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


Friday, May 3, 2024

AI Summary. Measuring U.S. manufacturing concentration by domestic production alone shows the top 20 firms' share rising, but including imports and excluding exports leaves the top 20 firms' share of total U.S. sales flat. The authors argue the falling market share of U.S. firms suggests their market power may have declined.

Mary Amiti and Sebastian Heise Federal Reserve Bank of New York
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A @NewYorkFed note argues that overall market concentration across 169 manufacturing industries has remained flat from 1992 to 2012 as foreign competition has put less competitive US firms out of business, increasing domestic production concentration.

Does counting imports change whether U.S. manufacturing concentration has risen?

Core argument: The top 20 U.S. manufacturing firms' production concentration — their sales as a share of U.S. production, excluding imports but including exports — rose between 1992 and 2012.

Previous studies have focused on what we refer to as production concentration, which is measured as the sales of the largest U.S. producers as a share of total production in the U.S. It does not take account of imported goods, but does include U.S. firms’ exports. As shown in the chart, the production concentration of the top twenty firms has increased between 1992 and 2012 (blue line). For questions related to market power in the product market, we need to take into account the sales of foreign exporters in the United States (and exclude U.S. firms’ sales abroad). We refer to this measure of concentration as market concentration. The chart [based on confidential census data] shows that the largest [20] firms’ (which could be U.S. or foreign) share of total sales (inclusive of sales by foreign firms) in U.S. manufacturing industries has been flat in the aggregate (red line). Our finding that U.S. firms’ market share has fallen suggests that the market power of U.S. manufacturing firms may actually have declined over the past few decades.

Takeaways by Macro Roundup® AI

  1. The top 20 U.S. manufacturing firms' production concentration — their sales as a share of U.S. production, excluding imports but including exports — rose between 1992 and 2012.
  2. Market concentration, which includes sales by foreign exporters in the United States and excludes U.S. firms' sales abroad, has been flat in the aggregate for the largest 20 firms in U.S. manufacturing industries, based on confidential census data.
  3. The authors find U.S. firms' market share has fallen, which suggests the market power of U.S. manufacturing firms may have declined over the past few decades.

Related Articles:

  • Why American Manufacturing is Increasingly Inefficient — Labor productivity in U.S. manufacturing has been in secular decline since 2011, the first decade-long fall in the available data, even as services drove overall output growth. More than a third of the manufacturing slowdown since 2011 is accounted for by computers and electronics, a sector whose gains had soared in the 1990s and 2000s.
  • The Concentration Conundrum; What To Do About Market Dominance — The largest US stocks make up a bigger share of the equity market than during the 2000 technology bubble, yet their valuations are lower than in earlier bubble episodes including the Nifty 50 of the early 1970s and Japan's late-1980s bubble. Today's dominant companies are also more profitable with stronger balance sheets.
  • Rising Markups and Declining Business Dynamism: Evidence From the Industry Cross Section — Across industries, larger increases in markups are not associated with larger declines in business dynamism—measured by new business entry rates and gross job or worker flows—and the correlation may even be positive. The authors conclude that rising markups as commonly measured are not a major explanatory factor behind declining dynamism.

AI Summary. Inflation-adjusted U.S. house prices are 2.4% below their peak, while the monthly principal-and-interest payment on an equivalent house has risen 12% over one year and 107% over three years, as house prices rose 31% over that three-year span and 30-year mortgage rates went from 2.81% to 6.78%.

Bill McBride Calculated Risk
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According to @calculatedrisk inflation-adjusted housing prices are 2.4% below their 2023 peak and 10.2% above the bubble era peak. Based on housing prices, mortgage rates, and median incomes, housing is now less affordable than during the bubble era.

Have mortgage payments risen far more than house prices?

Core argument: Inflation-adjusted U.S. house prices in February stood 2.4% below their peak.

For February: a year ago, the payment on a $500,000 house, with a 20% down payment and 6.26% 30-year mortgage rates, would be around $2,465 for principal and interest. The monthly payment for the same house, with house prices up 6.4% YoY and mortgage rates at 6.78% in February 2024, would be $2,769 - an increase of 12%. However, if we compare to three years ago, there is a huge difference in monthly payments. In February 2021, the payment on a $500,000 house, with a 20% down payment and 2.81% 30-year mortgage rates, would be around $1,646 for principal and interest. The monthly payment for the same house, with house prices up 31% over three years and mortgage rates at 6.78% in February 2024, would be $3,399 - an increase of 107%! More than double.

