Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “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
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “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
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “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
  • “…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, 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
Date Posted:
Is Database:
Database

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
Date Posted:
Is Database:
Database

.@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
Date Posted:
Is Database:
Database

.@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
Date Posted:

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
Date Posted:
Is Database:
Database

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.

Related Articles:

  • 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.

Tuesday, May 7, 2024

AI Summary. Bank lending standards tightened to a degree previously seen only during the 2008 financial crisis and the onset of the COVID-19 pandemic, with the tightening beginning well before the bank collapses and affecting businesses of all sizes. The analysis attributes about 23pp of the tightening to credit supply shocks and about 22pp to lending standards responding to broader economic conditions.

Vasco Cúrdia Federal Reserve Bank of San Francisco
Date Posted:
Is Database:
Database

.@VCurdia estimates that the contraction in credit in the aftermath of SVB’s failure may have added 0.4pp to unemployment through the end of this year and pushed down inflation slightly.

How much of tighter bank lending reflects credit supply shocks?

Core argument: Analysis suggests credit supply shocks account for about 23pp of the tightening in bank lending standards in the first half of 2023, with the remaining 22pp associated with lending standards responding to economic conditions including supply chain pressures.

Lending standards tightened in 2023 to a degree seen only during the Global Financial Crisis in 2008 and the onset of the COVID-19 pandemic in 2020. It also clearly shows that lending standards began tightening in the second half of 2022, well before the bank collapses in early 2023. Finally, the tightening in 2023 lending standards was very similar for all businesses regardless of their size. The analysis suggests that credit supply shocks account for about 23pp of the tighter lending standards in the first half of 2023. The remaining 22pp of the tightening is associated with the response of lending standards to changes in economic conditions due to supply chain pressures and other factors originating outside the credit market. The measure also shows that lending standards started to tighten before 2023, as early as the second quarter of 2022. This suggests that inflationary pressures and monetary policy tightening in previous quarters played a role in banking conditions more generally. Therefore, tighter credit standards may be related to the bank collapses in that they shared similar root causes in recent economic and financial conditions.

Takeaways by Macro Roundup® AI

  1. Analysis suggests credit supply shocks account for about 23pp of the tightening in bank lending standards in the first half of 2023, with the remaining 22pp associated with lending standards responding to economic conditions including supply chain pressures.
  2. Bank lending standards tightened in 2023 to a degree seen only during the Global Financial Crisis in 2008 and the onset of the COVID-19 pandemic in 2020, and the tightening was very similar across businesses of all sizes.
  3. Lending standards began tightening as early as the second quarter of 2022, before the bank collapses of early 2023, suggesting that inflationary pressures and monetary policy tightening in prior quarters played a role in banking conditions.

Related Articles:

  • The Secular Decline of Bank Balance Sheet Lending — Traditional bank balance sheet lending has declined as a share of credit intermediation, with credit increasingly channeled through arms-length transactions such as securitization. A structural model attributes falling lending shares to lower securitization costs, savers' behavior driving bank balance sheet size, and implicit bank costs and subsidies shaping balance sheet composition.
  • All Clear — Data and commentary indicate the banking panic has ended and had only a limited effect on credit availability, with overall bank lending little changed and still growing, reflecting problems at a few poorly managed banks rather than a systemic crisis. Recognition that the banking sector is not collapsing has already prompted some repricing of expected interest rate cuts.
  • How the Banking System Changed Post-SVB — American banks have tightened lending standards and reduced credit availability for both business and household loans, amid a weaker macroeconomic environment, limited liquidity, and elevated financial risks. The degree of tightening matches levels previously seen only during the 2008 recession and the onset of the COVID-19 pandemic.

AI Summary. In a survey of U.S. homeowners, close to half put their chance of moving within three years below 10% and almost three-quarters below 25%. These patterns hold across homeowners' self-reported mortgage rates and for those with and without a mortgage, with mean moving probabilities of 16% to 19%.

Felix Aidala, Andrew Haughwout, Ben Hyman, et al. Federal Reserve Bank of New York
Date Posted:

Analysis at @NewYorkFed estimates that 24.9% of homeowners would move in the next three years if their mortgage rate didn’t increase, compared to a baseline of 17.5%. @felix_aidala @ReviseNRetweet @JasonSomervil10

Do mortgage rates explain homeowners' low expectations of moving?

