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
  • “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
  • “…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
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…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
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, February 23, 2024

AI Summary. Inflation-adjusted wages for US workers in the middle pay range, between the 40th and 60th percentiles, were 6.6% higher than before the pandemic, slightly above what 2015-19 trends would predict. The US is the only G7 country with substantial real wage gains, ranging elsewhere from a 0.2% rise in Canada to a 9% decline in Italy.

Arindrajit Dube Project Syndicate
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As of December 2023, real wages for the US middle quintile are 6.6% higher than they were in 2019 and above the level implied by the 2015-2019 trend. The US is the only G7 country that experienced substantial real wage gains in recent years. @ArinduB

Have US middle-wage workers gained more real pay than other advanced economies?

Core argument: Inflation-adjusted wages for US workers between the 40th and 60th percentiles were 3.9% higher in December 2023 than a year earlier and 6.6% higher than in December 2019, with similar gains in establishment data.

Wage growth for most American workers has outpaced the spike in the cost of living since the beginning of the pandemic. Updated data show that in the middle pay range, between the 40th and 60th percentiles, inflation-adjusted wages in December 2023 were 3.9% higher than in December 2022, and 6.6% higher than in December 2019. Similar real wage gains can also be observed in establishment data. Importantly, the real wages of the middle quintile are not only higher today than they were before the pandemic but slightly higher than we would expect based on 2015-19 trends. The wage boom was not inevitable. In fact, the US is the only G7 country that experienced substantial real wage gains in recent years. While American workers’ wages have increased by 2.8% since late 2019, workers in other major economies have faced stagnant or even negative wage growth, ranging from a 0.2% increase in Canada to a 9% decline in Italy.

Takeaways by Macro Roundup® AI

  1. Inflation-adjusted wages for US workers between the 40th and 60th percentiles were 3.9% higher in December 2023 than a year earlier and 6.6% higher than in December 2019, with similar gains in establishment data.
  2. Real wages of the US middle quintile stand slightly above what 2015-19 trends would predict, in addition to exceeding pre-pandemic levels.
  3. The US is the only G7 country with substantial real wage gains, up 2.8% since late 2019, versus stagnant or negative growth elsewhere ranging from a 0.2% increase in Canada to a 9% decline in Italy.

Related Articles:

  • The Unexpected Compression: Competition at Work in the Low Wage Labor Market — 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.
  • Just How Bad Is the US Cost-of-Living Squeeze? We Did the Math — It now takes $119.27 to buy what $100 purchased before the pandemic, with prices rising about as much since early 2020 as in the preceding decade. Groceries and electricity are each up 25% since January 2020, used cars 35%, auto insurance 33%, and rents roughly 20%.
  • Why Americans Dislike the Economy — The Employment Cost Index, which adjusts for shifts in the mix of jobs and industries, shows inflation-adjusted wages have fallen 3.7% since the end of 2020, erasing the gains of the late 2010s. Real wages stand at 2015 levels, so American paychecks buy no more than they did eight years earlier.

AI Summary. A study classifying college graduates as underemployed when their occupation does not typically require a bachelor's degree finds that of every 100 graduates with a terminal bachelor's degree, 48 hold college-level jobs one year after graduation and 55 do at both five and 10 years. Graduates who start underemployed largely remain so.

Andrew Hanson, Carlo Salerno, Matt Sigelman, Mels de Zeeuw, and Stephen Moret Burning Glass Institute and Strada Institute for the Future of Work
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10 years after graduation 45% of four-year college graduates are working in jobs that don’t require a bachelor’s degree, as measured by the share of workers in the field required to have a degree.

How many college graduates hold college-level jobs after graduating?

Core argument: For every 100 college graduates with a terminal bachelor's degree, 48 hold college-level jobs one year after graduation, 55 at five years, and still 55 ten years after completion.

