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, June 3, 2024

AI Summary. Because companies weigh only their own private returns, they underinvest in research whose returns to society are far higher, and evidence contests whether intellectual property and research subsidies fix this. One model calculates that technology bubbles deliver net social gains when social returns exceed private returns by 2.5x, and estimates put corporate research's ratio near 4x.

Randall Morck Annual Review of Financial Economics
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Randall Morck’s research finds that the social return to R&D investment exceeds the private return by 4X and the social benefits of tech sector bubbles likely exceed the social costs of the subsequent crashes. Hat tip to @JimPethokoukis

Do technology bubbles deliver net social gains despite costly crashes?

Core argument: Lansing (2012) models technology bubbles with costly crashes and calculates that social benefits exceed social costs when a technology's social rate of return exceeds 2.5 times its internal rate of return.

Profit-maximizing firms only consider their own IRRs, [and thus] forgo much high-SRR [Social Rate of Return] R&D. Externality theory prescribes intellectual property (IP), R&D subsidies, and other interventions to boost innovators’ IRRs; however, mounting evidence contests the efficacy of these responses. [A “Kindelberger cycle” often] begins with a hot new technology, sometimes a new market, with very high expected IRRs. A mania inflates stocks thought favored by the disequilibrium. The bubble bursts, and a panic, crash, and (sometimes) socially costly economic downturn ensue. Economic comparisons of these social gains and losses are remarkably rare. Lansing (2012) models tech bubbles with costly crashes and calculates that social benefits outweigh social costs if the technology’s SRR exceeds 2.5 times its IRR. Figure 2 suggests that the SRR of corporate R&D exceeds the IRR by a factor of 4. Historians and marketing researchers also conclude the social benefits of bubbles exceed their social costs.

Takeaways by Macro Roundup® AI

  1. Lansing (2012) models technology bubbles with costly crashes and calculates that social benefits exceed social costs when a technology's social rate of return exceeds 2.5 times its internal rate of return.
  2. Figure 2 suggests the social rate of return on corporate R&D exceeds the internal rate of return by a factor of 4.
  3. Profit-maximizing firms weigh only their own internal rates of return and forgo much R&D with high social returns, while mounting evidence contests the efficacy of intellectual property, R&D subsidies, and other externality-theory remedies.

Related Articles:

AI Summary. Market-implied forward rates are highly correlated with current interest rates, so with the US ten-year rate around 4.5% they imply it will stay near 4.5% decades ahead; academic research finds such expectations are usually poor predictions. Estimates of the future neutral interest rate instead suggest future rates will be low.

Jesper Rangvid Rangvid's Blog
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The 10-year Treasury currently yields 4.5% and market-implied forward rates project close to 4.5% in ‘34 and ‘44. Jesper Rangvid notes that such projections too closely track recent rates and are usually not good predictors. He forecasts lower rates.

Are market-implied forward rates reliable predictors of future interest rates?

Core argument: With the US ten-year interest rate around 4.5%, market-implied forward rate models predict the ten-year rate will also be around 4.5% in 2034 and 2044, reflecting the high correlation between current and implied expected rates.

There is a high correlation between current interest rates and expected interest rates as implied by market-implied forward rates. As the US ten-year interest rate today is around 4.5%, this means that these models predict that the US ten-year interest rate will also be around 4.5% in 2034 and 2044. Academic research has found that such expectations are usually not good predictions of future outcomes. An alternative could be to look at expectations based on sound economic modeling, such as estimates of future r*. These estimates suggest that future interest rates will be low.

Takeaways by Macro Roundup® AI

  1. With the US ten-year interest rate around 4.5%, market-implied forward rate models predict the ten-year rate will also be around 4.5% in 2034 and 2044, reflecting the high correlation between current and implied expected rates.
  2. Academic research has found that expectations implied by forward rates are usually not good predictions of future interest rate outcomes.
  3. Expectations based on economic modeling, such as estimates of future r*, suggest future interest rates will be low.

