchers that they have produced hydrogen directly from seawater, without the need to desalinate or purify the seawater first, advancing a long-term goal of hydrogen power.
Researchers in China claim to have produced hydrogen by splitting seawater without the need to desalinate or purify it first. Heping Xie at Shenzhen University and Zongping Shao at Nanjing Tech kept the electrolyser separate from the seawater with a waterproof, breathable membrane. A bit like a sieve, the membrane keeps anything other than pure water vapor from entering the electrolyser. As the water vapor is drawn in and converted to hydrogen, more is pulled in from the seawater to take its place. It is, they reported recently in the journal Nature, a self-sustaining system. The scientists installed a prototype in China’s Shenzhen Bay and produced more than 1mn liters of hydrogen over 133 days without any reported deterioration.
December 13, 2022
US Core Inflation Slows, Giving Fed Some Breathing Room on Rates
According to the new CPI report, Core-CPI rose by 0.2% in November to 6% year-over-year, coming in under the 0.3% median estimate of a @Bloomberg survey of economists.
Excluding food and energy, the consumer price index rose 0.2% in November and was up 6% from a year earlier, according to a Labor Department report Tuesday. Economists see the gauge — known as the core CPI — as a better indicator of underlying inflation than the headline measure. The overall CPI increased 0.1% from the prior month and was up 7.1% from a year earlier, as lower energy prices helped offset rising food costs. The median estimates in a Bloomberg survey of economists called for 0.3% monthly increases in both the core and overall measures.
Furman On CPI Report
.@jasonfurman on today’s CPI report, which saw Headline CPI up ticking 0.1% and Core CPI 0.2%. “Some of this good news is probably transitory. But still a lot of good news.”
Terrific CPI report. This is my own concept that swaps in spot rents for all rents using the private measures from Apartment List and Zillow. This is NOT a good measure of the cost of living but may be a better way to think about where inflation is going. Overall lowest core since what turned out to be the false dawn in the summer of 2021. I feel better about it now because of what we’re seeing with commodity prices, supply chains, inventories, and housing. Some of this good news is probably transitory. But still a lot of good news.
Housing, Inflation, and Why the Fed Should Consider a Pause
.@calculatedrisk notes that excluding shelter, the annualized one-month change in Core-CPI was negative in both October and November and suggests inflation is easing faster than the Fed currently is projecting.
This graph shows the year-over-year change in Core CPI ex-Shelter (blue) and the one-month change annualized (red). The year-over-year change was at 5.2% in November, down from 5.9% in October. And the annualized one-month change was negative in both October and November! Core CPI ex-shelter fell at a 1.5% annual rate in November. My view is inflation will ease quicker than the Fed currently expects, and a pause in rate hikes should be considered.
World Debt-GDP Ratio Plummets But Remains Above Pre-Covid Level
The US’s debt-to-GDP ratio dropped last year to 128% from a peak of 135% in 2020, but remains well above the pre-pandemic level of 109%, according to new research from the IMF. @IMFNews @bloomberg
While total public and private debt hit a record $235 trillion last year, it plummeted when expressed as a percentage of economic output, which rebounded last year after the steep Covid-19 recession of 2020. Total debt fell to 247% of global gross domestic product last year, IMF data showed. That’s 10 percentage points less than in 2020 but is still the second-highest reading in history.
Productivity and Wages: What Was the Productivity-Wage Link in the Digital Revolution of the Past, and What Might Occur in the AI Revolution of the Future?
According to research published by @NBER, higher productivity growth in 1989-2017 “is more than sufficient to explain the greater wage growth that more educated workers enjoyed as compared with less educated workers.”
U.S. regression results show that there is a high implicit correlation between the rise over time of wages by skill level and the rise of productivity by skill level. Productivity in the high-education industries [orange] grew by over .34 log points between 1989 and 2017, while productivity in the low-education industries [blue] grew only .20 log points during that same 30-year period. Wages in high-education industries grew by .26 log points while those in the low-education industries half grew by .24 log points during the 1989-2017 period. It’s clear that the difference in productivity growth between the two skill groups is more pronounced than the difference in wages. This simple comparison suggests that differences in productivity growth rates between skill groups is more than sufficient to explain the greater wage growth that more educated workers enjoyed as compared with less educated workers.
China Readying $143 Billion Package for its Chip Firms in Face of U.S. Curbs
.@Reuters reports that China will shortly announce a $143B package to support their semiconductor industry, largely via subsidies for the purchase of domestically-produced semiconductor equipment.
China is working on a more than 1 trillion yuan ($143 billion) support package for its semiconductor industry, three sources said, in a major step towards self-sufficiency in chips and to counter U.S. moves aimed at slowing its technological advances. Beijing plans to roll out what will be one of its biggest fiscal incentive packages over five years, mainly as subsidies and tax credits to bolster semiconductor production and research activities at home, said the sources. The majority of the financial assistance would be used to subsidize the purchases of domestic semiconductor equipment by Chinese firms, mainly semiconductor fabrication plants, or fabs, they said.
December 12, 2022
How Much Would Creating a Child Allowance Reduce Work Among Parents?
.@swinshi notes that @JacobBastian25’s latest research underestimates the disemployment effects of an enhanced Child Tax Credit. Scott view of the disemployment effects support Bruce Myers and @kefincorinth CTC estimates @UChicago. @aei
In his reconciliation of his own results with those of the Chicago team, Bastian misattributes something on the order of 200,000 of the one-million-parent difference in predicted disemployment to married parents rather than to low-income single mothers. Relative to the Chicago team, he underestimates the disemployment of low-income single mothers by a similar amount. The evidence remains consistent with the Chicago team’s claims: a permanent expansion of the CTC that resembles the temporary child allowance created in 2021 could reduce employment among single mothers by about one million, an effect that would go a long way toward reversing the employment gains among single mothers since the policy reforms of the mid-1990s.
Fusion Energy Breakthrough by US Scientists Boosts Clean Power Hopes
.@ft reports that researchers at the Lawrence Livermore National Laboratory have achieved a net energy gain in a fusion power experiment – producing 2.5 megajoules of energy, about 120 per cent of energy used to trigger the fusion reaction.
The federal Lawrence Livermore National Laboratory in California, which uses a process called inertial confinement fusion that involves bombarding a tiny pellet of hydrogen plasma with the world’s biggest laser, had achieved net energy gain in a fusion experiment in the past two weeks, the people said. The fusion reaction at the US government facility produced about 2.5 megajoules of energy, which was about 120% of the 2.1 megajoules of energy in the lasers, the people with knowledge of the results said, adding that the data was still being analyzed.
End of the Road
.@GregorMacdonald notes a new EIA report that reports “US battery storage capacity is outpacing even the early growth of the country’s utility-scale solar capacity.”
The growth rate of US utility-scale battery storage capacity is outpacing the early growth rates seen in utility scale solar. That’s according to a new EIA outlook on grid-level storage: “The remarkable growth in US battery storage capacity is outpacing even the early growth of the country’s utility-scale solar capacity. US solar capacity began expanding in 2010 and grew from less than 1.0 GW in 2010 to 13.7 GW in 2015. In comparison, we expect battery storage to increase from 1.5 GW in 2020 to 30.0 GW in 2025.” New wind and solar + storage is probably at the current line of scrimmage with new natural gas. The former comes in around $28-$30/MWh without storage, and the latter comes in around $45-$74/MWh. But natural gas has higher value to the grid compared to wind and solar when they’re not paired with storage.
The Temptation to Call the End of Inflation
.@johnauthers reports that we may have seen a trough in global liquidity, according to data from Crossborder Capital.
The above chart by Michael Howell of Crossborder Capital shows estimates of global new liquidity. The lines indicate the three-month annualized % growth in the monetary base. Globally [red line], growth in liquidity has ticked up very slightly after dropping to its lowest level since the global financial crisis. In the major G10 economies [grey and yellow], there is a pickup from outright negative growth that has been helped by the startling fall in the US dollar in recent weeks. As many countries use dollar financing, this has the effect of easing conditions everywhere. Last week’s balance sheet data from major central banks show policy liquidity shrinking at 5.3% in local currency terms [yellow] but rising by 2.7% in US dollar terms [grey.] Thus, it is possible that a pivot away from tighter money is already under way.
A Sharper Signal Amid the Noise
Brian Chingone of @verdadcap notes that deleveraging is cyclical, with firms paying down debt as the economy slows.
Deleveraging is cyclical, with a higher proportion of companies paying down debt when the economy is slowing down. The figure above illustrates this process among Decile 10 companies that have the highest likelihood of deleveraging. The solid line represents actual deleveraging, and we can see spikes in the proportion of companies that pay down debt during recessions. Another important implication of the chart above is that deleveraging outcomes in the top decile remain within a consistent band between 60% and 80% over a 50-year sample that includes a range of macro environments, from inflation spirals to stock market bubbles to financial crises.
Booming Chinese Family Offices Recruit Top Bankers in Singapore
Mainland Chinese moving assets out of China account for half of the 1,500 Singapore-based single-family offices. @ft
Wealthy mainland Chinese moving assets out of President Xi Jinping’s China account for up to half of a rise in Singapore-based single-family offices — the private wealth management firms set up for rich individuals and their relatives. Numbers have jumped nearly threefold since the coronavirus pandemic began and, according to some estimates, now total as many as 1,500. Caught by surprise by the surging numbers of family office funds, Singapore’s government this year tightened the rules, with higher minimum capital and hiring requirements.
Japan to Join US Effort to Tighten Chip Exports to China
In what @bloomberg describes as “a near-total blockade,” Japan and the Netherlands have “agreed in principle” to join new export controls on China, which would limit access to equipment from Japan’s Tokyo Electron Ltd and the Dutch lithography firm ASM.
Japan and the Netherlands have agreed in principle to join the US in tightening controls over the export of advanced chipmaking machinery to China, according to people familiar with the matter, a potentially debilitating blow to Beijing’s technology ambitions. The three-country alliance would represent a near-total blockade of China’s ability to buy the equipment necessary to make leading-edge chips. The US rules restricted the supply from American gear suppliers Applied Materials Inc., Lam Research Corp. and KLA Corp. Japan’s Tokyo Electron Ltd. and Dutch lithography specialist ASML Holding NV are the two other critical suppliers that the US needed to make the sanctions effective, making their governments’ adoption of the export curbs a significant milestone.
