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AI Summary. Longer-horizon leading indicators point to a US economic slowdown later in the year despite strong recent data. Excess household savings are being drawn down and are projected to be 60%–70% depleted by year-end.
Core argument: Excess US household savings are being drawn down and should be 60%–70% depleted by the end of the year.
Despite strong US data in Q1 and Q2, the US still appears headed for a slowdown later this year. As shown above, many longer-horizon leading indicators point in that direction. Excess household savings are also being run down and should be 60%-70% depleted by the end of the year.AI Summary. US establishment closures spiked and then returned to normal levels, while new establishment openings reached record highs—peaking at 379,000 in a single quarter—and have since cooled but remain far above any pre-2020 level. Much of this may be new businesses replacing those that closed, and it is unclear whether the new entrants are more productive than the firms they replaced.
Core argument: Establishment deaths peaked mid-way through 2020 before dropping back to normal levels, while new establishments were launched, reaching a record 287,000 births in the third quarter of 2020 and peaking at 379,000 in the final quarter of 2021.
After peaking mid-way through 2020, “establishment deaths” rapidly dropped back to normal levels, and new establishments were launched. In the third quarter of 2020, a record-breaking 287,000 establishments were “born”. This rate continued to rise, peaking at 379,000 new establishments in the last quarter of 2021. The pace has cooled since then but remains far higher than anything on record before 2020. Much of this could merely be musical chairs, with new businesses replacing those that closed during the pandemic. Restaurants are a good example. New establishments have proliferated, but many also shuttered in 2020. Only in the past few months have the number of restaurants across the country surpassed the 2019 level. This intra-sector shuffling is part of the process of creative destruction, but it’s not clear that the new entrants are any more productive than the incumbents. We won’t know how many of the pandemic-born infant firms grew into toddlers for several years.AI Summary. None of the indicators typically used to identify recessions currently suggests a recession is underway.
Core argument: Torsten Sløk of Apollo Global notes that none of the indicators the NBER recession-dating committee normally examines suggests the economy is in a recession at the moment.
None of the indicators the NBER recession committee normally looks at suggest that we are in a recession at the moment, see chart above.AI Summary. Adjusted for inflation, U.S. national house prices are 4.6% below their recent peak and the 20-city composite is 6.4% below, yet real national prices remain above the housing bubble peak and are historically high. Affordability was essentially unchanged as a slight price increase offset a slight decline in mortgage rates.
Core argument: Deflated by CPI less Shelter, the national house price index sits 4.6% below its recent peak and the Composite 20 index 6.4% below its 2022 peak.
In real terms (using CPI less Shelter), the National index is 4.6% below the recent peak, and the Composite 20 index is 6.4% below the recent peak in 2022. In real terms, national 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, but real prices are historically high. Affordability was essentially unchanged in February as a slight increase in prices was offset by a slight decrease in mortgage rates. In October 2022, houses were the least “affordable” since 1982 when 30-year mortgage rates were over 14%.AI Summary. Inflation is unlikely to return to 2% without an economic downturn, according to the argument. Fallout from banking-sector stress is constricting credit and doing some of the work of the Federal Reserve's rate increases, so fewer rate hikes are needed than if the banking system were functioning smoothly.
Core argument: Larry Summers argues inflation will not return to 2% without an economic downturn.
Regarding the recent banking crisis, Summers said that the fallout is leading to a “constriction of credit” that is doing some of the work of the Fed’s rate hikes. “We don't need as much interest-rate increases as we would if the banking system were working smoothly,” he said. He's still optimistic about the US economy relative to the rest of the world: “I would rather be playing America’s hand than be playing the hand of any other major country in the world,” he said. “If you look at the collective value of all the American companies relative to all the non-American companies, that is at its highest level ever.”AI Summary. Chinese police made a surprise visit to the Shanghai offices of US consulting firm Bain & Company, questioning employees and taking computers and phones without detaining anyone. The episode has heightened concern among American companies that Beijing may be stepping up retaliatory action against US firms.
Core argument: Chinese police made a surprise visit to Bain & Company's Shanghai office and questioned employees, taking away computers and phones without detaining any team members, according to people familiar with the situation.