Underemployment is a concept that refers to individuals who are employed in jobs that do not fully utilize their skills, education, or availability. In this study, workers with a bachelor’s degree are classified as underemployed based on whether the majority of workers in an occupation have or are required to have a bachelor’s degree. For every 100 college graduates with a terminal bachelor’s degree, 48 are employed in college-level jobs one year after graduation and 55 five years after graduation; 10 years after completing, that number is still only 55. Approximately 27% of underemployed graduates escape underemployment between one and 10 years after graduation, and 21% of graduates employed in college-level jobs fall into underemployment. However, the vast majority of graduates who start in college-level jobs stay in them over time, while underemployed graduates largely remain underemployed.

Takeaways by Macro Roundup® AI

  1. For every 100 college graduates with a terminal bachelor's degree, 48 hold college-level jobs one year after graduation, 55 at five years, and still 55 ten years after completion.
  2. About 27% of underemployed graduates escape underemployment between one and 10 years after graduation, while 21% of those starting in college-level jobs fall into underemployment.
  3. The study classifies bachelor's-degree holders as underemployed when most workers in their occupation neither hold nor are required to hold a bachelor's degree, and finds underemployed graduates largely remain underemployed.

Related Articles:

  • Why Do Wages Grow Faster for Educated Workers? — College graduates sort into professional, non-routine occupations where wages rise much more with job tenure, and the author estimates this occupational sorting explains at least half of the life-cycle growth in the college wage premium. That premium is estimated at 22% at age 26, 49% at age 40, and 56% at age 60.
  • Falling College Wage Premiums by Race and Ethnicity — The college wage premium is largest for Asian workers, whose college graduates earn more than twice what high school graduates earn — about a 120% premium versus roughly 70–80% for Black, Hispanic, and White workers. The premium has edged down slightly for all groups except Hispanic workers since the pandemic recession.
  • Britain’s Graduates Are Being Short-Changed While America’s Are Rich — British graduates' median hourly pay of £21 (just over $26) trails the almost $36 earned by US graduates, a 27% gap that has widened from 8% roughly 15 years earlier, while non-graduates in both countries earn similar amounts. Across most of Britain, more than a third of graduates work in jobs that do not require a degree.

AI Summary. A second Trump administration would pair a 10 percentage point tariff increase on all US trading partners with a tariff of at least 60% on Chinese imports, with advisers arguing a broad import tax addresses America's persistent pattern of trade deficits rather than bilateral imbalances. Researchers estimate China's manufacturing goods surplus reached a record of almost 2% of world GDP.

Soumaya Keynes Financial Times
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China’s surplus in manufacturing goods is now almost 2% of global GDP. The country’s growth model will put increasing economic and political stress on the global trading system. @Brad_Setser @BaurVolk @SoumayaKeynes

How would a second round of US tariffs differ from the first?

Core argument: Donald Trump, in his bid for a second term, is promising a 10 percentage point tariff increase on all of America's trading partners and dangling a tariff of at least 60% on Chinese imports.

Donald Trump still likes tariffs. In his bid for a second term, he is promising a 10 percentage point tariff increase on all America’s trading partners, and dangling a tariff on Chinese imports of at least 60%. The discussion around a 10% tariff should be interesting, though controversial. Former US trade representative Robert Lighthizer, who seems likely to serve in the next administration, has argued that America’s problem is not necessarily bilateral trade deficits (absent unfair practices), nor even a trade deficit in any single year. Rather, a broader import tax is supposed to tackle America’s pattern of consistent trade deficits, year after year. Brad Setser’s work with Volkmar Baur of Union Investment, an asset manager, suggests that in 2022 China’s surplus in manufacturing goods grew to record highs, of almost 2% of world gross domestic product.

Takeaways by Macro Roundup® AI

  1. Donald Trump, in his bid for a second term, is promising a 10 percentage point tariff increase on all of America's trading partners and dangling a tariff of at least 60% on Chinese imports.
  2. Former US trade representative Robert Lighthizer argues that America's problem is not bilateral trade deficits absent unfair practices, nor a deficit in any single year, but its pattern of consistent trade deficits year after year, which a broader import tax is meant to tackle.
  3. Brad Setser's work with Volkmar Baur of the asset manager Union Investment suggests China's surplus in manufacturing goods grew in 2022 to a record high of almost 2% of world GDP.