December 9, 2022
All Pain and No Gain From Higher Interest Rates
.@JosephEStiglitz argues that current inflationary pressure is supply-side driven and states higher interest rates may exacerbate inflationary pressures.
The pandemic gave rise to numerous sectoral supply constraints and demand shifts that – together with adjustment asymmetries – became the primary drivers of price growth. Any benefits from the extra interest-rate-driven reduction in inflation will be minimal compared to what would have happened anyway. Inflation already appears to be easing. It may be moderating more slowly than optimists hoped a year ago – before Russia’s war in Ukraine – but it is moderating nonetheless, and for the same reasons that optimists had outlined. Higher interest rates make it even more difficult to mobilize investments that could alleviate supply shortages.
“The Great Retirement Boom”: The Pandemic-Era Surge in Retirements and Implications for Future Labor Force Participation
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.
How Republicans Lost Their House Edge in Midterms
A change in the way votes are distributed has eroded a GOP edge in the House of Representatives that the party has enjoyed over the past decade. @foxjust @bloomberg
The Nov. 8 midterm election results are nearly final, and Republican candidates have received 50.6% of the votes cast for the US House of Representatives to Democrats 47.8%. It also looks as if they will end up with 222 of the 435 House seats to the Democrats’ 213, or 51% to 49%. In other words, a vote margin of 2.8 percentage points will translate into a seat margin of 2.1 percentage points. This is not how things worked from 2010 through 2016 when Republicans won a much larger share of House seats compared with the votes they received. The disconnect was most pronounced in the 2012 election when Democrats’ 1.1-percentage-point winning vote margin resulted in a 7.6-point loss in terms of seats.
Biden Administration Quietly Approves Huge Texas Oil Export Project
The Biden administration has approved the largest oil export facility in American history. The facility will expand export capacity by 2 million barrels per day, vs. 2021 average exports of 8.5 million barrels per day. @TexasTribune
The Biden administration has approved plans to build the nation’s largest oil export terminal off the Gulf Coast of Texas, which would add 2 million barrels per day to the US oil export capacity. The administration’s move marked a major step forward for the export sector. The offshore oil export terminal, the first to be approved of four proposed along Texas’s Gulf Coast, will enable continued growth in US shale oil production and global consumption, dealing a substantial setback to the White House’s goals for drastic cuts in carbon emissions by the year 2030.
The Five-Year Engineering Feat Germany Pulled Off in Months
LNG import facilities in Germany are on schedule to be operational within a year, a process that usually would take five. @WSJ
In March, the German government asked energy companies to weigh a seemingly impossible engineering task. Could a new liquefied natural gas import terminal, which normally takes at least five years to build, be erected in this port town by year’s end? At the headquarters of the company asked to build the pipeline portion, technical director Thomas Hüwener posed that question to his team. “If no, then it’s a no,” he told them. “If yes, then we have to commit, with all the possible consequences for our company.” After three days of deliberations, the company concluded that if everything went perfectly, the project could be done by Christmas. Utility Uniper SE, which the German state recently agreed to nationalize and which will operate the terminal, said that if all goes according to plan, the first tanker carrying LNG will arrive at the start of next year.
Glencore Says This Time Is Different for Coming Copper Shortage
Glencore’s CEO forecasts a cumulative gap between projected copper demand and supply of 50mm tons between 2022 and 2030, relative to the current demand of 25mm tons a year. @bloomberg
Glencore Plc Chief Executive Officer Gary Nagle said that while some people were assuming that the industry would lift copper supplies as it had in previous cycles to meet a forecast increase in demand driven by the energy transition, “this time it is going to be a bit different.” He presented estimates showing a cumulative gap between projected demand and supply of 50 million tons between 2022 and 2030. That compares with the current world copper demand of about 25 million tons a year. “There’s a huge deficit coming in copper, and as much as people write about it, the price is not yet reflecting it,” Nagle said.
December 8, 2022
US Workers’ Wage Gains In 2023 are Likely to Exceed Inflation
.@PIIE analysts @GagnonMacro and @AshRose_99 argue that wage growth is likely to outpace inflation in 2023, as declining commodity prices and fewer supply chain issues drive a rapid reduction in inflation.
Figure 1 displays the growth rate of the employment cost index over the past 20 years along with a projection over the next two that is a bit higher than that of professional forecasters. Twelve-month ECI growth peaked at 5.4% in June 2022 and declined to 5.1% as of September. In the projection, ECI rises at an annualized pace of 5% from September 2022 to March 2023, 4.5% from March to December 2023, and 4% in 2024. This projection is consistent with only a modest cooling in the labor market and an unemployment rate still somewhat lower than its equilibrium rate. Further reductions in inflation beyond 2024 would require ECI growth to slow well below a 4% pace.
The Federal Reserve Is Deflating Financial Bubbles, Without a Crash
While the Nasdaq is down 30% from its high last year, the decline hasn’t yet stressed the financial system. @bloomberg
The monetary tightening campaign is having a major impact in deflating asset bubbles that swelled during the pandemic. This is occurring without upending the financial system. And the losses, while large, are a fraction of the scale seen in the bursting of the tech bubble at the start of the century. The Nasdaq Composite Index is down a little over 30% from its high reached last year, but that compares with an almost 80% crash two decades ago. “It’s astonishing,” said Harvard University professor Jeremy Stein “If you told any one of us a year ago, ‘we’re going to have a bunch of 75 basis-point hikes,’ you’d have said, ‘Are you nuts? You’re going to blow up the financial system.’”
Unions’ Inflation Warning?
.@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.
The Dream of Bringing Back Bell Labs
.@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.
Beijing Running Out of Fever Medication as Covid Outbreak Spreads
Ibuprofen is being rationed in Beijing, and new modelling suggests that as many as 1M people could die in China in a “winter wave” in the coming months. @ft
Beijing is running out of medical supplies as the Chinese capital combats a rapidly spreading coronavirus outbreak, health workers said, putting stress on limited resources just as authorities lift pandemic restrictions. Clinics designated for Covid-19 patients are quickly filling up, and some hospitals in the city of 22mn people have begun rationing ibuprofen and paracetamol. Residents of Chaoyang, the district at the center of Beijing’s Covid outbreak, have emptied chemists’ shelves of fever-reducing medicine and rapid antigen tests. New modeling revealed by the Financial Times this week showed that as many as 1M people could die in the country in a “winter wave” in the coming months.
The Democrats’ Tenuous Hold On the Suburbs
Ruy Teixeira of @AEI notes only 1/3 of the suburban vote is made up of college whites, and suggests that the democrats’ hold on the suburbs is tenuous.
It is widely misunderstood how vital suburban white working-class (noncollege) voters were to Biden’s victory in 2020. While suburban white college voters shifted around 10 margin points toward Biden, suburban white working-class voters also had a solid 5-point pro-Democratic shift. Because of this group’s larger size, their shift toward Biden contributed almost as much to the Democrats’ improved margin over Trump in 2020 as suburban white college voters. And just how liberal are these college-educated voters anyway? Overall, according to Gallup, just 30% of adults with a four-year degree only describe themselves as liberal, and 36% of those with some postgraduate education (the less numerous group) do so. Putting this together with the data about suburban demographics, this implies that perhaps one-ninth (a third of a third) of suburban voters are white college-educated liberals.
Picking Winners? Government Subsidies and Firm Productivity in China
Chinese R&D and equipment upgrade subsidies fail to generate a positive impact on firm-level total factor productivity. @nber
We estimate total-factor productivity (TFP) for Chinese listed firms and investigate the relationship between these estimates of TFP and the allocation of government subsidies. We find little evidence that the Chinese government consistently “picks winners.” Firms’ ex-ante productivity is negatively correlated with subsidies received by firms, and subsidies appear to have a negative impact on firms’ ex-post productivity growth throughout our data window, 2007 to 2018. Neither subsidies given out under the name of R&D and innovation promotion nor industrial and equipment upgrading positively affect firms’ productivity growth. On the other hand, we find a positive impact of subsidy on current-year employment, both for the aggregated and employment-related subsidies.
December 7, 2022
US Job and Wage Growth Beat Expectations, Making the Fed’s Job Harder
Over the past 12 months, only 20% of American workers have experienced real hourly earnings growth. Outside the leisure and hospitality, information and transportation, and warehousing sectors, wage gains fell short of 5.9% PCE price index inflation. @KarenDynan
Because of high inflation, most workers are experiencing declines in their real wages. Wages are growing most rapidly in the leisure and hospitality, information, and transportation and warehousing sectors, where gains over the past 12 months have been between 6.5 and 9% (figure 6). The wage gains for these industries—representing about 20% of employment—are above the 12-month change in consumer prices. In other sectors, wage increases have fallen short of consumer price increases (except for construction and utilities, where average wage growth has roughly kept up with inflation).
China Scraps Most Covid-19 Testing, Quarantine Requirements
In a step away from Covid-zero, China will now allow Covid patients with mild or no symptoms to isolate at home instead of being shipped to state-run quarantine facilities. @wsj
China dropped many of its quarantine and testing requirements and curtailed the power of local officials to shut down entire city blocks as the country’s leaders accelerate plans to dismantle zero-Covid controls in the wake of nationwide protests. Though widely predicted, Beijing’s retreat from its costly and increasingly unpopular pandemic regime has been faster than expected. The wide-ranging new measures will allow Covid patients with mild or no symptoms and their close contacts to isolate at home instead of being shipped to government quarantine facilities.
China’s Activist Shortage
.@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.
Millions of US Millennials Moved in With Their Parents This Year
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.
The Path to 2075 — Slower Global Growth, But Convergence Remains Intact
.@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).
Russian Imports Seem to Have Stabilized
.@M_C_Klein updates his Russian imports series, and finds that Russian imports have stabilized at 76% of pre-war levels, up 56% from the March-May 2022 monthly average. Imports with potential military uses are about 1/3 of the pre-war average.
