On a trailing 4q basis (so for the full year 2022) foreign demand for “safe” US bonds remained strong … Bondmageddon (the mark to market losses on low yielding bonds) didn’t seem to impede total foreign demand for US bonds (new inflows get the new higher rate.) Official demand (from foreign central banks and SWFs) did fall off in 2022 — and clearly shifted toward Agencies (cough, China) But foreign demand for US bonds decoupled from reserve growth … and that is reflected on the US side of the global data as well. Overall foreign demand for US bonds (which has been surprisingly strong in 2022 when judged relative to global reserve growth) from both public and private sources tailed off in q4 as well. It does seem that demand for US assets fell a bit faster than the goods deficit in q4 … so a potential source of dollar weakness (then) is in the data.
Another high reading for core PCE inflation, up 4.7% at an annual rate in April–and a 4.3% annual rate over the last three months, continuing its sideways move. But, under the hood it looks a little better as noisy items and imputations drove a lot of the extra high reading. Overall where does this leave us? The 4.7% annual rate for core PCE in April is too pessimistic a read of the inflation situation. But there is nothing in this report that would give any comfort that inflation is on track to fall to 3.5% or below without a further easing of the labor market.
A spike in the Kansas City Fed’s Financial Stress Index historically leads to higher unemployment and somewhat lower inflation. A one standard deviation increase in financial stress typically portends an increase in the unemployment rate of 0.7 percentage points. Financial stress historically reduces inflation as well: inflation, as measured by the consumer price index (CPI), falls by about 0.4 percentage points in the first year following an increase in financial stress. By this metric, financial stress is about half as disinflationary as monetary tightening. Could the recent increase in financial stress generate the same disinflationary effects as tighter monetary policy? The left panel in Chart 2 shows that monetary policy tightening, as measured by an unexpected increase in the expected path of the federal funds rate (blue line), slows economic activity and raises the unemployment rate, similar to an increase in financial stress. However, despite a similar increase in the unemployment rate, inflation falls by 0.65 percentage points in the first year following monetary tightening (right panel), a considerably larger decline than we estimate following an increase in financial stress.
Work requirements are an imperfect method to try to replace the incentive to work that social programs eliminate. Our government does this sort of thing all over to transfer income but contain the disincentives: Subsidize gas, and then regulate against its use for example. By the way, supposedly socialist Europe, after its experience with “the dole” in the early 1990s, is much more heard-hearted about these sorts of incentives than we are. Is there a better way? I’ve long played with the idea of limiting help by time rather than by income. That’s how unemployment insurance works. We understand that replacing people’s paycheck forever if they lose their job has bad incentive effects. Unemployment is understood as a temporary misfortune, and understanding the incentives, you get unemployment checks for a limited amount of time. Could not many other programs aimed at misfortune also be limited by time — but then allow you to keep each extra dollar of earnings? Perhaps even unemployment should be a fixed amount of time, and you can keep receiving it for the full (normally) 26 weeks even if you get a job.
Compare mortality in young adulthood for America’s Class of 1990 with their counterparts from affluent Cold War allies. Since breakdown by sex does not add much information here, we display overall mortality rates at ages 20 through 31 for the US and select Western European allies in Figure 3. Death rates at age 20 were universally lower for the treaty allies than Americans in the Class of 1990—usually much lower. Further, mortality curves for these allies generally remained much “flatter” over the course of their 20s than for the US. Consequently, the divergence in mortality risks between the US and the allies tended to increase over young adulthood for the Class of 1990, even before COVID. By age 29—i.e., in 2019, before the pandemic—mortality rates for the Class of 1990 were almost twice as high in the US as in New Zealand; two and a half times higher than in France; three time higher than in Japan; four times higher than in Italy or Spain.
Related: Who Won the Cold War? Part I
Sociologists Karen Benjamin Guzzo and Sarah Hayford found that when millennials (born 1981 to 1996) and the oldest members of Generation Z (starting in 1997) were surveyed in their late teens and early 20s, they said, on average, that they wanted to have at least two children. But the gap between women’s intended number of children and their actual family size has widened considerably. The researchers found that by the time women born in the late 1980s were in their early 30s, they had given birth, on average, to about one child less than they planned. That is roughly double the size of the shortfall for women born two decades earlier, and it is likely too large to be erased by a spurt of childbearing in their late 30s. The median age at which women give birth is 30, three years older than it was in 1990. Despite advances in fertility treatments, women who delay having kids until their final childbearing years reduce their chances of doing so—not just because it narrows their biological window but because other priorities and roadblocks can more easily derail their plans.
