Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, July 24, 2023

AI Summary. The normally inverse relationship between unemployment and worker quit rates broke down during and after the pandemic, with quits far above what unemployment would have predicted, and has since moved back toward its historical norm. The author argues this fading of pandemic-era labor market distortions, rather than Federal Reserve tightening, best explains slowing wage growth and disinflation.

Paul Krugman Krugman Wonks Out
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.@paulkrugman argues deflation to this point has been driven by “recombobulation,” or the fading of pandemic-related shocks, not tighter monetary policy.

Does fading labor market disruption explain disinflation better than Fed tightening?

Core argument: The quit rate's inverse relationship with unemployment, a quits-based version of the Beveridge Curve, broke down during the pandemic as quits ran far above what the unemployment rate would have predicted, presumably reflecting labor market dislocation.

Normally there is a fairly close inverse relationship between unemployment and quits, a quit-rate version of the famous Beveridge Curve linking unemployment to vacancies. During the pandemic and its aftermath, however, quits were much higher than the normal relationship to the unemployment rate would have predicted, presumably reflecting the dislocation of labor markets in a time of wild and crazy changes. Here too we see recombobulation, with the relationship of quits to unemployment moving back toward the historical norm, which is probably the main reason wage growth appears to be slowing. Stories about recombobulation — the fading away of pandemic-era distortions — driving disinflation are clearly supported by the data. Claims that Fed tightening drove it are sketchier and much more speculative. Which is not to say that the Fed was wrong to raise rates.

Takeaways by Macro Roundup® AI

  1. The quit rate's inverse relationship with unemployment, a quits-based version of the Beveridge Curve, broke down during the pandemic as quits ran far above what the unemployment rate would have predicted, presumably reflecting labor market dislocation.
  2. The quits-unemployment relationship is moving back toward its historical norm, which is probably the main reason wage growth appears to be slowing.
  3. The data support explanations of disinflation that credit the fading of pandemic-era distortions, while claims that Fed tightening drove disinflation are sketchier and more speculative, though that does not mean the Fed was wrong to raise rates.

Related Articles:

  • When Should We Declare Victory Over Inflation? — Modest positive inflation makes relative price and wage adjustments easier, since cutting prices or wages outright is difficult and rising prices elsewhere can accomplish the same shift. On this basis, some economists argue it is acceptable to stop disinflation at a 3% inflation rate rather than 2%.
  • The Second Great Experiment Update — Newer macroeconomic theory using forward-looking rather than adaptive expectations holds that inflation is stable under an interest rate target and can fade on its own even when interest rates sit below the inflation rate. Under the fiscal theory of the price level, a burst of inflation devalues government debt and ends once the real value of that debt is restored.
  • Fiscal Arithmetic and the Global Inflation Outlook — Across advanced economies, core inflation is significantly positively associated with growth in government debt since the start of the pandemic, and the authors expect this decade's fiscal expansions to shift price levels permanently higher. They argue this differs from permanently higher inflation, projecting inflation to diminish as temporary deficits normalize, with medium-term inflation expectations still anchored near central bank targets.

AI Summary. Underlying core inflation has slowed but remains well above the Federal Reserve's 2% target, with durable goods inflation over three months near typical pre-pandemic lows while services inflation stays about 2 percentage points above pre-pandemic norms. Risks ahead include sharper durable goods deflation or services inflation becoming entrenched at current levels.

Chris Marsh Money: Inside and Out
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The June CPI print shows steady deflation after removing volatile items; however, the reading is still well above target. @GeneralTheorist

Is core inflation slowing enough to reach the Fed's target?

Core argument: Services inflation remains about 2 percentage points above pre-pandemic norms, while adjusted durables inflation over three months has moved close to typical pre-pandemic lows.

Adjusted durables remain volatile, of course, but over 3 months are now close to typical pre-pandemic lows. Services remain elevated, about 2ppts above pre-pandemic norms. Overall, the Fed can be encouraged by the disinflation of underlying core inflation—though the reading is still well above 2%.  There may be two risks ahead. The first would be if durables goods begin to show even sharper deflation, perhaps portending more general price pressures. The second is if service inflation becomes entrenched at current levels—lower than a year ago, but well above a rate consistent with the Fed’s target.

Takeaways by Macro Roundup® AI

  1. Services inflation remains about 2 percentage points above pre-pandemic norms, while adjusted durables inflation over three months has moved close to typical pre-pandemic lows.
  2. The Federal Reserve can be encouraged by the disinflation of underlying core inflation, though the reading remains well above 2%.
  3. Two risks ahead are sharper durable goods deflation, which could portend more general price pressures, and services inflation becoming entrenched well above a rate consistent with the Federal Reserve's target.

AI Summary. Unemployment rates in 25 US states are at or within 0.1 percentage point of a record low, according to Bureau of Labor Statistics data. Payroll employment remains below pre-pandemic levels in a dozen states and Washington, DC, including New York and Hawaii, while Idaho, Utah, Texas, and Florida posted among the largest employment gains.

Reade Pickert, and Alexandre Tanzi Bloomberg
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The unemployment rate is at or near a record low in half of American states.

