Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, June 28, 2024

AI Summary. The authors project that the US fiscal trajectory is unsustainable, with deficits and debt exceeding both historical norms and official projections, arguing that official forecasts understate how labor shortages raise health care prices in inefficient sectors. They argue that reducing health care spending, increasing capital, and fiscal retrenchment could restore sustainable fiscal conditions.

Mark Warshawsky, John Mantus, and Gaobo Pang Journal of Policy Modeling
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Analysis led by Mark Warshawsky @AEIecon finds that CBO projections significantly underestimate rising healthcare costs, and proposes changing incentives to curb rising demand, and more rapid adoption of new technologies to improve productivity.

Can lower health care spending and fiscal retrenchment restore fiscal sustainability?

Core argument: The authors project the U.S. fiscal trajectory is unsustainable, with future deficits and debt well beyond both historical norms and official projections, and identify health care spending growth as a major cause of rising federal deficits.

Health care spending has grown significantly in the US, and is a major cause of rising federal deficits. Official projections find that low economic growth and aging of the population will lead to a modest continuation of this situation, but they miss that labor shortages have a particular impact on inefficient sectors, raising the cost of healthcare. We find that the current fiscal trajectory of the US is unsustainable, with future deficits and debt well beyond both historical norms and official projections. Table 1 gives a summary of the official projections for select future years, and compares it with our projections in key areas. We are fairly close to the official projections in the near term, but we see a worse situation in the medium and long term. In particular, our projection is that health care prices are higher and grow faster than the Trustees and CBO who see a cooling off. Policy steps, focusing on reducing health care spending, increasing capital, and fiscal retrenchment, can lead to sustainable fiscal conditions and raise living standards that will otherwise fall.

Takeaways by Macro Roundup® AI

  1. The authors project the U.S. fiscal trajectory is unsustainable, with future deficits and debt well beyond both historical norms and official projections, and identify health care spending growth as a major cause of rising federal deficits.
  2. Unlike the Trustees and CBO, who see health care prices cooling off, the authors project health care prices will be higher and grow faster, arguing that labor shortages weigh particularly on inefficient sectors and raise health care costs.
  3. The authors argue that policy steps reducing health care spending, increasing capital, and pursuing fiscal retrenchment can achieve sustainable fiscal conditions and raise living standards that would otherwise fall.

Related Articles:

  • CBO Releases June tt Baseline Update — The Congressional Budget Office projects federal spending of $84.9tn (24.1% of GDP) over the next decade against revenue of $62.8tn (17.8% of GDP), compared with 50-year averages of 21% and 17.3%. Interest costs are projected to reach $892bn, more than defense or Medicare, and grow to $1.7tn (4.1% of GDP).
  • The Long-Term Budget Outlook Undertt Alternative Scenarios8u for the Economy and the Budget — The Congressional Budget Office projects that if private investment were more sensitive to federal deficits, debt held by the public would exceed 250% of GDP and real national income per person would be 18% ($21,300) lower than its baseline, with the average interest rate on federal debt 2pp higher.
  • Analysis of the 2024 Medicare Trustees’ Report — 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.

AI Summary. Real wage growth has turned slightly positive, but wage levels remain below where they stood before the inflation surge: consumer prices rose nearly 18% while the Employment Cost Index, a broad wage measure, rose a little under 15%, leaving cumulative real wage growth about 3pp below zero.

Jose Maria Barrero, Nick Bloom, Steven Davis, Kevin Foster, Brent Meyer and Emil Mihaylov Federal Reserve Bank of Atlanta
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Adjusted for CPI inflation, the Q1 2024 Employment Cost Index of wages and benefits per hour is 3pp under its Q1 2021 level. @Jose_MariaRD @I_Am_NickBloom @Davis_StevenJ

Have real wages caught up to the inflation surge?

Core argument: Cumulative real wage growth stands roughly 3 percentage points below zero since the start of 2021, with CPI up nearly 18% through the first quarter of 2024 while the Employment Cost Index rose a little less than 15%.

