Regardless of current credit standards, affordability remains challenging for the incremental home buyer. Exhibit 13 stacks up the median sale price of an existing home vs. a theoretically ‘affordable’ home price. This affordable home is calculated by assuming a borrower spends 25% of gross household income on a mortgage payment, uses a 15% down payment, and borrows the remainder with a 30-year fixed rate mortgage. Now that interest rates have reversed course and are now far higher, affordability for the incremental home buyer is more challenged than during the 2004-07 period. But, the limited supply of homes for sale remains very low and most of the mortgage market has mortgage rates far below current levels (Exhibit 14). As a result, we continue to expect home prices to rise at a slow pace over the medium term.

Related: The "New Normal" Mortgage Rate Range and Could 6% to 7% 30-Year Mortgage Rates be the "New Normal"? and What Have We Learned About the Neutral Rate?

Household saving, measured as the difference between disposable income and consumer spending, soared in the United States and other high-income economies during the COVID-19 pandemic. In the U.S. and Canada, stepped-up social benefit payments and other income support measures pushed incomes well above pre-pandemic trajectories, while similar measures in the euro area, United Kingdom, and Japan kept incomes near their trend paths. Meanwhile, consumption plummeted in all these economies. We have no clear explanation for the divergence in U.S. and foreign saving behavior.

Related: Accumulated Savings During the Pandemic: An International Comparison with Historical Perspective and Excess No More? Dwindling Pandemic Savings and The Trickling Up of Excess Savings

The BOJ’s reluctance to increase its short-term policy rates is understandable, given that Japan’s gross government debt currently stands at 260% of GDP, or 235% of GDP after netting out $1.25 trillion in foreign-exchange reserves. Should the Bank be compelled to raise its short-term policy interest rates by 3% – about half as much as the US Federal Reserve has – the government’s debt-servicing costs would explode.  Moreover, a sharp interest-rate increase would put enormous pressure on the Japanese banking sector, particularly if long-term rates were to rise as well.

Related: BOJ Shock Has Wall Street Gaming Out the Global Spillovers

In recent years, data center electricity consumption has accounted for a relatively stable 1% of global electricity use, excluding cryptocurrency mining. There is increasing apprehension that the computational resources necessary to develop and maintain AI models and applications could cause a surge in data centers' contribution to global electricity consumption. Alphabet’s chairman indicated in February 2023 that interacting with an LLM could “likely cost 10 times more than a standard keyword search." As a standard Google search reportedly uses 0.3 Wh of electricity, this suggests an electricity consumption of approximately 3 Wh per LLM interaction. This figure aligns with SemiAnalysis’ assessment of ChatGPT’s operating costs in early 2023, which estimated that ChatGPT [requires] 2.9 Wh per request.

Related: Elon Musk’s Latest Mission: Rev Up the Electricity Industry and Gridlock: How a Lack of Power Lines Will Delay the Age of Renewables

Scientists in China say their latest quantum computer has solved an ultra-complicated mathematical problem within a millionth of a second-more than 20 billion years quicker than the world’s fastest supercomputer could achieve the same task. The JiuZhang 3 prototype also smashed the record set by its predecessor in the series, with a one million-fold increase in calculation speed, according to a paper published on Tuesday by the peer-reviewed journal Physical Review Letters. The fastest classical supercomputer Frontier-developed in the US and named the world’s most powerful in mid-2022 would take over 20 billion years to complete the same task, the researchers said.

Related: Quantum Computing Advance Begins New Era, IBM Says and White House Unveils Ban On US Investment In Chinese Tech Sectors

Combining team-level information on all Ivy League athletes from 1970 to 2021 with resume data for all Ivy League graduates, we examine both post-graduate education and career choices as well as career outcomes.  Athletes are far more likely to go into business and finance-related jobs than their non-athlete classmates. Athletes attain higher terminal wages and earn cumulatively more than non-athletes over the course of their careers controlling for school, graduation year, major, and first job. In addition, they attain more senior positions in the organizations they join. Collectively, our results suggest that non-academic human capital developed through athletic participation is valued in the labor market and may support the role that prior athletic achievement plays in admissions at elite colleges.

Related: The Economics of Inequality in High-Wage Economies and Diversifying Society’s Leaders? The Determinants and Causal Effects of Admission to Highly Selective Private Colleges and Why Do Wages Grow Faster for Educated Workers?

I find it entirely plausible that selection accounts for most or even all of the widening mortality gap.  Measures of achievement have not risen among 12 graders and other high school students for essentially the entire period since we started to measure them in a consistent way (i.e. since the early 1970s).  However, the share who obtain a BA degree has increased quite dramatically over the same period. An NLSY [National Longitudinal Survey Youth] exercise shows that non-BAs are increasingly negatively selected.   A comparison between the NLSY79 (1979) and the NLSY97 (1997) shows that the distribution of ASVAB [Armed Services Vocational Aptitude Battery] percentiles of non-BAs is shifted to the left for 97 vis-a-vis 79.

Related: Accounting for the Widening Mortality Gap Between American Adults With and Without a BA and Why Are Americans Dying So Young? and Who Won the Cold War? Part II

American Compass has a new survey out in which it finds, among other results, that “only 40% of workers have secure jobs.” This is the latest attempt by the outfit to portray the American economy as in dire need of “rebuilding.” One criterion for assessing whether a worker has a secure job is their indicating either that “I have a regular work schedule that is generally the same from week to week” or that “My work schedule varies from week to week, but I am satisfied with my control over it.” American Compass does not provide the alternative responses workers could give, but 96% of them gave one of these two answers. It is striking that nearly all workers (at least those working 20 or more hours a week) either have a stable work schedule or are OK with their varying schedules.

Related: The Cost of Thriving Has Fallen: Correcting and Rejecting the American Compass Cost of Thriving Index and Upward Mobility Is Alive and Well in America and The Economics of Inequality in High-Wage Economies

We estimate that the U.S. debt held by the public cannot exceed about 200% of GDP even under today’s generally favorable market conditions. Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation). Table 1 then shows the impact on the debt-GDP ratio if financial markets start to demand a larger return before unraveling. However, additional rates closer to 50 to 100 b.p. are more reasonable in the short run, as some borrowing rates are already locked in at a weighted average duration of about 6 years. Table 1 shows that between 2040 and 2045---or in about 20 years---the U.S. debt-GDP ratio will hit between 175 and 200 percent under current fiscal policy, depending on the assumed interest rates.

Related: Interest Expense: A Bigger Impact on Deficits than Debt and The High Cost of Borrowing at Low Rates and Living with High Public Debt

U.S. crude oil exports in the first half of 2023 averaged 3.99 million barrels per day (b/d), which is a record high for the first half of a year since 2015, when the U.S. ban on most crude oil exports from the United States was repealed. In the first half of 2023, crude oil exports were up 650,000 b/d (19%) compared with the first half of 2022. Although exports increased in the first half of 2023, the United States still imports more crude oil than it exports, meaning it remains a net crude oil importer. The United States continues to import crude oil despite rising domestic crude oil production in part because many U.S. refineries are configured to process heavy, sour crude oil rather than the light, sweet crude oil typically produced in the United States.

Related: U.S. Petroleum Product Exports Set New Record In the First Half of 2023 and Portfolio Nuclear and The Changing Nexus Between Commodity Prices and the Dollar: Causes and Implications

Before 2014, which is when concerns about police bias began to take center stage after a police killing in the St. Louis suburb of Ferguson, Missouri, Black Americans were at lower risk of dying in a traffic accident than White Americans (mainly because they drive much less). By 2021, Black Americans’ per-capita fatality rate was 37% higher; last year it was 26% higher.  National data on traffic stops is limited, with the Bureau of Justice Statistics’ most recent Police-Public Contact Survey, conducted in 2020, finding that 9% of Americans 16 and older were involved in a traffic stop as a driver or passenger that year, down from 10.3% in 2018 and 11% in 2015.

Related: The Pandemic Drinking Binge Just Keeps Going and Who Won the Cold War? Part II and Who Won the Cold War? Part III

Gallup suggests that remarkably few people, just about anywhere, are happily engaged with their work. The average of the 73 countries in our filtered version showed that 20% were thriving and 15% were loud quitters. The remaining 65% were quietly dragging their feet. Among big economies, America and India had the highest share of thrivers, though that was only around one-third. In Italy and Japan just 5% were thriving, the lowest shares in the sample.

