Edward Conard

Top Ten New York Times Bestselling Author

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  • “…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 comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, September 5, 2023

AI Summary. The Committee for a Responsible Federal Budget projects the federal deficit will roughly double to about $2tn for the fiscal year, driven by higher interest payments and lower tax receipts despite robust economic growth. After falling from close to $3tn to roughly $1tn in its largest-ever decline, the deficit turned upward rather than returning to pre-pandemic levels.

Jeff Stein Washington Post
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According to a @BudgetHawks analysis the US budget deficit will double in 2023 despite economic growth. @jasonfurman notes such deficits typically are associated with a “major crisis” like World War II or the 2008 financial meltdown.

Is the federal deficit doubling even as the economy grows?

Core argument: The Committee for a Responsible Federal Budget projects the U.S. federal deficit will roughly double to about $2 trillion for the fiscal year ending Sept. 30, as bigger interest payments and lower tax receipts widen the imbalance despite robust economic growth.

According to the Committee for a Responsible Federal Budget the federal deficit is projected to roughly double this year, as bigger interest payments and lower tax receipts widen the nation’s spending imbalance despite robust overall economic growth. After the government’s record spending in 2020 and 2021 to combat the impact of covid-19, the deficit dropped by the greatest amount ever in 2022, falling from close to $3 trillion to roughly $1 trillion. But rather than continue to fall to its pre-pandemic levels, the deficit then shot upward. Budget experts now project that it will probably rise to about $2 trillion for the fiscal year that ends Sept. 30. Jason Furman said the current jump in the deficit is only surpassed by “major crises,” such as World War II, the 2008 financial meltdown or the coronavirus pandemic.

Takeaways by Macro Roundup® AI

  1. The Committee for a Responsible Federal Budget projects the U.S. federal deficit will roughly double to about $2 trillion for the fiscal year ending Sept. 30, as bigger interest payments and lower tax receipts widen the imbalance despite robust economic growth.
  2. After falling from close to $3 trillion to roughly $1 trillion in 2022, the largest deficit drop ever, the U.S. deficit shot upward rather than returning to pre-pandemic levels.
  3. Jason Furman said the current jump in the deficit is surpassed only by major crises such as World War II, the 2008 financial meltdown and the coronavirus pandemic.

Related Articles:

  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.
  • There Is No “Stealth Fiscal Stimulus” — The U.S. federal budget deficit has widened by about 3-4 percentage points of GDP, with lower revenues mostly attributable to a plunge in capital gains tax receipts after an earlier windfall and to the collapse in Federal Reserve payments to the Treasury. Higher outlays are almost entirely attributable to surging interest payments on Treasury debt.
  • US Fiscal Alarm Bells Are Drowning Out a Deeper Problem — The Congressional Budget Office projects US federal debt held by the public at 98% of national income, within 7.6 percentage points of its 1946 wartime peak and on track to exceed it by 2028. International Monetary Fund forecasts show US debt surpassing Italy's by 2028 and Greece's by the end of the decade.

AI Summary. Growth theory holds that long-run growth in living standards is determined by growth in the worldwide number of people searching for ideas, and growth accounting for the US suggests temporary boosts from rising educational attainment and idea investment could fade. Potential offsets include China and India, better talent allocation, and artificial intelligence.

Charles Jones Federal Reserve Bank of Kansas City
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Stanford professor @chadjonesecon argues an improved allocation of talent globally and AI’s emergence as a general purpose technology might help the US maintain the long term 2% GDP/capital growth trend, offsetting stagnating TFP.

Does long-run growth depend on the number of people searching for ideas?

Core argument: Growth theory implies that long-run growth in living standards is determined by growth in the worldwide number of people searching for ideas.

Growth theory reveals that in the long run, growth in living standards is determined by growth in the worldwide number of people searching for ideas. A growth accounting exercise for the US since the 1950s suggests that many other factors have temporarily contributed to growth, including rising educational attainment and a rising investment rate in ideas. But these forces are inherently temporary, implying that growth rates could slow in the future. In contrast, other forces could potentially sustain or even increase growth rates. The emergence of countries such as China and India provides large numbers of people who could search for ideas. Improvements in the allocation of talent — for example, the rise of women inventors — and increased automation through artificial intelligence are other potential tailwinds.

Takeaways by Macro Roundup® AI

  1. Growth theory implies that long-run growth in living standards is determined by growth in the worldwide number of people searching for ideas.
  2. A growth accounting exercise for the US since the 1950s attributes much of measured growth to inherently temporary forces, including rising educational attainment and a rising investment rate in ideas, implying growth rates could slow.
  3. The emergence of countries such as China and India, improvements in the allocation of talent such as the rise of women inventors, and increased automation through artificial intelligence are potential forces sustaining or raising growth rates.

