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Friday, February 9, 2024

Interest Costs Will Leapfrog Medicare and Defense This Year

CRFB Staff Committee for a Responsible Federal Budget

Date Posted:: February 9, 2024

According to the new @USCBO numbers, in 2024 the US will spend more on interest than on defense or Medicare. Interest on the debt is the fastest-growing part of the budget. @BudgetHawks @MarcGoldwein

Net interest payments will exceed both defense and Medicare spending this year, in Fiscal Year (FY) 2024, according to new projections from the Congressional Budget Office (CBO). That will make interest the second largest government expenditure. Net interest has been exploding over the past few years, with payments rising from $223B in 2015 to $352B in 2021 before nearly doubling to $659B in 2023. In 2024, CBO projects net interest will total $870B, a near-record 3.1% of GDP. Spending on interest already topped the Medicaid budget and all spending on children last year. At a projected $870B, interest will surpass total spending on national defense ($822B) in 2024 and grow well beyond the defense budget over time. Interest costs will also slightly exceed net Medicare spending ($851B) this year and remain in line with Medicare costs in future years. That would make interest the second largest line item in the budget after Social Security.

Takeaways by Macro Roundup^® AI

CBO projects net interest payments will total $870 billion in FY2024, a near-record 3.1% of GDP, exceeding spending on national defense ($822 billion) and net Medicare ($851 billion).
Net interest would become the second largest line item in the federal budget after Social Security, and CBO projects it will grow well beyond the defense budget over time while remaining in line with Medicare costs.
Net interest payments rose from $223 billion in 2015 to $352 billion in 2021 before nearly doubling to $659 billion in 2023, already topping Medicaid and all spending on children last year.

Skilled Immigrants, Firms, and the Global Geography of Innovation

Britta Glennon Journal of Economic Perspectives

Date Posted:: February 9, 2024

Firms seeking skilled workers are a key driver of skilled immigration to the US; US-based multinational companies account for about 1/3 of H-1B visa applications. @BrittaGlennon

In the US economy, US-based multinational companies account for about one-third of H-1B visa applications, not including foreign multinational companies who also hire H-1B workers. Not coincidentally, US multinational companies account for 80% of the research and development done by US firms. A relatively small group of industries accounts for most of the H-1B visas. Figure 1 illustrates that most firms utilizing the program are in the same industry— Professional, Scientific, and Technical Services—with Manufacturing a distant second. In 2022 five firms Tata Consultancy, Amazon, Google, Microsoft, and Infosys accounted for nearly 10% of all H-1B approvals. This skewness has increased over time. The skewness is apparent geographically as well; 22.5% of approved H-1B petitions were allocated to employers in California alone.

Takeaways by Macro Roundup^® AI

US-based multinational companies account for about one-third of H-1B visa applications, excluding foreign multinationals that also hire H-1B workers, and account for 80% of the research and development done by US firms.
Five firms — Tata Consultancy, Amazon, Google, Microsoft, and Infosys — accounted for nearly 10% of all H-1B approvals in 2022, and this skewness has increased over time.
California employers received 22.5% of approved H-1B petitions, and most firms using the program are in Professional, Scientific, and Technical Services, with Manufacturing a distant second.

The Seven Samurai: Big Tech to the Rescue!

Aswath Damodaran Musings on Markets

Date Posted:: February 9, 2024

In 2012 the Magnificent 7 made up 8% of the market capitalization of all US public firms; by the end of 2023 they made up 24%. Their $12T market cap is worth more than all Chinese public equities. @AswathDamodaran

Let's look at the performance of the Mag 7 [AAPL, MSFT, GOOGL, AMZN, NVDA, META, TSLA] in 2023 when their collective market capitalization increased by a staggering $5.1T. Nvidia and Meta were the best performers, with the former more than and the latter almost tripling in value over the period. In terms of dollar value added, Microsoft and Apple each added a trillion dollars to their market capitalizations. These seven companies accounted for more than 50% of the increase in market capitalization of the entire US equity market. With them, US equities had price appreciation of 23.25% for the year, but without them, the year would have been an average one, with returns on 12.6%. Over the eleven-year period, the cumulative market capitalization of the seven companies has risen from $1.1 trillion in 2012 to $12 trillion in 2023. To put these numbers in perspective, the Mag Seven companies now have a market capitalization larger than that of all listed stocks in China.