Takeaways by Macro Roundup® AI

  1. Inflation-adjusted U.S. house prices in February stood 2.4% below their peak.
  2. The monthly principal-and-interest payment on a $500,000 house with 20% down rose 107% over three years, from $1,646 at February 2021's 2.81% mortgage rate to $3,399 at February 2024's 6.78% rate with prices up 31%.
  3. Over one year, the payment on a $500,000 house with 20% down rose 12%, from $2,465 at a 6.26% mortgage rate to $2,769, with house prices up 6.4% year-over-year and rates at 6.78% in February 2024.

Related Articles:

  • It’s All About Shelter — Producer price inflation for final demand tracks consumer price inflation excluding shelter closely, and both show inflation under control; overall consumer inflation looks hot only because the shelter component is up 5.6%. That shelter measure lags rents by construction, and more current rent series show no recent inflation.
  • The Boomer-Millennial Housing Battle Cools — Demographic needs are outweighing affordability in the housing market, with the share of first-time buyers returning nearly to pre-pandemic levels despite high prices and interest rates. One in four Millennial buyers reported purchasing because they had no choice, and Millennials again make up the largest group of homebuyers.
  • A Huge Number of Homeowners Have Mortgage Rates Too Good to Give Up — About 70% of US mortgage holders hold rates more than three percentage points below what a new loan would cost, compared with a 1998–2020 period in which no more than 40% had rates even one point below market. Economists at the Federal Housing Finance Agency estimate this lock-in effect accounts for roughly 1.3m fewer home sales.

AI Summary. Utility Dominion Energy says data center developers in Northern Virginia are requesting as much as several gigawatts of electricity for single planned campuses, with a gigawatt roughly equal to one nuclear reactor's output or enough to power 750,000 homes. Dominion has connected 94 data centers consuming about 4 gigawatts combined over the past five years.

Josh Saul Bloomberg
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Virginia electric utility Dominion Energy is fielding requests for new data centers that would need “several gigawatts” of power, compared to a total of 4GW consumed by 94 data centers added since 2019.

How much electricity are single data center campuses now requesting?

Core argument: Dominion Energy CEO Bob Blue said the utility regularly fields requests from data center developers whose planned campuses need as much as "several gigawatts" of electricity, roughly the output of several nuclear reactors.

Data center developers in Northern Virginia are asking utility Dominion Energy for as much power as several nuclear reactors can generate, in the latest sign of how artificial intelligence is helping drive up electricity demand. Dominion regularly fields requests from developers whose planned data center campuses need as much as “several gigawatts” of electricity, Chief Executive Officer Bob Blue said Thursday during the company’s first-quarter earnings call. A gigawatt is roughly the output of a nuclear reactor and can power 750,000 homes. Over the past five years, Dominion has connected 94 data centers that, together, consume about four gigawatts of electricity, Blue said. That means that just two or three of the data center campuses now being planned could require as much electricity as all the centers Dominion hooked up since about 2019.

Takeaways by Macro Roundup® AI

  1. Dominion Energy CEO Bob Blue said the utility regularly fields requests from data center developers whose planned campuses need as much as "several gigawatts" of electricity, roughly the output of several nuclear reactors.
  2. Dominion has connected 94 data centers over the past five years that together consume about four gigawatts, meaning two or three of the campuses now being planned could require as much electricity as all of them.
  3. A gigawatt is roughly the output of a nuclear reactor and can power 750,000 homes.