Related Articles:

  • US Warns China Against Dumping Goods on Global Markets — The US has warned China that it and its allies will respond if Beijing addresses its industrial overcapacity by dumping goods on international markets. US Treasury officials say Chinese industrial support and macroeconomic policies focused on supply rather than demand risk pushing excess capacity onto world markets.
  • 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.
  • Mexico Targets Chinese Steel Imports With Increased Tariff Of Nearly 80% — Mexico imposed a tariff of nearly 80% on some steel imports, including certain Vietnamese exports of cold-rolled steel sheets, after local producers said Chinese steelmakers had strangled their production. Exporters that prove the steel originates outside China are exempt.

AI Summary. China accounts for over 31% of global manufacturing but under 13% of global consumption, while the United States accounts for under 17% of manufacturing and nearly 27% of consumption. The author argues persistent surpluses reflect household subsidies to producers, and that the US could counter them with tariffs or taxes on capital inflows.

Michael Pettis China Financial Markets
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As long as the chronic surplus countries balance their trade with American assets the US has “no choice” but to run deficits. The most likely response to beggar-thy-neighbor trade policies will be additional tariffs or capital controls. @michaelxpettis

As long as the chronic surplus countries balance their trade with American assets the US has “no choice” but to...

Can trade intervention counter persistent surpluses and lead to freer trade?

Core argument: China accounts for less than 18% of global GDP but over 31% of global manufacturing and less than 13% of global consumption, while the United States has 24% of global GDP, under 17% of manufacturing, and nearly 27% of consumption.

China comprises less than 18% of global GDP, it accounts for over 31% of global manufacturing and less than 13% of global consumption. The United States, which accounts for 24% of global GDP, accounts for less than 17% of global manufacturing and nearly 27% of global consumption. In persistent surplus economies, weak domestic demand is simply the flip side of policies that result in manufacturing competitiveness. The manufacturing sector is subsidized directly or indirectly by households, which leaves them more competitive and leaves households less able to purchase a substantial share of what they produce. In order to balance these surpluses, the opposite transfers must occur in the deficit countries. Just as consumers are forced to subsidize producers in the surplus countries through various explicit and implicit transfers, producers are effectively forced to subsidize consumers in the deficit countries. Probably the best response for the United States and the world in the medium and long term would be for the United States to intervene to reverse the beggar-thy-neighbor policies of the surplus nations. This could be done either with restrictions on the ability of surplus countries to dump goods into the U.S. economy or with restrictions on the ability of surplus countries to dump excess savings into the U.S. financial system. The most obvious of the former policies are tariffs, and the most obvious of the latter are taxes on capital inflows.

Takeaways by Macro Roundup® AI

  1. China accounts for less than 18% of global GDP but over 31% of global manufacturing and less than 13% of global consumption, while the United States has 24% of global GDP, under 17% of manufacturing, and nearly 27% of consumption.
  2. In persistent surplus economies, weak domestic demand is the flip side of policies that subsidize manufacturing directly or indirectly through households, leaving producers more competitive and households less able to buy a substantial share of what they produce.
  3. Probably the best medium- and long-term response, the author argues, is for the United States to intervene against surplus nations' beggar-thy-neighbor policies through tariffs on dumped goods or taxes on capital inflows.

Related Articles:

  • Managing Economic and Financial Entanglements With China — China's surplus in manufactured goods net of commodity imports has kept growing relative to trade partners' output and relative to China's own economic output, alongside weak consumer spending and falling homebuilding. U.S. federal spending financed largely by borrowing has supported private balance sheets and demand, muting attention to that surplus.
  • China Set to Overtake Japan as World’s Biggest Car Exporter — China is set to overtake Japan as the world's biggest car exporter, driven in part by a mismatch between factory output and domestic demand. Analysts attribute the overcapacity to misjudged forecasts of declining internal combustion engine sales, surging electric vehicle demand, and reduced need for privately owned cars as shared mobility grows.
  • Danish Weight Loss Drugs vs. Chinese Cars: Two Models of Export Booms — Denmark's weight-loss drug exports illustrate a positive-sum export boom in which new products create both supply and demand, while Chinese car exports reflect firms with persistent overcapacity fighting for market share. The US preempted Chinese electric vehicles through legislation that boosts demand while reserving a share for local producers; Europe remains more exposed.

