Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason 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
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…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 very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, March 25, 2024

AI Summary. The authors argue that the gradual fall in interest rates from 1989 to 2019 likely played a prominent role in the observed rise in wealth-to-income ratios, as households need to accumulate more wealth for retirement when interest rates are low. In their quantitative exploration, target saving motives dominate intertemporal substitution effects in the aggregate.

Paul Beaudry, Katya Kartashova and Césaire Meh National Bureau of Economic Research
Date Posted:

A new @NBERpubs paper finds that decreasing interest rates likely led to a substantial increase in the rate of retirement saving as consumers anticipated low future returns.

Do falling interest rates raise household wealth-to-income ratios?

Core argument: The authors' quantitative exploration suggests the fall in interest rates from 1989 to 2019 played a prominent role in the observed increase in wealth-to-income ratios.

In this paper, we put forward the notion that the gradual fall in interest rates observed from the late 1980s up until the COVID period likely favored an increase in household-level demand for wealth. Our quantitative exploration suggests that the fall in interest rates from 1989 to 2019 likely played a prominent role in the observed increase in wealth-to-income ratios. The reason we put forward is the need to accumulate more wealth for retirement when interest rates are low - roughly speaking, at the aggregate level target saving motives dominate intertemporal substitution effects.

Takeaways by Macro Roundup® AI

  1. The authors' quantitative exploration suggests the fall in interest rates from 1989 to 2019 played a prominent role in the observed increase in wealth-to-income ratios.
  2. The authors argue that lower interest rates raised household-level demand for wealth because households need to accumulate more wealth for retirement when returns are low.
  3. In the mechanism the authors propose, target saving motives dominate intertemporal substitution effects at the aggregate level.

Related Articles:

  • The US Capital Glut and Other Myths — The US capital-output ratio remains close to its postwar average and the real return to capital has stayed roughly constant near 6%, at 5.84% in the 2000s and 6.42% in the 2010s. Market-based real returns averaged 5.52% from 1950-1989 versus 6.95% from 1990-2019, a rise rather than the decline a capital glut implies.
  • In Search of Safe Havens: The Trust Deficit and Risk-free Investments! — Plotting US Treasury bond rates against a crude fundamental risk-free rate—actual inflation plus real GDP growth—undercuts the argument that central banks set interest rates. Central banks can nudge rates at the margin but cannot override the fundamentals of inflation and real growth.
  • Global Savings Glut’s Demise Threatens Higher Borrowing Costs — The global surplus of savings that helped hold down long-term interest rates has crested, with aging populations, a weakened Chinese economy, and a more fragmented global economy threatening to turn it into a shortfall. The International Monetary Fund projects China's savings will fall to 42.4% of its gross domestic product as its current account surplus shrinks.

AI Summary. Microsoft and Nvidia's combined weight in the S&P 500 rose from 6.3% in 2021 to 12.3%, while Alphabet, Amazon, Apple, Meta, and Tesla's combined weight fell from 18% to 16.2% as they underperformed the index. The other 493 stocks rose 33.5% in value, from $23.9tn to $31.9tn.

Jesper Rangvid Rangvid's Blog
Date Posted:

Jesper Rangvid proposes designating Alphabet, Amazon, Apple, Meta, and Tesla as the “5 Not So Magnificent Anymore” stocks as they have underperformed the overall S&P 500 index since 2021.

Have only two of the Magnificent 7 outperformed the index?

Core argument: Microsoft and Nvidia together have nearly doubled their share of the S&P 500's total value since 2021, rising from 6.3% to 12.3% as the pair significantly outperformed the index.

Figure 2 divides the Magnificent 7 into two groups and shows their weights in the index since 2021. One group consists of only two stocks: The Magnificent 2 Microsoft and Nvidia [Mag2]. The other group consists of the remaining five stocks: Alphabet, Amazon, Apple, Meta, and Tesla [5NSMA] an acronym for “5 Not So Magnificent Anymore” stocks. In 2021, the 5NSMA stocks accounted for 18% of the total value of all 500 stocks in the index. The Mag2 accounted for 6.3%. Since 2021, the 5NSMA have underperformed the index. Today, their weight in the index has fallen to 16.2%. On the other hand, the Mag2 have significantly outperformed the market. In 2021, Microsoft and Nvidia together accounted for the aforementioned 6.3% of the market. Today they account for 12.3%. The other 493 shares in the S&P 500 have risen from a total value of USD 23.9 trillion at the beginning of 2021 to USD 31.9 trillion today, an increase of 33.5%.

