Edward Conard

Top Ten New York Times Bestselling Author

  • “…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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…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 very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…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
  • “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
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, February 12, 2024

AI Summary. A California ballot measure raising top marginal income tax rates by up to 3 percentage points prompted an additional 0.8% of the affected tax base to leave the state, with an estimated income elasticity of 2.5–3.2 for high earners who stayed. The authors estimate these responses eroded 45.2% of windfall revenues within one year and 60.9% within two.

Joshua Rauh and Ryan Shyu American Economic Journal
Date Posted:
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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?

Core argument: 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.

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

  1. 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.
  2. 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.
  3. 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.

Related Articles:

  • Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy — The authors estimate that US billionaires move to states without estate taxes as they age, with $80.7bn of Forbes 400 wealth escaping estate taxation as a result. They find that for the average state the added estate tax revenue exceeds forgone income tax revenue by 31%, with California a notable exception.
  • The Limits of Taxing the Rich — Stabilizing US federal debt at 100% of GDP would require non-interest savings starting at 2% of GDP and rising to 5% of GDP over three decades, assuming no new spending, tax cuts, or crises. Taxing the rich cannot close more than a small fraction of this gap.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

AI Summary. Real gross domestic product and real gross domestic income, an income-based alternative measure of economic activity, have diverged to their widest gap since the early 1990s, with output growth well above and income growth slightly negative. Averaging the two measures after adjusting for distortions yields an estimated 2.1% growth pace, close to potential.

Manuel Abecasis Goldman Sachs
Date Posted:

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?

Core argument: 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.

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

  1. 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.
  2. 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.
  3. 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.

Related Articles:

  • Global Views: Too Much of a Good Thing? — Two alternative gauges of US growth — gross domestic income, which sums all income rather than all spending, and a current activity indicator — show growth of 1.5% and 0.8% at annualized rates, well below corresponding GDP figures. The authors conclude real output is at most growing modestly above potential despite stronger GDP data.
  • The Big Picture: Back to the Future — The secular backdrop has shifted from disinflationary to more inflationary, with interest rates no longer near zero and real rates no longer negative. Household balance sheets are as healthy as they have been in 20 years, leaving room to borrow, while the public sector is as indebted as it has ever been.
  • 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%.

AI Summary. Since 1957, the 10 largest stocks in the S&P 500 have trailed an equal-weighted index of the remaining 490 stocks by 2.4% per year on average, though over the past decade the largest 10 outperformed by 4.9% per year. The authors argue history suggests the capitalization-weighted S&P 500 is likely to underperform the equal-weighted version over the next decade.

Ben Inker and John Pease GMO
Date Posted:

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?

Core argument: 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.

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

  1. 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.
  2. 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.
  3. 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.

Related Articles:

  • Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks — A study of about 64,000 global stocks estimates net global stock market wealth creation of $75.7tn, with returns highly concentrated: the top 159 firms (0.25%) account for half of net wealth creation and the top 1,526 (2.39%) account for all of it. Fewer than half of stocks beat one-month US Treasury bills, 42.6% of non-US and 44.8% of US stocks.
  • The Seven Samurai: Big Tech to the Rescue! — The seven largest US technology companies — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla — added $5.1tn in combined market value in a single year, accounting for more than 50% of the increase in the entire US equity market's capitalization. US equities returned 23.25% including them and 12.6% without them.
  • Five Easy Pieces — The rally in the seven largest US technology stocks has been driven by earnings rather than valuation: of the group's 28% return, 21 percentage points came from sales growth, 6 from margin expansion, and 1 from multiple expansion. Market concentration has reached its highest level since 1972, and large spikes in concentration have frequently coincided with or preceded prior recessions.

AI Summary. Germany's industrial base faces mounting pressure as the US competes with Europe for climate investment, China shifts from customer to rival, and cheap Russian natural gas has ended. In chemicals, nearly one in 10 companies plan to permanently halt production processes, according to an industry association survey, while BASF is cutting 2,600 jobs and Lanxess is reducing staff by 7%.

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

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?

Core argument: 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.

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

  1. 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.
  2. 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.
  3. 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.