The average monthly value of exports to Russia in August-October was 24% below the average monthly value before the invasion and 56% higher than the March-May 2022 monthly average. Overall exports of manufactured goods with potential military applications have been largely unchanged. Chinese and Turkish exports of machinery, electronics, and other goods with potential military uses have soared since June, with the total in October about a third below the pre-war average.
Wage Inequality and the Rise in Labor Force Exit: The Case of US Prime-Age Men
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.
Technology newsletter publisher @benthompson tested @OpenAI’s ChatGPT on his daughter’s homework assignment about Thomas Hobbes and received “a confident answer, complete with supporting evidence, and it is completely wrong.”
My daughter asked for help in her role as Thomas Hobbes, witness for the defense in “The Trial of Napoleon” for her European history class. I put the question to ChatGPT, which had just been announced by OpenAI a few hours earlier. [The service returned] a confident answer, complete with supporting evidence and a citation to Hobbes work, and it is completely wrong. Hobbes was a proponent of absolutism; checks and balances was the argument put forth by Hobbes’ younger contemporary, John Locke. Hobbes and Locke are almost always mentioned together, so Locke’s articulation of the importance of the separation of powers is likely adjacent to mentions of Hobbes and Leviathan in the homework assignments you can find scattered across the Internet.
December 6, 2022
Money Can’t Buy You Delay From a Recession Forever
M2 has declined 1.5% since peaking at a record $21.7T in March, but Yardeni Research estimates that November M2 remains at least $2T above its pre-pandemic trendline. @johnauthers @bloomberg
How much money is still sitting ready to spend in consumers’ bank accounts? As Yardeni Research points out, some economists are worried about M2’s decline. It has fallen 1.5% since peaking at a record high of $21.7 trillion in March. Although that followed a record peak, such a drop is unprecedented. Still, the firm’s founder, Ed Yardeni, thinks that supply remains at least $2 trillion above its pre-pandemic trendline. The year-over-year change in M2, in fact, has been moving in near lockstep with the 12-month sum of the personal saving rate; money supply has stopped rising as Americans have stopped accumulating new savings. Thus, for Yardeni, the recent weakness reflects the excess liquidity accumulated by US consumers since the start of the pandemic.
Holiday Eye on the Market: Non-Fungible Trainwreck
Michael Cembalest at JP Morgan notes that its basket of farm equipment, office cleaning supplies, and industrial REITs is now outpacing “innovation” stocks. @jpmorgan
During the stimulus bonanza, digital assets were priced at an unrealistic premium relative to physical ones. Monetary and fiscal policy are normalizing now after the longest period of negative real interest rates since 1820 and the largest fiscal deficits since 1800 (other than during WWI and WWII), so Cembalist is not surprised to see a basket of farm equipment, office cleaning supplies and industrial REITs finally outperforming “innovation” stocks.
TSMC to Triple U.S. Chip Investment to $40bn to Serve Apple, Others
TSMC is expanding its investment in Arizona, building a plant that will manufacture 3- nanometers chips which are the most advanced currently under production. @NikkeiAsia
Taiwan Semiconductor Manufacturing Co. says it will more than triple its investment in the US to $40 billion and bring the world’s most advanced chip production technology to the country by 2026, in a victory for Washington’s push to onshore vital parts of the semiconductor supply chain. TSMC, the world’s biggest contract chipmaker, announced on Tuesday it will increase its investment in Arizona, where it is currently building a $12 billion chip facility, to $40 billion in order to build a second, even more, advanced plant there. The additional facility will begin operation by 2026 and will be the first plant in the US to make 3-nanometer chips, the most advanced currently available.
Japan’s Rising Defense Budget Is Now Nearly on Par With Russia
Japan is on pace to increase defense spending by 57% over the next five years to near the levels spent by Russia. This would raise defense spending to 2% of GDP, the NATO target. @bloomberg
Japanese Prime Minister Fumio Kishida has ordered a sharp defense spending hike that could see his long-pacifist country’s defense budget balloon to near the levels spent by Russia. Kishida instructed ministers to put together a budget of about 43 trillion yen ($315 billion) for the five-year period starting in April, Defense Minister Yasukazu Hamada said Monday. That’s up 57% on the 27 trillion yen initially budgeted for the current five-year period. The money is set to be used for items such as stockpiling missiles that are capable of striking military assets in neighbors Russia, China, and North Korea. Another goal over the next 10 years would be to triple the number of military units equipped with ballistic missile interceptors in a southwestern island chain that stretches toward Taiwan.
US Upgrades Taiwan Weapons Package With Newer Patriot Missiles
The US has proposed selling as many as 100 of its most advanced Patriot air-defense missiles to Taiwan in a deal valued at $882M @bloomberg
The US has proposed selling Taiwan as many as 100 of its most advanced Patriot air-defense missiles along with radar and support equipment in a deal valued at $882 million, according to a State Department notice obtained by Bloomberg News. The new proposal calls for as many as 100 of Lockheed Martin Corp.’s hit-to-kill Patriot Pac-3 “Missile Segment Enhancement” missiles that are more advanced than earlier Patriots sent to Taiwan. The proposal also calls for M903 Launcher modification kits, missile round trainers, and software upgrades to accommodate the new missiles.
Global Supply Chain Pressure Index (GSCPI)
The @NewYorkFed Global Supply Chain Pressure Index increased slightly in November to 1.1 from 1.0 in October, driven by Chinese delivery times. The index remains far below its peak of 4.3 in December 2021.
Global supply chain pressures increased moderately in November, continuing a trend seen in October, albeit at a lower rate. The largest contributing factor to the rise in supply chain pressures was Chinese delivery times, though improvements were shown in US delivery times and Taiwanese purchases. The GSCPI’s recent movements suggest that developments in Asia are slowing down the return of the index back to historical levels.
The Brilliance and Weirdness of ChatGPT
ChatGPT by @OpenAI release to the public strikes @kevinroose as an important milestone, the first easily accessed AI tool. @nytimes
ChatGPT is, quite simply, the best artificial intelligence chatbot ever released to the general public. It was built by OpenAI, the San Francisco A.I. company that is also responsible for tools like GPT-3 and DALL-E 2, the breakthrough image generator that came out this year. Users have also been finding more serious applications. For example, ChatGPT appears to be good at helping programmers spot and fix errors in their code. It also appears to be ominously good at answering the types of open-ended analytical questions that frequently appear on school assignments. (Many educators have predicted that ChatGPT, and tools like it, will spell the end of homework and take-home exams.)
Missing Workers and Missing Jobs Since the Pandemic
As of October 2022, the US is 5.8mm jobs short of its pre-pandemic trend. @BHobijn and Aysegul Sahin argue that this number is attributable to cyclical factors that were unlikely to continue; they argue a proper accounting yields an 810k jobs shortfall. @NBER
The [5.8M estimate] of missing jobs is inflated because it is based on the unrealistic assumption that the pre-pandemic tailwinds for job growth from the decline in the unemployment rate and cyclical upward pressures on participation would have continued in 2020 and beyond if the pandemic would not have occurred. Instead, our payroll jobs accounting yields an 810 thousand cyclical shortfall in payroll jobs in October 2022 compared to right before the pandemic. At the recent pace of job growth, even without monetary and fiscal tightening, we expect a substantial deceleration of payroll growth in the coming months.
December 5, 2022
Larry Summers Says Fed Will Need to Boost Rates More Than Markets Expect
.@LHSummers suggests that the Fed will need to boost rates by more than the futures market expectation of 5% by May 2023, vs. the current 3.75-4.0%. “6% is certainly a scenario we can write…five is not a good best-guess.” @bloomberg
Interest-rate futures suggest traders expect the Fed to raise rates to about 5% by May 2023, compared with the current target range of 3.75% to 4%. “Six is certainly a scenario we can write,” Larry Summers said with regard to the peak percentage rate for the Fed’s benchmark. “And that tells me that five is not a good best-guess.” Summers reiterated that he didn’t think the Fed ought to change its inflation target to, say, 3% from the current 2% — in part because of potential credibility issues after having allowed inflation to surge so high the past two years.
Immaculate Disinflation Hopes Dashed?
.@M_C_Klein argues that 7% annualized growth in nominal employee pay, up from 4.5% before the pandemic, implies that inflation “will probably persist around 4-5% a year.”
Aggregate weekly payrolls has been rising about 7% annually since the beginning of this year, with minimal variation. That’s up from about 4.5% a year before the pandemic. Wages can rise 1-3 percentage points faster or slower than consumer prices for a variety of reasons—including but not limited to compositional and definitional differences—but larger gaps between the growth rates of wages and prices basically don’t exist outside of WWII and Korean War rationing, the late 1990s productivity boom, and the first year of the pandemic. The only time U.S. wages rose at least 4 percentage points faster than prices for at least two years in a row was 1941-1943.
When Should We Declare Victory Over Inflation?
.@paulkrugman agrees with @ojblanchard1’s case for an inflation target of 3% vs. 2%, perhaps without officially announcing the policy.
Many economists believe that a little bit of inflation helps to “lubricate” the economy. An ever-changing economy often requires that prices of some goods (and wages for some workers) fall relative to prices and wages elsewhere. But price and wage cuts are hard to achieve. If the price of widgets needs to fall relative to the price of gizmos, it’s easier to do this with rising gizmo prices rather than falling widget prices, so adjustment is easier if overall inflation is somewhat positive. On the other hand, there’s a lot to be said for more or less stable prices, and in particular for an inflation rate low enough that people don’t have to think about it much. I’m with Blanchard and others in believing that it’s OK to stop at 3, maybe without admitting that we’re doing it.
Markets Swayed by Inflation and Growth Prospects
Half of global trade is invoiced in dollars despite the United States accounting for just 10% of the trade. The dollar’s role in official foreign exchange reserves has declined to less than 60%, well under its 20-year mean of 65%. @BIS_org
Approximately half of global trade is invoiced in USD, although this share varies widely across regions. This disproportionately large reliance on the USD is in spite of the United States accounting for just over a 10th of global trade. These shares have hardly changed since 2019. One area where the role of the USD has been shrinking to some degree is official foreign exchange reserves, even though it remains the foremost reserve currency. As of the second quarter of 2022, the USD accounted for less than 60% of official foreign exchange reserves. This is one of the lowest shares in the past 20 years and is well below the average of 65% for the period.
