Edward Conard

Top Ten New York Times Bestselling Author

  • “…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 fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Wednesday, November 1, 2023

AI Summary. The World Bank estimates that conflict-driven disruptions to Middle East oil supply of 2mn barrels a day would push oil to $93-$102, 3-5mn barrels a day to $109-$121, and 6-8mn barrels a day to $141-$157, with the largest scenario approaching historic real price peaks. Closure of the Strait of Hormuz would be far worse.

Martin Wolf Financial Times
Date Posted:

Even though the oil intensity of the global economy has declined by 60% since the 1970s, Martin Wolf writes that the world remains extremely vulnerable to an oil shock.

How much would Middle East supply disruptions raise oil prices?

Core argument: The World Bank's big-disruption scenario assumes oil supply falls 6–8mn barrels a day and prices reach $141–157, which would bring real oil prices toward their historic peaks.

The World Bank envisages scenarios with small, medium, and big disruptions to supplies: the first would, it assumes, reduce supply by up to 2mn barrels a day (about 2% of world supply), the second would reduce it by 3-5mn barrels a day and the last would reduce it by 6-8mn barrels a day. Corresponding oil prices are estimated at $93-$102, $109-$121 and $141-157, respectively. The last would bring real prices towards their historic peaks. If the Strait were to be closed, the outcomes would be far worse. We are still in the fossil fuel era. A conflict in the world’s biggest oil-supplying region could be very damaging.

Takeaways by Macro Roundup® AI

  1. The World Bank's big-disruption scenario assumes oil supply falls 6–8mn barrels a day and prices reach $141–157, which would bring real oil prices toward their historic peaks.
  2. The World Bank's small-disruption scenario assumes a supply loss of up to 2mn barrels a day, about 2% of world supply, with oil at $93–102, while a medium disruption of 3–5mn barrels a day implies $109–121.
  3. Closure of the Strait would produce outcomes far worse than the World Bank's disruption scenarios, and with the world still in the fossil fuel era, conflict in the biggest oil-supplying region could be very damaging.

Related Articles:

  • The Changing Nexus Between Commodity Prices and the Dollar: Causes and Implications — The shale boom turned the United States into a net exporter of natural gas and of oil, altering how commodity prices relate to US trade. Where higher oil prices were historically associated with a deterioration in US terms of trade, they now correspond to an improvement.
  • US Shale: The Marginal Supplier Matures — The responsiveness of US oil supply to prices has declined and is estimated to be much smaller for publicly traded producers than private ones, with a 10% price increase raising US liquids output by roughly 1%, or 200,000 barrels a day. That implies US supply would offset only about 20-25% of a geopolitical supply shock.
  • U.S. Oil Boom Blunts OPEC’s Pricing Power — U.S. shale drilling and fracking costs have fallen 36% since 2014 even as recovered oil volumes have risen, according to J.P. Morgan. One major producer can now earn as much from $42-a-barrel oil as it once did at $86, while Saudi Arabia's budget is estimated to require $81 a barrel.

AI Summary. Consumer sentiment has been more depressed than historic correlations with the "misery index"—the sum of inflation and unemployment—would predict, even as consumer-price inflation fell from a 9.1% peak to 3.7%. The author argues much of this pessimism is "referred pain," reflecting dissatisfaction with the country as a whole rather than the economy.

Greg Ip Wall Street Journal
Date Posted:

Noting a disconnect between consumer economic sentiment and the “misery index” of unemployment plus inflation, @greg_ip argues Americans’ pessimism “may reflect dissatisfaction with the country as a whole.”

Why is consumer sentiment weaker than inflation and unemployment predict?

Core argument: Plotted against the "misery index"—the sum of inflation and the unemployment rate—the University of Michigan sentiment index since 1978 shows sentiment more depressed this year than historic correlations would predict.

Some 69% of respondents to a Wall Street Journal survey in August said the country is headed in the wrong direction. Can inflation be the whole story? After all, since peaking at 9.1% in June last year, based on the consumer-price index, inflation has fallen to 3.7%. Some gauges put underlying inflation at around 3%, and the Federal Reserve thinks it is headed gradually to 2%, relieving it of any need to raise interest rates for now. And yet, sentiment is up only moderately since inflation began falling. The puzzle deepens when I plot the University of Michigan index since 1978 against the “misery index”—the simple sum of inflation and the unemployment rate. Based on historic correlations, sentiment has been more depressed this year than you would expect given the level of economic misery. I suspect a lot of pessimism about the economy is “referred pain.” Just as part of your body can hurt because of injury to another, pessimism about the economy may reflect dissatisfaction with the country as a whole.