We revalue the stock of New York City commercial office buildings taking into account pandemic-induced cash flow and discount rate effects. We find a 45% decline in office values in 2020 and 39% in the longer-run, the latter representing a $453 billion value destruction. Higher quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower quality office buildings see much more dramatic swings. These valuation changes have repercussions for local public finances and financial sector stability. The decline in office values and the surrounding CBD retail properties, whose lease revenues have been hit at least as hard as office, has important implications for local public finances. For example, the share of real estate taxes in NYC’s budget was 53% in 2020, 24% of which comes from office and retail property taxes.
The 2020-21 numbers here were released in late April by the Internal Revenue Service. They sort taxpayers by whether and where they moved between filing their taxes in 2020 and filing them in 2021; the adjusted gross incomes are for the 2020 tax year. It has been two years since May 17, 2021 — that year’s belated income tax filing deadline — and a lot has changed. But New York has continued to lose population, and if the trend depicted above were to continue, even in less extreme form, it would be disastrous for the finances of a state that relies on income taxes paid by those making $200,000 or more a year for almost half its revenue. That the loss of affluent taxpayers didn’t lead to disaster during the pandemic mainly had to do with how much the prices of stocks, houses and other assets rose in 2020 and 2021.
In an i > g world [nominal interest rates higher than nominal growth,] growth in the revenues, wages or tax receipts that a debtor earns will be slower than the interest accumulating on their borrowing, meaning debt levels have the potential to explode. An i > g world is unfamiliar to America and most of the West. Since the end of 2009 nominal growth has been higher than nominal rates (aside from the first half of 2020, when the covid-19 pandemic crashed the economy). Now America is about to cross the threshold, [based on a panel of economists surveyed by Bloomberg.] It is far easier to swallow a high cost of capital when it is matched by high returns on said capital. And that will not be the case for much longer.
Was inflation the result of unpredictable shocks (i.e., unfortunate events) or was it predictable (i.e., original sin)? My view: core predominantly original sin but excess of headline was due to an unfortunate accident. An elegant paper but it does not answer whether inflation was “a series of unfortunate events” or “original sin”. The paper does suggest that food and energy shocks do not explain core inflation. Shortages are consistent with demand increases—and demand supporting higher overall consumption. It may be more fruitful to ignore the labor market in assessing large non-linear shocks. Regardless, we all agree about the present situation–and the unlikelihood of a soft landing to 2% inflation.
Last year defence spending worldwide increased by nearly 4% in real terms to over $2trn. The share prices of defence firms are performing better than the overall stockmarket. We estimate that total new defence commitments and forecast spending increases, if implemented, will generate over $200bn in extra defence spending globally each year. It could be a lot more. Imagine that countries which currently spend less than 2% of GDP per year meet that level and that the remainder increase spending by half a percentage point of GDP. Global defence outlays would rise by close to $700bn a year. There is little reason to believe that the new cold war will be sharply inflationary. Not even the fiercest hawks are calling for defence spending, as a share of GDP, to return to the levels of the 1960s or 1970s.
Microsoft has uncovered stealthy and targeted malicious activity focused on post-compromise credential access and network system discovery aimed at critical infrastructure organizations in the United States. The attack is carried out by Volt Typhoon, a state-sponsored actor based in China that typically focuses on espionage and information gathering. Microsoft assesses with moderate confidence that this Volt Typhoon campaign is pursuing development of capabilities that could disrupt critical communications infrastructure between the United States and Asia region during future crises. Volt Typhoon has been active since mid-2021 and has targeted critical infrastructure organizations in Guam and elsewhere in the United States. In this campaign, the affected organizations span the communications, manufacturing, utility, transportation, construction, maritime, government, information technology, and education sectors. Observed behavior suggests that the threat actor intends to perform espionage and maintain access without being detected for as long as possible.