Geopolitical Rivalries Are Transforming the Contours of Trade
The United States is now importing more goods from Europe than from China. @bloomberg
As the pandemic snarled global supply chains, US policymakers urged companies to look at ways to reinforce their supply chains and reduce American economic dependence on China and other authoritarian regimes. The Biden administration’s push toward “friend-shoring” production and manufacturing has steadily resulted in increased US trade between the US and its traditional allies in Europe. Over the next five years semiconductor companies will collectively spend more than $110 billion building new semiconductor fabrication plants outside of China.
Apple Makes Plans to Move Production Out of China
Apple will have problems moving higher-end iPhone production to Vietnam as the former lacks China’s scale of potential workers, and India is a very difficult business environment for imports and exports. @WSJ
In recent weeks, Apple has accelerated plans to shift some of its production outside China. It is telling suppliers to plan more actively for assembling Apple products elsewhere in Asia, particularly India and Vietnam, they say, and looking to reduce dependence on Taiwanese assemblers led by Foxconn. Dan Panzica, a former Foxconn executive who now advises companies on supply-chain issues, said Vietnam’s manufacturing was growing quickly but was short of workers. The country has just under 100 million people, less than a 10th of China’s population. It can handle 60,000-person manufacturing sites but not places such as Zhengzhou that reach into the hundreds of thousands, he said. “They’re not doing high-end phones in India and Vietnam,” said Mr. Panzica. “No other places can do them. India is the Wild West in terms of consistent rules and getting stuff in and out.”
Biden Administration Weighs Reviving Trump Border Asylum
Biden is considering adopting a 2019 Trump policy to deny asylum to migrants if they failed to apply for asylum in countries they had moved through, such as Mexico, on their way to the American border. @WSJ
Through the first three weeks of November, Border Patrol agents made roughly 127,000 arrests of people crossing the border illegally, according to internal government data viewed by The Wall Street Journal, primarily of Mexicans, Cubans, and Nicaraguans. The administration was able to use Title 42 against roughly 32% of those crossing, with the rest allowed to remain in the country and pursue asylum claims. The ban under discussion would prevent migrants from winning asylum in the U.S. if they moved through another country, such as Mexico, on the way and didn’t first apply for asylum in that country. The policy would be issued, so it would take effect in conjunction with the end of Title 42.
Military Briefing: Ukraine War Exposes ‘Hard Reality’ of West’s Weapons Capacity
The demands of the Ukraine war have significantly stressed the West’s defense industrial base. Increasing capacity will require investments supported by long-term production contracts, vs. the “just in time” model adopted after the Cold War era. @ft
“Ukraine has focused us . . . on what really matters. ” William LaPlante, the Pentagon’s chief weapons buyer, told a recent conference at George Mason University. “What matters is production. Production really matters.” NATO members’ defense ministries are discovering that dormant weapons production lines cannot be switched on overnight. Increasing capacity requires investment which, in turn, depends on securing long-term production contracts. Since the end of the cold war, these countries have reaped a peace dividend by slashing military spending, downsizing defense industries, and moving to lean, “just-in-time” production and low inventories of equipment such as munitions.
Europe Cuts Gas Demand by a Quarter to Shed Reliance on Russia
Germany cut its gas demand by 23% in November even as temperatures fell, with the EU cutting demand by 24% overall. @FT
EU countries cut gas demand by a quarter in November even as temperatures fell, in the latest evidence that the bloc is succeeding in reducing its reliance on Russian energy since Moscow’s full-scale invasion of Ukraine. Provisional data from commodity analytics company ICIS showed gas demand in the EU was 24% below the five-year average last month, following a similar fall in October.
What Happens in China Does Not Stay in China
New research from @FederalReserve quantifies the likely spillovers from the three rounds of Chinese stimulus, which each accounted for 1.5% of global GDP
Panel A in figure 1 illustrates the credit impulse as a share of China’s GDP. It highlights that the Chinese authorities have long used credit to stabilize the economy as they have long faced a tradeoff between strong economic growth and financial stability objectives. That said, the GFC stands out as a period of massive credit stimulus, amounting to 25% of GDP. To size China’s credit measures in a global context, panel B in figure 1 illustrates China’s credit impulse as a share of global GDP. It shows that prior to the GFC, China’s credit measures represented a small share of global GDP. However, with China’s rise in the global economy, the quantitative importance of China’s credit policies has risen as well. Indeed, China’s last three stimulus episodes each accounted for around 1.5% of global GDP.
December 2, 2022
Was Rising Inequality behind Falling Absolute Mobility? Reassessing Chetty et al. (2017)
.@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.
US Hiring and Wages Extend Strong Gains, Keeping Pressure on Fed
Today’s job report showed average hourly earnings rose twice what was forecast, now up 5.1% year-over-year and running at a 6% annual rate. @bloomberg
Nonfarm payrolls increased 263,000 in November after an upwardly revised 284,000 gain in October, a Labor Department report showed Friday. The unemployment rate held at 3.7% as participation eased. Average hourly earnings rose twice as much as forecast after an upward revision to the prior month. The jobs report showed average hourly earnings rose 0.6% in November in a broad-based gain that was the biggest since January and was up 5.1% from a year earlier. Wages for production and nonsupervisory workers climbed 0.7% from the prior month, the most in almost a year. The pace of pay raises is inconsistent with the Fed’s 2% inflation target.
Furman On Jobs Report
.@jasonfurman argues that the uptick in average hourly earnings should “dash hopes” for a soft landing: 6% growth is consistent with a 5% inflation rate.
The biggest news in this release is large upward revisions in wage growth for September and October and a big number for November. This is the second time this year we’ve seen AHE revisions like this dashing the hopes that maybe nominal wages growth was cooling. You can’t understate how huge this is. Last month the data showed average hourly earnings grew at a 3.8% annual rate (three-month average). With revisions and one month of data, this is now a 6% annual rate. I was allowing myself to get more hopeful about a soft landing (2nd time this year), but this pretty much dashed that hope. This pace of average hourly earnings growth is consistent with about 5% inflation. About the same or slightly worse than the story the ECI is telling.
More Americans Leave the Workforce as Participation Rate Drops Again
Prime-age labor force participation dropped to 82.4%, still under its pre-pandemic level of 83.1% in January 2020. @catarinasaraiva @bloomberg
The share of Americans either working or actively looking for a job fell to 62.1%, according to government data released Friday. The rate had risen to 62.4% in August, matching a post-pandemic high reached in March, but remains significantly below where it was before the pandemic. The participation rate for so-called prime-aged workers, those aged 25 to 54, also dropped to 82.4% from 82.5%. And it, too, remains below its pre-pandemic levels. While participation declined for both men and women, a larger share of female workers left the labor force last month.
Officials fear ‘complete doomsday scenario’ for drought-stricken Colorado River
Due to the rapidly dropping waters level of Lake Powell, the Glen Canyon (Hoover) Dam may have to be shut down next summer due to the risk posed by whirlpool formation @partlowj
The first sign of serious trouble for the drought-stricken American Southwest could be a whirlpool. It could happen if the surface of Lake Powell, a man-made reservoir along the Colorado River that’s already a quarter of its former size, drops another 38 feet down the concrete face of the 710-foot Glen Canyon Dam here. At that point, the surface would be approaching the tops of eight underwater openings that allow river water to pass through the hydroelectric dam. The normally placid Lake Powell, the nation’s second-largest reservoir, could suddenly transform into something resembling a funnel, with water circling the openings. If that happens, the massive turbines that generate electricity for 4.5 million people would have to shut down — after nearly 60 years of use — or risk destruction from air bubbles. The federal government projects that day could come as soon as July.
Longer-Run Neutral Rates in Major Advanced Economies
Despite a sharp increase in sovereign debt levels, the upward pressure on neutral rates has been modest. @FederalReserve
Leading up to the 2008 financial crisis, neutral rates in these four economies saw declines of between 2.1 and 2.8 percentage points, with all drivers pushing down neutral rates. Between 2008 and 2019, the positive contribution of the increased sovereign debt supply modestly offset the negative contributions from other drivers. Since the pandemic, the rise in government debt accounts for most of the recent rise in neutral rates in [the US, UK, Canada, and Euro area], with other factors exerting largely offsetting effects. All told, while the sharp rise in government indebtedness since the pandemic may have put upward pressure on neutral rates abroad, we estimate that this pressure has been likely modest.
December 1, 2022
Surging Business Formation in the Pandemic: Causes and Consequences
Applications to start new businesses, including firms that are likely employers, surged during the pandemic. @UpdatedPriors @JHaltiwanger_UM
A striking feature of the US economic experience during the COVID-19 pandemic has been a surge in applications for new businesses. After initially dropping in March and April of 2020, applications rose to record levels, an all-time high in July 2020 and remaining historically elevated through the fall of 2022 (Figure 1.) The surge was apparent even among “likely employers,” that is, applications with characteristics that are likely to result in the hiring of workers and growth. Historically, there has been a tight relationship between business applications and true business formation, but questions have remained about the degree to which the pandemic’s surging applications would translate into actual employer businesses with broader labor market implications.
Jay Powell Signals Federal Reserve Will Slow Pace Of Rate Rises Next Month
In a speech yesterday, Jay Powell signaled the pace of rate increases would slow but that the terminal rate will likely be higher than the 4.6% rate that Fed officials had projected in their last quarterly forecast. @ft
Jay Powell has sent a strong signal that the Federal Reserve will slow the pace of interest rate rises next month in an otherwise hawkish speech warning that the US central bank has a long way to go in its fight against inflation. “The time for moderating the pace of rate increases may come as soon as the December meeting,” the Fed chair said. The remarks from Powell suggest the Fed is preparing to “downshift” to a 0.5 percentage point increase when it meets in two weeks after it raised rates by 0.75 percentage points at each of its past four meetings. He reiterated that the endpoint of the tightening cycle would probably need to be higher than forecasted in projections released in September, which suggested most officials anticipated a so-called terminal rate of 4.6%. Most economists have penciled in the fed funds rate topping 5%.