Related: Where Are the Workers? From Great Resignation to Quiet Quitting and The Economics of Inequality in High-Wage Economies

The main implication of the further tightening in financial conditions led by rising rates is that the drag on GDP growth will last longer. Our financial conditions index (FCI) growth impulse model now implies a roughly -½pp hit to growth over the next year, meaningful but much less than last year and too little to threaten recession.  In financial markets, the key risk is that valuation measures that are benchmarked to interest rates are now higher for some assets, most importantly stocks. We estimate that if the equity risk premium fell to its 50th historical percentile, the hit to GDP growth over the following year would be 1pp. If it fell to its average level in the pre-GFC years, the hit would be 0.75pp.

Related: What Have We Learned About the Neutral Rate? and Measuring the Natural Rate of Interest After COVID-19 and In Search of Safe Havens: The Trust Deficit and Risk-free Investments!

Real interest rates have risen even more than nominal. Real interest rates have risen by almost 10pp. In comparison, real interest rates rose by “only” 4pp during the 2004-2006 episode. The main reason that economic activity has held up so well is that households entered this tightening episode with large savings that they had accumulated during the pandemic. Therefore, the pandemic caused both inflation and the flare-up in interest rates and led to this amazingly resilient economy. However, surplus savings will soon be used up, and at some point people will have to take out new mortgages at higher interest rates. Moreover, central banks have continued to raise interest rates in 2023 and will keep them high for longer. All this means that the full impact of this tightening episode has not yet been felt.

Related: Soft Landing Summer and Excess No More? Dwindling Pandemic Savings and The Trickling Up of Excess Savings

Market pricing over the past two years has persistently pushed back against the Fed’s “higher for longer” path and stubbornly priced both relatively low terminal rates and aggressive rate cuts. This paradoxically made rate hikes even more likely by easing financial conditions and in effect stimulating the economy. Market pricing is now largely in line with the September dot-plot, which guides towards one additional hike even as recent data has been very encouraging. The rise in longer dated yields and strengthening dollar do not appear to have been anticipated by Fed officials and raise the prospect of financial conditions becoming too tight.

Related: Rate Cuts and The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet) and What Have We Learned About the Neutral Rate?

The Biden administration said it would expand former President Donald Trump’s wall on the Mexican border and begin deporting thousands of Venezuelans in an effort to cut down on the migrant surge that shows no signs of abating.   Last month alone, 50,000 Venezuelans crossed the southern border, a record number, and they now represent the second largest nationality group, dwarfed only by Mexicans. The U.S. Border Patrol in the Rio Grande Valley, where the new stretch of the wall is to be built, had encountered more than 245,000 migrants who had entered the country between ports of entry, or unlawfully, in the 2023 fiscal year that ended Sept. 30, the notice said. It added that construction would be built with funds appropriated by Congress in 2019 for wall construction in the Rio Grande Valley.

Related: Rebound in Immigration Comes to Economy’s Aid and U.S. Bound Migrants Surge at Darien Jungle Crossing in Panama and Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995

Since the start of 2018, exports from 15 of China’s central and western provinces have rocketed 94%. In the 12 months through August, those provinces exported a combined $630 billion—more than India’s $425 billion, Mexico’s $590 billion, and Vietnam’s $346 billion over the same period, according to official figures compiled by data provider CEIC. Since the beginning of 2018, exports from India have risen 41%, exports from Mexico have risen 43%, and exports from Vietnam have increased 56%.

Related: How America Is Failing To Break Up With China and Mexico Seeks to Solidify Rank As Top U.S. Trade Partner, Push Further Past China and Global Supply Chains: The Looming “Great Reallocation”

Opportunities to move cash legitimately from China are severely limited, with individuals normally allowed to wire only $50,000 a year overseas. They also have a one-time opportunity to move their money when they emigrate. Plugging the gap is where the underground networks come into play. Two other private bankers at different European banks say that while on the books they can’t help clients avoid capital controls, they do pass on contact information for underground remittance agencies for close and trusted customers. The explosion in wealth in China over the past decades means there’s plenty of potential demand. UBS Group AG, for example, estimated in its annual wealth report that there were 6.2 million Chinese with assets of more than $1 million at the end of 2022.

Related: China Notes, July ’23: On Technological Momentum and Rich Chinese Eye Australia Homes as 700,000 to Leave by 2025 and Singapore Asks Banks to Keep Quiet on Wealth Inflows During China Boom

China’s trade surplus is already very large. The headline goods surplus is about 5% of China's GDP, and the underlying surplus in manufacturers is close to 10% of GDP.  I certainly worry that if China relied entirely on interest rate cuts, exchange rate liberalization, and a weak yuan to offset the property slump, China's external trade surplus could increase to record levels relative to the GDP of its trade partners. China, far more than other large economies, relied on net exports to sustain its economy during the pandemic. It would be placing a significant further burden on its trading partners if it ends up relying on an even bigger manufacturing surplus to offset the slack created by its property downturn over the next few years.

Related: Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and How China Can Avoid the Japan Trap and The Neoclassical Growth of China

336K jobs, participation remains high, wage growth moderated further. We could be in the middle of a sustainable increase in labor supply. Just about everyone expected job growth to moderate. Moreover, we had had a series of downward revisions and good reason to expect more. But instead, we have 266k jobs on average over the last three months. Way above replacement and what was happening earlier this year. The market is pricing in a higher chance of future hikes. But frankly, I wouldn't. This is the second month in a row of lower nominal wage growth. Doesn't make it a new trend but still the 3-month annualized growth rate is 3.4%, fully consistent with inflation in the 2-3% range.

We provide estimates of the impacts of the early termination of pandemic-era UI benefits in several states in 2021 that had expanded their generosity (FPUC) and the groups of workers eligible for benefits (PUA), relative to those that did not terminate those benefits early. Using CPS data, we present difference-in-difference estimates that the flow of unemployed workers into employment increased by around 12-14pp following early termination. Among prime-age workers, the effect is about two-thirds the size of the unemployed-to-employed flow among control states during the February–June 2021 period. We show that state-level unemployment rates fell following early exit from FPUC and PUA. Finally, we present evidence that early termination reduced the share of households that had no difficulty meeting expenses. The welfare implications of the early termination of FPUC and PUA are therefore ambiguous.

Related: Unemployment Is Low, Welfare High. What Gives? and Calomiris on Gramm Ekelund and Early on Income Distribution

The U.S. is courting trouble. The federal government is 43% larger than it was four years ago, and its reach is expanding mightily. More than a third of the surge in investment spending can be traced to government subsidies, credits, and handouts. The coming supply of Treasury securities required to fund U.S. government deficits will likely be substantially larger than official estimates. And purchasers of Treasury debt will demand higher yields, at least until something breaks in the economy.

Related: Maxing Out and 23% Increase in Treasury Auction Sizes in 2024 and The Real Stakes of the Debt-Ceiling Fight

Interest was already the fastest-growing part of the budget. Assuming these higher rates, interest costs would exceed defense spending by 2025 and exceed the net cost of Medicare by 2026. Under this scenario, interest would reach a record share of the economy within three years, at which point it would become the second-largest federal program. Although most of our national debt was issued when interest rates were low, that debt is quickly rolling over into a high-rate debt environment, and further borrowing continues. Without corrective action, interest costs could total more than $13 trillion over the next decade and $1.9 trillion per year by 2033.

Related: Increase in Treasury Auction Sizes in 2024 and Interest Expense: A Bigger Impact on Deficits than Debt and Living with High Public Debt

Domestic demand for the US’ major crops and livestock is expected to grow between 2-10% over the next decade.  Increasing consumption of meat, which requires >4x more acreage than a vegetarian diet, will further increase the demand pressure on feed crops. The US agricultural sector exports more than 20% of the value of its production, meaning that the sector will be impacted by the growing global population and increased demand for diversified diets and protein. The global population, which is expected to grow by an additional ~2 billion people by 2050 will require the global agriculture industry to produce more food in the next 3-4 decades than was produced in the last 8,000 years.

Related: Feeding the World Once Brought the US Untold Influence—No More and China Ups Food Security Drive, Plans To Grow 90 Percent Of Its Grain By 2032, Warning For US And Thai Farmers

In 1980, the average income share of earners in the top 10% was around 30%. However, by 2015, it had surpassed 45%. The employment share of small firms has also declined, with a decrease of approximately 5pp over the same period. We use variation across states to show a correlation between these two developments, with states having the greatest increase in the upper-income share also tending to be those with the biggest job creation declines in small firms compared to large firms. One explanation for this correlation is that the increase in the income share of the highest income earners reduced deposits in small and medium-sized banks from what they otherwise would have been. In doing so, this shift in income reduced the available credit for small firms, putting them at a disadvantage relative to large firms.  A 10pp increase in the top 10% income share results in a decline of 1.6pp in the net job creation rate of small firms compared to large firms.