Takeaways by Macro Roundup^® AI

The Magnificent Seven — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla — added $5.1 trillion in combined market capitalization in 2023, accounting for more than 50% of the increase in the entire US equity market's value.
US equities appreciated 23.25% in 2023 with the Magnificent Seven included, versus 12.6% without them, as Nvidia more than tripled and Meta almost tripled in value and Microsoft and Apple each added $1 trillion.
The Magnificent Seven's cumulative market capitalization rose from $1.1 trillion in 2012 to $12 trillion in 2023, exceeding the market capitalization of all listed stocks in China.

Five Easy Pieces

Michael Cembalest J.P. Morgan

Date Posted:: February 9, 2024

Michael Cembalest @jpmorgan notes the 28% rally of the Magnificent 7 since 2019 has been driven by earnings: “21% is attributable to sales growth, 6% from margin expansion and just 1% from multiple expansion.”

The Mag 7 [AAPL, MSFT, GOOGL, AMZN, NVDA, META, TSLA] rally has been earnings-driven rather than relying on multiple expansion. Of the group’s 28% return since 2019, 21% is attributable to sales growth, 6% from margin expansion, and just 1% from multiple expansion. This is quite different than the margin-less bubble in 2000-2001. But there are challenges as well, market concentration has reached its highest level since 1972. The top 10 stocks have broken away from stocks #11-#50 to an even greater degree than during the tech bubble in 2000-2001. Large spikes in market concentration have frequently coincided with or preceded prior recessions. Antitrust issues are the primary Achilles heel I can imagine that could disrupt the continued domination of the largest stocks. While Tesla has run into a pricing buzzsaw and lower volumes, the rest continue to thrive.

Takeaways by Macro Roundup^® AI

Of the Magnificent 7's 28% return since 2019, 21 points came from sales growth, 6 points from margin expansion, and just 1 point from multiple expansion, unlike the margin-less bubble of 2000–2001.
Market concentration has reached its highest level since 1972, with the top 10 stocks separating from stocks #11–#50 by a wider margin than during the 2000–2001 tech bubble.
Large spikes in market concentration have frequently coincided with or preceded prior recessions, and antitrust is the primary risk identified to continued domination by the largest stocks.

Another ‘Great Retirement’ Wave Hits the US After Stocks Rally

Alexandre Tanzi Bloomberg

Date Posted:: February 9, 2024

Retirements are rising again in line with American equity markets. According to @mfariacastro, the US has seen 2.7mm “excess” retirements.

Economists long expected the share of retirees in the population to soar as baby boomers aged. Covid-19 then caused the number to spike well beyond expectations, a surge dubbed the “Great Retirement Boom.” But just as they seemed to be coming back down, the numbers surged again in recent months, reaching a post-pandemic record in December. The US now has around 2.7 million more retirees than predicted in a model designed by Miguel Faria-e-Castro, an economist at the Federal Reserve Bank of St. Louis. Financial market performance looks to have played a role. The gap in the model appeared to be closing earlier last year following a 19% drop in the S&P 500 in 2022. But in 2023 the index rebounded, jumping 24%, with most of the gain coming in the fourth quarter. On top of that housing across the vast majority of US metro areas continued to rise last quarter, bolstering the wealth of older Americans.

Takeaways by Macro Roundup^® AI

The US has roughly 2.7 million more retirees than predicted by a model built by St. Louis Fed economist Miguel Faria-e-Castro, with the number of retirees reaching a post-pandemic record in December.
The gap in Faria-e-Castro's model appeared to be closing after the S&P 500 fell 19% in 2022, but the index rebounded 24% in 2023, with most of that gain in the fourth quarter.
Housing prices across the vast majority of US metro areas continued to rise in the most recent quarter, bolstering the wealth of older Americans.

Outlook for China: Slowing Exports, Housing Deflating, and Demographics Deteriorating

Torsten Sløk, Jyoti Agarwal, and Rajvi Shah Apollo

Date Posted:: February 9, 2024

A Torsten Sløk chart shows the number of workers per retiree in China has fallen from 10 in 2000 to 5 in 2024. By 2034, this is projected to fall to 3, the current level in the US.