Core argument: Close to half of surveyed U.S. homeowners put their chance of moving in the next three years below 10%, and almost three-quarters place their chances below 25%, across the distribution of self-reported mortgage rates.

To assess the impact of mortgage rate lock-in on homeowner’s moving plans, we first asked respondents who currently own a home for the percent chance that they will move in the next three years. As shown in the histograms below, U.S. households’ moving plans generally reflect the decline in mobility that we’ve seen in recent decades. Across the distribution of homeowners’ current self-reported mortgage rates, close to half of respondents assess their probability of moving in the next three years to be less than 10%, with almost three-quarters of respondents placing their chances at less than 25%. These patterns are broadly consistent across homeowners with and without a mortgage, as all groups report a mean probability of moving in the next three years between 16% and 19%.

Takeaways by Macro Roundup® AI

  1. Close to half of surveyed U.S. homeowners put their chance of moving in the next three years below 10%, and almost three-quarters place their chances below 25%, across the distribution of self-reported mortgage rates.
  2. Homeowners with and without a mortgage report broadly similar moving plans, with every group reporting a mean probability of moving in the next three years between 16% and 19%.
  3. Homeowners' self-reported moving plans generally reflect the decline in U.S. household mobility seen in recent decades.

Related Articles:

  • The Lock-In Effect of Rising Mortgage Rates — The authors estimate that each percentage point by which market mortgage rates exceed a homeowner's original rate lowers the probability of sale by 18.1%, an effect they calculate prevented 1.33m US home sales. They estimate this supply reduction raised home prices by 5.7%, outweighing a 3.3% price decline from higher rates.
  • Have Rising Mortgage Rates Frozen the Housing Market? — 42% of American homeowners own their homes outright with no mortgage, and among those with mortgages the median housing debt is 52% of the home's value. Homeowners with large equity cushions should be less affected by "lock-in" from low pandemic-era mortgage rates.
  • 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. The number of homeowners equals the adult population multiplied by the share who head households and the share of households that own rather than rent. Holding the headship and ownership rates at current levels, the author projects that population growth dominates and homeownership growth is set to slow rapidly.

Aziz Sunderji Home Economics
Date Posted:

.@AzizSunderji forecasts the end of an 80-year boom for the real estate industry, as slower population growth causes slower homeownership growth.

Will slowing population growth slow homeownership growth?

Core argument: The number of U.S. homeowners equals population multiplied by the headship rate (household heads divided by adult population) multiplied by the ownership rate (share of households owning rather than renting).

Three factors explain the growth rate of homeownership: The population growth rate. The headship rate: the number of household heads, divided by the total adult population. The ownership rate: the percentage of households who own their home, rather than renting. At any given time, the number of homeowners across the country is equal to the population multiplied by the headship rate, multiplied by the ownership rate. We can estimate the growth in homeownership by forecasting these three variables into the future. In my base case forecast, I assume headship and ownership rates stay right where they are today. In my view, this is a more reasonable approach than guessing at how these variables evolve. In any case, when I stressed these assumptions (I elaborate on this below), the result is not very different. The population effect dominates: the rate of homeownership growth is set to rapidly slow.

Takeaways by Macro Roundup® AI

  1. The number of U.S. homeowners equals population multiplied by the headship rate (household heads divided by adult population) multiplied by the ownership rate (share of households owning rather than renting).
  2. The author's base case holds headship and ownership rates at today's levels and finds the population effect dominates, with the rate of homeownership growth set to slow rapidly.
  3. Stressing the assumptions on headship and ownership rates produces results not very different from the base case, according to the author.

Related Articles:

  • America Is Uniquely Ill-Suited To Handle a Falling Population — U.S. population growth slowed to about 7.4% in the decade to 2020, the slowest since the Great Depression, as the fertility rate fell from above the 2.1 needed for a stable population to 1.67. Because local and regional authorities levy 48% of all U.S. taxes—versus 20% in France and 6% in Britain—shrinking local revenue forces service cuts or tax rises.
  • 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.
  • Inflation Adjusted House Prices 2.4% Below Peak — 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%.

AI Summary. The unemployment rate has risen over the past year to 3.9%, just shy of the Federal Reserve's year-end projection of 4%. The author argues unemployment exhibits momentum, with increases tending to foretell further increases, and that an opaque influx of millions of migrants with limited skills and English proficiency adds persistent upward pressure.