Related Articles:

  • The Future Of r* — Long-run equilibrium interest rates are argued to stay low relative to recent decades' historical average but above pre-pandemic lows, implying rates only slightly below current levels, with a nominal neutral rate near 3.5% offered as illustration. Rising government debt, particularly in the US, is identified as the main risk to that view.
  • Quo Vadis, r*? The Natural Rate Of Interest After The Pandemic — Estimates of the natural rate of interest across core advanced economies suggest it may have increased, though the estimates are widely dispersed and statistically uncertain. Low expected potential growth and rising longevity may weigh on the natural rate, while large fiscal deficits, age-related spending, and public investment needs for infrastructure, defense, and the green transition may push it up.
  • Global Natural Rates in the Long Run: Postwar Macro Trends and the Market-Implied r* in 10 Advanced Economies — Estimates for 10 advanced economies show natural interest rates have declined over the long run, though not steadily: as recently as the 1990s they ranged from 100 to 600 basis points, while by the end of the sample 4 of 10 countries had a negative natural rate and most others fell between 0 and 50 basis points.

AI Summary. The dollar value of US consumer spending has grown about 6% a year since mid-2022, but a growing share of that growth comes from "imputed" categories rather than actual transactions, and excluding those, spending appears to be slowing. Meanwhile core goods inflation has accelerated, running at 2% annually.

Matthew Klein The Overshoot
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Core consumer goods inflation has been accelerating over the past few months, reversing a long-term pre-pandemic trend of goods prices falling about 1% each year. @M_C_Klein

Does excluding imputed categories reveal slowing consumer spending despite rising inflation?

Core argument: U.S. nominal consumer spending has risen at about 6% a year since mid-2022, helping keep price growth somewhat above the Federal Reserve's 2% yearly goal.

The dollar value of U.S. consumer spending has been rising steadily at a yearly rate of about 6% since mid-2022. That has helped keep prices growing somewhat faster than the 2% yearly goal favored by Federal Reserve officials. But the composition of this spending has been shifting over the past year or so, with an increasingly large growth contribution coming from categories where spending is “imputed”, instead of based on actual transactions and observed prices. Strip that out, and nominal spending seems to have been slowing. Yet this does not seem to be translating into slower inflation, with core consumer goods prices accelerating notably over the past few months. Core goods inflation seems to have returned with a vengeance. Excluding energy, groceries, and motor vehicles and parts, PCE goods inflation is now running at 2% a year. In the years before the pandemic, ultra-core goods prices fell about 1% each year.

Takeaways by Macro Roundup® AI

  1. U.S. nominal consumer spending has risen at about 6% a year since mid-2022, helping keep price growth somewhat above the Federal Reserve's 2% yearly goal.
  2. An increasingly large share of U.S. consumer spending growth comes from categories where spending is imputed rather than based on actual transactions and observed prices, and excluding those categories, nominal spending appears to be slowing.
  3. PCE goods inflation excluding energy, groceries, and motor vehicles and parts is running at 2% a year, whereas such ultra-core goods prices fell about 1% each year before the pandemic.

Related Articles:

  • The Inflation Outlook Is Getting Better, But Also Worse? — Producer price measures of input costs for manufactured goods have turned positive again, in some cases rising at the fastest rate in more than a year, and this is filtering through to core final demand. US domestic manufacturing production has been flat or slightly down since 2013 despite strong growth in domestic demand for manufactured goods.
  • 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.
  • An Update About How Inflation Has Affected Households at Different Income Levels Since 2019 — The Congressional Budget Office estimates that income after transfers and taxes grew faster than consumption prices for all income groups, lowering the share of income needed to buy the same goods by 2% for the lowest-income fifth and 6.3% for the highest-income fifth.

AI Summary. U.S. Department of Homeland Security data suggest that in the year with the most border apprehensions on record, nearly 72% of border crossers were apprehended and more than 650,000 entered without inspection, for just over 2.3m total crossings — eighth-highest since 2000. Applying similar apprehension rates to later years suggests those totals, while high, were also not records.

Kevin Rinz Briefing Book
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Illegal immigration may not be at a record high. @kevinrinz argues that apprehension statistics reflect a change in behavior as illegals seek out government authorities to take advantage of the asylum system.

Do record border apprehensions mean record border crossings?

Core argument: DHS data suggest nearly 72% of border crossers were apprehended in 2021, including Title 42 expulsions, while more than 650,000 entered without inspection, bringing total crossings to just over 2.3 million.

