Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “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
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, November 14, 2023

AI Summary. Labor market tightness produced an unexpected compression in the US wage distribution, with disproportionate wage growth at the bottom reducing the college wage premium and reversing nearly 40% of the rise in 90-10 wage inequality since 1980. The authors attribute this in part to increased competition for low-wage workers.

David Autor, Arindrajit Dube, and Annie McGrew National Bureau of Economic Research
Date Posted:
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Database

Updated work by @davidautor documents that, since the pandemic, real hourly wage gains for the bottom 10% have reversed nearly 40% of the cumulative increase in inequality since 1980. @nberpubs

Does a tight labor market reduce wage inequality at the bottom?

Core argument: Post-pandemic labor market tightness reversed almost 40% of the rise in 90-10 log wage inequality since 1980, with disproportionate wage growth at the bottom of the distribution also reducing the college wage premium.

Labor market tightness following the height of the Covid-19 pandemic led to an unexpected compression in the US wage distribution that reflects, in part, an increase in labor market competition. Disproportionate wage growth at the bottom of the distribution reduced the college wage premium and reversed almost 40% of the rise in 90-10 log wage inequality since 1980, as measured by the 90-10 ratio. The Unexpected Compression as measured by the fall in the 90-10 log wage ratio was nearly half of the Great Compression of the 1940s. The rise in wages was particularly strong among workers under 40 years of age and without a college degree. The post-pandemic rise in labor market tightness—and the consequent wage compression— represent a profound shift in US labor market conditions, seen most clearly in the rise of the wage-separation elasticity among young non-college workers.

Takeaways by Macro Roundup® AI

  1. Post-pandemic labor market tightness reversed almost 40% of the rise in 90-10 log wage inequality since 1980, with disproportionate wage growth at the bottom of the distribution also reducing the college wage premium.
  2. The Unexpected Compression, measured by the fall in the 90-10 log wage ratio, was nearly half the size of the Great Compression of the 1940s, and reflects in part an increase in labor market competition.
  3. Wage gains were particularly strong among workers under 40 without a college degree, a shift in US labor market conditions seen most clearly in the rise of the wage-separation elasticity among young non-college workers.

Related Articles:

  • Perspectives on the Labor Share — The share of US income going to labor fell roughly 5 percentage points between 1929 and 2022, with declines across most US industries and in most countries of Europe, Asia, and emerging markets. The author argues the most plausible causes are technological, including the information age and automation.
  • Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends — Using administrative tax data with the Survey of Consumer Finances, the authors estimate the top 1% pre-tax income share fell from 11.1% in 1962 to 9.4% in 1979, then rose to 13.8% by 2019, a 3 percentage point rise over the full period. Their after-tax measure shows increases of only 1.4 points since 1979 and 0.2 points since 1962.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

AI Summary. Goldman Sachs projects limited recession risk, holding a 15% US recession probability, and expects tailwinds to global growth including strong real household income growth, a smaller drag from monetary and fiscal tightening, recovering manufacturing, and central banks more willing to cut rates if growth slows. It projects core inflation falling to 2–2½%.

Jan Hatzius, Dominic Wilson, Joseph Briggs, Vickie Chang, Devesh Kodnani, and Giovanni Pierdomenico Goldman Sachs
Date Posted:

Jan Hatzius @GoldmanSachs argues the prospect of a recession in the US is not elevated relative to historic patterns.

Will growth tailwinds keep recession risk low as inflation falls?

Core argument: The authors reaffirm a 15% probability of a US recession, seeing only limited recession risk.

We continue to see only limited recession risk and reaffirm our 15% US recession probability. We expect several tailwinds to global growth in 2024, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity, and an increased willingness of central banks to deliver insurance cuts if growth slows. More disinflation is in store over the next year. Although the normalization in product and labor markets is now well advanced, its full disinflationary effect is still playing out, and core inflation should fall back to 2-2½% by end-2024. The market outlook is complicated by compressed risk premia and markets that are quite well-priced for our central case.