Related Articles:

  • Electricity 2024 — More than 8,000 data centers operate globally, with about 33% in the United States, 16% in Europe, and close to 10% in China. US data center electricity use is projected to rise from roughly 200 TWh in 2022, about 4% of US electricity demand, to almost 260 TWh, or 6% of total demand.
  • Generational Growth AI, Data Centers and the Coming US Power Demand Surge — Data center power demand is projected to grow 15% annually through 2030, lifting data centers to 8% of US power demand from about 3% and raising overall US power demand growth to 2.4% a year versus roughly 0% over the prior decade.
  • The AI Transition One Year Later: On Track, but Macro Impact Still Several Years Off — Investment in AI hardware is projected to rise substantially as a precursor to integrating AI into business processes, with the investment cycle estimated to peak at 2–2½% of GDP and early signs visible among AI-enabling companies. The authors estimate generative AI could raise developed-market labor productivity growth by 1.5pp annually over a 10-year adoption period, roughly 15% cumulatively.

AI Summary. Mining companies' interest in acquiring Anglo American reflects the value of its copper mines in Chile and Peru, with copper futures contracts trading well above spot prices. Such acquisitions add no new copper supply, and it is simpler and cheaper to buy a rival copper miner than to build a new mine.

FT Staff Financial Times
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Copper futures are trading above spot prices as traders bet on a structural mismatch between supply and demand. BlackRock forecasts at least a 20% jump in prices is needed to catalyze large-scale investment which can take a decade to start production.

Why are miners buying copper rivals instead of building new mines?

Core argument: BHP's £31bn bid for Anglo American was rebuffed, and the world's largest mining group is weighing an improved offer for a target whose draw is its lucrative copper mines in Chile and Peru.

After its £31bn bid for Anglo American was rebuffed last week, BHP — the world’s largest mining group — is mulling an improved offer. Other suitors may emerge too. On the surface, the effort to acquire the UK-listed mining group’s complex and sprawling business may seem more trouble than it is worth. But it is what is below ground that is luring buyers. Anglo American owns lucrative copper mines in Chile and Peru, and prices for the shiny red metal have been soaring recently. Contracts for copper futures have been rising well above the spot price since the start of 2023. The acquisition of Anglo American’s mining sites, however, makes little contribution to boosting global copper output. It highlights a worrying reality: it is simpler and cheaper to buy out a rival copper miner than to build a new mine. This raises significant concerns for meeting the rising copper demands of the global economy and the green transition.

Takeaways by Macro Roundup® AI

  1. BHP's £31bn bid for Anglo American was rebuffed, and the world's largest mining group is weighing an improved offer for a target whose draw is its lucrative copper mines in Chile and Peru.
  2. Copper futures contracts have traded well above the spot price since the start of 2023, amid soaring prices for the metal.
  3. Acquiring Anglo American's mining sites adds little to global copper output, highlighting that buying out a rival copper miner is simpler and cheaper than building a new mine, raising concerns for meeting rising copper demand and the green transition.

Related Articles:

  • Copper Producers Warn of Lack of Mines to Meet Demand for Metal — Copper producers warn that existing and planned mines are insufficient to meet expected demand, which is projected to climb as the world electrifies and as living standards rise in India and other developing nations. Anglo American estimates Western living standards require 200-250kg of copper per person, versus a global average of 60kg.
  • Glencore Says This Time Is Different for Coming Copper Shortage — Glencore estimates a cumulative gap between projected copper demand and supply of 50m tons through 2030, against current world demand of about 25m tons a year, and argues the industry will not lift supply as it has in previous cycles. The company says copper prices do not yet reflect the coming deficit.
  • Copper Is Unexpectedly Getting Cheaper — Financial investors have shifted away from copper toward cash-generating assets as interest rates rise, with futures positioning implying more bets on falling prices than recovery. Prices remain about $2,500 a tonne above marginal production costs, suggesting the correction removed froth rather than pushing prices too low.

AI Summary. A proposal would require billionaires to pay annual income taxes equal to at least 2% of their wealth, so that someone worth about $210bn who pays no income tax would owe roughly $4.2bn. Supporters estimate it would raise about $250bn a year globally, more than the global minimum tax on corporations is expected to add.

Gabriel Zucman New York Times
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In 2018 the 400 richest Americans had a lower effective tax rate than working-class Americans. @gabriel_zucman argues for a global minimum tax, ensuring that the super-rich tax pay “a small portion — say, 2 percent — of their wealth each year.”

Should billionaires owe minimum annual income taxes equal to 2% of wealth?