The equity risk premium declined in the first half of the year, from 5.94% on January 1, 2023, to 5.00% on July 1, 2023, but has been relatively stable in the third quarter, albeit on top of higher risk-free rates. Thus, the equity risk premium of 4.84% on October 1, 2023, when added to the ten-year T.Bond rate of 4.58% on that day yields an expected return on equity of 9.42%, up from 8.81% on July 1, 2023. Put simply, notwithstanding the ups and downs in stock prices and interest rates in the third quarter of 2023, there is little evidence that changes in the pricing of risk had much to do with the volatility. Much of the change in stock and corporate bond prices in the third quarter has come from rising interest rates, not a heightened fear factor.

Related: A Few Stocks Drive the Stock Market: Dot.com Vs. Today vs. the Last 100 Years and Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOs and Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks

Treasury auction sizes will increase on average 23% in 2024 across the yield curve. This forecast comes from the Treasury Borrowing Advisory Committee’s neutral issuance scenario. The 37% increase in issuance of 3-year notes and the 28% increase in issuance of 5-year notes will in 2024 stress-test demand for Treasuries in the belly of the curve. This dramatic growth in the supply of the risk-free asset is “pulling dollars away” from other fixed-income assets, including investment grade credit, as investors substitute away from spread products toward Treasuries. The bottom line is that the world only saves a limited amount of dollars every year, and the significant growth in the size of the Treasury market is at risk in 2024 of crowding out demand for other types of fixed income.

Related: Resilience Redux in the US Treasury Market and Maxing Out and The High Cost of Borrowing at Low Rates

Most of the increase is due to the part of yields, called the term premium, which has nothing to do with inflation or short-term rates. Numerous factors affect the term premium, and rising government deficits are a prime suspect.  Deficits have been wide for years. There’s not much sign that this has yet imposed a penalty. Investors still project that the Fed will get inflation down to its 2% goal. At 2.4%, real (inflation-adjusted) Treasury yields are comparable to those in the mid-2000s and lower than in the 1990s, when the U.S. government’s debts and deficits were much lower.

Related: Interest Expense: A Bigger Impact on Deficits than Debt and Will A.I. Transform the Economy, and if So, How? and American Gothic

According to NHE data, between 1987 and 1996, the average annual real per capita growth rate within Medicare was 5.2%. From 1996 to 2005, the rate was cut roughly in half, to 2.7%. From 2006 to 2022, it dropped again, to 0.7%.  Why did the downward trend begin nearly three decades ago and not in 2011? While there are likely many explanations, the most obvious is the steady implementation of congressionally mandated payment reforms (and cuts). The reasons for the current slowdown may not be sustainable: For example, payments per service under current law are not expected to keep up with inflation and therefore may not be sufficient to ensure full access to care for the program’s beneficiaries. By 2040, Medicare’s payments for physician services and hospital care are expected to be just 40% and 55-60%, respectively, of the average amounts paid by commercial insurers. With aging baby boomers pushing enrollment up from 66 million today to 83 million by 2040, aggregate costs will grow very rapidly over the coming three decades.

Related: A Huge Threat to the U.S. Budget Has Receded. And No One Is Sure Why and Why Medicare and Social Security Are Sustainable

Europe’s economic performance looks far better at PPP than in nominal terms. In 2012 prices in America were just 5.4% higher than in the EU at market exchange rates. Today, the gap is 46%, largely thanks to a strong dollar. Adjusting for PPP, the EU’s GDP is roughly 95% of America’s, the same as it was ten years ago. Still, PPP-adjusted GDP per person has grown faster in America than in most of Western Europe.

Related: From Strength To Strength and Fully Grown - European Vacation! and Europe Has Fallen Behind America and the Gap is Growing

Scientists at the Copernicus Climate Change Service said 2023 was on course to be the hottest on record, after the average global temperature in September was 1.75C degrees warmer than the pre-industrial period of 1850-1900 before human-induced climate change began to take effect. The monitoring service also found Antarctic sea ice levels remained at record lows for the time of year. Last month’s global average temperature of 16.38C was 0.5C above the previous warmest September in 2020, it said, and 0.93C above the 1991-2020 average for the month.

Related: Missing Ice and Bleached Coral: The Sudden Warming of the Oceans and The Rapid Loss Of Antarctic Sea Ice Brings Grim Scenarios Into View and What Happens in Antarctica, Doesn’t Stay in Antarctica

Another insurer is pulling back from the Sunshine State. Progressive confirmed it is dropping 100,000 home insurance policies across Florida, with a first wave of non-renewal notices going out in December. The move will cut half of Progressive’s home policies in the state. The Insurance Information Institute anticipates Progressive will cut 47,000 DP3 policies, which are typically used for second homes, and 53,000 policies for “high-risk properties,” the publication reported. The latest cut of 100,000 policies adds to the heap of 56,000 policies Progressive didn’t renew last year in Florida.

Related: Farmers Insurance Limits Sales in Florida, California Amid Storm, Wildfire Risks and Why California and Florida Have Become Almost Uninsurable and Parts of America are Becoming Uninsurable

The best evidence available suggests that the dollar share in China’s reserves has been broadly stable since 2015 (if not a bit before). If a simple adjustment is made for Treasuries held by offshore custodians like Belgium's Euroclear, China’s reported holdings of US assets look to be basically stable at between $1.8 and $1.9 trillion.   After netting out China's substantial holdings of U.S. equities, China's holdings of U.S. bonds, after adjusting for China's suspected Euroclear custodial account, have consistently been around 50% of China's reported reserves.  Nothing all that surprising.

Related: Is China the Source of Higher US Long Rates? and Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency

Here’s a view of the 1995-2005 boom, in which I show the natural log of productivity — so that a straight line corresponds to steady growth — and plot a continuation of the growth rate from 1973 to 1995 (the red line), so that you can see how actual growth compared. By the time the productivity surge tapered off, productivity was about 12%  higher than the previous trend would have led you to expect it would be. Since A.I. is arguably an even more profound innovation than the technologies that drove the 1995-2005 boom, 15% isn’t at all unreasonable. If optimistic estimates of the boost from the technology are at all right, growth will be much higher than conventional estimates of the economy’s long-run sustainable growth rate, like those of the Federal Reserve, which put it at around 1.8% over the next decade. [If that’s the case] debt won’t be a big concern after all — especially because faster growth will boost revenue and reduce the budget deficit.

Related: Integrating the Goldman AI Report Into Our Views and The Outlook for Long-Term Economic Growth and AI, Mass Evolution, and Weickian Loops

Most of the exploding interest costs resulted from borrowing when interest rates were low. We estimate that nearly 60% of our debt originated when the average interest rate on ten-year Treasury notes was less than 3%, while 75% of current debt originated when three-month Treasuries paid less than 3%.  That debt, borrowed at low rates, is now being rolled over into Treasuries paying interest rates between 4.5 and 5.6%. Though borrowing seemed cheap during those periods, policymakers failed to account for rollover risk, and we are now facing the cost.

Related: U.S. Deficit Explodes Even As Economy Grows and Interest Expense: A Bigger Impact on Deficits than Debt and Interest Costs Will Grow the Fastest Over the Next 30 Years

A large chunk of the upward revisions to GDP data came from increases in real fixed investment, which was raised by more than 6.4% and saw its cumulative growth since early 2019 increase from 5.8% to 8.7%. That means the investment and construction boom we’ve seen over the last few years has actually been stronger than first reported—with manufacturing, housing, software, and power investments all being revised upward. The revisions to software data and methodologies, which included updates that now treat a portion of labor from an expanded pool of workers in various tech occupations as in-house investments, raised real private fixed software investment by 12%. This also spilled over into higher estimates of public-sector software investments, both inside and outside of the defense sector, and upward revisions to the real output of the US information industry.

Related: An American Investment Boom Would Be Good for the World and Making Manufacturing Great Again and What Have We Learned About the Neutral Rate?