Takeaways by Macro Roundup® AI

  1. Plotted against the "misery index"—the sum of inflation and the unemployment rate—the University of Michigan sentiment index since 1978 shows sentiment more depressed this year than historic correlations would predict.
  2. The author suspects much of the pessimism about the economy is "referred pain," in which dissatisfaction with the country as a whole shows up as negative views of the economy.

Related Articles:

  • Why Less Engaged Voters Are Biden’s Biggest Problem — Times/Siena survey data indicate that Democrats and Biden voters were somewhat more likely than Republicans and Trump voters to skip the midterm election, implying the presidential electorate was more Democratic. Yet the same data indicate higher turnout would not help Biden now, even though it would bring more Democratic and Biden voters to the polls.
  • Have Workers Gotten A Raise? — Measures of typical and aggregate pay adjusted by personal consumption inflation have grown since 2019 and kept pace with or exceeded longer-term trends, while results are more mixed when deflated by the consumer price index, with average hourly earnings and total compensation below trend.
  • The Unexpected Compression: Competition at Work in the Low Wage Economy — Wage inequality is falling for the first time in four decades as pay rises at the bottom, with real wages increasing among young high school graduates and workers in the lowest quartile. The authors argue this reflects intensified employer competition for workers rather than simply a tight labor market, implying wages better reflect productivity and higher aggregate productivity.

AI Summary. Inflation-adjusted US house prices are 3.1% below their peak. On an affordability index using the Case-Shiller National Index and Freddie Mac 30-year fixed mortgage rates, the monthly principal-and-interest payment on an equivalent home is up 25% over a year and 88% over two years as rates rose from 2.84% to 7.07%.

Bill McBride Calculated Risk
Date Posted:

According to @calculatedrisk, houses in October were the least “affordable” since 1982 when the 30-year mortgage rate was >14%.

How much have rising mortgage rates raised monthly housing payments?

Core argument: Inflation-adjusted U.S. house prices stand 3.1% below their peak, based on the Case-Shiller National Index, seasonally adjusted.

I’ve put together my own affordability index. I used median income from the Census Bureau (estimated 2023), assumed a 15% down payment, and used a 2% estimate for property taxes, insurance, and maintenance. For house prices, I used the Case-Shiller National Index, Seasonally Adjusted (SA). For mortgage rates, I used the Freddie Mac PMMS (30-year fixed rates). For August: a year ago, the payment on a $500,000 house, with a 20% down payment and 5.22% 30-year mortgage rates, would be around $2,201 for principal and interest. The monthly payment for the same house, with house prices up 2.6% YoY and mortgage rates at 7.07% in August 2023, would be $2,749 - an increase of 25%. However, if we compare to two years ago, there is huge difference in monthly payments. In August 2021, the payment on a $500,000 house, with a 20% down payment and 2.84% 30-year mortgage rates, would be around $1,652 for principal and interest. The monthly payment for the same house, with house prices up 15.9% over two years and mortgage rates at 7.07% in August 2023, would be $3,107 - an increase of 88%!

Takeaways by Macro Roundup® AI

  1. Inflation-adjusted U.S. house prices stand 3.1% below their peak, based on the Case-Shiller National Index, seasonally adjusted.
  2. The monthly principal-and-interest payment on a $500,000 house with 20% down rose 25% over a year to $2,749 in August 2023, as prices rose 2.6% year-over-year and 30-year mortgage rates went from 5.22% to 7.07%.
  3. Compared with August 2021, when 30-year mortgage rates were 2.84%, the payment on a $500,000 house rose 88% from $1,652 to $3,107, with house prices up 15.9% over the two years.