Related Articles:

  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth
  • From Strength To Strength — The US produced $25.5tn in GDP, about 25% of the world total—roughly its 1990 share—while China's share stands at 18%; the US share of the G7's nominal GDP rose from 40% in 1990 to 58%. Income per person is now about 30% above western Europe and 54% above Japan, adjusted for purchasing power.
  • Fully Grown – European Vacation! — Europe's growth slowdown reflects a widespread drop in productivity growth rather than changes in physical capital accumulation, with human capital growth also mattering but varying by country. The productivity decline is larger than in the US: in countries such as the UK and France, productivity growth fell from about 2% to near zero or negative.

AI Summary. Bloomberg Economics projects China's growth slowing to 3.5% by 2030 and near 1% by 2050, below its earlier forecasts of 4.3% and 1.6%. On that path, China's economy would surpass the US only in the mid-2040s, by a small margin, before falling back behind; US potential growth is projected to drift down to 1.5% by 2050.

Jasmine Ng Bloomberg
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Bloomberg Economics now forecasts China’s GDP won’t surpass the US until the mid 2040s, and then by “a small margin” before “falling back behind.” Prior to the pandemic Bloomberg forecasted China would permanently overtake the US by the early 2030’s.

Will China's slowing growth keep it from overtaking the US economy?

Core argument: Bloomberg Economics projects China's growth slowing to 3.5% in 2030 and near 1% by 2050, down from prior projections of 4.3% and 1.6% respectively.

Bloomberg Economics now sees growth in China’s economy — the world’s second largest — slowing to 3.5% in 2030 and to near 1% by 2050. That’s lower than prior projections of 4.3% and 1.6%, respectively. It will take until the mid-2040s for China’s GDP to exceed that of the US — and even then, it will happen by “only a small margin” before “falling back behind.” Before the pandemic, Bloomberg expected China to take and hold pole position as early as the start of next decade. Bloomberg estimates potential US growth at 1.7% in 2022-2023, with long-term forecasts showing a gradual drifting down to 1.5% by 2050.

Takeaways by Macro Roundup® AI

  1. Bloomberg Economics projects China's growth slowing to 3.5% in 2030 and near 1% by 2050, down from prior projections of 4.3% and 1.6% respectively.
  2. Bloomberg Economics expects China's GDP to exceed that of the US only by the mid-2040s, and then by "only a small margin" before "falling back behind," versus a pre-pandemic expectation that China would take and hold the lead as early as the start of the next decade.
  3. Bloomberg estimates US potential growth at 1.7% in 2022–2023, drifting down gradually to 1.5% by 2050.

Related Articles:

  • When Will China’s GDP Overtake America’s? — China's productivity growth has slowed and its working-age population is shrinking, with the UN projecting a decline of more than 100m people aged 15-64 in the 2030s. Several forecasters project China's GDP will overtake America's sometime in the 2030s, while Capital Economics argues that if it does not, it may never happen.
  • How Soon and At What Height Will China’s Economy Peak? — Goldman Sachs now projects China's economy will not overtake America's until 2035 and will peak at only 14% larger, down from an earlier projection of surpassing the US in 2026 and being over 50% larger by mid-century. Capital Economics argues China will reach 90% of America's size in 2035 and then lose ground.
  • The Neoclassical Growth of China — China's per capita GDP growth path closely tracks those of Japan, South Korea, and Taiwan from similar starting income levels, indicating nothing unusual about its growth rate. The authors' model projects China's per capita GDP will level off at about 41% of the US level, reflecting a slowdown in productivity catch-up.

AI Summary. Real disposable income is forecast to grow 3% over the year, with labor income accounting for over half the increase, interest income adding over 1 percentage point, and a pullback in Medicaid coverage subtracting almost half a point. That pace is below the prior year's 4% but above the roughly 2.5% average in the two decades before the pandemic.

Joseph Briggs Goldman Sachs
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Despite the labor market cooling Goldman Sachs forecasts real income growth of 3% in 2024, “comfortably above the roughly 2½% real growth pace observed in the 20 years prior to the pandemic.”

Is real disposable income growth still outpacing its pre-pandemic average?

Core argument: US real income is forecast to grow 3% in 2024 on a Q4/Q4 basis, below the 4% pace in 2023 but above the roughly 2.5% real growth pace of the 20 years before the pandemic.

We expect real income will grow by 3% in 2024 on a Q4/Q4 basis. In terms of components, expected labor income gains account for over half this increase, we expect interest income increases will raise real income growth by over 1pp, and the pullback in Medicaid coverage [Sunset of pandemic era continuous enrollment provision] is set to subtract almost ½pp. This pace of real income growth is below the 4% pace in 2023, but comfortably above the roughly 2½% real growth pace observed in the 20 years prior to the pandemic. In terms of the timing of these real income gains, we forecast a flatter profile than in 2023, as start-of-year adjustments from COLAs and changes in the effective tax rate will likely be less of a driver of income growth in 2024.

Takeaways by Macro Roundup® AI

  1. US real income is forecast to grow 3% in 2024 on a Q4/Q4 basis, below the 4% pace in 2023 but above the roughly 2.5% real growth pace of the 20 years before the pandemic.
  2. Labor income gains account for over half of the expected 2024 real income increase, interest income is expected to add over 1pp, and the pullback in Medicaid coverage from the sunset of pandemic-era continuous enrollment is set to subtract almost 0.5pp.
  3. The profile of real income gains in 2024 is forecast to be flatter than in 2023, as start-of-year cost-of-living adjustments and changes in the effective tax rate are likely to be less of a driver of income growth.