While real wage growth has turned slightly positive in recent months, the level of real wages is still below where they were at the onset of the inflation surge that we began to see in the first quarter of 2021. Simply put, real wages haven't fully caught up to the sudden burst in inflation. For example, the cumulative growth in the CPI since the beginning of 2021 is nearly 18% (through the first quarter of 2024). The Employment Cost Index (ECI)—one of the broadest measures of wage growth and which at least partially accounts for compositional shifts in the labor force—is up a little less than 15% over that period, leaving cumulative real wage growth roughly 3pp below zero. This decline in real wages is unusual compared to what the ECI typically depicts. During the prior expansion, real growth in the ECI averaged around 0.5pp per year. Projecting that over the period from the first quarter of 2021 to the first quarter of 2024 would have led to a cumulative increase in the real ECI of 1.5 percentage points.

Takeaways by Macro Roundup® AI

  1. Cumulative real wage growth stands roughly 3 percentage points below zero since the start of 2021, with CPI up nearly 18% through the first quarter of 2024 while the Employment Cost Index rose a little less than 15%.
  2. Real wage growth has turned slightly positive in recent months, but the level of real wages remains below where it stood at the onset of the inflation surge that began in the first quarter of 2021.
  3. Real growth in the Employment Cost Index averaged around 0.5 percentage points per year during the prior expansion, a pace that, projected from the first quarter of 2021 to the first quarter of 2024, would have yielded a cumulative real ECI increase of 1.5 percentage points.

Related Articles:

  • Has Pay Kept Up With Inflation? — All four measures of typical and aggregate pay have grown since 2019 when adjusted using the personal consumption expenditures price index, but show smaller increases in three measures and a decline in one when adjusted using the consumer price index. This pattern of smaller gains under consumer price index adjustment holds across time periods.
  • Are You Better Off Than You Were Four Years Ago? — Inflation-adjusted wages rose over the past four years, including when measured from just before the pandemic, at roughly the same pace as in the preceding years: about 3% cumulative growth adjusted by the consumer price index versus about 4% in 2015-2019, and about 5% growth adjusted by personal consumption prices.
  • Credit Bidenomics for Rising US Wages — Inflation-adjusted wages for US workers in the middle pay range, between the 40th and 60th percentiles, were 6.6% higher than before the pandemic, slightly above what 2015-19 trends would predict. The US is the only G7 country with substantial real wage gains, ranging elsewhere from a 0.2% rise in Canada to a 9% decline in Italy.

AI Summary. Credit markets show wide dispersion by quality: investment grade and BB-rated debt trade near decade-tight spreads while CCC-rated spreads sit near their 10-year average. The authors expect this divergence to persist, with demand for high-quality credit holding index spreads near record tights as weaker borrowers face high interest rates.

John Cortese, Robert Bittencourt, Shobhit Gupta, et al. Apollo
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.@Apolloglobal doesn’t expect a further deterioration in credit quality; demand for high-quality credit will keep option-adjusted spreads (OAS) tight while some lower-quality corporates remain under pressure.

Will credit quality divergence persist between strong and weak borrowers?

Core argument: About 60% of the US high yield index trades inside 250 basis points while 7% trades above 750 basis points, a more extreme distribution than in prior periods when high yield spreads were at similar levels.

This divergence across credit markets has resulted in significant dispersion in performance across the quality spectrum. Investment grade and BB-rated debt are trading near their tights of the past decade, while CCC-rated spreads are near their 10-year average. In fact, the CCC/BB spread ratio is hovering near its post-Covid peak. The dispersion is evident in the makeup of the US high yield benchmark, where about 60% of the index trades inside 250 basis points and 7% trades above 750 basis points—a more extreme distribution than in prior periods when HY spreads were at similar levels. We expect this theme of divergence to persist through 2024 as demand for high-quality credit keeps index spreads near record tights while a subset of lower-quality corporates remain under pressure with generationally high interest rates.

