Edward Conard

Top Ten New York Times Bestselling Author

  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, November 18, 2022

AI Summary. Chinese data show US imports from China as a share of GDP slightly higher than before the trade war, and G-7 imports from China have boomed, indicating little shift of global supply chains out of China. Decoupling is a forecast rather than a current reality.

Brad Setser @Brad_Setser
Date Posted:

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

Have global supply chains actually shifted out of China?

Core argument: Setser argues that US imports from China, measured as a share of GDP, are slightly higher than before the trade war based on Chinese data, which he views as less distorted by tariff avoidance than US data.

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!

Takeaways by Macro Roundup® AI

  1. Setser argues that US imports from China, measured as a share of GDP, are slightly higher than before the trade war based on Chinese data, which he views as less distorted by tariff avoidance than US data.
  2. China's exports-to-GDP ratio trended down from 2010 to 2018 but has moved up strongly in the past year, which Setser describes as a reglobalization of China's economy after the pandemic.
  3. G-7 imports from China have boomed over the last three years, and Setser holds that decoupling is a forecast rather than a current reality, with the pandemic having increased the world's reliance on Chinese manufactured supply and China's reliance on exports for demand.

AI Summary. Research estimates that a 1-percentage-point rise in the unemployment rate lowers happiness about as much as a 1.97-point rise in the inflation rate, implying a misery index should weight unemployment roughly double. Such a double-weighted index stood at 20% in the aftermath of the 2007-09 recession versus 15.1% currently.

Josh Zumbrun Wall Street Journal
Date Posted:

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

Does unemployment reduce happiness twice as much as inflation?

Core argument: Andrew Oswald of the University of Warwick found that a 1-percentage-point rise in the unemployment rate had the same impact on happiness as a 1.97-point rise in the inflation rate.

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.

Takeaways by Macro Roundup® AI

  1. Andrew Oswald of the University of Warwick found that a 1-percentage-point rise in the unemployment rate had the same impact on happiness as a 1.97-point rise in the inflation rate.
  2. Oswald's modified Misery Index, which doubles the unemployment rate and adds inflation, stood at 20% in 2010 and 15.1% now, helping explain why 2010 was much worse for Democrats.
  3. Since the early 1990s, the Misery Index has been higher than its current level only during the 2007-09 recession and its aftermath and for a couple of months in 2020 during the early lockdowns.

AI Summary. S&P 500 companies increased capital spending by about 20% from a year earlier while stock buybacks fell 11%.

Hannah Miao Wall Street Journal
Date Posted:

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

AI Summary. SoftBank's founder personally owes the Japanese conglomerate close to $5bn as a result of mounting losses on its technology investments, which have also left his stake in the group's second Vision Fund worthless. The liabilities were identified in an analysis of SoftBank's filings amid falling technology stock and private company valuations.

Robert Smith, Kana Inagaki, and Leo Lewis Financial Times
Date Posted:

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, chief executive and founder of SoftBank, owes the company close to $5B from loans that enabled his...

Have falling tech valuations left a founder personally owing billions?

Core argument: Masayoshi Son personally owes SoftBank $4.7bn as losses mount on the Japanese conglomerate's technology bets, according to a Financial Times analysis of SoftBank's filings.

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.

Takeaways by Macro Roundup® AI

  1. Masayoshi Son personally owes SoftBank $4.7bn as losses mount on the Japanese conglomerate's technology bets, according to a Financial Times analysis of SoftBank's filings.
  2. Growing losses on SoftBank's technology investments have rendered the value of Masayoshi Son's stake in the group's second Vision Fund worthless.
  3. SoftBank, the world's biggest tech investor, was hammered by plunging tech stocks and falling valuations in private companies.

AI Summary. Comparing the equal-weighted S&P 500, in which every stock counts the same, with the market-capitalization-weighted version shows that a small group of large technology stocks has driven the index's moves. In a recent rally, the equal-weighted index outperformed, indicating the market rose without Big Tech.

Robert Armstrong Financial Times
Date Posted:

The S&P is rallying outside of large-cap tech stocks. @rbrtrmstrng @ft

Can the stock market rise without big technology stocks?

Core argument: Since the beginning of October, the equal-weight S&P index has outperformed the market-cap-weighted S&P and the index has risen, a rally without Big Tech.

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.

Takeaways by Macro Roundup® AI

  1. Since the beginning of October, the equal-weight S&P index has outperformed the market-cap-weighted S&P and the index has risen, a rally without Big Tech.
  2. Comparing the equal-weight S&P, where every stock counts the same, with the market-cap-weighted S&P shows a few large-cap stocks, mostly the Big Techs, dragging the index around.

AI Summary. US commercial banks now operate in conditions marked by worsening financial conditions, greater interest rate volatility, and higher long-term interest rates, a shift from the prior era of low rates, bond-buying by the Federal Reserve, weak credit creation, and low inflation.

Joseph Politano Apricitas Economics
Date Posted:

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.

Are banks now facing higher long-term rates and greater volatility?

Core argument: Since the start of Quantitative Tightening, financial conditions have worsened, interest rate volatility has increased, and long-term interest rates have risen, suggesting the program is likely having some of its intended effects.

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).

Takeaways by Macro Roundup® AI

  1. Since the start of Quantitative Tightening, financial conditions have worsened, interest rate volatility has increased, and long-term interest rates have risen, suggesting the program is likely having some of its intended effects.
  2. Through most of the 2010s, the US banking system operated under low interest rates, large amounts of Quantitative Easing, weak credit creation, and low inflation, whereas commercial banks now face a different challenge.
  3. Disaggregating the effects of Quantitative Tightening from those of short-term rate hikes and signaling remains difficult.

AI Summary. Including Social Security and Medicare, the federal government's unfunded liabilities reached $93.1tn, or nearly 400% of annual GDP, compared with $11.1tn, or 105% of GDP, two decades earlier. These obligations receive less attention than public debt, which is highlighted in regular budget reports and media coverage.

James Capretta American Enterprise Institute
Date Posted:

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

James Capretta notes the federal government’s unfunded liabilities in 2021 were $93.1 trillion, nearly 400% of annual...

Are federal unfunded liabilities growing faster than public debt?

Core argument: Federal unfunded liabilities, including Social Security and Medicare, reached $93.1 trillion in 2021, nearly 400 percent of annual GDP, up from $11.1 trillion, or 105 percent of GDP, as calculated in the 2001 Treasury report.

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.

Takeaways by Macro Roundup® AI

  1. Federal unfunded liabilities, including Social Security and Medicare, reached $93.1 trillion in 2021, nearly 400 percent of annual GDP, up from $11.1 trillion, or 105 percent of GDP, as calculated in the 2001 Treasury report.
  2. Federal unfunded liabilities are growing more rapidly than public debt, and the author argues they warrant more alarm than the publicly reported debt figures.
  3. Political leaders know about mounting public debt because regular budget reports and media outlets highlight it, while the growth of unfunded liabilities remains less well-known or understood.