Consider 2021, which at the time was the year with the most apprehensions on record. That year, DHS data suggest that nearly 72% of people crossing the border were apprehended (including Title 42 expulsions), while more than 650,000 people entered without inspection. That brings the total number of border crossings for the year to just over 2.3 million. Rather than being the most border crossings on record, this total ranked eighth to that point since 2000 (the earliest year for which estimates of entries without inspection are available). Applying the 2021 apprehension rate to data for 2022 and 2023 suggests that, while high, those years are also not record-setting even since 2000. Using the average apprehension rate for 2000 through 2010 to impute entries without inspection prior to 2000 suggests several additional years in which total border crossing may have been higher than they are now, including periods in the late 1990s and mid-1980s.

Takeaways by Macro Roundup® AI

  1. DHS data suggest nearly 72% of border crossers were apprehended in 2021, including Title 42 expulsions, while more than 650,000 entered without inspection, bringing total crossings to just over 2.3 million.
  2. The 2021 total of just over 2.3 million border crossings ranked eighth since 2000, the earliest year for which estimates of entries without inspection are available, rather than setting a record.
  3. Applying the 2021 apprehension rate to 2022 and 2023 data suggests those years were high but not record-setting, and using the 2000–2010 average rate to impute earlier entries points to higher totals in the late 1990s and mid-1980s.

Related Articles:

  • Illegal US Border Crossings Aren’t Really Breaking Records — Official US border encounter statistics exclude people who evade Border Patrol agents, who in past decades made up the majority of illegal crossers. The Department of Homeland Security estimated apprehension rates of 33%–43% in the 2000s versus 81% more recently, a shift attributed mainly to most crossers intending to turn themselves in and apply for asylum.
  • 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.
  • 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.

AI Summary. Negotiations over the Power of Siberia 2 pipeline have stalled, with people familiar with the talks saying China asked to pay close to Russia's heavily subsidised domestic gas prices and would commit to buying only a small fraction of the pipeline's planned 50bn cubic metre annual capacity. China already pays Russia less for gas than other suppliers.

Max Seddon, Anastasia Stognei, Henry Foy, and Joe Leahy Financial Times
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Russia’s effort to conclude a major gas pipeline deal with the PRC is running into obstacles as Beijing is demanding a price close to Russia’s heavily subsidised domestic price.

Are China's price demands holding up a major Russian gas pipeline?

Core argument: China has asked to pay close to Russia's heavily subsidised domestic gas prices for Power of Siberia 2 and would commit to buying only a small fraction of the pipeline's planned 50 bcm annual capacity, according to people familiar with the matter.

Beijing’s tough stance on the Power of Siberia 2 pipeline underscores how Russia’s invasion of Ukraine has left Putin increasingly dependent on Xi Jinping for economic support. People familiar with the matter said China had asked to pay close to Russia’s heavily subsidised domestic prices and would only commit to buying a small fraction of the pipeline’s planned annual capacity of 50bn cubic metres of gas. Before the war in Ukraine, Gazprom relied on selling gas to Europe at high prices in order to subsidise Russia’s domestic market. China already pays Russia less for gas than to its other suppliers, with an average price of $4.4 per million British thermal units, compared with $10 for Myanmar and $5 for Uzbekistan, the CGEP researchers calculated from 2019-21 customs data. Gazprom’s exports to Europe fell to 22 bcm in 2023 from an average 230 bcm a year in the decade before the full-scale invasion of Ukraine.

Takeaways by Macro Roundup® AI

  1. China has asked to pay close to Russia's heavily subsidised domestic gas prices for Power of Siberia 2 and would commit to buying only a small fraction of the pipeline's planned 50 bcm annual capacity, according to people familiar with the matter.
  2. China already pays Russia an average of $4.4 per million British thermal units for gas, versus $10 for Myanmar and $5 for Uzbekistan, according to CGEP researchers' calculations from 2019–21 customs data.
  3. Gazprom's exports to Europe fell to 22 bcm in 2023 from an average of 230 bcm a year in the decade before the full-scale invasion of Ukraine, having previously relied on high-priced European sales to subsidise Russia's domestic market.