Chinese police have visited the Shanghai offices of Bain & Company and questioned employees at the US management consulting group, in the latest case of heightened scrutiny of foreign businesses in China as tensions between Beijing and Washington rise. Six people familiar with the situation said Chinese police had made a surprise visit two weeks ago. Police took away computers and phones but did not detain any team members, according to two people briefed on the incident. The raid has particularly fuelled concern at American companies that were already worried about signs that Beijing may be stepping up retaliatory action because of measures taken against Chinese firms by the administration of Joe Biden. US Treasury secretary Janet Yellen last week voiced concerns about what she described as “a recent uptick in coercive actions targeting US firms.”AI Summary. Adjusted for purchasing power, the economies of the US and its allies remain about 80% larger than those of China and Russia combined, and China's income per person is still under 30% of the US level. Even so, China's economic weight, trade role, and military make strategic confrontation dangerous, requiring transparency over aims and plans.
Core argument: Measured at purchasing power parity, the economies of the US and its allies remain some 80 per cent bigger than those of China and Russia combined.
Measured in comparable terms (at “purchasing power parity”), the economies of the US and its allies remain some 80 per cent bigger than those of China and Russia together. Yet China is still a poor country: at PPP, China’s GDP per head in 2022 was still less than 30 per cent that of the US. Suppose it managed to reach the current relative position of South Korea. Its economy would then be almost half as big again as those of the US and EU, combined. Will this happen? Probably not. But, given past performance, it cannot be ruled out. In any case, China already has a potent economy, a big role in world trade and a huge military. The era of strategic confrontation we have entered is frightening. Somehow, we have to co-operate and compete, while also avoiding military conflict. Our starting point must be to achieve the greatest possible transparency over our aims and plans. We learnt the necessity of that after the Cuban missile crisis in 1962. But we will need far more than that and probably for longer.AI Summary. Survey data show sizable majorities of U.S. adults expect that by 2050 the economy will be weaker, the country less important in the world, political divisions wider, and the gap between rich and poor larger. Some 58% say life for people like them is worse today than 50 years ago.
Core argument: Sizable majorities of U.S. adults expect that by 2050 the U.S. economy will be weaker, the United States will be less important in the world, political divisions will be wider and the gap between rich and poor will be larger.
Sizable majorities of U.S. adults say that in 2050 – just over 25 years away – the U.S. economy will be weaker, the United States will be less important in the world, political divisions will be wider and there will be a larger gap between the rich and the poor. Far fewer adults predict positive developments in each of these areas. And when Americans reflect on the country’s past, the present looks worse by comparison. Around six-in-ten (58%) say that life for people like them is worse today than it was 50 years ago, according to the survey, which was conducted from March 27 to April 2. Confidence in the future of the country has declined over the past year. In May 2022, 68% said they had at least some confidence in the country’s future, 8 points higher than the share who say this today. The share expressing at least some confidence in the future of the U.S. changed only modestly between August 2020 and May 2022.AI Summary. Real wages for the bottom 50% of earners have risen 9.6% since 2017, adding an estimated $150bn in annual spending power, or $250bn including income sources such as social security. Because lower-income consumers spend more of each extra dollar on goods, goods consumption has remained elevated rather than shifting back toward services.
Core argument: Real wages for the bottom 50% of earners have risen 9.6% since 2017, adding about $150bn in annual spending power, or $250bn including other income sources such as social security.
Real wage levels for the bottom 50% of earners have increased by 9.6% since 2017, translating to an additional $150bn in annual spending power, rising to $250bn when including other income sources like social security. This increase in disposable income supports higher consumer spending, particularly on goods, as lower-income consumers tend to spend more of each extra dollar earned on goods. Despite expectations of a shift back to services spending post-pandemic, goods consumption remains elevated due to these stronger consumer finances. The sustained increase in disposable income and muted financial distress suggest that the current level of goods spending is sustainable, with implications for economic growth and inflation dynamics.A research note from GS’s Spencer Hill, which finds that real wage levels for bottom 50 percent earners were almost 10% higher than in 2017, supporting sustainably higher levels of consumer spending.
Robert Armstrong and Ethan Wu, "Why goods spending isn’t falling,"Financial Times, April 25, 2023, https://www.ft.com/content/47002aa9-18b3-4db4-ba34-3bac45d82268
Why goods spending isn’t falling
There is an enigma at the centre of the US economy: what’s up with goods spending?