Related Articles:

  • US Housing Market Crash Turns Not-So-Sweet 16 — The median existing-home sale price exceeds what a buyer spending 25% of gross household income with a 15% down payment and a 30-year fixed mortgage could afford, leaving affordability more strained than in 2004-07. With for-sale supply very low and most existing mortgages carrying below-market rates, the authors expect home prices to rise slowly.
  • The “New Normal” Mortgage Rate Range — Goldman Sachs economists expect the federal funds rate to eventually stabilize at 3–3.25%, above what the Federal Reserve currently projects for the neutral rate. With a funds rate near 3.25% and a 10-year Treasury yield of 4.45%, 30-year fixed mortgage rates would sit in the low-to-mid 6% range.
  • Could 6% to 7% 30-Year Mortgage Rates be the “New Normal”? — Goldman Sachs economists estimate that if inflation is brought down without a recession, the federal funds rate will stabilize near 3–3.25% rather than the Federal Reserve's 2.5% longer-run median projection. At that neutral rate, 30-year fixed mortgage rates would sit in the low-to-mid 6% range, around 6.45% with a 4.45% 10-year Treasury yield.

AI Summary. Emerging markets have built resilience by accumulating large foreign exchange reserves—roughly $600bn in India, $300bn in Brazil, and $50bn in South Africa—and by extending debt maturities while interest rates were ultra-low. The single biggest factor has been greater central-bank independence, which let many emerging-market central banks raise policy rates before advanced-economy peers.

Kenneth Rogoff Project Syndicate
Date Posted:

Despite rising interest rates, @krogoff attributes the resilience of emerging markets to large foreign exchange reserves and increased central bank independence.

Despite rising interest rates, @krogoff attributes the resilience of emerging markets to large foreign exchange reserves and...

How have emerging markets become more resilient to higher interest rates?

Core argument: India holds $600 billion in foreign exchange reserves, Brazil roughly $300 billion, and South Africa $50 billion, accumulations identified as an innovation to fend off liquidity crises in a dollar-dominated world.

One notable innovation has been the accumulation of large foreign exchange reserves to fend off liquidity crises in a dollar-dominated world. India’s forex reserves, for example, stand at $600 billion, Brazil’s hover around $300 billion, and South Africa has amassed $50 billion. Crucially, emerging-market firms and governments took advantage of the ultra-low interest rates that prevailed until 2021 to extend the maturity of their debts, giving them time to adapt to the new normal of elevated interest rates. But the single biggest factor behind emerging markets’ resilience has been the increased focus on central-bank independence. Once an obscure academic notion, the concept has evolved into a global norm over the past two decades. This approach, which is often referred to as “inflation targeting,” has enabled emerging-market central banks to assert their autonomy, even though they frequently place greater weight on exchange rates than any inflation-targeting model would suggest. Owing to their enhanced independence, many emerging-market central banks began to hike their policy interest rates long before their counterparts in advanced economies. This put them ahead of the curve for once, instead of lagging behind. Moreover, emerging markets never bought into the notion that debt is a free lunch, which has thoroughly permeated the US economic-policy debate, including in academia. The idea that sustained deficit finance is costless due to secular stagnation is not a product of sober analysis, but rather an expression of wishful thinking.

Takeaways by Macro Roundup® AI

  1. India holds $600 billion in foreign exchange reserves, Brazil roughly $300 billion, and South Africa $50 billion, accumulations identified as an innovation to fend off liquidity crises in a dollar-dominated world.
  2. The single biggest factor behind emerging markets' resilience has been increased central-bank independence, with inflation targeting evolving from an obscure academic notion into a global norm over the past two decades.
  3. Emerging-market firms and governments used the ultra-low interest rates prevailing until 2021 to extend debt maturities, and their more independent central banks began hiking policy rates long before advanced-economy counterparts.

Related Articles:

  • BIS International Banking Statistics and Global Liquidity Indicators at End December 2022 — The Bank for International Settlements reported that banks' cross-border claims fell by $1.4tn in a single quarter, slowing year-on-year growth to 6%, driven by lower bank credit and a drop in the market value of banks' derivatives. Dollar credit to emerging market and developing economies shrank by 4%.
  • Dollar Deleveraging — 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.

AI Summary. Chinese researchers report developing a chip that performs certain AI tasks, such as image recognition and autonomous driving, faster and more energy efficiently than current high-performance AI chips. The authors write that while it cannot replace chips in computers or smartphones, it may be used in wearable devices, electric cars, or smart factories.

Zhang Tong South China Morning Post
Date Posted:

.@SCMPNews reports that Chinese scientists have created a light-based chip that can perform some select task up to 3000 times faster than a Nvidia A100 chip.