Once nonfarm payrolls start moving below 100,000, credit spreads will widen because investors will take it as a sign that corporate earnings are about to slow down.  But with core PCE inflation at 3.9%, the Fed cannot turn dovish. As a result, the Fed will continue to be hawkish even as the unemployment rate starts moving higher. Once the recession finally begins, the Fed can turn dovish and start to lower base rates. But the costs of capital will not decline because at that time corporate earnings will be slowing, and therefore, credit spreads will likely be widening further. The bottom line is that even if we get weak data and the Fed, after a few soft prints in nonfarm payrolls, starts turning dovish, the costs of capital will move higher. In short, the Fed controls the base rate but doesn’t control credit spreads, and that is the reason why a soft landing is unlikely.

Related: Soft Landing Summer and Breaking Down the Sources of US Economic Resilience and Has the Fed Tightened Enough? Guideposts to Consider

The three-day strike could stall services for nearly 13mm people in at least half a dozen states. The Kaiser strike is the latest in a string of high-profile labor disputes fueled by a tight labor market, high inflation, and record corporate profits that have left workers both resentful and emboldened. The United Auto Workers has steadily expanded a strike against the Detroit automakers that started Sept. 14, demanding raises as high as 40% and the end of job tiers. The Writers Guild of America last week reached a tentative agreement to end a five-month strike over artificial intelligence and streaming pay, while SAG-AFTRA actors remain on the picket line.  And in Las Vegas, more than 50,000 hospitality workers could soon walk off the job over staff cuts and increased workloads—complaints that aren’t so different from the healthcare workers.

Related: Unions’ Inflation Warning? and The ‘Summer of Strikes’ Isn’t Living Up to the Hype and ​​Everyone Wants to Work at UPS After Teamsters Deal

The greater challenge facing US fiscal policy is not new: the US is running a primary (ex-interest) deficit much larger than has been the case historically, and it is happening at a point in the business cycle when the deficit would normally be smaller than usual. When interest expense rose sharply in the 1980s, fiscal policymakers reacted by shrinking the primary (ex-interest) deficit. The largest fiscal adjustment from that period, enacted in 1993, would be sufficient if enacted now to offset the additional interest expense we project (relative to 2021) after 5 years. The average interest rate on federal debt is likely to remain at or below the rate of nominal GDP growth for the next decade, and this relationship is likely to be more benign than the historical average over the next five years.

Related: Maxing Out and Resilience Redux in the US Treasury Market and Living with High Public Debt

Maybe China is behind the rise in US long rates. Growth in China is slowing for cyclical and structural reasons, and Chinese exports to the US are lower. As a result, China has fewer dollars to recycle into Treasuries. In fact, China has been selling $300 billion in Treasuries since 2021, and the pace of Chinese selling has been faster in recent months. If slowing growth in China is a source of higher US rates—together with the US sovereign downgrade, Fed QT, Japan YCC exit, and rising US Treasury issuance—then a bad US employment report on Friday may not result in dramatically lower rates. The bottom line is that the cost of capital will likely stay permanently higher for reasons that have little to do with the business cycle, and it was the period with essentially zero interest rates from 2008 to 2020 that was unusual.

Related: Setser On Chinese "De-Dollarizing" and Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency and Sester On Sløk

Sløk's charts of the day are generally great but he forgot to adjust the major foreign holdings table for valuation changes, Euroclear, and Agencies.  The available data shows purchases for most of last year, sales in Q1, and a moderation of those sales in the last few months. Nothing dramatic. The Chinese data doesn't suggest informal PBOC reserves sales to date -- all the action has been through the state banks, and the sums there have been modest/the state banks wouldn't need to use their bonds to fund intervention. Has the Chinese bid for Treasuries stopped? No. But China has shifted toward Agencies and holds more of its Treasuries in offshore custodians. This should be the definitive flow chart --not a chart changing the valuation of US custodied Treasuries!

Related: Is China the Source of Higher US Long Rates? and Setser On Chinese "De-Dollarizing" and Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency

In currencies, the US dollar continued its recent rampaging strength, with the yen coming within a whisker of dropping below the level of Y150/$, at which many assume the Japanese authorities would feel obliged to step in to prop up the currency, as they did when it briefly topped that level a year ago. Any intervention by Japanese authorities would likely send yields further upward, so this is a reason for caution about betting on them to fall in short order. The logic is that the Federal Reserve will be happy for yields to rise until they “break something,” at which point bonds’ prices would rise as their yields fell. That makes sense, but if the first thing to break is the patience of the Ministry of Finance in Tokyo, then such a bet on buying bonds would lose money.

Related: BOJ Shock Has Wall Street Gaming Out the Global Spillovers and Why Are Long Rates Going Up? and Raising Anchor

U.S. petroleum product exports totaled nearly 6.0 million barrels per day (b/d) in the first half of 2023, 2% more than during the same period in 2022. The first half of 2023 saw the most U.S. petroleum product exports during the first six months of any year in our Petroleum Supply Monthly data, which date back to 1981. U.S. petroleum product exports increased significantly in the 2000s and 2010s because of a number of factors, including the increasing competitiveness and efficiency of production at U.S. refineries along the U.S. Gulf Coast and increasing hydrocarbon gas liquids (HGLs) production associated with rising U.S. upstream oil and natural gas production.

Related: The Changing Nexus Between Commodity Prices and the Dollar: Causes and Implications and U.S. Oil Boom Blunts OPEC’s Pricing Power and Portfolio Nuclear

A new estimate of remote work from the Bureau of Labor Statistics (BLS) suggests that remote work is less common than previously thought. While the new BLS data reveals hybrid remote work to be substantially lower than other surveys estimated, fully remote work is close to where other surveys show, at around one out of ten workers.  As a result, fully remote work appears slightly more common than hybrid remote work.  Looking at the college-educated, nearly one in five are fully remote. Among advanced degree holders, nearly 40% are hybrid or fully remote. Among skilled workers, remote working is now a substantial share of the labor force, including fully remote.

Related: Working Remotely? Selection, Treatment, and the Market for Remote Work and Remote Work, Three Years Later and Central Business Districts: City Strugglers

The pandemic sparked rapid, dramatic changes to the composition of consumer demand and to preferences for work and lifestyle, and these patterns have continued to evolve through mid-2023. From the standpoint of potential entrepreneurs, these dramatic changes presented opportunities—both to meet newly formed consumer and business needs and to change the career trajectories of the entrepreneurs themselves. Entrepreneurs made plans and applied to start businesses both early on and through mid-2023; some of these plans have resulted in new firms and establishments that hired workers in large numbers. Entrepreneurial opportunities and the demand for employees at these new firms appear to have played an important role in the “Great Resignation,” as some quitting workers likely flowed toward new businesses (as either entrepreneurs or new hires). Taken together, these patterns imply significant economic restructuring across industry, geography, and the firm size and age distribution.

Related: Surging Business Formation in the Pandemic: Causes and Consequences and Creative Destruction After the Pandemic and Business Formation Boom

Each month life insurers receive insurance premium payments and pension funds receive employee contributions that they invest. These inflows are then filtered through investment policies and then allocated into a range of assets, including Treasuries. Over the past few years, this has translated into Treasury purchases at an annual rate of around $100b. This does not come close to meeting the trillions in coupons that will be issued each year for the foreseeable future. Real money managers will not be the marginal buyer of Treasuries that the market is looking for.

Related: Resilience Redux in the US Treasury Market and Maxing Out and Who Has Been Buying U.S. Treasury Debt?

What’s causing this interest rate spike? You might be tempted to see rising rates as a sign that investors are worried about inflation. But that’s not the story. We can infer market expectations of inflation from breakeven rates, the spread between interest rates on ordinary bonds and on bonds indexed for changes in consumer prices; these rates show that the market believes that inflation is under control. What we’re seeing instead is a sharp rise in real interest rates — interest rates minus expected inflation. At this point, real interest rates are well above 2%, up from yields usually below 1% before the pandemic. And if these higher rates are the new normal, they have huge and troubling implications. My instinct is to say that the bond market is overreacting to recent data and that high interest rates, like high inflation, will be transitory.

Related: Living with High Public Debt and Did the U.S. Really Grow Out of Its World War II Debt? and American Gothic

If the [rising term premium] is not driven by changing Fed expectations, what are then the reasons why long rates are moving higher? There are several potential explanations: 1) First, with declining repo it could be an unwind of the basis trade that is pushing long rates higher, somewhat similar to what happened in March 2020. This has been getting a lot of attention, and maybe conditions for getting repo are tightening. 2) Another potential explanation is the slowing growth in China, which means that China is recycling fewer dollars into Treasuries because of declining Chinese exports. 3) Rates may also be moving higher because of the Fed still doing QT. Remember, the entire goal with QT is to put upward pressure on government bond yields. 4) The US budget deficit remains big at 6% of GDP, which requires more Treasury issuance today and in the future, and investors may be reacting to that. 5) The US sovereign downgrade has likely had a negative impact. 6) Japan exiting YCC has put upward pressure on JGB yields, which, despite high hedging costs, makes US yields less attractive. 7) There is a large stock of T-bills outstanding, and the Treasury intends over the next six months to increase auction sizes across the Treasury curve.