The New Winners and Losers in Business
Over the past three years, the best-performing sectors of the S&P 500 have been energy and IT, outpacing the Technology sector. @TheEconomist
We have examined which American industries and firms have done best over the past three years based on stock market performance. The headline is that market leadership has flipped dramatically. The digital hares have given ground to old-economy tortoises. Big tech is no longer running away with the race. Firms once derided as obsolete and sluggish suddenly look vital again. We have chosen January 1st, 2020, as the starting date for our analysis. Since then, the S&P 500 index of leading American shares has risen by 23%. The best-performing industry sector is energy, followed by information technology (IT). Health care has done well, as might be expected during a public-health crisis: the second-best-performing company in the S&P 500 is Moderna, a leading vaccine maker, whose share price is up by nearly 800%.
The Deflating of the Great Cash Cushion
.@economistmeg argues in @ft that by mid-2023, consumers and corporations will have depleted the excess savings they built up during the pandemic, and the long-awaited recession will get underway.
Bank of America expects that at the current three-month average rate of decline of household deposits, it would take between 12 and about 40 months (depending on income quartile) to return to 2019 levels. Goldman Sachs estimates US households will have less than $1T in excess savings by the end of 2023. JPMorgan recently warned excess savings could be completely depleted by the second half of next year. There are many reasons to fall on the pessimistic side of these estimates. The personal savings rate jumped from 8.3% at the end of 2019 to 26.3% at the height of Covid-19 in March 2021. In September, it had fallen back to 3.1%, well below the historical average. And for all the cash still left in aggregate household bank accounts, consumers are not feeling very confident. The Conference Board’s consumer confidence index has been declining since mid-2021.
US Inflation Indicator Rises by Less Than Forecast as Spending Increases
The PCE inflation measure rose 0.2% in October, under the forecast, while the personal savings rate fell to 2.3%, the lowest since 2005. @bloomberg
A key gauge of US consumer prices posted the second-smallest increase this year while spending accelerated, offering hope that the Federal Reserve’s interest-rate hikes are cooling inflation without sparking a recession. The personal consumption expenditures price index, excluding food and energy, which Fed Chair Jerome Powell stressed this week is a more accurate measure of where inflation is heading, rose a below-forecast 0.2% in October from a month earlier, Commerce Department data showed Thursday. The saving rate fell to 2.3% in October, the lowest since 2005, the Commerce Department report showed.
November 30, 2022
The New Geopolitics of Global Finance
The run-up in energy prices has driven an increase in trade imbalances, with a ~ $1 Trillion surplus largely ending up in the hands of autocratic countries: China, Russia, Saudi Arabia, and the Gulf. @Brad_Sester
There was an enormous swing in the trade surplus of the energy-exporting economies, and surprisingly, China’s surplus also has continued to rise. Russia’s surplus is set to top $250 billion. Saudi Arabia’s surplus should top $200 billion. The other monarchies in the Gulf should have a surplus comparable to that of the Saudis—if anything, it will be a bit bigger. Summed up, these autocratic countries’ surpluses should total about $1 trillion in 2022. But there is an important difference between now and then: the big autocratic surplus countries are not adding to their formal foreign exchange reserves. By implication, private financial intermediaries somewhere around the world will need to absorb Treasury bonds. Just as financial intermediaries globally had to absorb U.S. “subprime” (household) risk prior to the global crisis, now they have to absorb U.S. interest rate risk.
Does Inflation Disproportionately Hurt the Poor?
.@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.
Inequality in Society Drives Stock-Market Performance
An Oliver Wyman model argues that the increase in inequality has driven equity valuations @jmackin2
Oliver Wyman has constructed a model of demand for stocks that tries to assess the effect of inequality and two other long-running shifts. These are the rise in willingness of pension-fund managers to hold stocks since the 1950s and the easier access to stocks for ordinary investors, both through lower fees and the popularity of funds. This “demand-weighted income” measure is then compared with household equity wealth to come up with something akin to a slow-moving price-to-earnings ratio. A price-to-inequality ratio won’t replace a simple price-to-earnings gauge. Inequality data are slow to be produced, so this can’t be used as a real-time indicator.
Global Debt Costs Are Soaring. Here’s Where It Will Hurt Most
While global debt declined slightly from last year, the total outstanding debt is $290 Trillion, up 1/3 from a decade ago, as borrowers face rising interest rates globally, report @mccormickliz @atanzi @endacurran
The total debt owed by households, businesses, and governments stands at $290 trillion, up by more than one-third from a decade ago, according to research by the Institute of International Finance. Although the world’s debt has declined from a pandemic-driven record early this year, the risks it poses to economies and financial markets are intensifying.
How Is the Corporate Bond Market Functioning as Interest Rates Increase?
Since the start of the current tightening cycle, increases in the Investment Grade Corporate Bond Market Distress Index (CMDI) have been relatively modest. The index remains close to historical medians. @NewYorkFed
The increases in the Investment Grade Corporate Bond Market Distress Index since the start of the current tightening cycle have been relatively modest. Overall, the IG CMDI has trended sideways recently, with the 2022 peak not substantially above that observed in the 2015 tightening cycle.
Industry is Really Worried About IRA
The president of the German federation of industry argues “more than a fifth of German medium-sized companies they had polled were considering packing up and leaving the country,” given expected structurally higher energy costs going forward.
FAZ quotes the president of the German federation of industry as saying that more than a fifth of German medium-sized companies they had polled were considering packing up and leaving the country. Despite recent market moves, end-user energy prices will not revert to the pre-war times on a sustained level. What we expect to see in Germany is not so much large de-industrialization but a shift in production technologies. We expect to see a shift away from energy-intensive production, like bulk chemicals and steel, towards lower energy-intensive industrial segments and a shift towards low carbon technologies, in particular, a process that will be accompanied with friction and possibly lower GDP growth.
Gun Death Rate Nears Three-Decade High, With Men at Most Risk
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.
Inflation Adjusted House Prices 3.3% Below Peak
Inflation-adjusted home prices are 3.3% under their recent peak, but affordability decreased as mortgage rates increased. @calculatedrisk
In real terms, the National index is 3.3% below the recent peak, and the Composite 20 index is 4.4% below the recent peak in 2022. In real terms, house prices are still above the bubble peak levels. There is an upward slope to real house prices, and it has been over 16 years since the previous peak, but real prices are historically high. Affordability worsened in September as mortgage rates increased, even though house prices declined.
Alibaba Founder Jack Ma Living in Tokyo Since China’s Tech Crackdown
Jack Ma has been living in central Tokyo for the last six months in the aftermath of the Chinese government’s regulatory crackdown on his businesses. @ft
Jack Ma, the Alibaba founder and once the richest business leader in China, has been living in central Tokyo for almost six months amid Beijing’s continuing crackdown on the country’s technology sector and its most powerful businessmen. Since his fallout with Chinese authorities, Ma has been spotted in various countries, including Spain and the Netherlands. People involved in Japan’s modern art scene said that Ma had become an enthusiastic collector. Friends close to the billionaire in China said he had turned to painting watercolors to pass the time after being forced to retreat from his frenetic public life, jet-setting between meetings with top officials in China and around the globe.
NYC Becomes One Billionaire Family’s Haven From China Property Crash
A good example of capital flight from the PRC: the founders of Soho China now live in New York, where their real estate assets value may exceed their Chinese assets. @bloomberg
Zhang Xin and her husband Pan Shiyi, who grew Soho China Ltd. into a behemoth that reshaped the country’s skylines, have built a discreet family office. Two of its biggest assets: stakes in the General Motors Building on Fifth Avenue and Park Avenue Plaza in Midtown. Now, after the implosion of the Chinese property sector, the combined equity value of just these two investments — about half a billion dollars — is roughly the same as the couple’s holding in the Beijing-based company responsible for their wealth. Their five-part strategy — build a successful business in China, list it on a global exchange, pay out billions of dollars in dividends, set up a family office abroad, and buy up foreign real estate — means their fortune is relatively protected while other Chinese billionaires have seen their riches crumble after running foul of President Xi Jinping’s clampdowns.
Chinese Companies Set Up In Singapore To Hedge Against Geopolitical Risk
At least 500 Chinese firms have redomiciled or registered in Singapore over the past year to hedge against geopolitical risk. @ft
The exact number of Chinese companies being set up is unclear because Singapore does not disclose the origin country in its public statistics. However, one lawyer said his firm’s internal research division found more than 500 new Chinese companies had set up this year in Singapore, which experts noted was a rise from previous years. Another business advisory group in the city-state that had reviewed the data calculated the number at 400, including family offices, but also asked not to be identified due to the sensitivities involved. Analysts expect the number of family offices — many of which are from China — to be well over 1,000 by the end of this year, compared with 400 at the end of 2020.
Protests; Covid; Xi’s diplomacy; National security; Real Estate Support; Hong Kong Law
China newsletter publisher @niubi notes that the scale of the protests is “remarkable and meaningful, but expects that the Chinese security services “will succeed in nipping [protests] in the bud.”
While there have been some breathless claims using terms like “uprising” and “revolt,” I think that is an exaggeration of the protests at this stage and that the security services will succeed in nipping them in the bud. But no mistake, the fact that so many were willing to stand up publicly in spite of the likely personal costs is remarkable and meaningful. Still, in spite of how stirring these protests have been, I would be surprised if they continue in any meaningful way, given how much work the system has put into dealing with just these kinds of contingencies and how it has repeatedly demonstrated that when it comes to ensuring political security, there is no bottom line.
China Set to Expand Nuclear Arsenal to 1,500 Warheads by 2035, US Says
The Chinese are seeking to deploy 1,500 nuclear weapons by 2035 and have doubled their intelligence, surveillance, and reconnaissance (ISR) satellite systems since 2018 to 260 satellites, according to a new Pentagon report. @ft
The Pentagon said Beijing “probably accelerated” its nuclear expansion last year and was on track to have a stockpile of 1,500 nuclear weapons by 2035. The Pentagon said China was also investing heavily in space, including everything from intelligence assets to weapons to counter an adversary, such as kinetic-kill missiles and ground-based lasers. It said China had more than 260 intelligence, surveillance, and reconnaissance (ISR) satellite systems, which marked an almost doubling since 2018. US officials say China has shown no willingness to engage in any talks about nuclear weapons.
