Edward Conard

Top Ten New York Times Bestselling Author

  • “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 comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, August 6, 2024

AI Summary. Deutsche Bank estimates Japanese households, pension plans, banks and the Bank of Japan built a $20tn carry trade funded by low-cost yen deposits and invested in overseas and longer-duration assets. A Bank of Japan hike of 25 basis points helped trigger a 14% yen rally, among the largest in 40 years.

Michael Cembalest J.P. Morgan
Date Posted:

“JP Morgan FX traders believe that there could be more carry trade unwinds ahead.” Mike Cembalest notes the unwinding of the carry trade was catalyzed by a 25bps hike “indicative of how large the unmeasurable Yen carry trade might actually be.”

How large is Japan's yen-funded carry trade?

Core argument: Deutsche Bank estimates Japan's carry trade at $20 trillion, built as years of negative policy rates led Japanese households, pension plans, state-owned banks and the Bank of Japan to fund via low-cost deposits and invest in overseas and longer-duration domestic assets.

Years of negative policy rates enticed Japanese households, pension plans, state-owned banks and the Bank of Japan itself to create what Deutsche Bank estimates as a $20 trillion carry trade in which “Japan Inc” funds itself via low-cost bank deposits and invests in overseas assets and domestic assets of longer duration. A lot of macro hedge funds piled on to do the same, funding in Yen. When the Fed began to hike in 2022, the Japanese carry trade accelerated, pushing the Yen to its weakest level since 1986. Rising core inflation and wage negotiation outcomes finally prodded the Bank of Japan to raise rates just as the Fed is projected to begin easing, driving up the Yen sharply. The recent Yen rally of 14% is among the largest seen over the last 40 years. Note how it only took a BoJ hike of 25 basis points (!!) to trigger this, which is indicative of how large the unmeasurable Yen carry trade might actually be. While the Yen is now closer to fair value based on interest rate differentials, JP Morgan FX traders believe that there could be more carry trade unwinds ahead.

Takeaways by Macro Roundup® AI

  1. Deutsche Bank estimates Japan's carry trade at $20 trillion, built as years of negative policy rates led Japanese households, pension plans, state-owned banks and the Bank of Japan to fund via low-cost deposits and invest in overseas and longer-duration domestic assets.
  2. A Bank of Japan hike of 25 basis points, coming as the Fed is projected to begin easing, helped drive a 14% Yen rally, among the largest over the last 40 years.
  3. The Yen sits closer to fair value based on interest rate differentials after weakening to its softest level since 1986 as the Fed hiked from 2022, though JP Morgan FX traders believe more carry trade unwinds lie ahead.

Related Articles:

  • The Bank of Japan’s Seductive Widow-Maker Trade — Japan's gross government debt stands at 260% of GDP, or 235% after netting out $1.25tn in foreign-exchange reserves, making the Bank of Japan reluctant to raise short-term policy rates. A 3% increase would sharply raise government debt-servicing costs and strain Japanese banks, especially if long-term rates also rose.
  • Japanese Workers Secure Biggest Pay Rise In Three Decades — Japanese companies including Honda, Nippon Steel, and ANA Holdings granted workers their largest pay rise in more than three decades, with economists expecting large firms to give unionised workers average increases above 4%, up from 3.6% the prior year. The increases strengthen the case for the Bank of Japan to begin raising interest rates.
  • What About Japan? — The authors find Japan's government runs a large duration mismatch on its consolidated balance sheet, holding long-duration risky assets financed mainly with short-duration funding such as bank reserves, Treasury bills, and bonds. They estimate this carry trade has earned an ex-post excess return of about 2.13% a year above funding costs, worth more than 3% of GDP.

AI Summary. In a randomized experiment giving 1,000 individuals $1,000 per month, the authors estimate spending rose in most categories, most for housing, food, and car expenses, along with increased housing moves. Debt rose steadily to $1,600 higher by the study's end, and estimated net worth effects turned to roughly -$2,800.