Related: Breaking Down the Sources of US Economic Resilience and Soft Landing Summer

There are two connected anomalies, or ‘elephants’, in World markets (1) huge capital inflows into the US$ and (2) a large negative term premia on US Treasuries. Both reflect the structural shortage of ‘safe’ assets in global financial markets. We are now in the early unwind stage. China needs to unhook from the US dollar by further devaluing the Yuan. She is unlikely, as a result, to buy a lot more US Treasuries. Unless the US authorities do something to cap rising yields, the current duration crisis could turn into a more worrying credit crisis. China, for one, has already started to print money again. We expect others to follow. 

Related: The US Capital Glut and Other Myths and The Return of Quantitative Easing and Unstable Prosperity: How Globalization Made the World Economy More Volatile

[The] headwind from rising yields should not be a surprise given that equity risk premia have fallen sharply back to pre pandemic levels, providing much less buffer for equities as rates rise (Exhibit 5). Some argue that this makes sense; if the post-pandemic tail-risk of deflation has now eroded, then equity risk premia should fall as term premia rises. However, while nominal and real bond yields are back to pre financial crisis levels, at least in the US, the PE remains much higher, and earnings growth much lower. In the absence of much better growth in corporate profits, the significant increase in both nominal and real interest rates create a much higher bar for equities to beat.

Related: Breaking Down the Sources of US Economic Resilience and Soft Landing Summer and The Price of Risk: With Equity Risk Premiums, Caveat Emptor!

By 2022, the prices of new homes sold in Beijing, Shanghai, Guangzhou, and Shenzhen were 1.73 times, 1.81 times, 1.80 times, and 1.97 times their 2014 levels, respectively. The value of China’s housing market is four times the country’s GDP, compared to 1.6 in the US and 2.1 in Japan. Accounting for more than one-quarter of all economic activity and two-thirds of household wealth. Now that China’s total population is shrinking, especially the home-buying-age cohort, the collapse of the property dam seems inevitable.

Related: How China Can Avoid the Japan Trap and Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and The Neoclassical Growth of China

From 1992 to 2010, American adults with and without a four-year college degree saw falling mortality, but with greater improvements for the more educated; from 2010 to 2019, mortality continued to fall for those with a BA while rising for those without; during the COVID pandemic, mortality rose for both groups, but markedly more rapidly for the less educated. In consequence, the mortality gap between the two groups expanded in all three periods, leading to an 8.5-year difference in adult life expectancy by the end of 2021. One remarkable finding here is that Americans with a college degree, if they were a separate country, would be one of the best performers, just below Japan, though there was some decline in 2020 and 2021 during the pandemic.

Related: Why Are Americans Dying So Young? and Who Won the Cold War? Part II and Who Won the Cold War? Part III

Nominal bank lending growth has slowed from 10% to 2% since the start of this year on a 3-month annualized basis, for two main reasons. First, deposit outflows and higher deposit rates have led banks to reduce lending to a degree roughly in line with the usual historical relationships. Second, recession fears have likely led banks to reduce lending, and we find that banks that built up more provisions for loan losses over the last year have slowed lending by more. We expect the drag on growth from tighter bank lending standards to fade because we expect bank lending standards to remain roughly unchanged in Q3—as fading recession fears and modestly higher bank stock prices roughly offset higher interest rates—and to start to normalize gradually next year.

Related: All Clear and Outlook for Regional Banks and Real-Estate Doom Loop Threatens America’s Banks

While stimulus was an important factor in limiting credit card-financed spending earlier in the pandemic, in recent times the strength of the labor market and the associated wage gains are likely a major reason why consumers have not had to resort to hitting their credit cards harder. Exhibit 7 shows that according to Bank of America internal data, average credit card balances have risen over the last few years, after a dip in 2020. The latest reading through August 2023 suggests that for middle- and higher-income households, credit card balances are at levels equivalent to that in 2019. However, card balances for lower-income households have seen a steeper rise and have exceeded their pre-pandemic range. The good news is that lower-income households continue to see faster wage growth, as suggested by Exhibit 8, which helps offset some of the pressure that the group is facing from higher card balances.

Related: The Pandemic Has Broken a Closely Followed Survey of Sentiment and What Has Policy Tightening Accomplished So Far? and The Q4 Pothole: Student Loans, Shutdown, and Strikes

The world’s top exporter of corn, soy, and wheat for much of the past seven decades, the US is now facing a future of persistent agricultural trade deficits. The shortfall for the fiscal year ending Sept. 30 is estimated at $19 billion and is expected to balloon to almost $28 billion in fiscal 2024, according to Agriculture Department forecasts. The trend is driven in part by a shift in Americans’ eating habits—for instance, households today consume more imported produce, such as Mexican avocados and Indian mangoes—but stagnating grain and oilseed exports are also a factor. Since 1974 the only other annual deficits were in 2019 and 2020, during President Donald Trump’s trade war with China.

Related: China Expands Farmland In Bid To Cut Foreign Food Reliance and Could Economic Indicators Signal China’s Intent To Go To War?

The ballooning bilateral deficit is entirely driven by a rise in imports rather than a fall in exports; the two grew more or less in parallel at the end of the last decade. Then, after the first lockdown-related swings, EU exports to China remained more or less stable, while imports soared. The change in imports is visible across broad categories of manufacturing, although machinery and transport equipment (think of China’s electric car boom) may be contributing more than its proportionate share. [In 2023] all of these changes have recently been going into reverse. Import volumes have fallen by about 10% since the peak in August last year; import prices by about 15%. The total import bill, consequently, is down by about quarter since a year ago.

Related: The Chinese Carmakers Planning to Shake Up The European Market and China’s Auto Export Wave Echoes Japan's in the ’70s and Europe Can’t Decide How to Unplug from China

US exposure to foreign supply chains is much bigger than it appears at face value, but it is not that big on the macro level. By any measure, the US buys at least 80% of all industrial inputs from domestic sources. Thus, at an aggregate level, its foreign exposure is hardly alarming. However, while this may be reassuring, it is important to note that supply chain disruptions rarely occur at the macro level. The 80% figure was not relevant when the US auto sector shuttered factories due to a lack of semiconductors, or when buying home office electronics became problematic due to a demand surge and logistic snarls. Taking account of the Chinese inputs into all the inputs that American manufacturers buy from other foreign suppliers – what we call look through exposure – we see that US exposure to China is almost four times larger than it appears to be at face value.

Related: Setser On Rumors Of Decoupling and How America Is Failing To Break Up With China and US-China Trade is Close to a Record, Defying Talk of Decoupling

The term premium is up one percentage point since late July. The ongoing rise in long rates is driven less by changing Fed expectations and more by: 1) The US sovereign downgrade 2) Japan exiting YCC 3) Fed QT 4) Fewer dollars for China to recycle in a falling exports environment 5) The US budget deficit 6) The large stock of T-bills and the Treasury’s intention to increase auction sizes. Looking ahead, the real risk to the economy, including financial stability, is if weak economic data doesn’t result in falling long-term interest rates.

Related: Maxing Out and Resilience Redux in the US Treasury Market and Living with High Public Debt

I would suggest that substantial and accumulating deficits and debts are a substantial threat to national security and national power. A reasonable calculation would suggest that our budget prospects are vastly worse than they were at the time of the Clinton administration's successful budget actions and substantially worse than they were at the time of the Simpson-Bowles efforts. The budget deficits a decade out comfortably in double digits as a share of GDP now seem a reasonable projection with primary deficits quite likely in the 5% of GDP range. This is without the assumption of the need for vast mobilization for meeting contingencies, military or non-military. And I think it is reasonable to ask the question. How long can or will the world's greatest debtor be able to maintain its position as the world's greatest power?

Related: Summers and Blanchard Debate the Future of Interest Rates and Interest Rates Hit 16-Year Record and Is a U.S. Debt Crisis Looming? Is it Even Possible?