Related Articles:

  • Germany’s Industrial Slowdown — German output remains barely above pre-pandemic levels, with cumulative GDP growth of less than 0.5% over roughly five years. German industrial investment has not recovered to pre-pandemic levels, and real fixed investment in equipment remains below its 2018 level, even as the US devotes record resources to factory construction and equipment purchases.
  • Can Volkswagen Win Back China? — Volkswagen relies on China for at least half its annual profits, but its flagship VW brand has been displaced as China's best-selling car by BYD and holds just 2% of the electric vehicle market, ninth place, versus nearly 40% for BYD and over 10% for Tesla.
  • Comparing EU-to-US Output Per Hour — European Union output per hour worked has risen from about 72% of the US level in the early 2000s to about 82%. The EU's 28% shortfall in GDP per capita versus the US is roughly two-thirds attributable to lower output per hour and one-third to fewer hours worked; Germany's shortfall reflects fewer hours alone.

AI Summary. Manufacturing accounts for 18% of Germany's GDP, versus 16% globally and 11% in the US, and an even larger share in Japan (20%), Singapore (21%), South Korea (26%), China (28%) and Taiwan (34%). These economies combine high manufacturing shares with low consumption shares and reliance on trade surpluses, leaving them vulnerable if protectionism rises globally.

Michael Pettis @michaelxpettis
Date Posted:

.@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.

.@michaelxpettis argues German malaise will soon spread to other countries with large manufacturing shares of GDP as the...

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

Core argument: 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.

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

  1. 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.
  2. 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.
  3. 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.

Related Articles:

  • Germany’s Days as an Industrial Superpower Are Coming to an End — Germany's industrial base faces mounting pressure as the US competes with Europe for climate investment, China shifts from customer to rival, and cheap Russian natural gas has ended. In chemicals, nearly one in 10 companies plan to permanently halt production processes, according to an industry association survey, while BASF is cutting 2,600 jobs and Lanxess is reducing staff by 7%.
  • EU to Press China On Industrial Overcapacity at Beijing Summit — European Union leaders are pressing China over its expansion of industrial capacity, particularly in renewable energy products, at a time of weak Chinese domestic demand and tightening access to markets such as the US, leaving Europe a target for excess exports. EU officials say the bloc's trade deficit with China is just below $400bn and has doubled within two years.
  • Pettis On China’s Export Strategy — China is shifting investment from its weakened property sector toward manufacturing, which already accounts for 27% of Chinese GDP versus 14% elsewhere and is constrained by weak demand rather than scarce capital. Since China holds about 18% of global GDP but 30% of global manufacturing, added output must be absorbed abroad absent higher consumption.

AI Summary. The rising US fiscal deficit is attributed largely to a secular increase in spending — driven by retirement-related outlays and interest expense that are politically difficult to change — rather than to revenue changes. The author argues the resulting growth in Treasury supply will weigh on long-dated interest rates while adding upward pressure on consumer and asset prices.

Joseph Wang Fed Guy Blog
Date Posted:

.@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?

Core argument: 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.

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

  1. 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.
  2. 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.
  3. 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.

Related Articles:

  • The Curious Incident of the Elevated Profit Margins — The US fiscal deficit averaged just under 3% of gross national product from 1950 to 2011 but 6.6% from 2012 to 2022, driven mainly by health and social security spending, a pattern that holds excluding pandemic years. Even assuming permanently elevated profit margins, US equity valuations imply low long-run returns.
  • The Budget and Economic Outlook: 2024 to 2034 — The Congressional Budget Office projects the federal budget deficit will grow from $1.6tn to $2.6tn over a decade, rising from 5.6% to 6.1% of gross domestic product. That end-point is well above the 3.7% average of the past 50 years, as outlays are projected to rise faster than revenues over most of the period.
  • 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.

Tuesday, February 13, 2024

AI Summary. Computerization concentrated decision-making power and resources among elite experts with college and graduate degrees, while the 60% of U.S. adults without a bachelor's degree were relegated to low-paid service jobs. Because artificial intelligence can combine information and rules with acquired experience, it could enable more workers to perform higher-stakes decision-making tasks.

