Edward Conard

Top Ten New York Times Bestselling Author

  • “…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 fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, March 18, 2024

AI Summary. Slowing wage growth across all three major US wage measures is consistent with a soft landing in which inflation returns to 2% without a recession. Forward-looking measures based on wage surveys and posted wages in job ads point to further slowing toward roughly 3½%, an estimated sustainable pace.

Jan Hatzius Goldman Sachs
Date Posted:

Jan Hatzius @GoldmanSachs raised his 2024 core PCE forecast to 2.4% and expects 75bps of cuts this year. GS’s wage growth tracker has slowed down to 3.5%, consistent with the 2% inflation target and 1.5% productivity growth.

Does slowing wage growth signal inflation returning to 2% without recession?

Core argument: Average hourly earnings rose 0.1% in February, with January revised down to 0.5%, keeping the downward trend in the year-on-year rate intact.

The US economy is still on track for a soft landing, defined as a return of inflation to 2% without a recession. The ongoing slowdown in wage growth fits well into this picture. It is visible across all three of the major wage measures. The employment cost index continued to slow meaningfully in Q4 (although Q1 won't be available until April 30). Average hourly earnings grew just 0.1% in February while January was revised down to 0.5%, keeping the downward trend in the year-on-year rate intact. And over the past two months, the Atlanta Fed wage growth tracker—which measures year-on-year changes in individual wages in the household survey—ran at the lowest rate since 2021. Moreover, forward-looking measures suggest that the slowdown has further to run. Both our wage survey tracker and the Indeed wage tracker—which is based on posted wages in job ads—are already consistent with a slowdown to 3½%, our estimate of sustainable wage growth at 2% inflation and 1½% productivity growth.

Takeaways by Macro Roundup® AI

  1. Average hourly earnings rose 0.1% in February, with January revised down to 0.5%, keeping the downward trend in the year-on-year rate intact.
  2. The Atlanta Fed wage growth tracker, which measures year-on-year changes in individual wages in the household survey, ran at its lowest rate since 2021 over the past two months, while the employment cost index slowed meaningfully in Q4.
  3. Forward-looking measures, including Goldman Sachs' wage survey tracker and the Indeed wage tracker based on posted wages in job ads, are consistent with a slowdown to 3½%, the firm's estimate of sustainable wage growth at 2% inflation and 1½% productivity growth.

Related Articles:

  • 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.
  • 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.
  • 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. Shelter costs make up about 30% of the consumer price index, and their monthly inflation appears to be stabilizing above pre-pandemic rates rather than delivering the disinflation forward-looking data had implied. The author suggests this may be related to a surge in migration, estimated at 3.3m migrants in a year.

Joseph Wang Fed Guy Blog
Date Posted:
Is Database:
Database

.@FedGuy12 argues that the recent surge of at least 3.3mm immigrants is putting upward pressure on housing costs which make up 30% of the CPI, creating a challenge to the 2% target.

Is a surge in migration keeping shelter inflation elevated?

Core argument: Shelter inflation, which accounts for around 30% of CPI, was widely expected based on forward-looking data to slow or fall into outright deflation and become a major contributor to disinflation.

Shelter inflation accounts for around 30% of CPI and was widely anticipated to slow or even fall into outright deflation. Shelter inflation surged post-pandemic, but was widely expected based on forward looking data to become a major contributor to disinflation. That disinflation has stalled in recent months as monthly shelter inflation appears to be stabilizing at a rate clearly above that seen pre-pandemic. This may potentially be related to the surge to migration [an estimated 3.3 million migrants in 2023], as the housing market is unlikely to be elastic enough to accommodate the unexpected appearance of millions of people. Note that some research also attributes the continued strength in U.S. job growth and consumer spending to the surge in migration.

Takeaways by Macro Roundup® AI

  1. Shelter inflation, which accounts for around 30% of CPI, was widely expected based on forward-looking data to slow or fall into outright deflation and become a major contributor to disinflation.
  2. Shelter disinflation has stalled, with monthly shelter inflation appearing to stabilize at a rate clearly above its pre-pandemic pace.
  3. The stalled shelter disinflation may relate to an estimated 3.3 million migrants in 2023, as the housing market is unlikely to be elastic enough to accommodate millions of people; some research also attributes continued U.S. job growth and consumer spending to that migration surge.

Related Articles:

  • New Immigration Estimates Help Make Sense Of The Pace Of Employment — The Congressional Budget Office estimates net immigration was 3.3m in 2023, versus the 1m it had projected, implying faster population and labor force growth than currently reported. The authors estimate this raised real economic growth by about 0.1 percentage point and, by lifting both production and demand, added little price or wage pressure.
  • The Demographic Outlook: 2024 to 2054 — The Congressional Budget Office projects the US population will grow from 342mm in 2024 to 383mm in 2054, an average 0.4% a year — less than half the 0.9% pace of the prior five decades. Immigration accounts for about 70% of growth over the next decade and for all population growth beginning in 2040.
  • Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995 — U.S. labor force data show immigrants accounted for 49% of labor force growth over roughly the past three decades and their children another 21%, together about 70% of an increase of nearly 32.8m workers. Immigrants rose from about 10% to 18% of the labor force, and immigrants plus their children from 18% to 29%.

AI Summary. Measured using the 1970s-era method, which treated home purchase prices and mortgage interest rates as the cost of housing rather than the current approach based on rental costs, the recent inflation episode would have registered higher than the worst of the 1970s. The change in measurement complicates comparisons of inflation across time.

John Cochrane The Grumpy Economist
Date Posted:

.@JohnHCochrane comments on @LHSummers’ new working paper on inflation which accounts for interest costs. “[Their] new way is closer to right, if the question is to measure changes in the cost of living right now for the average person.”