Takeaways by Macro Roundup® AI

  1. The authors reaffirm a 15% probability of a US recession, seeing only limited recession risk.
  2. Global growth in 2024 is expected to be supported by strong real household income growth, a smaller drag from monetary and fiscal tightening, recovering manufacturing activity, and central banks more willing to deliver insurance cuts if growth slows.
  3. Core inflation is expected to fall to 2–2½% by end-2024 as the disinflationary effect of well-advanced product and labor market normalization continues to play out, while compressed risk premia and markets well-priced for the central case complicate the market outlook.

Related Articles:

  • Soft Landing Summer — 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.
  • Inching Toward Equilibrium — With short-term interest rates far enough above zero, they are again the central bank's main lever for steering the economy toward equilibrium, a difficult task because policy changes affect spending, output, and inflation with lags that can span years. Equity yields have changed little while bond yields rose significantly, moving equity pricing further from equilibrium.
  • U.S. Wage Growth Is Slowing, Somewhat — U.S. wage growth has slowed substantially without a large rise in joblessness, though wages are still rising faster than in the decade before the pandemic, at a pace comparable to the late 1990s and 2006-2007. The author argues much of the earlier outsized pay gains reflected one-off job market churn and sectoral shifts.

AI Summary. The US faces lower energy risk than in the 1970s: it is a net energy exporter rather than a net importer, the oil intensity of its economic growth is 65% lower, and annual global oil consumption growth has fallen from 8%-10% to 0%-2%. The Strategic Petroleum Reserve is down about 50% from its peak.

Michael Cembalest J.P. Morgan
Date Posted:

Michael Cembalest @jpmorgan argues an energy shock is a lower risk to the American economy than it was in the past. He notes that the oil intensity of the American economy has declined, and that US crude imports are down 75% from their 2005 peak.

Is the US less vulnerable to oil shocks than in the 1970s?

Core argument: The oil intensity of US GDP growth is 65% lower than in the 1970s, and the US is now a net energy exporter rather than a net importer, leaving US energy risks generally much lower than in that decade.

Energy risks to the US are generally much lower than in the 1970’s. The US is a net energy exporter vs its net import position in the 1970s. The oil intensity of US GDP growth is 65% lower than it was in the 1970’s. Annual global oil consumption growth has declined from 8%-10% in the early 1970s to 0%-2% today. Geopolitical benefits to OPEC of an oil embargo would be less clear now: 75% of Saudi oil exports go to Asia, China gets half its oil from the Middle East and the US gets most of its imported oil from Canada, Mexico, and other non-OPEC sources. Saudi Arabia also has spare capacity to bring online if needed. The Biden Administration, in an act of geopolitical malpractice, opted not to refill the Strategic Petroleum Reserve before the conflict erupted; the SPR is down ~50% from its peak and at its lowest level since 1983.

Takeaways by Macro Roundup® AI

  1. The oil intensity of US GDP growth is 65% lower than in the 1970s, and the US is now a net energy exporter rather than a net importer, leaving US energy risks generally much lower than in that decade.
  2. Annual global oil consumption growth has fallen from 8%–10% in the early 1970s to 0%–2% today, while Saudi Arabia retains spare capacity it can bring online if needed.
  3. An OPEC embargo would carry less clear geopolitical benefit now, with 75% of Saudi oil exports going to Asia, China sourcing half its oil from the Middle East, and the US importing mostly from Canada, Mexico, and other non-OPEC suppliers.

Related Articles:

  • The Economic Consequences of the Israel-Hamas War — 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.
  • 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. The pandemic-era increase in the federal deficit was largely driven by discretionary policy, including major spending bills such as the $2tn Coronavirus Aid, Relief, and Economic Security Act that funded small business support, unemployment benefits, household transfers, aid to state and local governments, and health care. That deficit increase likely acted as a strong tailwind stimulating growth during the recovery.