David Autor National Bureau of Economic Research
Date Posted:

.@davidautor argues that AI can help rebuild middle-class jobs by democratizing higher-stakes decision-making tasks to lower and middle-skilled workers that had previously been the providence of elite experts.

.@davidautor argues that AI can help rebuild middle-class jobs by democratizing higher-stakes decision-making tasks to lower...

Can AI extend decision-making work to workers without college degrees?

Core argument: The 60% of U.S. adults without a bachelor's degree have been relegated to non-expert, low-paid service jobs, while computerization concentrated decision-making power and resources among elite experts holding college or graduate degrees.

Information is merely an input for a more consequential economic function, decision making, which is the province of elite experts — typically the minority of U.S. adults who hold college or graduate degrees. By making information and calculation cheap and abundant, computerization catalyzed an unprecedented concentration of decision-making power, and accompanying resources, among elite experts. Meanwhile, lacking better opportunities, the 60% of adults without a bachelor’s degree have been relegated to non-expert, low-paid service jobs. The unique opportunity that AI offers humanity is to push back against the process started by computerization — to extend the relevance, reach and value of human expertise for a larger set of workers. Because artificial intelligence can weave information and rules with acquired experience to support decision-making, it can enable a larger set of workers equipped with necessary foundational training to perform higher-stakes decision-making tasks currently arrogated to elite experts, such as doctors, lawyers, software engineers and college professors. In essence, AI used well can assist with restoring the middle-skill, middle-class heart of the U.S. labor market that has been hollowed out by automation and globalization.

Takeaways by Macro Roundup® AI

  1. The 60% of U.S. adults without a bachelor's degree have been relegated to non-expert, low-paid service jobs, while computerization concentrated decision-making power and resources among elite experts holding college or graduate degrees.
  2. Because AI can weave information and rules with acquired experience to support decision making, it could enable workers with foundational training to perform higher-stakes decisions now reserved for doctors, lawyers, software engineers and college professors.
  3. Information is merely an input to the more consequential economic function of decision making, and AI used well can assist with restoring the middle-skill, middle-class heart of a U.S. labor market hollowed out by automation and globalization.

Related Articles:

  • Generative AI at Work — A study of 5,179 customer support agents finds that access to a generative AI conversational assistant raised issues resolved per hour by 14% on average, with the largest gains for novice and low-skilled workers and minimal effect on experienced, highly skilled ones. The authors also find AI assistance improved customer sentiment, reduced requests for managerial intervention, and improved employee retention.
  • Centaurs and Cyborgs on the Jagged Frontier — In a pre-registered experiment at Boston Consulting Group covering 18 realistic consulting tasks, consultants using ChatGPT-4 completed 12.2% more tasks, worked 25.1% faster, and produced 40% higher quality results than those without it. The tool acted as a skill leveler: the lowest-scoring consultants improved 43%, while top performers gained less.
  • The Short-Term Effects of Generative Artificial Intelligence on Employment: Evidence from an Online Labor Market — Freelancers in occupations most exposed to generative AI saw employment and earnings decline, with the authors estimating a 2% drop in jobs and a 5.2% drop in monthly earnings on an online labor platform. Offering high-quality service did not mitigate the effect, and top-rated freelancers appear disproportionately hurt.

AI Summary. The International Energy Agency reports that data center energy use is growing rapidly in the US, home to a third of the world's 8,000 data centers, and in China, which has a tenth, and projects that global electricity consumption from data centers, cryptocurrencies, and artificial intelligence could double over a four-year span.

Kenza Bryan Financial Times
Date Posted:

Increased electrical demand from data centers is putting stress on electrical grids. Morgan Stanley forecasts that generative AI will drive 3/4 of data center power demand in 2027.

Is data center electricity demand set to double globally?

Core argument: The IEA says global electricity consumption from data centres, cryptocurrencies, and artificial intelligence could double between 2022 and 2026, with energy use from data centres growing rapidly in both the US and China.