Does housing measurement make recent inflation look lower than the 1970s?

Core argument: Measured with the 1970s methodology, the recent bout of inflation would exceed the worst of the 1970s, according to the author's recomputation.

If we measured inflation as we did in the 1970s, the recent bout of inflation would have been even higher than the worst of the 1970s! No wonder the deplorables are ungrateful for Bidenomics, is essentially the author’s point, though quantified and much more politely stated. The main difference is that the old measure counts the price and interest rate you have to pay to buy a new house as the cost of the house, while the new measure is based on what it costs to rent a house. You can see that the new and old methods are the same in the initial run up of inflation starting in 2021, but then the new measure shoots up when the Fed raised interest rates. But the change in measurement makes it hard to compare over time. It would be nice to recompute the old data with new measurement. But when you can’t do that, computing new data with the old measurement is a nice way to compare over time on an even basis.

Takeaways by Macro Roundup® AI

  1. Measured with the 1970s methodology, the recent bout of inflation would exceed the worst of the 1970s, according to the author's recomputation.
  2. The older measure treated the purchase price and interest rate paid on a new house as the cost of housing, while the newer measure is based on what it costs to rent.
  3. The two measures move together during the inflation run-up beginning in 2021 and diverge after the Federal Reserve raised interest rates, a change in measurement that the author says makes comparison over time difficult.

Related Articles:

  • The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly — 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%.
  • 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.

AI Summary. Using disaggregated price data, the author estimates that industry-specific shocks to goods whose supply cannot easily expand raise overall inflation through cost-push price wedges. Constructing a counterfactual inflation rate that would have prevailed had monetary policy kept output at potential allows consumer price inflation to be decomposed into components driven by the output gap and by these relative price shocks.

Elisa Rubbo National Bureau of Economic Research
Date Posted:

Elisa Rubbo finds that consumer price inflation in 2020 was due to industry-specific supply bottlenecks, while since 2021 excess aggregate demand has played an approximately equal role.

How much of inflation comes from sector shocks versus demand?

Core argument: The author argues that industry-specific shocks to inelastically supplied goods raise aggregate inflation through a cost-push shock that shows up as a price wedge.

Industry specific shocks to inelastically supplied goods increase aggregate inflation through a cost-push shock [showing up as] a price wedge. I construct the counterfactual consumer price inflation rate which would have prevailed had monetary policy closed the output gap at all periods. The difference between actual and counterfactual inflation is a measure of the component of inflation due to non-zero output gaps, accounting for their effect through inflation expectations and the price wedges χ. Figure 4 shows a decomposition of consumer price inflation between January 2019 and July 2022. The dark rust line is the official CPI [and the lighter orange line is the core PCE]. The bright orange line plots the component of the CPI due to the aggregate output gap. The dark blue bars instead represent the component of CPI inflation driven by exogenous shocks to the relative price wedges. All inflation series are normalized to zero in January 2020.

Takeaways by Macro Roundup® AI

  1. The author argues that industry-specific shocks to inelastically supplied goods raise aggregate inflation through a cost-push shock that shows up as a price wedge.
  2. The author constructs a counterfactual consumer price inflation rate that would have prevailed had monetary policy closed the output gap in all periods, treating the difference from actual inflation as the component attributable to non-zero output gaps, including effects through inflation expectations and price wedges.
  3. The decomposition of consumer price inflation from January 2019 to July 2022 separates the component driven by the aggregate output gap from the component driven by exogenous shocks to relative price wedges, with all inflation series normalized to zero in January 2020.

Related Articles:

  • What We’ve Learned About Inflation — Fiscal theory holds that a one-time $5tn fiscal expansion produces a one-time rise in the price level sufficient to inflate away $5tn of debt value, after which inflation stops even if the Federal Reserve does nothing. Raising interest rates lowers current inflation at the cost of more-persistent inflation, a beneficial smoothing.
  • Fiscal Arithmetic and the Global Inflation Outlook — Across advanced economies, core inflation is significantly positively associated with growth in government debt since the start of the pandemic, and the authors expect this decade's fiscal expansions to shift price levels permanently higher. They argue this differs from permanently higher inflation, projecting inflation to diminish as temporary deficits normalize, with medium-term inflation expectations still anchored near central bank targets.
  • Fiscal Influences on Inflation in OECD Countries, 2020-2022 — Across 21 economies, the authors find that headline and core inflation responded positively to a measure of government spending increases scaled by pre-pandemic debt-to-GDP and average debt duration. Estimated coefficients of 0.4–0.5 suggest 40–50% of the extra spending was financed through inflation, with the rest through conventional public finance.

AI Summary. Among school districts with similar poverty levels, remote learning was associated with greater declines in student achievement, and a district-level analysis found community poverty rates and the length of school closures had roughly equal effects on outcomes. For each week spent remote, students in poor districts experienced steeper math losses than peers in richer districts.

Sarah Mervosh, Claire Cain Miller, and Francesca Paris New York Times
Date Posted:
Is Database:
Database

The more time students spent in pandemic-related remote learning, the more they underperformed. The mean drop in math scores for 3rd through 8th grades in 2022 for mostly in-person was .35 years behind and for mostly remote .57 years behind. @NYTimes

Did remote learning worsen achievement losses most in poor districts?

Core argument: Among districts with similar poverty levels, remote learning was associated with greater declines in student achievement, according to a district-level analysis led by Stanford's Sean Reardon with Harvard economist Thomas Kane.