Takeaways by Macro Roundup® AI

  1. Microsoft and Nvidia together have nearly doubled their share of the S&P 500's total value since 2021, rising from 6.3% to 12.3% as the pair significantly outperformed the index.
  2. The other five "Magnificent 7" stocks — Alphabet, Amazon, Apple, Meta, and Tesla — have underperformed the S&P 500 since 2021, with their combined index weight falling from 18% to 16.2%.
  3. The 493 S&P 500 stocks outside the Magnificent 7 rose in total value from USD 23.9 trillion at the start of 2021 to USD 31.9 trillion, an increase of 33.5%.

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.
  • Magnificently Concentrated — Since 1957, the 10 largest stocks in the S&P 500 have trailed an equal-weighted index of the remaining 490 stocks by 2.4% per year on average, though over the past decade the largest 10 outperformed by 4.9% per year. The authors argue history suggests the capitalization-weighted S&P 500 is likely to underperform the equal-weighted version over the next decade.
  • 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. The authors argue that manufacturing-led growth in China would be unsustainable over the medium term, producing low returns and a new cycle of bad debt, while its scope is limited by trading partners' willingness to absorb more Chinese goods. China's manufacturing trade surplus stands at $1.6tn, more than 10% of GDP.

Ozge Akinci, Hunter Clark, Jeff Dawson, Matthew Higgins, Silvia Miranda-Agrippino, Ethan Nourbash, and Ramya Nallamotu Federal Reserve Bank of New York
Date Posted:

A @NewYorkFed analysis argues that higher-than-expected growth in Chinese manufacturing driven by credit expansion would likely drive meaningful upward pressure on U.S. inflation through rising global commodity and intermediate goods prices.

Can manufacturing-led growth sustain China's economy over the medium term?

Core argument: China's manufacturing trade surplus stands at $1.6 trillion, more than 10% of GDP, and the authors argue that trading partners' willingness to absorb a further flood of Chinese products limits the scope for manufacturing-led growth.

We believe any period of manufacturing-led growth would prove unsustainable over the medium term—thus our characterization of the scenario as involving a “sugar high.” A sustained focus on manufacturing will lead to low returns and a new cycle of bad debt. The scope for manufacturing-led growth will also be limited by trading partners’ willingness to absorb a new flood of Chinese products. In this connection, China’s manufacturing trade surplus now stands at a massive $1.6 trillion, more than 10% of GDP. Our sugar-high scenario assumes that there will be no new restrictions over the near term. The materialization of this upside scenario could generate persistently higher inflation in the U.S. over the next two years. The boost in Chinese demand generates higher demand for foreign goods, including both final goods and intermediate inputs. This pushes up U.S. exports while generating significant upward pressure on global commodity and intermediate goods prices.

Takeaways by Macro Roundup® AI

  1. China's manufacturing trade surplus stands at $1.6 trillion, more than 10% of GDP, and the authors argue that trading partners' willingness to absorb a further flood of Chinese products limits the scope for manufacturing-led growth.
  2. The authors characterize manufacturing-led Chinese growth as a "sugar high" that would prove unsustainable over the medium term, arguing that a sustained manufacturing focus leads to low returns and a new cycle of bad debt.
  3. In the authors' sugar-high scenario, which assumes no new restrictions in the near term, stronger Chinese demand for foreign final goods and intermediate inputs lifts U.S. exports and global prices, and could generate persistently higher U.S. inflation over the next two years.

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.
  • 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.
  • 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.

AI Summary. China has issued government procurement guidelines that phase out US microprocessors from Intel and AMD in state PCs and servers and sideline Microsoft's Windows and foreign database software in favor of domestic alternatives. China accounted for 27% of Intel's $54bn in sales and 15% of AMD's $23bn.

Ryan McMorrow, Nian Liu and Qianer Liu Financial Times
Date Posted:

China’s import substitution campaign is accelerating with new guidelines banning Intel and AMD microprocessors and Microsoft Windows from government PCs and servers. The autarky strategy is referred to as xinchuang, “IT application innovation.”

Is China replacing US chips and software in government computers?