Brigid Meisenbacher and Daniel Wilson Federal Reserve Bank of San Francisco
Date Posted:

A @sffed analysis argues the fiscal tailwind is fading and going forward fiscal policy will be effectively neutral.

Did discretionary spending drive the deficit increase and boost growth?

Core argument: The pandemic-era deficit increase stemmed largely from discretionary policy, including the $2 trillion Coronavirus Aid, Relief, and Economic Security Act and other major spending bills enacted over 2020, with the spending increase especially large in 2021.

What accounts for the large increase in the deficit during the pandemic recession? As Figure 2 implies, [the pandemic] spending increase, especially in 2021, was largely the result of discretionary policy. In particular, several major spending bills, including the $2 trillion Coronavirus Aid, Relief, and Economic Security Act, were enacted over the course of 2020. These pieces of legislation included spending on small business support, unemployment benefits, and other household transfers, aid to state and local governments, and health care. To be clear, this spending surge and the resulting “excess” cyclical response of the deficit do not say anything about whether this was good or bad policy. Nonetheless, the large increase in the deficit was likely a strong tailwind to stimulate economic growth during the pandemic recovery.

Takeaways by Macro Roundup® AI

  1. The pandemic-era deficit increase stemmed largely from discretionary policy, including the $2 trillion Coronavirus Aid, Relief, and Economic Security Act and other major spending bills enacted over 2020, with the spending increase especially large in 2021.
  2. Pandemic legislation funded small business support, unemployment benefits, other household transfers, aid to state and local governments, and health care.
  3. The large increase in the deficit was likely a strong tailwind stimulating economic growth during the pandemic recovery, though the spending surge says nothing about whether the policy was good or bad.

Related Articles:

  • Fiscal Arithmetic and the Global Inflation Outlook — Across advanced economies, core inflation is significantly positively associated with growth in government debt since the start of the pandemic, and the authors expect this decade's fiscal expansions to shift price levels permanently higher. They argue this differs from permanently higher inflation, projecting inflation to diminish as temporary deficits normalize, with medium-term inflation expectations still anchored near central bank targets.
  • Fiscal Influences on Inflation in OECD Countries, 2020-2022 — Across 21 economies, the authors find that headline and core inflation responded positively to a measure of government spending increases scaled by pre-pandemic debt-to-GDP and average debt duration. Estimated coefficients of 0.4–0.5 suggest 40–50% of the extra spending was financed through inflation, with the rest through conventional public finance.

AI Summary. Using US firm-level patent and balance-sheet data spanning 1950–2020, the author estimates that a 1% decline in spillovers from publicly funded research and development causes a 0.17% decline in firm productivity growth, with public R&D spillovers about 3x as impactful as private ones and smaller firms gaining most.

Arnaud Dyevre London School of Economics
Date Posted:
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New research from @ArnaudDyevre finds a 1% decline in public R&D spillovers caused a 0.17% decline in productivity growth in the United States. Notably, the decline in public R&D can explain a third of the deceleration in TFP since 1995.

How much does declining public R&D spillovers reduce firm productivity growth?

Core argument: Using firm-level patent and balance-sheet data spanning 1950–2020, the author estimates that a 1% decline in public R&D spillovers causes a 0.17% decline in firm productivity growth.

Using a unique firm-level dataset with patent and balance-sheet information covering 70 years (1950-2020), I estimate the impact of the decline in public R&D in the US on long-run productivity growth. I first document three new facts about publicly-funded innovations: they are (i) more reliant on science, (ii) more likely to open new technological fields, and (iii) more likely to generate knowledge spillovers, especially toward smaller firms. I then use two instrumental variable strategies–a historical shift-share IV and a patent examiner leniency instrument–to estimate the impact of the decline in public R&D on the productivity of firms through spillovers. I find that a 1% decline in public R&D spillovers causes a 0.17% decline in productivity growth. Public R&D spillovers are three times as impactful as private R&D spillovers for firm productivity and their impact persists at the sector level. Moreover, smaller firms experience larger productivity gains from public R&D spillovers.