.@SCMPNews reports that Chinese scientists have created a light-based chip that can perform some select task up to 3000...

Has China built a chip outperforming top AI chips on some tasks?

Core argument: Chinese scientists report a chip that performs an AI task 3,000 times faster than Nvidia's A100 and with greater energy efficiency on tasks such as image recognition and autonomous driving, according to a study published in Nature.

Chinese scientists have produced a chip that is significantly faster and more energy efficient than current high-performance AI chips when it comes to performing some tasks such as image recognition and autonomous driving, according to a new study. Although the new chip cannot immediately replace those used in devices such as computers or smartphones, it may soon be used in wearable devices, electric cars, or smart factories and help boost China’s competitiveness in the mass application of artificial intelligence, researchers wrote in a paper published in the journal Nature.

Takeaways by Macro Roundup® AI

  1. Chinese scientists report a chip that performs an AI task 3,000 times faster than Nvidia's A100 and with greater energy efficiency on tasks such as image recognition and autonomous driving, according to a study published in Nature.
  2. The researchers write that the chip cannot immediately replace chips used in computers or smartphones, but may soon be used in wearable devices, electric cars, or smart factories.
  3. The researchers argue the chip could help boost China's competitiveness in the mass application of artificial intelligence.

Related Articles:

  • China AI & Semiconductors Rise: US Sanctions Have Failed — China's Kirin 9000S is a better-designed, leading-edge chip than the West realizes, developed without access to extreme ultraviolet lithography or cutting-edge US intellectual property, indicating existing export controls have not worked. The authors argue only decisive, full-scale measures—not half measures—could prevent China from mass-manufacturing chips needed for high-end military applications.
  • Huawei’s Breakthrough Still Shows China’s Limits in Tech Race — A teardown of Huawei's Mate 60 Pro smartphone found its main chip is made with technology comparable to a 7nm process, possibly by Chinese foundry SMIC, still generations behind leaders such as TSMC, which is mass-producing 3nm chips. SMIC lacks the most advanced lithography machines and likely used older equipment with multipatterning.
  • US Restricts Nvidia Made-for-China Chips in New Export Rules — The US is restricting sales of Nvidia's A800 and H800 chips, designed specifically for the Chinese market, and curbing exports to two Chinese artificial-intelligence chip firms. The export controls aim to block China's access to advanced semiconductor technology with military uses.

Thursday, November 2, 2023

AI Summary. As the Federal Reserve shrinks its bond portfolio, the authors argue private investors, U.S. and foreign, are the more likely buyers of Treasury securities, since their purchases respond to yields and their holdings tilt toward longer-maturity bonds. Foreign governments have not materially added to their Treasury holdings in almost a decade and tend to hold shorter-maturity bonds.

Alexandra Tabova and Francis Warnock National Bureau of Economic Research
Date Posted:

Alexandra Tabova and Francis Warnock find that two of three major purchasers of Treasuries, US private purchasers and foreign private purchasers, have elastic demand curves, implying that rates will tend to go higher as Treasury issuance increases.

Who will buy Treasuries as the Fed shrinks its portfolio?

Core argument: Foreign governments have not materially added to their Treasury portfolios in almost a decade.

Our results have implications for a pressing question as we transition to a post-QE world: Who will buy Treasuries as the Fed reduces the size of its portfolio? Perhaps foreign governments, but they have not materially added to their Treasury portfolios in almost a decade. Moreover, they tend to hold shorter duration bonds, while the Fed’s portfolio is tilted more towards longer durations. More likely it will be private investors, whether U.S. or foreign, whose purchases react to yields and whose portfolios are tilted towards longer duration bonds.

Takeaways by Macro Roundup® AI

  1. Foreign governments have not materially added to their Treasury portfolios in almost a decade.
  2. Foreign governments tend to hold shorter-duration Treasuries, while the Federal Reserve's portfolio is tilted more toward longer durations.
  3. Private investors, U.S. and foreign, whose purchases react to yields and whose portfolios tilt toward longer-duration bonds, are the more likely buyers of Treasuries as the Federal Reserve reduces its portfolio.