Alexander Bartik, Elizabeth Rhodes, David Broockman, et al. National Bureau of Economic Research
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An experiment giving 1,000 individuals $1k per month for 3 years raised spending on housing as well as consumption, but also increased indebtedness, suggesting transfers may have little impact on the financial health of young, low-income households.

How do unconditional cash transfers affect household spending, debt, and net worth?

Core argument: In a randomized experiment assigning 1,000 individuals $1,000 per month, net worth treatment effects rose by about $1,000 by year two but fell to roughly -$2,800 by year three of the transfers.

We provide new evidence on the causal effect of unearned income on consumption, balance sheets, and financial outcomes by exploiting an experiment that randomly assigned 1000 individuals to receive $1000 per months. The spending impact is positive in most categories, and is largest for housing, food, and car expenses. The treatment increases housing units and neighborhood mobility. Figure 5 shows how net worth and its three components, real assets, financial assets, and debt, evolved over the course of the study for the treatment group and the control group. Total real assets actually rise somewhat by year two but then decline to negative point estimate by year three. Debt follows a different pattern and steadily rises over the course of the study, rising from $700 higher at midline to $1600 higher at endline. Combined, these patterns result in net worth treatment effects that slightly rise by $1000 by year 2 but then fall to roughly -$2800 by year three of the transfers. This pattern is consistent with households somewhat building up their assets at the start of the transfers but then spending down those assets by the end of the transfers.

Takeaways by Macro Roundup® AI

  1. In a randomized experiment assigning 1,000 individuals $1,000 per month, net worth treatment effects rose by about $1,000 by year two but fell to roughly -$2,800 by year three of the transfers.
  2. Debt among transfer recipients rose steadily, from $700 higher at midline to $1,600 higher at endline, while total real assets rose somewhat by year two before declining to a negative point estimate by year three.
  3. The cash transfers raised spending in most categories, with the largest increases in housing, food, and car expenses, and increased housing units and neighborhood mobility.

Related Articles:

  • The Employment Effects of a Guaranteed Income: Experimental Evidence from Two U.S. States — In a randomized experiment, 1,000 low-income individuals received $1,000/month unconditionally for three years while a control group of 2,000 received $50/month, and the transfers reduced individual income excluding transfers by about $1,500/year. The authors find no significant effects on human capital investment and conclude the transfers produced a moderate labor supply reduction not offset by other productive activities.
  • Pandemic Labor Force Participation and Net Worth Fluctuations — Applying the pre-pandemic peak labor force participation rate to the adult population implies about 3.73m "missing workers" and 3.27m "excess retirees" in the US economy. The authors estimate that wealth effects on retirement decisions among those aged 55 and over account for over 50% of the aggregate participation decline and more than 80% of excess retirements.
  • Another Wrong Way to Measure Poverty — The official U.S. poverty measure has barely changed in over 50 years because most social benefits aren't counted as recipient income, even as benefits to the average household in the bottom 20% rose from $9,700 to $45,000 in inflation-adjusted dollars; counting all benefits puts poverty at 2.5%.

AI Summary. Policies that put federal debt on a sustainable footing would improve the trade balance by reducing government spending and taxing private-sector spending power. Although US liabilities to foreigners exceed its foreign assets, borrowing costs are low enough that the country still earns more on those assets than it pays out, leaving it a net winner from international financial transactions.

Maurice Obstfeld Project Syndicate
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Maurice Obstfeld argues the Federal deficit is “a main driver of the trade deficit” and lowering spending would improve the US trade balance by reducing both government and private demand in a more efficient way than capital controls or tariffs.

Would putting federal debt on a sustainable path improve the trade balance?

Core argument: The net gain to the US from its international investment position totaled $15.12 billion in the first quarter of 2024, as America earns more on its foreign assets than it pays on its larger foreign liabilities.