The improvement in Black employment matters a lot, and not just because of the income generated. As the sociologist William Julius Wilson argued, the loss of economic opportunities as jobs moved out of urban areas was a major driving force behind social dysfunction in Black communities. I’ve long seen the recent emergence of social dysfunction in largely white small towns and rural areas left behind by a changing economy as a vindication of Wilson’s thesis (and a repudiation of “cultural” explanations). So the fact that Black America is working again is really good news on multiple fronts. But while full employment helps, racial gaps are considerably smaller now than they were circa 2000 — arguably the last time we had truly full employment. Why? I’d argue — this will probably get me in trouble on both the right and the left — that racism and racial discrimination, while both still very real, have gradually declined over time, at least in a way that’s reflected in employment numbers.
Young people aged 15-24 years old appear particularly vulnerable when economic growth slows and labor market faces stresses. For example, International Labor Organization (ILO) data showed youth unemployment rate in 2021 was more than 20% in a few European countries such as Spain, Italy, and close to 10% in the US in 2021. Note ILO’s definition is slightly different from NBS’s. ILO uses the 15-24 age group while China’s National Bureau of Statistics (NBS) survey looks at the 16-24 age group. China does not seem to be an outlier when comparing its youth unemployment rate relative to income level among global peers. Although our analysis above suggests youth unemployment rate is quite cyclical and is set to decline as service activity growth improves, there may be other structural headwinds contributing to the high youth unemployment rate. In particular, mismatches between skillset graduates acquired from their higher education and skillset required by employers in industry with booming labor demand might have caused frictions in the labor market and therefore contributed to high youth unemployment rate.
This time last year, natural-gas prices were skyrocketing after Russia’s invasion of Ukraine kicked off the worst energy crisis since the 1970s. To the surprise of many prognosticators, that energy shock has now subsided, with gas prices in full retreat around the world. The result is a windfall for the global economy, especially as it contends with stubbornly high inflation. Energy-intensive businesses are restarting operations, consumers are about to enjoy lower bills and fears of a winter shortage have eased.
Because data on total mortality is scant outside the rich world, our model’s estimates have become less precise over time. Its confidence interval for the world’s current excess-death rate stretches from near zero all the way up to the estimated levels of mid-2020. However, excluding the recent surge in China, its best guess for the past year is around one of every 1M people per day. As a share of people aged at least 65, excess-death rates in rich countries are three times lower than elsewhere. But because such places have older populations, their overall mortality rate is similar. Covid may not be the sole cause of this change. Some countries’ health-care systems remain strained, and cases of other diseases that went untreated in 2020-21 could be raising death rates today. But if covid were indeed responsible for the full increase, it would be tied for the world’s fourth-leading cause of death. At current rates, it would kill more people in the next eight years than in the past three.
Last year central banks bought 1,079 tonnes of bullion—the most since records began in 1950. As a result, gold has been hovering close to its nominal all-time high of $2,072 per troy ounce—the traditional unit for precious metals—since late March. There is a geopolitical factor, as developing countries grow wary of the strength of the US dollar. As the west imposed sanctions on Russia following the invasion of Ukraine, the US and its allies froze $300bn of foreign exchange holdings denominated in dollars, euros and sterling. That alarmed many countries with US dollar holdings, whose central banks have been racing to diversify their holdings and buy more gold.
Moreover, both the “unipolar” moment of the US and the economic dominance of the G7 are history. True, the latter is still the most powerful and cohesive economic bloc in the world. It continues, for example, to produce all the world’s leading reserve currencies. Yet, between 2000 and 2023, its share in global output (at purchasing power) will have fallen from 44 to 30 percent, while that of all high-income countries will have fallen from 57 to 41 percent. Meanwhile, China’s share will have risen from 7 to 19 percent. For some emerging and developing countries, China is a more important economic partner than the G7: Brazil is one example. President Luiz Inácio Lula da Silva may have attended the G7, but he cannot sensibly ignore China’s heft.
China overtook Japan as the largest auto exporter in the world last quarter. Surging exports to Russia gave the country’s car exports a big bump. But the strength of China’s electric vehicle ecosystem is also an important factor driving the trend. China exported 1.07 million vehicles in the first quarter of this year, a 58% increase from a year earlier, according to official figures. In comparison, Japan shipped 950,000 vehicles abroad during the quarter, according to the Japan Automobile Manufacturers Association. China is the largest exporter of EVs, and its lead appears to be growing: Around 35% of EVs exported globally came from China last year, compared with 25% in 2021, according to the International Energy Agency.