Energy use from data centers is growing rapidly in the US, home to a third of the world’s 8,000 data centers, and in China, which has a tenth, according to the IEA. Globally, electricity consumption from data centres, cryptocurrencies, and artificial intelligence could double between 2022 and 2026, the IEA also said last month. Morgan Stanley analysts expect generative AI to drive more than three-quarters of global data center power demands in 2027, based on 2022 numbers.

Takeaways by Macro Roundup® AI

  1. The IEA says global electricity consumption from data centres, cryptocurrencies, and artificial intelligence could double between 2022 and 2026, with energy use from data centres growing rapidly in both the US and China.
  2. The US hosts a third of the world's 8,000 data centres and China a tenth, according to the IEA.
  3. Morgan Stanley analysts expect generative AI to drive more than three-quarters of global data centre power demand in 2027, based on 2022 numbers.

Related Articles:

  • Elon Musk’s Latest Mission: Rev Up the Electricity Industry — U.S. electricity demand has grown at an average of 1% a year over the past 20 years, but McKinsey projects it will double by 2050 and PG&E expects a 70% rise over the next 20 years. Deloitte estimates the largest U.S. electric companies will together spend as much as $1.8tn by 2030.
  • Electricity 2024 — More than 8,000 data centers operate globally, with about 33% in the United States, 16% in Europe, and close to 10% in China. US data center electricity use is projected to rise from roughly 200 TWh in 2022, about 4% of US electricity demand, to almost 260 TWh, or 6% of total demand.
  • Top 10 Charts of 2023 — Goldman Sachs projects that artificial intelligence could drive a capital investment cycle reaching almost 2.5% of US GDP by 2032, up from 0.5% of GDP.

AI Summary. Core consumer price inflation came in hotter than expected at 0.4% in a single month, a 4.8% annual rate, versus 3.9% over 12 months, 3.6% over 6 months and 4.0% over 3 months. Overall inflation also picked up but trailed core, as food prices rose further while energy prices fell for a fourth straight month.

Jason Furman @jasonfurman
Date Posted:

Overall inflation was 3.1% in January. Noting Core CPI was 0.4% in which implies a 4.8% annual rate @jasonfurman expects “PCE inflation to stay within a comfortable range. But more nervous.”

Is core inflation accelerating above its recent annual pace?

Core argument: Core CPI rose 0.4% in January, a 4.8% annualized rate, hotter than expected, with Jason Furman citing annual rates of 3.9% over 12 months, 3.6% over 6 months, and 4.0% over 3 months.

Core CPI comes in hotter than expected, 0.4% in the month of January which is a 4.8% annual rate. I'm not a big fan of second derivative forecasting but those of you who are should be worried. Annual rates: 12 months: 3.9%. 6 months: 3.6%. 3 months: 4.0%. 1 month: 4.8%. Overall inflation also picked up but was below core as already (relatively) high food prices rose further but already low energy prices fell for the fourth straight month. Quick interpretation, this is not a good report. But it is one report, in January (which is hard for seasonal adjustment given the price resets). + is CPI, not the Fed's target for PCE. I still expect PCE inflation to stay within a comfortable range. But more nervous.

Takeaways by Macro Roundup® AI

  1. Core CPI rose 0.4% in January, a 4.8% annualized rate, hotter than expected, with Jason Furman citing annual rates of 3.9% over 12 months, 3.6% over 6 months, and 4.0% over 3 months.
  2. Overall CPI inflation also picked up but came in below core, as relatively high food prices rose further while already low energy prices fell for a fourth straight month.
  3. Furman calls the report not a good one while cautioning that it is one month, that January is hard to seasonally adjust given price resets, and that CPI is not the Fed's PCE target, and he still expects PCE inflation to stay within a comfortable range.