Policies to place the federal debt on a sustainable footing would directly improve the trade balance by reducing government spending and taxing the spending power of the private sector. While data on international investment returns are imperfect, the US remains a net winner from its international financial transactions. Even though the country has, on net, borrowed abroad through its trade deficits, it holds vast foreign assets alongside its liabilities to foreigners. America’s liabilities exceed its assets. But, for now, US international borrowing costs are low enough that America earns more on its huge stock of foreign assets than it pays out on its even bigger foreign debts. In national balance-of-payments statistics, the net gain to the US from its international investment position totaled $15.12 billion in the first quarter of 2024. While the US certainly cannot run trade deficits forever, the current costs of those deficits hardly justify drastic action – and certainly not ineffective and damaging tariffs.

Takeaways by Macro Roundup® AI

  1. The net gain to the US from its international investment position totaled $15.12 billion in the first quarter of 2024, as America earns more on its foreign assets than it pays on its larger foreign liabilities.
  2. Policies placing the federal debt on a sustainable footing would directly improve the US trade balance by reducing government spending and taxing the private sector's spending power.
  3. The US cannot run trade deficits indefinitely, but the current costs of those deficits hardly justify drastic action, and certainly not ineffective and damaging tariffs.

Related Articles:

  • The Dangers of a US Capital Inflow Tax — A tax on foreign capital inflows large enough to balance US trade would raise real interest rates for all US borrowers, domestic and foreign-funded alike, since some foreign funding is needed whenever a trade deficit exists. The argument holds the deficit would shrink mainly through lower investment, reducing demand, growth, and innovation.
  • Can Trade Intervention Lead to Freer Trade? — China accounts for over 31% of global manufacturing but under 13% of global consumption, while the United States accounts for under 17% of manufacturing and nearly 27% of consumption. The author argues persistent surpluses reflect household subsidies to producers, and that the US could counter them with tariffs or taxes on capital inflows.
  • 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.

AI Summary. US legislation supporting semiconductors, clean energy, and infrastructure has triggered an industrial renaissance in artificial intelligence and energy, and US manufacturing capacity is now growing after declining for decades.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk argues that the CHIPS Act, IRA, and Infrastructure Acts “have triggered a new industrial renaissance in AI and energy,” reversing a multi-decade decline in US manufacturing capacity.

Has US industrial policy revived manufacturing capacity growth?

Core argument: The CHIPS Act, the Inflation Reduction Act, and the Infrastructure Act have triggered an industrial renaissance in AI and energy.

The CHIPS Act, the Inflation Reduction Act, and the Infrastructure Act have triggered a new industrial renaissance in AI and energy. Also, US manufacturing capacity is now growing after having declined for many decades.

Takeaways by Macro Roundup® AI

  1. The CHIPS Act, the Inflation Reduction Act, and the Infrastructure Act have triggered an industrial renaissance in AI and energy.
  2. US manufacturing capacity is growing after declining for many decades.

Related Articles:

  • Business Spending Is Lining Up to Reinforce Growth — 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.
  • The Mysterious Slowdown in U.S. Manufacturing Productivity — US manufacturing labor productivity growth slowed broadly after the Great Recession, with the four largest firms in each industry averaging –0.5% growth from 2010 to 2022 versus 3.7% from 1987 to 2007, and smaller follower firms showing an identical 4.2 percentage-point decline. The authors find the slowdown spans all industries and firm sizes.
  • Capital Is Making a Comeback — Tangible investment in property, factories and equipment fell from 12.5% to 8.5% of private gross domestic product, while intangible investment in intellectual property, software and process knowledge rose from about 11.5% to 16.75%. The author argues demand for tangible capital investment will now have to rise.

AI Summary. Private credit — direct lending to businesses by nonbank institutions — accounts for about 15% of private companies' outstanding debt, with volumes comparable to leveraged loans and high-yield corporate bonds. The authors find monetary policy transmission through private credit may be muted relative to bank lending and public bond markets, given resilient credit supply.