Related Articles:

  • Soft Landing Optimism Is Everywhere. That’s Happened Before — Analysts argue the historical record offers limited guidance because this has not been a typical business cycle: pandemic shutdowns abruptly halted growth and widespread government stimulus fueled a rapid rebound, producing shortages, bottlenecks and unusually strong demand in unexpected parts of the economy. That disruption contributed to inflation, and the slow return to normal is helping it fade.
  • Has the Fed Tightened Enough? Guideposts to Consider — Wage growth of about 2.5% would be consistent with 2% inflation given low recent-trend productivity growth, but wage growth is running near 4.5%. On this view inflation is more likely to level out at its current rate than keep falling, pushing the Federal Reserve toward further tightening through rate rises or holding rates high.
  • The Unresolved Tension Between Prices and Incomes — Persistent per-worker income growth of about 5% a year is difficult to reconcile with forecasts of 2% inflation, since inflation reflects the gap between nominal spending growth and real production, and wages are the largest source of financing for consumer spending. Interest rates may therefore fall more slowly than market prices imply.

AI Summary. Among firms trading at a discount to book value, European companies show a gross profit-to-assets ratio of 18.5%, 1.5x that of North American value firms, and earnings-to-assets of 6.4%, nearly 3x North America's. The authors argue wide valuation spreads plus higher profitability strengthen the case for European and Japanese value stocks.

Brian Chingono Verdad
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Capital inflows into North American markets have contributed to a 3.9x Price/Book value relative to market averages of 1.9x in Europe and 1.4x in Japan according to @verdadcap_quant. He believes this offers opportunities in both Europe and Japan.

Are European value stocks more profitable than North American ones?

Core argument: Among firms trading at a discount to book value, Europe posts a Gross Profit/Assets ratio of 18.5%, 1.5x the profitability of North American value firms.

We’ve found reasons to think more highly of Europe and Japan. Notably, we find that value stocks in Europe and Japan are more profitable, with Europe being particularly impressive. Among firms that trade at a discount to book value, Europe has a Gross Profit/Assets ratio of 18.5%, which is 1.5x the profitability of North American value firms. The differences are even more stark in terms of EBITDA/Assets, with Europe’s value firms delivering a 6.4% return on assets, almost 3x higher than North America’s profitability among value firms. We believe that the combination of historically wide valuation spreads in Europe and higher levels of profitability among Europe’s value stocks bolster the case for upward mean reversion going forward. Historically, mean reversion in multiples has supported significant outperformance of value relative to growth.

Takeaways by Macro Roundup® AI

  1. Among firms trading at a discount to book value, Europe posts a Gross Profit/Assets ratio of 18.5%, 1.5x the profitability of North American value firms.
  2. Europe's value firms deliver EBITDA/Assets of 6.4%, almost 3x the level of North American value firms, with value stocks in both Europe and Japan more profitable than North American ones.
  3. Historically wide valuation spreads in Europe combined with higher profitability among European value stocks strengthen the case for upward mean reversion, which historically has supported value outperforming growth.

Related Articles:

  • Europeans Are Becoming Poorer. ‘Yes, We’re All Worse Off.’ — Measured in dollars, the eurozone economy grew about 6% over 15 years versus 82% for the U.S., leaving the average European Union country poorer per person than every U.S. state except Idaho and Mississippi. Inflation-adjusted private consumption fell about 1% in the eurozone since late 2019 while rising nearly 9% in the U.S.
  • From Strength To Strength — The US produced $25.5tn in GDP, about 25% of the world total—roughly its 1990 share—while China's share stands at 18%; the US share of the G7's nominal GDP rose from 40% in 1990 to 58%. Income per person is now about 30% above western Europe and 54% above Japan, adjusted for purchasing power.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

AI Summary. Offshore dollar bank lending has contracted outright, with a year-over-year decline of $325bn concentrated in loans to emerging markets, while lending inside the US has plateaued. The pullback is attributed to borrowers facing higher rates and banks facing lower profitability, and is described as a headwind to global growth.

Joseph Wang Fed Guy Blog
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Off-shore non-bank dollar credit is contracting at a rate not seen since the financial crisis as higher US interest rates increase funding costs for foreign borrowers. This may slow global growth. @FedGuy12

Is shrinking offshore dollar lending a headwind to global growth?

Core argument: Off-shore dollar bank lending declined $325 billion year over year as of 2023Q1, a rate of outright contraction not seen since the 2008 financial crisis, with the bulk concentrated in lending to emerging markets.