Core argument: China's new procurement guidelines will phase Intel and AMD microprocessors out of government PCs and servers; China was Intel's largest market last year, supplying 27% of its $54bn in sales and 15% of AMD's $23bn in sales.

China has introduced new guidelines that will mean US microprocessors from Intel and AMD are phased out of government PCs and servers, as Beijing ramps up a campaign to replace foreign technology with homegrown solutions. The stricter government procurement guidance also seeks to sideline Microsoft’s Windows operating system and foreign-made database software in favour of domestic options. It runs alongside a parallel localisation drive under way in state-owned enterprises. China was Intel’s largest market last year, providing 27% of its $54bn in sales and 15% of AMD’s $23bn in sales. Microsoft does not break out China sales but president Brad Smith last year told the US Congress that the country provided 1.5% of revenues. Beijing’s procurement revamp is part of a national strategy for technological autarky in the military, government, and state sectors that has become known as xinchuang or “IT application innovation.”

Takeaways by Macro Roundup® AI

  1. China's new procurement guidelines will phase Intel and AMD microprocessors out of government PCs and servers; China was Intel's largest market last year, supplying 27% of its $54bn in sales and 15% of AMD's $23bn in sales.
  2. The stricter Chinese procurement guidance also seeks to sideline Microsoft's Windows and foreign-made database software in favour of domestic options; Microsoft president Brad Smith told the US Congress that China provided 1.5% of revenues.
  3. Beijing's procurement revamp forms part of a national strategy for technological autarky across the military, government and state sectors known as xinchuang, or "IT application innovation," and runs alongside a parallel localisation drive in state-owned enterprises.

Related Articles:

  • China Intensifies Push to ‘Delete America’ From Its Technology — A Chinese government directive requires state-owned companies in finance, energy, and other sectors to replace foreign software in their information technology systems by 2027, part of a broader push to remove U.S. technology. Hardware makers were targeted first, with Dell, IBM, and Cisco equipment gradually replaced by Chinese products.
  • 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.
  • Managing Economic and Financial Entanglements With China — China's surplus in manufactured goods net of commodity imports has kept growing relative to trade partners' output and relative to China's own economic output, alongside weak consumer spending and falling homebuilding. U.S. federal spending financed largely by borrowing has supported private balance sheets and demand, muting attention to that surplus.

AI Summary. Short-term Treasury bills have risen to 22.4% of outstanding U.S. government debt, above the 20% limit recommended by the committee that advises the Treasury on borrowing. Demand remains solid, with investors requiring no extra compensation to hold longer-term Treasurys and fewer alternatives available in corporate and mortgage-backed bond markets.

Eric Wallerstein Wall Street Journal
Date Posted:

Since 2019 the Treasury market has grown 60% to $27T and shifted towards short-term bills. Currently, 22.4% of Treasuries outstanding have a maturity of one year or less, above the government’s 20% recommended level.

Is government debt shifting toward short-term bills without weakening demand?

Core argument: Treasury bills with maturities of one year or shorter have risen to 22.4% of the $27 trillion in outstanding U.S. debt, above the 20% limit recommended by the borrowing committee that advises the government.

The amount of bills—those with maturities of one year or shorter—has risen to 22.4% of debt outstanding, above the recommended 20% limit set by the borrowing committee that advises the government. Demand has been more than adequate. Investors still aren’t requiring extra compensation to hold longer-term Treasurys. The so-called term premium is actually negative. One reason demand for Treasurys remains solid: fewer alternatives. Many companies issued long-term bonds when the pandemic sent rates near zero, then slowed borrowing when the Fed started raising them. The market for mortgage-backed securities is nearly frozen, with few Americans moving in the most expensive housing market in decades.

Takeaways by Macro Roundup® AI

  1. Treasury bills with maturities of one year or shorter have risen to 22.4% of the $27 trillion in outstanding U.S. debt, above the 20% limit recommended by the borrowing committee that advises the government.
  2. Demand for Treasurys has been more than adequate, with investors not requiring extra compensation to hold longer-term issues and the term premium actually negative.
  3. Fewer alternatives support Treasury demand: many companies issued long-term bonds when the pandemic sent rates near zero and slowed borrowing once the Federal Reserve raised them, while the mortgage-backed securities market is nearly frozen.