Related Articles:

  • America’s Energy Export Boom — The US produces more crude oil than any other country and, counting total petroleum products, more than Saudi Arabia and Russia combined, with crude and natural gas output at record highs and gas production up 7% from its 2019 peak. Net US energy exports reached $70bn over 12 months despite falling oil and gas prices.
  • Electravision — The fossil fuel share of global primary energy is falling about 0.40% per year, matching the pace of decarbonization during the 1973–1988 nuclear buildout, though total carbon dioxide emissions have not declined because energy consumption keeps rising. Renewable energy is used almost exclusively for the electricity grid, with little penetration in industry and transport.
  • Germany’s Days as an Industrial Superpower Are Coming to an End — Germany's industrial base faces mounting pressure as the US competes with Europe for climate investment, China shifts from customer to rival, and cheap Russian natural gas has ended. In chemicals, nearly one in 10 companies plan to permanently halt production processes, according to an industry association survey, while BASF is cutting 2,600 jobs and Lanxess is reducing staff by 7%.

Tuesday, June 4, 2024

AI Summary. Using a randomized visa lottery for low-skill non-agricultural foreign workers, the authors estimate that U.S. firms authorized to employ more immigrants significantly increased production, investment, and profit rates, with effects on native employment zero or positive overall and positive in rural areas.

Michael Clemens and Ethan Lewis National Bureau of Economic Research
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US firms that won a low-skill H2B work visa lottery in 2021-22 and hired temporary foreign workers saw higher revenue and investment with no crowding out of temporary domestic workers. @m_clem @ethanglewis

How does hiring low-skill immigrants affect firm growth and native employment?

Core argument: Firms exogenously authorized through a randomized U.S. visa lottery in 2021 and 2022 to employ more foreign workers in low-skill jobs significantly increased production (elasticity 0.20–0.22), investment (1.5–2.1), and the rate of profit (0.15).

U.S. firms face a binding quota on visas to employ foreign workers in low-skill occupations outside of agriculture. The government allocates this quota to firms in part through a randomized lottery. We evaluate the marginal impact of the quota on firms entering this lottery in 2021 and 2022. Firms exogenously authorized to employ more immigrants in low-skill jobs significantly increase production (elasticity 0.20–0.22), investment (1.5–2.1), and the rate of profit (0.15). Because the foreign-native elasticity of substitution in production is very low in the policy-relevant occupations (0.8–2.2), the effect on native employment is zero or positive overall, and positive in rural areas. The vertical axis in the three panels [of Figure 7] shows the effect of foreign employment on each outcome. The results exhibit substantial heterogeneity across different predetermined firm types. The magnitude of the [positive] U.S. employment effect [of foreign workers] is 7.9 times greater in rural areas than urban areas. The investment results are consistent with small firms and rural firms facing more binding capital constraints, which tend to magnify the effects of shocks.

Takeaways by Macro Roundup® AI

  1. Firms exogenously authorized through a randomized U.S. visa lottery in 2021 and 2022 to employ more foreign workers in low-skill jobs significantly increased production (elasticity 0.20–0.22), investment (1.5–2.1), and the rate of profit (0.15).
  2. The foreign-native elasticity of substitution in the policy-relevant low-skill occupations is estimated at 0.8–2.2, and the effect of additional foreign workers on native employment is zero or positive overall and positive in rural areas.
  3. The positive U.S. employment effect of foreign workers is 7.9 times greater in rural areas than urban areas, and the investment results are consistent with small and rural firms facing more binding capital constraints.

Related Articles:

  • Immigration’s Effect on US Wages and Employment Redux — The authors estimate that immigration to the US over 2000-2019 raised wages of natives with a high school degree or less by 1.7% to 2.6%, a period when that group's real wages fell by 5% to 6%. Effects on more-educated natives ranged from -0.5% to +0.7%, with an overall average effect of +0.5% to +0.8% that was not statistically significant.
  • Monopsony, Efficiency, and the Regularization of Undocumented Immigrants — A study of France's amnesty program, which regularized undocumented workers making up 2.0% of workers in Paris and nearly 1% nationwide, finds positive effects on employment and wages, particularly for male, low-skill workers. The authors argue regularization reduces employers' wage-setting power in the undocumented labor market, and estimate a rise in total French GDP of around 1%.
  • Without Immigrants, US Working-Age Population Would Shrink — All net US employment growth since early 2020 has been among foreign-born workers, and without immigration the US working-age population would be shrinking — a pattern likely to persist for the rest of the decade. The jump in immigration appears to be enabling a soft landing that most economists had thought impossible.