Ahmet Degerli and Phillip Monin Federal Reserve Board
Date Posted:

.@FederalReserve analysis notes direct lending assets have risen from $340B in Dec. ‘21 to $751B in June ‘23, and finds that “the effects of monetary policy transmission through private credit may be muted.”

Does private credit weaken monetary policy transmission to business borrowers?

Core argument: Private credit accounts for roughly 15% of the total outstanding debt of private companies, but has grown substantially since the global financial crisis to aggregate volumes comparable to leveraged loans and high-yield corporate bonds.

Private credit refers to direct lending to businesses by nonbank institutions. Although private credit accounts for a relatively small share of the total outstanding debt of private companies, at around 15%, it has experienced substantial growth since the GFC and has become an increasingly important source of credit for businesses, with aggregate outstanding volumes comparable to leveraged loans and high-yield corporate bonds. We find that monetary policy transmission through private credit may be muted relative to bank C&I lending and public bond markets due to resilient credit supply. Direct lending has performed well in both easing and tightening monetary policy environments. Private credit fundraising appears strong when policy is tightening, suggesting that the availability of credit remains solid. Finally, high levels of dry powder – capital commitments mainly from institutional investors with long time horizons – provide a buffer against shocks. Private credit fund returns and capital raising remain relatively resilient during policy tightening cycle.

Takeaways by Macro Roundup® AI

  1. Private credit accounts for roughly 15% of the total outstanding debt of private companies, but has grown substantially since the global financial crisis to aggregate volumes comparable to leveraged loans and high-yield corporate bonds.
  2. Monetary policy transmission through private credit may be muted relative to bank commercial and industrial lending and public bond markets because of resilient credit supply, with direct lending performing well in both easing and tightening environments.
  3. Private credit fundraising and fund returns remain relatively resilient during policy tightening cycles, and high levels of dry powder committed largely by long-horizon institutional investors provide a buffer against shocks.

Related Articles:

  • Where Are All the Defaults? — One explanation for subdued high-yield bond spreads is that the lowest-quality borrowers, those most likely to default, have migrated from high-yield markets into private credit. Moody's reports the number of issuers with its lowest speculative-grade ratings has fallen, and that 62% of its rated universe is rated single-B or below.
  • Private Credit: Characteristics and Risks — Private credit loans are negotiated bilaterally outside traditional regulatory requirements and are illiquid because no secondary market exists, leaving investors expected to hold them to maturity or face steep losses if they need to exit. Scarce data on this growing form of nonbank lending makes assessing its risks difficult.
  • 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.

AI Summary. The Federal Reserve's credible guidance on how it would respond to incoming data allowed markets to adjust, with the 10-year Treasury yield falling 19 basis points to 3.8% after a jobs report and holding there through an equity sell-off. An unemployment rate of 4.3% is sufficient basis for a 50-basis-point rate cut.

Jason Furman Wall Street Journal
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.@jasonfurman notes a 19bps decline in the 10-year yield after Friday’s job report, despite the FOMC not cutting. He suggests that a 50bps cut in September may be appropriate.

Does credible Fed guidance let markets adjust before rate cuts?

Core argument: The 10-year Treasury yield fell another 19 basis points after Friday's jobs report to 3.8%, holding there on Monday despite the sell-off in equity markets.

While it’s unfortunate the Fed didn’t have the latest employment data during its meeting, the committee’s clear and credible statements about how it would respond to data in the future ensured the market adjusted appropriately, cutting the 10-year Treasury yield by another 19 basis points after Friday’s jobs report, bringing it to 3.8%, where it stayed on Monday despite the sell-off in equity markets. The unemployment rate staying at 4.3% should be more than sufficient basis for a 50-basis-point reduction at the next meeting.