AI Summary. Texan cities have cheap homes and growing populations because the state makes urban development easy, while planning systems in California, New York, and London constrain supply. A 1998 Houston rule change let landowners subdivide one home into three, with an opt-out for neighborhoods wishing to preserve existing rules.

John Burn-Murdoch Financial Times
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Removing artificial constraints to building lowers housing costs argues @jburnmurdoch: “Homes in Texan cities are cheap and their populations soaring because the state has made urban development easy.”

Do easier subdivision rules make housing cheaper and cities denser?

Core argument: Houston's 1998 planning change let landowners convert one home into three, creating space for new families in the heart of the city while generating a profit for the owners who subdivided.

Homes in Texan cities are cheap and their populations soaring because the state has made urban development easy. California, New York, and London are overheating and squeezing out young families because their planning systems place artificial constraints on supply, making urban development extremely difficult. It’s not just that Texas simply has more space to build on: its cities aren’t merely adding sprawl at the periphery, they’re densifying the existing city, and doing so by allowing existing homeowners to expand and subdivide their property. In Houston, a 1998 change to planning laws empowered landowners to turn one home into three — instantly creating space for new families in the heart of the city, while generating a tidy profit for themselves. A crucial detail was the inclusion of an opt-out for individual neighbourhoods whose residents wished to keep things as they were, increasing the scheme’s durability.

Takeaways by Macro Roundup® AI

  1. Houston's 1998 planning change let landowners convert one home into three, creating space for new families in the heart of the city while generating a profit for the owners who subdivided.
  2. Texan cities keep homes cheap and populations rising by making urban development easy, densifying existing neighbourhoods through homeowner expansion and subdivision rather than only adding sprawl at the periphery.
  3. California, New York, and London are overheating and squeezing out young families because their planning systems place artificial constraints on housing supply, making urban development extremely difficult.

Related Articles:

  • On The Move: West Side Story — The West's share of US population has flattened and appears to be falling, with relative housing affordability cited as a key part of the story. Metropolitan areas with median mortgage payments above the US average generally show negative or weakly positive population growth, and Pacific-state metros all have above-average mortgage payments.
  • The Determinants Of Declining Internal Migration — A 10% increase in wages where people live is associated with 3.5% less migration, while a 10% increase in destination wages is associated with 7.8% more migration; a 10% rise in destination home prices is associated with 2.6% less migration. The authors find wage responses alone would have raised migration rates, but housing-related factors more than offset them.
  • The US Housing Market Is Very Quickly Becoming Unaffordable — Home prices in Las Vegas, Phoenix, Orlando, and Tampa now stand at 6 to 7x incomes, exceeding the ratios reached at the peak of the early 2000s housing bubble in each of those metro areas. All four shifted from affordable, to unaffordable, back to affordable, and into unaffordable territory again.

AI Summary. An American-made lander became the first private spacecraft to reach the lunar surface intact, the first US lander on the moon since the Apollo era. The mission supports Intuitive Machines' aim of building a business ferrying payloads and experiments to the moon, and it holds NASA contracts to deliver two additional landers.

Loren Grush Bloomberg
Date Posted:

A lander made by a private American firm, Intuitive Machines, touched down safely on the moon Thursday, in the first successful private moon landing.

A lander made by a private American firm, Intuitive Machines, touched down safely on the moon Thursday, in the first...

Can private spacecraft land on the moon intact?

Core argument: An American-made lander touched down on the moon for the first time since the Apollo era, becoming the first private spacecraft to reach the lunar surface intact after a series of failed attempts by private groups.