November 29, 2022
It is Time to Revisit the 2% Inflation Target
.@ojblanchard1 revises his recommendation for the “right” inflation target from 4% to 3%, given evidence that Google search activity on “inflation” increases once it surpasses 3-4%. @ft
When inflation is low, people and companies simply do not think about it and thus do not react to it. This was certainly the case pre-Covid. When it becomes higher, however, inflation becomes salient, wage and price decisions become more sensitive to it, and inflation expectations become more easily de-anchored. The question is, what rate of inflation leads to salience? A hint is given in a recent paper, which looks at Google searches for “inflation” as a function of the actual inflation rate. It found that, for the US, if inflation was around 3-4%, people simply did not pay attention. Above 3-4%, they did. Altogether, these arguments have led me to conclude that, while a higher inflation target is desirable, the right target for advanced economies such as the US might be closer to 3% than our original 4% proposal.
Yield Curve Inversion Reaches New Extremes
Last week, the yield on the 10-year US Treasury note dropped to 0.78 percentage point below the 2-year yield, the largest negative gap since late 1981. Many investors and analysts see reasons to think that the current yield curve may presage waning inflation. @wsj
Yields on longer-term US Treasurys have fallen further below those on short-term bonds than at any time in decades, a sign that investors think the Federal Reserve is close to winning its inflation battle regardless of the cost to economic activity. Last week, the yield on the 10-year US Treasury note dropped to 0.78 percentage points below that of the two-year yield, the largest negative gap since late 1981, at the start of a recession that pushed the unemployment rate even higher than it would later reach in the 2008 financial crisis.
There’s an Unusual Divergence Between Energy Stocks and Oil Prices
.@tracyalloway and @luwangnyc of @bloomberg report an unusual divergence: the price of West Texas Intermediate crude oil for immediate delivery has dropped almost 18% since July, while energy stocks have jumped more than 32% in the same time frame.
While the price of West Texas Intermediate crude oil for immediate delivery has dropped almost 18% since the middle of July, energy stocks, as encapsulated by the Energy Select Sector SPDR exchange-traded fund (XLE), have jumped more than 32% in the same time frame. Two main factors seem to be behind the divergence: 1) Energy earnings have been recovering, with the sector claiming the highest percentage of companies reporting earnings above estimates in the most recent quarter, according to Factset data, and 2) Brent crude has flipped into contango for the first time since December 2021.
More Men Are Staying Out of the Workforce to Care for Kids
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.
The Child Tax Credit Is a Failed Experiment
.@scottahodge, one of the architects of the Child Tax Credit, notes the American Rescue Plan’s expanded credits left 48.3% of all filers with no income tax liability in 2021 and argues making expanded credits permanent, based on the $1.3T ten-year cost. @wsj
According to a Tax Policy Center estimate, some 74 million tax filers—or nearly half (48.3%) of all filers in 2021—had no income tax liability. Can we have a sustainable tax system if the number of nonpayers continues to grow? Expanding the child tax credit would take our redistributionist tax code to a new level. Although 2021 was a pandemic year, it gives us a picture of what that world would look like. The child tax credit is a drain not only on the federal budget but on the nation’s economy. Congress’s Joint Committee on Taxation economic models predict that the policy would reduce the labor supply by 0.2% over a decade and the amount of capital by 0.4%. As a result of the reduced supply of labor and capital investment, gross domestic product would shrink by 0.2%.
Large Racial Reading and Math Performance Gaps Persist as Children Age
Black students continue to lag white students in the last National Assessment of Educational Progress results. In 8th grade, 38% of black students were performing at their grade level vs. 74% of white students. @aei
Whereas nationally, 86% of white 4th graders were at least on grade level in mathematics, this was true for only 55% of black students. As students progressed to the 8th grade, the share performing at grade level or better fell by 15% (86 to 74%) for white students nationally. Among black students, the decline was 30% nationally (from 55 to 38%) and among black students in the [poorest-performing cities poorest performing cities (Baltimore, Cleveland, Detroit, Milwaukee, and Philadelphia)] (28 to 20%). A Brookings Report found that in 2019, only 7% of black test-takers scored at least 600 on the math portion of the SAT exam. By contrast, 11%, 31%, and 62% of Latino, white, and Asian test-takers, respectively, did that well.
Tesla’s Lithium Lead at Risk as Rivals Make Supply Deals
.@Bloomberg forecasts that lithium demand is set to increase more than fivefold by the end of the decade and notes that “EV sales targets for 2030 are probably unachievable because of constraints on various raw materials.”
Lithium demand is expected to jump more than fivefold by the end of the decade. EV sales targets for 2030 are probably unachievable because of constraints on various raw materials, according to Piper Sandler & Co. New lithium mines can cost as much as $1 billion and take more than six years to build, too slow for the sector’s needs, Piper analysts wrote in a November note. And BloombergNEF predicts shortages of lithium will be a problem until 2026 for companies that refine the products into chemicals used in EV batteries.
The Cost of Regulatory Compliance in the United States
Between 2002 and 2014, regulatory costs averaged 1.34% of firms’ wage bills in the United States @xftrebbi @rainozhang @NBER
We quantify firms’ regulation compliance costs from 2002 to 2014 in terms of their labor input expenditure to comply with government rules. Detailed establishment-level occupation data, in combination with occupation-specific task information, allow us to recover the share of an establishment’s wage bill owing to employees engaged in regulatory compliance. Regulatory costs account, on average, for 1.34% of the total wage bill of a firm but vary substantially across and within industries and have increased over time. We investigate the returns to scale in regulatory compliance and find an inverted-U shape, with the percentage of regulatory spending peaking for an establishment size of around 500 employees.
November 28, 2022
United States: Is Disinflation Real?
October CPI showed continued disinflation month-over-month in durables and the service sector, but it will “take more time to be confident that disinflation is real.” @GeneralTheorist
Housing now dominates—accounting for more than half of service inflation pressure over 3 months. It is expected that housing will take time to reflect past rent increases still, but at the margin, the housing sector is already softening—which should hit Core CPI in about 12 months. Medical services distorted service inflation downward—something unlikely to be repeated in coming months. Overall, the October print doesn’t yet provide confidence that disinflation has spread from durables to services.
A Different Kind of Kitchen-Table Economics
.@PaulKrugman argues that the rent surge of 2021-2022 was driven by changing preferences related to work-from-home during the pandemic, and has now largely ended.
A couple of notes about [the above] chart: I show rates of rent growth [reported by Zillow] over a three-month period, a practice many economists have converged on in recent discussions: Monthly data are too noisy, but annual growth rates lag too far behind a rapidly changing economy. I also show inflation in the average rental rate reported by the Bureau of Labor Statistics (labeled official rent above.) As you can see, the rental surge of 2021-22 was quite spectacular, with rents rising at double-digit rates for about a year and a half. But it has leveled off recently. Zillow’s index (a three-month average) fell in October; other private measures, like those published by Realtor.com and Apartmentlist.com, have been signaling rent declines for two or three months.
The Treasury Market’s Big Recession Trade Is Gathering Momentum
Bond markets forecast a 2023 recession, with long-dated Treasury yields below the Fed’s overnight benchmark range of 3.75-4%. @bloomberg
The bond market is zeroing in on a US recession next year, with traders betting that the longer-term trajectory for interest rates will be down even as the Federal Reserve is still busy raising its policy rate. Long-dated Treasury yields are already below the Fed’s overnight benchmark range — currently 3.75% to 4% — and there’s still an extra percentage point of central bank increases priced in for the coming months. Demand for Treasuries with longer tenors this week dragged the rate on 10-year and 30-year securities below the lower bound of the Fed’s overnight range. With front-end rates holding relatively steady, that’s seen an intensification of the most pronounced yield curve inversion in four decades — a widely watched indicator of potential economic pain to come.
Employers Rethink Need for College Degrees in Tight Labor
In November, 41% of American job listings required a college degree, down from 46% at the start of 2019, suggesting employers are relaxing degree requirements in tight labor markets. @wsj
US job postings requiring at least a bachelor’s degree were 41% in November, down from 46% at the start of 2019 ahead of the Covid-19 pandemic, according to an analysis by the Burning Glass Institute, a think tank that studies the future of work. Degree requirements dropped even more early in the pandemic. They have grown since then but remain below pre-pandemic levels.
Are We Ready for the Approaching Loneliness Epidemic?
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.
Xi Jinping Faces Stiffest Challenge to Rule as Covid Outrage Sparks Mass Protests
Rare, widespread political protest spread across major Chinese cities over the weekend, seemingly driven by frustrations with zero-Covid. @ft
At least 10 cities, including Shanghai, Beijing, Wuhan, and Chengdu, were shaken by rare political protests over the weekend, triggering clashes with police and security officers that led to a spate of detentions. The sudden outbreak of civil disobedience was sparked by outrage after a deadly apartment fire in Urumqi, Xinjiang, was partly blamed on coronavirus restrictions. While most of the protests appeared to have been stamped out by Monday, they followed months of frustration, especially among China’s young people, with relentless lockdowns, quarantines, mass testing, and electronic surveillance under Xi’s zero-Covid policies.
Setser On China's Trade Surplus
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.)
Chinese Telecoms Groups Huawei and ZTE Barred From US Sales
The FCC has banned China-based Huawei and ZTE from telecommunications sales into the American market, citing national security concerns. The move may further fuel tensions with Beijing. @ft
Washington’s top telecommunications regulator has barred China-based Huawei and ZTE from selling equipment in the US, citing national security concerns in a move that could further fuel tensions with Beijing. The Federal Communications Commission announced the step on Friday, saying it was the latest effort by US authorities to “build a more secure and resilient supply chain” in the telecommunications industry. “The action we take today covers base station equipment that goes into our networks. It covers phones, cameras, and WiFi routers that go into our homes. And it covers rebranded or ‘white label’ equipment that is developed for the marketplace. In other words, this approach is comprehensive,” said Jessica Rosenworcel, chair of the FCC.