Related Articles:

  • The U.S. Economy Refuses to Slow Down — Wages for most U.S. private-sector workers are rising slightly faster than 4.5% a year, even as job-market churn measures such as the quits rate and detrended job openings rate have returned to or fallen below pre-pandemic norms. That income growth coincides with nominal retail spending rising about 6–7% a year.
  • US December CPI — US goods prices excluding used cars and trucks have been in sequential deflation, while services excluding housing, travel and medical care slowed from an annualized pace above 7% to about 4.5% over three months. If those trends persist, core inflation measures running near 1% annualized over three months are expected to weaken further.
  • The Big Picture: Back to the Future — The secular backdrop has shifted from disinflationary to more inflationary, with interest rates no longer near zero and real rates no longer negative. Household balance sheets are as healthy as they have been in 20 years, leaving room to borrow, while the public sector is as indebted as it has ever been.

AI Summary. Global insurance losses from natural catastrophes have topped $100bn for four straight years, a level once considered the mark of an exceptionally bad year, and US insurers have repriced risk with significant premium increases. Reinsurer Swiss Re predicts a growing number of areas where buying insurance becomes uneconomical.

Ian Smith, Attracta Mooney, and Aime Williams Financial Times
Date Posted:

The CEO of one of the world’s largest reinsurers described rising premiums after four years of $100B losses as a carbon price, “this is the first time we actually bring a climate change bill back to the consumer.”

Are rising natural catastrophe losses making home insurance uneconomical in some areas?

Core argument: Insurance losses from natural catastrophes have exceeded $100bn for four consecutive years, a level previously marking a remarkably bad year, and the run has spooked insurance executives.

A run of four consecutive years when overall insurance losses from natural catastrophes have topped $100bn, previously the mark of a remarkably bad year, has spooked executives. In the US, a repricing of risks has sparked a significant rise in premiums. Last year saw a record-breaking number of natural catastrophes causing at least $1bn in insurance losses: 37 separate events, according to data from insurance broker Aon. That included 25 so-called severe convective storms, of which 21 were in the US. The cost of property catastrophe reinsurance cover, which they use to share the burden of natural disaster claims, is at its highest in a generation. If yearly losses stick above the $100bn level, and firms are forced into further price rises and pullbacks to protect their balance sheets, it could “harm the whole proposition of the insurance sector to society”, says one reinsurance chief executive. There will be growing “patches” where buying insurance is uneconomical, Swiss Re has predicted.

Takeaways by Macro Roundup® AI

  1. Insurance losses from natural catastrophes have exceeded $100bn for four consecutive years, a level previously marking a remarkably bad year, and the run has spooked insurance executives.
  2. Aon data show a record 37 separate natural catastrophes each causing at least $1bn in insurance losses, including 25 severe convective storms, 21 of them in the US.
  3. The cost of property catastrophe reinsurance cover stands at its highest in a generation, US premiums have risen significantly as risks are repriced, and Swiss Re predicts growing "patches" where buying insurance is uneconomical.

Related Articles:

  • Parts of America are Becoming Uninsurable — Florida's average home insurance premium reached about $6,000, over 3x the national average and up 42% year-on-year, yet insurers are exiting, leaving the state-backed insurer of last resort with the largest market share and $608bn of insured assets. In California, consumer-protection rules prevent premiums from covering rising wildfire and reinsurance costs.
  • The Insurance Market Is Healing — Higher returns are drawing capital into reinsurance, which is likely to ease pressure on coverage pricing. Catastrophe bond issuance hit a record $15bn, global property catastrophe reinsurance pricing rose about 5% at January renewals versus closer to 30% a year earlier, and risk-adjusted prices for reinsurance bought by reinsurers fell as much as 15%.
  • Why California and Florida Have Become Almost Uninsurable — Wildfires in California and hurricanes in Florida have generated large volumes of insurance claims, while higher housing prices and construction and repair costs have made each claim more expensive. Insurers have also faced costlier reinsurance, with worldwide average reinsurance rates up about a quarter in one year and another third the next, according to reinsurance broker Howden Tiger.

AI Summary. The Congressional Budget Office projects the U.S. primary deficit will rise gradually until the early 2040s before plateauing near 2.7% of GDP, driven mainly by mandatory spending such as Social Security and Medicare. Limiting both health-care and Social Security spending to grow no faster than GDP would not produce a primary surplus until 2036.

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

The primary source of long-run pressure on the primary deficit is funding Social Security and Medicare obligations. @sffed highlights stabilizing that spending at 2023 levels would not balance the primary deficit for decades.