Takeaways by Macro Roundup® AI

  1. Using firm-level patent and balance-sheet data spanning 1950–2020, the author estimates that a 1% decline in public R&D spillovers causes a 0.17% decline in firm productivity growth.
  2. Public R&D spillovers are estimated to be three times as impactful as private R&D spillovers for firm productivity, with effects persisting at the sector level and larger productivity gains accruing to smaller firms.
  3. Publicly funded innovations are documented as more reliant on science, more likely to open new technological fields, and more likely to generate knowledge spillovers, especially toward smaller firms.

Related Articles:

  • Moonshot: Public R&D and Growth — Federal R&D investment for the mission to send a crewed mission to the Moon peaked at over 0.7% of GDP for NASA. The authors estimate that NASA research-and-development contractor spending had a local economic impact similar to that of typical government expenditures, and note there is no credible empirical estimate of the space program's contribution to economic growth.
  • Bottlenecks: Sectoral Imbalances and the US Productivity Slowdown — The authors estimate that greater dispersion in productivity growth among an industry's input and idea suppliers has a strong negative effect on that industry's own productivity growth, using data on 462 US manufacturing industries and 42 non-manufacturing industries. Their evidence implies most of the US productivity slowdown can be explained by rising cross-industry variance in productivity growth.
  • The Productivity Slowdown in Advanced Economies: Common Shocks or Common Trends? — Total factor productivity is the main factor accounting for differences in labor productivity growth across countries and over time, and its growth has been lackluster across large advanced economies since the mid-2000s. The authors find this slowdown appears in both manufacturing and market services, with U.S. productivity growth slowing before the Great Recession.

AI Summary. US consumer price inflation was 0% in a recent month as gasoline prices fell 5%, while core inflation excluding food and energy ran at a 2.8% annualized rate, below expectations. Core inflation still exceeds 3% over three-, six-, and twelve-month horizons, indicating no reacceleration but continued elevated inflation.

Jason Furman @jasonfurman
Date Posted:

Overall CPI inflation was flat in October but remains above 3% Y/Y; the economy slowing might bring inflation back to target without further tightening. @jasonfurman

Is inflation reaccelerating or just staying elevated?

Core argument: Headline CPI was 0% in October as gasoline prices fell 5%, while core CPI excluding food and energy ran at a 2.8% annualized rate, lower than expected, according to Jason Furman.

The CPI data was a pleasant surprise. Headline was 0 inflation in October, which happened because volatile gasoline fell 5%. More important, core CPI (excluding food and energy) was 2.8% annualized in October, lower than expected. Not out of woods: still 3%+ over 3/6/12 months. Looking at core but with new rents instead of all rents you get annual rates of: 1 month: 1.8% 3 months: 1.3% 6 months: 0.8% 12 months: 1.6% (Would caution that I don't expect all rent ever to slow to this extent since marginal rent still above all rent.) Here is overall inflation. Annual rate: 1 month: 0.5% 3 months: 4.4% 6 months: 3.1% 12 months: 3.2%. Overall this is reassuring about no reacceleration of inflation. But it remains true that we've only had two unambiguously good inflation prints in 2-1/2 years (June & July). And IF inflation is running at 3%+ that would mean more work to do. A slowing economy may do that work.

Takeaways by Macro Roundup® AI

  1. Headline CPI was 0% in October as gasoline prices fell 5%, while core CPI excluding food and energy ran at a 2.8% annualized rate, lower than expected, according to Jason Furman.
  2. Core CPI measured with new rents instead of all rents shows annualized rates of 1.8% over 1 month, 1.3% over 3 months, 0.8% over 6 months, and 1.6% over 12 months, with marginal rent still above all rent.
  3. Furman puts overall inflation at annualized rates of 0.5% over 1 month, 4.4% over 3 months, 3.1% over 6 months, and 3.2% over 12 months, counting only two unambiguously good prints in 2-1/2 years, June and July.