While bank lending plateaued in the U.S., off-shore dollar bank lending has actually contracted outright at a rate not seen since the 2008 financial crisis. Data as of 2023Q1 indicates a year over year decline of $325b in loans with the bulk of the decline concentrated in lending to emerging markets. This is likely due to both supply and demand factors, where borrowers pull back due to higher rates and banks reduce lending due to lower profitability. A similar trend is observed on-shore, where bank lending has been growing at a very sluggish rate. Note that foreign banks may not have access to dollar liquidity backstops like FHLB lending and the discount window, so they may be more cautious than U.S. banks. The reduction in dollar credit is likely contributing to the global manufacturing slump and will remain a significant headwind to global growth.

Takeaways by Macro Roundup® AI

  1. Off-shore dollar bank lending declined $325 billion year over year as of 2023Q1, a rate of outright contraction not seen since the 2008 financial crisis, with the bulk concentrated in lending to emerging markets.
  2. The off-shore dollar lending contraction likely reflects both supply and demand factors, with borrowers pulling back on higher rates and banks reducing lending because of lower profitability.
  3. Foreign banks may lack access to dollar liquidity backstops such as FHLB lending and the discount window, leaving them potentially more cautious than U.S. banks, while the reduction in dollar credit is likely contributing to the global manufacturing slump.

Related Articles:

AI Summary. A Chinese push to export its way out of its economic slump, allowing a further large depreciation of the yuan, could pressure parts of the U.S. economy that compete with Chinese manufacturing, absent a major increase in trade restrictions. The U.S. remains the largest market globally for consumer and imported goods.

Benjamin Hart and Brad Setser New York Magazine
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.@Brad_Setser notes the Yuan is at an ~ 15-year low relative to the $ and worries that China may pursue a global beggar-thy-neighbour policy by devaluing the Yuan.

.@Brad_Setser notes the Yuan is at an ~ 15-year low relative to the $ and worries that China may pursue a global...

Does a weaker yuan and export push threaten U.S. manufacturing?

Core argument: The Yuan sits at roughly a 15-year low, and a return to its level when China joined the World Trade Organization would, absent a large increase in trade restrictions, put meaningful pressure on parts of the U.S. economy.

The big way I think China could negatively impact the U.S. economy is that if China decides to export its way out, the U.S. is still the biggest market for consumer goods and the biggest market for imported goods globally. If China really wanted to export its way out, let its currency go, there would be a big further depreciation in the Yuan. And the Yuan’s already a 15-year low, more or less. If the Yuan goes back to the levels where it was when China joined the WTO, without an enormous ratcheting up of trade restrictions, there would be pressure on certain parts of the U.S. economy that I think would be meaningful. There’s no doubt that China has the biggest manufacturing base in the world. And those parts of the U.S. economy that compete with it may face difficulty if China can’t find a way to recover other than exports.

Takeaways by Macro Roundup® AI

  1. The Yuan sits at roughly a 15-year low, and a return to its level when China joined the World Trade Organization would, absent a large increase in trade restrictions, put meaningful pressure on parts of the U.S. economy.
  2. China's main channel for harming the U.S. economy runs through exports, since the U.S. remains the largest market for consumer goods and the largest market for imported goods globally.
  3. China has the world's biggest manufacturing base, and U.S. sectors that compete with it may face difficulty if China cannot recover by means other than exports.

Related Articles:

  • Setser On China’s Trade Surplus — China's trade data show manufacturing exports sharply higher, pushing its trade surplus up even as its commodity import bill hit record levels. The author argues China's currency remains managed, so a weaker yuan alongside a large surplus reflects policymakers' judgment that they must sustain export growth relative to GDP to offset domestic weakness.
  • Brad Setser On Deglobalization — Talk of "reglobalization" is premature because no real deglobalization has occurred: Chinese exports of manufactures remain at a record level relative to global output, and China continues to draw a record amount of net demand from the rest of the world to sustain its unbalanced economy.
  • Is the Chinese Government Pushing Down the Yuan? — 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.

AI Summary. Tokyo's minimum wage is equivalent to about $7.65 an hour, compared with $15 in New York City, and Japan's median household income of roughly $29,000 compares with $70,784 in the US, according to government statistics in both countries. The typical Asian-American household earned just over $100,000, more than 3x the typical Japanese family.

Megumi Fujikawa Wall Street Journal
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The typical Asian-American household in the US earns just over $100,000, 3x a typical Japanese family’s earnings.

Do Japanese workers earn far less than their American counterparts?

Core argument: Median household income in Japan was about $29,000 at the current exchange rate in 2021, compared with $70,784 in the U.S. that year, according to government statistics in the two countries.

Even after a planned rise in October, the minimum wage in Tokyo will be the equivalent of just $7.65, compared with $15 in New York City. Median household income in Japan in 2021, the most recent year for which data are available, was equivalent to about $29,000 at the current exchange rate, compared with $70,784 in the U.S. that year, according to government statistics in the two countries. The typical Asian-American household brought in just over $100,000—more than triple what the typical Japanese family made.

Takeaways by Macro Roundup® AI

  1. Median household income in Japan was about $29,000 at the current exchange rate in 2021, compared with $70,784 in the U.S. that year, according to government statistics in the two countries.
  2. Tokyo's minimum wage will equal just $7.65 even after a planned October increase, compared with $15 in New York City.
  3. The typical Asian-American household brought in just over $100,000, more than triple what the typical Japanese family made.