Related Articles:

  • The Long Term Budget Outlook: 2024 to 2054 — The Congressional Budget Office projects the federal budget deficit will reach 8.5% of gross domestic product over a 30-year horizon, with outlays rising to 27.3% of GDP and revenues to 18.8%. The projected growth is attributed to rising interest costs, large sustained deficits excluding interest, and spending on federal health care programs, particularly Medicare.
  • From Riches to Rags: Causes of Fiscal Deterioration Since 2001 — Federal debt held by the public rose from 32% to 98% of GDP over roughly two decades, despite earlier Congressional Budget Office projections that the debt would be paid off. The authors attribute 37 percentage points to major tax cuts, 33 to discretionary spending and Medicare expansions, and 28 to recession and pandemic responses.
  • Bond Vigilantes Snooze As Treasury Market Shrugs Off Vast US Borrowing — The 10-year US Treasury yield has fallen from a peak of 5% to 4.3% as inflows into US bond funds reached their highest level since 2021, despite heavy government borrowing. Goldman Sachs projects the stock of outstanding Treasuries will rise by $1.7tn this year, weighted more toward longer-dated bonds that are riskier for investors.

Tuesday, March 26, 2024

AI Summary. Workers age 55 and older have not reversed the decline in labor force participation that began with the COVID-19 pandemic, unlike other age groups, amounting to roughly 2m workers by some estimates. The shortfall is concentrated among those without a college degree, while college-educated older workers' participation returned to its pre-pandemic trend.

Brandon Miskanic, Nicolas Petrosky-Nadeau and Cindy Zhao Federal Reserve Bank of San Francisco
Date Posted:
Is Database:
Database

The pandemic-era excess retirement surge was concentrated among non-college workers over age 55. Relative to the pre-pandemic trend about 2mm workers are missing. @Petrosky_Nadeau

Have older workers returned to the labor force after the pandemic?

Core argument: Workers age 55 and older have yet to reverse the decline in labor force participation that occurred with the onset of the COVID-19 pandemic, in contrast to other age groups.

A strong labor market is usually an engine that pulls and keeps people in the labor market, growing the pool of available workers. These forces have played out over the past three years for many groups of people, with one notable exception: workers age 55 and older. In contrast to other age groups, workers age 55 and older have yet to reverse the decline in labor market participation that occurred with the onset of the COVID-19 pandemic. By some estimates, this represents about 2 million workers who otherwise would have been in the labor force in 2023 absent the global pandemic. The drop in labor force participation for individuals without a college degree is a break from what would have been expected following the pre-COVID trend. This contrasts with the experience for college-educated workers, whose rate of participation in the labor market in 2023 returned to its pre-pandemic trend.

Takeaways by Macro Roundup® AI

  1. Workers age 55 and older have yet to reverse the decline in labor force participation that occurred with the onset of the COVID-19 pandemic, in contrast to other age groups.
  2. By some estimates, about 2 million workers age 55 and older would have been in the labor force in 2023 absent the pandemic.
  3. Labor force participation among individuals without a college degree broke from its pre-COVID trend, while college-educated workers' participation returned to its pre-pandemic trend in 2023.

Related Articles:

  • Why Is Prime-Age Labor Force Participation So High? — Labor force participation among 25-to-54-year-olds rose after the pandemic shock, with women's rate exceeding its pre-pandemic peak while men's returned to its pre-pandemic level but stayed below its historical high. The authors find this participation rise can ease wage and price pressures in hot labor markets, but appears to have ended.
  • “The Great Retirement Boom”: The Pandemic-Era Surge in Retirements and Implications for Future Labor Force Participation — An increase in the retired share of the working-age population of nearly 1.5 percentage points above pre-pandemic levels—more than 3.5m additional retirees—accounts for essentially all of the shortfall in the labor force participation rate, while other causes of non-participation such as caregiving have receded.
  • Post-Pandemic Recovery for America’s Prime Age Labor Force: A Tale of Two Sexes — Prime-age women's labor force participation climbed about 5 points above its pre-pandemic level over a decade, while prime-age men's rose barely a point, only just regaining pre-pandemic levels. Despite economic expansion and labor shortages, work rates for prime-age American men are barely as high as at the trough of the severe Reagan-era recession.