AI Summary. Over 2014–2023 the 10 largest U.S. stocks averaged 19% of market capitalization while generating 47% of total economic profit, and by 2023 they were 27% of market capitalization and 69% of economic profit. The S&P 500 returned above its average when concentration was rising and below it when concentration was falling.

Michael Mauboussin and Dan Callahan Morgan Stanley
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Last year the top 10 equities made up 27% of market capitalization but 69% of total economic profits; historically, increasing concentration has been associated with above-average S&P 500 returns. @mjmauboussin

Does rising stock market concentration reflect the largest companies' economic profits?

Core argument: The top 10 stocks averaged 19% of market capitalization but 47% of total economic profit from 2014 to 2023, and in 2023 reached 27% of market capitalization and 69% of total economic profit.

From 2014 to 2023, the top 10 stocks were 19% of the market capitalization, on average, while the companies made up 47% of the total economic profit. In 2023, the top 10 equities were 27% of the market capitalization and the firms contributed 69% to the total economic profit. The S&P 500 has delivered returns above the average when concentration was rising and below the average when concentration was falling. The results were pronounced for the concentration changes associated with the inflating and deflating of the dot-com bubble, with compound annual returns of 23.5% from 1994 through 1999 and just 3.6% from 2000 to 2013. The largest stocks at the apex in 1999 traded at very high multiples of earnings and cash flow. The top stocks today are at a premium to the overall market but also represent companies with solid ROICs and growth prospects. Owning the stock of the largest company has historically been a poor investment relative to the market overall until about a decade ago. Owning the second and third largest stocks produced excess returns from 1950 to 2023. However, all three of the top stocks have provided stellar relative returns from 2014 to 2023.

Takeaways by Macro Roundup® AI

  1. The top 10 stocks averaged 19% of market capitalization but 47% of total economic profit from 2014 to 2023, and in 2023 reached 27% of market capitalization and 69% of total economic profit.
  2. The S&P 500 delivered above-average returns when concentration was rising and below-average returns when it was falling, with compound annual returns of 23.5% from 1994 through 1999 and 3.6% from 2000 to 2013.
  3. Owning the largest company's stock was historically a poor investment relative to the market until about a decade ago, while the second and third largest produced excess returns from 1950 to 2023, and all three delivered strong relative returns from 2014 to 2023.

Related Articles:

  • Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks — A study of about 64,000 global stocks estimates net global stock market wealth creation of $75.7tn, with returns highly concentrated: the top 159 firms (0.25%) account for half of net wealth creation and the top 1,526 (2.39%) account for all of it. Fewer than half of stocks beat one-month US Treasury bills, 42.6% of non-US and 44.8% of US stocks.
  • 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.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

AI Summary. Around 70% of sectors are posting positive year-over-year profit growth, with big tech showing the largest acceleration in demand and profits but strength broadening across the economy. Companies are responding with rising capital spending growth and more optimistic investment plans, as firms typically add capacity with a slight lag after real demand picks up.

Bob Prince, Khia Kurtenbach, and Bella Dunbar Bridgewater Associates
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Bridgewater argues higher rates won’t slow capital spending given strong cash flow growth and relatively low net leverage. “Capex growth is expected to accelerate“ driven by the AI buildout, increases in defense spending, and electrical demand.

Is broadening profit growth driving a pickup in business investment?

Core argument: Around 70% of sectors have posted positive year-over-year profit growth, with last quarter's gains showing broad-based strength, while big tech firms saw the most significant acceleration in demand and profits in the upswing so far.

Last year we saw a broad-based turn down in corporate profits. Corporates pulled in their horns, though the pullback was more muted than typical, as companies’ cash stockpiles allowed them to operate without materially cutting jobs and wages and allowed high spending on capex to continue. Now, we’re seeing the same in reverse. In year-over-year terms, around 70% of sectors have experienced positive profit growth. While big tech firms have had the most significant acceleration in demand and profits in the economic upswing so far, last quarter’s growth shows broad-based strength. We’re already seeing corporates respond, with capital spending growth ticking back up and with increasingly optimistic capital spending plans. As real demand picks up, corporates typically respond (with a slight lag) by investing in building out additional capacity.