Related Articles:

  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth
  • Japan Demographic Woes Deepen as Birthrate Hits Record Low — Japan's fertility rate fell for a seventh consecutive year to a record low of about 1.26 children per woman, far below the 2.07 rate considered necessary to maintain a stable population. Births fell 5% to 770,747, a record low, while deaths rose 9% to a record 1.57m.
  • From Strength To Strength — The US produced $25.5tn in GDP, about 25% of the world total—roughly its 1990 share—while China's share stands at 18%; the US share of the G7's nominal GDP rose from 40% in 1990 to 58%. Income per person is now about 30% above western Europe and 54% above Japan, adjusted for purchasing power.

AI Summary. Japan's defense budget rises 13% over the prior fiscal year's planned spending, part of a five-year, ¥43tn plan to lift military spending to roughly 2% of gross domestic product, versus the roughly 1% cap maintained since the 1960s. Purchases include Aegis-equipped destroyers and Tomahawk cruise missiles, with the largest share directed at the Self-Defense Forces' sustainability and resilience.

Kana Inagaki Financial Times
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Japan is increasing it’s defense spending 13% y/y as part of a military buildup that will double defense spending to 2% of GDP up from a self-imposed postwar cap of 1%.

Japan is increasing it’s defense spending 13% y/y as part of a military buildup that will double defense spending to...

How much is Japan raising military spending to counter China?

Core argument: Japan's 2024–25 defence budget is 13% above this fiscal year's intended spending, part of a five-year, ¥43tn plan to raise military spending to roughly 2% of current GDP from the self-imposed cap of about 1% maintained since the 1960s.

The 2024-25 budget represents a 13% rise compared with this fiscal year’s intended spending. It is part of a five-year, ¥43tn plan by Tokyo to strengthen its defence capabilities and bring military spending to roughly 2% of current gross domestic product, compared with the self-imposed cap of about 1% of GDP that Japan has maintained since the 1960s. Japan intends to build destroyers equipped with a US-built Aegis missile defence. The planned shopping list also includes the acquisition of counterstrike weapons, including Tomahawk cruise missiles. The largest portion of the requested spending will be designated to strengthening the “sustainability and resilience” of the Self-Defense Forces. The aim is to address shortages of basic items that officials fear will hamper the SDF’s ability to cope with a prolonged conflict.

Takeaways by Macro Roundup® AI

  1. Japan's 2024–25 defence budget is 13% above this fiscal year's intended spending, part of a five-year, ¥43tn plan to raise military spending to roughly 2% of current GDP from the self-imposed cap of about 1% maintained since the 1960s.
  2. Japan plans to build destroyers equipped with the US-built Aegis missile defence system and to acquire counterstrike weapons including Tomahawk cruise missiles.
  3. The largest portion of Japan's requested spending is designated for the "sustainability and resilience" of the Self-Defense Forces, addressing shortages of basic items that officials fear would hamper the SDF in a prolonged conflict.

Related Articles:

  • The Age-Old Question: How Do Governments Pay For Wars? — Denmark abolished a centuries-old religious holiday, requiring people to work that day, partly to help pay for extra defence spending, a move 70% of Danes opposed in one poll. The Stockholm International Peace Research Institute calculates global defence spending rose 4% to a record $2.24tn and is set to keep rising even as higher interest rates raise governments' borrowing costs.
  • The Cost of the Global Arms Race — Global defence spending rose nearly 4% in real terms to over $2tn, and new commitments and forecast increases, if implemented, are estimated to add more than $200bn a year worldwide. If countries below 2% of GDP reached that level and others added half a percentage point, outlays would rise by close to $700bn annually.
  • US To Link Up With Taiwan and Japan Drone Fleets To Share Real-Time Data — The US, Taiwan and Japan plan to share real-time data from naval reconnaissance drones, with Taiwan's four MQ-9B Sea Guardian drones integrated into the same system used by US forces in the region and Japan's Self-Defense Force. The arrangement would let the US and its allies view the same drone-gathered information simultaneously.

Wednesday, September 6, 2023

AI Summary. The authors estimate that unexpected monetary tightening has persistent effects: a 1% rise in interest rates leaves output about 5% lower after 12 years, with total factor productivity about 3% lower and capital about 4% lower. They find the effects are asymmetric, as interest rate cuts have mostly temporary effects that fade after a few years.

Òscar Jordà, Sanjay Singh and Alan Taylor Federal Reserve Bank of San Francisco
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Researchers at @sffed find that an unexpected 1% rise in short-term interest rates reduces real GDP by 5% after 12 years, but no evidence that loose monetary policy increases potential output. @sanjayrajsingh

Does monetary tightening lower output and productivity for over a decade?

Core argument: A 1% unexpected increase in interest rates leaves output about 5% lower after 12 years than it would otherwise be, a more persistent slowdown in economic activity than commonly believed.