US Effort to Arm Taiwan Faces New Challenge With Ukraine Conflict
The backlog of US weapons delivery has grown to $18.7B from more than $14B last December, as competing demands from Ukraine and Taiwan stress the military supply chain. @wsj
The flow of weapons to Ukraine is now running up against the longer-term demands of a US strategy to arm Taiwan to help it defend itself against a possible invasion by China, according to congressional and government officials familiar with the matter. The backlog of deliveries, which was more than $14 billion last December, has grown to $18.7 billion. Included in the backlog is an order made in December 2015 for 208 Javelin antitank weapons and a separate one at the same time for 215 surface-to-air Stinger missiles. None of them have arrived on the island, according to congressional sources and people familiar with the matter. Executives at Lockheed Martin Corp., Boeing Co., and other defense companies say pandemic-driven supply-chain problems have set back production for many systems and that they have struggled to keep up with orders even before Russia’s invasion of Ukraine boosted demand.
Poorly Equipped German Army Awaits Financial Reinforcement From Berlin
German defense spending is set to decline by €300M in 2023 as the country continues to fall short of its NATO-set obligation of spending the equivalent of 2% of GDP on defense. @ft
Nine months ago, in the wake of Russia’s full-scale invasion of Ukraine, Olaf Scholz declared a Zeitenwende — a turning point — for Germany’s military and its place in the world. But since then, barely any of the €100bn in extra funding the German chancellor pledged has made its way to the armed forces. The parliamentary body set up in the spring to allocate money to modernization and reform programs has met once. The defense ministry had no procurement proposals to submit to it. Its next sitting will not be until February. Far from rising, the 2023 defense budget, opposition leader Friedrich Merz noted, was set to shrink by €300mn based on current government plans. The lack of German action was “[giving] rise to considerable distrust” at NATO and in allied capitals, he claimed.
A Note on the Concentration of Power
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.
2021 North American Heatwave Amplified by Climate Change-Driven Nonlinear Interactions
Temperatures anomalies that were once-in-1,000-yearly events in North America in the 1970s are now expected to be 5-yearly events, according to new research in @Nature
We find that slow- and fast-moving components of the atmospheric circulation interacted, along with regional soil moisture deficiency, to trigger a 5-sigma heat event. Its severity was amplified by ~40% by nonlinear interactions between its drivers, probably driven in part by land-atmosphere feedback catalyzed by long-term regional warming and soil drying. Since the 1950s, global warming has transformed the peak daily regional temperature anomaly of the event from virtually impossible to a presently estimated ~200-yearly occurrence. Its likelihood is projected to increase rapidly with further global warming, possibly becoming a 10-yearly occurrence in a climate 2 °C warmer than the pre-industrial period, which may be reached by 2050.
November 22, 2022
Trade Wars are Class Wars, 34 Months Later
.@M_C_Klein cites the end of a spike in compensation for low-skilled workers and longer-term forward real interest rates well within their post-financial crisis range and argues against a deliberate economic downturn to curb inflation.
In the US, the earlier spike in lower-end wages relative to other workers’ pay has completely stopped, while the split between labor income and profits has, if anything, moved in favor of investors. For better or worse, the popular and elite reactions to the inflation outbreak suggest that policymakers are not going to respond to future downturns the way they did to the pandemic. Soft budget constraints do not appear to be on the menu. And while there have been some constructive increases in public investment (and military spending) in the major economies, they do not seem large enough to move the needle. Financial markets may be wrong, but it is noteworthy that longer-term forward real interest rates are well within their post-financial crisis range, even if they have jumped over the past 12 months.
China Lockdowns Reach Record Level as Coronavirus Cases Soar
China reported almost 28,000 new Covid cases on Tuesday, with outbreaks in Beijing, Guangzhou, and Chongqing. Lockdowns are more extensive than during the Shanghai outbreak that slowed annual economic growth to 0.4% in Q2. @ft
Covid-19 cases in China are spiraling towards record highs, forcing officials to lock down again large swaths of the country. The world’s second-biggest economy reported almost 28,000 new Covid cases on Tuesday, with outbreaks in Beijing, the southern manufacturing hub of Guangzhou, and the southwestern metropolis of Chongqing continuing to grow. Covid restrictions have hit areas responsible for one-fifth of China’s gross domestic product. Officials in Beijing shut most non-essential businesses in the city’s largest district, Chaoyang, which has a population of 3.4mn, and have closed restaurants and other entertainment venues in much of the city while telling residents to work from home.
How do Deposit Rates Respond to Monetary Policy?
Researchers at @NewYorkFed evaluate the pass-through of the fed funds rate to deposit rates (that is, deposit betas) over the past several interest rate cycles, and discuss factors that affect deposit rates.
We can observe that the gap [between the deposit rate and the Fed funds rate] is negative when rates are near zero (and deposit levels are high) and positive when rates rise. As a consequence, post-GFC and before the 1994 tightening, deposits were more attractive to depositors, and deposit supply was high relative to loans. However, as rates rise, the gap increases, depositors move elsewhere, banks raise their rates, and cumulative deposit betas rise. Since the 1990s, the response of deposits to monetary policy has been attenuated. This can be explained by the growth in deposits over the post-crisis period relative to investment opportunities.
Fed's Aggressive Rate Hikes are a Game Changer
.@WSJ notes that the Fed has been raising rates at the fastest pace in four decades (+375 basis points in 9 months.) Key variables such as housing starts have declined much more rapidly than in previous cycles.
The Nobel Prize-winning economist Milton Friedman famously argued that “monetary actions affect economic conditions only after a lag that is both long and variable.” Historically, housing starts begin to decline within two years of a Fed hike. New home construction fell by 24% from the Fed increase in March to July. Declines in home construction that follow Fed rate increases can take years before they bottom out.
How Conditions Today Compare to Past Equity Market Bottoms
Bridgewater notes that recent market conditions do not fit the historical pattern. Typically, rising discount rates and risk premiums lead to declining asset prices, which in turn leads to declining economic activity and earnings, and more pressure on equities.
There is typically a meaningful increase in equity expected returns (shown below in excess of cash) before the turn in the market because investors need to be incentivized back into equities and out of safe assets following significant losses. Today, based on our read, the re-rating of equity prices has a way to go. Our estimate for long-term excess expected returns remains relatively low compared to history. Consistent with that, analyst consensus for long-term corporate cash flow growth has barely budged over the last year, not yet reflecting the cooling of the economy we expect to see.
Global Debt Pile Declines But Interest Bill Set to Surge, IIF Says
@bloomberg reports that the dollar value of global debt as a share of the global economy is 20 percentage points under its pandemic peak, as a result of inflation and a sharply appreciated dollar.
Total debt declined $6.4 trillion in the three months through September, to about $290 trillion, the IIF said in its quarterly Global Debt Monitor published Tuesday in Washington. That drop is amplified by the surging dollar, which makes loans denominated in other currencies look smaller when they’re measured in greenbacks. As a share of the world economy, debt has dropped to 343% — about 20 percentage points below its pandemic peak last year. Soaring inflation in many economies has helped erode debt burdens measured against the size of economic output because the nominal value of gross domestic product has risen rapidly.
The Inflation Reduction Act Comes for Medicare
.@caseybmulligan and @TomasPhilipson estimate that The Inflation Reduction Act will reduce healthcare subsidies by $30B starting in 2025, leading to benefit cuts and premium increases for seniors. @WSJ
The Inflation Reduction Act will lead to benefit cuts and premium increases for seniors. We estimate that beginning in 2025, plan subsidies—specifically, the reinsurance subsidies for the beneficiaries with the most drug spending—will be cut $30 billion, out of revenue that currently totals about $110 billion. With $30 billion less to finance prescription benefits, something will have to give. Traditional Medicare members face a difficult choice in 2025: either take drastic cuts in drug coverage or switch to Medicare Advantage plans that cover prescriptions but may not cover the hospitals and doctors who are currently providing them care.
November 21, 2022
Wonking Out: Why Interest Rates (Probably) Won’t Stay High
.@paulkrugman argues that once the demand shock from pandemic aid fades, “we’ll probably be back to a situation in which too much saving is chasing too few investment opportunities, and interest rates will be revisiting their old lows.”
Once [the economic boost from pandemic aid fades away,] we’ll probably be back where we were before the pandemic, with weak private investment demand holding interest rates down. Last time I wrote about this I stressed demography — the drastic slowdown in growth of the working-age population — plus what looks like disappointing rates of technological progress. Let me now put it a different way. [The macroeconomic accelerator effect] tells us that investment spending will only remain high if we expect rapid economic growth. And what we know now doesn’t support that expectation. What all this suggests to me is that the era of cheap money is not, in fact, over. A few years from now, we’ll probably be back to a situation in which too much saving is chasing too few investment opportunities, and interest rates will be revisiting their old lows
As Savings Slowly Shrink, Consumer Spending Is on Borrowed Time
Excess savings associated with the pandemic, which are somewhere in the $1.2-$1.8T range, should provide support for the economy through the end of next year according to a range of estimates. @WSJ
Headed into the third quarter of this year, households still had about $1.2 trillion to $1.8 trillion in “excess savings”—the amount above what they would have saved had there been no pandemic. Economists’ estimates for how much consumers have left vary. JPMorgan Chase & Co. put the hoard at about $1.2 to $1.8 trillion in the third quarter and said it could be entirely spent by the second half of next year. Goldman Sachs economists estimate households have drawn down about 25% of excess savings and will have spent about 60% by the end of 2023. Ian Shepherdson, chief economist of Pantheon Macroeconomics, puts it at $1.3 trillion and estimates that at the current rate of rundown, that could last another year or so.