Joseph Wang Fed Guy Blog
Date Posted:

.@FedGuy12 notes that the US labor market is softening while labor supply is rising due to immigration, and sees a possible spike in unemployment, implying the “probability of more rate cuts is increasing.”

Will unemployment rise faster than the Fed projects?

Core argument: The U.S. unemployment rate has risen steadily over the past year to 3.9%, just shy of the Fed's expected 4% rate for year-end 2025.

While the Fed expects the labor market to soften this year, the unemployment rate can easily rise by more than they expect. The unemployment rate has steadily risen over the past year and now sits at 3.9%, just shy of the Fed’s expected 4% unemployment rate for year-end 2025. An observation made by Dudley and Sahm is that the unemployment rate exhibits momentum, so increases tend to foretell further increases. In addition, the influx of millions of migrants places persistent upward pressure on the unemployment rate. Many of these migrants have limited skills and lack English proficiency, so they may be particularly vulnerable to weaker labor demand. A large but opaque increase in labor supply combined with a bout of weakening demand could move the unemployment rate upwards faster than anticipated.

Takeaways by Macro Roundup® AI

  1. The U.S. unemployment rate has risen steadily over the past year to 3.9%, just shy of the Fed's expected 4% rate for year-end 2025.
  2. Dudley and Sahm observe that the unemployment rate exhibits momentum, so increases tend to foretell further increases.
  3. The influx of millions of migrants, many with limited skills and lacking English proficiency, places persistent upward pressure on the unemployment rate, and combined with weakening labor demand could push it up faster than anticipated.

Related Articles:

  • Is Nominal Wage Growth Starting to Slow? — 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.
  • 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 Active Role of the Natural Rate of Unemployment During Cyclical Recoveries — The authors conclude that the natural rate of unemployment declined during the expansion that began in 2009, when unemployment fell from 10% to 3.5% with near-constant inflation. Their reasoning is that with inflation anchored at the Federal Reserve's 2% target over such a long stable period, New Keynesian theory implies the observed unemployment rate equals the natural rate.

AI Summary. The Social Security Trustees project the retirement trust fund will deplete its reserves by 2033, triggering a 21% across-the-board benefit cut, with the combined retirement and disability funds insolvent by 2035 and a 17% cut. Restoring 75-year solvency would require the equivalent of a 27% payroll tax increase or a 21% benefit reduction.

CRFB Staff Committee for a Responsible Federal Budget
Date Posted:
Is Database:
Database

A @BudgetHawks analysis notes the Social Security “trust fund” will deplete its reserves by 2033, triggering a 21% benefit cut under current law. A 27% (i.e. 3.3pp) payroll tax increase could close the funding gap.

How large a benefit cut will Social Security insolvency trigger?

Core argument: The Social Security Trustees project the Old-Age and Survivors Insurance trust fund will deplete its reserves by 2033, when all beneficiaries would face a 21 percent across-the-board benefit cut.

Social Security is approaching insolvency. Under current law, Social Security cannot guarantee full benefits to current retirees. The Trustees project the Social Security Old-Age and Survivors Insurance (OASI) trust fund will deplete its reserves by 2033, when today’s 58-year-olds reach the full retirement age and today’s youngest retirees turn 71. Upon insolvency, all beneficiaries will face a 21 percent across-the-board benefit cut. Including the Disability Insurance (SSDI) trust fund, the theoretically combined trust funds will be insolvent by 2035 and beneficiaries would face a 17 percent cut. According to the Trustees, lawmakers could restore 75-year solvency with the equivalent of a 27% (3.3 percentage point) payroll tax increase, a 21% reduction in all benefits, or a 25% reduction in benefits for new beneficiaries if they act today.

Takeaways by Macro Roundup® AI

  1. The Social Security Trustees project the Old-Age and Survivors Insurance trust fund will deplete its reserves by 2033, when all beneficiaries would face a 21 percent across-the-board benefit cut.
  2. Including the Disability Insurance trust fund, the Trustees project the theoretically combined trust funds will be insolvent by 2035, with beneficiaries facing a 17 percent cut.
  3. The Trustees estimate lawmakers acting today could restore 75-year solvency with the equivalent of a 27 percent (3.3 percentage point) payroll tax increase, a 21 percent reduction in all benefits, or a 25 percent reduction for new beneficiaries.