Takeaways by Macro Roundup® AI

  1. Around 70% of sectors have posted positive year-over-year profit growth, with last quarter's gains showing broad-based strength, while big tech firms saw the most significant acceleration in demand and profits in the upswing so far.
  2. Corporate capital spending growth has ticked back up alongside increasingly optimistic capex plans, consistent with the pattern in which companies respond to picking-up real demand, with a slight lag, by building out additional capacity.
  3. Last year's broad-based downturn in corporate profits produced a more muted pullback than typical, as cash stockpiles let companies avoid materially cutting jobs and wages while continuing high capex.

Related Articles:

  • Are We on the Brink of an AI Investment Arms Race? — Spending on AI chips and data centers was a bit below $100bn in 2023, around 0.4% of US GDP, and the broader set of companies exposed to AI-related investment has not yet seen a major jump in sales. The authors argue the underlying dynamics point to a spending surge large enough to shape the business cycle.
  • 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.
  • 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.

AI Summary. China's manufacturing surplus rose by about 1 percentage point of global GDP over a four-year span and is far larger than those of Germany and Japan. China's $800bn goods trade surplus depends on the large U.S. trade deficit, which is still indirectly financed by China through the large offshore dollar stockpiles held by Chinese exporters.

Brad Setser Foreign Affairs
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Between 2019 and 2023 China’s manufacturing surplus rose by 1pp of global GDP. @Brad_Setser notes “It is impossible for a global economy characterized by a large U.S. deficit on one side and a large Chinese surplus on the other to truly fragment.”

Are the US and Chinese economies still dependent on each other?

Core argument: China's manufacturing surplus rose by about one percentage point of global GDP between 2019 and 2023, leaving it far larger than the surpluses of Germany and Japan, the world's other manufacturing powerhouses.

Between 2019 and 2023, China’s manufacturing surplus rose by about a percentage point of global GDP; it is now far larger than the surpluses run by Germany and Japan, the world’s other manufacturing powerhouses. China could not have achieved its current $800 billion trade surplus in goods if the United States did not have a large trade deficit. That deficit is no longer financed by the direct purchase of U.S. bonds by China’s central bank. But it is still indirectly financed by China, in the form of the large stockpiles of dollars that Chinese exporters now hold offshore. The way China's surpluses remain the mirror image of the U.S. deficit is just one of the many, complex forms in which the U.S. and Chinese economies continue to rely on one another, even as the ties become harder to see in topline economic data.

Takeaways by Macro Roundup® AI

  1. China's manufacturing surplus rose by about one percentage point of global GDP between 2019 and 2023, leaving it far larger than the surpluses of Germany and Japan, the world's other manufacturing powerhouses.
  2. China could not run its $800 billion goods trade surplus without a large U.S. trade deficit, which China still finances indirectly through the large offshore dollar stockpiles held by Chinese exporters rather than central bank purchases of U.S. bonds.
  3. The mirror-image relationship between Chinese surpluses and the U.S. deficit is one of many complex ways the two economies continue to rely on each other, even as those ties become harder to see in topline economic data.

Related Articles:

  • Brazil, India, and Mexico are Taking on China’s Exports — Foreign direct investment into China fell to a 30-year low even as Chinese leaders launched an investment push in high-tech goods such as batteries and electric vehicles. Weak domestic demand for cars, chemicals, and steel has pushed Chinese goods into global markets, with average manufactured export prices down nearly 10% and export volumes near record levels.
  • China’s Excess Savings Are A Danger — China's current account surplus of 4% of GDP is larger in global terms than its 2007 peak of 10%, because its share of the world economy at market prices rose from 6% to 17%. Sustaining that surplus would require China to fund deficits in smaller developing countries.
  • China’s Record Manufacturing Surplus — China's manufacturing trade surplus has reached about 2% of world GDP, exceeding the peak surpluses of export powerhouses like Japan and Germany, and shows no signs of shrinking as policy continues to emphasize advanced manufacturing capacity. The main offsetting manufactured-goods deficit is in the United States rather than commodity exporters.

AI Summary. Huawei's Mate 60 smartphone contained a system-on-chip made with SMIC technology comparable to the 7-nanometer process, despite Chinese chipmakers lacking access to ASML's most advanced lithography machines. Semiconductor engineers say the chips were likely made by exposing silicon to light multiple times, a technique that worsens yields and raises costs and becomes harder at more advanced nodes.