AI Summary. Democratic support among Hispanic working-class voters fell 20 points since 2018, more than double the 9-point decline among Hispanic college-educated voters, and the party's nationwide margin among Hispanics narrowed by 12 points from 2020. Democrats' advantage among the nonwhite working class has shrunk by 33 points since 2012.

Ruy Teixeira The Liberal Patriot
Date Posted:
Is Database:
Database

Democrats carried Hispanic men by only 6pp in 2022, relative to prior midterm elections. They are down 20pp with Hispanics overall.

Are Democrats losing Hispanic working-class voters faster than college-educated ones?

Core argument: Democrats' margin among Hispanic voters fell 12 points from 2020 and 18 points from 2018, with Hispanic men giving Democrats a 6-point edge (51–45) in 2022.

In 2022, Democrats' support among Hispanic men dropped significantly, with a narrow 6-point lead (51-45) compared to previous years. This decline is part of a broader trend, with Democratic support among Hispanic working-class voters falling by 20 points since 2018, more than double the 9-point decline among Hispanic college voters. Nationwide, Democrats' margin among Hispanics decreased by 12 points from 2020 and 18 points from 2018. In key states like Florida and Texas, Republicans made substantial gains, with DeSantis winning the Hispanic vote by 13 points and Republicans securing 43% of the Hispanic House vote in Texas. These trends highlight a growing challenge for Democrats, as their advantage among the nonwhite working class has diminished by 14 points between 2020 and 2022, and by 33 points since 2012, indicating a critical issue that remains unresolved.

Takeaways by Macro Roundup® AI

  1. Democrats' margin among Hispanic voters fell 12 points from 2020 and 18 points from 2018, with Hispanic men giving Democrats a 6-point edge (51–45) in 2022.
  2. Democratic support among Hispanic working-class voters dropped 20 points since 2018, more than double the 9-point decline among Hispanic college-educated voters.
  3. Republicans gained in Florida and Texas, with DeSantis winning the Hispanic vote by 13 points and Texas Republicans taking 43% of the Hispanic House vote, while the Democratic advantage among the nonwhite working class narrowed 14 points from 2020 to 2022 and 33 points since 2012.

“…Democrats appeared to have done particularly poorly among Hispanic men in 2022. In the VoteCast data, Democrats carried this group by a scant 6 points (51-45). Compared to 2018, Democratic Hispanic working-class support is down 20 margin points, more than double the decline among Hispanic college voters (9 points). AP VoteCast estimates the decline in Democrats’ advantage among the nonwhite working class as 14 points between 2020 and 2022, 23 points between 2018 and 2022, and (splicing in some Catalist data, which overlap pretty well with VoteCast data where they overlap) an astonishing 33 point drop between 2012 and 2022….”

Ruy Teixeira, "Democrats’ Hispanic Problem: The Sequel,"The Liberal Patriot, November 17, 2022, https://theliberalpatriot.substack.com/p/democrats-hispanic-problem-the-sequel

Democrats’ Hispanic Problem: The Sequel

Democrats are feeling pretty good about themselves these days after a 2022 election that went way, way better than they (and most observers) thought it would. Those on the Democratic left, in particular, are congratulating themselves that they were right about…well, everything. Ezra Levin, who co-founded the activist progressive group, Indivisible said: "The great thing about having your strategy being proven correct is that you don’t have to rethink your strategy…We would have, if the red wave materialized. But it didn’t have the potency that we thought."

God forbid anyone should do any rethinking. That would never do.

The fact remains, however, that while they held the Senate (and may possibly pick up a seat), they lost the House, as well as the nationwide popular vote by 3-4 points. That’s a swing of 7-8 points toward the Republicans compared to Biden’s 4 point national advantage in 2020. The Senate map for the Democrats in 2024 looks absolutely terrifying: Democrats will have to hold seats in a wide range of red and purple states—Arizona, Maine, Michigan, Minnesota, Montana, Nevada, Ohio, Pennsylvania, Virginia, Wisconsin and West Virginia. The Republican seats that will be up are all in solid GOP states, with the possible exceptions of Texas and Florida (and we saw what just happened there). Plus there’s no guarantee that the 2024 Democratic nominee—likely Biden—will get to run again against the Democrats’ preferred opponent, Trump. It could be someone much tougher to take down.

In light of this, it’s worth considering the possibility that Democrats did not, in fact, fix all their problems in 2022 and that some of these may be lurking beneath the surface to undermine their chances—perhaps fatally—in 2024. One such problem is the Democrats’ Hispanic voter problem. In 2020, Democrats’ advantage among Hispanic voters declined nationwide by 16 points relative to 2016. Democrats had hoped to stop the bleeding in 2022. Did they?

It does not appear so. Prior to the election, the AEI demographics tracker, which averages poll subgroup results, found the Democratic Congressional margin among Hispanic voters consistently 7-9 points below its 2020 level and 17-19 points below its 2018 level. Results from AP/NORC VoteCast indicate that the drop in the 2022 election was actually larger than that foreshadowed by the pre-election data. These data show Democrats carrying Hispanics nationwide by just 56-39 in 2022, a 12 point decline in margin relative to 2020 (18 points relative to 2018). For what it’s worth, the less-reliable network exit polls, show an identical decline in Hispanic support between 2020 and 2022.

Digging more into the available data, some other troubling signs can be discerned beneath this broad national trend (all data from VoteCast except election returns).

1. Democrats appeared to have done particularly poorly among Hispanic men in 2022. In the VoteCast data, Democrats carried this group by a scant 6 points (51-45).

2. Democrats did worse among Hispanic working class (noncollege) voters than college voters. They carried Hispanic working class voters by just 15 points, compared to 21 points among their college-educated counterparts. Compared to 2018, Democratic Hispanic working class support is down 20 margin points, more than double the decline among Hispanic college voters (9 points).

3. With a few exceptions like Nevada, Democratic decline in Hispanic support can be seen across states. The most striking example of this is in Florida where DeSantis carried the Hispanic vote by 13 points, a 22 point swing from Biden’s 9 point margin among this group in 2020. He carried heavily Hispanic Miami-Dade county, historically the Democrats’ firewall, by 11 points. He carried Osceola County by almost 7 points—a county where Puerto Ricans, among the most Democratic of Hispanic subgroups, loom large. Shockingly, statewide DeSantis actually split the Puerto Rican vote 50-50 with Democrat Charlie Crist.

4. Democrat Val Demings also lost the Hispanic vote in Florida to Marco Rubio by 11 points. And statewide Democrats lost the Hispanic House vote by 7 points to the Republicans.

5. In Texas, Republicans got 43 percent of the statewide House vote among Hispanics, losing it by only 10 points to the Democrats. Beto O’Rourke did somewhat better than Biden in the Rio Grande Valley but still carried Hispanics statewide by just 14 points.

6. The poor showing of Democrats in the Hispanic Texas House vote was driven by working class Hispanics. They gave Democrats a mere 6 point margin statewide (51-45) compared to 24 points among college Hispanics (61-37). But working class Hispanics are three-quarters of the Texas Hispanic vote.