Monday, February 12, 2024

Behavioral Responses to State Income Taxation of High Earners: Evidence from California

Joshua Rauh and Ryan Shyu American Economic Journal

Date Posted:: February 12, 2024
Is Database:: Database
Is Important:: Important

After a 2012 increase in marginal tax rates of up to 3% for high-income California households 0.8% of the impacted tax base left the state in 2013 and others restructured income, eroding 61% of “windfall revenues” within the first 2 years. @joshrauh

Using administrative data, we analyze the response to Proposition 30, a 2012 measure that increased California marginal tax rates by up to 3 percentage points for high-income households. Relative to baseline departure rates, an additional 0.8 percent of the residential tax base that landed in the top bracket left California in 2013. Using matched out-of-state taxpayers as controls reveals an income elasticity with respect to the marginal net-of-tax rate of 2.5–3.2 for high earners who stayed. These responses eroded 45.2 percent of state windfall tax revenues within the first year and 60.9 percent within 2 years, driven largely by the intensive margin.

Takeaways by Macro Roundup^® AI

Behavioral responses to California's Proposition 30, a 2012 measure that raised marginal tax rates by up to 3 percentage points on high-income households, eroded 45.2% of state windfall tax revenues within one year and 60.9% within two years, driven largely by the intensive margin.
An additional 0.8% of the residential tax base landing in California's top bracket left the state in 2013 relative to baseline departure rates, according to an analysis of administrative data.
Using matched out-of-state taxpayers as controls, the analysis finds an income elasticity with respect to the marginal net-of-tax rate of 2.5–3.2 for high earners who remained in California.

Making Sense of the GDP-GDI Gap

Manuel Abecasis Goldman Sachs

Date Posted:: February 12, 2024

Taking into account both GDP and GDI @GoldmanSachs argues year-over-year US growth was 2.1% through Q3 of last year, modestly above potential.

Real GDP grew by 3.3% year-over-year in 2023Q4, well above expectations and our estimate of potential growth. However, real gross domestic income (GDI), an alternative measure of economic activity derived from income rather than expenditure data, declined by 0.1% year-over-year in 2023Q3, and the gap between the levels of GDP and GDI is now at its highest level since the early 1990s. To gauge “true” growth in the four quarters to 2023Q3, we would use the average of GDP (2.9%) and GDI adjusted for four distortions (1.3%). The resulting 2.1% estimate implies that the US economy grew at a pace close to or very slightly above potential. This is also consistent with the performance of the labor market over the past 12-18 months.

Takeaways by Macro Roundup^® AI

Real GDP grew 3.3% year-over-year in 2023Q4, well above expectations and the authors' estimate of potential growth, while real gross domestic income fell 0.1% year-over-year in 2023Q3.
The gap between the levels of GDP and GDI stands at its highest since the early 1990s, with GDI derived from income rather than expenditure data.
Averaging GDP growth of 2.9% with GDI adjusted for four distortions at 1.3% yields a 2.1% estimate of "true" growth in the four quarters to 2023Q3, close to or slightly above potential and consistent with labor market performance.

Magnificently Concentrated

Ben Inker and John Pease GMO

Date Posted:: February 12, 2024

Ben Inker and John Pease note that large-cap stocks have historically underperformed the market, and argue the Magnificent 7 stocks that currently make up 28% of the S&P 500’s market cap will underperform going forward. @GMOInsights

The largest stocks certainly don’t underperform all of the time, but on average, they have substantially trailed the average S&P 500 stock, as we can see in Exhibit 2. Since 1957, the 10 largest stocks in the S&P 500 have underperformed an equal-weighted index of the remaining 490 stocks by 2.4% per year. But the last decade has been a very notable departure from that trend, with the largest 10 outperforming by a massive 4.9% per year on average. History suggests that the next decade is likely to see a reversal of the recent pattern with the capitalization-weighted version of the S&P 500 underperforming the equal-weighted version. In such an environment, active managers will suddenly look much better versus the S&P 500 and other capitalization-weighted benchmarks.