Unexpected changes in monetary policy can slow the pace of economic activity much more persistently than is commonly believed. In response to a 1% increase in interest rates, output would be about 5% lower after 12 years than it would otherwise be. To provide some context for these numbers, consider some data for the United States. In response to a similar 1% increase in interest rates, after 12 years TFP would be about 3% lower and capital would be about 4% lower. When we separate our interest rate experiments into those that resulted in rate hikes versus those that resulted in lower interest rates, we see that there is no free lunch. The blue line shows that lower interest rates have mostly temporary effects that vanish after a few years, as traditional theories predict.

Takeaways by Macro Roundup® AI

  1. A 1% unexpected increase in interest rates leaves output about 5% lower after 12 years than it would otherwise be, a more persistent slowdown in economic activity than commonly believed.
  2. In U.S. data, a comparable 1% interest rate increase is followed after 12 years by total factor productivity about 3% lower and capital about 4% lower.
  3. Separating the interest rate experiments into hikes versus cuts shows no free lunch, as lower interest rates have mostly temporary effects that vanish after a few years, consistent with traditional theories.

Related Articles:

  • Loose Monetary Policy and Financial Instability — Using data on 18 advanced economies since 1870, the authors estimate that a loose monetary policy stance causally raises the risk of financial crises over the medium term, against an unconditional 10.5% probability of a crisis in a 3-year window. Lower rates raise asset valuations, opening the door to collateral-driven credit booms.
  • Monetary Policy and Innovation — The authors estimate that a 100bps monetary tightening reduces investment in intellectual property by about 1%, research and development spending at public firms by about 3%, venture capital investment by up to 25%, and patenting in important technologies by up to 9%.

AI Summary. Spending per Medicare beneficiary in the US has nearly leveled off over more than a decade, though total enrollment has grown as baby boomers age. Policy changes including cuts to hospital and private plan payments explain some savings, but the Congressional Budget Office attributes most of its lowered forecasts to "technical adjustments" in public health and medical practice.

Margot Sanger-Katz, Alicia Parlapiano and Josh Katz New York Times
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The growth in Medicare spending per beneficiary leveled off nearly a decade ago. If spending had grown at the prior rate, spending since 2011 would have been at least $3.9 trillion higher.

Why has Medicare spending per beneficiary stopped growing?

Core argument: Medicare spending per beneficiary has nearly leveled off over more than a decade, a slowdown obscured by the growing number of enrollees as baby boomers age.

Spending per Medicare beneficiary has nearly leveled off over more than a decade. The trend can be a little hard to see because, as baby boomers have aged, the number of people using Medicare has grown. The reason for the per-person slowdown is a bit of a mystery. Some of the reductions are easy to explain. The Affordable Care Act in 2010 reduced Medicare’s payments to hospitals and to health insurers that offered private Medicare Advantage plans. Congress also cut Medicare payments as part of a budget deal in 2011. But most of the savings can’t be attributed to any obvious policy shift. Economists at the Congressional Budget Office described the huge reductions in its Medicare forecasts between 2010 and 2020. Most of those reductions came from a category the budget office calls “technical adjustments,” which it uses to describe changes to public health and the practice of medicine itself.

Takeaways by Macro Roundup® AI

  1. Medicare spending per beneficiary has nearly leveled off over more than a decade, a slowdown obscured by the growing number of enrollees as baby boomers age.
  2. The Affordable Care Act's 2010 cuts to Medicare payments to hospitals and Medicare Advantage insurers, plus payment cuts in a 2011 budget deal, explain only part of the per-person slowdown.
  3. Congressional Budget Office economists attributed most of the large reductions in its Medicare forecasts between 2010 and 2020 to "technical adjustments," the category it uses for changes in public health and the practice of medicine.

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  • America’s Entitlement Programmes Are Rapidly Approaching Insolvency — The trust fund for Medicare hospital insurance for the elderly is projected to be exhausted by 2031 and the Social Security old-age benefits fund by 2033. These mandatory programs cost $2.2tn, or 8.6% of GDP, exceeding total discretionary federal spending including housing, education, and defense.
  • Why Medicare and Social Security Are Sustainable — Growth in U.S. health spending above GDP growth has slowed considerably, and the Congressional Budget Office projects social insurance spending will eventually rise by about 5 percentage points of GDP, half of that from assumed health cost increases. The author argues better incentives for medically effective care could hold cost growth well below those projections.
  • Interest Costs Will Grow the Fastest Over the Next 30 Years — The Congressional Budget Office projects federal spending will reach 29.1% of GDP over three decades, with net interest on the national debt rising from 1.9% of GDP to 6.7%, or $5.4tn. Under that projection, interest becomes the largest single federal budget line item, surpassing Social Security, Medicare, and Medicaid.

AI Summary. The estimated 12-month US recession probability has been cut to 15%, matching the postwar unconditional average implied by a recession occurring roughly once every seven years, and far below the 60% Bloomberg consensus. The authors expect interest rates to fluctuate in a higher range than in the post-2008 period.

Jan Hatzius Goldman Sachs
Date Posted:

Jan Hatzius @GoldmanSachs lowered his 12-month recession probability to 15% which is equal to the postwar mean. He also expects the Federal funds rate to be closer to 1991-2007 level of just over 4% relative to the post-crisis level of just under 1%.

