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, March 11, 2024

AI Summary. The authors find that the estimated decline in labor market returns to pre-labor-market cognitive skills for white men across two U.S. youth cohorts depends critically on the widening and increased left-skewness of the test-score distribution, with declines appearing only at the lower end of that distribution.

Judith Hellerstein, Sai Luo and Sergio Urzúa National Bureau of Economic Research
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Wage returns to cognitive skill have declined for white men who took the Armed Forces Qualifying Test (AFQT) in 1997 relative to 1979, driven primarily by a decline in scores at the bottom of the skill distribution.

Have labor market returns to cognitive skills declined across cohorts?

Core argument: The estimated decline in returns to pre-labor market cognitive skills for white men between the NLSY-1979 and NLSY-1997 cohorts depends critically on changes in the distribution of adjusted Armed Forces Qualifying Test (AAFQT) scores across the two cohorts.

It is well known that the wage structure widened in the U.S. labor market over the decades encompassing the early adulthood of the 1979 and 1997 National Longitudinal Survey of Youth (NLSY) cohorts. Although often overlooked, changing pre-labor market skill distributions may play a crucial role in capturing the evolution of labor market returns to cognitive skills. We show that for white men in the NLSY, the estimated decline over this period in the return to adjusted Armed Forces Qualifying Test (AAFQT) scores, which measure pre-labor market cognitive skills, critically depends on changes in the distribution of these scores between the two cohorts and particularly on the widening (and increased left-skewness) of the AAFQT distribution in the NLSY–97. To the extent that returns to cognitive skills did decline for the white men in our sample, they did so only at the lower part of the AAFQT distribution. This may prove especially important in the future given continuing changes in skill development in recent youth cohorts.

Takeaways by Macro Roundup® AI

  1. The estimated decline in returns to pre-labor market cognitive skills for white men between the NLSY-1979 and NLSY-1997 cohorts depends critically on changes in the distribution of adjusted Armed Forces Qualifying Test (AAFQT) scores across the two cohorts.
  2. To the extent that returns to cognitive skills declined for the white men in the NLSY sample, the decline occurred only at the lower part of the AAFQT distribution.
  3. Changes in the measured return to AAFQT scores depend particularly on the widening and increased left-skewness of the AAFQT distribution in the NLSY-1997, which may prove important given continuing changes in skill development in recent youth cohorts.

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.
  • Multidimensional Human Capital and the Wage Structure — The wage return to cognitive skills has declined, from about 10% higher hourly wages per standard deviation of test score in the 1980s and early 1990s to 4.5% in the 2000s and early 2010s, while returns to a bachelor's degree rose. Social skill-intensive occupations grew as a share of US jobs, with faster real wage growth.
  • The Plateauing of Cognitive Ability Among Top Earners — Measured cognitive ability plateaus at higher wage levels, flattening around an annual wage of about €60,000 ($64,200) at under one standard deviation above average. The authors find no significant ability differences across the top three income percentiles, even though top-percentile earners make more than double those in the 98th percentile.

AI Summary. The largest US stocks make up a bigger share of the equity market than during the 2000 technology bubble, yet their valuations are lower than in earlier bubble episodes including the Nifty 50 of the early 1970s and Japan's late-1980s bubble. Today's dominant companies are also more profitable with stronger balance sheets.

Peter Oppenheimer, Guillaume Jaisson, Sharon Bell, Marcus von Scheele and Lilia Peytavin Goldman Sachs
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A @GoldmanSachs analysis notes while market concentration is high, valuations are lower than in recent bubble periods and US superstar firms are much more profitable and have stronger balance sheets than they did during the tech bubble.

Does record market concentration mean stocks are in a bubble?

Core argument: The largest US stocks account for a much bigger share of the equity market today than during the 2000 stock market bubble.

While the biggest stocks in the US equity market are much bigger today as a share of the market compared with the stock market bubble of 2000, current valuations are much lower than have been typical in other recent bubble periods, stretching back to the Nifty 50 era of the early 1970s, the Japanese bubble in the late 1980s, and indeed the technology bubble in 2000. Perhaps more importantly, however, the current dominant companies are much more profitable and have stronger balance sheets than those that dominated during the tech bubble.