An American-made lander touched down on the moon for the first time since the Apollo era, ending a string of failures and making it the first private spacecraft to ever reach the lunar surface intact. The success follows a series of missteps by private groups looking to land on the moon and bodes well for Intuitive Machine’s aim of creating a business ferrying payloads and experiments there. It’s hoped the landing will provide an up-close look at the moon’s south pole region and offer NASA new information as it aims to return humans to the lunar surface. Intuitive Machines holds contracts with NASA to deliver two additional landers to the moon’s surface in the coming years.

Takeaways by Macro Roundup® AI

  1. An American-made lander touched down on the moon for the first time since the Apollo era, becoming the first private spacecraft to reach the lunar surface intact after a series of failed attempts by private groups.
  2. The landing supports Intuitive Machines' aim of building a business ferrying payloads and experiments to the moon, and the company holds NASA contracts to deliver two additional landers in the coming years.
  3. The mission is hoped to provide an up-close look at the moon's south pole region and offer NASA new information as it aims to return humans to the lunar surface.

Related Articles:

  • SpaceX Launches 15 Starlink Satellites, Lands Rocket At Sea — SpaceX launched 15 more Starlink internet satellites aboard a Falcon 9 rocket from California's Vandenberg Space Force Base, with the rocket's first stage landing on a drone ship at sea about 9.5 minutes after liftoff. SpaceX has launched 4,918 Starlink spacecraft to date, more than 4,500 of which are currently functional.
  • Space: The Missing Element of Your Strategy — Private-sector funding of space-related companies has topped $10bn, close to a tenfold rise over the past decade, though the US government remains the largest source of space funding. If current momentum continues, commercial funding for space ventures could surpass government funding within 20 years.
  • How War in Europe Boosts the U.S. Economy — Federal Reserve data show U.S. defense and space industrial production has risen 17.5% since Russia's full-scale invasion of Ukraine. U.S. officials say 64% of the $60.7bn earmarked for Ukraine will flow back to the U.S. defense industrial base, and the State Department reported over $80bn in major arms deals, about $50bn to European allies.

Monday, February 26, 2024

AI Summary. Variation in the University of Michigan consumer sentiment index that inflation and unemployment cannot explain is strongly correlated with growth in consumer borrowing costs, such as mortgage and car loan rates. The authors estimate that including interest payments and homeownership costs in the consumer price index would raise measured inflation from 3% to 9%.

Marijn Bolhuis, Judd Cramer, Karl Oskar Schulz and Lawrence Summers National Bureau of Economic Research
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US consumer sentiment is significantly lower than expected based on unemployment and inflation. Alternative measures of inflation that include borrowing costs can account for almost three quarters of this gap. @MA_Bolhuis @juddcramer @LHSummers

Do borrowing costs explain weak consumer sentiment that inflation and unemployment cannot?

Core argument: The authors construct alternative CPI measures in which including interest paid raises year-on-year inflation by one percentage point over the past year, and adding both personal interest payments and homeownership costs raises November inflation from 3% to 9%.

We show that the variation in the current University of Michigan Index of Consumer Sentiment, which cannot be explained by inflation and unemployment, has historically shown a strong correlation with proxies for the growth of consumer borrowing costs, such as the growth of interest rates for mortgages or car loans and the willingness of banks to extend consumer installment loans. We show that the other questions in the survey that measure consumer sentiment provide direct evidence that concerns of consumers about borrowing costs are at historic highs, surpassed only by the Volcker-era. We develop alternative CPI measures that explicitly incorporate the cost of money. When interest paid is considered as a cost borne by consumers and included in the CPI, the year-on-year inflation rate increases by one percentage point throughout the last year. When both personal interest payments and the cost of homeownership are accounted for in the CPI, the inflation rate increases from 3 to 9 percent in November. In January, after most of the research for this paper was completed, consumer sentiment jumped to its highest level since 2021. Although this is just one month of data, it appears consistent with our hypothesis. If high borrowing costs explain the consumer sentiment anomaly of 2023, then the recent moderation of the growth rate of borrowing costs in recent months could help consumers significantly in 2024, but further rises could prolong consumer dissatisfaction.