Looking at districts with similar poverty levels, remote learning was associated with greater declines [in achievement]. A community’s poverty rate and the length of school closures had a “roughly equal” effect on student outcomes, said Sean Reardon, a professor of poverty and inequality in education at Stanford, who led a district-level analysis with Thomas Kane, an economist at Harvard. But the combination — poverty and remote learning — was particularly harmful. For each week spent remote, students in poor districts experienced steeper losses in math than peers in richer districts. That is notable, because poor districts were also more likely to stay remote for longer. Some of the country’s largest poor districts are in Democratic-leaning cities that took a more cautious approach to the virus.

Takeaways by Macro Roundup® AI

  1. Among districts with similar poverty levels, remote learning was associated with greater declines in student achievement, according to a district-level analysis led by Stanford's Sean Reardon with Harvard economist Thomas Kane.
  2. Sean Reardon said a community's poverty rate and the length of school closures had "roughly equal" effects on student outcomes, with the combination of poverty and remote learning particularly harmful.
  3. For each week spent remote, students in poor districts experienced steeper math losses than peers in richer districts, and poor districts were also more likely to stay remote longer, with some of the largest in Democratic-leaning cities.

Related Articles:

  • Students Are Making a ‘Surprising’ Rebound From Pandemic Closures. But Some May Never Catch Up — An analysis of standardized test data led by Stanford and Harvard researchers finds elementary and middle-school students have regained about a third of pandemic learning losses in math and a quarter in reading. Because poorer districts lost more ground initially, the typical poor district remains nearly half a grade level behind, versus about a fifth for rich districts.
  • NAEP Long-Term Trend Assessment Results: Reading and Mathematics — U.S. national assessment scores for 13-year-olds declined 4 points in reading and 9 points in mathematics from the prior assessment, and 7 and 14 points respectively compared with a decade earlier. Mathematics declines were larger for lower-performing students (12–14 points) than for middle- and higher-performing students (6–8 points).
  • Parents Don’t Understand How Far Behind in School Their Kids Are — The authors calculate that the average student fell half a year behind in math and a third of a year behind in reading. Students in the poorest 10% of districts lost three-quarters of a year in math, more than double the decline in the richest districts, with reading declines half as large.

AI Summary. Brazil's industry ministry has opened at least half a dozen investigations into alleged dumping of Chinese industrial products, spanning metal sheets, pre-painted steel, chemicals and tyres. Brazilian steelmakers have asked for tariffs of 9.6% to 25% on imported steel, as Brazil's steel and iron imports from China rose from $1.6bn to $2.7bn.

Bryan Harris, Joe Leahy, and A. Anantha Lakshmi Financial Times
Date Posted:

Brazil has joined Mexico and the EU in launching a series of anti-dumping investigations in response to a surge of Chinese exports, as the PRC seeks to drive its economy through increased exports.

Are rising Chinese imports triggering anti-dumping probes in Brazil?

Core argument: Brazil's industry ministry has opened at least half a dozen anti-dumping investigations in the past six months into Chinese industrial products spanning metal sheets, pre-painted steel, chemicals and tyres, at the request of industry bodies.

Brazil’s industry ministry has launched a number of investigations into the alleged dumping of industrial products by China as Latin America’s largest economy reels from a wave of cheap imported goods. At the request of industry bodies, the ministry has in the past six months opened at least half a dozen probes on products ranging from metal sheets and pre-painted steel to chemicals and tyres. Brazilian steelmakers have requested the government slap tariffs of between 9.6% and 25% on imported steel products. Overall imports of steel and iron from China rose from $1.6bn in 2014 to $2.7bn last year.

Takeaways by Macro Roundup® AI

  1. Brazil's industry ministry has opened at least half a dozen anti-dumping investigations in the past six months into Chinese industrial products spanning metal sheets, pre-painted steel, chemicals and tyres, at the request of industry bodies.
  2. Brazilian imports of steel and iron from China rose from $1.6bn in 2014 to $2.7bn last year.
  3. Brazilian steelmakers have asked the government to impose tariffs of between 9.6% and 25% on imported steel products.

Related Articles:

  • China’s Record Manufacturing Surplus — 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.
  • 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.
  • China’s Plan to Reshape World Trade On Its Own Terms — 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.

AI Summary. China is adding more chip-making capacity than the rest of the world combined, all in mature nodes, backed by government incentives worth more than $150bn, according to research consultancy Gavekal Dragonomics. Utilization rates for mature-node chip producers have fallen from nearly 100% to 65–75%, leaving India's $11bn semiconductor push facing an already well-supplied market.

Megha Mandavia Wall Street Journal
Date Posted:

China is expected to add more legacy chipmaking capacity than the rest of the world combined in 2024, creating a risk that indigenous chipmaking efforts in India will be stillborn.

Does China's mature-node chip expansion undercut India's semiconductor ambitions?

Core argument: China will add more chip-making capacity in 2024 than the rest of the world combined — one million more wafers a month than in 2023, all at mature nodes — according to Gavekal Dragonomics.

When India’s largest conglomerate, Tata Group, broke ground on a $11 billion semiconductor factory this week, Prime Minister Narendra Modi said the country was poised to become a world leader in the sector. He might be in for a rude awakening. China, is pouring capital into legacy chip making on a breathtaking scale. China will add more chip-making capacity than the rest of the world combined in 2024, according to research consulting firm Gavekal Dragonomics: one million more wafers a month than in 2023—all mature nodes. China’s aggressive expansion comes at a time when the market for legacy chips is already well supplied. Utilization rates for producers of mature-node chips have fallen from nearly 100% in 2020 to 65-75% at present, according to Gavekal. China’s government incentives—worth more than $150 billion—will help producers absorb losses. But India would struggle to shower such a capital-intensive infant industry with that kind of cash, especially given its already high government debt and enormous funding needs for infrastructure in general.