Takeaways by Macro Roundup® AI

  1. The largest US stocks account for a much bigger share of the equity market today than during the 2000 stock market bubble.
  2. Valuations of today's dominant US stocks are much lower than those typical of prior bubble periods, including the Nifty 50 of the early 1970s, Japan's late-1980s bubble, and the 2000 technology bubble.
  3. Today's dominant companies are much more profitable and carry stronger balance sheets than the companies that dominated during the technology bubble.

Related Articles:

  • 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.
  • 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.
  • Pillow Talk — The "magnificent 7" megacap stocks represent an all-time-high share of US market capitalization and accounted for most equity market gains, with 72% of S&P 500 stocks underperforming the index versus a 52% average since 1980. Adjusted for higher earnings growth expectations, these megacaps look less overpriced relative to the market, though the trade is very crowded.

AI Summary. Falling interest rates reduced interest payments as a share of corporate profits, raising profits and stock market valuations. Measured against GDP, the US stock market is historically expensive, and since rates cannot fall as sharply as they have over the past four decades, expected future returns are low.

Jesper Rangvid Rangvid's Blog
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Jesper Rangvid shows that high stock market returns over the last 40 years have been driven by falling interest rates. With rates now rising, he expects real returns of only around 2% annually over the next decade.

Have falling interest rates made stocks expensive and future returns low?

Core argument: The total value of US stocks scaled by GDP, the author's preferred valuation measure, shows the market as historically expensive, apart from the brief and unusual 2020 coronavirus episode.

Lower interest rates have lowered the share of interest payments in corporate profits, thereby increasing profits and the valuation of the stock market, which in turn has caused the stock market to rise so remarkably. Today’s valuation of the US stock market is high. By my favorite measure, scaling the total value of stocks by GDP, the stock market is historically expensive, apart from the strange and short-lived corona experience in 2020. From here, interest rates can no longer fall as sharply as they could over the past four decades. Looking ahead, expected returns from the US stock market are low.

Takeaways by Macro Roundup® AI

  1. The total value of US stocks scaled by GDP, the author's preferred valuation measure, shows the market as historically expensive, apart from the brief and unusual 2020 coronavirus episode.
  2. Lower interest rates reduced the share of interest payments in corporate profits, raising profits and stock market valuations, which the author identifies as the driver of the market's remarkable rise.
  3. The author expects low returns from the US stock market going forward, since interest rates can no longer fall as sharply as they did over the past four decades.

Related Articles:

  • End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns — The authors estimate that declining interest and corporate tax rates accounted for over 40% of real corporate profit growth from 1989 to 2019, while falling risk-free rates explain the entire expansion in price-to-earnings multiples. Real earnings before interest and taxes grew slightly more slowly than in 1962–1989, at 2.2% versus 2.4% per year.
  • 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.
  • 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.

AI Summary. Across industries, larger increases in markups are not associated with larger declines in business dynamism—measured by new business entry rates and gross job or worker flows—and the correlation may even be positive. The authors conclude that rising markups as commonly measured are not a major explanatory factor behind declining dynamism.

Brian Albrecht and Ryan Decker Federal Reserve Board
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Industries with the largest increase in markups between 1980 and 2016 saw smaller declines in dynamism. Larger increases in markups are not associated with larger declines in dynamism at the industry level.

Do rising markups explain declining business dynamism across industries?

Core argument: Across industries over 1980–2016, the authors find no negative correlation between changes in markups and changes in business dynamism, measured by new business entry rates and gross job or worker flows.

Looking across industries we do not find a negative correlation between changes in dynamism [new business entry rates and gross job or worker flows] and changes in markups over the 1980-2016 period; and the correlation may even be positive. In other words: larger increases in markups are not associated with larger declines in dynamism at the industry level. Our evidence strongly suggests that rising markups—as commonly measured in the literature on broadly rising market power—are not a major explanatory factor behind declining dynamism.

Takeaways by Macro Roundup® AI

  1. Across industries over 1980–2016, the authors find no negative correlation between changes in markups and changes in business dynamism, measured by new business entry rates and gross job or worker flows.
  2. The industry-level correlation between markup increases and dynamism may even be positive, so larger increases in markups are not associated with larger declines in dynamism.
  3. The authors conclude their evidence strongly suggests that rising markups, as commonly measured in the literature on broadly rising market power, are not a major explanatory factor behind declining dynamism.