Related Articles:

  • Inching Toward Equilibrium — With short-term interest rates far enough above zero, they are again the central bank's main lever for steering the economy toward equilibrium, a difficult task because policy changes affect spending, output, and inflation with lags that can span years. Equity yields have changed little while bond yields rose significantly, moving equity pricing further from equilibrium.
  • Macro Outlook 2024: The Hard Part Is Over — Goldman Sachs projects limited recession risk, holding a 15% US recession probability, and expects tailwinds to global growth including strong real household income growth, a smaller drag from monetary and fiscal tightening, recovering manufacturing, and central banks more willing to cut rates if growth slows. It projects core inflation falling to 2–2½%.
  • Fiscal Influences on Inflation in OECD Countries, 2020-2022 — Across 21 economies, the authors find that headline and core inflation responded positively to a measure of government spending increases scaled by pre-pandemic debt-to-GDP and average debt duration. Estimated coefficients of 0.4–0.5 suggest 40–50% of the extra spending was financed through inflation, with the rest through conventional public finance.

Wednesday, November 15, 2023

AI Summary. The authors conclude that the natural rate of unemployment declined during the expansion that began in 2009, when unemployment fell from 10% to 3.5% with near-constant inflation. Their reasoning is that with inflation anchored at the Federal Reserve's 2% target over such a long stable period, New Keynesian theory implies the observed unemployment rate equals the natural rate.

Robert Hall and Marianna Kudlyak National Bureau of Economic Research
Date Posted:

Robert Hall and @MariannaKudlyak argue the natural rate of unemployment has fallen in the aftermath of the financial crisis to 3.5%.

Does the natural rate of unemployment decline during long recoveries?

Core argument: Unemployment fell from 10% to 3.5% during the decade-long expansion beginning in 2009 while inflation remained nearly constant, a combination the authors argue makes Phillips curves with constant natural rates and constant slopes untenable.

The decade-long expansion starting in 2009 combined near constant inflation with continuing declines in unemployment from 10% to 3.5%. Phillips curves constructed with constant natural rates and constant slopes became untenable as this process unfolded. Our investigation of the recovery starting in 2009 concludes in favor of a declining natural rate. The logical basis for this conclusion is that the anchored inflation rate must have converged to the Fed’s target rate of 2% over such a long period of stable inflation so close to that target. A bedrock principle of the New Keynesian model is that in an economy with actual inflation equal to its anchor, the observed unemployment rate must equal the natural rate.

Takeaways by Macro Roundup® AI

  1. Unemployment fell from 10% to 3.5% during the decade-long expansion beginning in 2009 while inflation remained nearly constant, a combination the authors argue makes Phillips curves with constant natural rates and constant slopes untenable.
  2. The authors conclude that the natural rate of unemployment declined over the recovery starting in 2009, reasoning that anchored inflation must have converged to the Fed's 2% target over such a long period of stable inflation close to that target.
  3. A bedrock principle of the New Keynesian model, cited by the authors, holds that when actual inflation equals its anchor, the observed unemployment rate must equal the natural rate.

Related Articles:

  • How Far Is Labor Force Participation from Its Trend? — The share of Americans working or looking for work stands at 62.6%, nearly a percentage point below its pre-pandemic level, and the authors project the trend will decline another 1 percentage point over a decade. They attribute the projected decline to population composition, with more people entering older age groups that have low participation rates, outweighing rising educational attainment.
  • The Dual U.S. Labor Market Uncovered — The authors identify a dual U.S. labor market in which a primary segment of about 55% of the population is almost always employed, while a secondary segment of about 14% absorbs most seasonal and business-cycle fluctuations. Workers in the secondary segment have 6x higher turnover and are 10x more likely to be unemployed than primary-segment workers.