Are unemployment rates at record lows in half of US states?

Core argument: Unemployment rates in 25 US states stand at or within 0.1 percentage point of record lows, according to Bureau of Labor Statistics data.

The unemployment rates in 25 states are currently at or within 0.1 percentage point of a record low [according to] Bureau of Labor Statistics data. In a dozen states and DC, the number of people on payrolls remains below pre-pandemic levels. That includes New York and Hawaii. Idaho, Utah, Texas, and Florida were among the states with the biggest gains in employment since February 2020.

Takeaways by Macro Roundup® AI

  1. Unemployment rates in 25 US states stand at or within 0.1 percentage point of record lows, according to Bureau of Labor Statistics data.
  2. Payroll employment in a dozen states plus Washington, DC, including New York and Hawaii, remains below pre-pandemic levels.
  3. Idaho, Utah, Texas, and Florida were among the states posting the largest employment gains since February 2020.

Related Articles:

  • Labor Inelasticity — Early retirements during the pandemic cut labor supply, and the resulting wage spike drew in workers who had not been seeking jobs, lifting prime-age labor force participation to multi-year highs near 1990s peaks. With little slack left, moderating employment growth would reflect labor scarcity accompanied by reaccelerating wages.
  • Unions’ Inflation Warning? — The share of people aged 16 and over working or looking for work fell when the pandemic hit and has only partly recovered, with population aging accounting for most of the remaining shortfall. That implies economic activity must run at a lower level to avoid persistent wage and price inflation.
  • America Is Barreling Toward a Summer of Strikes — More than 650,000 US workers are on strike or threatening to strike, a level of union activity not seen in decades, with actors and writers already out and unions at UPS and Detroit's three largest automakers poised to join if contract talks fail. One Bank of America analyst put the odds of a United Auto Workers strike above 90%.

AI Summary. US labor force participation among people aged 25–54 stands at 83.5%, a two-decade high, with rising participation among prime-age women offsetting a decline among prime-age men since 2000. Participation for prime-age women reached a record 77.8%, up from 73.5% at the pandemic's low.

Jeffrey Sparshott Wall Street Journal
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Americans aged 25-54 are employed or looking for jobs at rates not seen in two decades, helping counter the exodus of older baby boomers from the workforce.

Is rising participation among prime-age women lifting overall labor force participation?

Core argument: U.S. prime-age (25–54) labor force participation stands at a two-decade high of 83.5%, as rising female participation has offset a decline in prime-age male participation since 2000.

American prime age 25-54 labor force participation is at a two decade high of 83.5% as an uptick in prime age female LFP has offset a decline in male prime age LFP since 2000. In the first months of the pandemic, nearly four million prime-age workers left the labor market, pushing participation in early 2020 to the lowest level since 1983—before women had become as much of a force in the workplace. Prime-age workers now exceed prepandemic levels by almost 2.2 million. The resurgence of midcareer workers is driven by women taking jobs. The labor-force participation rate for prime-age women was the highest on record, 77.8% in June. That is well up from 73.5% in April 2020.

Takeaways by Macro Roundup® AI

  1. U.S. prime-age (25–54) labor force participation stands at a two-decade high of 83.5%, as rising female participation has offset a decline in prime-age male participation since 2000.
  2. Prime-age women's labor force participation reached a record 77.8% in June, up from 73.5% in April 2020, driving the resurgence of midcareer workers.
  3. Nearly four million prime-age workers left the labor market in the first months of the pandemic, pushing participation in early 2020 to its lowest since 1983, but prime-age workers now exceed prepandemic levels by almost 2.2 million.

Related Articles:

  • The Labor Supply Rebound from the Pandemic — The prime-age labor force participation rate, which took more than a decade to recover after the Great Recession, has returned to those high levels, indicating that the "missing workers" discussed during the pandemic recovery are largely back in the labor market.
  • Where Are the Missing Gen Z Workers — US labor-force participation for ages 25 to 54 reached 83.1%, surpassing its pre-pandemic peak, while participation rates for those ages 20 to 24 and over 55 remain well below pre-pandemic levels. More than 400,000 Americans in their 20s are missing from the labor force, a decline not explained by shifts in age composition.

AI Summary. Children from top-1% families are more than 2x as likely as middle-class students with comparable SAT/ACT scores to attend an Ivy-Plus college, with two-thirds of the gap attributable to higher admissions rates. The authors attribute this advantage to legacy preferences, weight on non-academic credentials, and athlete recruitment.

Raj Chetty, David Deming and John Friedman National Bureau of Economic Research
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.@OppInsights finds that the “Ivy-Plus” (Ivy League, plus UChicago, Duke, MIT, Stanford) admit students from the highest income families scoring in the top 1% of SAT/ACT at far greater rates than those from lower-income families.

Why are high-income students likelier to attend highly selective private colleges?

Core argument: Children from top-1% families are more than twice as likely to attend an Ivy-Plus college (Ivy League, Stanford, MIT, Duke, Chicago) as middle-class students with comparable SAT/ACT scores.