Yoko Kubota Wall Street Journal
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In an effort to eradicate dependence on US technology, China established another national semiconductor fund in May worth roughly $48B on top of a previous $50B. However, China has no homegrown alternative for higher-end lithography machines.

Can China make advanced chips without access to top lithography machines?

Core argument: Huawei's Mate 60 smartphone contains a system-on-chip made with SMIC technology comparable to the 7-nanometer process, seen as a feat given that SMIC and other Chinese chip makers lack access to ASML's latest lithography machine.

Last year, Huawei Technologies released its new Mate 60 smartphone, which contained a system-on-chip made with SMIC’s technology comparable with the 7-nanometer process. It was seen as a feat because SMIC and other Chinese chip makers don’t have access to the latest lithography machine made by ASML. Veteran semiconductor-manufacturing engineers think Huawei and its partners could have made the chips using a process that exposes the silicon to light multiple times instead of once—but doing so would lead to worse yields and higher costs. At more advanced levels of chipmaking, the technique would become even more difficult and less efficient, the engineers say. China has no homegrown alternative for the higher-end lithography machines. The country’s top domestic option is Shanghai Micro Electronics Equipment Group, whose website shows it makes lithography machines for production of chips as advanced as 90-nanometer circuit size. Globally, that technology was introduced more than 20 years ago.

Takeaways by Macro Roundup® AI

  1. Huawei's Mate 60 smartphone contains a system-on-chip made with SMIC technology comparable to the 7-nanometer process, seen as a feat given that SMIC and other Chinese chip makers lack access to ASML's latest lithography machine.
  2. Veteran semiconductor-manufacturing engineers say Huawei and its partners could have produced the chips by exposing silicon to light multiple times rather than once, a method that would worsen yields and raise costs, growing harder and less efficient at more advanced levels.
  3. China's top domestic lithography option, Shanghai Micro Electronics Equipment Group, states on its website that it makes machines for chips as advanced as 90-nanometer circuit size, technology introduced globally more than 20 years ago.

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  • China Is Quietly Reducing Its Reliance On Foreign Chip Technology — China's producers of wafer-fabrication tools have increased their domestic market share from 4% to an estimated 14%, according to broker Bernstein. Even if Huawei and SMIC reach 5nm chip production, they would remain behind Samsung and TSMC, which have mass-produced 3nm chips.
  • China AI & Semiconductors Rise: US Sanctions Have Failed — China's Kirin 9000S is a better-designed, leading-edge chip than the West realizes, developed without access to extreme ultraviolet lithography or cutting-edge US intellectual property, indicating existing export controls have not worked. The authors argue only decisive, full-scale measures—not half measures—could prevent China from mass-manufacturing chips needed for high-end military applications.

AI Summary. OPEC+, led by Saudi Arabia and Russia, agreed to extend its layered production cuts while allowing members to begin adding barrels back to the market, with larger increases to follow. The International Monetary Fund estimates Saudi Arabia needs oil above $96 a barrel to balance its budget, versus an $80 average from 2000 to 2020.

Javier Blas Bloomberg
Date Posted:

OPEC+ is apparently abandoning attempts to drive oil prices from the current $77/barrel for Brent crude toward $100, allowing output increases starting in the fall. KSA needs oil prices to average $96 a barrel to balance their budget. @JavierBlas

Is OPEC+ abandoning its push for higher oil prices?

Core argument: OPEC+, led by Saudi Arabia and Russia, announced a deal that on paper extends its cumulative production cuts into 2025, but allows members to start adding barrels from October, with significant increases the following year.

Over the weekend, the group, led by Saudi Arabia and Russia, announced a deal that, on paper, prolongs its complex layers of cumulative production cuts well into 2025. But read the fine print, and the agreement looks different. Under the pact, OPEC+ members will be able to start adding more barrels into the market from October, with significant increases next year. Saudi Arabia needs oil prices to average more than $96 a barrel this year to square the government books, up from an average of $80 from 2000 to 2020, according to the International Monetary Fund. With a GDP-to-debt ratio of less than 30%, Prince Mohammed has the luxury of having plentiful room to issue even more debt. The Saudi population has surged to about 34 million this year, nearly double from 18 million in 2000. As a result, Saudi Arabia looks poorer per capita than its wealthy neighbors: GDP per capita stood at just over $30,000 in 2023, well behind the $55,000 of the United Arab Emirates and the $80,000 of Qatar.