Core argument: The proposal would require billionaires to pay annual income taxes equivalent to 2 percent of their wealth, raising an estimated $250 billion per year in additional tax revenue for countries.

The idea is simple. Let’s agree that billionaires should pay income taxes equivalent to a small portion — say, 2 percent — of their wealth each year. Someone like Bernard Arnault, who is worth about $210 billion, would have to pay an additional tax equal to roughly $4.2 billion if he pays no income tax. In total, the proposal would allow countries to collect an estimated $250 billion in additional tax revenue per year, which is even more than what the global minimum tax on corporations is expected to add.

Takeaways by Macro Roundup® AI

  1. The proposal would require billionaires to pay annual income taxes equivalent to 2 percent of their wealth, raising an estimated $250 billion per year in additional tax revenue for countries.
  2. Bernard Arnault, worth about $210 billion, would owe an additional tax of roughly $4.2 billion under the proposal if he pays no income tax.
  3. The estimated $250 billion in annual revenue from the proposed billionaire tax exceeds what the global minimum tax on corporations is expected to add.

Related Articles:

  • Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends — Using administrative tax data with the Survey of Consumer Finances, the authors estimate the top 1% pre-tax income share fell from 11.1% in 1962 to 9.4% in 1979, then rose to 13.8% by 2019, a 3 percentage point rise over the full period. Their after-tax measure shows increases of only 1.4 points since 1979 and 0.2 points since 1962.
  • Comment on Auten and Splinter (2023) — A critique argues that Auten and Splinter's methodology misallocates a large share of untaxed business and capital income to the bottom of the distribution, assuming the top 1% earns only about 15% of untaxed business income while tax data show they earn about 55% of business income overall.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

Monday, May 6, 2024

AI Summary. The authors estimate a "shadow" country risk premium for the US of 25–35 basis points rather than the zero conventionally assumed, reflecting US political and institutional risk. If the US premium rose to current UK levels, they project real equity wealth per household would be $50,000 lower and real GDP 1% smaller after 10 years.

Ernie Tedeschi The Budget Lab
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US financial assets benefit from a “Safe Harbor Premium” due to perceived lower risk. @ernietedeschi argues that US “shadow risk” increased 20-25 bps between 2016-20.

What would a higher US country risk premium cost households and growth?

Core argument: The authors estimate a "shadow" US country risk premium of 25–35bps rather than the conventionally assumed 0%, roughly half the UK's premium immediately after Brexit.

Expected Return on Equity Investment = Risk-Free Rate + Global Equity Risk Premium + Country Risk Premium. Even a relatively modest move in risk premia would have profound implications for the US. If the US country risk premium moved to that of the current UK level, after 10 years, real equity wealth per household would be $50,000 lower and real GDP 1% smaller. The erosion of safe harbor advantages could include more uncertainty and discontinuous risk, higher bond yields, and, ultimately, lower growth. Country risk analysis is a relative concept. Since the US is conventionally the benchmark for measuring global risk, by construct, US risk is often assumed to be 0%. Along several different dimensions, however, US political risk has risen over the last eight years: we estimate a “shadow” risk premium for the US that implies that US political and institutional risk is more consistent with a country risk premium of 25-35bps rather than zero. For context, this is roughly half of the UK’s premium in the immediate aftermath of Brexit. US shadow political risk was broadly falling over 2006-16 and has risen since by around 20-25bps. Most of this rise occurred from 2016-20.

Takeaways by Macro Roundup® AI

  1. The authors estimate a "shadow" US country risk premium of 25–35bps rather than the conventionally assumed 0%, roughly half the UK's premium immediately after Brexit.
  2. If the US country risk premium rose to the current UK level, the authors estimate real equity wealth per household would be $50,000 lower and real GDP 1% smaller after 10 years.
  3. US shadow political risk fell broadly over 2006–16 and has since risen by about 20–25bps, with most of the increase occurring from 2016–20.

Related Articles:

  • Equity Risk Premiums: Determinants, Estimation, and Implications — The implied equity risk premium for the S&P 500 — the forward-looking extra return investors demand for holding stocks over risk-free assets — has fallen to 4.23%, its lowest level since 2008, as the market has climbed.
  • 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.
  • When Does Federal Debt Reach Unsustainable Levels? — The authors estimate that U.S. debt held by the public cannot exceed roughly 200% of GDP even under favorable market conditions, and that under current policy the ratio reaches 175–200% within about 20 years. After that point, they argue, no tax increases or spending cuts could avert default or inflationary debt monetization.