Takeaways by Macro Roundup® AI

  1. The authors construct alternative CPI measures in which including interest paid raises year-on-year inflation by one percentage point over the past year, and adding both personal interest payments and homeownership costs raises November inflation from 3% to 9%.
  2. Variation in the University of Michigan Index of Consumer Sentiment unexplained by inflation and unemployment has historically correlated strongly with proxies for growth in consumer borrowing costs, including mortgage and car loan rates and banks' willingness to extend installment loans.
  3. Other University of Michigan survey questions show consumer concerns about borrowing costs at historic highs, surpassed only by the Volcker era, and the authors argue moderating borrowing-cost growth could help consumers in 2024 while further rises could prolong dissatisfaction.

Related Articles:

  • Americans Are Suddenly a Lot More Upbeat About the Economy — The University of Michigan's consumer sentiment survey recorded a 29% rise over two months, the largest two-month increase since 1991. The improvement was broad-based across consumers of different ages, incomes, education levels, and regions.
  • Digesting Inflation — The authors estimate that inflation's drag on consumer sentiment decays about 50% per year, with a 10% inflation shock cutting sentiment by 35 index points in the current year, 16 the next, and 8 the year after. On these estimates, inflation over the prior three years is holding sentiment down by 16 index points.
  • Asymmetric Amplification and the Consumer Sentiment Gap — 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%.

AI Summary. US households have reduced debt over the past 20 years, leaving room to borrow more if incentives improve, while companies that issued debt at low rates hold large liquidity and healthy balance sheets. That gives businesses capacity to raise investment, and business surveys indicate capital-spending sentiment is already improving.

Karen Karniol-Tambour, Larry Cofsky, and Yusuf Jailani Bridgewater Associates
Date Posted:

Bridgewater argues “In a tight economy with high levels of fiscal spending and a very healthy private sector, there is limited room for a pickup in private sector borrowing without reigniting inflation.”

Do household and corporate balance sheets leave room for more borrowing?

Core argument: Households have deleveraged meaningfully over the past 20 years, including during the current cycle, leaving room to take on more leverage in response to more favorable incentives.

Households have deleveraged meaningfully over the last 20 years, including during the current cycle. So, there is plenty of room for households to leverage up in response to more favorable incentives. In the direct aftermath of the COVID pandemic, companies took advantage of historically low rates by issuing a lot of debt, allowing them to build up an unprecedentedly large amount of liquidity. That, along with continued strength in corporate cash flows as economic activity remained strong, allowed companies to reduce debt issuance when yields rose and capital market volatility was elevated. The lack of new debt issuance, coupled with strong earnings, has kept corporate fundamentals in a very healthy position. With balance sheets in a healthy position, businesses have the capacity to respond to the continued strength in household spending by increasing investment. Business surveys we track indicate that capex sentiment is already improving.

Takeaways by Macro Roundup® AI

  1. Households have deleveraged meaningfully over the past 20 years, including during the current cycle, leaving room to take on more leverage in response to more favorable incentives.
  2. Companies issued large volumes of debt at historically low rates after the COVID pandemic, building an unprecedentedly large amount of liquidity that, with strong cash flows, let them curtail issuance when yields rose and capital market volatility was elevated.
  3. Light debt issuance combined with strong earnings has kept corporate fundamentals healthy, giving businesses the capacity to raise investment in response to continued strength in household spending, and business surveys indicate capex sentiment is already improving.

Related Articles:

  • U.S. Inflation Surged in January. Is It a Fluke? — Quarterly growth in the Employment Cost Index has slowed continuously and now runs roughly 1 percentage point faster on an annualized basis than just before the pandemic, while hourly private-sector pay growth has stayed stable. Despite the normalization of job-market churn, both measures of pay gains remain much faster than pre-pandemic.
  • 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. US federal spending equaled 23% of GDP, and the Congressional Budget Office projects it to trend slightly higher as a share of GDP while a growing deficit shifts funding toward borrowing. Deficit spending redirects cash earmarked for financial assets into goods and services, leaving the investor's wealth unchanged since cash is exchanged for Treasury debt.