AI Summary. The authors estimate that U.S. counties receiving publicly financed World War II plants saw persistent local development and expanded higher-wage manufacturing employment, with men born there before the war earning $1,200 (2020 dollars), or 2.5%, more annually in adulthood than peers elsewhere. Gains were larger for children of lower-income parents.

Andrew Garin and Jonathan Rothbaum National Bureau of Economic Research
Date Posted:
Is Database:
Database

.@andy_garin et al. show that men born before WWII in counties chosen for large wartime plant construction earned 2.5% more per year in adulthood relative to those born in comparable regions, with benefits mainly to children born to low-income parents.

Does public industrial investment raise local development and economic mobility?

Core argument: Men born before World War II in U.S. counties where publicly financed war plants were built earned $1,200 (2020 dollars), or 2.5 percent, more per year in adulthood than those born in comparison regions.

Publicly financed plants were built in dispersed locations outside of major urban centers for security reasons during the United States' industrial mobilization for World War II. Such wartime plant construction had large and persistent impacts on local development, characterized by an expansion of relatively high-wage manufacturing employment throughout the postwar era. Men born before WWII in counties where plants were built earned $1,200 (in 2020 dollars) or 2.5 percent more per year in adulthood relative to those born in comparison regions, with larger benefits accruing to children of lower-income parents. The balance of evidence suggests that these individuals benefited primarily from the local expansion of higher-wage jobs to which they had access as adults.

Takeaways by Macro Roundup® AI

  1. Men born before World War II in U.S. counties where publicly financed war plants were built earned $1,200 (2020 dollars), or 2.5 percent, more per year in adulthood than those born in comparison regions.
  2. Wartime plant construction, sited in dispersed locations outside major urban centers for security reasons, had large and persistent effects on local development through an expansion of relatively high-wage manufacturing employment across the postwar era.
  3. The earnings gains from wartime plant siting were larger for children of lower-income parents, and the balance of evidence suggests these individuals benefited primarily from the local expansion of higher-wage jobs accessible to them as adults.

Related Articles:

  • ‘Transformational Change’: Biden’s Industrial Policy Begins to Bear Fruit — Financial Times research identified more than 75 large-scale US manufacturing announcements following the passage of American semiconductor and clean-energy subsidy laws, with companies committing roughly $204bn to boost semiconductor and clean-tech production and promising at least 82,000 jobs. That is almost double the capital spending commitments made in those sectors two years earlier.
  • Small Towns Chase America’s $3 Trillion Climate Gold Rush — About $1tn in US federal tax incentives and loans for green energy is drawing a flood of corporate investment into rural counties and reshaping local economies. Estimates of the total private and public spending driven over the next decade range from several hundred billion dollars to roughly $3tn.
  • Republican Districts Dominate US Clean Technology Investment Boom — A Financial Times analysis found that more than 80% of pledged investment in large-scale clean energy and semiconductor manufacturing is destined for Republican congressional districts. The analysis attributes this partly to those districts' available land and cheap labor, and to state-level tax breaks and subsidies in states such as Georgia and Ohio.

AI Summary. Incoming data — strong employment growth, low jobless claims, and upward pressure on consumer and producer price inflation — suggest monetary policy is not restrictive, a better guide than estimates of the neutral interest rate. Eased financial conditions, including record-high stock prices, tight credit spreads, and rising home prices, affect consumer spending immediately.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk @apolloglobal argues that the impact of the tightening cycle on labor markets has been offset by a wealth effect from the 25% increase in the S&P 500 since November.

Does incoming data show monetary policy is not restrictive?

Core argument: January and February data showed strong employment growth, low jobless claims, and upward pressure on CPI and PPI inflation, which the author argues indicates monetary policy is not restrictive.

The best guide to whether monetary policy is restrictive is not r-star but the incoming data. The incoming data shows that after the Fed turned dovish and the stock market rallied, we have in January and February seen strong employment growth, low jobless claims, and upward pressure on CPI and PPI inflation. Maybe the lagged effects of Fed hikes work after 12 to 18 months through income in the consumption function. However, the effects of easy financial conditions on consumer spending are immediate. Given that financial conditions have eased significantly over the past five months, with record-high stock prices, tight credit spreads, and rising home prices, it is not surprising that the incoming economic data is strong. The bottom line is that the last mile is harder because of the immediate positive impact on the economy of record-high stock prices. In contrast, the long and variable lags work mainly through a rising unemployment rate.