Takeaways by Macro Roundup® AI

  1. About 60% of the US high yield index trades inside 250 basis points while 7% trades above 750 basis points, a more extreme distribution than in prior periods when high yield spreads were at similar levels.
  2. Investment grade and BB-rated debt trade near their tights of the past decade while CCC-rated spreads sit near their 10-year average, leaving the CCC/BB spread ratio near its post-Covid peak.
  3. Credit market divergence is expected to persist through 2024, with demand for high-quality credit holding index spreads near record tights while a subset of lower-quality corporates remain under pressure from generationally high interest rates.

Related Articles:

  • Corporate Debt, Boom-Bust Cycles, and Financial Crises — Using a dataset on sectoral credit exposure for 115 economies, the authors find corporate debt accounts for two-thirds of credit expansion before financial crises and three-quarters of nonperforming loans during busts, and that corporate debt expansions predict crises similarly to household debt. Recoveries are slower after corporate debt booms.
  • The Calm Before the Storm — Private credit and direct lending have not rewritten the rules of credit risk, and much financial innovation amounts to repackaging risk in higher-fee wrappers. High-yield bonds followed a comparable path: after the 1980s boom, below-investment-grade default rates reached roughly 10.4% and 9.1% before the market matured.
  • The Corporate Debt Maturity Wall: Implications for Capex and Employment — The authors estimate the average interest rate on outstanding corporate debt will rise from 4.20% to 4.50%, lifting private sector interest expense as a share of gross output by 0.25 percentage points. They project this would reduce capital spending growth by up to 0.25 percentage points and labor cost growth by up to 0.15.

AI Summary. Running the US economy at high pressure appears to support the "reverse hysteresis" hypothesis that sustained strong demand draws people into the labour force and boosts business investment, research and development, and dynamism. As inflation cools toward central bank targets, the economy and labour market have shown marked resilience, though US budget deficits are projected at 6% of GDP.

Julia Coronado Financial Times
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Julia Coronado argues the US economy’s outperformance relative to other advanced economies suggests “reverse hysteresis” where tight labor markets due to fiscal stimulus are driving increased investment and productivity.

Does running the economy at high pressure boost labor supply and investment?

Core argument: Janet Yellen's 2016 hypothesis that a "high-pressure economy" could raise labour force engagement, business investment, research and development, and dynamism — a reverse hysteresis — is increasingly supported by US outcomes.

Janet Yellen pondered in 2016 whether a “high-pressure economy” could prompt more labour force engagement, business investment, research and development, and generally greater dynamism — a sort of reverse hysteresis. The combination of the pandemic and the policy failures in the aftermath of the financial crisis effectively led the US to run the experiment of running a high-pressure economy. The results are increasingly supportive of Yellen’s reverse hysteresis hypothesis. Pandemic frictions and generous policy support initially contributed to spiking global inflation and a hard turn towards restrictive monetary policy. But as inflation cools towards central bank targets, we have seen a stunning degree of economic and labour market resilience. Bond markets have been understandably nervous with budget deficits in the US projected at 6% of GDP for the foreseeable future.

Takeaways by Macro Roundup® AI

  1. Janet Yellen's 2016 hypothesis that a "high-pressure economy" could raise labour force engagement, business investment, research and development, and dynamism — a reverse hysteresis — is increasingly supported by US outcomes.
  2. The pandemic combined with post-financial-crisis policy failures effectively led the US to run the high-pressure economy experiment, with pandemic frictions and generous policy support initially contributing to spiking global inflation and a hard turn to restrictive monetary policy.
  3. US budget deficits are projected at 6% of GDP for the foreseeable future, leaving bond markets nervous even as inflation cools towards central bank targets alongside economic and labour market resilience.