Related Articles:

  • Surging Business Formation in the Pandemic: Causes and Consequences? — Shifts in consumer demand and in preferences for work and lifestyle during the pandemic created entrepreneurial opportunities, and applications to start businesses produced new firms and establishments that hired workers in large numbers. The authors argue these new businesses drew in quitting workers as founders or hires, implying economic restructuring across industry, geography, and firm size and age.
  • America’s New Business Boom — The share of US workers employed by young firms is rising for the first time in decades, with 11.3% of jobs at firms less than 5 years old and 8.6% at firms 6–10 years old. Gains in the share of jobs at firms under 5 years old were larger in transportation and warehousing, management and information, and manufacturing.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

AI Summary. China's manufacturing trade surplus has reached about 2% of world GDP, exceeding the peak surpluses of export powerhouses like Japan and Germany, and shows no signs of shrinking as policy continues to emphasize advanced manufacturing capacity. The main offsetting manufactured-goods deficit is in the United States rather than commodity exporters.

Brad Setser, Volkmar Baur and Michael Weilandt Council on Foreign Relations
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China’s post-pandemic manufacturing goods surplus is now 2% of global GDP and shows no sign of shrinking, driving countries to seek protection from Chinese overcapacity. @Brad_Setser @Mike_Weilandt @BaurVolk

Has China’s manufacturing surplus surpassed that of past export powerhouses?

Core argument: China's post-pandemic manufacturing surplus has reached about 2% of world GDP, far exceeding the peak surpluses run by export powerhouses such as Japan and Germany.

China’s post pandemic surplus in manufacturing – which has now reached about two percent of world GDP – far exceeds the peak surpluses run by export powerhouses like Japan and Germany. More importantly, China’s surplus shows no signs of shrinking. While there was a pause in the expansion of the surplus in 2023, that only came after a huge jump between 2018 and 2022. Chinese policy continues to emphasize upgrading China capacity in advanced manufacturing as a major driver of future growth. It should go without saying that a large manufacturing surplus requires an offsetting deficit in manufactured elsewhere in the global economy. That deficit could just be with commodity exporters – there is a natural trade between oil exporters like Russia and the Gulf and manufacturing exporters like Europe and East Asia. But right now the main counterpart to the Chinese surplus is not in the commodity exporters but in the United States. The U.S. deficit has continued to increase in the past few years as a share of world GDP, in part because global dollar GDP has shrunk with the dollar’s rise.

Takeaways by Macro Roundup® AI

  1. China's post-pandemic manufacturing surplus has reached about 2% of world GDP, far exceeding the peak surpluses run by export powerhouses such as Japan and Germany.
  2. China's manufacturing surplus shows no signs of shrinking, with a pause in its expansion in 2023 following a large jump between 2018 and 2022, while Chinese policy continues to emphasize upgrading advanced manufacturing capacity as a driver of future growth.
  3. The main counterpart to China's manufacturing surplus is the United States rather than commodity exporters, and the U.S. deficit has continued to increase as a share of world GDP, in part because global dollar GDP has shrunk with the dollar's rise.

Related Articles:

  • China’s Excess Savings Are A Danger — China's current account surplus of 4% of GDP is larger in global terms than its 2007 peak of 10%, because its share of the world economy at market prices rose from 6% to 17%. Sustaining that surplus would require China to fund deficits in smaller developing countries.
  • A Second Dose of Trump On Trade Would Differ From The First — 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.
  • 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.

AI Summary. The commonly cited figure that women earn 84% of men's pay compares average annual earnings of full-time, year-round workers, a category defined broadly enough to obscure differences in hours, experience, and occupation. Women over 40 average three fewer years of experience than men the same age, which the author says explains about a third of the gap.

Phil Gramm and John Early Wall Street Journal
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Phil Gramm and John Early note that the “Gender Pay Gap” is largely driven by female preference for fewer hours worked and lower-paying professions.

Phil Gramm and John Early note that the “Gender Pay Gap” is largely driven by female preference for fewer hours...

Does the widely cited gender pay gap reflect differing work choices?

Core argument: The 84% figure comes from dividing the average annual pay of women working full-time year-round by that of men, a comparison the author argues is misleading because "full-time, year-round" work is defined so broadly.