The cancellations rippled across the country: A Japanese choral band touring China, stand-up comedy shows in several cities, jazz shows in Beijing. In the span of a few days, the performances were among more than a dozen that were abruptly called off — some just minutes before they were supposed to begin — with virtually no explanation. Just before the performances were scrapped, the authorities in Beijing had fined a Chinese comedy studio around $2 million, after one of its stand-up performers was accused of insulting the Chinese military in a joke; the police in northern China also detained a woman who had defended the comedian online. Those penalties, and the sudden spate of cancellations that followed, point to the growing scrutiny of China’s already heavily censored creative landscape. China’s top leader, Xi Jinping, has made arts and culture a central arena for ideological crackdowns, demanding that artists align their creative ambitions with Chinese Communist Party goals and promote a nationalist vision of Chinese identity. Performers must submit scripts or set lists for vetting, and publications are closely monitored.
Figure 12 shows the estimated sources of inflation from 2020Q1 to 2023Q1. For comparison, the continuous line shows actual inflation. (The inflation data are quarterly, at annualized rates, and thus more jagged than the annualized series we often see.) Figure 12 yields several conclusions. First, the contributions of food [light blue] and (especially) energy [dark blue] price shocks to the pandemic-era inflation were large. Energy price shocks in particular account for much of the rise of overall inflation in late 2021 and the first half of 2022, and the for the decline in inflation in the second half of 2022. The large and extended contributions of commodity price shocks to inflation shown in Figure 12 are not inconsistent with our earlier finding that price shocks tend to have transitory effects on inflation, as both energy and food prices rose continuously over much of the period (see Figures 4 and 5), which our procedure interprets as a series of positive shocks. Second, the combination of increased demand for durables and shortages [yellow] associated with disrupted supply chains was the dominant source of inflation in 2021Q2, and the effects of supply chain problems, both direct and indirect, remained significant through the end of our sample period. Third, and importantly, the contribution to inflation of tight labor-market conditions [red] —the leading concern of many early critics of U.S. monetary and fiscal policies—was quite small early on, and indeed was negative in 2020 and early 2021 as labor markets suffered from the effects of the pandemic recession. However, over time, as the labor market has remained tight, the traditional Phillips curve effect has begun to assert itself, with the high vacancy-to-unemployment ratio becoming increasingly important, though by no means dominant, source of inflation.
By September 2022, Europe’s P/E multiple hit a post-2006 low relative to the US. While there were valid concerns at the time about Europe’s energy situation, rising inflation and exposure to a shuttered China, investors were receiving an enormous discount for taking European equity exposure, and I should have paid more attention to that. Europe’s outperformance is likely to have a ceiling since US companies generate higher returns on equity and higher returns on assets, as shown in the table. But everything has a price, and a 35% P/E discount was apparently it. As things stand now, the discount is still large from an historical perspective.
The consensus has been forecasting negative growth since October 2022, and the recession has yet to arrive because it has taken longer to run down excess savings in the household sector, see chart below. Put differently, it is taking longer to remove from the economy the $5trn fiscal and $5trn monetary expansion done during covid. On the back of stronger-than-expected growth, the correction in stock markets and credit spreads has been relatively limited despite the rapid increase in short rates. With inflation still at 5%, far above the Fed’s 2% inflation target, the Fed will keep the costs of capital high, and the recession will come as households eventually run out of excess savings. The implication for markets is that the Fed will continue to put downward pressure on earnings growth and employment growth until they get what they want, namely lower inflation.
Senator Bill Cassidy proposes that, over a five-year period, the federal government should borrow approximately $1.5 trillion. The current federal borrowing rate is roughly 3.9%. The federal government would reinvest those funds in stocks, private equity, hedge funds, or other instruments that are riskier than U.S. Treasury bonds but offer higher expected returns. The fund would hold its investments for 75 years, presumably building interest along the way. Until then, the federal government would borrow to cover Social Security’s funding shortfalls. After 75 years, the investment fund could, in theory at least, repay that borrowing. As Wharton School economist Kent Smetters has shown, Cassidy’s approach is not meaningfully different from simply increasing the capital gains tax: When the stock market goes up, the federal government takes a slice of the gains. Everything else is simply window dressing.