Related Articles:

  • Why is the U.S. GDP Recovering Faster Than Other Advanced Economies? — The U.S. output advantage over other advanced economies is attributed mainly to faster labor productivity growth and secondarily to hours worked per employee. Rigid foreign labor markets and job-retention policies kept workers attached to firms producing below capacity, while the U.S. saw about 3x more sectoral worker reallocation and a surge in new firm formation.
  • Does Worker Scarcity Spur Investment, Automation, and Productivity? Evidence from Earnings Calls — The authors estimate that a one-unit increase in a firm's labor issues, as measured by earnings calls, raises its investment by 28 basis points, implying roughly $55bn in additional US investment attributable to tighter labor markets. The effect is concentrated in industries relying heavily on routine manual tasks, such as manufacturing assembly and warehouse packaging.
  • U.S. Business Investment in the Post-COVID Expansion — Business fixed investment has held at roughly the same share of U.S. GDP as before COVID, a better outcome than after every other recession since 1980, when investment typically fell as a share of GDP and contributed less well into the recovery. American businesses invested $430bn more than if investment had followed its usual historical pattern.

AI Summary. China’s official balance-of-payments data show a large gap between its customs and foreign-exchange agencies’ estimates of the goods trade balance, and reported returns on Chinese foreign assets have broken from their historical relationship with the 5-year US Treasury yield despite central banks raising interest rates. The author argues both anomalies are consistent with unrecorded capital flight.

Matt Klein The Overshoot
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.@M_C_Klein argues that adjusting for understated exports and missing investment income, China’s Q1 2024 current account surplus is probably about 3.5x the official numbers, implying capital flight of around $500B per year.

Do anomalies in China's balance-of-payments data indicate unrecorded capital flight?

Core argument: The historically close relationship between China's foreign investment returns and the 5-year U.S. Treasury yield has broken down, with implied yields now lower than ever, even as most major central banks raised rates sharply since the end of 2021.

The gap between the GACC and SAFE estimates of China’s trade balance in goods is large and unusual, but it is not the only questionable feature of China’s balance of payments in recent years. Most of the major central banks have raised interest rates sharply since the end of 2021, which should have boosted the income that Chinese residents earn on their foreign investments. China’s foreign assets are mostly either reserves or bank loans, which means that their yields should more or less float in line with market rates. SAFE provides no details on Chinese foreign investment income, which makes it impossible to determine the effective yields on specific types of assets, but historically, there was a close relationship between Chinese foreign investment returns and the yield on the 5-year U.S. Treasury note. That relationship has broken down, with implied yields now lower than ever. That has depressed foreign investment income and the current account balance in ways that I (and others) find implausible. Combine this missing investment income with the missing trade surplus in goods, and the estimates of capital flight start to make a lot more sense.

Takeaways by Macro Roundup® AI

  1. The historically close relationship between China's foreign investment returns and the 5-year U.S. Treasury yield has broken down, with implied yields now lower than ever, even as most major central banks raised rates sharply since the end of 2021.
  2. China's foreign assets consist mostly of reserves or bank loans whose yields should float roughly in line with market rates, which makes the depressed reported foreign investment income and current account balance implausible.
  3. The large and unusual gap between the GACC and SAFE estimates of China's goods trade balance, combined with the missing foreign investment income, makes estimates of Chinese capital flight more plausible.

Related Articles:

  • Anatomy of Capital Fight in China… — Unaccounted capital outflows from China show up not only in the balance of payments' net errors and omissions category but also in net other investment and in the gap between customs-reported and foreign-exchange-reported goods trade balances. This combined residual averaged roughly $100bn per quarter, and about twice that during periods of heavier outflow pressure.
  • China’s Unremitted Export Earnings — A substantial share of China's net export proceeds is never repatriated and cannot be accounted for; the authors attribute this to offshore holdings by private Chinese firms, overseas accumulation by state-owned entities, and reduced reinvestment by foreign exporters. They argue state-linked funds could be repatriated in a crisis, while lower foreign reinvestment is more structural.
  • The Rise & Fall of Foreign Direct Investment in China — Net foreign direct investment into China has been negative for four consecutive quarters, as foreign investors shifted from reinvesting earnings from their Chinese operations to repatriating them. Whether this reflects cash management or signals a future slowdown in foreign direct investment is unclear, but the repatriation of profits is negative for China's currency.

AI Summary. Analysts estimate private capital flight from China has run at an annualized rate of roughly $516bn, peaking near $738bn, compared with about $94bn before the pandemic. Chinese officials and analysts attribute the outflows to wealthy entrepreneurs losing confidence in China's future and seeking ways to move money abroad through informal or illicit channels.