Related Articles:

  • Slow Money — Life insurers and pension funds invest monthly premium and contribution inflows across assets including Treasuries, amounting to Treasury purchases at an annual rate of roughly $100bn. That falls far short of the trillions in coupon-bearing Treasury debt to be issued annually, so these managers will not be the marginal buyer the market seeks.
  • Resilience Redux in the US Treasury Market — The authors argue that large, persistent US federal deficits and limited dealer balance-sheet flexibility will cause outstanding Treasury debt to grow rapidly relative to the market's capacity to intermediate trades, absent significant changes in market structure. They contend broad central clearing, all-to-all trading, real-time post-trade reporting, capital-regulation changes, and transparent official purchase programs could strengthen market capacity and resilience.
  • Who Has Been Buying U.S. Treasury Debt? — Net purchases of U.S. Treasury securities by the "households and nonprofits" category have soared, more than offsetting sales and redemptions by money market funds, the Federal Reserve, and banks; much of this buying likely reflects hedge funds. The composition of Treasury financing has shifted dramatically as bond prices fell.

AI Summary. The US Treasury said it will keep raising two- and five-year note auction sizes by $3bn per month while slowing increases in longer-dated debt, lifting 10-year note auctions by $2bn and 30-year bond auctions by $1bn. Its quarterly refunding will total $112bn, down from $114bn.

Kate Duguid and Mary McDougall Financial Times
Date Posted:

Following weak demand for long-dated Treasuries, the US Treasury is slowing the pace of longer-term issuance, and increasing the issuance of short-dated notes.

Following weak demand for long-dated Treasuries, the US Treasury is slowing the pace of longer-term issuance, and increasing...

Is the Treasury shifting borrowing toward shorter-dated debt?

Core argument: The US Treasury will slow the pace of longer-dated debt issuance, raising 10-year note auctions by $2bn and 30-year bond auctions by $1bn, down from the $3bn and $2bn increases made in August.

The Treasury said on Wednesday that it would continue to increase issuance of shorter-dated notes at the pace it set three months ago while slowing the pace of 10- and 30-year bond issues. To satisfy its borrowing needs, the Treasury will raise the auction sizes of the two- and five-year notes by $3bn per month, with a rise in 10-year note auctions by $2bn and in 30-year bond auctions by $1bn. In August, the Treasury had increased its 10-year auctions by $3bn and its 30-year auctions by $2bn. In its quarterly refunding auctions next week, the Treasury Department will sell $112bn worth of debt, lower than the $114bn put on offer in the previous quarter. Primary dealers had anticipated the Treasury would auction $114bn this quarter too.

Takeaways by Macro Roundup® AI

  1. The US Treasury will slow the pace of longer-dated debt issuance, raising 10-year note auctions by $2bn and 30-year bond auctions by $1bn, down from the $3bn and $2bn increases made in August.
  2. The US Treasury will keep increasing shorter-dated issuance at the pace set three months earlier, lifting two- and five-year note auction sizes by $3bn per month.
  3. The Treasury Department's quarterly refunding auctions will total $112bn, below the $114bn offered in the previous quarter and the $114bn primary dealers had anticipated.

Related Articles:

  • Resilience Redux in the US Treasury Market — The authors argue that large, persistent US federal deficits and limited dealer balance-sheet flexibility will cause outstanding Treasury debt to grow rapidly relative to the market's capacity to intermediate trades, absent significant changes in market structure. They contend broad central clearing, all-to-all trading, real-time post-trade reporting, capital-regulation changes, and transparent official purchase programs could strengthen market capacity and resilience.
  • Maxing Out — Hedge funds became a major buyer of US Treasuries after the Federal Reserve and commercial banks stepped back, financing those purchases through dealer repurchase agreements that grew rapidly and then stalled. If these leveraged buyers are hitting financing limits set by dealer balance sheet costs, a new marginal buyer must emerge to absorb upcoming issuance.
  • Interest Expense: A Bigger Impact on Deficits than Debt — The US is running a primary deficit—excluding interest costs—much larger than its historical norm, at a point in the business cycle when deficits would normally be smaller than usual. The average interest rate on federal debt is projected to remain at or below the rate of nominal GDP growth over the next decade.

AI Summary. National debt is considered sustainable when it grows more slowly than gross domestic product, so when the average interest rate on government debt (R) is below the economy's growth rate (G), debt can be sustainable even if non-interest spending exceeds revenue. R has been below G over the past 15 years.