Takeaways by Macro Roundup® AI

  1. China will add more chip-making capacity in 2024 than the rest of the world combined — one million more wafers a month than in 2023, all at mature nodes — according to Gavekal Dragonomics.
  2. Utilization rates for mature-node chip producers have fallen from nearly 100% in 2020 to 65–75% at present, according to Gavekal, as China expands into an already well-supplied legacy chip market.
  3. Chinese government incentives worth more than $150 billion will help domestic producers absorb losses, while India's high government debt and infrastructure funding needs would make comparable support difficult, as Tata Group breaks ground on an $11 billion semiconductor factory.

Related Articles:

  • The US-China Chip War is Escalating — China's imports of chipmaking equipment have reached record highs, with purchases rising from Japan, the Netherlands, and Singapore alongside a rebound in imports from the United States, as Chinese manufacturers work to indigenize chip production. Chinese government and military buyers have obtained some NVIDIA A100 and H100 chips that US sanctions were designed to block.
  • China AI & Semiconductors Rise: US Sanctions Have Failed — China's Kirin 9000S is a better-designed, leading-edge chip than the West realizes, developed without access to extreme ultraviolet lithography or cutting-edge US intellectual property, indicating existing export controls have not worked. The authors argue only decisive, full-scale measures—not half measures—could prevent China from mass-manufacturing chips needed for high-end military applications.
  • China Imports Record Amount of Chipmaking Equipment — Chinese customs data show semiconductor production tool imports reached nearly $5bn over two months, up 70% from $2.9bn a year earlier, a record high. Most of the equipment came from the Netherlands and Japan, which have imposed export restrictions on chipmaking equipment alongside the US.

Tuesday, March 19, 2024

AI Summary. Using administrative employer-employee data on workers displaced by firm closures, the authors find that workers in larger labor markets experience shorter non-employment spells and smaller earnings losses than those in smaller markets, indicating larger markets partially insure workers against job-loss shocks. The effects are larger in industries where human capital is more specialized and less portable.

Enrico Moretti and Moises Yi National Bureau of Economic Research
Date Posted:
Is Database:
Database

Large labor markets are more liquid and improve matching. A 1% increase in market size results in an increase in the 1-year re-employment probability following a firm closure by .14 and .023 for high school and college graduates respectively. @MoisesYi3

Do larger labor markets protect workers against job loss?

Core argument: Using Longitudinal Employer-Household Dynamics administrative data, the authors find that workers displaced by firm closures in larger labor markets experience significantly shorter non-employment spells and smaller earnings losses than workers in smaller markets.

We use administrative data [Longitudinal Employer‐Household Dynamics reporting] to compare the job search outcomes of workers originally in large and small markets who lost their jobs due to a firm closure. Workers in larger markets experience significantly shorter non-employment spells and smaller earning losses following a closure than workers in smaller markets, indicating that larger markets partially insure workers against idiosyncratic employment shocks. We find that the effects are larger in industries where human capital is more specialized and less portable.

Takeaways by Macro Roundup® AI

  1. Using Longitudinal Employer-Household Dynamics administrative data, the authors find that workers displaced by firm closures in larger labor markets experience significantly shorter non-employment spells and smaller earnings losses than workers in smaller markets.
  2. The authors read the larger-market advantage as an indication that larger labor markets partially insure workers against idiosyncratic employment shocks.
  3. The estimated benefits of larger markets are greater in industries where human capital is more specialized and less portable, according to the authors.

Related Articles:

  • Changes in the U.S. Economy and Rural-Urban Employment Disparities — Long-term shifts in the US economy — technological innovation and automation, declines in some energy extraction, greater globalization, and the move to a knowledge-based economy — have coincided with disproportionately negative employment outcomes in rural communities, especially for prime working-age men and those without a high school degree.
  • The World’s Rust Belts: The Heterogeneous Effects of Deindustrialization on 1,993 Cities in Six Countries — A study of 1,993 cities in France, Germany, Italy, Japan, the UK and the US finds former manufacturing hubs lost employment on average after each country's manufacturing peak, though a large share fully recovered. After the peak, hubs with a higher initial share of college-educated workers grew significantly faster.
  • Exodus From America’s Big Cities Slowed Last Year as Pandemic Receded — The core counties of large U.S. metropolitan areas lost a net of more than 800,000 residents to other parts of the country, an improvement from a 1.2m net outflow the prior year. About 500,000 net arrivals from abroad, plus more births and fewer deaths, left those counties' combined population little changed.

AI Summary. Even as the Bank of Japan moves away from negative interest rates and yield curve control, Japanese short- and long-term interest rates are expected to remain well below those in the U.S. and Europe. On that basis, Japan is likely to remain a modest net buyer of foreign bonds.

Brad Setser and Alex Etra Council on Foreign Relations
Date Posted:

The end of yield control in Japan is expected to reduce the Bank of Japan’s purchases of foreign debt, but “the best bet is that Japan will continue to be a modest net buyer of foreign bonds, as it was in 2023.” @EtraAlex @Brad_Setser

Will Japanese investors keep buying foreign bonds as policy tightens?

Core argument: The Bank of Japan appears set to exit its negative interest rate policy, lifting its target rate to just above zero and possibly allowing 10-year Japanese government bond yields to fluctuate more freely, continuing a two-year retreat from yield curve control.

The Bank of Japan (BoJ) seems set to exit its negative interest rate policy (NIRP) this week and allow its target interest rate to rise to just above zero. It also may also take further gradual steps to allow the yield on 10-year Japanese government bonds (JGBs) to fluctuate more freely, continuing its two-year long process of backing away from yield curve control. Shifts in Japanese monetary policy – even if widely telegraphed – are of global interest. There are always fears that Japanese investors will lose interest in foreign paper. At the end of the day, the ongoing evolution in Japanese monetary policy settings isn’t likely to change all that much. Both short-term and long-term Japanese rates will remain well below rates in the U.S. and Europe. Thus, the best bet is that Japan will continue to be a modest net buyer of foreign bonds, as it was in 2023.