Children from families in the top 1% are more than twice as likely to attend an Ivy-Plus college (Ivy League, Stanford, MIT, Duke, and Chicago) as those from middle-class families with comparable SAT/ACT scores. Two-thirds of this gap is due to higher admissions rates for students with comparable test scores from high-income families; the remaining third is due to differences in rates of application and matriculation. The high-income admissions advantage at private colleges is driven by three factors: (1) preferences for children of alumni, (2) weight placed on non-academic credentials, which tend to be stronger for students applying from private high schools that have affluent student bodies, and (3) recruitment of athletes, who tend to come from higher-income families. Highly selective public colleges that follow more standardized processes to evaluate applications exhibit smaller disparities in admissions rates by parental income than private colleges that use more holistic evaluations.

Takeaways by Macro Roundup® AI

  1. Children from top-1% families are more than twice as likely to attend an Ivy-Plus college (Ivy League, Stanford, MIT, Duke, Chicago) as middle-class students with comparable SAT/ACT scores.
  2. Two-thirds of that attendance gap comes from higher admissions rates for high-income students with comparable test scores, and the remaining third from differences in application and matriculation rates.
  3. The high-income admissions advantage at private colleges reflects preferences for alumni children, weight on non-academic credentials that tend to be stronger among applicants from affluent private high schools, and recruitment of athletes, while highly selective public colleges using more standardized evaluation show smaller disparities by parental income.

Related Articles:

  • Why Do Wages Grow Faster for Educated Workers? — College graduates sort into professional, non-routine occupations where wages rise much more with job tenure, and the author estimates this occupational sorting explains at least half of the life-cycle growth in the college wage premium. That premium is estimated at 22% at age 26, 49% at age 40, and 56% at age 60.
  • Multidimensional Human Capital and the Wage Structure — The wage return to cognitive skills has declined, from about 10% higher hourly wages per standard deviation of test score in the 1980s and early 1990s to 4.5% in the 2000s and early 2010s, while returns to a bachelor's degree rose. Social skill-intensive occupations grew as a share of US jobs, with faster real wage growth.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

AI Summary. Chinese direct overseas investment fell 18% year over year by one new measure, and is down 25% from its 2016 peak amid plummeting overseas mergers and acquisitions and tighter Chinese rules to curb capital flight. Nickel-rich Indonesia is the largest recipient of Chinese investment, according to preliminary American Enterprise Institute estimates.

Stella Yifan Xie and Jason Douglas Wall Street Journal
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Chinese investment in the US has declined by just under 25% as focus shifts to manufacturing and natural resource investments in non-Western nations. @AEIecon @DerekScissors1

Is Chinese overseas investment declining and shifting away from the West?

Core argument: China's direct overseas investment to the rest of the world fell 18% from a year earlier by one new measure, leaving it 25% below its 2016 peak.

The biggest recipient of Chinese investment so far this year is nickel-rich Indonesia, according to a preliminary estimate of Chinese investments compiled by the American Enterprise Institute. Direct overseas investment from China to the rest of the world fell by 18% from a year earlier by one new measure released recently. The latest level marks a decline of 25% from a peak in 2016, as overseas mergers and acquisitions have plummeted and Beijing has tightened rules to curb capital flight.

Takeaways by Macro Roundup® AI

  1. China's direct overseas investment to the rest of the world fell 18% from a year earlier by one new measure, leaving it 25% below its 2016 peak.
  2. Nickel-rich Indonesia is the biggest recipient of Chinese investment so far this year, according to a preliminary estimate of Chinese investments compiled by the American Enterprise Institute.
  3. Overseas mergers and acquisitions have plummeted as Beijing has tightened rules to curb capital flight.

Related Articles:

  • Exodus of Wealthy Chinese Accelerates with End of Covid Zero — China faced capital flight of roughly $150bn a year from citizens traveling overseas before the pandemic, estimated from unexplained gaps in global tourism data, with about 10,800 wealthy Chinese migrating in 2022. One private banker reports the cost of moving money offshore rose to 12 cents on the dollar from 1 cent.
  • Singapore Asks Banks to Keep Quiet on Wealth Inflows During China Boom — Singapore's central bank has asked major banks to minimize public discussion of the origins of large inflows of money into the city-state, much of it from wealthy Chinese, an issue that has become politically sensitive domestically. Lawyers and industry groups estimate Singapore hosts roughly 1,500 family offices, a large share of them Chinese.
  • The Mysterious $300 Billion Flow Out of China — Unexplained financial flows in China's balance of payments, which generally correspond to capital flight and other surreptitious efforts to move money abroad, have been relatively low in recent years, but that may be an illusion created by official reporting. Corresponding flows are hard to locate elsewhere, though the UK has experienced a surge in such unexplained flows.

AI Summary. China's job mix has shifted toward low-pay, low-skill, informal work at the expense of higher-paid, high-skill manufacturing and construction jobs, with the informal-to-formal ratio flipping from 40:60 to 60:40 over 15 years, according to a Stanford University estimate. Younger workers are over-represented in low-pay sectors and gig work.

George Magnus Financial Times
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.@georgemagnus1 notes that the ratio of low-pay, low-skill informal sector jobs to high-skilled jobs in China is now 60:40, the opposite of 15 years ago.