AI Summary. Stabilizing federal debt would require a zero primary deficit — borrowing only to cover interest on past borrowing — which today would mean a cash deficit of about 3% of GDP, or roughly $800bn a year. The actual deficit is about $1.7tn, or 6% of GDP, with no political dynamics in prospect that would cut it to 3%.

Brad DeLong Milken Review
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.@delong argues that the US is on track for a debt crisis unless the overall deficit is cut in half to 3% of GDP, running deficits only to service existing debt.

How much deficit reduction would stabilizing federal debt require?

Core argument: The U.S. federal deficit runs about $1.7 trillion a year, or 6% of GDP, double the roughly 3% of GDP — about $800 billion — consistent with holding the primary deficit at an average of zero.

If the United States matches spending to taxes – or in the parlance of economics, if it manages to sustain an average level of zero for the primary deficit. That does not mean a balanced budget. It means borrowing more only to pay the interest owed on what had been borrowed before. Today, this means a current cash deficit of around 3% of GDP – of approximately $800 billion a year. But there is a problem here. Our current deficit is $1.7 trillion a year – not 3% but 6% of GDP – with no prospects of a change in political dynamics that would lead to a reduction to 3%. Nixon economic advisor Herb Stein said: “If something cannot go on forever, it will stop.” But when? And how?

Takeaways by Macro Roundup® AI

  1. The U.S. federal deficit runs about $1.7 trillion a year, or 6% of GDP, double the roughly 3% of GDP — about $800 billion — consistent with holding the primary deficit at an average of zero.
  2. Sustaining a zero average primary deficit would not require a balanced budget, only borrowing enough to cover interest owed on debt already incurred.
  3. No change in political dynamics is in prospect that would cut the U.S. deficit to 3% of GDP, leaving open when and how Herb Stein's maxim that what cannot go on forever will stop applies.

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.
  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.
  • Did the U.S. Really Grow Out of Its World War II Debt? — Decomposing U.S. debt-to-GDP movements, the authors find the post-World War II decline from 106% to a trough of 23% was explained mostly by primary budget surpluses and interest-rate distortions from surprise inflation and pegged nominal rates; absent those, the ratio would have fallen only to 74%.

AI Summary. US-China financial interdependence creates what has been called a "balance of financial terror," in which the US relies on other countries' costs of not financing its current account deficit as assurance that financing continues. Chinese policymakers worry that dollar holdings expose China to financial sanctions, while the US has feared Chinese sales of Treasuries could threaten its financial stability.

Brad Setser French Institute of International Relations
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.@Brad_Setser suggests the 2004 US-China “balance of financial terror” has evolved: “In a crisis over Taiwan, China would likely lose access to its reserves–and the G7 countries would see their supply of new cell phones disappear.”

Does financial interdependence give the US and China leverage over each other?

Core argument: Summers' "balance of financial terror" describes a situation in which the US relies on the costs to others of not financing its current account deficit as assurance that such financing will continue.

Summers used the term ‘balance of financial terror’ to refer to “a situation where we rely on the costs to others of not financing our current account deficit as assurance that financing will continue”. Chinese policymakers have expressed concern about losses on their Treasury or Agency holdings and have sought to diversify China’s reserves [and] increasingly worry that its dollar holdings and the dollar’s global role increase its vulnerability to potential financial sanctions. The US feared China would sell its US bonds, jeopardizing US financial stability. Both parties thus worry about the possibility that financial interdependence can be weaponized yet find it hard to extricate themselves from the inevitability of financial interdependence. The debate on whether external debt is a strategic vulnerability or a strategic asset is of particular importance in the current era [as] geopolitical risks have returned.

Takeaways by Macro Roundup® AI

  1. Summers' "balance of financial terror" describes a situation in which the US relies on the costs to others of not financing its current account deficit as assurance that such financing will continue.
  2. Chinese policymakers have voiced concern about losses on their Treasury or Agency holdings and have sought to diversify China's reserves, while worrying that dollar holdings and the dollar's global role increase China's vulnerability to potential financial sanctions.