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.
  • Bill Cassidy’s Well-Intentioned but Misguided Social-Security Reform — A Senate proposal would have the federal government borrow about $1.5tn over five years—at a federal borrowing rate of roughly 3.9%—and invest it in stocks, private equity, and other assets riskier than Treasury bonds for 75 years, borrowing meanwhile to cover Social Security shortfalls. A Wharton economist argues this is not meaningfully different from raising the capital gains tax.
  • A Million Simulations, One Verdict for US Economy: Debt Danger Ahead — Bloomberg Economics projects US federal debt will reach 123% of GDP by 2034, with debt servicing costs near 5.4% of GDP — over 1.5x what the federal government spent on national defense in 2023 and comparable to the entire Social Security budget. Across a million simulations, the worst 5% of outcomes put the debt ratio above 139%.

AI Summary. Medicare's Hospital Insurance trust fund is projected to exhaust its reserves in 2036, with a 75-year shortfall of 0.35% of payroll, and total gross Medicare costs are projected to rise from 3.90% of GDP to 6.20% by 2098. An alternative scenario from the program's Chief Actuary projects 8.38% of GDP instead.

CRFB Staff Committee for a Responsible Federal Budget
Date Posted:
Is Database:
Database

The Medicare Trustees report that the Medicare “trust fund” will be insolvent in 2036 with a 75-year shortfall of up to 1.2% of payroll. @MarcGoldwein @BudgetHawks

How large is Medicare's projected shortfall and spending growth?

Core argument: The 2024 Medicare Trustees' Report projects the Hospital Insurance Trust Fund will exhaust its reserves in 2036, when today's 53-year-olds first become eligible for benefits and today's youngest beneficiaries turn 77.

The HI Trust Fund will run out of reserves in 12 years, with a projected insolvency date of 2036. That’s when today’s 53-year-olds will first be eligible for benefits and today’s youngest beneficiaries turn 77. The HI trust fund faces a large shortfall, totaling 0.35% of payroll (0.15% of GDP) over 75 years and peaking at 0.60% of payroll (0.27% of GDP) in 2044. Total Medicare costs will grow rapidly. Total Gross Medicare costs have increased from 2.19% of GDP in 2000 to a projected 3.90% of GDP in 2025 and are projected to grow further to 5.86% of GDP by 2050 and 6.20% of GDP by 2098. Medicare’s financial outlook has largely improved since last year, with the insolvency date now five years later, the 75-year HI shortfall 44% smaller, and gross program costs in 2050 15 percent of GDP lower. However, Part B and D costs are projected to be higher after 2060 and gross costs higher after 2080. Medicare’s situation might be far worse than official projections. Under an alternative scenario created by the Chief Actuary, Medicare spending will rise to 8.38% of GDP in 2098 rather than 6.20 percent. The HI shortfall in this scenario would be 1.19% of payroll instead of 0.35% of payroll.

Takeaways by Macro Roundup® AI

  1. The 2024 Medicare Trustees' Report projects the Hospital Insurance Trust Fund will exhaust its reserves in 2036, when today's 53-year-olds first become eligible for benefits and today's youngest beneficiaries turn 77.
  2. Total gross Medicare costs rose from 2.19% of GDP in 2000 to a projected 3.90% in 2025 and are projected to reach 5.86% by 2050 and 6.20% by 2098.
  3. Medicare's outlook improved from the prior year, with the insolvency date five years later and the 75-year HI shortfall 44% smaller at 0.35% of payroll, though the Chief Actuary's alternative scenario puts spending at 8.38% of GDP in 2098 and the shortfall at 1.19% of payroll.

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.
  • Has the Medicare Cost Problem Gone Away? — Average annual real per capita spending growth in the US Medicare program fell from 5.2% in 1987-1996 to 2.7% in 1996-2005 and 0.7% in 2006-2022, a slowdown most plausibly attributed to congressionally mandated payment reforms and cuts. With enrollment projected to rise from 66m to 83m by 2040, aggregate costs are expected to grow rapidly.
  • Long-Run Fiscal Outlook in the United States — The Congressional Budget Office projects the U.S. primary deficit will rise gradually until the early 2040s before plateauing near 2.7% of GDP, driven mainly by mandatory spending such as Social Security and Medicare. Limiting both health-care and Social Security spending to grow no faster than GDP would not produce a primary surplus until 2036.