7. In Arizona, the GOP got 41 percent of the statewide House vote among Hispanics, cutting their deficit with this demographic to 13 points. Democrats’ House margin was down 6 points from Biden’s margin among this group in 2020. Katie Hobbs also ran behind Biden in her Hispanic support while Mark Kelley did a little better. But Kelley’s healthy margin of victory (5 points) is clearly attributable to a sharp improvement in support among white college graduates relative to Biden.

8. Even in California, Democratic House candidates in 2022 ran 11 points behind Biden’s margin in the state in 2020. This decline can be illustrated by looking as some heavily Latino CDs in Los Angeles County (vote counts ongoing): CA-31, Biden +31, 2022 House +16; CA-35, Biden +28, 2022 House +12; CA-38, Biden +30, 2022 House +13; CA-42, Biden +46, 2022 House +34.

These data suggest Democrats are far from out of the woods in terms of their Hispanic voter support. In fact, they indicate the problem is getting worse. More broadly, Democrats would be well-advised to look at these results in the context of their ongoing decline in working class support among nonwhites. AP VoteCast estimates the decline in Democrats’ advantage among the nonwhite working class as 14 points between 2020 and 2022, 23 points between 2018 and 2022 and (splicing in some Catalist data, which are consistent with VoteCast data where they overlap) an astonishing 33 point drop between 2012 and 2022.

I’d say that qualifies as a problem—and one that’s very, very far from being fixed.

AI Summary. The authors estimate that rapid house price growth, at annualized rates of 15–25%, explains about one-third of the rise in consumer prices during the pandemic, operating through a wealth effect that boosted demand amid tight supply. They argue that as house price growth decelerates, inflation may ease absent other shocks.

Elliot Anenberg Federal Reserve Board
Date Posted:
Is Database:
Database

House price growth during COVID-19 contributed to 1/3 of CPI increase from 2020-22, driven by a wealth effect amid tight supply conditions.

How much of pandemic inflation did rising house prices explain?

Core argument: Rapid house price growth explains about one-third of the CPI increase from 2020–2022, according to the analysis, which attributes the effect to a wealth effect that boosted aggregate demand amid tight supply conditions.

During the COVID-19 pandemic, rapid house price growth significantly contributed to inflation, explaining about 1/3 of the CPI increase from 2020-22. This was driven by a wealth effect that boosted aggregate demand amid tight supply conditions. House prices rose at annualized rates of 15-25%, preceding CPI acceleration. Despite various controls, the elasticity of non-housing inflation to house price growth remained stable, indicating a strong correlation. The analysis suggests that as house price growth decelerates, inflation may ease, barring other shocks. The study highlights the role of housing wealth in shaping economic dynamics during the pandemic, with implications for future inflation trends.

Takeaways by Macro Roundup® AI

  1. Rapid house price growth explains about one-third of the CPI increase from 2020–2022, according to the analysis, which attributes the effect to a wealth effect that boosted aggregate demand amid tight supply conditions.
  2. House prices rose at annualized rates of 15–25% during the pandemic, preceding the acceleration in CPI.
  3. The elasticity of non-housing inflation to house price growth remained stable across various controls, and the analysis suggests inflation may ease as house price growth decelerates, barring other shocks.

“…The main mechanism through which house prices affect non-shelter inflation is through shifts in demand or changes in markups arising from housing wealth effects. A back-of-the-envelope calculation based on our regression estimates suggests that house price growth could explain about 1/3 of the consumer price index (CPI) increase, excluding housing services between February 2020 and February 2022. Following many months of annualized house price growth rates of 15-25%, recently, house prices have decelerated sharply. The acceleration of house prices early in the pandemic preceded the acceleration in the CPI. The correlations we document in this note suggest that inflation should step down somewhat in the future, given the sharp slowdown in house price growth and absent other inflationary shocks…”

House Price Growth and Inflation During COVID-19: Extended Excerpt Image 1


The remaining columns in Table 2 add various controls, XiXi, to address leading potential omitted variables. One possibility is that areas with high house price growth saw increases in population during the pandemic, and the increase in population increased aggregate demand and inflation. Even though there is a strong relationship between population and house price growth during the pandemic, the results in column 2 show that the estimated elasticity of non-housing inflation to house price growth is little changed when adding population growth as a control.

Another possibility is that house price growth is associated with the strength of the local labor market, and it is local labor market conditions that influence inflation, not house price growth directly. The results in column 3, however, show that the estimated elasticity of non-housing inflation to house price growth is little changed when adding the change in the unemployment rate as a control.2 Also, the coefficient on house price growth is similar when controlling for the growth in average weekly wage changes or the total wage bill from the Quarterly Census of Employment and Wages (not shown).

Over our sample period, Congress passed massive fiscal stimulus, and the generosity of the income support from these stimulus programs likely varied across metro areas. It is possible that local income growth drove both house price growth and inflation. In column 4, we control for the growth in personal income as measured by the BEA, which includes income that people get from government benefits.3 Personal income growth is not significantly associated with inflation, and again the estimated elasticity of inflation to house price growth is little changed when adding local income growth as a control. Next, we consider the possibility that the housing wealth effect on inflation that we estimate may be correlated with a stock market wealth effect. Like house prices, stock prices soared in 2020 and 2021. We proxy for local exposure to increases in stock market wealth with the per-capita pre-pandemic average interest and dividend income in the metro area calculated from the 2019 IRS SOI tax data. Column 5 shows the results are little changed when this variable is added as a control. Column 6 shows results with controls for pre-pandemic median household income, share of households with college education, the homeownership rate, and median age - potential alternative proxies for exposure to the stock market boom. The results are similar.

Column 7 shows the results when all controls are added. None of the controls are individually significant, and the estimated elasticity of inflation to house price growth remains sizable and significant. Finally, column 8 includes as a control the log change in market-rate rents, available for 21 of the metro areas in our sample. The coefficient on house price growth remains of a similar magnitude as in other specifications and remains significant. This is further evidence that the coefficient on house price growth is primarily measuring housing wealth effects rather than confounding factors, as changes in market rate rents should reflect various unobserved factors associated with housing demand and supply that could be correlated with house price growth and inflation. Indeed, changes in rents are highly correlated with changes in house prices, inflation, and population.

In sum, looking across all the columns in the table, the estimated elasticity is remarkably stable considering the small sample size. A natural question is what is driving the variation in house prices across cities. While pinpointing the causes of house price changes is beyond the scope of this Note, some factors that could drive cross-sectional variation in house price growth that are plausibly unrelated to inflation include housing supply elasticity, the increase in demand for second homes from out-of-town buyers, or the pre-pandemic work-from-home share (Mondragon and Wieland, 2022). We explore instruments for house price growth in future work.

2.1. Inflation by type of goods or services

Table 3 shows results separately for inflation of durable goods, nondurable goods, services excluding shelter, and shelter services. We find the strongest effects of house price growth on inflation for services excluding shelter, nondurable goods and shelter services. For durable goods, we estimate a small or very noisy effect of house price growth on inflation. House price growth may not have a clear effect on durable goods inflation because durable goods are less likely to be produced locally (e.g. motor vehicles), and therefore, firms selling durable goods may set prices nationally. It is possible that house price growth increases inflation for durable goods, but trade reduces differences across metro areas. Our cross-sectional estimation strategy cannot identify this type of aggregate effect.