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.
  • Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency — Institutions reporting to China's central government likely hold closer to $6tn in foreign assets than the $3.12tn officially reported as reserves, with the state banking system the main vehicle for holding these uncounted foreign currency assets. China remains a massive global creditor whose foreign exchange accumulation is felt worldwide.
  • The Big Picture: Back to the Future — The secular backdrop has shifted from disinflationary to more inflationary, with interest rates no longer near zero and real rates no longer negative. Household balance sheets are as healthy as they have been in 20 years, leaving room to borrow, while the public sector is as indebted as it has ever been.

AI Summary. Researchers estimate U.S. households' pandemic-era excess savings peaked at $2.1tn and were drawn down at an average pace of about $70bn per month before being depleted. The depletion is unlikely to cause households to sharply cut spending as long as they can support consumption through continued employment or wage gains, other wealth, and more debt.

Hamza Abdelrahman and Luiz Edgard Oliveira Federal Reserve Bank of San Francisco
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According to a @sffed estimate, US pandemic-era “excess savings” were fully exhausted as of March 2024. They argue the rundown of excess savings need not cause sharp cuts in consumer spending, due to higher labor income and non-pandemic-related savings.

Will the depletion of pandemic savings sharply reduce consumer spending?

Core argument: Aggregate U.S. excess savings are estimated to have peaked at $2.1 trillion in August 2021 and were steadily depleted over the following 2½ years.

We estimate that excess savings at the aggregate level peaked at $2.1 trillion in August 2021 and were steadily depleted over the subsequent 2½ years. Households drew down their excess savings at an average pace of $70 billion per month since September 2021, although this drawdown accelerated to about $85 billion per month since last fall relative to the average pace for the entire period. Figure 2 shows this monthly accumulation, in blue, and subsequent drawdown, in red, of pandemic-era excess savings. The depletion of these excess savings is unlikely to result in American households sharply cutting their spending levels as long as they are able to support their consumption habits through continuous employment or wage gains, other forms of wealth—including non-pandemic-related savings—and higher debt.

Takeaways by Macro Roundup® AI

  1. Aggregate U.S. excess savings are estimated to have peaked at $2.1 trillion in August 2021 and were steadily depleted over the following 2½ years.
  2. Households drew down excess savings at an average pace of $70 billion per month since September 2021, with the drawdown accelerating to about $85 billion per month since the prior fall.
  3. Depleted excess savings are unlikely to prompt sharp spending cuts by American households as long as they sustain consumption through continuous employment or wage gains, other forms of wealth, and higher debt.

Related Articles:

  • The Rise and Fall of Pandemic Excess Wealth — Real household net worth peaked at about $13tn above its pre-pandemic projected path before falling back to that path, while real financial assets peaked roughly $10tn above trend and then dropped to about $7.3tn below it. The shortfall in financial assets is attributed mainly to lower equity holdings, which fell 17%.
  • The Rich Have all the “Excess” Cash Now — Excess cash balances outside the top 1% have mostly disappeared, but the author argues their liquidation did little to finance consumer spending, which has been driven mainly by wage income. Relatively low household debt leaves many Americans room to spend above their income, potentially aided by lower interest rates.
  • Spending Down Pandemic Savings Is an “Only-in-the-U.S.” Phenomenon — Household saving rose in the United States and other high-income economies during the COVID-19 pandemic, but only in the U.S. and Canada did income-support measures push incomes well above pre-pandemic trajectories, while consumption fell everywhere. The divergence between U.S. and foreign saving behavior has no clear explanation.

AI Summary. The author argues the economy remains strong because it is less sensitive to Federal Reserve rate hikes—40% of homeowners have no mortgage, 95% of mortgages are 30-year fixed, firms termed out debt cheaply, and capital spending has shifted toward intangibles. Fiscal spending, strong immigration, and easy financial conditions add demand.

Torsten Sløk Apollo
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Torsten Sløk @apolloglobal argues the US economy’s continued strength reflects both reduced current interest rate sensitivity of household and corporate borrowing and multiple “demand tailwinds.”