Marc Goldwein Committee for a Responsible Federal Budget
Date Posted:
Is Database:
Database

Noting for the past 15 years R < G, @MarcGoldwein argues that in a world where R > G, at current debt stocks and primary deficits, the US will face a debt spiral.

How does the interest rate relative to growth determine debt sustainability?

Core argument: The average interest rate on U.S. government debt (R) has run below the average growth rate of the U.S. economy (G) for the last 15 years.

Debt Sustainability = When national debt grows slower than gross domestic product (GDP) or expected to stop growing before getting too high. Average interest rate on government debt (R) describes the growth of current debt, while G the average growth rate of U.S. economy represents its erosion (relative to GDP). When R<G, debt may be sustainable even when non-interest spending exceeds revenue. When R<G, one-time borrowing has little effect on long-term debt-to-GDP. For the last 15 years, R has been below G.

Takeaways by Macro Roundup® AI

  1. The average interest rate on U.S. government debt (R) has run below the average growth rate of the U.S. economy (G) for the last 15 years.
  2. When R is below G, national debt may be sustainable even when non-interest spending exceeds revenue.
  3. Debt is sustainable when it grows more slowly than GDP or is expected to stop growing before reaching too high a level, and with R below G one-time borrowing has little effect on long-term debt-to-GDP.

Related Articles:

  • When Does Federal Debt Reach Unsustainable Levels? — The authors estimate that U.S. debt held by the public cannot exceed roughly 200% of GDP even under favorable market conditions, and that under current policy the ratio reaches 175–200% within about 20 years. After that point, they argue, no tax increases or spending cuts could avert default or inflationary debt monetization.
  • Are High Interest Rates the New Normal? — The rise in interest rates reflects higher real interest rates rather than inflation expectations, since breakeven rates—the gap between yields on ordinary bonds and inflation-indexed bonds—indicate markets expect inflation to stay under control. Real rates well above 2%, up from below 1% before the pandemic, may prove transitory.
  • 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.

AI Summary. Cumulative real GDP growth over the past year reached 2.9%, recovering from 2022 lows and returning to levels in line with the high-growth years of the 2010s. Year-on-year nominal economic output growth picked up to 6.3%, while the inflation gap between real and nominal growth narrowed to its smallest level since early 2021.

Joseph Politano Apricitas Economics
Date Posted:

Cumulative real GDP growth in the year ending Q3 was 2.9%, “returning to levels more in line with the high growth years in the 2010s.” @JosephPolitano

Has economic growth returned to its strong prior decade pace?

Core argument: U.S. cumulative real GDP growth over the last year reached 2.9%, continuing to bounce back from its 2022 lows and returning to levels more in line with the high-growth years of the 2010s.

Cumulative real GDP growth over the last year to 2.9%, continuing to bounce back from its 2022 lows and returning to levels more in line with the high growth years of the 2010s. In fact, these numbers are so strong that GDP could shrink by 0.8% annualized in Q4 and still match the median FOMC participants’ growth projections from last month. Year-on-year growth in nominal, non-inflation-adjusted, economic output picked up again to 6.3%, but even still the inflation gap between real and nominal GDP growth shrank to the smallest level since early 2021.

Takeaways by Macro Roundup® AI

  1. U.S. cumulative real GDP growth over the last year reached 2.9%, continuing to bounce back from its 2022 lows and returning to levels more in line with the high-growth years of the 2010s.
  2. Real GDP could shrink by 0.8% annualized in the fourth quarter and still match the median FOMC participants' growth projections from last month.
  3. Year-on-year growth in nominal, non-inflation-adjusted economic output picked up to 6.3%, while the gap between nominal and real GDP growth shrank to its smallest level since early 2021.

Related Articles:

  • An Update from Our CIOs: Entering the Second Stage of Tightening — A second stage of the monetary tightening cycle is led by long-term interest rates: after a period when short-term rate hikes continued but bond yields traded sideways, long-term yields resumed rising. The earlier reprieve reflected market expectations of future easing and Treasury issuance shifted toward short-term bills funded by excess central bank reserves.
  • Why No Recession (Yet)? — Real interest rates have risen by almost 10 percentage points, compared with 4 points during the 2004–2006 tightening, yet activity has held up because households entered the episode with large savings accumulated during the pandemic. As those surplus savings are used up and borrowers refinance at higher rates, the full impact of tightening has not yet been felt.
  • Will A.I. Transform the Economy, and if So, How? — During the 1995-2005 information technology boom, productivity ended about 12% above the trend implied by growth from 1973 to 1995, and a comparable or larger gain of around 15% from artificial intelligence is plausible. If such optimistic estimates hold, growth would exceed conventional long-run estimates such as the Federal Reserve's roughly 1.8%, lifting revenue and easing debt concerns.