The pay gap is the natural economic result of choices men and women make, including how much or how little to work and which occupations to enter. The 84% figure, which is correct, is arrived at by dividing the average annual pay for women who work full-time all year by the average annual pay of men working full-time all year. But that comparison is misleading because full-time, year-round work is defined so broadly. Workers’ earning power increases as they gain more experience. On average, women over 40 have three less years of experience than men of the same age. The reason for this should be obvious: Many women drop out of the labor force at some point to rear children. That alone explains about a third of the observed pay gap. Women and men also make different choices in terms of occupations and education. Men tend to choose higher-paying college majors and occupations. Only one of the 10 highest-earning college majors graduates more women than men, while nine of the 10 lowest-earning majors graduate more women than men.

Takeaways by Macro Roundup® AI

  1. The 84% figure comes from dividing the average annual pay of women working full-time year-round by that of men, a comparison the author argues is misleading because "full-time, year-round" work is defined so broadly.
  2. Women over 40 average three fewer years of experience than men of the same age, because many women leave the labor force to rear children, which the author says explains about a third of the observed pay gap.
  3. Only one of the 10 highest-earning college majors graduates more women than men, while nine of the 10 lowest-earning majors graduate more women than men.

Related Articles:

AI Summary. U.S. legislation that would ban TikTok or force its sale by Chinese parent ByteDance advanced out of the House Energy and Commerce Committee on a 50-0 vote. TikTok's campaign urging users to call their congressional representatives against the bill appeared to harden supporters' resolve.

Natalie Andrews, Georgia Wells, Kristina Peterson, Stu Woo, Keach Hagey, and Jessica Toonkel Wall Street Journal
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Legislation that would ban Tiktok in the U.S. unless its Chinese parent divests ownership is heading to a full vote in the house; Biden has indicated he would sign the bill if it passes.

Legislation that would ban Tiktok in the U.S. unless its Chinese parent divests ownership is heading to a full vote in the...

Is US legislation to ban or force the sale of TikTok advancing?

Core argument: Legislation that would ban TikTok in the U.S. or force ByteDance to sell it passed the House Energy and Commerce Committee 50-0 and is heading toward a House vote.

Legislation that would ban TikTok in the U.S. or force its sale is hurtling toward a vote in the House. Efforts had seemingly stalled until last week, when a new bill passed the House Energy and Commerce Committee 50-0. An effort by TikTok to push users to call their congressional representatives in opposition to the bill appeared to backfire by only hardening proponents’ resolve. Chuck Schumer said a ban “should be looked at” but didn’t commit to bringing the House legislation up for a vote. The first push to force ByteDance to sell TikTok started from then-president Donald Trump. Trump on Thursday appeared to reverse his position, writing on social media that banning TikTok would help Meta Platforms’s Facebook, which he described as an “enemy of the people.”

Takeaways by Macro Roundup® AI

  1. Legislation that would ban TikTok in the U.S. or force ByteDance to sell it passed the House Energy and Commerce Committee 50-0 and is heading toward a House vote.
  2. TikTok's campaign urging users to call their congressional representatives against the bill appeared to backfire by hardening proponents' resolve.
  3. Donald Trump, who launched the first push to force ByteDance to sell TikTok, appeared to reverse his position, writing on social media that a ban would help Meta Platforms's Facebook, which he described as an "enemy of the people.".

Related Articles:

  • US Bill Would Ban TikTok From App Stores Unless ByteDance Divests It — Bipartisan US legislation would bar app stores from distributing TikTok unless its Chinese owner ByteDance divests control within 165 days. The bill would also create a process letting the president act against social media applications controlled by groups headquartered or domiciled in China, Russia, Iran, or North Korea.
  • Teens, Social Media, and Technology 2023 — About nine-in-ten U.S. teens ages 13 to 17 say they use YouTube, making it the most widely used platform in Pew Research Center's survey, followed by TikTok (63%), Snapchat (60%), and Instagram (59%). Facebook use among teens fell from 71% in 2014-2015 to 33%, and Twitter's teen user base also shrank over the past decade.

Tuesday, March 12, 2024

AI Summary. The authors estimate individual unemployment risk using employment status, demographic, job, and geographic characteristics, and find that before a recession this risk is concentrated: unemployment risk is below 5% for the vast majority of employed workers. Unemployed individuals, a small share of the population, average nearly 22% risk, about 10x the average for employed (2.7%) or out-of-the-labor-force (2.4%) individuals.

Brendan Chapuis and John Coglianese Federal Reserve Board
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An unemployment risk measure based on workers’ personal characteristics finds in 2007 unemployed workers made up 2.8% of the population but had an average unemployment risk of 22%, 10 times the 2.7% unemployment risk rate of employed workers.