Has the economy become less sensitive to interest rate hikes?

Core argument: Reduced interest-rate sensitivity reflects that 40% of homeowners have no mortgage and 95% of mortgages are 30-year fixed, while most firms termed out their debt at very low levels during Covid.

Why is the economy still so strong? Lower interest-rate sensitivity and strong demand tailwinds. Specifically: A) Lower interest-rate sensitivity: 1) 40% of homeowners don’t have a mortgage, and 95% of mortgages are 30-year fixed that are not sensitive to the Fed raising interest rates. 2) During Covid, most firms termed out their debt at very low levels. 3) A growing share of capex spending is intangibles (R&D and software), which generally is less sensitive to Fed hikes. B) Strong cyclical and structural demand tailwinds: 1) Fiscal spending, including the CHIPS Act, Inflation Reduction Act, and Infrastructure Act. 2) Excess savings have recently started to rise again for higher income households. 3) Immigration has been unusually strong, supporting overall employment growth. 4) The Fed turning dovish in December 2023 has eased financial conditions significantly. 5) Higher interest rates give higher cash flow to households that own fixed-income assets. 6) After 14 years of very low interest rates from 2008 to 2022, the demand for higher all-in yields remains extremely strong from insurance companies, pension funds, and retail investors, which has contributed to easy financial conditions that have been offsetting Fed hikes. The AI story has also boosted household wealth and eased financial conditions. 7) Corporates that got into trouble once the Fed started hiking [are] doing reorganizations and distressed exchanges, and this has kept many firms alive that would otherwise have gone out of business.

Takeaways by Macro Roundup® AI

  1. Reduced interest-rate sensitivity reflects that 40% of homeowners have no mortgage and 95% of mortgages are 30-year fixed, while most firms termed out their debt at very low levels during Covid.
  2. A growing share of capital expenditure goes to intangibles such as R&D and software, which is generally less sensitive to Federal Reserve rate hikes.
  3. Demand tailwinds include fiscal spending under the CHIPS Act, Inflation Reduction Act, and Infrastructure Act, rising excess savings among higher-income households, unusually strong immigration supporting employment growth, and the Fed's dovish turn in December 2023 easing financial conditions.

Related Articles:

  • Global Views: Friendly Baseline, Greater Risks — Despite upside inflation surprises, the authors argue the broader disinflation narrative remains intact, citing a labor market that continues to rebalance: a jobs-workers gap of 2.0m, a quits rate below pre-pandemic levels, and wage growth running just over 4% year-on-year. They expect wage growth to converge to 3.5%, the pace they estimate is consistent with 2% inflation.
  • 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.
  • Cicadian Rhythms — The authors see limited signs of the profit or capital spending declines that often accompany recessions, noting that unlike prior yield-curve inversions the corporate sector is running a surplus with stable interest expense. They flag fading disinflationary-boom prospects as a risk to price-to-earnings multiples, particularly for technology stocks.

AI Summary. Aggregate nominal wage income, which tracks closely with nominal gross domestic product, has grown at a yearly rate of just 4.5%—identical to the pre-pandemic pace—compared with almost 7% over the prior six months. The author argues that several consecutive slow months, rather than a one-off, suggest the deceleration could be significant.

Matt Klein The Overshoot
Date Posted:

Nominal wage growth in the first four months of 2024 has been slower than in 2022-23. @M_C_Klein suggests this deceleration might imply “inflation may be much closer to normalization than I had previously thought.”

Is nominal wage growth slowing to its pre-pandemic pace?

Core argument: Aggregate nominal wage income was unchanged in April 2024, the weakest month for aggregate nominal income growth since February 2021, and before that April 2020.

Until this year, unusually slow months of nominal wage growth, such as August 2023, were one-offs. I interpreted the February 2024 numbers the same way, especially given the pop in January. But nominal wage growth stayed slow in March and now April—at least as of this writing. While things could revert in the months ahead, the recent change therefore seems like it has the potential to be significant. This measure translates pretty closely to nominal gross domestic product, and was unchanged in April 2024. That would make last month the weakest month for aggregate nominal income growth since February 2021. (And before that, April 2020). Thus, while aggregate wage income had grown at a yearly rate of almost 7% from October 2023-March 2024, aggregate wage income has grown at a yearly rate of just 4.5% since the end of last year—identical to the pre-pandemic pace.