Takeaways by Macro Roundup^® AI

Since 1957, the 10 largest S&P 500 stocks have underperformed an equal-weighted index of the remaining 490 stocks by 2.4% per year on average, though the largest stocks do not trail in every period.
Over the past decade, the 10 largest S&P 500 stocks outperformed by 4.9% per year on average, a notable departure from the pattern since 1957.
History suggests the next decade is likely to reverse the recent pattern, with the capitalization-weighted S&P 500 underperforming the equal-weighted version and active managers looking much better against capitalization-weighted benchmarks.

Germany’s Days as an Industrial Superpower Are Coming to an End

Wilfried Eckl-Dorna, Jana Randow, Carolynn Look, and Petra Sorge Bloomberg

Date Posted:: February 12, 2024

Germany’s economic model is under threat as its manufacturing sector reels from higher energy prices driven by the end of cheap Russian natural gas.

The underpinnings of Germany’s industrial machine have fallen like dominoes. The US is drifting away from Europe and is seeking to compete with its transatlantic allies for climate investment. China is becoming a bigger rival and is no longer an insatiable buyer of German goods. The final blow for some heavy manufacturers was the end of huge volumes of cheap Russian natural gas. One of the hardest-hit sectors has been chemicals — a direct result of Germany’s loss of cheap Russian gas. With the transition to clean hydrogen still uncertain, nearly one in 10 companies are planning to permanently halt production processes, according to a recent survey by the VCI industry association. BASF SE, Europe’s biggest chemical producer, is cutting 2,600 jobs and Lanxess AG is reducing staff by 7%.

Takeaways by Macro Roundup^® AI

Nearly one in 10 German chemical companies plan to permanently halt production processes, according to a survey by the VCI industry association, in a sector hit hard by Germany's loss of cheap Russian natural gas.
BASF SE, Europe's biggest chemical producer, is cutting 2,600 jobs and Lanxess AG is reducing staff by 7%, with the transition to clean hydrogen still uncertain.
Germany's industrial model has been undermined by a US drifting away from Europe and competing for climate investment, a China that is a bigger rival and no longer an insatiable buyer of German goods, and the end of cheap Russian gas.

Pettis On Germany

Michael Pettis @michaelxpettis

Date Posted:: February 12, 2024

.@michaelxpettis argues German malaise will soon spread to other countries with large manufacturing shares of GDP as the global “consumers of last resort” reduce their role in absorbing excess production.

As the world changes, with the global "consumers of last resort" determined to reduce their roles in absorbing excess production abroad, and manufacturing powers determined to double down on their manufacturing sectors, this might become a wider problem. That's because Germany is not the only vulnerable large economy. While manufacturing comprises 18% of its GDP (compared to 16% globally and 11% in the US) it comprises 20% of Japan's, 21% of Singapore’s, 26% of South Korea's, 28% of China's, and 34% of Taiwan’s. These economies all combine a disproportionately large manufacturing share of GDP, a disproportionately low consumption share and, as a direct consequence, an historical reliance on trade surpluses to resolve the imbalances between the two. As we saw in the 1930s, a global rise in protectionism is likely to be especially painful for the manufacturing sectors in persistent surplus countries. If we do indeed see this rise, Germany may become more of an example than an exception.

Takeaways by Macro Roundup^® AI

Manufacturing accounts for 18% of German GDP versus 16% globally and 11% in the US, and larger shares in Japan (20%), Singapore (21%), South Korea (26%), China (28%) and Taiwan (34%), per Pettis.
Pettis argues these economies combine disproportionately large manufacturing shares of GDP with disproportionately low consumption shares, and as a direct consequence have historically relied on trade surpluses to resolve the imbalance.
Pettis contends that, as in the 1930s, a global rise in protectionism would be especially painful for manufacturing sectors in persistent surplus countries, leaving Germany as more of an example than an exception.

Sea Change

Joseph Wang Fed Guy Blog

Date Posted:: February 12, 2024

.@FedGuy12 notes that fiscal deficits could exceed the new CBO projections of 5.5% of GDP and argues, “We are in the early innings of an era with strong nominal growth and surging equity markets” driven by fiscal stimulus.