Takeaways by Macro Roundup® AI

  1. The 10-year Treasury yield fell another 19 basis points after Friday's jobs report to 3.8%, holding there on Monday despite the sell-off in equity markets.
  2. The Fed's clear and credible statements about how it would respond to future data ensured the market adjusted appropriately, even though the committee lacked the latest employment data at its meeting.
  3. The unemployment rate holding at 4.3% should be more than sufficient basis for a 50-basis-point rate reduction at the Fed's next meeting.

Related Articles:

  • The U.S. Job Market Is Better Than It Looks — Permanent job losers account for just 0.1 percentage point of the 0.8 percentage point rise in the US unemployment rate from its trough, with new entrants and re-entrants to the labor force explaining nearly all of the increase. Typical worker pay is still rising a little more than 4% a year, faster than before the pandemic.
  • The Fed Should Not Cut Interest Rates Yet — Labor demand continues to outpace labor supply, with job openings 17% above pre-pandemic levels and average wages up 3.9% year on year. The author argues current conditions do not warrant interest rate cuts, as the risk of inflation getting stuck above 2.5% is too great.
  • Markets Think Inflation Will Be Too High For The Next 20 Years — 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.

Wednesday, August 7, 2024

AI Summary. State-level bans on affirmative action in US higher education are estimated to reduce under-represented minority women's college degree completion, earnings, and employment relative to non-Hispanic White women, driven largely by effects on Hispanic women, widening racial and ethnic gaps among women. Effects on under-represented minority men are more ambiguous and vary across states.

Francisca Antman, Brian Duncan, and Michael Lovenheim National Bureau of Economic Research
Date Posted:

Affirmative action bans by several states have increased racial/ethnic disparities in both college degree completion and earnings among minority women. Effects on minority men are more ambiguous. @FranciscaAntman

How do affirmative action bans affect minority women's degrees and earnings?

Core argument: Using US Census and American Community Survey data, the authors estimate that state affirmative action bans reduced under-represented minority women's college degree completion, earnings, and employment relative to non-Hispanic White women, driven largely by impacts on Hispanic women.

Using data from the US Census and American Community Survey, we compare the college degree completion, graduate degree completion, earnings, and employment of [under-represented minority (URM)] individuals to non-URM individuals before and after affirmative action bans went into effect across several US states. Results suggest that banning affirmative action results in a decline in URM women’s college degree completion, earnings, and employment relative to non-Hispanic White women, driven largely by impacts on Hispanic women. Thus, affirmative action bans resulted in an increase in racial/ethnic disparities in both college degree completion and earnings among women. Effects on URM men are more ambiguous and indicate significant heterogeneity across states, with some estimates pointing to a possible positive impact on labor market outcomes of Black men. These results suggest that the relative magnitude of college quality versus mismatch effects vary for URM men and women and highlight the importance of disaggregating results by gender, race, and ethnicity.

Takeaways by Macro Roundup® AI

  1. Using US Census and American Community Survey data, the authors estimate that state affirmative action bans reduced under-represented minority women's college degree completion, earnings, and employment relative to non-Hispanic White women, driven largely by impacts on Hispanic women.
  2. The authors find that affirmative action bans increased racial and ethnic disparities in both college degree completion and earnings among women.
  3. Effects on under-represented minority men are more ambiguous, with significant heterogeneity across states and some estimates pointing to a possible positive impact on the labor market outcomes of Black men.

Related Articles:

AI Summary. An analysis calculates the "zero bracket" — how much income a household can earn before owing any federal income tax — for single filers and married couples with and without two children, assuming the standard deduction plus broadly available provisions such as personal exemptions, the Child Tax Credit, and the Earned Income Credit.

Jeremy Horpedahl Economist Writing Every Day
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This year a married couple with 2 children can earn $65,708 without paying federal income taxes; the same couple without children would owe $4,000. @jmhorp notes the government already significantly subsidizes parents directly.

How much can households earn before owing federal income tax?