Joe Miller and James Kynge Financial Times
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.@Brad_Setser argues that as of Q1 2024 private capital flight from China was running at $516B per year, equivalent to Norway’s entire GDP leaving the country. Prior to the pandemic, the rate was $94B.

Has capital flight from China surged above pre-pandemic levels?

Core argument: Brad Setser of the Council on Foreign Relations estimates private capital flight from China was running at an annualised rate of about $516bn as of the first quarter of this year, compared with $94bn in the last quarter of 2019.

“The levels of capital flight in the past three years have been quite alarming,” says one senior Chinese official, who declined to be identified and who says that a lot of billionaires and multimillionaires are trying to leave China and take their money with them. “Some wealthy private entrepreneurs are losing confidence in China’s future. They feel unsafe so they are finding ways to get their money out. Calculating the extent of capital flight from China is not straightforward. It requires forensic analysis of China’s balance of payments data to work out how much money is leaving the country through informal or illicit channels. Brad Setser, a former US Treasury official and an expert on global capital flows at the Council on Foreign Relations, a US think-tank, estimates that as of the first quarter of this year, private capital flight from China was running at an annualised rate of about $516bn. It was even higher in the third quarter of 2022 when it hit nearly $738bn. These levels are well above outflows in the last quarter of 2019 — before the pandemic struck early in 2020 — which were taking place at an annualised rate of $94bn.

Takeaways by Macro Roundup® AI

  1. Brad Setser of the Council on Foreign Relations estimates private capital flight from China was running at an annualised rate of about $516bn as of the first quarter of this year, compared with $94bn in the last quarter of 2019.
  2. Setser estimates Chinese private capital flight reached an annualised rate of nearly $738bn in the third quarter of 2022.
  3. A senior Chinese official, speaking anonymously, says many billionaires and multimillionaires are seeking to leave China with their money because some wealthy private entrepreneurs are losing confidence in China's future and feel unsafe.

Related Articles:

  • 2023 Letter — Rising numbers of Chinese nationals are being apprehended at the US-Mexico border, with US officers encountering around 1,000 in one month early in the year and nearly 5,000 by November. Most Chinese emigrants leave through legal means, going primarily to Singapore, Japan, and Thailand.
  • China to See Biggest Millionaire Exodus in 2024 as Many Head to U.S. — China is projected to see a record 15,200 high-net-worth individuals — those with at least $1m in assets — leave the country, the world's largest such outflow, according to a Henley & Partners report. The prior year's 13,800 departures went mostly to the US, Canada, and Singapore.
  • Singapore Family Office Applicants Face 18-Month Wait Amid Tighter Scrutiny — Singapore-registered family offices rose from 50 in 2018 to 1,100 at the end of 2022, according to the Monetary Authority of Singapore. Lawyers and advisers setting up such offices say new registrations have slowed and processing times have stretched from under six months to as long as 18 months amid an application backlog and stricter criteria.

Monday, July 1, 2024

AI Summary. US law allows up to $800 of imports per person per day to enter duty-free with minimal customs requirements, and such shipments are not recorded in Census trade data. Analysis of carrier and customs shipment data finds lower-income zip codes are more likely to import these shipments, particularly from China.

Pablo Fajgelbaum and Amit Khandelwal National Bureau of Economic Research
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Imports valued at <$800 enter the US duty-free, and have grown from $9.2B in 2016 to $54.5B in 2023, 19% of US e-commerce spending, and are not reflected in Census trade data. These imports are largely direct-to-consumer shipments from China.

Do lower-income households benefit most from duty-free small imports?

Core argument: Section 321 of the 1930 Tariff Act lets up to $800 of imports per person per day enter the US duty-free with minimal customs requirements, and such de minimis shipments are not recorded in Census trade data.