Joseph Wang Fed Guy Blog
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.@FedGuy12 notes rising deficits as a % of GDP, but argues that “A nominal GDP growth rate that is comfortably higher than the interest rate suggests there will be sufficient income to service debt.”

How does deficit spending shift cash from financial assets into spending?

Core argument: Fiscal spending was 23% of GDP in 2023, and the CBO forecasts it trending slightly higher as a share of GDP over the next several years, with the funding mix shifting toward borrowing as the deficit grows.

Fiscal spending was 23% of GDP in 2023 and forecast by the CBO to slightly trend higher as a share of GDP over the next several years. The CBO also expects the source of funds to shift towards borrowings due to a growing fiscal deficit. Deficit spending may be a particularly impactful form of redistribution as it draws from pools of cash earmarked for financial assets and spends it on goods and services. Also note the investor’s wealth is unchanged as he receives a Treasury in exchange for cash, while taxation would reduce the purchasing power of the taxpayer. A nominal GDP growth rate that is comfortably higher than the interest rate suggests there will be sufficient income to service debt. One measure of the restrictiveness of interest rates is the difference between income growth and interest rates, where a smaller or negative gap indicate higher levels of restraint. The distribution of income is heterogeneous as are the spreads charged by lenders, but the two could roughly be proxied on a macro scale through the growth rate of nominal GDP and the 10 year yield. Credit spreads have historically widened when income growth is lower than interest rates. Nominal GDP has been comfortably above the 10 year yield since 2020 and recent economic indicators suggest continued strength.

Takeaways by Macro Roundup® AI

  1. Fiscal spending was 23% of GDP in 2023, and the CBO forecasts it trending slightly higher as a share of GDP over the next several years, with the funding mix shifting toward borrowing as the deficit grows.
  2. Deficit spending may be a particularly impactful form of redistribution, drawing from pools of cash earmarked for financial assets and spending it on goods and services, leaving investor wealth unchanged as cash is swapped for a Treasury, whereas taxation reduces the taxpayer's purchasing power.
  3. Nominal GDP growth has run comfortably above the 10-year yield since 2020, a gap that suggests sufficient income to service debt, while credit spreads have historically widened when income growth is lower than interest rates.

Related Articles:

  • Interest Costs Will Leapfrog Medicare and Defense This Year — The Congressional Budget Office projects net interest payments on federal debt will reach $870bn, or 3.1% of GDP, exceeding spending on national defense ($822bn) and net Medicare ($851bn). That would make interest the second-largest federal budget item after Social Security, up from $223bn in 2015 and $659bn in 2023.
  • 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.

AI Summary. By median price-to-earnings ratio, the 10 largest companies in the S&P 500 stock index are more overvalued than the top 10 were during the 1990s technology stock bubble.

Torsten Sløk Apollo
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Torsten Sløk @apolloglobal notes that based on their median PE ratio, the top 10 firms in the S&P 500 are more overvalued than they were during the 1990’s tech bubble.

Are the largest stocks more overvalued than during the tech bubble?

Core argument: Torsten Sløk of Apollo Global finds that the top 10 firms in the S&P 500, measured by median price-to-earnings ratio, are more overvalued than the top 10 firms were during the 1990s tech bubble.

The top 10 companies in the S&P 500 today are more overvalued than the top 10 companies were during the tech bubble in the mid-1990s.

Takeaways by Macro Roundup® AI

  1. Torsten Sløk of Apollo Global finds that the top 10 firms in the S&P 500, measured by median price-to-earnings ratio, are more overvalued than the top 10 firms were during the 1990s tech bubble.

Related Articles:

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AI Summary. Countries covered by China's free trade agreement network took about 38% of its merchandise exports, roughly $1.3tn out of some $3.43tn shipped worldwide over a 12-month period. That free trade footprint exceeds the total worldwide exports of the Netherlands or Japan, the world's fourth- and fifth-biggest exporters.