How concentrated is unemployment risk across workers before a recession?

Core argument: Unemployed individuals in 2007, who made up 2.8% of the population, had an estimated average unemployment risk of nearly 22%, about ten times the 2.7% average for employed workers and 2.4% for those not in the labor force.

We estimate unemployment risk in our sample as a function of many individual-level characteristics. We include current employment status characteristics (employed/unemployed/not in the labor force, unemployment duration, work absence, reason for unemployment, reason for non-participation), demographic characteristics, job characteristics, and geographic characteristics. Before a recession, unemployment risk is relatively concentrated. The dashed lines in Figure 3 show the distribution of unemployment risk as of 2007 broken out separately for employed, unemployed, and not-in-the-labor-force individuals. Unemployment risk was below 5% for the vast majority of employed workers and below 10% for all but the extreme tail. Since the unemployment rate was low in 2007, unemployed workers made up only a small sliver of the population (2.8%), but this group had an average unemployment risk of nearly 22%, about ten times larger than either of the other categories (2.7% average for employed, 2.4% average for not in the labor force).

Takeaways by Macro Roundup® AI

  1. Unemployed individuals in 2007, who made up 2.8% of the population, had an estimated average unemployment risk of nearly 22%, about ten times the 2.7% average for employed workers and 2.4% for those not in the labor force.
  2. Estimated unemployment risk in 2007 was below 5% for the vast majority of employed workers and below 10% for all but the extreme tail, indicating risk was relatively concentrated before the recession.
  3. The authors estimate unemployment risk as a function of individual-level characteristics including employment status, unemployment duration, work absence, reason for unemployment or non-participation, demographics, job characteristics, and geography.

Related Articles:

  • The Dual U.S. Labor Market Uncovered — The authors identify a dual U.S. labor market in which a primary segment of about 55% of the population is almost always employed, while a secondary segment of about 14% absorbs most seasonal and business-cycle fluctuations. Workers in the secondary segment have 6x higher turnover and are 10x more likely to be unemployed than primary-segment workers.
  • The Active Role of the Natural Rate of Unemployment During Cyclical Recoveries — The authors conclude that the natural rate of unemployment declined during the expansion that began in 2009, when unemployment fell from 10% to 3.5% with near-constant inflation. Their reasoning is that with inflation anchored at the Federal Reserve's 2% target over such a long stable period, New Keynesian theory implies the observed unemployment rate equals the natural rate.

AI Summary. Consumer price inflation is running at annualized rates of 4.4% over one month, 4.2% over three months, 3.9% over six months, and 3.8% over twelve months, with the three-, six-, and twelve-month rates higher than at any point from 1992 to 2019. Shelter continues to drive inflation up, moderating less than optimists had hoped.

Jason Furman @jasonfurman
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.@jasonfurman notes “Core CPI came in high for the eighth month in a row,” running at 3.8% over the last 12 months, “higher than any time from 1992-2019.”

Is inflation running higher than at any point in recent decades?

Core argument: Jason Furman notes CPI inflation at annualized rates of 4.4% over 1 month, 4.2% over 3 months, 3.9% over 6 months, and 3.8% over 12 months, with the 3/6/12-month rates higher than any time from 1992–2019.

Annual rates: 1 month 4.4%. 3 months 4.2%. 6 months 3.9%. 12 months 3.8%. For perspective, the 3/6/12 month rates [are]higher than any time from 1992-2019. Inflation remains unusually high. Shelter continues to drive inflation up. It moderated from its extreme pace in January (which was a widely understood quirk) but is not moderating to nearly the extent the optimists had hoped. Optimistic take this is CPI, not PCE which the Fed targets, the later is running more slowly and elevation is mostly about shelter and that will fall. Pessimistic take dumps cold water on January being an anomaly, shelter won't slow and can't count on goods prices to keep falling.

Takeaways by Macro Roundup® AI

  1. Jason Furman notes CPI inflation at annualized rates of 4.4% over 1 month, 4.2% over 3 months, 3.9% over 6 months, and 3.8% over 12 months, with the 3/6/12-month rates higher than any time from 1992–2019.
  2. Furman identifies shelter as the continuing driver of inflation, moderating from its extreme January pace — a widely understood quirk — but not nearly to the extent optimists had hoped.
  3. Furman frames the optimistic reading as CPI running faster than the PCE measure the Fed targets, with elevation mostly shelter that will fall, against a pessimistic reading that January was no anomaly, shelter won't slow, and falling goods prices can't be relied on.