Core argument: The "zero bracket" — income earnable without owing federal income tax — is charted for four household types in inflation-adjusted dollars: single with no children, married with no children, head of household with two children, and married with two children.

Having children is a choice, and most of the benefits are internal to the family, rather than external. I show the “zero bracket” — that is, how much income you can earn without paying any federal income taxes. The four households are: a single person with no children, a married couple with no children, a single person with two children (“head of household”), and a married couple with two children. All dollar amounts are inflation-adjusted to current dollars. For each taxpayer, I assume that they take the standard deduction and only take broadly available deductions and credits — such as the personal exemptions, Child Tax Credit, and Earned Income Credit. There are other credits available to parents of children, such as for childcare, but I don’t include those since not all parents will be able to use those. The chart also doesn’t include payroll taxes, but these taxes don’t differ based on the number of children.

Takeaways by Macro Roundup® AI

  1. The "zero bracket" — income earnable without owing federal income tax — is charted for four household types in inflation-adjusted dollars: single with no children, married with no children, head of household with two children, and married with two children.
  2. The calculations assume the standard deduction plus only broadly available provisions such as personal exemptions, the Child Tax Credit, and the Earned Income Credit, excluding childcare credits that not all parents can use.
  3. The author argues that having children is a choice whose benefits are mostly internal to the family rather than external, and excludes payroll taxes from the chart because they do not vary with the number of children.

Related Articles:

  • Employment and Labor Supply Responses to the Child Tax Credit Expansion: Theory and Evidence — A review of existing research finds no reduction in employment within broadly defined demographic groups from the 2021 expansion of the Child Tax Credit, which raised benefits to families and especially the lowest-income families. The authors estimate that among unmarried mothers with low levels of education, the group most affected, employment fell by 4.5 percentage points during the advance payments.
  • The Cost of Thriving Has Fallen: Correcting and Rejecting the American Compass Cost of Thriving Index — The authors recalculate the Cost of Thriving Index and estimate the cost of supporting a family on one male earner's wages rose by just over 10 weeks of work rather than 22 weeks. Accounting for federal taxes—including the child tax credit—and quality improvements in health care and cars, they estimate the cost is now lower than in 1985.
  • The Child Tax Credit Is a Failed Experiment — The Tax Policy Center estimates about 74m tax filers—48.3% of all filers—had no income tax liability in 2021. Congress's Joint Committee on Taxation models project that expanding the child tax credit would reduce labor supply by 0.2% and capital by 0.4% over a decade, shrinking gross domestic product by 0.2%.

AI Summary. Global oil demand continues to grow by at least 1m barrels a day, as strong consumption in the US, India, and Europe offsets weakness in China. Rising non-OPEC production, led by the US, Canada, Brazil, and Guyana, is enough to meet that growth, making supply the larger problem for OPEC+.

Javier Blas Bloomberg
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OPEC+ can defend $75-a-barrel “for a few weeks, or maybe two or three months” but investors should expect lower prices in late 2024 despite robust oil demand. @JavierBlas

Can oil producers hold prices up as non-OPEC supply grows?

Core argument: US total oil consumption rose to 20.8 million barrels a day in May, the highest ever for that month, offsetting weak Chinese demand alongside robust Indian consumption and European demand that is holding up as electric-car sales plummet.

Global oil appetite continues to increase at a healthy clip, despite weak consumption in China. Offsetting the trouble in the Asian giant is runaway demand in America. US total oil consumption rose to 20.8 million barrels a day in May, the highest ever for that month. Even in Europe, oil demand is holding rather well as sales of electric cars plummet. India is witnessing robust consumption, too, helping to offset the weakness in China. Put together, this year the world will consume at least a million barrels a day more than in 2023 — if not more — on par with an average year over the last couple of decades. Despite the naysayers’ warnings, global oil demand isn’t falling off a cliff; it’s just that growth has moderated. Supply is a larger problem for OPEC+. Non-OPEC production is increasing fast, led by the Americas. There, the extra output from the US, Canada, Brazil, and Guyana is enough to meet the growth in global oil consumption.