Takeaways by Macro Roundup® AI

  1. January and February data showed strong employment growth, low jobless claims, and upward pressure on CPI and PPI inflation, which the author argues indicates monetary policy is not restrictive.
  2. Financial conditions have eased significantly over the past five months, with record-high stock prices, tight credit spreads, and rising home prices, making strong incoming economic data unsurprising in the author's view.
  3. The author argues easy financial conditions affect consumer spending immediately, while the long and variable lags of Fed hikes work mainly through a rising unemployment rate, making the last mile harder.

Related Articles:

  • The Fed’s Growth Optimism Puts a Floor Under Rates — Federal Reserve officials have marked up growth projections, with output growing 3.1% versus the 1% previously projected, and now expect short-term interest rates to fall by only 1.5pp after peaking rather than the 2.25pp once anticipated. Rising asset prices and the resilience of rate-sensitive sectors such as housing help explain upward revisions to "neutral" rate estimates.
  • Has the U.S. Economy Transitioned to a Higher Long-Run Real Interest Rate Regime? — Labor productivity growth in the U.S. nonfarm business sector has exceeded its longer-run average in three of the past five years, suggesting a possible shift to a faster productivity growth regime. Such a shift is one possible explanation for a long-run neutral real interest rate above 2%.
  • Measuring the Natural Rate of Interest After COVID-19 — Model estimates for the United States, Canada, and the Euro Area place the natural rate of interest within a few tenths of a percentage point of pre-pandemic estimates, with the main longer-term consequence of the pandemic a reduction in the natural rate of output. The authors find no evidence that the era of historically low natural rates has ended.

AI Summary. The Swiss National Bank has begun the developed-market rate-cutting cycle with other central banks expected to follow, while fiscal policy remains loose and longer-dated yields stable. With steady growth, low unemployment, and central banks no longer restraining markets, the backdrop remains benign for risk assets and speculative psychology appears to be taking hold.

Joseph Wang Fed Guy Blog
Date Posted:

As the global rate-cutting cycle gets underway in advanced economies @FedGuy12 expects risk assets to appreciate.

Does synchronized central bank easing create a benign backdrop for risk assets?

Core argument: The Swiss National Bank began the developed-market easing cycle with a surprise rate cut, with other central banks close behind.

The Swiss National Bank kicked off the developed market central bank cutting cycle with a surprise cut this week, but everyone else is right behind them. The macro backdrop remains benign for risk assets, where speculative psychology appears to be taking hold. Fiscal policy remains loose as the popular culture continues to demand more fiscal spending. Longer-dated yields appear to be stable, potentially responding to an imminent QT tapering. Economic growth remains steady, unemployment remains low, and most importantly the central banks are no longer standing in the way. While the declines in 2008 and 2020 understandably loom large in the memory of many speculators, that is not the only possible path for an upward price trend. There are also periods like the 1990s and 1920s where the market can rise longer and higher than anyone ever imagined.

Takeaways by Macro Roundup® AI

  1. The Swiss National Bank began the developed-market easing cycle with a surprise rate cut, with other central banks close behind.
  2. The macro backdrop remains benign for risk assets, with steady economic growth, low unemployment, loose fiscal policy, and central banks no longer standing in the way.
  3. Longer-dated yields appear stable, potentially responding to an imminent tapering of quantitative tightening, while speculative psychology appears to be taking hold in risk assets.

Related Articles:

  • The Fed and the Secular Decline in Interest Rates — The authors find that the long-run decline in US Treasury yields since 1980 is fully accounted for by movements in a narrow window around Federal Reserve policy meetings, while yield changes outside that window prove transitory. They suggest the Federal Reserve conveys information to markets about the long-run level of interest rates.
  • The Fed’s Growth Optimism Puts a Floor Under Rates — Federal Reserve officials have marked up growth projections, with output growing 3.1% versus the 1% previously projected, and now expect short-term interest rates to fall by only 1.5pp after peaking rather than the 2.25pp once anticipated. Rising asset prices and the resilience of rate-sensitive sectors such as housing help explain upward revisions to "neutral" rate estimates.
  • Has the U.S. Economy Transitioned to a Higher Long-Run Real Interest Rate Regime? — Labor productivity growth in the U.S. nonfarm business sector has exceeded its longer-run average in three of the past five years, suggesting a possible shift to a faster productivity growth regime. Such a shift is one possible explanation for a long-run neutral real interest rate above 2%.