Is the US recession risk now no higher than average?

Core argument: Continued positive inflation and labor market news prompted a cut in the estimated 12-month US recession probability to 15%, down 5 percentage points from the prior estimate.

The continued positive inflation and labor market news has led us to cut our estimated 12-month US recession probability further to 15%, down 5pp from our prior estimate and equal to the unconditional average recession probability of 15% calculated from the fact that a recession has occurred roughly once every seven years since WW2. Our estimate is far below the Bloomberg consensus, which remains stuck at 60%. Our expectation is that the 1991-2007 period, when the nominal funds rate fluctuated between 1% and 6½%, will prove to be a better template than the post-2008 period when the Fed found it difficult to get much above 2%.

Takeaways by Macro Roundup® AI

  1. Continued positive inflation and labor market news prompted a cut in the estimated 12-month US recession probability to 15%, down 5 percentage points from the prior estimate.
  2. The 15% estimate equals the unconditional average recession probability implied by a recession occurring roughly once every seven years since World War II, and sits far below the Bloomberg consensus of 60%.
  3. The 1991–2007 period, when the nominal federal funds rate fluctuated between 1% and 6.5%, is expected to prove a better template than the post-2008 period, when the Fed found it difficult to get much above 2%.

Related Articles:

  • What Have We Learned About the Neutral Rate? — Analysts estimate that if inflation is brought down without a recession, the Federal Reserve's policy rate will stabilize nearer 3–3.25% than the 2.5% longer-run median projection of Federal Reserve officials. Projected shifts in government debt and demographics imply a roughly 0.5 percentage point net increase in the neutral rate over the next decade.
  • Has the Fed Tightened Enough? Guideposts to Consider — Wage growth of about 2.5% would be consistent with 2% inflation given low recent-trend productivity growth, but wage growth is running near 4.5%. On this view inflation is more likely to level out at its current rate than keep falling, pushing the Federal Reserve toward further tightening through rate rises or holding rates high.

AI Summary. 31% of outstanding US government debt, roughly $7.6tn in bonds, matures within the next 12 months, which the author identifies as a source of upward pressure on US interest rates.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk @apolloglobal notes that 31% of US government debt outstanding will mature over the next 12 months, putting upward pressure on US rates.

Does near-term government debt maturing push up US interest rates?

Core argument: Torsten Sløk of Apollo Global notes that 31% of US government debt outstanding, some $7.6 trillion in Treasury bonds, matures over the next 12 months.

One source of upward pressure on US rates is the $7.6 trillion in US government bonds that will mature over the coming 12 months.

Takeaways by Macro Roundup® AI

  1. Torsten Sløk of Apollo Global notes that 31% of US government debt outstanding, some $7.6 trillion in Treasury bonds, matures over the next 12 months.
  2. Torsten Sløk identifies the $7.6 trillion of US government bonds maturing over the coming 12 months as one source of upward pressure on US rates.

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  • Is a U.S. Debt Crisis Looming? Is it Even Possible? — A debt spiral requires the interest rate on government debt to exceed the economy's growth rate; with inflation-protected 10-year U.S. bond yields near 1.83%, close to most estimates of sustainable growth, any spiral would be slow-moving. Stabilizing debt at 100% of GDP would require a 2% primary surplus.
  • Rising Rates Slowing Growth Through Higher Debt Servicing Costs — US government annual debt servicing costs are close to $1tn, with net interest expense as a share of total government revenues near all-time highs. Higher interest rates act as a drag on growth through debt servicing costs for the government as well as for consumers and corporations, making it harder for elevated rates to persist when government debt is high.
  • US Fiscal Alarm Bells Are Drowning Out a Deeper Problem — The Congressional Budget Office projects US federal debt held by the public at 98% of national income, within 7.6 percentage points of its 1946 wartime peak and on track to exceed it by 2028. International Monetary Fund forecasts show US debt surpassing Italy's by 2028 and Greece's by the end of the decade.

AI Summary. A Wall Street Journal analysis estimates banks' total commercial real-estate exposure at $3.6tn—about 20% of their deposits—including indirect lending, foreclosed properties, commercial mortgage-backed securities, and loans to nonbank mortgage lenders. Losses on these loans risk triggering a doom loop in which banks cut lending, pushing property prices down further and generating additional losses.

Shane Shifflett and Konrad Putzier Wall Street Journal
Date Posted:

US banks have total exposure to commercial real estate of $3.6T or 20% of deposits. They are facing the risk of a “doom loop” where loan losses trigger lending reductions and further price declines, this creates particular risk for regional banks.

How large is banks' commercial real-estate exposure relative to deposits?

Core argument: U.S. banks' total exposure to commercial real estate reaches $3.6 trillion once indirect lending, foreclosed properties and trading portfolios are included, equivalent to about 20% of their deposits, according to a Wall Street Journal analysis.