James Kynge and Keith Fray Financial Times
Date Posted:

As the US and EU seek to prevent the PRC from dumping its industrial overcapacity in Western markets, Beijing will become increasingly reliant on South Asian and African markets.

How large is China's free trade agreement export footprint?

Core argument: China shipped about 38% of its worldwide merchandise exports to countries and territories covered by its free trade agreement network in the 12 months to end-October last year, according to Financial Times calculations.

Calculations by the Financial Times reveal significant progress. China’s merchandise exports to all countries and territories covered by its FTA network comprised about 38% of its worldwide exports in the 12 months to the end of October last year. Given that over this period, China — as by far the world’s biggest exporter — shipped some $3.43tn around the world, its FTA network took roughly $1.3tn of that total. To put the size of this FTA footprint into context, China exports more to its FTA network than the world’s fourth and fifth-biggest exporters, the Netherlands and Japan, did all over the world during 2022.

Takeaways by Macro Roundup® AI

  1. China shipped about 38% of its worldwide merchandise exports to countries and territories covered by its free trade agreement network in the 12 months to end-October last year, according to Financial Times calculations.
  2. China, the world's biggest exporter, sent roughly $1.3tn to its FTA partners out of the $3.43tn it shipped worldwide over that period.
  3. China's exports to its FTA network exceed what the Netherlands and Japan, the world's fourth and fifth-biggest exporters, each shipped worldwide during 2022.

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  • Can Trade Intervention Lead to Freer Trade? — China accounts for over 31% of global manufacturing but under 13% of global consumption, while the United States accounts for under 17% of manufacturing and nearly 27% of consumption. The author argues persistent surpluses reflect household subsidies to producers, and that the US could counter them with tariffs or taxes on capital inflows.
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AI Summary. UK small-cap companies previously earned higher profit margins and traded at higher price-to-book valuations than continental European peers, but the margin gap has almost entirely disappeared and UK stocks now trade at a discount. The analysis uses small-caps in both regions because such firms earn most of their income domestically.

Brian Chingono Verdad
Date Posted:

.@verdadcap_quant compares profit margins and valuation multiples for British and European small-cap companies before and after Brexit and argues that British companies now trade at a discount to their European counterparts.

Have UK small-caps lost their profit margin and valuation edge over Europe?

Core argument: UK companies once earned higher profit margins than continental European peers, but post-Brexit that margin spread has almost entirely disappeared.

In the table margin spreads are defined as UK profit margins minus European profit margins, and valuation spreads are measured as UK Price/Book minus European Price/Book. To isolate the Brexit effect on domestic economies, the analysis is based on small-cap companies in both regions, since small-cap firms primarily generate earnings in their domestic markets. Companies in the UK used to earn higher profit margins—and trade at higher valuations—than companies in continental Europe. But, post-Brexit, the spread in margins has almost entirely disappeared, and UK stocks now trade at a discount.

Takeaways by Macro Roundup® AI

  1. UK companies once earned higher profit margins than continental European peers, but post-Brexit that margin spread has almost entirely disappeared.
  2. UK stocks, which previously traded at a valuation premium to continental Europe measured as UK Price/Book minus European Price/Book, now trade at a discount.
  3. The analysis uses small-cap companies in the UK and Europe to isolate the Brexit effect on domestic economies, since small-cap firms primarily generate earnings in their domestic markets.

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  • Britain’s Graduates Are Being Short-Changed While America’s Are Rich — British graduates' median hourly pay of £21 (just over $26) trails the almost $36 earned by US graduates, a 27% gap that has widened from 8% roughly 15 years earlier, while non-graduates in both countries earn similar amounts. Across most of Britain, more than a third of graduates work in jobs that do not require a degree.
  • Britain’s Economic Record Since 2007 Ranks Near The Bottom Among Peer Countries — Britain's economy has grown 7% per person in real terms since 2007, ahead of Canada and France at 6% but behind the US, Australia, and Germany at 13-16%. British labor productivity rose just 4% over 15 years, compared with 6% in France and double-digit gains elsewhere.