AI Summary. Consumer sentiment surveys show Republican respondents' views swing about ±15 index points relative to predicted levels depending on which party holds the presidency, while Democrats' views swing only about ±6 points. The authors estimate that adjusting for this asymmetric amplification shrinks the gap between observed and predicted consumer sentiment by 30%.

Ryan Cummings and Neale Mahoney Briefing Book
Date Posted:

When the opposing party holds the White House, Republicans have 2.5 times more negative sentiment than Democrats. Adjusting for this asymmetry closes 30% of the current gap between predicted and reported economic sentiment. @nealemahoney

Does partisan bias in survey responses explain the consumer sentiment gap?

Core argument: Republican survey respondents' consumer sentiment swings about +/-15 index points relative to predicted levels depending on whether a Republican or Democrat holds the White House, while Democrats' views swing only about +/-6 points.

When a Republican is in the White House, Republican survey respondents feel about 15 index points better than predicted about the economy, whereas Democrats feel around 6 index points worse. When a Democrat is President, Republicans feel about 15 index points worse than the economy, but Democrats only feel around 6 index points better. This roughly +/- 15 point swing for Republicans versus the +/- 6 point swing for Democrats is what we term asymmetric amplification. (Independents’ views are roughly halfway between those of Republicans and Democrats.) We find that adjusting for asymmetric amplification shrinks the current gap between observed and predicted consumer sentiment by 30 percent.

Takeaways by Macro Roundup® AI

  1. Republican survey respondents' consumer sentiment swings about +/-15 index points relative to predicted levels depending on whether a Republican or Democrat holds the White House, while Democrats' views swing only about +/-6 points.
  2. The authors term the gap between Republicans' +/-15 point swing and Democrats' +/-6 point swing "asymmetric amplification," with independents' views falling roughly halfway between the two parties.
  3. Adjusting for asymmetric amplification shrinks the gap between observed and predicted consumer sentiment by 30 percent, according to the authors.

Related Articles:

  • The Economy Is Great. Why Are Americans in Such a Rotten Mood? — 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.
  • The Pandemic Has Broken a Closely Followed Survey of Sentiment — A statistical model using 13 economic variables including inflation, unemployment, and petrol prices explained 86% of the variation in the monthly US consumer-sentiment index between 1980 and 2016, but the correlation between sentiment and both current and future spending has vanished since the pandemic began. The same variables retain their power to forecast consumer spending.
  • 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.

AI Summary. Even as inflation eases and gasoline prices fall by about a third from their peak, the University of Michigan's consumer sentiment index keeps declining. Housing costs stand apart: home prices are up 29% and mortgage rates have nearly tripled, leaving the typical buyer with a monthly principal and interest payment of nearly $2,200, more than double its earlier level.

Greg Ip Wall Street Journal
Date Posted:

Since January 2021, CPI has increased 17%, but the monthly principal and interest cost of owning the median US home is up 113%. @greg_ip

Why does consumer sentiment keep falling as inflation eases?

Core argument: U.S. home prices have risen 29% since January 2021 despite a late-2022 dip, according to the S&P/Case-Shiller national home price index, while mortgage rates have nearly tripled.

Inflation, we just learned, eased in October, extending a two-week rally in stocks and bonds. And yet the University of Michigan’s index of consumer sentiment keeps falling. Gasoline is down about a third since its mid-2022 peak. Grocery prices haven’t fallen, but they are only up 2% in the past year; dairy, eggs, chicken, and meat are flat. Even if they don’t drop, maybe a long spell of not going up will loosen their grip on our psyche. Housing is an entirely different matter. Since January 2021, home prices, despite a late 2022 dip, have risen 29%, according to the S&P/Case-Shiller national home price index, and mortgage rates have nearly tripled. The buyer of the typical home thus faces a monthly principal and interest payment of nearly $2,200, more than double the level of early 2021, the National Association of Realtors calculates.