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.
  • How Fast Can the Fed Ease? The Private Sector Response to Easier Conditions Will Be a Key Factor — 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.

AI Summary. Germany's trade surplus has returned to 8% of GDP, with the authors attributing the gain to higher traded-goods prices boosting nominal exports despite weak export volumes. A growing share of the surplus is bilateral with the rest of the Eurozone, Central Europe, and the US.

Chris Marsh Money: Inside and Out
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As energy prices have normalized Germany’s trade surplus is back, reaching a nominal record, though in real terms German exports continue to contract. @GeneralTheorist

Are higher goods prices driving a record trade surplus despite weak volumes?

Core argument: Germany's trade surplus returned to 8% of GDP in January, a level matched in only a few prior months, and the author expects it could increase further.

Our best guess here is that traditional German industries, while enjoying weak export volumes, have experienced a boost in nominal terms due to the post-pandemic surge in traded goods prices. As noted, now that energy prices have normalised this full effect is starting to show. We ought to scale this monthly surplus by GDP to put it in context. While there have been months when Germany’s trade balance surplus, relative to GDP, has been larger these are few. And the trade balance in January is back to 8% of GDP and could increase further from here! Moreover, a growing portion of this is bilateral with the rest of the Eurozone, as well as CEE-3 and the US. In a sense, we are returning to the pre-GFC decade when a large part of Germany’s current account surplus was intra-Eurozone.

Takeaways by Macro Roundup® AI

  1. Germany's trade surplus returned to 8% of GDP in January, a level matched in only a few prior months, and the author expects it could increase further.
  2. The author's best guess is that German traditional industries posted weak export volumes but gained in nominal terms from the post-pandemic surge in traded goods prices, an effect showing now that energy prices have normalised.
  3. A growing share of Germany's surplus is bilateral with the rest of the Eurozone, the CEE-3, and the US, resembling the pre-GFC decade when much of its current account surplus was intra-Eurozone.

Related Articles:

  • EU To Launch Anti-Subsidy Probe into Chinese Electric Vehicles — The European Union is opening an anti-subsidy investigation into Chinese electric vehicles it says are distorting the EU market, one of its largest trade cases. Manufacturers found in breach of trade rules could face punitive tariffs, as the EU seeks to avoid a repeat of the insolvencies in its solar panel industry caused by cheap Chinese imports.
  • Germany Is Losing Its Mojo. Finding It Again Won’t Be Easy — The International Monetary Fund projects Germany will be the only major economy to contract this year, while even sanctioned Russia grows. German exports long depended on a rapidly industrializing China buying its capital goods, but Chinese growth and import demand have faltered, and German industry still faces higher energy costs than U.S. and Asian competitors.
  • 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%.

AI Summary. Mexico's export boom is largely genuine rather than a channel for tariff avoidance, since much of the growth comes from industries like motor vehicles where China has little presence in the North American market. Mexican manufacturing output has risen 5% since 2018, with computer output up nearly 25% and appliance and electrical equipment output up 15%.

Joseph Politano Apricitas Economics
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Citing an ongoing investment boom and rising manufacturing employment in Mexico, @JosephPolitano suggests that the Mexican export boom is more than Chinese re-exports.

Is Mexico's export boom genuine growth rather than tariff avoidance?

Core argument: Mexico's overall manufacturing output has risen 5% since 2018, with export-oriented industries stronger still: computer output up nearly 25% and appliance and electrical equipment output up 15%.

The majority of Mexico’s export boom is genuine—most tariff avoidance would go through countries elsewhere in Asia and many of the sources of rising Mexican exports are in industries where China has little presence in the North American market, like motor vehicles. It’s also obvious when you look at Mexican manufacturing output—overall production has risen by 5% since 2018 but has been even stronger in export-oriented industries—computer output is up nearly 25%, appliance, and electrical equipment output is up 15%, and motor vehicle production has more than recovered from the effects of the semiconductor shortage.