House Price Growth and Inflation During COVID-19: Extended Excerpt Image 2


The very strong effect of house price growth on shelter services inflation shown in columns 4 and 8 is unlikely to be entirely causal. There is no mechanical link between the two, as shelter services inflation is based on rents for renters and a measure of implied rents for owners.4 That said, when housing supply is constrained, a positive housing demand shock will tend to raise both house prices and rents, leading to a positive correlation between house price growth and shelter services inflation. For this reason, we remove shelter inflation from the measure of inflation we use for the results in Table 2. Still, there is potential for some causal effect of house price growth on shelter inflation as discussed in Dias and Duarte (2019).

2.2. Comparing the pandemic inflation-house price growth relationship with its historical one

An increase in non-housing demand, induced by increases in housing wealth, is likely to be more inflationary when supply is more constrained. Since the second half of 2020 through the start of 2022, supply conditions have seemed generally tight, with retailers reporting low inventories and producers reporting slow delivery times amid shortages of inputs used in production. Hence, our prior is that demand effects were likely more inflationary from February 2020 to February 2022 than in other periods.

Table 4 shows results from a regression of non-shelter inflation on house price growth using metro area observations pooled across all two-year periods between February 2000 and February 2022. The regression includes an interaction between house price growth and a dummy variable for the 2020 to 2022 pandemic period allowing us to estimate the relation between house prices and inflation separately in the pre-pandemic and pandemic periods. The results in column 2 include metro area fixed effects and the results in column 3 include both metro area fixed effects and time period fixed effects. The results across all three columns show that the association between inflation and house price growth was unusually strong during the pandemic. Indeed, in the two decades prior to the pandemic, there was essentially no correlation between house price growth and non-shelter inflation for these metropolitan areas.

House Price Growth and Inflation During COVID-19: Extended Excerpt Image 3


3. Spending and House Price Growth Across Metro Areas

The main mechanism through which house prices would affect non-shelter inflation is through shifts in demand or changes in markups arising from housing wealth effects. To provide evidence consistent with these mechanisms, we use data on credit card spending from the Federal Reserve Board's FR Y-14M reports. These reports require large U.S. bank holding companies, with at least $100 billion in total assets, to report information on individual credit card accounts on a monthly basis. For each metro area, we construct the change in nominal spending as measured by the flow of new purchases on credit cards between January-February 2020 and January-February 2022.5 For the 23 metro areas for which we observe CPI, we also construct a change in real spending by deflating nominal spending with the local CPI less shelter over the same time period.

Table 5 shows results of regressions similar to equation 1, replacing the dependent variable with spending growth. The first column shows that the estimated nominal spending elasticity to house price growth is 0.58 for the same small sample of metro areas used in Table 2. Column 2 shows the elasticity is little changed when the controls are added to the regression. The third and fourth columns show the real spending elasticity is strongly positive but smaller than the nominal elasticity, consistent with the positive association between inflation and house price growth shown in Table 2.

House Price Growth and Inflation During COVID-19: Extended Excerpt Image 4


In fact, 25-40 percent of the nominal spending effect reflects an increase in prices. Focusing on spending in a sample of retail chains, Kaplan, Mitman and Violante (2020) estimated the elasticity of spending with respect to house price changes during the Great Recession. Their results suggest 20 percent of the nominal spending response during the Great Recession is due to changes in prices, with the remaining 80 percent reflecting a response in real spending.

The positive real spending response we estimate suggests a role for increased aggregate demand in explaining the positive effect of house price growth on inflation during the pandemic. Also, the substantial price response we find together with the evidence in Table 4 is consistent with tight supply conditions preventing firms from providing additional goods and services without raising prices. The price response may also be partly explained by households becoming less sensitive to price increases such that firms raised mark-ups.

Columns 5 and 6 show the elasticity of nominal spending in the full sample of 896 metropolitan and micropolitan areas covered by the Y-14M data. The estimated elasticities for the large sample are quantitatively similar to those estimated for the small sample. If we assume that 60-75 percent of the nominal spending effect in the large sample reflects an increase in real spending, consistent with the split we directly estimated for the small sample, then columns 5 and 6 imply an elasticity of non-shelter inflation with respect to house price growth of 0.125 or 0.145 for the large sample, very similar to the point estimates in Table 2 for the small sample.

4. Role of house price growth in explaining recent inflation

We can use our estimates to calculate the contribution of house price growth to national, non-shelter inflation between February 2020 and February 2022. Multiplying the increase in national house prices over this time period by the elasticity estimate from column 1 of Table 2, we find that house price growth increased the national, non-shelter CPI by 4 log points, which is 39 percent of the total increase in national, non-shelter CPI over this time period. Even at the lower bound of the 90 percent confidence interval around our elasticity estimate, house price growth still explains 13 percent of the increase in national, non-shelter CPI.

The calculation is back-of-the-envelope for a few reasons. First, it extrapolates based on a linear relationship between house price growth and inflation estimated using a sample of metro areas where house price growth was high for every observation. Still, under a very conservative scenario that assumes zero effect of house price growth on inflation until house price growth reaches the minimum level in our sample, house price growth explains 19 percent of the increase in non-shelter inflation CPI. Second, house price growth could increase price inflation for some goods or services only at the national level and not differentially by metropolitan area. Our back-of-the-envelope calculation cannot account for any national effects and thus could understate the contribution of house price growth to non-shelter inflation. Third, we cannot rule out a role for some omitted variable or measurement error to bias our estimated elasticity up or down.

Finally, the correlations we document in this note have some implications for the current inflation outlook. Following many months of annualized house price growth rates of 15-25 percent, recently house prices have decelerated sharply. The acceleration of house prices early in the pandemic preceded the acceleration in the CPI. The correlations we document in this note suggest that inflation should step down somewhat in the future, given the sharp slowdown in house price growth and absent other inflationary shocks.

References

Adams, Robert M., Vitaly M. Bord, and Bradley Katcher. 2021. "Why Did Credit Card Balances Decline so Much during the COVID-19 Pandemic?" Board of Governors of the Federal Reserve System (U.S.) FEDS Notes 2021-12-03-3.

Aladangady, Aditya. 2017. "Housing wealth and consumption: Evidence from geographically-linked microdata." American Economic Review, 107(11): 3415-46.

Dias, Daniel A, and João B Duarte. 2019. "Monetary policy, housing rents, and inflation dynamics." Journal of Applied Econometrics, 34(5): 673-687.

Guren, Adam M, Alisdair McKay, Emi Nakamura, and Jón Steinsson. 2021. "Housing wealth effects: The long view." The Review of Economic Studies, 88(2): 669-707.

Hazell, Jonathon, Juan Herreno, Emi Nakamura, and Jón Steinsson. 2022. "The slope of the Phillips Curve: evidence from US states." The Quarterly Journal of Economics, 137(3): 1299-1344.