Young adults in the United States are reaching key life milestones later than they did 40 years ago, according to a new Pew Research Center analysis of Census Bureau data. Adults who are 21 are less likely than their predecessors four decades ago to have reached five frequently cited milestones of adulthood: having a full-time job, being financially independent, living on their own, getting married and having a child. By the time they are 25, however, today’s young adults are somewhat closer to their predecessors in 1980 on two of these milestones: having a full-time job and financial independence. In 2021, the most recent year with available data, 39% of 21-year-olds were working full time, compared with 64% in 1980. And only a quarter of people this age in 2021 were financially independent of their parents – meaning that their income was at least 150% of the poverty line – compared with 42% in 1980.
Tokyo has said it intends to put restrictions on exports of 23 types of crucial chipmaking equipment from July, as it aligns itself with the US and the Netherlands in implementing sweeping export controls that could limit China’s access to cutting-edge chips. However, Chinese industry executives who have examined the fine print of the intended rules say they could potentially go further than the US in restricting China’s ability to make semiconductors. “Japan’s export controls will be more disturbing to China than Washington’s sanctions last year,” said a Chinese chip factory executive, who did not wish to be named.
China isn’t creating enough of the high-wage, high-skill jobs that are sought after by its expanding base of educated young people, many of whom have loftier expectations than previous generations. China has significantly expanded high education enrollment during the past decade. In the past three years, more than 28 million college graduates entered the labor market, accounting for about two-thirds of the new urban labor supply. “China’s high youth unemployment rate is not transitory but structural,” said David Wang, chief China economist at Credit Suisse. “There is a mismatch in the skills the youth are trained to provide and the skills that existing jobs require.”
Overall, post–Cold War America has been fantastically successful in wealth creation. By the reckoning of the Federal Reserve, the net worth of American households amounted to nearly $140 trillion at the end of 2022: an average of over $400,000 per person and over a million dollars per household (for a 2.5 person home). America’s struggle for mass prosperity can also be placed in international perspective, thanks to the path-breaking research for the Credit Suisse Global Wealth Databook. Those estimates are still a work in progress for poorer societies, but they look fairly reliable for most affluent Western democracies. The Global Wealth Databook offers estimates for “median wealth per adult” in current US dollars for the years 2000–2021 for 170 countries and places. Figures 2 and 3 show US estimated median wealth per adult for 2000–2021 in relation to America’s Cold War treaty allies in Europe and Asia.
The chart below shows the responses of credit spreads and output to a one percentage point increase in real interest rates in our calibrated model. The blue solid lines display the responses when the economy is in a tranquil period (r** is almost 1.5 percentage points above r before the shock hits). The one percentage point shock is by construction not large enough to push the economy into the crisis region, with the r**–r gap staying positive throughout. As a consequence, the shock has only modest effects on output and spreads. The red dashed lines display the responses when the economy is much closer to the financially unstable region (r** is only 0.5 percentage points above r before the shock). In this case, the increase in interest rates is enough for the financial accelerator mechanism to kick in, and the response of both spreads and output to the shock is much larger.
Foreign-born workers’ share of the U.S. labor force rose last year to the highest level in 27 years of records, as labor demand surged, and the pandemic faded. People born outside the U.S. made up 18.1% of the overall labor force, up from 17.4% the prior year and the highest level in data back to 1996, the Labor Department said in its annual report on foreign-born workers. The number of immigrants in the labor force—those working or actively looking for jobs—rose by 1.8 million, or 6.3%, to 29.8 million in 2022.
In April, the United Nations estimated that India had overtaken China as the world’s most populous country. While the announcement received a great deal of media attention, India’s 2024 census will likely reveal that the UN’s projections have been vastly overestimated. According to India’s most recent census data, the country’s population stood at 1.03 billion in 2001 and 1.21 billion in 2011. The UN’s 2022 World Population Prospects (WPP) report, however, put these figures at 1.08 billion and 1.26 billion, respectively. Moreover, India’s National Family Health Survey indicated a fertility rate of 1.99 in 2017-19, in contrast to the WPP’s estimate of 2.1.