Takeaways by Macro Roundup® AI

  1. Mexico's overall manufacturing output has risen 5% since 2018, with export-oriented industries stronger still: computer output up nearly 25% and appliance and electrical equipment output up 15%.
  2. Most of Mexico's export boom is genuine rather than tariff avoidance, since such rerouting would largely run through other Asian countries and much of the export growth is in industries like motor vehicles where China has little presence in the North American market.
  3. Mexican motor vehicle production has more than recovered from the effects of the semiconductor shortage.

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  • China Circumvents US Tariffs By Shipping More Goods Via Mexico — An analysis of trade data indicates China is shipping more goods to the US via Mexico, circumventing US tariffs, with containers shipped from China to Mexico rising to 881,000 from 689,000 over comparable nine-month periods. Mexico has overtaken China as the largest exporter of goods to the US.
  • China Set To Lose Crown As Top U.S. Exporter After 17 Years — U.S. goods imports from China fell more than 20% year over year, leaving China at 13.9% of total U.S. imports, its smallest share since 2004 after peaking above 21%. Mexico's share topped 15%, positioning it to become the top exporter to the U.S. for the first time since 2000.

AI Summary. The United States has produced more crude oil than any nation at any time for six consecutive years, averaging 12.9m barrels per day in 2023 and surpassing the prior record of 12.3m barrels per day. Output fell to 5.0m barrels per day in 2008 before rising as producers applied hydraulic fracturing and horizontal drilling.

Erik Kreil Energy Information Administration
Date Posted:

US crude production set a record in December of last year with 13.3mm b/d; the US has been the world’s largest oil producer since 2018. @EIAgov

How did the US become the largest crude oil producer ever?

Core argument: U.S. crude oil production, including condensate, averaged 12.9 million b/d in 2023, breaking the previous U.S. and global record of 12.3 million b/d set in 2019, according to International Energy Statistics.

The United States produced more crude oil than any nation at any time, according to our International Energy Statistics, for the past six years in a row. Crude oil production in the United States, including condensate, averaged 12.9 million barrels per day (b/d) in 2023, breaking the previous U.S. and global record of 12.3 million b/d, set in 2019. Average monthly U.S. crude oil production established a monthly record high in December 2023 at more than 13.3 million b/d. After peaking at 9.6 million b/d in 1970, annual U.S. crude oil production flattened and then generally declined for decades to a low of 5.0 million b/d in 2008. Crude oil production in the United States began increasing again in 2009, as producers increasingly applied hydraulic fracturing and horizontal drilling techniques, and has increased steadily since.

Takeaways by Macro Roundup® AI

  1. U.S. crude oil production, including condensate, averaged 12.9 million b/d in 2023, breaking the previous U.S. and global record of 12.3 million b/d set in 2019, according to International Energy Statistics.
  2. The United States has produced more crude oil than any nation at any time for six consecutive years, with average monthly output reaching a record of more than 13.3 million b/d in December 2023.
  3. U.S. crude oil production peaked at 9.6 million b/d in 1970, generally declined for decades to a low of 5.0 million b/d in 2008, and began rising in 2009 as producers increasingly applied hydraulic fracturing and horizontal drilling.

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  • Oil Market Caught By Surprise As US Output Surges — US crude oil production reached an all-time high of 13.2mn barrels a day, more than any other country and about one in eight barrels of global output, outpacing official forecasts. The International Energy Agency attributes 80% of this year's growth in global oil supply to the US, complicating OPEC+ efforts to prop up prices through output cuts.
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AI Summary. The U.S. stock market's cyclically adjusted price-to-earnings ratio of 34 ranks in the top 1% of history while corporate profits sit near record levels, a combination the author argues means long-run return prospects are as poor as at almost any time in history. No sustained rally has begun from such valuations or from full employment.

Jeremy Grantham GMO
Date Posted:

Jeremy Grantham cautions that the market’s current cyclically-adjusted price-to-earnings ratio (aka Shiller P/E) of 34 is in the top 1% historically and “There has never been a sustained rally starting from a 34 Shiller P/E.”

Jeremy Grantham cautions that the market’s current cyclically-adjusted price-to-earnings ratio (aka Shiller P/E) of 34...

Do record-high valuations and profit margins signal poor long-run returns?

Core argument: The U.S. Shiller P/E stood at 34 as of March 1st, in the top 1% of history, while total profits as a share of almost any measure sit at near-record levels.