Horvath, Akos, Benjamin S. Kay, and Carlo Wix. 2021. "The COVID-19 Shock and Consumer Credit: Evidence from Credit Card Data." Board of Governors of the Federal Reserve System (U.S.) Finance and Economics Discussion Series 2021-008.

Kaplan, Greg, Kurt Mitman, and Giovanni L. Violante. 2020. "Non-durable consumption and housing net worth in the Great Recession: Evidence from easily accessible data." Journal of Public Economics, 189: 104176.

Mian, Atif, Kamalesh Rao, and Amir Sufi. 2013. "Household balance sheets, consumption, and the economic slump." The Quarterly Journal of Economics, 128(4): 1687-1726.

Mondragon, John, and Johannes Wieland. 2022. "Housing Demand and Remote Work."

Stroebel, Johannes, and Joseph Vavra. 2019. "House prices, local demand, and retail prices." Journal of Political Economy, 127(3): 1391-1436.

________________________________

1. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. The authors thank Ari Gelbard, Raghav Warrier, and Adithya Raajkumar for excellent research assistance. Return to text

2. While changes in the unemployment rate are not significantly associated with inflation excluding shelter in this sample, they are negatively associated with shelter inflation. Hazell et al. (2022) find that the regional Phillips curve for rents is substantially steeper than for inflation excluding shelter. Return to text

3. Because the BEA data at a metro-area level are only available for 2020, we use personal income growth for 2020 relative to 2019. Since the progressivity of fiscal support in 2021 was similar to 2020 generally, our measure likely captures broad cross-sectional patterns in earnings and transfers over this period. Return to text

4. For more information, seehttps://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.htmReturn to text

5. Purchases on credit cards that do not become revolving balances are still included in our data. Information in the Y-14 is anonymized and does not contain transaction-level detail. Accounts associated with the same consumer cannot be linked across or within reporting banks. The large banks reporting to the FR Y-14M account for a high percentage of total credit card spending. For other work using this data, see Adams, Bord and Katcher (2021); Horvath, Kay and Wix (2021). Return to text

Aditya Aladangady, Elliot Anenberg, and Daniel Garcia, "House Price Growth and Inflation During COVID-19"Federal Reserve Board, https://www.federalreserve.gov/econres/notes/feds-notes/house-price-growth-and-inflation-during-covid-19-20221117.html

House Price Growth and Inflation During COVID-191

1. Introduction

House prices have risen rapidly during the pandemic, creating $9 trillion in owner occupied housing wealth between the first quarter of 2020 and the first quarter of 2022. Both housing and non-housing inflation also moved up over this time period to its highest level in many decades. This note considers whether the large increase in housing wealth has been an important contributor to non-housing inflation during the pandemic.

There are two main channels through which increases in housing wealth can contribute to non-housing inflation. First, the increase in housing wealth can stimulate additional consumption among existing homeowners, either because they feel wealthier or by relaxing borrowing constraints (Guren et al., 2021; Mian, Rao and Sufi, 2013; Aladangady, 2017). This shift in aggregate demand can result in non-housing inflation, especially when the slope of the aggregate supply curve is steep, as may have been the case during the pandemic. Second, homeowners may become less price sensitive as they become wealthier, allowing some firms to respond to a less price-elastic demand curve by raising markups and prices (Stroebel and Vavra, 2019).

This note documents a strong positive association between non-housing inflation and house price growth across major metropolitan areas during the first two years of the pandemic. Also, we show this correlation is much stronger than in recent history. The association during the pandemic does not appear to be driven by other leading omitted variables that could be correlated with local house price growth and inflation, such as changes in the local unemployment rate or population growth. In addition, we find a strong cross-sectional correlation between house price growth and both nominal and real credit card spending.

Taken together, our results provide suggestive evidence that house price growth has been an important contributor to inflation during the pandemic, in part by shifting aggregate demand along a steeper-than-normal aggregate supply curve. A back-of-the-envelope calculation based on our regression estimates suggests that house price growth could explain about 1/3 of the increase in the consumer price index (CPI) excluding housing services between February 2020 and February 2022. At the lower bound of the 90 percent confidence interval around our regression estimate, house price growth still explains 13 percent of the increase in the CPI excluding housing services.

2. Inflation and House Price Growth Across Metro Areas

We estimate the cross-sectional relationship between inflation and house price growth using the regression equation:

(1) Δlog(cpixi)=β0+β1Δlog(hpii)+β2Xi+εi(1) Δlog(cpixi)=β0+β1Δlog(hpii)+β2Xi+εi

where cpixcpix is the CPI excluding housing services for metro area ii, hpihpi is the CoreLogic house price index for metro area ii, XiXi is a vector of other local characteristics, and ΔΔ denotes the two-year change in the variable, February 2022 relative to February 2020.

The CPI is available for the 21 largest metro areas in the country, in addition to Honolulu, HI and Anchorage, AK, which jointly account for about 40 percent of the U.S. population. Table 1 reports summary statistics and sources for the variables used in this analysis.

House Price Growth and Inflation During COVID-19: Extended Excerpt Image 5


The scatter plot in Figure 1 shows a strong positive association between Δlog(cpixi)Δlog(cpixi) and Δlog(hpii)Δlog(hpii). Table 2, column 1 shows that a one percentage point increase in house price growth is associated with a 0.15 percentage point increase in inflation. Also, house price growth alone explains 42 percent of the cross-sectional variation in non-housing inflation during the pandemic.

AI Summary. Higher discount rates from aggressive monetary tightening have raised asset yields and weighed on asset prices, yet equity returns and analysts' earnings estimates have held up, indicating markets have not priced in falling future earnings. Markets expect tightening to end with little growth slowdown and inflation returning quickly to target.

Bob Prince Bridgewater Associates
Date Posted:
Is Database:
Database

Adjusting equity returns for the rise in discount rates implies “relatively normal expectations for earnings growth and economic activity.”

Have markets priced in falling earnings from monetary tightening?

Core argument: The rise in discount rates has not reduced equity returns, and analysts' earnings estimates have remained stable after tightening, indicating that markets have not priced in a decline in future earnings.

The recent rise in discount rates has not led to a decline in equity returns, indicating that markets have not priced in a drop in future earnings. Analysts' earnings estimates remain stable post-tightening, suggesting normal expectations for earnings growth. The aggressive tightening of monetary policies has driven up asset yields, impacting asset prices through the present value effect. Despite this, markets anticipate that the first round of tightening is nearly complete, with minimal growth slowdown and a rapid decline in inflation to target levels. This scenario supports the potential for interest rate cuts in 2023 and 2024, restoring normal risk premiums in bonds. However, the economic impact of tightening is expected to manifest as a significant slowdown, potentially leading to a downturn, contingent on the extent and duration of economic weakness and its effect on employment and inflation.

Takeaways by Macro Roundup® AI

  1. The rise in discount rates has not reduced equity returns, and analysts' earnings estimates have remained stable after tightening, indicating that markets have not priced in a decline in future earnings.
  2. Aggressive monetary tightening has raised asset yields and affected asset prices through the present value effect, with markets anticipating that the first round of tightening is nearly complete.
  3. Markets expect a minimal growth slowdown and a rapid fall in inflation to target, a scenario that would support interest rate cuts in 2023 and 2024 and a restoration of normal risk premiums in bonds.