Takeaways by Macro Roundup® AI

  1. The Bank of Japan appears set to exit its negative interest rate policy, lifting its target rate to just above zero and possibly allowing 10-year Japanese government bond yields to fluctuate more freely, continuing a two-year retreat from yield curve control.
  2. The ongoing evolution in Japanese monetary policy is unlikely to change much, since both short-term and long-term Japanese rates will remain well below rates in the U.S. and Europe.
  3. Despite recurring fears that Japanese investors will lose interest in foreign paper, Japan is likely to continue as a modest net buyer of foreign bonds, as it was in 2023.

Related Articles:

  • BOJ Shock Has Wall Street Gaming Out the Global Spillovers — The Bank of Japan has signaled it will allow yields to trade toward 1% from roughly 0.5%, though its intervention in the market suggests that shift is not imminent. With Japanese domestic investors holding around $2.5tn of US stocks, bonds and credit, Wall Street is weighing volatile spillovers that could reinforce higher-for-longer interest rates.
  • Japanese Workers Secure Biggest Pay Rise In Three Decades — Japanese companies including Honda, Nippon Steel, and ANA Holdings granted workers their largest pay rise in more than three decades, with economists expecting large firms to give unionised workers average increases above 4%, up from 3.6% the prior year. The increases strengthen the case for the Bank of Japan to begin raising interest rates.
  • Japan’s Stock Market Is Back After 34 Years But The Country Is Deeply Changed — Japan's economy grew an average of just 0.7% during the 2000s amid mild deflation, and the International Monetary Fund expects public debt to reach 256% of gross domestic product, up from 65% in 1989. Net profits at non-financial Japanese firms rose more than fourfold over that period, leaving ¥343tn in cash.

AI Summary. The US Treasury buyer base has shifted from yield-insensitive buyers such as sovereign wealth funds and central banks toward yield-sensitive buyers such as US households, pensions, and insurers. If the Federal Reserve cuts rates, demand from these yield-sensitive buyers could weaken, producing a steeper yield curve.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk notes the buyer base for US Treasuries has shifted from yield-insensitive central banks and sovereign wealth funds to yield-sensitive households and institutions. Once the Fed starts cutting rates this could steepen the yield curve.

Has the Treasury buyer base shifted toward yield-sensitive buyers?

Core argument: The US Treasury buyer base has shifted from yield-insensitive buyers such as sovereign wealth funds and central banks, including the Federal Reserve, toward yield-sensitive buyers including US households, pensions, and insurers.

The buyer base for US Treasuries has shifted from yield-insensitive buyers (sovereign wealth funds and central banks, including the Fed) to yield-sensitive buyers (US households, US pensions, US insurance). This may become a problem once the Fed begins to cut rates because that could mean less demand from the yield-sensitive buyers, ultimately resulting in a steeper yield curve.

Takeaways by Macro Roundup® AI

  1. The US Treasury buyer base has shifted from yield-insensitive buyers such as sovereign wealth funds and central banks, including the Federal Reserve, toward yield-sensitive buyers including US households, pensions, and insurers.
  2. Federal Reserve rate cuts could weaken demand from the yield-sensitive US households, pensions, and insurers now anchoring the Treasury buyer base, potentially resulting in a steeper yield curve.

Related Articles:

  • In 2023 Foreign Demand for Long Term Treasuries Exceed Net Issuances — Foreign demand for long-term US Treasuries, at just over $450bn, exceeded the Treasury's net long-term issuance of just over $400bn, with that demand not coming from China. Net long-term issuance lagged the fiscal deficit—roughly 1.5% of GDP versus 6%—leaving the increase in the stock of long-term "safe" US assets modest.
  • Manufacturing Demand — Banks' Treasury holdings have fallen as a share of assets to historically low levels, with banks preferring loans, higher-yielding securities, reserves, and agency mortgage-backed securities to meet liquidity requirements. Revising bank capital rules to revamp the leverage calculation could boost market liquidity and make banks significant Treasury buyers.
  • Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements — Fiscal dominance requires governments to fund deficits at the margin with non-interest-bearing debt, and the revenue from inflation taxation—both expected and unexpected—is limited. The authors argue a US fiscal dominance episode could end the payment of interest on bank reserves and restore requirements that banks hold large zero-interest reserves against deposits.

AI Summary. Private equity returns lagged public equity markets by a wide margin, and buyout exits fell 66% from 2021 and 44% from 2022, according to Bain & Co. Private equity-backed companies grew more slowly than public companies and generated significantly lower free cash flow, suggesting weakening relative fundamentals rather than valuation smoothing.

Dan Rasmussen Verdad
Date Posted:

.@verdadcap examines the 2023 performance of private equity portfolio companies with public debt and finds they had lower revenue growth and higher interest costs compared with public firms, and zero free cash flow.

Are private equity fundamentals weakening relative to public markets?

Core argument: Bain & Co. reports that buyout exits are down 66% since 2021 and 44% from 2022, which suggests that something beyond valuation smoothing is affecting private equity.

Private equity lagged public equity markets last year by a significant margin. The easiest explanation is that this is simply the result of smoothing: PE firms didn’t much mark down their portfolios when the market sold off in 2022 and then didn’t have to write them back up as much in 2023. But according to Bain & Co.'s latest report, buyout exits are down 66% since 2021 and 44% from 2022—which suggests that something more worrisome is happening underneath the hood. In 2023, PE-backed companies grew slower than the public market and generated significantly lower free cash flow. The lagging performance of buyouts relative to public markets looks like it might be more than just smoothing. It may reflect the weakening of the relative fundamentals.