.@georgemagnus1 notes that the ratio of low-pay, low-skill informal sector jobs to high-skilled jobs in China is now 60:40,...

Is China's job mix shifting toward low-pay informal work?

Core argument: Stanford University professor Scott Rozelle says China's ratio of informal to formal sector jobs was 40:60 fifteen years ago and has now flipped.

A marked change in the occupational structure of jobs has meant that the proportion of low pay, low skill, informal sector jobs has been rising at the expense of higher paid, high skill jobs in manufacturing and construction. According to Stanford University professor Scott Rozelle, the ratio of informal to formal sector jobs 15 years ago was 40:60, but has now flipped. This is a particular problem for younger workers who are over-represented in low pay sectors and the gig economy.

Takeaways by Macro Roundup® AI

  1. Stanford University professor Scott Rozelle says China's ratio of informal to formal sector jobs was 40:60 fifteen years ago and has now flipped.
  2. China's occupational structure has shifted toward low-pay, low-skill, informal sector jobs at the expense of higher-paid, high-skill jobs in manufacturing and construction.
  3. Younger Chinese workers are over-represented in low-pay sectors and the gig economy, making the shift toward informal employment a particular problem for them.

Related Articles:

  • China’s Youth Left Behind As Jobs Crisis Mounts — China's unemployment rate for 16- to 24-year-olds reached 20.8%, the highest since the data series began in 2018 and above levels in European countries such as France and Italy. The national civil service examination drew a record 2.6mn applicants, nearly 2x the 2019 figure, with a 1.4% success rate.
  • Why Has Youth Unemployment Risen So Much in China? — Young workers aged 15-24 are particularly vulnerable when economic growth slows, and China's youth unemployment rate does not appear to be an outlier relative to its income level among global peers. Mismatches between the skills graduates acquire in higher education and those employers demand may add to labor market frictions.
  • Can China Fix Youth Unemployment Woes With Military Recruitment Drive? — More than 90% of China's military recruitment this year could come from recent graduates and high school students, which analysts say serves both the People's Liberation Army's modernisation targets and the country's record youth unemployment. Military academies remain less attractive to top students than leading public universities.

AI Summary. The California Department of Finance projects the state will have about 39.5m people in 2060, roughly the same as now, down from earlier projections of 45m and nearly 53m. The forecast has the population returning to its 2020 level in the 2030s and peaking in 2044.

Alexandre Tanzi and Eliyahu Kamisher Bloomberg
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California’s Department of Finance forecast the state’s population will be smaller in 2060 than it was in 2020.

Is California's long-term population growth coming to an end?

Core argument: The California Department of Finance projects California will have 39.5 million people in 2060, roughly the same as today, which could mark the end of more than a century of long-term population growth.

More than a century of long-term population growth in California could be over, according to new projections that show the state will have about the same number of people in 2060 as it does now. The California Department of Finance predicts that there’ll be 39.5 million people in the state by 2060. Just three years ago, forecasters were expecting the number to be 45 million — and a decade ago, the population was seen surging to almost 53 million. If there’s a bright spot in the forecast, the state is at least expected to recoup its pandemic population decline in the coming years — returning to its 2020 population level in the 2030s, before peaking in 2044.

Takeaways by Macro Roundup® AI

  1. The California Department of Finance projects California will have 39.5 million people in 2060, roughly the same as today, which could mark the end of more than a century of long-term population growth.
  2. California's long-range population forecast has fallen from almost 53 million a decade ago and 45 million three years ago to 39.5 million by 2060.
  3. California is expected to recoup its pandemic population decline, returning to its 2020 population level in the 2030s before peaking in 2044.

Related Articles:

  • Taxes, Revenues, and Net Migration In California — California's top income tax bracket shows the highest net out-migration rate, with departing high earners not replaced by other high earners at the same rate. Potential net outflows of taxable income reached nearly $4bn in the year federal tax reform took effect and $10.7bn around the COVID-19 pandemic.
  • The Population of California Declined, Again — California's population fell by 138,443 to 38.94 million, a third consecutive annual decline, according to state data. The main driver has been residents moving to other states such as Texas, Nevada, Idaho and Oregon, with net outmigration reaching a record 407,000 people and now spanning every education and income group.

AI Summary. US per capita carbon dioxide emissions have returned to their early-20th-century level, yet remain nearly 2x China's per capita level.

Our World In Data Staff Our World In Data
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American per capita CO₂ emissions are back to the level prior to the United States’ entry into the First World War but remain almost 2X Chinese levels.

Related Articles:

  • War and Subsidies Have Turbocharged the Green Transition — Global capital spending on wind and solar assets rose from $357bn to $490bn, surpassing investment in oil and gas wells for the first time, aided by large subsidy programs in the US, Europe, and China. The International Energy Agency expects global renewable capacity to rise by 2,400 gigawatts over five years, nearly 30% above its earlier forecast.
  • Clean Energy Sets $1.1 Trillion Record That’s Bound to Be Broken — Global investment in the energy transition reached $1.1tn, matching investment in fossil fuels for the first time, according to clean energy research group BloombergNEF. The fossil fuel figure covers oil and gas across upstream, midstream and downstream segments plus power generation without emissions reduction technology.