AI Summary. A crisis in China's property sector is projected to materially weaken U.S. growth and trade while lowering U.S. inflation, with the largest effects in the first four quarters. In the authors' scenario, U.S. real GDP growth falls up to 2pp below baseline, export volumes up to 10pp, and consumer prices about 3pp.

Ozge Akinci, Hunter Clark, Jeff Dawson, Matthew Higgins, Silvia Miranda-Agrippino, Ethan Nourbash, and Ramya Nallamotu Federal Reserve Bank of New York
Date Posted:

A @NewYorkFed analysis argues the prospect of a hard landing in China is high given the ratio of nonfinancial sector debt to GDP is now over 300%. They forecast a further slowdown in China’s property sector will materially weaken US growth.

How would a Chinese property crash affect U.S. growth and inflation?

Core argument: In the authors' forecast of a Chinese hard landing, U.S. real GDP growth falls as much as 2 percentage points below baseline before beginning to recover, with the largest impacts occurring over the first four quarters following a crash.

A Chinese hard landing could result in materially weaker U.S. growth and trade performance and lower U.S. inflation, with the largest impacts occurring over the first four quarters following a crash. Real GDP growth [in their forecast] falls as much as 2pp below baseline before beginning to recover, while export volumes fall as much as 10pp below baseline. The PCE price index, for its part, falls some 3pp below baseline before crisis impacts begin to fade.

Takeaways by Macro Roundup® AI

  1. In the authors' forecast of a Chinese hard landing, U.S. real GDP growth falls as much as 2 percentage points below baseline before beginning to recover, with the largest impacts occurring over the first four quarters following a crash.
  2. U.S. export volumes fall as much as 10 percentage points below baseline in the Chinese hard landing scenario, amounting to materially weaker U.S. trade performance.
  3. The PCE price index falls some 3 percentage points below baseline in the Chinese hard landing scenario before crisis impacts begin to fade.

Related Articles:

  • The Neoclassical Growth of China — China's per capita GDP growth path closely tracks those of Japan, South Korea, and Taiwan from similar starting income levels, indicating nothing unusual about its growth rate. The authors' model projects China's per capita GDP will level off at about 41% of the US level, reflecting a slowdown in productivity catch-up.
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AI Summary. The Swiss Re Institute estimates global insured losses from natural catastrophes will rise 5%–7% a year over the next decade, roughly doubling in about 10 years, with climate change accounting for about one-eighth of the increase in damages. Only about 40% of global economic losses are insured.

Leslie Kaufman Bloomberg
Date Posted:

Swiss Re estimates that only one-eighth of the rise in insured damages is attributable to climate change and forecasts that claims will double in the next decade. 2023 was the fourth year in a row where insured losses topped $100B.

Swiss Re estimates that only one-eighth of the rise in insured damages is attributable to climate change and forecasts that...

How fast are insured losses from natural catastrophes rising?

Core argument: Insured losses from natural catastrophes topped $100 billion in 2023, the fourth consecutive year above that level, though below the totals recorded in 2021 and 2022.

Around the world, insured damages inflicted by natural catastrophes are climbing fast and set to double in roughly 10 years according to the Swiss Re Institute — the research arm of the giant reinsurance firm. Insured losses from natural catastrophes have been on a slow and steady rise. Although last year saw a drop from 2022 and 2021, it was the fourth year in a row when they topped $100 billion. Only about 40% of economic losses globally are insured, meaning the total economic losses are much higher. Swiss Re estimates that climate change was responsible for only a fraction of increase in damages, about one-eighth, although it expects that its contribution will rise. With factors like inflation, exposure, and rising natural perils combined, total insured losses will likely rise 5% to 7% a year over the next decade.

Takeaways by Macro Roundup® AI

  1. Insured losses from natural catastrophes topped $100 billion in 2023, the fourth consecutive year above that level, though below the totals recorded in 2021 and 2022.
  2. The Swiss Re Institute projects insured losses from natural catastrophes will rise 5% to 7% a year over the next decade and roughly double in about 10 years, with inflation, exposure, and rising natural perils combined.
  3. Swiss Re estimates climate change accounted for about one-eighth of the increase in damages and expects that contribution to rise, while only about 40% of global economic losses are insured.

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