Takeaways by Macro Roundup® AI

  1. Bain & Co. reports that buyout exits are down 66% since 2021 and 44% from 2022, which suggests that something beyond valuation smoothing is affecting private equity.
  2. Private equity trailed public equity markets by a significant margin in 2023, which the smoothing explanation attributes to PE firms neither marking portfolios down much in 2022 nor writing them back up in 2023.
  3. PE-backed companies grew more slowly than the public market in 2023 and generated significantly lower free cash flow, which may reflect weakening relative fundamentals for buyouts.

Related Articles:

  • Private Equity Fundamentals — An analysis of North American private equity- and venture-backed companies with public stock or debt finds they trade at 22.4x adjusted earnings, in line with small-cap growth stocks, but at 33.4x on standard accounting measures with net debt of 8.8x earnings. The authors describe the group as heavily leveraged and mostly cash-flow negative.
  • It’s Mostly a Paper Moon: Alternative Investments Review — Venture capital financing has tightened: the median time between funding rounds has lengthened, more startups have shut down through bankruptcy, and the share of "down rounds" — new financing at a lower valuation — rose from 8% to nearly 20%, with those rounds cutting post-money valuations by more than 50%.
  • The Dispersion Delusion — In simulations of 20-stock micro-cap portfolios used as a comparison for private equity median returns, the authors find value characteristics appear to have the largest effect, raising the median return from 10% in a random sample to 18% in a value-ranked sample. Ranking on profitability raises the median return to 14%.

AI Summary. Following Federal Reserve rate increases, the annual interest Americans pay on mortgages, credit cards, and other debt rose by nearly $420bn while interest income rose only about $280bn, producing a decline in household net interest income unlike prior tightening cycles. Consumer credit reprices quickly, banks were slow to raise deposit rates, and wealth has shifted from interest-paying holdings into stocks.

Ben Holland Bloomberg
Date Posted:

.@markets argues that declining net interest income has become a drag on consumer spending as the interest bill for US households has risen by $420B since the start of the hiking cycle, while interest income grew by only $280B.

Why did rate increases reduce household net interest income this time?

Core argument: U.S. household interest payments on mortgages, credit cards, and other debt have risen by nearly $420 billion since the Fed began tightening in March 2022, while household interest income rose only about $280 billion.

The annual interest bill that Americans pay on mortgages, credit cards, and other debt has climbed by almost $420 billion since the Fed started tightening policy in March 2022. The rise in interest income over the same period was only about $280 billion. Unlike every other Fed hiking cycle of the past half century, the latest one triggered a sharp decline in household net interest income. On the spending side, interest costs rose faster this time because Americans now have a larger share of their debts in consumer credit, which is quicker to reprice and saddles borrowers with bigger bills when rates go up. Mortgages, by contrast, are mostly locked-in beyond the Fed’s reach. As for interest income, one reason it’s lagged is that banks were slow to pass on higher rates to depositors. Another is that wealth has shifted out of the kind of holdings that pay interest, and into stocks.

Takeaways by Macro Roundup® AI

  1. U.S. household interest payments on mortgages, credit cards, and other debt have risen by nearly $420 billion since the Fed began tightening in March 2022, while household interest income rose only about $280 billion.
  2. Unlike every other Fed hiking cycle of the past half century, the latest one produced a sharp decline in household net interest income.
  3. Interest costs rose faster because Americans hold a larger share of debt in quick-repricing consumer credit while mortgages are mostly locked in; interest income lagged as banks were slow to pass higher rates to depositors and wealth shifted from interest-bearing holdings into stocks.

Related Articles:

  • Global Views: Cutting Through the Noise — Higher interest rates have mixed economic effects because government interest payments to private holders of public debt add to private-sector spending power, while private-sector interest payments only redistribute income among private actors. If rates stay higher for longer, these payments are projected to exceed $1tn, and the current policy stance may not return inflation to 2%.
  • 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.
  • Stock and Flow — Higher interest rates have mixed economic effects because government interest payments to private holders of public debt add to private-sector spending power, while private-sector interest payments only redistribute income among private actors. If rates stay higher for longer, these payments are projected to exceed $1tn, and the current policy stance may not return inflation to 2%.

AI Summary. TerraPower, founded by Bill Gates, plans to seek a US construction permit for its Natrium reactor, which is cooled with liquid sodium rather than water, at a first plant in Kemmerer, Wyoming. The company says the reactors could be built for about half the cost of standard water-cooled reactors.

Jamie Smyth Financial Times
Date Posted:

TerraPower, founded by @BillGates, plans to build a groundbreaking nuclear plant cooled by liquid sodium at half the cost of traditional water-cooled reactors. The plant should be operational by 2030.

TerraPower, founded by @BillGates, plans to build a groundbreaking nuclear plant cooled by liquid sodium at half the cost of...

Can sodium-cooled reactors be built for half the cost of water-cooled ones?

Core argument: TerraPower chief executive Chris Levesque told the Financial Times that the company's Natrium reactors, cooled with liquid sodium rather than water, could be built for about half the cost of standard water-cooled reactors.

TerraPower, a company founded by Bill Gates, plans to start building the first of a new generation of nuclear power plants in the US in June. Chris Levesque, TerraPower’s chief executive, told the Financial Times the company would apply for a construction permit from US regulators this month for its reactor, which is cooled with liquid sodium rather than water. He said the company’s Natrium-branded reactors could be built for about half the cost of standard water-cooled reactors. TerraPower, which has raised almost $1bn in private funding, signed an agreement with Emirates Nuclear Energy Corporation in December to explore using Natrium reactors to generate electricity and produce hydrogen in the United Arab Emirates. The company has secured pledges from the US government to provide up to $2bn to complete work at TerraPower’s first plant in Kemmerer, Wyoming.