Takeaways by Macro Roundup® AI

  1. OPEC+, led by Saudi Arabia and Russia, announced a deal that on paper extends its cumulative production cuts into 2025, but allows members to start adding barrels from October, with significant increases the following year.
  2. Saudi Arabia needs oil prices to average more than $96 a barrel this year to balance its government books, up from an average of $80 over 2000–2020, according to the International Monetary Fund.
  3. Saudi Arabia's population has nearly doubled to about 34 million this year from 18 million in 2000, and its GDP per capita stood at just over $30,000 in 2023, behind the United Arab Emirates' $55,000 and Qatar's $80,000.

Related Articles:

  • Megaprojects in the Desert Sap Saudi Arabia’s Cash — Saudi Arabia's spending on megaprojects has risen while oil revenues have leveled off, and the International Monetary Fund estimated oil prices near $80–$86 a barrel would be needed to balance its budget. The kingdom is expected to run a deficit of about $21bn, roughly 2% of gross domestic product.
  • Saudi Arabia’s PIF and the New Petrodollar Recycling — Saudi Arabia's Public Investment Fund appears to have taken over a significant portion of the foreign asset allocation previously handled by the Saudi Central Bank, making its balance sheet a window into a new form of petrodollar recycling. Of roughly $777bn in total assets, $305bn were current and $472bn non-current, with $225bn of the latter held as investment securities.
  • The World Is Transitioning to American Oil From Saudi Crude — Saudi Aramco scrapped plans to raise production capacity to 13mm barrels a day from 12mm, a cancellation expected to save $20–40bn in capital spending over five years and signaling insufficient demand for additional Saudi oil. Saudi Arabia, pumping about 9mm barrels a day under OPEC+ cuts, appears set on lower output to support higher prices.

AI Summary. India's ruling Bharatiya Janata Party is on course to win roughly 240 of the 543 lower-house seats, short of an outright majority and forcing reliance on smaller National Democratic Alliance partners, which together led in at least 292 seats. Share prices in Mumbai fell as counts showed weaker-than-expected results.

John Reed, Benjamin Parkin, Jyotsna Singh, and Chris Kay Financial Times
Date Posted:

In a surprise result, Modi’s BJP lost its outright parliamentary majority. Indian stocks fell 6% on the day after surging to a record high Monday, when exit polls indicated Modi would win the election comfortably.

Will India's ruling party need coalition partners after losing its majority?

Core argument: Narendra Modi's BJP was on course for roughly 240 of the 543 seats in India's lower house, short of the outright majority it won on its own at each of the previous two general elections.

Narendra Modi’s Bharatiya Janata party is set to lose its parliamentary majority, forcing the Indian prime minister to rely on smaller allies to secure a historic third term. Share prices slumped in Mumbai on Tuesday after vote counts showed the BJP and its National Democratic Alliance allies performing much worse than expected. As of Tuesday evening, the BJP was on course to take around 240 seats out of the 543 in India’s lower house, falling short of the outright majority Modi’s party won on its own at the previous two general elections. Together with its NDA allies, the ruling party was ahead in at least 292 seats.

Takeaways by Macro Roundup® AI

  1. Narendra Modi's BJP was on course for roughly 240 of the 543 seats in India's lower house, short of the outright majority it won on its own at each of the previous two general elections.
  2. The BJP and its National Democratic Alliance allies were ahead in at least 292 seats, leaving Modi reliant on smaller allies to secure a third term as prime minister.
  3. Share prices slumped in Mumbai after vote counts showed the BJP and its National Democratic Alliance allies performing much worse than expected.

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  • Apple’s India iPhone Output Hits $14 Billion in China Shift — Apple assembled $14bn of iPhones in India in its last fiscal year, doubling output there to roughly 14%, or about 1 in 7, of its iPhones. China remains Apple's largest iPhone-making hub and biggest overseas market, though its revenue there is falling amid competition from rivals such as Huawei.
  • Wall Street Snubs China for India in a Historic Markets Shift — US-listed exchange-traded funds buying Indian stocks drew record inflows while the four largest China funds saw combined outflows of nearly $800m, and India's weight in the main developing-market equity benchmark hit an all-time high of 18% as China's fell to a record low of 24.8%. Indian equities trade at more than 20x future earnings, 27% above their 2010–2020 average.