The U.S. is enjoying itself if you go by stock prices. A Shiller P/E of 34 (as of March 1st) is in the top 1% of history. Total profits (as a percent of almost anything) are at near-record levels as well. Remember, if margins and multiples are both at record levels at the same time, it is double counting and double jeopardy – for waiting somewhere in the future is another July 1982 or March 2009 with simultaneous record low multiples and badly depressed margins. There has never been a sustained rally starting from a 34 Shiller P/E. The only bull markets that continued up from levels like this were the last 18 months in Japan until 1989, and the U.S. tech bubble of 1998 and 1999, and we know how those ended. Separately, there has also never been a sustained rally starting from full employment. If you double the price of an asset, you halve its future return. The long-run prospects for the broad U.S. stock market here look as poor as almost any other time in history.

Takeaways by Macro Roundup® AI

  1. The U.S. Shiller P/E stood at 34 as of March 1st, in the top 1% of history, while total profits as a share of almost any measure sit at near-record levels.
  2. Record margins and record multiples occurring together amount to double counting and double jeopardy, with another July 1982 or March 2009 waiting somewhere in the future, combining record-low multiples with badly depressed margins.
  3. There has never been a sustained rally starting from a 34 Shiller P/E or from full employment; the only bull markets that continued up from such levels were Japan's last 18 months until 1989 and the U.S. tech bubble of 1998 and 1999.

Related Articles:

  • The Concentration Conundrum; What To Do About Market Dominance — The largest US stocks make up a bigger share of the equity market than during the 2000 technology bubble, yet their valuations are lower than in earlier bubble episodes including the Nifty 50 of the early 1970s and Japan's late-1980s bubble. Today's dominant companies are also more profitable with stronger balance sheets.
  • End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns — The authors estimate that declining interest and corporate tax rates accounted for over 40% of real corporate profit growth from 1989 to 2019, while falling risk-free rates explain the entire expansion in price-to-earnings multiples. Real earnings before interest and taxes grew slightly more slowly than in 1962–1989, at 2.2% versus 2.4% per year.
  • 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. Financial crises are costly, with average declines of 5.5% of real GDP and median fiscal costs of 16% of real GDP to resolve distressed banks. The authors identify four categories of causal factors: politically motivated risk subsidies such as government support for housing credit, shifts in investor risk preferences, investor learning, and fraud.

Charles Calomiris and Matthew Jaremski National Bureau of Economic Research
Date Posted:
Is Database:
Database

Calomiris and Jaremski review ten famous financial crises from ancient Rome through the present and find four common factors: politically motivated subsidies, changes in investor preferences towards risk, unsophisticated investors, and fraud.

What causes financial crises to recur despite their large economic costs?

Core argument: Charles Calomiris and Matthew Jaremski find financial crises involve average declines of 5.5% of real GDP, with much larger declines when financial distress culminates in a full-scale crisis.

Charles Calomaris and Matthew Jaremski note that financial crises are very costly to the economy, involving average declines of 5.5% of real GDP and much larger declines when financial distress culminates into a full scale crisis, as well as median fiscal costs of 16% of real GDP associated with resolution of distressed banks. Why is it so hard for us to learn from the past and avoid the severe costs that attend these events? The authors find four broad categories of causal factors: 1) politically motivated risk subsidies that skew incentives such as government subsidizing risks related to housing credit. 2) changes in investor preferences towards risk. It may be that the financial system and economy as a whole benefit from taking the risks that sometimes lead to crises. 3) learning by more and less sophisticated investors and 4) fraud.

Takeaways by Macro Roundup® AI

  1. Charles Calomiris and Matthew Jaremski find financial crises involve average declines of 5.5% of real GDP, with much larger declines when financial distress culminates in a full-scale crisis.
  2. Median fiscal costs associated with resolving distressed banks amount to 16% of real GDP, according to Calomiris and Jaremski.
  3. Calomiris and Jaremski identify four categories of causal factors behind recurring crises: politically motivated risk subsidies such as government subsidies for housing credit, changes in investor risk preferences, learning by more and less sophisticated investors, and fraud.

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  • Credit Allocation and Macroeconomic Fluctuations — Credit expansions disproportionately channel credit to non-tradable sector firms and households, and the authors find that the sectoral allocation of credit predicts future GDP paths and the likelihood of systemic banking crises. Credit growth to non-tradable industries predicts boom-bust output patterns and elevated financial fragility, while credit to tradable industries is associated with higher future productivity growth.