AI Summary. AI regulation locks in incumbents, and the early AI winners promoting alarm in Washington about AI risks are engaged in regulatory capture, seeking rules that hobble future competitors while continuing their own development. Such an executive order is proscriptive rather than adaptive and presumes knowledge of an unknowable future.

Ben Thompson Stratechery
Date Posted:

.@benthompson sees President Biden’s executive order proscribing AI development as “blocking progress and hindering the solutions to our greatest challenges.”

.@benthompson sees President Biden’s executive order proscribing AI development as “blocking progress and hindering...

Does AI regulation entrench incumbents at the expense of future competitors?

Core argument: The author argues that the early AI winners are the most invested in generating alarm in Washington about AI while continuing their own work, since regulation locks in incumbents and concerns about imagined harms would kneecap competitors.

If you accept the premise that regulation locks in incumbents, then it sure is notable that the early AI winners seem the most invested in generating alarm in Washington, D.C. about AI. This despite the fact that their concern is apparently not sufficiently high to, you know, stop their work. No, they are the responsible ones, the ones who care enough to call for regulation; all the better if concerns about imagined harms kneecap inevitable competitors. In short, this Executive Order is a lot like Bill Gates’ approach to mobile: rooted in the past, yet arrogant about an unknowable future; proscriptive instead of adaptive; and, worst of all, trivially influenced by motivated reasoning best understood as some of the most cynical attempts at regulatory capture the tech industry has ever seen.

Takeaways by Macro Roundup® AI

  1. The author argues that the early AI winners are the most invested in generating alarm in Washington about AI while continuing their own work, since regulation locks in incumbents and concerns about imagined harms would kneecap competitors.
  2. The author characterizes the AI Executive Order as proscriptive instead of adaptive and rooted in the past yet arrogant about an unknowable future, comparing it to Bill Gates' approach to mobile.
  3. The author describes the AI Executive Order as trivially influenced by motivated reasoning amounting to some of the most cynical attempts at regulatory capture the tech industry has seen.

Related Articles:

  • Artificial Intelligence Is A Familiar-Looking Monster, Say Henry Farrell and Cosma Shalizi — Markets and bureaucracies are enormous impersonal distributed systems of information-processing that make use of tacit knowledge no individual brain or government can comprehend, and large language models are another such system rather than something new. The authors argue individual freedom is preserved by setting these systems against one another.
  • Will A.I. Transform the Economy, and if So, How? — During the 1995-2005 information technology boom, productivity ended about 12% above the trend implied by growth from 1973 to 1995, and a comparable or larger gain of around 15% from artificial intelligence is plausible. If such optimistic estimates hold, growth would exceed conventional long-run estimates such as the Federal Reserve's roughly 1.8%, lifting revenue and easing debt concerns.
  • The Outlook for Long-Term Economic Growth — 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.

AI Summary. US full-service restaurants appear to have restructured toward operating with less labor, with higher minimum wages likely factoring into those decisions. Labor productivity, measured as real output per hour worked, grew at a 1.2% annualized rate over an earlier six-year stretch, then jumped 21% in a single year, retaining most of that gain after a slight pullback.

Justin Fox Bloomberg
Date Posted:
Is Database:
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In response to higher wages associated with the pandemic, the US restaurant sector has significantly improved productivity: from a 1.2%/year rate from 2014-20, productivity jumped 21% in 2021 and has retained most of those gains. @foxjust

Are restaurants operating with less labor after higher wages?

Core argument: Labor productivity at full-service restaurants jumped 21% in 2021 after rising at a 1.2% annualized rate from 2014 to 2020, and despite receding slightly the following year, most of those gains remain intact.