Section 321 of the 1930 Tariff Act allows up to $800 in imports per person per day to enter the US duty-free and with minimal customs requirements. Fueled by rising direct-to-consumer trade, these “de minimis” shipments have exploded yet are not recorded in Census trade data. Who benefits from this type of trade, and what are the policy implications? We analyze international shipment data, including de minimis shipments, from three global carriers and US Customs and Border Protection. Lower-income zip codes are more likely to import de minimis shipments, particularly from China, suggesting that the tariff and administrative fee incidence in direct-to-consumer trade is pro-poor

Takeaways by Macro Roundup® AI

  1. Section 321 of the 1930 Tariff Act lets up to $800 of imports per person per day enter the US duty-free with minimal customs requirements, and such de minimis shipments are not recorded in Census trade data.
  2. Analyzing shipment data from three global carriers and US Customs and Border Protection, the authors find lower-income zip codes are more likely to import de minimis shipments, particularly from China.
  3. The concentration of de minimis imports in lower-income zip codes suggests that the incidence of tariffs and administrative fees in direct-to-consumer trade is pro-poor.

Related Articles:

  • Setser On Kearney Reshoring Index — US imports from Southeast Asia have risen, but China's reported exports to the US exceed recorded US imports from China by about 10%, reflecting incentives to shift final assembly and to avoid tariffs. Trade data cannot show how much Chinese content is embedded in rising Southeast Asian imports.
  • He Helped Trump Remake Global Trade. His Work Isn’t Done — A former U.S. trade representative argues that countries running chronic trade surpluses for decades are by definition protectionist, and backs a universal 10% tariff plus a higher tariff on China to push toward globally balanced trade over time. Alternatives include import certificates tied to exports and a charge on foreign investment in U.S. assets.
  • 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.

AI Summary. Amazon plans a discount service shipping low-cost fashion, household, and other goods directly from warehouses in China, replicating the supply-chain approach of rivals Temu and Shein. Those platforms keep prices low by avoiding fast delivery and U.S. inventory, and by using a U.S. rule exempting shipments valued at $800 or less from certain tariffs.

Tracy Qu and Sherry Qin The Wall Street Journal
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Amazon plans to launch a service focused on shipping cheap products directly from warehouses in China to counter growing competition from low-cost Chinese e-commerce platforms Temu and Shein.

How are low-cost Chinese e-commerce platforms reshaping American retail competition?

Core argument: Amazon plans a service shipping cheap fashion wear, household goods, and other products directly from warehouses in China, as it faces growing competition from low-cost e-commerce platforms Temu and Shein.

Amazon.com plans to launch a service focused on shipping cheap fashion wear, household goods, and other products directly from warehouses in China, as it faces growing competition from low-cost e-commerce platforms Temu and Shein. Both companies are able to offer lower prices in part because they avoid the expense of fast delivery. They ship products directly from China and don’t store much inventory in the U.S. Temu, Shein, and other e-commerce companies benefit from a U.S. statute that allows shipments with a value of $800 or less to enter the country without facing certain tariffs. Merchants who are part of Amazon’s new service could also benefit from the rule. “The only way Amazon could match prices was to replicate the supply-chain advantage,” said Juozas Kaziukėnas, founder of market research firm Marketplace Pulse.

Takeaways by Macro Roundup® AI

  1. Amazon plans a service shipping cheap fashion wear, household goods, and other products directly from warehouses in China, as it faces growing competition from low-cost e-commerce platforms Temu and Shein.
  2. Temu and Shein keep prices low partly by forgoing fast delivery, shipping directly from China and holding little U.S. inventory, and by using a U.S. statute exempting shipments valued at $800 or less from certain tariffs.
  3. Merchants in Amazon's new service could also benefit from the $800 shipment rule, and Marketplace Pulse founder Juozas Kaziukėnas said the only way Amazon could match prices was to replicate the supply-chain advantage.

Related Articles:

  • The Value of De Minimis Imports — US law allows up to $800 of imports per person per day to enter duty-free with minimal customs requirements, and such shipments are not recorded in Census trade data. Analysis of carrier and customs shipment data finds lower-income zip codes are more likely to import these shipments, particularly from China.