Takeaways by Macro Roundup® AI

  1. US total oil consumption rose to 20.8 million barrels a day in May, the highest ever for that month, offsetting weak Chinese demand alongside robust Indian consumption and European demand that is holding up as electric-car sales plummet.
  2. Global oil consumption will rise by at least 1 million barrels a day this year versus 2023, on par with an average year over the last couple of decades, reflecting moderated growth rather than collapsing demand.
  3. Supply poses the larger problem for OPEC+, as fast-rising non-OPEC output from the US, Canada, Brazil, and Guyana is enough to meet the growth in global oil consumption.

Related Articles:

  • The Petrodollar Is Dead, Long Live the Petrodollar — Saudi Arabia has no surplus left to recycle and is instead borrowing heavily in sovereign debt markets and selling assets, including stakes in its national oil company, to fund its economic plans. The International Monetary Fund projects the Saudi current account surplus narrowing to 0.5% of GDP before shifting into deficit through the end of the decade.
  • U.S. Energy Production Exceeded Consumption By Record Amount In 2023 — U.S. energy production rose 4% to nearly 103 quadrillion British thermal units while consumption fell 1% to 94, leaving production exceeding consumption by 9 quadrillion British thermal units, the widest gap in records dating to 1949. Dry natural gas, crude oil, natural gas plant liquids, and renewables all reached record output.
  • 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. China's emphasis on industrial output has produced overinvestment in sectors where domestic demand is already saturated and foreign governments are wary of Chinese supply chain dominance, with surplus steel capacity eventually exceeding the combined steel output of Germany, Japan, and the United States. Similar excesses have appeared in coal, aluminum, glass, cement, robotics, and electric-vehicle batteries.

Zongyuan Zoe Liu Foreign Affairs
Date Posted:

Zongyuan Zoe Liu argues “Simply put, in many crucial economic sectors, China is producing far more output than it, or foreign markets, can sustainably absorb.” Chinese factories can now produce 2X as many solar panels as the world can put to use.

Zongyuan Zoe Liu argues “Simply put, in many crucial economic sectors, China is producing far more output than it, or...

Does China's focus on industrial output create overinvestment in saturated sectors?

Core argument: China's surplus steel capacity eventually exceeded the combined steel output of Germany, Japan, and the United States.

In prioritizing industrial output, China’s economic planners assume that Chinese producers will always be able to offload excess supply in the global market and reap cash from foreign sales. In practice, however, they have created vast overinvestment in production across sectors in which the domestic market is already saturated and foreign governments are wary of Chinese supply chain dominance. In the early years of the twenty-first century, it was Chinese steel, with the country’s surplus capacity eventually exceeding the entire steel output of Germany, Japan, and the United States combined. More recently, China has ended up with similar excesses in coal, aluminum, glass, cement, robotic equipment, electric-vehicle batteries, and other materials.

Takeaways by Macro Roundup® AI

  1. China's surplus steel capacity eventually exceeded the combined steel output of Germany, Japan, and the United States.
  2. China has accumulated similar excess capacity in coal, aluminum, glass, cement, robotic equipment, and electric-vehicle batteries, in sectors where the domestic market is already saturated.
  3. Chinese economic planners assume producers can always offload excess supply in the global market and reap cash from foreign sales, but foreign governments are wary of Chinese supply chain dominance.

Related Articles:

  • Which Country Should Design U.S. Industrial Policy? — Manufacturing is 15% of global GDP but 11% of U.S. GDP versus 19% in Germany, 21% in South Korea, 26% in mainland China, and 34% in Taiwan, according to World Bank data. The author argues this gap stems from trade and industrial policies in surplus economies that effectively force households to subsidize manufacturing, drawing global manufacturers toward the largest subsidies.
  • 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.
  • The Dangerous Myth of Deglobalization — 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.