US households saved some $1.1 trillion less than previously thought over the past six years, according to revised government data released Thursday. The Bureau of Economic Analysis now calculates that Americans stashed away an average 8.3% of their disposable income annually from 2017 through 2022, down from a previously estimated 9.4%. The reduction stems from an accounting adjustment that lowered personal income from mutual funds and real estate investment trusts.

Europeans are using our high taxes to fund social transfers, not public sector investments. Innovators are therefore confronted with the worst of all worlds: a capital market not fit for purpose, high taxes, and low public sector investments.  For a capital-markets driven system of innovation, you require a complete reboot of your entire socio-economic system. You would need to replace your pay-as-you go pension systems with pension funds. You would have to stop subsidising old industries and let them fall over the cliff. You would need lower rates of corporate taxes, which you can only have through cuts in social transfers. You would also need to raise public investment spending. It is safe to predict that this will not happen, not even during a long-lasting period of economic decline. We know the politics of decline.

Related: How The US Is Crushing Europe’s Domestic Exchanges and From Strength To Strength and Europe Has Fallen Behind America and the Gap is Growing

Annual births fell from 18.83 million in 2016 to 17.65 million, 15.23 million, 14.65 million, 12.02 million in 2020, 10.62 million, and 9.56 million last year. Therefore, the rate of decline each year from 2017 to 2022 was 6.27%, 13.71%, 3.81%, 17.95%, 11.65%, and 9.98%, respectively. The number of women of childbearing age is decreasing. Based on the seventh national census data, the number of women of childbearing age is expected to decline by about 4 million annually from 2020 to 2025.

Related: China’s Fertility Rate Dropped Sharply, Study Shows and China’s Collapsing Birth and Marriage Rates Reflect a People’s Deep Pessimism and China’s Defeated Youth

Gross investment has typically been 20-25% of GDP over time, although in recent years it’s been closer to the lower end of that range. From the 1950s up into the 1980s, net investment was (very roughly) 10% of GDP. Thus, it was plausible to say that in a typical year, a little more than half of gross investment went to replace capital that was wearing out, and a little less than half of gross investment was actually new, net investment growing the capital stock. But in the last decade or so, gross investment has been about 20% of GDP, and net investment has fallen to about 5% of GDP. In other words, gross investment as a share of GDP has fallen a bit, but not too much. The real change is that about three-quarters of investment is now going to replace capital that has worn out, so net investment is much lower.

Related: Capital Allocation

We examined the spread between return on invested capital (ROIC) and weighted average cost of capital (WACC) for companies that did an initial public offering from 1990 to 2022. We expected to see low or negative spreads between ROIC and WACC for companies newly listed, rising spreads as they mature, and a decline in senescence. But what we found was nearly the opposite. The spread at the date of the IPO was high and narrowed before stabilizing around year five.

Related: Birth, Death, and Wealth Creation and The Economics of Inequality in High-Wage Economies and Data Update 5 for 2023: Pathways to Profitability

Using testing data from over two million students in nearly 10,000 schools in 49 states (plus the District of Columbia), we investigate the role of remote and hybrid instruction in widening gaps in achievement by race and school poverty. We find that remote instruction was a primary driver of the widening gaps. Math gaps did not widen in areas that remained in person (although reading gaps did). We estimate that high-poverty districts that went remote in 2020–2021 will need to spend nearly all of their federal aid on helping students recover from pandemic-related academic achievement losses.

Related: Parents Don’t Understand How Far Behind in School Their Kids Are and NAEP Long-Term Trend Assessment Results: Reading and Mathematics

Households are paying down their mortgage debt. As of July 2023, mortgage loans accounted for over 50% of total household debt ($6 trillion and a third of GDP). Over the past year, the amount of mortgage loans outstanding has declined for the first time ever in China as households have prioritized mortgage repayments. Note that other forms of consumer credit have also slowed sharply.  The lockdown’s impact on consumer spending helped push up deposits in the 2020-21 period. New deposit growth has accelerated notably over the past year.

Related: China Is Now Growing Slower Than the U.S. and China Must Slow Down Investment If It Wants To Rebalance its Debt-Laden Economy and China’s Defeated Youth

Acceptance rates at top Chinese universities are estimated to be below 0.01% for students in some provinces and around 0.5% for those in major municipalities such as Beijing and Shanghai. For comparison, Harvard College had an acceptance rate of 3.41% this year. During China’s large-scale privatization process, older workers struggled to find new employment in the rapidly changing economy. But now, employers are reluctant to lay off older workers – both because they have valuable experience and because they are protected by labor laws. The contraction in jobs therefore is felt most acutely among young people.

Related: Why Has Youth Unemployment Risen So Much in China? and The Root of China’s Growing Youth Unemployment Crisis and China’s Defeated Youth

China is in fact hyper-capitalist. An enormous proportion of national income goes to the controllers of capital and is being saved by them. During the earlier hypergrowth period, this worked well. But now the savings are far greater than can be productively used. Income now needs to accrue to those who will spend it. The danger is not one of a huge financial crisis: China is a creditor country; its debts are overwhelmingly in its own currency; and its government owns all the important banks. A policy of financial repression would work quite well. The danger is rather one of chronically weak demand. It will be impossible, in today’s global environment, to generate either a huge export boom or consistent current account surpluses. The investment rate is already spectacularly high, while growth is slowing. Still higher non-property investment cannot be justified.

Related: An Economic Hail Mary for China and Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and The Neoclassical Growth of China

Equities have been sustained by the anomaly of equity valuations rising at a time of muted earnings growth, and the AI catalyst. The major US equity catalyst this year has been the rise in AI-linked stocks. They’ve come off the boil since July, but there’s still a lot of optimism regarding AI’s impact on growth, profits and productivity. All of these use cases have created a frenzy of analysts comparing large language models and other generative AI to 20th century milestones such as the electrification of farms, the interstate highway system and the internet itself.

Related: Centaurs and Cyborgs on the Jagged Frontier and Generative AI at Work and AI, Mass Evolution, and Weickian Loops

Rather quietly, inflows from official investors came close to generating about half of the net inflows needed to sustain the United States' current account deficit (over the last 4qs of data, q3 23 may be different). A lot of the inflow over the last 4qs (q3 22 to q2 23) has gone into equities and bank deposits so it doesn't get the attention of Treasury flows. But q2 23 Treasury inflows were substantial as well. Total foreign demand for LT US bonds (official and private, including private demand for corporate bonds) exceeded the US current account deficit in q1 2023. The fall in reported foreign holdings last year though got a lot more attention. The IMF's data for global reserves isn't available (yet) for q2, but central banks added to their dollar holdings in q1 (and likely q2). They are getting a lot of coupon payments on their existing stock-- and reinvesting I assume.

Related: Setser On Chinese "De-Dollarizing" and Saudi Arabia's PIF and the New Petrodollar Recycling and Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency

The US Equal Employment Opportunity Commission requires companies with 100 or more employees to report their workforce demographics every year. Bloomberg obtained 2020 and 2021 data for 88 S&P 100 companies and calculated overall US job growth at those firms. In total, they increased their US workforces by 323,094 people in 2021, the first year after the Black Lives Matter protests — and the most recent year for which this data exists. The overall job growth included 20,524 White workers. The other 302,570 jobs — or 94% of the headcount increase — went to people of color. Many people just starting out in their career are from growing Black, Hispanic, and Asian populations, who are entering the workforce just as more tenured White employees retire. That, however, can’t fully account for changes, particularly at the top of the corporate ladder.

Related: Biggest Pay Raises Went to Black Workers, Young People and Low-Wage Earners and Rebound in Immigration Comes to Economy’s Aid and Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995

Figure 1 shows that the median forecast of professional economists for one-year-ahead consumer price index (CPI) inflation has become less sensitive to actual CPI inflation. The figure shows the results of regressions measuring the strength of the relationship between one-year-ahead expected CPI inflation (vertical axis) and the contemporaneous four-quarter CPI inflation rate (horizontal axis). For the period from 1949 through the end of 1998, the blue line indicates a strong relationship with a slope of 0.71, implying that the median inflation forecast adjusts nearly one-for-one with actual inflation. The regression yields a much smaller slope of 0.18 for the period from 1999 through the second quarter of 2023 (red line), implying very little forecast adjustment in response to actual inflation.

Related: What We’ve Learned About Inflation

Commercial real-estate insurance costs have risen 7.6% annually on average since 2017, according to Moody’s Analytics. Costs to insure rental-apartment buildings rose 14.4% annually on average in Dallas, 13% in Los Angeles and 12.6% in Houston. Some owners struggle to find anyone willing to insure their buildings, Moody’s said. Intensifying natural disasters are a big reason for the increase, particularly in cities vulnerable to wildfires, floods or storms. The cost of reinsurance has also increased, trickling down to higher property insurance rates. Meanwhile, inflation has pushed up the cost of repairing or rebuilding damaged properties.