AI Summary. Startup Fervo Energy completed a 30-day full-scale well test of enhanced geothermal technology at its northern Nevada site that generated 3.5 megawatts of electricity, with the project set to power Google data centers and infrastructure in the state. The company projects its Utah site will deliver about 400 megawatts.

Michelle Ma Bloomberg
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Fervo Energy is building a commercial geothermal facility that will power 300,000 Utah homes; the firm has started permitting on another half dozen facilities.

Fervo Energy is building a commercial geothermal facility that will power 300,000 Utah homes; the firm has started...

Can enhanced geothermal technology deliver reliable carbon-free power at scale?

Core argument: Fervo Energy completed a full-scale 30-day well test at its Project Red enhanced geothermal site in northern Nevada, which generated 3.5 megawatts of electricity.

In a landmark step for enhanced geothermal technology’s potential as a dependable carbon-free energy source, startup Fervo Energy has wrapped up a full-scale, 30-day well test at its Project Red site in northern Nevada, which was able to generate 3.5 megawatts of electricity. (One megawatt can power roughly 750 homes at once.) Project Red will connect to the grid later this year and power Google's data centers and infrastructure throughout Nevada. With the demo complete, Fervo is attempting to repeat its success at its southwest Utah site, which is currently under construction. With design improvements maximizing power output as expected, the Utah site is predicted to deliver about 400 megawatts by 2028, roughly enough electricity to power 300,000 homes at once.

Takeaways by Macro Roundup® AI

  1. Fervo Energy completed a full-scale 30-day well test at its Project Red enhanced geothermal site in northern Nevada, which generated 3.5 megawatts of electricity.
  2. Project Red is slated to connect to the grid and supply Google's data centers and infrastructure across Nevada.
  3. Fervo's southwest Utah site, under construction, is projected to deliver about 400 megawatts by 2028 — roughly enough to power 300,000 homes at once — if design improvements maximize power output as expected.

Related Articles:

  • This Geothermal Startup Showed Its Wells Can Be Used Like a Giant Underground Battery — Experiments at a geothermal startup's twin wells in Nevada found that pumping water underground and holding it builds pressure that flexes the rock, then produces higher-than-normal water output for hours once released. The results suggest geothermal plants could ramp electricity up or down and store energy for hours or days, acting like a large underground battery.

AI Summary. Wildfires in California and hurricanes in Florida have generated large volumes of insurance claims, while higher housing prices and construction and repair costs have made each claim more expensive. Insurers have also faced costlier reinsurance, with worldwide average reinsurance rates up about a quarter in one year and another third the next, according to reinsurance broker Howden Tiger.

Peter Coy New York Times
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Globally mean reinsurance rates rose by 25% in 20222 and are up 33% so far in 2023 according to reinsurance broker Howden Tiger. @petercoy

Globally mean reinsurance rates rose by 25% in 20222 and are up 33% so far in 2023 according to reinsurance broker Howden...

Why are home insurance costs rising in disaster-prone states?

Core argument: Average worldwide reinsurance rates rose by a quarter last year and by another third this year, according to London-based reinsurance broker Howden Tiger, part of Howden Group Holdings.

Wildfires in California and hurricanes in Florida produced lots of claims. Housing prices and bills for construction and repairs have gone up, making claims larger. And insurance companies have had to pay more for reinsurance: Worldwide, average rates for reinsurance rose by a quarter last year and by another third this year, according to the London-based reinsurance broker Howden Tiger, an arm of Howden Group Holdings.

Takeaways by Macro Roundup® AI

  1. Average worldwide reinsurance rates rose by a quarter last year and by another third this year, according to London-based reinsurance broker Howden Tiger, part of Howden Group Holdings.
  2. Wildfires in California and hurricanes in Florida generated large volumes of claims, while higher housing prices and construction and repair bills made each claim larger.
  3. Insurers face higher costs for reinsurance in addition to larger claims, contributing to California and Florida becoming almost uninsurable.

Related Articles:

  • Climate Shocks Are Making Parts of America Uninsurable. It Just Got Worse — State Farm, California's largest homeowner insurer, stopped accepting applications for most new home insurance policies statewide, citing rapidly growing catastrophe exposure. Florida faced a similar retreat by national carriers after Hurricane Andrew and responded with a market of small insurers backed by a state-mandated company providing windstorm coverage to homeowners who cannot obtain private insurance.
  • Farmers Insurance Limits Sales in Florida, California Amid Storm, Wildfire Risks — Farmers Insurance is limiting homeowners policy sales in Florida and California, hurricane- and wildfire-prone states, joining other large insurers in pulling back. In Florida it is ending sales of home, auto, and umbrella policies under its own brand — about 30% of the policies it sells there, affecting roughly 89,000 policies.
  • Your Homeowners’ Insurance Bill Is the Canary in the Climate Coal Mine — Average annual homeowners insurance costs about $1,900 nationwide but roughly $4,000 in New Orleans and $5,000 in Miami, with US premiums up 12% in a year and expected to keep rising. Insurers, facing about 20 billion-dollar disasters a year, are adopting pricing models that incorporate warming-climate costs and withdrawing from risky areas, shifting exposure to state-backed plans.