Takeaways by Macro Roundup® AI

  1. TerraPower chief executive Chris Levesque told the Financial Times that the company's Natrium reactors, cooled with liquid sodium rather than water, could be built for about half the cost of standard water-cooled reactors.
  2. TerraPower, founded by Bill Gates, plans to begin building the first of a new generation of US nuclear plants in June and will apply this month for a construction permit from US regulators.
  3. TerraPower has raised almost $1bn in private funding and secured US government pledges of up to $2bn to complete work at its first plant in Kemmerer, Wyoming.

Related Articles:

  • Electravision — The fossil fuel share of global primary energy is falling about 0.40% per year, matching the pace of decarbonization during the 1973–1988 nuclear buildout, though total carbon dioxide emissions have not declined because energy consumption keeps rising. Renewable energy is used almost exclusively for the electricity grid, with little penetration in industry and transport.
  • First New US Nuclear Reactor In Three Decades May Be Its Last — Plant Vogtle unit 3 in Georgia, a 1,100-megawatt reactor originally slated to enter service in 2016, is the first nuclear reactor built from scratch in the US in more than three decades. The combined cost of Vogtle units 3 and 4 has grown from an original $14bn to more than $30bn.

AI Summary. Global sea surface temperatures set daily records for 365 consecutive days, peaking at an all-time high of 21.2C, according to US National Oceanic and Atmospheric Administration and Climate Reanalyzer data. Scientists are concerned that climate change could push marine ecosystems beyond a tipping point, with seas showing no sign of returning to typical seasonal temperatures.

Jana Tauschinski and Emiliya Mychasuk Financial Times
Date Posted:

Oceans have hit record-high temperatures for the last 365+ days, reaching an all-time high of 70.2°F on March 13. This is raising alarms about impacts on marine life and weather patterns. @FT

Have global sea surface temperatures set records for a full year?

Core argument: Global sea surface temperatures set daily records for 365 consecutive days, peaking at an all-time high of 21.2C on March 13, according to data from the US National Oceanic and Atmospheric Administration and the Climate Reanalyzer research collaboration.

Oceans marked 365 straight days of record-breaking global sea surface temperatures this week, fuelling concerns among international scientists that climate change could push marine ecosystems beyond a tipping point. The consistent climb in temperatures reached a peak on [March 13] when the new all-time high was set for the past 12 months, at 21.2C. The world’s seas have yet to show any signs of dropping to typical, seasonal temperatures, with daily records consecutively broken since they first went off the charts in mid-March last year, according to data from the US National Atmospheric and Oceanic Administration and the Climate Reanalyzer research collaboration.

Takeaways by Macro Roundup® AI

  1. Global sea surface temperatures set daily records for 365 consecutive days, peaking at an all-time high of 21.2C on March 13, according to data from the US National Oceanic and Atmospheric Administration and the Climate Reanalyzer research collaboration.
  2. The world's seas have shown no signs of returning to typical seasonal temperatures since daily records began being broken in mid-March of last year.
  3. International scientists have voiced concern that climate change could push marine ecosystems beyond a tipping point.

Related Articles:

  • Long-term Surface Impact of Hunga Tonga-Hunga Ha’apai-like Stratospheric Water Vapor Injection — A volcanic eruption that injected large amounts of water vapor — a strong greenhouse gas — into the stratosphere is estimated to have raised surface temperatures by more than 1.5°C across large regions for several years, while cooling some areas by close to 1°C. The authors suggest a possible link to tropical Pacific sea surface temperatures that warrants further investigation.
  • Gulf Coast Temperatures Surge to Highest Levels Ever Observed — Sea surface temperatures in the Gulf of Mexico have warmed more than 3 degrees above the norm for the date, with temperatures near 88°F common down to depths of 165 feet. Though the Gulf as a whole has cooled slightly from record levels, it remains near all-time highs.
  • Warming Could Push the Atlantic Past a ‘Tipping Point’ This Century — New research projects that the Atlantic Meridional Overturning Circulation, the network of ocean currents shaping North Atlantic climate, could collapse around midcentury as human-driven warming slows it. A much weaker circulation could cool much of the Northern Hemisphere, speed sea-level rise along North American and European coasts, and reduce rainfall in Africa's Sahel and Asian monsoon regions.

AI Summary. The share of children earning more than their parents fell from 91.5% for those born in 1940 to 50% for those born in 1980. A reanalysis estimates that had the later cohort seen the earlier cohort's income growth, absolute mobility would have been 81% even with unchanged inequality, pointing to slower growth rather than rising inequality.

Scott Winship American Enterprise Institute
Date Posted:
Is Database:
Database

Slower economic growth, not rising inequality, is the primary factor behind declining absolute mobility, according to Scott Winship’s analysis of Chetty’s data.

Is slower growth, not rising inequality, behind falling absolute mobility?

Core argument: Scott Winship's counterfactual analysis estimates absolute mobility for the 1980 birth cohort would have been 81% rather than 50% had it experienced the 1940 cohort's intergenerational income growth of 204% versus 5%, holding inequality unchanged.

Scott Winship's analysis of Chetty's data suggests that slower economic growth, rather than rising inequality, is the primary factor behind declining absolute mobility. Chetty's findings indicated that absolute mobility fell from 91.5% for children born in 1940 to 50% for those born in 1980, attributing this mainly to inequality. However, Winship's counterfactual analysis shows that if the 1980 cohort had experienced the same intergenerational income growth as the 1940 cohort (204% vs. 5%), absolute mobility would have been 81% instead of 50%, even with unchanged inequality. This contrasts with Chetty's estimate of 62% under higher growth conditions. Winship's results highlight that higher growth would have increased absolute mobility significantly more than lower inequality, reversing Chetty's conclusions and emphasizing the critical role of economic growth in enhancing mobility.