The conventional story is well known. Fearing a pandemic depression, Congress and the Federal Reserve unleashed enormous fiscal and monetary stimulus. Everyone was afraid of in-person services businesses, so all that money flooded into the goods sector. At the peak, in March 2021, inflation-adjusted goods consumption had shot up 21 percent from pre-pandemic levels, and goods inflation wasn’t far behind. This, though, was transitory. Eventually everyone had their fill of buying dressers and air fryers. Much ink was spilled about the great goods-to-services rotation: goods spending should return to trend as services spending rises. In the last year or so, it’s been all about inflation and spending in services.
But what if that’s wrong? What if real goods spending never falls back to its pre-pandemic trend, but instead plateaus at a higher level? It’s now been three years since lockdowns began and any trend-reversion is hard to spot:
This matters for two reasons: lower-income consumers spend more of each extra dollar earned, and they spend more of each extra dollar earned on goods, specifically. So long as bottom-half consumers have money to spend, goods consumption should stay high.
Is it sustainable, though? Comparing detailed (but less timely) consumer survey data for 2021 to 2019, Hill argues that it is. Consumer financial distress looks muted by historical standards. More than $1tn in excess savings is still out there. On top of that: "While the $1.6tn increase in consumer goods spending over three years is enormous in absolute terms, it may indeed be sustainable in the context of the $3.3tn rise in disposable income and the proportionately smaller spending increases for services categories on net. The increase in goods spending also does not look as outsized when one considers the strong disposable income growth of the bottom 3-4 income quintiles — recall that data imply a high marginal propensity to consume goods for lower- and middle-income consumers."
In other words, consumers are broadly spending no more than what they’re earning. After stripping out certain (misleading) imputed costs, Hill finds that nominal spending has risen by $3.5tn and nominal income by $3.3tn:
AI Summary. Headline GDP growth slowed, but the drag came from volatile inventories, with underlying growth strong. US output sits slightly below the Congressional Budget Office's pre-pandemic forecast, within its rounding error, with most GDP components close to where they were expected to be, though these figures will be revised repeatedly.
Core argument: Jason Furman argues that headline Q1 GDP slowed because volatile inventories pulled it down, and that growth excluding inventories was strong.
Headline GDP slowed in Q1 but was pulled down by volatile inventories--absent that strong growth. Overall, the economy is a little below what CBO forecast prior to the pandemic. But that is not surprising given that the pandemic did lasting damage to the economy. Plus, it is well within the rounding error of the pre-pandemic forecast. Overall, most components of GDP are basically where they were expected to be prior to the pandemic. If a Rip Van Winkle economist had GDP data through 2019 and then for 2023-Q1 they would not have thought anything particularly notable had occurred in the interim. Finally, a reminder: everything above is wrong. These numbers will be revised many, many times in the coming quarters, years, and even decades.AI Summary. China's manufacturing trade surplus again exceeded 10% of its GDP, with its overall goods surplus approaching its pre-global-financial-crisis peak and far larger in dollar terms. Net of processing imports, exports run about 14% of GDP while manufactured imports are under 4%, meaning the rest of the world supplies China with net demand.
Core argument: China's surplus again topped 10% of GDP, with its overall goods trade surplus approaching its pre-global-financial-crisis peak even amid relatively high commodity prices.
Despite all the talk about how the world is standing in the way of China's growth, the world (including the US) continues to supply China with one thing it cannot generate domestically -- demand for its manufactures. China's surplus again topped 10% of its GDP. Even with relatively high commodity prices, China's overall trade surplus (in goods) is approaching its pre-global financial crisis peak. As is the surplus in manufacturing. And of course, in dollars, the surplus is WAY bigger than it was prior to the global financial crisis (dollars are an OK proxy for scaling the surplus v the size of its trading partners). The world still supplies China with a ton of net demand. China simply doesn't import many manufactures for its own use (it imports chips for reexport) Net of processing imports, exports are about 14% of GDP and manufactured imports are now under 4% of GDP. This is true "deglobalization."AI Summary. US manufacturing construction is running at more than $140bn annualized, with over $60bn going to computer, electronic, and electrical facilities alone — more than all US medical and educational construction combined at about $65bn. Outside semiconductor-related industries, nominal manufacturing construction spending has grown only marginally, implying real declines amid elevated inflation.
Core argument: US spending on new domestic manufacturing facilities runs at more than $140 billion annualized, with over $60 billion going to computer, electronic, and electrical manufacturing alone, buoyed by the CHIPS Act.