The steady rise in the fiscal deficit is largely due to a secular rise in spending rather than changes in revenue. This structural change is largely driven by rising retirement related spending and interest expense, both of which are politically very difficult to change. The fiscal authorities are essentially on track to print trillions in Treasuries for the foreseeable future. Recall that Treasuries are essentially money that pays interest. The increase in Treasury supply will continue to weigh on long-dated interest rates, and the increase in private sector purchasing power will continue to place upward pressure on inflation – including asset inflation. Fiscal spending is not the only thing that matters, but the current trajectory strongly argues we are in the early innings of an era with strong nominal growth and surging equity markets. There will be periods of over extension and pull backs along the way.

Takeaways by Macro Roundup^® AI

The rise in the fiscal deficit stems largely from a secular increase in spending rather than changes in revenue, driven by rising retirement-related outlays and interest expense, both politically very difficult to change.
Fiscal authorities are on track to issue trillions in Treasuries for the foreseeable future, and the added supply will continue to weigh on long-dated interest rates while increasing private sector purchasing power.
The current fiscal trajectory argues that an era of strong nominal growth and surging equity markets is in its early innings, with upward pressure on inflation including asset inflation, punctuated by periods of overextension and pullbacks.

According to the new @USCBO numbers, in 2024 the US will spend more on interest than on defense or Medicare. Interest on the debt is the fastest-growing part of the budget. @BudgetHawks @MarcGoldwein

Are interest payments on federal debt now exceeding defense and Medicare spending?

Takeaways by Macro Roundup® AI

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Firms seeking skilled workers are a key driver of skilled immigration to the US; US-based multinational companies account for about 1/3 of H-1B visa applications. @BrittaGlennon

How concentrated is skilled-worker visa use among firms and industries?

Takeaways by Macro Roundup® AI

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In 2012 the Magnificent 7 made up 8% of the market capitalization of all US public firms; by the end of 2023 they made up 24%. Their $12T market cap is worth more than all Chinese public equities. @AswathDamodaran

How much of US equity market gains came from seven tech giants?

Takeaways by Macro Roundup® AI

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Michael Cembalest @jpmorgan notes the 28% rally of the Magnificent 7 since 2019 has been driven by earnings: “21% is attributable to sales growth, 6% from margin expansion and just 1% from multiple expansion.”

Is the largest tech stock rally driven by earnings or valuation?

Takeaways by Macro Roundup® AI

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Retirements are rising again in line with American equity markets. According to @mfariacastro, the US has seen 2.7mm “excess” retirements.

Are rising stock and home prices pushing more Americans into retirement?

Takeaways by Macro Roundup® AI

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A Torsten Sløk chart shows the number of workers per retiree in China has fallen from 10 in 2000 to 5 in 2024. By 2034, this is projected to fall to 3, the current level in the US.

Related Articles:

After a 2012 increase in marginal tax rates of up to 3% for high-income California households 0.8% of the impacted tax base left the state in 2013 and others restructured income, eroding 61% of “windfall revenues” within the first 2 years. @joshrauh

How much revenue do high earners' responses erode after tax increases?

Takeaways by Macro Roundup® AI

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Taking into account both GDP and GDI @GoldmanSachs argues year-over-year US growth was 2.1% through Q3 of last year, modestly above potential.

What does the gap between output and income measures say about growth?

Takeaways by Macro Roundup® AI

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Ben Inker and John Pease note that large-cap stocks have historically underperformed the market, and argue the Magnificent 7 stocks that currently make up 28% of the S&P 500’s market cap will underperform going forward. @GMOInsights

Will the largest stocks underperform the average S&P 500 stock ahead?

Takeaways by Macro Roundup® AI

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Germany’s economic model is under threat as its manufacturing sector reels from higher energy prices driven by the end of cheap Russian natural gas.

Is Germany's industrial base losing the foundations that supported it?

Takeaways by Macro Roundup® AI

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.@michaelxpettis argues German malaise will soon spread to other countries with large manufacturing shares of GDP as the global “consumers of last resort” reduce their role in absorbing excess production.

Are high-manufacturing, surplus-reliant economies vulnerable to rising protectionism?

Takeaways by Macro Roundup® AI

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.@FedGuy12 notes that fiscal deficits could exceed the new CBO projections of 5.5% of GDP and argues, “We are in the early innings of an era with strong nominal growth and surging equity markets” driven by fiscal stimulus.

Is rising government spending driving long-term interest rates and inflation higher?

Takeaways by Macro Roundup® AI

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