Takeaways by Macro Roundup® AI

  1. Scott Winship's counterfactual analysis estimates absolute mobility for the 1980 birth cohort would have been 81% rather than 50% had it experienced the 1940 cohort's intergenerational income growth of 204% versus 5%, holding inequality unchanged.
  2. Chetty's data show absolute mobility fell from 91.5% for children born in 1940 to 50% for those born in 1980, a decline Chetty attributes mainly to rising inequality.
  3. Winship's 81% figure under higher growth exceeds Chetty's 62% estimate under higher-growth conditions, supporting Winship's argument that slower economic growth, rather than rising inequality, is the primary factor behind declining absolute mobility.

Scott Winship revisits Chetty data and argues that slower economic growth has been much more important than the rise in inequality in terms of explaining the reduction of absolute mobility. Recall Chetty"found that while the vast majority of American kids born in 1940 ended up better off at age 30 than their parents fared at the same age, that was only true of half of kids born in 1980. Moreover, the paper found that rising income inequality was much more to blame for this falling “absolute mobility” than slower economic growth."
Chetty's claim, "...Chetty et al. report that absolute mobility fell from 91.5 percent for children born in 1940 to 50 percent for those born in 1980. In their counterfactual simulations, they found that if the economic growth rates prevailing for the 1940 cohort had been experienced by the 1980 cohort, with inequality nonetheless rising as much as it actually did, the absolute mobility rate for the 1980 cohort would have been 62 percent rather than 50 percent. However, if the adulthood inequality experienced by the 1980 cohort had been what the 1940 cohort saw, with economic growth increasing as slowly as it actually did, 80 percent of the most recent cohort would have experienced absolute mobility...."
This is a relative technical debate but Winship noted a methodological flaw in Chetty’s work, "...The central point at issue here is that incorporating GDP per working-age person into the counterfactual analyses introduces potentially problematic assumptions into the Chetty analyses. Dividing average income for each percentile of the distribution of 30-year-olds by GDP per working-age person is different than dividing average income for each percentile by total income measured the same way as in the numerator. In the latter case, the ratios would sum to 100 across percentiles. The ratios Chetty et al. compute only sum to 44.3. What that means is that most GDP per working-age individual is not allocated to the incomes of 30-year olds. That is appropriate in that the Chetty team later compares the counterfactual incomes of these adults to parental income, with average parental income also smaller than GDP per working-age person in 1980. If all of GDP per working-age individual were allocated to 30-year-olds, these amounts would automatically tend to be larger than parental incomes, artificially inflating absolute mobility..."

“…Section III.B. of their paper acknowledges that “a significant portion of the increase in absolute mobility in our counterfactual is driven by the fact that 30 year olds today earn a smaller fraction of GDP than in the past.” That means their counterfactual analyses must assume not only that the 1980 cohort of 30-year-olds have the within-30-year-old distribution of the 1940 cohort but that they have the 30-year-old-to-everyone-else distribution of the 1940 cohort too. In his correspondence with me, Chetty confirmed that the team prefers making this assumption and incorporating GDP per working-age person into the analyses to the alternative of simply using parental and 30-year-old incomes in their data. As they note in Section III.B., the income in their data misses an increasing share of national income, so using it alone to simulate a counterfactual of lower inequality seems unwarranted….”

His alternativeapproach "...There is a simpler alternative approach to modeling counterfactual absolute mobility rates for the 1980 cohort if growth had been stronger. We can look at the intergenerational increase in income (as measured in the Chetty data) for the 1940 birth cohort (comparing average 30-year-old income in 1970 to average parental income). Then we can apply that growth to the 1980 birth cohort’s parental income and assume that 30-year-old incomes would still have been distributed as unequally as they really were. The income growth calculations need only use the parental and 30-year-old income estimates from the Chetty data (not GDP per working-age person), and the income distribution of the 30-year-olds likewise need only use the 30-year-old income estimates.."
Winship's results, "...implemented this strategy. The result? If the 1980 birth cohort had experienced the same intergenerational income growth as the 1940 cohort did (an increase of 204 percent rather than 5 percent), while the fruits of that income growth had been distributed as unequally in 2010 as really occurred, the absolute mobility rate would have been 81 percent instead of 50 percent. Again, Chetty et al. report an estimate of just 62 percent for their “higher growth” simulation...."
Winship bottom line is that slower economic growth is much more important than inequality is understanding absolute mobility, "... my results indicate the opposite: higher growth would have raised absolute mobility from 50 percent to 81 percent, while lower inequality would have increased it to just 57 percent.This is almost the mirror image of the Chetty findings. Chetty also reported trends looking at absolute mobility for the 1970 cohort as of age 40 rather than for the 1980 cohort at age 30 (Figure S12 in their paper). These analyses showed that in the “high growth” counterfactual, instead of 56 percent of the 1970 birth cohort experiencing absolute mobility, 67.5 percent would have. Meanwhile, in the “low inequality” counterfactual, the rate was 74 percent. However, using my approach, the “high growth” scenario produced an absolute mobility rate of 78.5 percent, while the “low inequality” scenario featured a rate of 63 percent. Again, the Chetty conclusion about the importance of growth versus inequality reverses..."
What’s Robert Lucus line? "Once one starts to think about it is hard to think about anything else

Scott Winship, "Was Rising Inequality behind Falling Absolute Mobility?"American Enterprise Institute, December 1, 2022, https://www.aei.org/wp-content/uploads/2022/12/Was-Rising-Inequality-Behind-Falling-Absolute-Mobility.pdf