Takeaways by Macro Roundup® AI

  1. U.S. home prices have risen 29% since January 2021 despite a late-2022 dip, according to the S&P/Case-Shiller national home price index, while mortgage rates have nearly tripled.
  2. The National Association of Realtors calculates that the buyer of a typical home faces a monthly principal and interest payment of nearly $2,200, more than double the level of early 2021.
  3. Inflation eased in October and gasoline prices are down about a third from their mid-2022 peak, with grocery prices up 2% over the past year and dairy, eggs, chicken, and meat flat, yet the University of Michigan's consumer sentiment index keeps falling.

Related Articles:

  • Inflation Adjusted House Prices 3.1% Below Peak — 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%.
  • Higher For Longer and The 2024 Housing Outlook — Sustained higher mortgage rates are expected to weigh most on housing turnover, since nearly all borrowers hold rates below market levels, discouraging moves; the authors project existing home sales of 3.8mn, the fewest annual sales since the early 1990s. Housing starts are projected to fall 4% to 1.34mn.
  • 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.

AI Summary. Annual growth of broad money is negative, and it looks increasingly plausible that the monetary tightening cycle has ended and that loosening is closer than central banks suggest. Waiting too long risks a costly slowdown and a return to too-low inflation, though the outlook remains uncertain.

Martin Wolf Financial Times
Date Posted:

Martin Wolf predicts that the hiking cycle is likely over.  He thinks the central banks, especially in the US, have largely achieved their inflation goals.

Should central banks start loosening sooner than they now suggest?

Core argument: Annual growth of broad money (M3) is firmly negative, and monetary data, while it cannot be targeted, should not be ignored by central banks.

Central banks must look ahead and remember the lags between their actions and economic activity. In doing so, they might also cast one eye on monetary data. Annual growth of broad money (M3) is firmly negative. Monetary data cannot be targeted. But it must also not be ignored. In brief, it looks increasingly plausible that this tightening cycle has come to an end. It also looks quite likely that the beginning of the subsequent loosening is closer than central banks are suggesting. If that turns out not to be the case, there is some risk that it will come too late to avoid a costly slowdown and even a return to too low inflation. Yet none of this is certain: policymaking is now at a truly difficult point in the cycle.

Takeaways by Macro Roundup® AI

  1. Annual growth of broad money (M3) is firmly negative, and monetary data, while it cannot be targeted, should not be ignored by central banks.
  2. It looks increasingly plausible that the tightening cycle has ended and that the start of the subsequent loosening is closer than central banks are suggesting.
  3. If loosening does not come sooner, it risks arriving too late to avoid a costly slowdown and even a return to too low inflation, leaving policymaking at a truly difficult point in the cycle.

Related Articles:

  • Macro Outlook 2024: The Hard Part Is Over — Goldman Sachs projects limited recession risk, holding a 15% US recession probability, and expects tailwinds to global growth including strong real household income growth, a smaller drag from monetary and fiscal tightening, recovering manufacturing, and central banks more willing to cut rates if growth slows. It projects core inflation falling to 2–2½%.
  • Inching Toward Equilibrium — With short-term interest rates far enough above zero, they are again the central bank's main lever for steering the economy toward equilibrium, a difficult task because policy changes affect spending, output, and inflation with lags that can span years. Equity yields have changed little while bond yields rose significantly, moving equity pricing further from equilibrium.
  • U.S. Wage Growth Is Slowing, Somewhat — U.S. wage growth has slowed substantially without a large rise in joblessness, though wages are still rising faster than in the decade before the pandemic, at a pace comparable to the late 1990s and 2006-2007. The author argues much of the earlier outsized pay gains reflected one-off job market churn and sectoral shifts.

AI Summary. Long-running nationally representative surveys of U.S. 12th graders show the share saying they want to do their best at a job "even if this sometimes means working overtime" fell from 54% to 36%, a relative drop of 33% in two years, after work ethic measures had recovered among Gen Z in the 2010s.

Jean Twenge Generation Tech
Date Posted:

The self-reported work ethic of US high school seniors has plummeted: 54% of 18-year-olds were willing to work overtime at the start of 2020. This dropped to 36% by 2022, the lowest level in the 46-year history of the survey. @jean_twenge

Has the willingness of young workers to work overtime declined?