“….A near-term economic downturn, an extended period of above-target inflation, and a second round of tightening are not discounted in the markets at all.What the markets are now discounting is that the first round of tightening is nearly over, that growth will not slow much and yet inflation will quickly fall to desired levels and that this will allow a cut in interest rates in 2023 and 2024 that restores a normal risk premium in bonds. If you adjust recent equity returns for the portion that is attributable to the rise in discount rates, they are not down. In other words, there has been no discounting of a decline in future earnings. This is corroborated byanalysts’ earnings estimates, which have barely changed post-tightening….”

Bob Prince, “An Update from Our CIOs: Progressing Through the Tightening Cycle,”Bridgewater Associates, October 11, 2022, https://www.bridgewater.com/research-and-insights/an-update-from-our-cios-progressing-through-the-tightening-cycle

An Update from Our CIOs: Progressing Through the Tightening Cycle

Going back before going forward, in 2020-21, aggressively applied MP3 policies stimulated a high level of nominal spending growth that was well in excess of the output capacity of labor, with the difference between them producing a self-sustaining, monetary-induced inflation. In 2022, recognition of this condition led markets to discount a coming rise in interest rates and tightening of monetary policy. The Fed and central banks then followed suit. The speed and magnitude of the tightening has been severe, among the sharpest in the past 60 years. The primary effect of this tightening has been to drive asset yields higher to compete with the higher yield on cash, which drove prices lower through the present value effect. That is pretty much the full explanation for this year’s weak asset markets.

The effect of this tightening on economies has been far less, though not enough time has passed to expect a lot. The effects are coming, and they must come in order for targeted levels of inflation to be achieved. Therefore, the next stage of the tightening cycle is likely to be a significant slowing of economic activity, probably a downturn. Whether the weakening of the economy sufficiently lowers inflation to central banks’ target levels and to the levels that are now discounted in the markets depends on the degree of economic weakness and how long that weakness lasts. And in particular, whether there is a contraction in employment and a material rise in the unemployment rate.

The key linkages are as follows. Inflation is too high because nominal spending growth is far greater than the ability of labor to produce more output. This is amplified a bit by supply issues, but supply is not the problem. Sustainably reducing inflation will require cutting nominal spending growth by about half to around 3% to 5%, which is where it was during the moderate inflation period of the 2000s and 2010s. While this high level of spending growth was initially financed by government credit and money printing, it is now financed by the income that the spending is producing. In other words, it is self-financing via the income that the spending produces, which is the second stage of a monetary-induced inflation.

So, how does a tightening of monetary policy break the cycle? It does so through a number of channels. First, higher interest rates directly reduce debt-financed spending, such as housing and autos, which incrementally reduces income. This has already happened via mortgages and housing, but housing and housing-related spending is too small to be the solution. Second, the rise in interest rates, through the present value effect, lowers asset prices, which reduces wealth, which typically raises the savings rate, which means less spending and less income. Third, higher interest rates and a tightening of credit conditions reroute income from spending to debt service payments. Fourth, income is reduced directly via a contraction in hours worked, a contraction in labor markets. Given the high level of nominal spending and the degree to which it has passed through to wage growth, this fourth lever will be required.

For the tightening to sustainably reduce inflation will require significant impacts on labor income. Labor income is the sum of two parts, hours worked (dominated by headcount) and wages per hour. The tightening will have to first produce a contraction in the number of people working and raise the unemployment rate by enough and for a long enough period of time to reverse the supply/demand imbalance for labor sufficiently to lower the price of labor, i.e., wages. Only after wage growth slows will inflation stabilize at the levels that central banks want and that the markets are discounting.

Up to this point, the appropriate policy response to the environment has been clear, though it came too late. Strong growth and the emergence of a self-reinforcing, high level of inflation required a tightening. Going forward, the policy choices will be far more challenging when the goals of full employment and stable prices are at odds and the contraction in employment has not been sustained for long enough to bring down wage growth. For most central banks, at that stage there is a tendency to pause and see how things transpire. Such a pause tends to give markets a celebratory reprieve, producing a period of very good asset returns and a pickup in growth, both of which conspire to prevent wages and inflation from settling at the desired level, which necessitates the next round of tightening.

A near-term economic downturn, an extended period of above-target inflation, and a second round of tightening are not discounted in the markets at all. What the markets are now discounting is that the first round of tightening is nearly over, that growth will not slow much and yet inflation will quickly fall to desired levels and that this will allow a cut in interest rates in 2023 and 2024 that restores a normal risk premium in bonds. There is a lot of room for markets to be blindsided by what we see as the normal sequence of events which typically follows the conditions that exist today.

This description of conditions is applicable to the US, Europe, the UK, and other developed economies which countered the pandemic via MP3 policies, which boosted incomes via the monetization of government debt. In contrast, conditions in China, Japan, and other economies which resisted this path and instead chose the path of more severe social adjustments are quite different. In those countries, nominal spending growth is at normal levels, which is producing normal inflation rates, which is giving policy makers more latitude to counter economic weakness with stimulative policies that can be executed via combinations of monetary policy, fiscal policy, and macroprudential regulatory policy. China is applying some of that latitude while trying not to overdo it. Japan is sticking with their QQE policies and the targeting of bond yields while experiencing near 2% inflation rates for the first time in years. These more accommodative policies are in contrast to the severe tightening by the Fed, weakening these countries’ exchange rates but stabilizing their asset markets in local currency terms.

Below, we will try to succinctly elaborate on this unfolding story via a brief series of illustrations and charts.

Illustrating the Dynamics at Work

There are two big imbalances that must be resolved to achieve equilibrium conditions. Nominal spending growth is far higher than the output capacity of labor, and nominal spending is also far higher than interest rates. The first condition is why inflation is high; the second condition contributes to the ability of credit growth to sustain the high level of nominal spending until a rise in interest rates is sufficient to bring the level of nominal spending down, converging at a reasonable balance. The following charts illustrate these two disequilibriums.

An Update from Our CIOs: Progressing Through the Tightening Cycle: Extended Excerpt Image 1

Asset prices are down this year because asset yields are up, and asset yields are up because the aggressive tightening of monetary policies has driven up the discounted future real yield of cash, which we call the discount rate. The discount rate is the base reference by which all assets are ultimately compared because holding cash is an alternative to holding risky assets. There is a risk curve which is like a yield curve across assets, which reflects the required yield on other assets as risk increases. The following illustration shows how over the past decade central banks managed a progressive decline in the discount rate in stages (1) and (4), which led to the decline in yields on other assets, steepening the risk curve (2) and (5), which induced money to move from cash to assets (3) and (6), driving their yields down. That was the basis of very high returns on assets over this period.

An Update from Our CIOs: Progressing Through the Tightening Cycle: Extended Excerpt Image 2

This year’s tightening has reversed that process by driving the discount rate up (7), flattening the risk curve (8), requiring higher yields on all assets (9).