Indirect lending—along with foreclosed properties, trading portfolios and other assets linked to commercial properties—brings banks’ total exposure to commercial real estate to $3.6 trillion, according to a Wall Street Journal analysis. That’s equivalent to about 20% of their deposits. Holdings of CMBS and loans to mortgage REITs and other nonbank lenders accounted for about 18% of the nearly $3.6 trillion in commercial real-estate exposure in 2022, or nearly $623 billion. The first quarter of 2023 marked the first decline in banks’ commercial real-estate holdings since 2013. At that point, banks’ overall securities holdings had lost nearly $400 billion in value, largely due to higher interest rates. Banks don’t have to mark down the value of loans in most cases, so the real losses are likely greater. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses.

Takeaways by Macro Roundup® AI

  1. U.S. banks' total exposure to commercial real estate reaches $3.6 trillion once indirect lending, foreclosed properties and trading portfolios are included, equivalent to about 20% of their deposits, according to a Wall Street Journal analysis.
  2. Holdings of commercial mortgage-backed securities and loans to mortgage REITs and other nonbank lenders made up about 18% of the nearly $3.6 trillion in commercial real-estate exposure in 2022, or nearly $623 billion.
  3. Banks' commercial real-estate holdings fell in the first quarter of 2023 for the first time since 2013, with overall securities holdings down nearly $400 billion in value largely due to higher interest rates, and real losses likely greater because most loans need not be marked down.

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  • Work From Home and the Office Real Estate Apocalypse — The authors estimate New York City office values fell 45% in 2020 and 39% in the longer run, a $453bn value destruction, with lower-quality buildings hit hardest as tenants shifted to higher-quality space. They argue this has implications for local public finances and financial sector stability.
  • Who’s Afraid of Commercial Real Estate? — Commercial real estate valuations look stretched, but distress remains rare: regional banks' commercial real estate loans carry an average loan-to-value ratio near 66%, far below the dangerously high levels of the early-1990s bust. Outside offices, where vacancy rates are soaring, net operating income growth appears healthy.
  • Rates Are Up. We’re Just Starting to Feel the Heat — U.S. companies have $600bn in corporate debt maturing this year, a total Goldman Sachs data show rising to more than $1tn a year from 2025 through 2028. Those debt loads, combined with higher financing costs, may cut into corporate profits, investor returns, innovation spending, and hiring, with some analysts expecting credit-rating downgrades.

AI Summary. Consumer spending in central business districts remains below pre-pandemic levels in northern and western US cities while southern city centers show strong growth, a gap attributed largely to migration patterns rather than differences in working from home. Cities with population gains show spending roughly 20% above pre-pandemic levels, while those with population losses are down about 20%.

Taylor Bowley and David Michael Tinsley Bank of America
Date Posted:

Changes in spending in cities’ central business districts are now largely being driven by changes in population, not differences in work from home according to a @BankofAmerica analysis.

Does migration explain the gap in downtown spending recovery?

Core argument: Cities with net population losses — New York, Boston, San Francisco and Atlanta — show central business district spending down roughly 20% from pre-pandemic levels, while Tampa, Phoenix, Orlando, Nashville, Jacksonville, Columbus, Charlotte and Austin are up around 20%.

Central business districts (CBDs) in the northern and western US continue to see consumer spending below pre-pandemic levels. However, there is a glimmer in New York City and Seattle that the situation is not continuing to deteriorate. Cities in the south are seeing strong growth in their city centers. The difference in performance is largely driven by migration patterns as working from home doesn't necessarily vary across cities. For example, southern cities with increased population growth also seem to be capturing more of the increasing spend in their city centers. Cities with population gains %YoY as of 2Q 2023 (Tampa, Phoenix, Orlando, Nashville, Jacksonville, Columbus, Charlotte and Austin) are seeing spending relative to pre-pandemic up around 20%. On the other hand, cities with net population losses over this period (New York, Boston, San Francisco and Atlanta) have spending down around 20%.

Takeaways by Macro Roundup® AI

  1. Cities with net population losses — New York, Boston, San Francisco and Atlanta — show central business district spending down roughly 20% from pre-pandemic levels, while Tampa, Phoenix, Orlando, Nashville, Jacksonville, Columbus, Charlotte and Austin are up around 20%.
  2. The divergence in central business district spending is largely driven by migration patterns rather than working from home, which does not necessarily vary across cities, with New York City and Seattle showing signs that conditions are no longer deteriorating.

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  • Remote Work, Three Years Later — Remote work has reduced office utilization but not yet office occupancy, because most firms are locked into long-duration leases. Baseline estimates suggest remote work will exert 0.8 percentage points of upward pressure on the office vacancy rate near-term, 2.3 more over the following five years, and 1.8 thereafter.
  • A $100 Billion Wealth Migration Tilts US Economy’s Center of Gravity South — Six fast-growing Southern states — Florida, Texas, Georgia, North and South Carolina, and Tennessee — now contribute more to US GDP than the Northeast, including the Washington-New York-Boston corridor. The Southeast accounted for more than two-thirds of US job growth since the pandemic began, nearly double its pre-pandemic share, and housed 10 of the 15 fastest-growing large American cities.