Stock and Flow
Former Fed bond trader Joseph Wang notes that higher interest rates subsidize consumption by increasing private sector interest income from public sector liabilities. He argues, “the current policy stance may not be effective in moving inflation back to 2%.” @FedGuy12
The economic impact of higher rates is mixed because it also subsidizes consumption by increasing private sector interest income from public sector liabilities. While private sector interest expenditures merely redistribute income among private actors, public sector interest rate expenditures increase the overall spending power of the private sector. If rates are higher for longer, the interest payments will easily exceed $1t next year. The aggressive rate hikes have thus far appeared to have a limited effect on dampening inflation. With the policy rate much closer to the terminal rate than 0% and financial markets stabilizing, the stock effect of monetary policy appears to be waning. If the flow effects are mixed, then the current policy stance may not be effective in moving inflation back to 2%
Have We Been Measuring Housing Inflation All Wrong?
.@foxjust at @bloomberg argues that the lag between the new leases rent measure and the CPI’s shelter component may mean the Fed “was behind the curve when it started raising interest rates in March and could end up late again in pivoting to easier monetary policy.”
The most important of those implications would seem to be that the Federal Reserve’s policy-making committee was behind the curve when it started raising interest rates in March — a year after rents on new leases started exploding — and could end up late again in pivoting to easier monetary policy long after rents have started to fall. I ran the idea of switching to a new-leases rent measure by Princeton economist and former Fed Vice Chairman Alan Blinder, who wrote an influential paper in 1980 urging the switch to owner’s equivalent rent. He emailed, “For most purposes, making that change would be a terrible idea. It would reflect the prices paid by a small, and not representative, minority. That said, if the BLS (or anyone) wants to create a leading indicator of inflation, using rents on new leases would be quite sensible.”
Chartbook #173: Barred From Employment - How Criminalization Blights American Lives
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.
India Equity: An Unsung Long-Term Performance Story
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.
Does “Made in China 2025” Work for China? Evidence from Chinese Listed Firms
New research cast doubts on the impact of Made In China 2025, at least through 2018 “we see little statistical evidence of productivity improvement or increases in R&D expenditure, patenting and profitability”
Using a Difference-in-Differences approach, we find evidence that participation [in Made In China 2025] enables firms to receive more innovation subsidies, which appears to induce increases in R&D intensity. However, there is no evidence that participation increases domestic and foreign patenting, labor productivity, TFP, or profitability of participating firms, suggesting the most important goals of the policy are still unrealized. There is no statistically significant evidence (at a 5% significance level) of positive effects of the “Made in China 2025” initiative on total subsidies, Chinese invention patents, US utility patents, log labor productivity, TFP, and profit margin.
Japan Expands Fleet of Aegis Missile Defense Destroyers to 8
Two Aegis-equipped Japanese destroyers successfully intercepted mock ballistic missiles during tests off the coast of Hawaii earlier this month. Japan added two more vessels to its Aegis-equipped fleet and now has a total of 8 operational.
Japan added two more vessels to its fleet of Aegis-equipped destroyers, raising to eight the number of ships capable of intercepting ballistic missiles. Two Maya-class Aegis destroyers, the Maya and the Haguro, successfully intercepted mock ballistic missiles during tests off the coast of Hawaii earlier this month, the Defense Ministry said Monday. In addition, the Maya fired the Standard Missile-3 Block 2A, the interceptor missile developed by the US and Japan. This marks the first time a Japan Maritime Self-Defense Force vessel launched an interceptor from the state-of-the-art Block 2A system.
China Births: Which 13 Provincial-Level Populations Officially Shrank in 2021?
New official Chinese numbers show over 40% of 31 provincial-level jurisdictions reported more deaths than births last year. Total population grew by 480,000 to 1.4B in 2021, the smallest increase since 1962, with births down 11.5% from 2021. @SCMPNews
Among China’s 31 provincial-level jurisdictions, 13 reported more deaths than births last year. Those 13 comprised the wealthy regions of Shanghai, Jiangsu, and Tianjin; the central provinces of Sichuan, Chongqing, Hunan, and Hubei; Hebei, Shanxi, and the Inner Mongolia autonomous region in the north and northwest; and the northeastern rust-belt provinces of Liaoning, Jilin, and Heilongjiang. China has shined a bit more light on its demographic crisis, with newly released figures showing that more than a third of its provinces saw their populations shrink last year. Chinese mothers gave birth to just 10.62 million babies in 2021 – an 11.5% decline from 2020.
November 18, 2022
Setser On Rumors Of Decoupling
Large scale decoupling isn’t showing up in the Chinese trade data. Chinese exports to the US rose to 2.5% of GDP in Q3 ‘22, up from about 2.25% on average from 2010 to 2018. @Brad_Setser
I don’t think there has been much of a shift in global supply chains out of China. If you trust the Chinese data — the Chinese data here may be better, as the US data is influenced by tariff avoidance — US imports from China are slightly higher (as a share of GDP) than before the trade war. China’s overall data tells a story of the reglobalization of China’s economy after the pandemic. Exports to GDP had been trending down from 2010 to 2018 — but have moved up strongly in the past year. And there is no sign that the G-7 has already decoupled from China as a source of supply! (imports from China have boomed in the last 3 years) So decoupling, in my view, is a forecast — not a current reality. The pandemic increased the world’s reliance on China as a source of manufactured supply and increased China’s reliance on exports for demand!
Inflation and Unemployment Both Make You Miserable, but Maybe Not Equally
The Oswald Misery Index (2 x unemployment + inflation ) was 15% in October, on par with the 20% peaks in the aftermath of the financial crisis. @WSJ
Since the early 1990s, the Misery Index has only been higher during the 2007-09 recession and its aftermath and for a couple of months in 2020 during the early lockdowns. Importantly, though, the two factors didn’t necessarily carry the same weight, as the Misery Index implies. [Andrew Oswald, a professor at the University of Warwick, found that] a 1-percentage-point increase in the unemployment rate had an equivalent impact on happiness as a 1.97-point increase in the inflation rate. [If Oswald] were to construct a Misery Index, he would make a simple modification: Multiply the unemployment rate by two and add it to the inflation rate. His index was 20% in 2010 and 15.1% now. By putting extra weight on unemployment, the index helps explain why 2010 was so much worse for Democrats.
Companies Are Still Boosting Capital Spending Despite Higher Rates
Despite worries about the recession, S&P 500 firms are increasing Capex spending, a jump of about 20% from a year earlier, while stock repurchases declined 11% from a year earlier. @WSJ
Capital spending among companies in the S&P 500 in the third quarter is set to top $200 billion, according to S&P Dow Jones Indices, which analyzed data through Monday from roughly 90% of index components. That is on pace for a jump of about 20% from a year earlier, roughly in line with the first and second quarter's growth rates. Energy companies are ramping up spending at the fastest pace of the groups in the S&P 500, according to Bank of America Corp. data. Stock repurchases are on pace for an 11% decline in the third quarter from a year earlier at roughly $180 billion, S&P Dow Jones Indices data through Monday show. Dividend payments, which are committed before the quarter begins, rose about 8% to $140 billion.
Masayoshi Son owes $4.7bn to SoftBank following tech rout
Masayoshi Son, chief executive and founder of SoftBank, owes the company close to $5B from loans that enabled his investments in the company’s tech funds. @ft
Masayoshi Son personally owes SoftBank close to $5bn because of growing losses on the Japanese conglomerate’s technology bets, which have also rendered the value of his stake in the group’s second Vision Fund worthless. The billionaire’s ballooning personal liabilities, discovered through a Financial Times analysis of SoftBank’s recent filings, comes as the world’s biggest tech investor was hammered by plunging tech stocks and valuations in private companies over the past year.
Can the market rise without Big Tech?
The S&P is rallying outside of large-cap tech stocks. @rbrtrmstrng @ft
One way to think about the relationship between the great Big Tech stocks and the broader market is by comparing the equal-weight S&P index — where the performance of every stock counts the same — to the plain vanilla S&P, which is [weighted by market capitalization.] The performance of the equal-weight index is the light blue line in the chart above, [with a dark blue line for the market cap weighted index.] What that chart shows, in short, is the performance of a few [large cap] stocks, mostly the Big Techs, dragging the index around. But in the most recent rally, things have changed meaningfully, as seen from the extreme right part of the chart. Since the beginning of October, the equal-weight index has outperformed, and the index has risen. The market has rallied without Big Tech.
Banks Face a New Challenge
Economics newsletter publisher @JosephPolitano notes worsening financial conditions, increasing interest rate volatility and rising long-term interest rates as the Federal Reserve began Quantitative Tightening earlier this year.
Throughout most of the 2010s, the dominant state for the US banking system was low-interest rates, large amounts of Quantitative Easing, weak credit creation, and low inflation. Now, however, commercial banks face a different challenge. Since the start of Quantitative Tightening, we have seen financial conditions worsening, increasing interest rate volatility, and rising long-term interest rates—so the program is likely having some of its intended effects (although it’s hard to disaggregate the effects of short-term rate hikes and signaling against the actions of QT).
Federal Unfunded Liabilities Are Growing More Rapidly Than Public Debt
James Capretta notes the federal government’s unfunded liabilities in 2021 were $93.1 trillion, nearly 400% of annual GDP. In 2001, they stood at 105% of GDP. @AEI
Most of the nation’s political leaders show little concern or even awareness that the federal government’s net financial position has eroded rapidly in this century. They know about mounting public debt because regular budget reports highlight it, as do media outlets. Less well-known or understood is the growth of the government’s unfunded liabilities, which, if anything, should be more alarming. With Social Security and Medicare included in the assessment, the federal government’s unfunded liabilities in 2021 are $93.1 trillion, or nearly 400 percent of annual GDP. That compares with $11.1 trillion as calculated in the 2001 Treasury report, which was 105 percent of GDP.
November 11, 2022
The Peak Looks In, But Markets Risk Overdoing It
.@JohnAuthers argues that the Cleveland Fed “trimmed mean” and the Atlanta Fed “sticky” inflation measure suggest inflation has peaked.
Underlying metrics confirmed that this time might really be the peak, in a way they conspicuously failed to do earlier this year when core CPI last seemed to have started a descent. The chart shows the “trimmed mean” inflation produced by the Cleveland Fed that excludes the biggest outliers in either direction from the index’s components and takes the average of the rest; and the