An Update from Our CIOs: Progressing Through the Tightening Cycle: Extended Excerpt Image 3

Given these conditions, there has been a reversal in the long-term downtrend in discount rates and real bond yields. This rise in real yields has passed through all assets and supported the dollar relative to gold and other currencies.

An Update from Our CIOs: Progressing Through the Tightening Cycle: Extended Excerpt Image 4

If you adjust recent equity returns for the portion that is attributable to the rise in discount rates, they are not down. In other words, there has been no discounting of a decline in future earnings. This is corroborated by analysts’ earnings estimates, which have barely changed post-tightening.

An Update from Our CIOs: Progressing Through the Tightening Cycle: Extended Excerpt Image 5

In addition to the rise in real and nominal interest rates, the Fed and other central banks are now contracting balance sheets at a time when government bond issuance remains high, withdrawing liquidity from financial markets and creating a liquidity hole. In the decade since the financial crisis, there has been excess liquidity from central banks buying assets. This buying drove assets up faster than the economy and meant that even with government debt rising, the government debt held by the private sector could stay flat. The private sector didn’t have to buy bonds; they just had to hold on. This is now reversing. For the first time in a while, the private sector must buy new bonds at a massively increasing clip in order for the market to clear. This requires a level of yields at which the private sector desires to buy them, not the yields that central banks want to create and are willing to accept in order to institute their policies.

An Update from Our CIOs: Progressing Through the Tightening Cycle: Extended Excerpt Image 6

The table below gives perspective on the magnitude of this liquidity hole. The amount of government debt that will need to be absorbed by the private sector in the coming months is larger than at any time outside of world wars (when the central bank engineered a safe risk premium on bonds) and the global financial crisis.

An Update from Our CIOs: Progressing Through the Tightening Cycle: Extended Excerpt Image 7

The impacts of the liquidity hole stretch far beyond the bond market. When a private player buys bonds, they have to either use cash (which they might have otherwise used to buy assets) or sell assets. The consequence is that the liquidity hole is showing up not just in the bond market, but in the equity market and in other assets. The chart below shows the impact we have already seen this year from the liquidity hole trickling through all assets. Looking ahead, this is getting worse, not better.

An Update from Our CIOs: Progressing Through the Tightening Cycle: Extended Excerpt Image 8

As we progress through the tightening cycle, what likely comes next is a weakening of economies. The following diagram illustrates where we are in the liquidity cycle, which is the tendency of money to move from assets to cash or from cash to assets. Starting from economic contractions in the pandemic there was an aggressive easing, then the declines in discount rates and risk premiums and rises in asset values, then the pickup in economies, which led to inflation, then the tightening and rise in discount rates in response to that. What comes next is the rise in risk premiums and the weakening of economies.

An Update from Our CIOs: Progressing Through the Tightening Cycle: Extended Excerpt Image 9

The charts below show our most timely read of current economic conditions across countries, as well as our leading estimates. China’s divergence from the other developed economies is clear.

An Update from Our CIOs: Progressing Through the Tightening Cycle: Extended Excerpt Image 10

Our leading estimates of inflation indicate that economies have not weakened enough for long enough to move inflation rates very far toward central bank targets or what the markets are discounting. Again, China and Japan are experiencing different inflation conditions leading to very different policies and diversifying asset returns.

An Update from Our CIOs: Progressing Through the Tightening Cycle: Extended Excerpt Image 11

To put this most recent chapter in the context of the unfolding story, we invite you to revisit our CIO updates from our 1Q 2022 and 2Q 2022 reports.

Monday, November 21, 2022

AI Summary. Economists estimate US households held roughly $1.2tn–$1.8tn in "excess savings" above pre-pandemic saving patterns, with JPMorgan Chase projecting the cushion could be fully spent within about a year and Goldman Sachs estimating about 25% has been drawn down so far.

Harriet Torry Wall Street Journal
Date Posted:

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

How much excess savings do households have left to spend?

Core argument: JPMorgan Chase estimates U.S. households held about $1.2 trillion to $1.8 trillion in "excess savings"—the amount above what they would have saved absent the pandemic—in the third quarter, and says the hoard could be entirely spent by the second half of next year.

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.

Takeaways by Macro Roundup® AI

  1. JPMorgan Chase estimates U.S. households held about $1.2 trillion to $1.8 trillion in "excess savings"—the amount above what they would have saved absent the pandemic—in the third quarter, and says the hoard could be entirely spent by the second half of next year.
  2. Goldman Sachs economists estimate households have drawn down about 25% of excess savings and will have spent about 60% by the end of 2023.
  3. Ian Shepherdson, chief economist of Pantheon Macroeconomics, puts remaining excess savings at $1.3 trillion and estimates that at the current rate of rundown it could last another year or so.

AI Summary. Once the economic boost from pandemic aid fades, weak private investment demand will likely push interest rates back toward their pre-pandemic lows, as too much saving chases too few investment opportunities. Slow growth in the working-age population and disappointing technological progress argue against the rapid growth needed to sustain high investment spending.

Paul Krugman Krugman Wonks Out
Date Posted:

.@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.”

Will weak investment demand push interest rates back to pre-pandemic lows?

Core argument: Krugman argues that once the economic boost from pandemic aid fades, the economy will return to its pre-pandemic pattern of weak private investment demand holding interest rates down.

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

Takeaways by Macro Roundup® AI

  1. Krugman argues that once the economic boost from pandemic aid fades, the economy will return to its pre-pandemic pattern of weak private investment demand holding interest rates down.
  2. Krugman points to the drastic slowdown in growth of the working-age population and what he sees as disappointing rates of technological progress as reasons to expect low interest rates.
  3. Invoking the macroeconomic accelerator effect, Krugman contends investment spending stays high only if rapid economic growth is expected, and that a few years from now too much saving will again chase too few investment opportunities.

AI Summary. Higher interest rates have mixed economic effects because government interest payments to private holders of public debt add to private-sector spending power, while private-sector interest payments only redistribute income among private actors. If rates stay higher for longer, these payments are projected to exceed $1tn, and the current policy stance may not return inflation to 2%.

Joseph Wang Fed Guy Blog
Date Posted:

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

Do higher interest rates boost private spending power through government interest payments?

Core argument: If rates stay higher for longer, interest payments will easily exceed $1tn next year, and interest paid on public sector liabilities raises the private sector's overall spending power rather than merely redistributing income among private actors.

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%

Takeaways by Macro Roundup® AI

  1. If rates stay higher for longer, interest payments will easily exceed $1tn next year, and interest paid on public sector liabilities raises the private sector's overall spending power rather than merely redistributing income among private actors.
  2. Aggressive rate hikes have so far appeared to have a limited effect in dampening inflation, in part because higher rates subsidize consumption by increasing private sector interest income from public sector liabilities.
  3. With the policy rate much closer to the terminal rate than to 0% and financial markets stabilizing, the stock effect of monetary policy appears to be waning, and the current policy stance may not move inflation back to 2%.