Tuesday, July 25, 2023

AI Summary. The authors estimate that declining interest and corporate tax rates accounted for over 40% of real corporate profit growth from 1989 to 2019, while falling risk-free rates explain the entire expansion in price-to-earnings multiples. Real earnings before interest and taxes grew slightly more slowly than in 1962–1989, at 2.2% versus 2.4% per year.

Michael Smolyansky Federal Reserve Board
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Michael Smolyansky @federalreserve argues the decline in interest and corporate tax rates mechanically explains 40% of real growth in corporate profits between 1989-2019 suggesting lower returns going forward.

How much of corporate profit growth came from lower rates and taxes?

Core argument: Declining interest and corporate tax rates accounted for over 40% of the growth in real corporate profits from 1989 to 2019, while falling risk-free rates explain the entirety of the expansion in price-to-earnings multiples.

The reduction in interest and corporate tax rates was responsible for over 40% of the growth in real corporate profits from 1989 to 2019. Moreover, the decline in risk-free rates over this period explains the entirety of the expansion in price-to-earnings (P/E) multiples. These two factors therefore account for the majority of this period’s exceptional stock market performance. From 1989 to 2019, real corporate profits grew at the robust rate of 3.8% per year. This was almost double the pace seen from 1962 to 1989. The difference in profit growth between these two periods is entirely due to the decline in interest and corporate tax rates from 1989 to 2019. One way to see this is to compare the growth of earnings before subtracting interest and tax expenses (EBIT). In fact, real EBIT growth was slightly lower from 1989 to 2019 compared to 1962 to 1989: 2.2% versus 2.4% per year. The outlook for stock price growth is bleak.

Takeaways by Macro Roundup® AI

  1. Declining interest and corporate tax rates accounted for over 40% of the growth in real corporate profits from 1989 to 2019, while falling risk-free rates explain the entirety of the expansion in price-to-earnings multiples.
  2. Real corporate profits grew 3.8% per year from 1989 to 2019, almost double the pace from 1962 to 1989, a difference attributed entirely to the decline in interest and corporate tax rates.
  3. Real EBIT growth was slightly lower from 1989 to 2019 than from 1962 to 1989, at 2.2% versus 2.4% per year, and the outlook for stock price growth is judged bleak.

Related Articles:

  • The Curious Incident of the Elevated Profit Margins — The US fiscal deficit averaged just under 3% of gross national product from 1950 to 2011 but 6.6% from 2012 to 2022, driven mainly by health and social security spending, a pattern that holds excluding pandemic years. Even assuming permanently elevated profit margins, US equity valuations imply low long-run returns.
  • Charlie Munger: US Banks Are ‘Full of’ Bad Commercial Property Loans — Berkshire Hathaway has compounded annual returns of nearly 20% since 1965, about twice the S&P 500's rate, but that period reflected low interest rates, low equity values, and ample opportunities. Investors now face lower returns amid higher interest rates and more competitors chasing bargains, according to the firm's vice-chairman.

AI Summary. The Bank for International Settlements measure of China's inflation-adjusted, trade-weighted exchange rate has fallen roughly 14% from its recent peak, the largest decline among the 64 countries it tracks. The author argues this reflects a policy choice, with China's central bank having outsourced foreign reserve management to state-run banks while lending increasingly large sums to the domestic banking system.

Matt Klein The Overshoot
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.@M_C_Klein argues the Chinese government is managing the Yuan real exchange rate to boost exports and insulate domestic firms from foreign competition.

Is China's currency decline the result of deliberate policy?

Core argument: China's inflation-adjusted trade-weighted exchange rate, as measured by the BIS using consumer price differences, has fallen roughly 14% since its peak in March, the largest decline among the 64 countries the BIS tracks.

The Bank for International Settlements (BIS) measure of China’s inflation-adjusted trade-weighted exchange rate (based on differences in consumer prices) is down by roughly 14% since the recent peak last March, which is the largest decline out of 64 countries tracked by the BIS. This appears to be a policy choice. While China’s official foreign reserves are substantially lower now than at the peak in 2014, the consolidated position of the PBOC and the state-run banks looks a bit different. As I suggested two years ago, there are good reasons to think that the PBOC has deliberately outsourced reserve management to Chinese banks (which among other things helps explain the continued reductions in reserve requirements). After the PBOC mostly stopped buying foreign currency reserves, it switched to lending increasingly large sums to the domestic banking system.

Takeaways by Macro Roundup® AI

  1. China's inflation-adjusted trade-weighted exchange rate, as measured by the BIS using consumer price differences, has fallen roughly 14% since its peak in March, the largest decline among the 64 countries the BIS tracks.
  2. The yuan's depreciation appears to be a policy choice: China's official foreign reserves sit well below their 2014 peak, but the consolidated position of the PBOC and state-run banks looks different.
  3. There are good reasons to think the PBOC has deliberately outsourced reserve management to Chinese banks, which helps explain continued cuts in reserve requirements, and that after mostly ceasing foreign currency purchases it shifted to lending increasingly large sums to domestic banks.