AI Summary. Inflation expectations derived from the gap between regular Treasury yields and inflation-indexed Treasury yields show expected annual inflation over the next 10 and 20 years running considerably above expected inflation for the decade beginning 20 years out. Before the pandemic-era inflation surge, actual inflation and expected future inflation tracked each other closely.

Jesper Rangvid Rangvid's Blog
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Jesper Rangvid reviews the pricing of Treasuries relative to TIPS and concludes that the market expects annual inflation of 2.33% in 2024-34 and 2.65% in 2034-44, implying “the Fed will struggle to control inflation for the next twenty years.”

Do bond markets expect inflation to stay above target for two decades?

Core argument: Subtracting expected real interest rates from Inflation-Indexed Treasuries from expected nominal Treasury rates yields expected inflation excluding risk premiums, measured over the next 10 years, 2034–2044, and 2044–2054.

By subtracting [expected real interest rates from Inflation-Indexed Treasuries] from [expected nominal interest rates from Treasuries], we can determine expected inflation rates (excluding the effects of risk premiums). Figure 2 illustrates the results of this calculation, showing the expected annual inflation rate over the next 10 years (10y), the expected annual inflation rate for the period from 2034 to 2044 (10y10y), and the expected annual inflation rate for the period from 2044 to 2054 (20y10y). Figure 2 reveals an interesting development in expected inflation following the inflation flare-up in 2021. Up until the pandemic, inflation and expected future inflation closely tracked each other. However, after the pandemic and the associated inflation surge, expected inflation over the next ten and twenty years is considerably higher than expected inflation twenty years out.

Takeaways by Macro Roundup® AI

  1. Subtracting expected real interest rates from Inflation-Indexed Treasuries from expected nominal Treasury rates yields expected inflation excluding risk premiums, measured over the next 10 years, 2034–2044, and 2044–2054.
  2. Expected inflation over the next ten and twenty years is considerably higher than expected inflation twenty years out, a divergence that followed the pandemic and the 2021 inflation surge.
  3. Up until the pandemic, inflation and expected future inflation closely tracked each other.

Related Articles:

  • Don’t Rely (Too Much) On Implied Forward Rates When Predicting Future Interest Rates — 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.
  • 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 Analysis of Pandemic-Era Inflation In 11 Economies — A cross-country analysis of 11 economies finds wide agreement that global energy and food price increases and supply disruptions in key sectors drove pandemic-era inflation, and that their recession accounts for most of the global cooling of inflation. The authors find tight labor markets had smaller but more persistent inflationary effects, leaving wage inflation as the larger remaining factor.

AI Summary. US labor income net of social insurance taxes has grown at a 6% annual rate while nominal consumer spending grew 4% and capital income 3%. Growth in core "market-based" consumer spending is running about half a percentage point below its 4.4% pre-pandemic annual average, while net labor income runs roughly a point faster.

Matt Klein The Overshoot
Date Posted:

The pace of consumer spending has slowed to 4% the slowest rate since the pandemic. @M_C_Klein argues that this pace may allow for an “immaculate disinflation,” a return to target inflation without a major hit to labor markets.

Is consumer spending growing more slowly than labor income?

Core argument: Labor income net of social insurance taxes has grown at a 6% annual rate since the end of 2023, while nominal consumer spending has grown 4% and capital income 3% annualized.

Since the end of 2023, the total amount of dollars earned as labor income net of social insurance taxes has grown at a yearly rate of 6%. Over the same period, nominal consumer spending has grown at a yearly rate of just 4%. (Capital income has grown by 3% annualized.) Focus specifically on the subset of consumer spending that excludes imputations as well as volatile food and energy prices, and nominal spending growth year-to-date has been slower than in any five-month period since the great reopening. In fact, the annualized growth rate in the dollar value of core “market-based” consumer spending so far this year is about half a percentage point slower than the January 2018-February 2020 yearly average of 4.4%. By contrast, net labor income is currently rising about 1 percentage faster than the pre-pandemic pace.