What drives the long-run rise in the US primary deficit?

Core argument: CBO projects the U.S. primary deficit will rise gradually until the early 2040s before plateauing around 2.7% of GDP, with mandatory programs such as Social Security and Medicare the main source of long-run upward pressure.

Figure 3 shows the CBO’s projections of the primary deficit (blue line) over the next 30 years. Over the long run, the primary deficit is projected to increase gradually until the early 2040s before plateauing around 2.7% of GDP. The main source of the long-run upward pressure on the primary deficit is spending on mandatory programs such as Social Security and Medicare. The red line shows a projection of the primary deficit in which government health-care spending is assumed to grow at the same rate as GDP from fiscal years 2024 to 2054.The green line is similar but assumes government health-care and Social Security spending grow at the same pace as GDP. The projection shows that limiting spending on these programs to grow no faster than the economy would eventually lead to a primary surplus. However, even imposing this restriction on both health-care programs and Social Security would not eliminate the primary deficit until 2036. Imposing the restriction just on health-care programs would not eliminate it until 2044.

Takeaways by Macro Roundup® AI

  1. CBO projects the U.S. primary deficit will rise gradually until the early 2040s before plateauing around 2.7% of GDP, with mandatory programs such as Social Security and Medicare the main source of long-run upward pressure.
  2. Holding both government health-care and Social Security spending to grow no faster than GDP from fiscal years 2024 to 2054 would not eliminate the primary deficit until 2036.
  3. Limiting only government health-care spending to grow at the same rate as GDP would not eliminate the primary deficit until 2044.

Related Articles:

  • The Budget and Economic Outlook: 2024 to 2034 — The Congressional Budget Office projects the federal budget deficit will grow from $1.6tn to $2.6tn over a decade, rising from 5.6% to 6.1% of gross domestic product. That end-point is well above the 3.7% average of the past 50 years, as outlays are projected to rise faster than revenues over most of the period.
  • 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.
  • 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. The Congressional Budget Office projects federal debt held by the public to rise from roughly 97% of GDP to 106.3% and then 116% of GDP over the following decade under current law. Stabilizing debt near 97% of GDP is estimated to require $7.9tn of deficit reduction over ten years, while cutting it to 80% would require $15tn.

Marc Goldwein Committee for a Responsible Federal Budget
Date Posted:

.@MarcGoldwein projects achieving primary balance, in which revenue would fund spending excluding interest, would require about $3T of savings over 5 years.

How much deficit reduction would it take to stabilize federal debt?

Core argument: CBO projects federal debt held by the public will rise from roughly 97% of GDP to a record 106.3% by the end of FY 2028 and 116% by the end of FY 2034 under current law.

Under current law, CBO projects federal debt held by the public to rise from roughly 97% of GDP to a record 106.3% by the end of FY 2028 and further to 116% by the end of FY 2034. Policymakers should set a fiscal goal to stabilize or reduce the debt to prevent substantial risks and threats to the budget and economy. Stabilizing debt at roughly 97% of GDP would require $3.6 trillion of deficit reduction over five years or $7.9 over ten years. Reducing debt to 80% of GDP would require $9.4 trillion over five years or $15 trillion over ten years. Balancing the budget would require about $7.5 trillion of five-year savings or $15 trillion over ten years.

Takeaways by Macro Roundup® AI

  1. CBO projects federal debt held by the public will rise from roughly 97% of GDP to a record 106.3% by the end of FY 2028 and 116% by the end of FY 2034 under current law.
  2. Stabilizing debt at roughly 97% of GDP would require $3.6 trillion of deficit reduction over five years or $7.9 trillion over ten years, while reducing debt to 80% of GDP would require $9.4 trillion over five years or $15 trillion over ten.
  3. Balancing the federal budget would require about $7.5 trillion of five-year savings or $15 trillion over ten years, and policymakers should set a fiscal goal to stabilize or reduce the debt to prevent substantial risks to the budget and economy.