Related: Analyzing State Resilience to Weather and Climate Disasters and Rising Insurance Costs Start to Hit Home Sales and How a Small Group of Firms Changed the Math for Insuring Against Natural Disasters

The 5.3 point shift between 2016 and 2020–just enough to tilt the state to Biden—was driven by three factors: 2016 third-party voters switching to Biden in 2020, Black population growth and white population decline, and persuasion, primarily among high-income, high-education voters. The total shift in Georgia due to persuasion is about 3.1 points—and 2.2 points comes from the changes in the composition of the electorate. Georgia as a whole is not demographically favorable to Donald Trump: unlike the upper Midwest, there are fewer white working-class voters left for him to flip, and a lot of cross pressured college-educated white Republicans. If Trump’s path with suburban whites is closed off, Trump has another option: continuing to chip away at Democratic margins among African Americans, as current polls suggest he might. Trump would likely need a bigger breakthrough with Black voters than he’s gotten to date to fully counteract the effect of the state’s Black population growth.

Related: The Road to A Political Realignment in American Politics and Consistent Signs of Erosion in Black and Hispanic Support for Biden and How to Interpret Polling Showing Biden’s Loss of Nonwhite Support

The Pentagon’s goal must contend with booming demand in the commercial aerospace market that has left a shortage of skilled labor, raw materials, and parts such as advanced electronics and fasteners. The Pentagon wants to buy thousands of cheap drones in as little as 18 months, and as many as 2,000 larger uncrewed jets. By contrast, one of its primary drone suppliers, Shield AI, produced 38 of the aircraft last year. The emerging air taxi makers present another challenge. Roughly a dozen companies are vying to develop propeller-driven vehicles that can take off and land like helicopters, potentially cutting journey times in New York City, Los Angeles, and other big urban areas. Flush with cash from venture capital, stock offerings, and military contracts, the sector is moving closer to large-scale production.

Related: Pentagon Plans Vast AI Fleet to Counter China Threat and Rocket Motor Shortage Curbs Weapons for Ukraine and Military Briefing: Ukraine War Exposes ‘Hard Reality’ of West’s Weapons Capacity

Every five to 10 years, the World Values Survey asks people in dozens of countries where they would place themselves on a scale from the zero-sum belief that “people can only get rich at the expense of others”, to the positive-sum view that “wealth can grow so there’s enough for everyone”. The average response among those in high-income countries has become 20% more zero-sum over the last century. Moreover, two distinct rises in the prevalence of zero-sum attitudes have coincided with two slowdowns in gross domestic product growth, one in the 1970s and another in the past two decades. The same pattern holds within individual countries. Britons and Americans have become significantly more likely to believe that success is a matter of luck rather than effort precisely as income growth has slowed. 

Related: Zero-Sum Thinking and the Roots of U.S. Political Divides and Is the Surge to the Left Among Young Voters a Trump Blip or the Real Deal? and Millennials are Shattering the Oldest Rule in Politics

Zero-sum thinking is associated with more preference for liberal economic policies in general and with stronger political alignment with the Democratic Party and weaker alignment with the Republican Party. We also find that zero-sum thinking is linked empirically to important political crises experienced in the United States. Specifically, we find that individuals who view the world in zero-sum terms are more likely to believe that the conspiracy theory QAnon holds some truth for U.S. politics. We also find that zero-sum thinking is linked with empathy and understanding for the January 6, 2021 attack on the U.S. Capitol Building, an act that is more justifiable and seen as being less harmful if one presumes the world is zero-sum (rather than positive/negative sum).

Related: Are We Destined For A Zero-Sum Future? and Is the Surge to the Left Among Young Voters a Trump Blip or the Real Deal? and Millennials are Shattering the Oldest Rule in Politics

This paper hypothesizes that the decline of the Rust Belt was due in large part to the persistent labor market conflict that was prevalent throughout the region’s main industries. [Labor conflict] results in lower investment and productivity growth, which causes employment to move from the Rust Belt to the rest of the country. The model also features rising foreign competition as an alternative source of the Rust Belt’s decline. Quantitatively, labor conflict accounts for around half of the decline in the Rust Belt’s share of manufacturing employment. Consistent with the data, the model predicts that the Rust Belt’s employment share stabilizes by the mid 1980s, once labor conflict subsides. Rising foreign competition plays a more modest role quantitatively, and its effects are concentrated in the 1980s and 1990s, after most of the Rust Belt’s decline had already occurred.

Related: Autoworkers Have Good Reason to Demand a Big Raise and American Labor’s Real Problem: It Isn’t Productive Enough and EV Boom Remakes Rural Towns in the American South

As measured in the CES data, manufacturing average hourly wages for all employees were 3% above wages in the private sector in 2006, a difference commonly known as the manufacturing wage premium. Since then, manufacturing wages have averaged gains of 2.3% per year, while wages in the private sector have risen 2.6% per year. While manufacturing workers used to receive a premium relative to workers in other sectors, that premium has disappeared in recent years for most manufacturing jobs. Our results indicate that the decline in unionization rates is responsible for more than 70% of the drop in the manufacturing wage premium. Notably, the unionization effect remains significant even after accounting for a large set of worker and sectoral characteristics.

Related: American Labor’s Real Problem: It Isn’t Productive Enough and The World Is In The Grip Of A Manufacturing Delusion and Unpacking the Boom in U.S. Construction of Manufacturing Facilities

The Treasury market may be entering a period of volatility as leveraged investors have stalled in their purchases and the next marginal buyer has not yet arrived. When the Fed and commercial banks stepped away from the Treasury market, hedge funds stepped in and bought cash Treasuries in size as part of a cash futures basis trade. The financing for that trade is sourced through dealer repo, which grew rapidly and then stalled. While dealers themselves have access to virtually unlimited financing from the Fed, the size of their activity is constrained by balance sheet costs. If the leveraged buyers are reaching financing limits, then a new marginal Treasury buyer must emerge to absorb the sizable upcoming issuance.

Related: Resilience Redux in the US Treasury Market and Who Has Been Buying U.S. Treasury Debt? and Raising Anchor

US equities account for nearly 70% of the MSCI World index; the next five largest — in Japan, UK, France, Canada, and Germany — total less than 20%. The top 10 constituent equities of the MSCI World index, which are all US companies including Apple at number one and ExxonMobil at number 10, aggregate to more than 20%. To put it bluntly, the 10 most valuable US equities are larger than the market capitalisations of Japan, UK, France, Canada, and Germany combined. In effect, the US has scaled up the largest companies in the world in its own public markets, creating a colossal pool of recyclable equity capital residing in domestic and non-US investor portfolios. This has created a virtuous cycle of new listings from US and overseas issuers attracted by the depth and liquidity of that equity pool.

Related: Europe Has Fallen Behind America and the Gap is Growing and Why Europe’s Stock Markets Are Failing to Challenge the US and From Strength To Strength

Stabilizing the federal debt at 100% of GDP over the long term—which would far exceed the post-1960 average of 45% of GDP—would require non-interest savings beginning at 2% of GDP and ramping up to 5% of GDP over the next three decades. (The resulting interest savings from a smaller debt would provide the rest of the savings.) These figures assume the renewal of the 2017 tax cuts (as there is strong bipartisan support for extending the tax cuts for the bottom-earning 98% of earners) but do not assume any additional spending expansions, tax cuts, or economic crises—all of which would also have to be fully offset to meet this debt target. In short, the non-interest savings required to stabilize the debt will almost surely rise past 5% of GDP when accounting for additional spending and tax-cut legislation. Taxing the rich cannot close more than a small fraction of this gap.

Related: Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy and American Gothic and The Economics of Inequality in High-Wage Economies

Treasury 10-year yields rose above 4.5% for the first time since 2007 as a more hawkish Federal Reserve adds to concern the bonds face a toxic mix of large US fiscal deficits and persistent inflation. Bill Ackman of Pershing Square Capital Management says he remains short bonds because he expects long-term rates to rise further. “The long-term inflation rate plus the real rate of interest plus term premium suggests that 5.5% is an appropriate yield for 30-year Treasurys.” The yield on 30-year debt climbed as much as one basis point Friday to 4.59%, adding to the 13 basis-point jump on Thursday that took it to the highest since 2011.