One thing is for sure so far—the CHIPS Act has already massively buoyed US semiconductor/computer/electronic manufacturing investment and by extension overall US manufacturing construction. At an annualized rate, more than $140B is now being plowed into new domestic manufacturing facilities with more than $60B going to new computer/electronic/electrical manufacturing alone. To put that number in perspective, the current combined value of all medical and educational construction in the US is only about $65B, and the total for all office buildings is only about $80B. Outside of CHIPS-related industries, nominal manufacturing construction spending has grown only marginally—which amidst elevated inflation almost certainly means that real US manufacturing construction would have been on the decline in the absence of CHIPS.AI Summary. Barred from selling many of its most advanced machines in China and targeted by data thefts, Dutch chipmaking-equipment maker ASML is defending its lead by building more sophisticated systems, including a next-generation machine priced above $380m. Analysts argue its main long-term risk is that future lithography systems prove too costly and unwieldy to mass-produce.
Core argument: ASML's next lithography machine, priced above $380 million — more than a Boeing 787 Dreamliner — is set to reach markets in 2025 and can etch patterns on silicon wafers smaller than a virus.
Barred from selling many of its top-end machines in China, and a victim of data thefts, ASML is doing the only thing it can to preserve its almost insurmountable lead: building evermore sophisticated machines. Its next contraption, about the size of an Amsterdam studio apartment, is set to hit markets in 2025. With a price tag of more than $380 million — costlier than a Boeing 787 Dreamliner — it will be capable of etching delicate patterns on silicon wafers smaller than a virus. Already way ahead of rivals, ASML is making sure no one can do what it does for the foreseeable future. Its only real hurdle will be technological limits — building machines that are viable and economical for mass production. “The big long-term risk is that new lithography systems are too costly and unwieldy to produce,” said Chip War author Miller. “ASML will bring its high-NA systems online, but the generation after that, hyper-NA, is still in development. Some ASML staff have speculated it may be too difficult to mass-produce.”AI Summary. The Federal Reserve Bank of Atlanta's survey of business inflation expectations, which asks firms how much they expect their own costs to rise over the coming year, remains above pre-pandemic levels but has been declining. The author argues the data point to gradually falling inflation without a rise in unemployment.
Core argument: The Atlanta Fed's index of business inflation expectations, which asks companies how much they expect their own costs to rise over the next year, is probably the best available inflation measure, according to the author.
The best available inflation measure is probably the Atlanta Fed’s index of business inflation expectations, which asks companies how much they expect their costs to rise over the next year (a number they may actually know something about). This number is still elevated from pre-pandemic levels but not by a lot, and it has been coming down. Overall, the data seems to me to point to gradually falling inflation, even though unemployment hasn’t gone up. I’m hoping that as more data comes in, this view will be increasingly vindicated. But I’m going to try not to let my hopes color my analysis, and that’s why I’ve put my preferred measures on the record today.AI Summary. Working-class voters are projected to outnumber college-educated voters by roughly half again in the US presidential electorate, so slippage among them carries outsize weight. The author argues that if Republicans matched their 13-point national House margin among working-class voters, Democrats would need a college-educated advantage above 30 points to offset it.
Core argument: Trump carried the overall working-class vote by 4 points in 2020, while Republicans won the nationwide House vote by 13 points in 2022, a margin that would make Trump very hard to beat if replicated in 2024.
A reasonable guess is working-class class voters will be half again as large as college voters in 2024. That means that slippage in the working-class vote can have on outsize effect on the outcome. In 2020, Trump carried the overall working-class vote by 4 points. In 2022, Republicans carried the nationwide House vote by 13 points. If Trump replicated that 2022 margin in 2024, he would be very hard to beat. Absent a countervailing Democratic improvement in the college vote—which the Democrats already carried by 18 points in 2020—Trump would likely carry Arizona, Georgia, Nevada, Wisconsin, and even Pennsylvania and Michigan. A counter trend among the smaller college-educated group could still cancel these effects out but to completely do so it would have to be larger than the working-class shift, spiking Biden’s advantage among the college-educated to over 30 points. Possible, but a very heavy lift. Since Trump is regularly showing double digit advantages among working-class voters in trial heats and has a proven track record in attracting working-class support, the challenge for Biden’s campaign seems clear. They must at all costs prevent the kind of working-class slippage that could put Trump once again in the Oval Office.