AI Summary. Because official housing inflation measures reflect rents across all leases rather than new ones, the argument is that the Federal Reserve was behind the curve in raising interest rates and could be late again in easing after rents fall. Rents on new leases cover a small, unrepresentative minority of renters but could serve as a leading indicator of inflation.

Justin Fox Bloomberg
Date Posted:

.@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.”

Do official housing inflation measures make monetary policy late?

Core argument: The Federal Reserve began raising interest rates in March, a year after rents on new leases started surging, and could end up late again in pivoting to easier policy long after rents have started to fall.

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.”

Takeaways by Macro Roundup® AI

  1. The Federal Reserve began raising interest rates in March, a year after rents on new leases started surging, and could end up late again in pivoting to easier policy long after rents have started to fall.
  2. Alan Blinder, the Princeton economist and former Fed Vice Chairman whose 1980 paper urged the switch to owner's equivalent rent, says using new-lease rents for most purposes would be "a terrible idea" because they reflect prices paid by a small, unrepresentative minority.
  3. Blinder says that using rents on new leases would be "quite sensible" if the Bureau of Labor Statistics or anyone wanted to create a leading indicator of inflation.

AI Summary. A study finds 60% of young American men with less than a high-school education have been arrested at least once by age 26, with arrest rates having increased over time. Among men aged 26–35, 33% of Black men versus 23% of white men had been arrested by 26, a gap education levels help explain.

Adam Tooze Chartbook
Date Posted:
Is Database:
Database

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

How common are arrests among young American men with less education?

Core argument: 60% of young American men with less than a high-school education have been arrested at least once by age 26, and James P. Smith found that the arrest rate has increased dramatically over time.

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.

Takeaways by Macro Roundup® AI

  1. 60% of young American men with less than a high-school education have been arrested at least once by age 26, and James P. Smith found that the arrest rate has increased dramatically over time.
  2. Among men aged 26–35 in James P. Smith's study, 33% of black men had been arrested by age 26 versus 23% of white men, with education playing an outsized role in explaining the racial difference.
  3. James P. Smith found that having a more educated father was associated with lower rates of arrests and convictions by age 26.

AI Summary. The authors estimate that participation in China's "Made in China 2025" industrial policy is associated with more innovation subsidies and higher research-and-development intensity among listed Chinese firms. They find no statistically significant evidence of gains in domestic or US patenting, labor productivity, total factor productivity, or profitability.

Lee Branstetter and Guangwei Li National Bureau Of Economic Research
Date Posted:

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”

New research cast doubts on the impact of Made In China 2025, at least through 2018 “we see little statistical evidence of...

Does China's industrial policy raise firms' innovation beyond R&D spending?

Core argument: Using a difference-in-differences approach on Chinese listed firms, the authors find that participation in "Made in China 2025" enables firms to receive more innovation subsidies, which appears to induce increases in R&D intensity.

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.

Takeaways by Macro Roundup® AI

  1. Using a difference-in-differences approach on Chinese listed firms, the authors find that participation in "Made in China 2025" enables firms to receive more innovation subsidies, which appears to induce increases in R&D intensity.
  2. The authors find no evidence that "Made in China 2025" participation increases domestic or foreign patenting, labor productivity, total factor productivity, or profitability, suggesting the policy's most important goals remain unrealized.
  3. Estimated effects of "Made in China 2025" on total subsidies, Chinese invention patents, US utility patents, log labor productivity, TFP, and profit margin are not statistically significant at the 5% level.

AI Summary. Cumulative total returns for Indian equities have been comparable to or better than US equities over roughly three decades, while Chinese equities have lagged both, according to index data for the MSCI India, S&P 500, and MSCI China indexes.

Niraj Bhagwat and Philip Brooks Wellington
Date Posted:
Is Database:
Database

The MSCI India Index has outperformed the MSCI China Index through April 2022, according to @Wellington_Mgmt research, as noted by @tylercowen

Have Indian stocks matched or beaten US and Chinese equities long term?

Core argument: Cumulative total returns from December 31, 1992 through April 20, 2022 show the MSCI China Index trailing both the S&P 500 Index and the MSCI India Index, according to the author's Figure 1.

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.

Takeaways by Macro Roundup® AI

  1. Cumulative total returns from December 31, 1992 through April 20, 2022 show the MSCI China Index trailing both the S&P 500 Index and the MSCI India Index, according to the author's Figure 1.
  2. Clients have been uniformly surprised that China's long-term equity performance has lagged that of the US and India, despite heavy investor focus on China in recent years.
  3. The MSCI India Index, representing a market many clients have more or less ignored, has fared well over the long run.

AI Summary. Japan has expanded its fleet of Aegis-equipped destroyers capable of intercepting ballistic missiles to eight ships. Japan's Defense Ministry said two Maya-class destroyers intercepted mock ballistic missiles in tests off Hawaii, including the first launch by a Japanese vessel of the US-Japan-developed Standard Missile-3 Block 2A interceptor.

Ryo Nemoto Nikkei Asia
Date Posted:

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.

Two Aegis-equipped Japanese destroyers successfully intercepted mock ballistic missiles during tests off the coast of Hawaii...

Is Japan expanding its ballistic missile defense destroyer fleet?

Core argument: Japan raised to eight the number of Aegis-equipped destroyers capable of intercepting ballistic missiles, adding two more vessels, according to the Defense Ministry.

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.

Takeaways by Macro Roundup® AI

  1. Japan raised to eight the number of Aegis-equipped destroyers capable of intercepting ballistic missiles, adding two more vessels, according to the Defense Ministry.
  2. The Maya-class destroyers Maya and Haguro intercepted mock ballistic missiles in tests off the coast of Hawaii, the Defense Ministry said.
  3. The Maya fired the Standard Missile-3 Block 2A interceptor developed by the US and Japan, the first launch of a Block 2A interceptor by a Japan Maritime Self-Defense Force vessel.

AI Summary. 13 of China's 31 provincial-level jurisdictions reported more deaths than births, including Shanghai, Jiangsu, Tianjin, Sichuan, Chongqing, Hunan, Hubei, Hebei, Shanxi, Inner Mongolia, Liaoning, Jilin, and Heilongjiang. Nationwide births totaled 10.62m, an 11.5% decline from the prior year.

Luna Sun South China Morning Post
Date Posted:

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

New official Chinese numbers show over 40% of 31 provincial-level jurisdictions reported more deaths than births last year....

How widespread is population decline across China's provinces?

Core argument: Chinese mothers gave birth to 10.62 million babies in 2021, an 11.5% decline from 2020, according to newly released official figures.

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.

Takeaways by Macro Roundup® AI

  1. Chinese mothers gave birth to 10.62 million babies in 2021, an 11.5% decline from 2020, according to newly released official figures.
  2. Thirteen of China's 31 provincial-level jurisdictions, more than a third, reported more deaths than births in 2021.
  3. The 13 shrinking jurisdictions span wealthy Shanghai, Jiangsu, and Tianjin; central Sichuan, Chongqing, Hunan, and Hubei; northern Hebei, Shanxi, and Inner Mongolia; and northeastern Liaoning, Jilin, and Heilongjiang.