Related Articles:

  • The Budget and Economic Outlook: 2024 to 2034 — The Congressional Budget Office projects the federal budget deficit will grow from $1.6tn to $2.6tn over a decade, rising from 5.6% to 6.1% of gross domestic product. That end-point is well above the 3.7% average of the past 50 years, as outlays are projected to rise faster than revenues over most of the period.
  • Why We Should, but Won’t, Reduce the Budget Deficit — High interest rates will likely crowd out private investment and weaken long-term growth prospects. Because Social Security, health care, other safety-net programs, defense, and interest payments make up most federal spending, leaving only a small and already squeezed slice of nondefense discretionary spending, deficit reduction requires either cutting popular benefits or raising taxes.
  • The Limits of Taxing the Rich — Stabilizing US federal debt at 100% of GDP would require non-interest savings starting at 2% of GDP and rising to 5% of GDP over three decades, assuming no new spending, tax cuts, or crises. Taxing the rich cannot close more than a small fraction of this gap.

AI Summary. China produced more than half of the world's commercial shipbuilding output, while Europe accounts for about 5% and the US next to nothing, with most of the remainder built in South Korea and Japan. Analysts argue that in a protracted conflict China's wartime-scale yards could quickly accelerate production, replace lost ships, and repair damaged ones.

Niharika Mandhana Wall Street Journal
Date Posted:

China dominates global shipbuilding, producing over half of all commercial ships relative to 5% for Europe and “next to nothing” in the US. China’s prowess could tip naval conflicts in its favor, with rapid production and repair capabilities. @WSJ

How does China's shipbuilding capacity compare with America's in a prolonged war?

Core argument: China produced more than half of the world's commercial shipbuilding output last year, making it the top global shipmaker by a wide margin, while Europe accounted for 5% and the U.S. contributed next to nothing.

More than half of the world’s commercial shipbuilding output came from China last year—making it the top global shipmaker by a wide margin. The once-prolific shipyards of the West that helped forge empires, expand trade, and win wars have shriveled. Europe accounts for just 5% of the world’s output, while the U.S. contributes next to nothing. Most of what China doesn’t build comes from South Korea and Japan. “The scale [of China’s shipbuilding] is just almost hard to fathom,” said Thomas Shugart, an adjunct senior fellow at the Center for a New American Security whose research focuses on maritime competition. “The degree to which it dwarfs American shipbuilding is just unbelievable.” In a protracted conflict, China’s shipyards would give its navy a significant upper hand. Sized to build at wartime rates, they would be able to quickly accelerate production, replace lost ships, and repair damaged ones. That is a capability U.S. shipyards brought to the fight during World War II, building Allied vessels faster than German U-boats could sink them.

Takeaways by Macro Roundup® AI

  1. China produced more than half of the world's commercial shipbuilding output last year, making it the top global shipmaker by a wide margin, while Europe accounted for 5% and the U.S. contributed next to nothing.
  2. China's shipyards, sized to build at wartime rates, would give its navy a significant upper hand in a protracted conflict by quickly accelerating production, replacing lost ships, and repairing damaged ones.
  3. U.S. shipyards brought surge capability to World War II, building Allied vessels faster than German U-boats could sink them.

Related Articles:

  • Why Xi Can No Longer Brag About the Chinese Economy — China's shipyards build 46% of the world's ships, letting it produce several warships and submarines a year, while the U.S. holds under 1% of capacity and its Navy faces late, over-budget deliveries from a few yards lacking workers. China is also the largest drone producer.
  • Nearly 40% of US Attack Submarines Are Out of Commission for Repairs — US Navy data show 18 of its 49 attack submarines — 37% — are out of commission for repairs because of naval shipyard delays, up from 28% and well above the 20% industry best practice. The report argues this leaves the US at a disadvantage against China's numerically larger fleet.
  • U.S. Weapons Industry Unprepared for a China Conflict, Report Says — A Center for Strategic and International Studies report argues the U.S. defense industrial base is not prepared for the current security environment and operates in a manner better suited to peacetime. The study recommends reassessing total munitions requirements and stockpile replenishment needs, creating a strategic munitions reserve, and setting a sustainable procurement plan.