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  • China’s Surplus Again Topped 10% Of GDP — 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.

AI Summary. Banks have reported a squeeze on net interest margins as deposit funding costs came in higher than expected, reversing the margin expansion typical of a rate-hiking cycle. Customers are shifting out of non-interest-bearing deposits and demanding higher rates on interest-bearing ones, a pattern reported by all but the largest banks.

Joseph Wang Fed Guy Blog
Date Posted:

Large banks are seeing a funding advantage as competition for deposits increases. @FedGuy12

Are rising deposit costs squeezing bank net interest margins?

Core argument: A wide range of banks reported a squeeze on net interest margins as deposit funding costs surprised to the upside, reversing the steady margin expansion of past quarters.

A wide range of banks have reported a squeeze on net interest margins as deposit funding costs have surprised to the upside. In a typical rate hiking cycle, interest income on bank assets tend to rise more quickly than interest paid on deposits. This led to a steady expansion of net interest margins over the past quarters that is suddenly reversing. Banks now see customers both shifting out of non interest bearing deposits and demanding higher interest for interest bearing deposits. This was widely reported in recent earnings calls by all but the largest banks.

Takeaways by Macro Roundup® AI

  1. A wide range of banks reported a squeeze on net interest margins as deposit funding costs surprised to the upside, reversing the steady margin expansion of past quarters.
  2. In a typical rate hiking cycle, interest income on bank assets rises faster than interest paid on deposits, but banks now see customers shifting out of non-interest-bearing deposits and demanding higher rates on interest-bearing ones.
  3. The deposit cost squeeze was reported on earnings calls by all but the largest banks.

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  • All Clear — Data and commentary indicate the banking panic has ended and had only a limited effect on credit availability, with overall bank lending little changed and still growing, reflecting problems at a few poorly managed banks rather than a systemic crisis. Recognition that the banking sector is not collapsing has already prompted some repricing of expected interest rate cuts.
  • Bank Funding during the Current Monetary Policy Tightening Cycle — The banking system's deposit funding declined considerably after monetary policy tightening began, with the most acute outflows concentrated among super-regional banks holding $50bn–$250bn in assets, while banks under $50bn were relatively stable and banks above $250bn received inflows. Banks replaced deposit outflows using alternative funding sources.

AI Summary. Default rates on high-yield bonds and leveraged loans are rising as more companies default under a higher cost of capital, with the Federal Reserve signaling interest rates will stay at these levels for a couple of years. Tighter financing conditions are the channel through which monetary policy restrains the economy and capital markets.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk @apolloglobal notes an uptick in bond defaults and argues that we are at the start of a default cycle. He argues market sentiment will change when a “household name” defaults.

Are corporate defaults rising as the cost of capital stays high?

Core argument: Default rates for high-yield bonds and leveraged loans are rising as more companies default under a higher cost of capital, a trend the author argues markets are not taking seriously.

Markets are not taking the ongoing rise in default rates for HY and loans seriously. The reality is that more and more companies are defaulting because the cost of capital is higher, and Fed Chair Powell says that interest rates will stay at these levels “for a couple of years,” so tight monetary policy will continue to have a greater negative effect on the economy and capital markets. In fact, higher costs of capital is precisely how monetary policy works: By making it more difficult to get financing. Once there is a default by some household name in credit, we will likely see an overnight change in market sentiment from bullish to bearish.

Takeaways by Macro Roundup® AI

  1. Default rates for high-yield bonds and leveraged loans are rising as more companies default under a higher cost of capital, a trend the author argues markets are not taking seriously.
  2. Fed Chair Powell says interest rates will stay at these levels "for a couple of years," so tight monetary policy will continue to weigh more heavily on the economy and capital markets.
  3. A default by a household name in credit would likely flip market sentiment from bullish to bearish overnight, in the author's view.

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  • Credit Allocation and Macroeconomic Fluctuations — Credit expansions disproportionately channel credit to non-tradable sector firms and households, and the authors find that the sectoral allocation of credit predicts future GDP paths and the likelihood of systemic banking crises. Credit growth to non-tradable industries predicts boom-bust output patterns and elevated financial fragility, while credit to tradable industries is associated with higher future productivity growth.

AI Summary. Fentanyl causes most of the more than 85,000 annual opioid overdose deaths in the US and Canada, and has become the leading cause of death for young US adults. Researchers at Rand Corporation estimate a full year's US fentanyl supply weighs about 5 tonnes, versus roughly 125 tonnes for heroin.

Christine Murray Financial Times
Date Posted:

Current annual US demand for fentanyl is the equivalent of one truckload, making interdiction very difficult. The equivalent US heroin demand would weigh 25X more.

Has fentanyl's small size made drug smuggling harder to stop?

Core argument: Fentanyl causes most of the more than 85,000 annual opioid overdose deaths in the US and Canada, and over the last decade has become the leading cause of death for young adults in the US.