It does seem as if employers in the sector have made peace with having fewer workers — and not unreasonable to think that higher minimum wages are playing some role in their calculations. The shock of the pandemic and the accompanying labor shortages allowed for and in many cases required a rethinking of how to do business in a way that the pre-pandemic wage increases did not, and restaurants overall appear to have found a way to do this with less labor. The best measure of this is real output per hour worked, aka labor productivity. After years of little to no growth at full-service restaurants, it rose at a 1.2% annualized rate from 2014 to 2020, then jumped 21% in 2021. It receded a little last year, but most of its gains are still intact.

Takeaways by Macro Roundup® AI

  1. Labor productivity at full-service restaurants jumped 21% in 2021 after rising at a 1.2% annualized rate from 2014 to 2020, and despite receding slightly the following year, most of those gains remain intact.
  2. Restaurant employers appear to have made peace with operating with fewer workers, with higher minimum wages plausibly playing some role in their calculations.
  3. The pandemic shock and accompanying labor shortages allowed for and often required a rethinking of restaurant operations that pre-pandemic wage increases did not, and restaurants overall appear to have found a way to operate with less labor.

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  • The Unexpected Compression: Competition at Work in the Low Wage Labor Market — The authors estimate that post-pandemic labor market tightness compressed the US wage distribution, reducing the college wage premium and offsetting roughly one-quarter of the four-decade rise in 90-10 wage inequality. They attribute this in part to greater labor supply elasticity facing firms in low-wage markets, which reduced employer market power as young non-college workers moved to higher-paying jobs.
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AI Summary. An analysis of trade and investment data identifies Vietnam, Poland, Mexico, Morocco, and Indonesia as "connector" economies positioning themselves as links between the US and China and between China, Europe, and other Asian economies. Together they account for 4% of global output but have attracted slightly over 10%, or $550bn, of greenfield investment.

Enda Curran, Shawn Donnan, and Maeva Cousin Bloomberg
Date Posted:

According to a Bloomberg analysis, five countries (Vietnam, Poland, Mexico, Morocco, and Indonesia) are disproportionately benefiting as “connectors” in a balkanizing global economy.

Are some economies gaining outsized investment by linking rival trading blocs?

Core argument: Vietnam, Poland, Mexico, Morocco, and Indonesia account for 4% of global GDP but have attracted slightly over 10% of all greenfield investment since 2017, or $550 billion, according to Bloomberg Economics and Bloomberg Businessweek.

In collaboration with Bloomberg Economics, Bloomberg Businessweek took a dive into trade and investment data and found five nations straddling the new geopolitical fault lines: Vietnam, Poland, Mexico, Morocco, and Indonesia. As a group, these countries logged $4 trillion in economic output in 2022—more than India and almost as much as Germany or Japan. Despite their very different politics and pasts, they share an opportunistic desire to seize the economic windfall to be had by positioning themselves as new links between the US and China—or China, Europe, and other Asian economies. They represent 4% of global gross domestic product, yet they’ve attracted slightly over 10%, or $550 billion, of all so-called greenfield investment since 2017.

Takeaways by Macro Roundup® AI

  1. Vietnam, Poland, Mexico, Morocco, and Indonesia account for 4% of global GDP but have attracted slightly over 10% of all greenfield investment since 2017, or $550 billion, according to Bloomberg Economics and Bloomberg Businessweek.
  2. Vietnam, Poland, Mexico, Morocco, and Indonesia logged $4 trillion in combined economic output in 2022, more than India and almost as much as Germany or Japan.
  3. Despite differing politics and histories, the five nations share an opportunistic aim to position themselves as new links between the US and China, or between China, Europe, and other Asian economies.

Related Articles:

  • How America Is Failing To Break Up With China — Research finds that countries with the strongest existing trade ties to China in a given industry have gained the most as direct Chinese exports to the US are redirected, suggesting Chinese supply chains remain central to American imports even in advanced-manufacturing goods officials most want to shield from China.
  • Hidden Exposure: Measuring U.S. Supply Chain Reliance — The US buys at least 80% of industrial inputs domestically, so aggregate foreign supply chain exposure is limited, but disruptions occur at the sector level rather than the macro level. Accounting for Chinese inputs embedded in goods bought from other foreign suppliers, US exposure to China is almost 4x larger than it appears at face value.
  • Sester On Kearney Reshoring Index — US imports from Southeast Asia have risen, but China's reported exports to the US exceed recorded US imports from China by about 10%, reflecting incentives to shift final assembly and to avoid tariffs. Trade data cannot show how much Chinese content is embedded in rising Southeast Asian imports.