Takeaways by Macro Roundup® AI

  1. Aggregate nominal wage income was unchanged in April 2024, the weakest month for aggregate nominal income growth since February 2021, and before that April 2020.
  2. Aggregate wage income has grown at a yearly rate of just 4.5% since the end of 2023, identical to the pre-pandemic pace, down from almost 7% from October 2023–March 2024.
  3. Unusually slow months of nominal wage growth, such as August 2023, had been one-offs, but slow readings persisted in March and April 2024, giving the shift potential significance even if it reverts.

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  • US Union Members See Record Pay Raises, Outpacing Nonunion Workers — US private sector union workers' wages rose 6.3% over 12 months, the largest increase in Bureau of Labor Statistics employment cost data going back to 2001, while nonunion private sector pay rose 4.1%, not much above inflation.
  • Global Views: Friendly Baseline, Greater Risks — Despite upside inflation surprises, the authors argue the broader disinflation narrative remains intact, citing a labor market that continues to rebalance: a jobs-workers gap of 2.0m, a quits rate below pre-pandemic levels, and wage growth running just over 4% year-on-year. They expect wage growth to converge to 3.5%, the pace they estimate is consistent with 2% inflation.
  • The 6% Solution? — U.S. nominal economic growth has remained in a stable range of roughly 5.5–6% a year, with nominal GDP, consumer spending, domestic income, and private final domestic demand all growing at rates near that pace across recent periods.

AI Summary. Immigration long helped Canada, Australia, and the UK offset aging populations and falling birth rates, but a surge of arrivals has met a chronic shortage of homes. Bloomberg Economics analysis finds 13 developed economies were in per-capita recessions, with housing shortages and cost-of-living strains a common thread.

Randy Thanthong-Knight, Swati Pandey, and Tom Rees Bloomberg
Date Posted:

According to a @markets analysis, several major Western economies including Germany, France, the UK, and Canada have seen their per-capita GDP shrink over the last two quarters, driven by housing prices and a rise in less productive service jobs.

Are housing shortages undermining immigration-driven economic growth in developed economies?

Core argument: Bloomberg Economics' analysis finds thirteen developed economies were in per-capita recessions at the end of last year, with housing shortages and associated cost-of-living strains a common thread across them.

For decades, the rapid inflow of migrants helped countries including Canada, Australia, and the UK stave off the demographic drag from aging populations and falling birth rates. That’s now breaking down as a surge of arrivals since borders reopened after the pandemic runs headlong into a chronic shortage of homes to accommodate them. All up, thirteen economies across the developed world were in per-capita recessions at the end of last year, according to exclusive analysis by Bloomberg Economics. While there are other factors — such as the shift to less-productive service jobs and the fact that new arrivals typically earn less — housing shortages and associated cost-of-living strains are a common thread.

Takeaways by Macro Roundup® AI

  1. Bloomberg Economics' analysis finds thirteen developed economies were in per-capita recessions at the end of last year, with housing shortages and associated cost-of-living strains a common thread across them.
  2. Canada, Australia, and the UK used rapid migrant inflows for decades to offset the demographic drag from aging populations and falling birth rates, a model now breaking down as post-pandemic arrivals meet a chronic shortage of homes.
  3. Alongside housing shortages, the shift to less-productive service jobs and the lower earnings typical of new arrivals are cited as factors weighing on per-capita growth across the developed world.

Related Articles:

  • Immigration Is Surging, With Big Economic Consequences — Net migration into the rich world has surged, with annual inflows of 3.3m to America, 1.9m to Canada, 1.2m to Britain and 740,000 to Australia — record levels in each. While new arrivals boost total output, they appear to be dragging down output per person, which fell 2% in a year in Canada.
  • 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.
  • Immigration and the U.S. Economy Since the Pandemic: An Accounting Exercise — The US native-born labor force fell by about 1.2m over four years, a decline driven overwhelmingly by population aging, while foreign-born labor supply grew by about 3m, leaving the overall labor force up roughly 2m. Without immigration, the total US labor force would have shrunk.