In the last decade, fentanyl has become the leading cause of death for young adults in the US. Fentanyl now causes most of the more than 85,000 annual opioid overdose deaths in the US and Canada. All the fentanyl needed to supply the US for one year weighs the equivalent of 5 tonnes and would easily fit into one lorry, according to researchers at Rand Corporation. That compares with about 125 tonnes for heroin and even more for cocaine.

Takeaways by Macro Roundup® AI

  1. Fentanyl causes most of the more than 85,000 annual opioid overdose deaths in the US and Canada, and over the last decade has become the leading cause of death for young adults in the US.
  2. Rand Corporation researchers estimate all the fentanyl needed to supply the US for one year weighs the equivalent of 5 tonnes and would fit into one lorry.
  3. Supplying the US for a year takes about 125 tonnes of heroin and even more cocaine, compared with roughly 5 tonnes of fentanyl, according to Rand Corporation researchers.

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AI Summary. The Semiconductor Industry Association projects US chipmakers will add roughly 115,000 jobs by 2030, but estimates about 58% could go unfilled based on current degree completion rates. The group says too few Americans study science, engineering, math and technology, while many foreign-born engineering graduates leave the US.

Ian King Bloomberg
Date Posted:
Is Database:
Database

The American semiconductor industry trade association reports the industry is facing a likely shortfall of 60% of the 115,000 new positions they will need through 2030. @markets

Will worker shortages leave most new US chip jobs unfilled?

Core argument: The Semiconductor Industry Association projects chipmakers will add about 115,000 jobs by 2030, but based on current degree completion rates roughly 58% of those positions could remain unfilled.

Chipmakers are on course to add about 115,000 jobs by 2030 [according to] Semiconductor Industry Association (SIA). Based on a study of current degree completion rates, though, about 58% of those projected positions could remain unfilled. Not enough Americans are studying science, engineering, math and technology-related subjects, according to the SIA. And people from other countries who are acquiring those skills are leaving, the group said. At US colleges and universities, more than 50% of master’s engineering graduates and 60% of those with a Ph.D. in engineering are citizens of other countries. About 80% of those master’s graduates and 25% of those who earn doctorates depart the US — either by choice or because immigration policy doesn’t allow them to stay.

Takeaways by Macro Roundup® AI

  1. The Semiconductor Industry Association projects chipmakers will add about 115,000 jobs by 2030, but based on current degree completion rates roughly 58% of those positions could remain unfilled.
  2. The Semiconductor Industry Association attributes the projected shortfall to too few Americans studying science, engineering, math and technology subjects, and to people from other countries with those skills leaving the US.
  3. Citizens of other countries account for more than 50% of master's engineering graduates and 60% of engineering Ph.D.s at US colleges and universities, with about 80% of those master's graduates and 25% of doctorate earners departing the US by choice or because immigration policy does not allow them to stay.

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  • TSMC To Send Hundreds More Workers To Speed U.S. Plant Construction — Chipmaker TSMC and its suppliers are in talks with the U.S. government on non-immigrant visas to dispatch more than 500 experienced workers to speed construction of its U.S. chip plants, according to chip supply chain executives. Executives said too few U.S. workers have hands-on experience building semiconductor facilities, causing installation delays.

AI Summary. Sea ice around Antarctica has fallen to an all-time low, following earlier record lows, and for the first time in the observational record it has failed to substantially recover during winter, leaving vast stretches of coastline ice free. Scientists describe the decline as a five-sigma event.

Alexandra Alvaro Australian Broadcast Corporation
Date Posted:

According to oceanographer Edward Doddridge the decline in Antarctic ice this winter is “a five-sigma event,” i.e. once every 7.5 million years.

According to oceanographer Edward Doddridge the decline in Antarctic ice this winter is “a five-sigma event,”...

Has Antarctic sea ice fallen to an unprecedented low without winter recovery?

Core argument: Antarctic sea ice extent hit an all-time low, which physical oceanographer Edward Doddridge called a five-sigma event — five standard deviations beyond the mean — expected roughly once every 7.5 million years if nothing had changed.

The sea ice around Antarctica is in sharp decline, scientists observed an all-time low in the amount of sea ice around the icy continent, following all-time lows in 2016, 2017 and 2022. Usually, the ice has been able to recover in winter but this year is different. For the first time, the sea ice extent has been unable to substantially recover this winter, leaving scientists baffled. Physical oceanographer Edward Doddridge said vast regions of the Antarctic coastline were ice free for the first time in the observational record. "To say unprecedented isn't strong enough, for those of you who are interested in statistics, this is a five-sigma event. So it's five standard deviations beyond the mean. Which means that if nothing had changed, we'd expect to see a winter like this about once every 7.5 million years."

Takeaways by Macro Roundup® AI

  1. Antarctic sea ice extent hit an all-time low, which physical oceanographer Edward Doddridge called a five-sigma event — five standard deviations beyond the mean — expected roughly once every 7.5 million years if nothing had changed.
  2. Antarctic sea ice has failed to substantially recover in winter for the first time, following record lows in 2016, 2017 and 2022.
  3. Vast regions of the Antarctic coastline were ice free for the first time in the observational record, according to physical oceanographer Edward Doddridge.

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