Core argument: The share of U.S. 18-year-olds saying they wanted to do their best in their job "even if this sometimes means working overtime" fell from 54% in early 2020 to 36% in 2022, a relative drop of 33%.

What was each generation’s work ethic like when they were young? Nationally representative surveys like Monitoring the Future can show us this – it has asked U.S. 12th graders, most of whom are 18 years old, about their work attitudes since 1976. Up until a few years ago, the work ethic news was positive for Gen Z (those born 1995-2012, and 18 years old 2013-2030). After declining from Boomers to Millennials, work ethic made a comeback among Gen Z 18-year-olds in the 2010s. Until it didn’t. The number of 18-year-olds who said they wanted to do their best in their job “even if this sometimes means working overtime” suddenly plummeted in 2021 and 2022. In early 2020, 54% of 18-year-olds said they were willing to work overtime. By 2022, it was 36%. That’s a (relative) drop of 33% in just two years.

Takeaways by Macro Roundup® AI

  1. The share of U.S. 18-year-olds saying they wanted to do their best in their job "even if this sometimes means working overtime" fell from 54% in early 2020 to 36% in 2022, a relative drop of 33%.
  2. Monitoring the Future, which has surveyed U.S. 12th graders about work attitudes since 1976, shows work ethic declining from Boomers to Millennials before rebounding among Gen Z 18-year-olds during the 2010s.
  3. The rebound in work ethic among Gen Z, defined as those born 1995–2012 and turning 18 between 2013 and 2030, reversed in 2021 and 2022.

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AI Summary. Private equity firms that built more than $1.5tn of assets in China face difficulty exiting investments, with secondary buyers demanding discounts of 30% to more than 60% versus roughly 15% in Europe and the US. Weak public markets and unattractive valuations have pushed buyout firms toward private sales.

Cathy Chan and Preeti Singh Bloomberg
Date Posted:

Private equity firms have assets of at least $1.5T in China; currently, secondary buyers are demanding extreme discounts, in some cases exceeding 60%, to take on these assets.

Are private equity firms struggling to exit their Chinese investments?

Core argument: Private equity firms that built more than $1.5 trillion of assets in China over two decades are struggling to exit once-promising investments they were counting on for hefty returns.

Private equity firms that amassed more than $1.5 trillion of assets in China in just two decades are now struggling to offload once-promising investments they were counting on for hefty returns. With public markets in a slump and offering unattractive valuations, buyout firms are exploring private sales. But mounting concerns about the risks of investing in mainland China have left so-called secondary buyers demanding discounts of 30% to more than 60%, according to people familiar with the market. Haircuts in Europe and the US are closer to 15%.

Takeaways by Macro Roundup® AI

  1. Private equity firms that built more than $1.5 trillion of assets in China over two decades are struggling to exit once-promising investments they were counting on for hefty returns.
  2. Secondary buyers are demanding discounts of 30% to more than 60% on Chinese private equity stakes, versus closer to 15% in Europe and the US, according to people familiar with the market.
  3. With public markets in a slump and offering unattractive valuations, buyout firms holding Chinese assets are exploring private sales.

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  • China Suffers Plunging Foreign Direct Investment Amid Geopolitical Tensions — Foreign direct investment into China is falling across multiple measures, with one month showing a 34% year-on-year drop to Rmb72.8bn ($10bn), the steepest decline since monthly figures became available in 2014. After rising 15% year on year early in the year, inflows have posted double-digit percentage declines each month since.
  • The Rise & Fall of Foreign Direct Investment in China — Net foreign direct investment into China has been negative for four consecutive quarters, as foreign investors shifted from reinvesting earnings from their Chinese operations to repatriating them. Whether this reflects cash management or signals a future slowdown in foreign direct investment is unclear, but the repatriation of profits is negative for China's currency.