Takeaways by Macro Roundup® AI

  1. Labor income net of social insurance taxes has grown at a 6% annual rate since the end of 2023, while nominal consumer spending has grown 4% and capital income 3% annualized.
  2. Core "market-based" consumer spending, which excludes imputations and volatile food and energy prices, has grown year-to-date at an annualized rate about half a percentage point below the January 2018–February 2020 average of 4.4%.
  3. Net labor income is rising about 1 percentage point faster than its pre-pandemic pace, while nominal growth in core market-based consumer spending year-to-date is slower than in any five-month period since the great reopening.

Related Articles:

  • 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.
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AI Summary. The 10 largest companies in the S&P 500 account for 35% of its market value but only 23% of its earnings, the widest such gap on record. The author argues this reflects record bullishness on future earnings from a small group of companies, compounding the index's concentration.

Torsten Sløk Apollo
Date Posted:

The top 10 firms in the S&P 500 make up 35% of market cap but only 23% of earnings, a record gap. Torsten Sløk argues the market is “looking more vulnerable.”

Does top-company concentration leave the index more vulnerable?

Core argument: The top 10 companies in the S&P 500 account for 35% of index market cap but only 23% of earnings, the widest such divergence on record.

The top 10 companies in the S&P 500 make up 35% of the market cap but only 23% of earnings. This divergence has never been bigger, suggesting that the market is record bullish on future earnings for the top 10 companies in the index. In other words, the problem for the S&P 500 today is not only the high concentration but also the record-high bullishness on future earnings from a small group of companies.

Takeaways by Macro Roundup® AI

  1. The top 10 companies in the S&P 500 account for 35% of index market cap but only 23% of earnings, the widest such divergence on record.
  2. The record gap between the top 10 companies' share of S&P 500 market cap and their share of earnings suggests the market is record bullish on those firms' future earnings.
  3. The S&P 500 faces not only high concentration in a small group of companies but also record-high bullishness on that group's future earnings.

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  • Stock Market Concentration — 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.
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AI Summary. U.S. sales of electricity to commercial customers exceeded pre-pandemic levels by 14 billion kilowatt-hours, or 1%, with growth concentrated in a few states building large-scale computing facilities such as data centers. Virginia added the most demand at 14 billion kilowatt-hours, followed by Texas at 13 billion.

Nilay Manzagol and Tyler Hodge Energy Information Administration
Date Posted:

American electrical consumption was 1% higher than pre-pandemic levels in 2023; demand growth has been concentrated in states with data center clusters led by Virginia and Texas.

Is commercial electricity demand growth concentrated in data center states?

Core argument: U.S. sales of electricity to commercial customers totaled 14 BkWh, or 1%, more in 2023 than in 2019, with the growth concentrated in a handful of states developing large-scale computing facilities such as data centers.

Consumption of electricity in the U.S. commercial sector has recovered from pandemic levels, with annual U.S. sales of electricity to commercial customers in 2023 totaling 14 billion kilowatt-hours (BkWh), or 1%, more than in 2019. However, the growth in commercial demand for electricity is concentrated in a handful of states experiencing rapid development of large-scale computing facilities such as data centers. Electricity demand has grown the most in Virginia, which added 14 BkWh, and Texas, which added 13 BkWh. Electricity demand has grown the most in Virginia, largely driven by Dominion Energy Virginia, the main electricity utility in the state. Virginia has become a major hub for data centers, with 94 new kilowatt-hours connected since 2019 given the access to a densely packed fiber backbone and to four subsea fiber cables.

Takeaways by Macro Roundup® AI

  1. U.S. sales of electricity to commercial customers totaled 14 BkWh, or 1%, more in 2023 than in 2019, with the growth concentrated in a handful of states developing large-scale computing facilities such as data centers.
  2. Virginia added the most commercial electricity demand at 14 BkWh, followed by Texas at 13 BkWh, with Virginia's growth largely driven by Dominion Energy Virginia, the state's main electricity utility.
  3. Virginia has become a major hub for data centers, connecting 94 new kilowatt-hours since 2019, with access to a densely packed fiber backbone and four subsea fiber cables.

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