Related: 31% of All US Government Debt Outstanding Matures within 12 Months and Is a U.S. Debt Crisis Looming? Is it Even Possible? and US Fiscal Alarm Bells Are Drowning Out a Deeper Problem

Even if wage growth did normalize, it is not clear why interest rates would need to fall much, if at all, in a world of 2% real growth, 2% inflation, and healthy private sector balance sheets. Real yields on 5-year Treasury inflation-protected securities (TIPS) are currently about 0.5 percentage point higher than 5-year real yields starting five years from now. But from 2003 until the pandemic, spot 5-year real rates were about 1pp lower than forward rates. (This includes the flat curve years of 2006-7 and 2018-2019, when the spread was more or less zero.) If further-forward real yields were poised to revert to this longer-term average, then that would have implications for a range of asset prices.

Related: In Search of Safe Havens: The Trust Deficit and Risk-free Investments! and What Have We Learned About the Neutral Rate? and BIS Quarterly Review

Since the Fed started hiking rates last year, US households have bought $1.5 trillion in Treasuries, and over the past six months, US pension and insurance have also emerged as a buyer. Over the same period, the Fed has been doing QT and been a net seller of Treasuries. The bottom line is that US households and real money are finding current levels of US yields attractive.

Related: Demand for Treasuries and Trapped Liquidity and Raising Anchor

Real interest rates have risen across the yield curve after stalling out between late 2022 and the first half of 2023. Importantly, the real yield curve remains relatively flat—implying that real interest rates are slated to remain at roughly their near-term levels for the foreseeable future. For real interest rates to stay around their current levels of about 2% and inflation to remain at the target of 2% would imply a long-run natural rate of between 4 and 4.5% (after accounting for the difference between CPI and the Fed’s preferred PCE inflation adjustments). Again, that is higher than even the highest estimate put forward by a FOMC participant yesterday.

Related: What Have We Learned About the Neutral Rate? and Measuring the Natural Rate of Interest After COVID-19 and In Search of Safe Havens: The Trust Deficit and Risk-free Investments!

This year, average monthly growth in the foreign-born labor force is about 65,000 higher compared with 2022 on a seasonally adjusted basis, a  Goldman Sachs analysis found. After plunging at the start of the pandemic, the size of the foreign-born labor force has rebounded, nearing 32 million people in August.  Foreign-born workers’ share of the labor force—those working or looking for work—reached 18% in 2022, the highest level on record going back to 1996, according to the Labor Department. It has climbed further this year to an average of 18.5% through August, not adjusted for seasonal variation.

Related: Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995 and Immigration Playing a Key Role in the Labor Market and Immigration and U.S. Labor Market Tightness: Is There a Link?

In Florida the average home insurance premium in 2023 is around $6,000, more than three times the national average and up 42% year-on-year. Yet rather than drooling over juicy profits, insurers are fleeing. With 1.3m policies, the state-backed insurer of last resort now has the highest market share in Florida and is insuring assets worth $608bn. The Golden State is following the Sunshine State into market failure, but for different reasons. Though California is a pricey place to live, property insurance is relatively cheap thanks to strict consumer-protection laws. Regulations prevent insurers from raising premiums high enough to cover inflation, increasing wildfire risk and rising reinsurance rates.

Related: Analyzing State Resilience to Weather and Climate Disasters and How a Small Group of Firms Changed the Math for Insuring Against Natural Disasters and Rising Insurance Costs Start to Hit Home Sales

There is no good evidence that China has reduced its exposure to the dollar. In fact, if you account for the higher dollar share of China's hidden reserves, its USD likely has increased since 2014. I am pretty sure that over the last year China hasn't shifted its reserves out of the dollar. It has shifted from US custodied Treasuries to offshore custodians and risk assets (Agencies, equities).  When China stops targeting 60% for the dollar share of its formal reserves, we will know.  The interesting question is what is the dollar share of China's shadow reserves -- and I think the answer is that it is a lot higher than the dollar share of China's formal reserves.

Related: Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency and Great Power Conflict Puts the Dollar’s Exorbitant Privilege Under Threat and Pettis On Pozsar

Almost 90% of surveyed Americans say people shouldn’t be judged for moving back home, according to Harris Poll in an exclusive survey for Bloomberg News. It’s seen as a pragmatic way to get ahead, the survey of 4,106 adults in August showed. Covid-19 lockdowns in 2020 drove the share of young adults living with parents or grandparents to nearly 50%, a record high. These days, about 23 million, or 45%, of all Americans ages 18 to 29 are living with family, roughly the same level as the 1940s, a time when women were more likely to remain at home until marriage and men too were lingering on family farms in the aftermath of the Great Depression.

Related: Millions of US Millennials Moved in With Their Parents This Year and Young Adults in the U.S. Are Reaching Key Life Milestones Later Than in the Past and Americans’ Ideal Family Size Is Larger Than the Birthrate Suggests

Democrats have been posting special-election overperformances of that magnitude all year long, in all kinds of districts. And on average, they have won by margins 11 points higher than the weighted relative partisanship of their districts. The types of people who vote in low-turnout special elections tend to be different from the types of people who vote in regularly scheduled elections: Lower turnout generally means a more college-educated electorate, and college graduates have gotten more Democratic in recent years. That could be why special-election overperformance has consistently been a couple of points more Democratic than the House popular vote over the past three cycles. However, college graduates were disproportionately Democratic in 2020 and 2022 too, and Democrats didn’t consistently do this well in special elections in those cycles. So something seems to be different this time that the education realignment doesn’t fully explain.

Related: Is a Trump-Biden Rematch Inevitable? and Trump’s Electoral College Edge Seems to Be Fading and How to Interpret Polling Showing Biden’s Loss of Nonwhite Support

Patent concentration, which can affect diffusion, has risen over the past several decades with a concurrent surge in patent litigation cases. In the post-1980 period, a parallel trend concerning patents in the U.S. has been the dramatic increase in the number of patent cases filed, which some authors have dubbed the “patent litigation explosion.” The annual number of litigation cases filed per 100 granted patents rises from about 1.2 in the early 1990s to an average of about 1.5 between 1995 and 2010, before rising again to more than 1.8 between 2010 and 2015 and only receding marginally since then.

Related: Where Have All the "Creative Talents" Gone? Employment Dynamics of US Inventors and The Economics of Inequality in High-Wage Economies

Since 2009, manufacturing output per hour in the U.S. has grown just 0.2% a year, well below the economy as a whole and peer economies in Europe and Asia, except Japan. In motor vehicle manufacturing, the picture is especially bad: From 2012 through last year, productivity plummeted 32%, though some of this was no doubt due to pandemic disruptions.  Warehouses and hospitals can pass the cost of higher wages and reduced hours to customers without being undercut by foreign competitors. Manufacturers don’t have that luxury. That’s why Detroit is recoiling at the UAW’s demands. While their output per employee is among the highest of 11 global manufacturers ranked by consultants AlixPartners, so are their costs per vehicle. The lowest cost: China’s.

Related: Autoworkers Have Good Reason to Demand a Big Raise and Auto Union Boss Wants 46% Raise, 32-Hour Work Week in ‘War’ Against Detroit Carmakers and EV Boom Remakes Rural Towns in the American South

We discuss how Large Language Models (LLM) can improve experimental design, including improving the elicitation wording, coding experiments, and producing documentation. Second, we discuss the implementation of experiments using LLM, focusing on enhancing causal inference by creating consistent experiences, improving comprehension of instructions, and monitoring participant engagement in real time. Third, we highlight how LLMs can help analyze experimental data, including pre-processing, data cleaning, and other analytical tasks while helping reviewers and replicators investigate studies. Each of these tasks improves the probability of reporting accurate findings

Related: Centaurs and Cyborgs on the Jagged Frontier and Society's Technical Debt and Software's Gutenberg Moment and Generative AI at Work

Joe Biden is likely to be the Democratic nominee. I would put his chances in the range of 80 to 85%. Donald Trump is likely to be the Republican nominee. I would put his chances in the range of 75%. The chance of an average non-Hispanic white man of Biden’s age (80) dying in the next year is about 5%. Biden’s odds are presumably lower than this, however. Even if he’s lost a step or two, I feel comfortable asserting that his physical and mental health are better than that of the typical 80-year-old. However, there are a lot of medical events other than Biden literally passing away that might end his bid for a second term. Overall, I figure there’s a 10% chance that Trump loses the nomination in “typical” fashion, such as being caught from behind in Iowa, a 5% chance that a health-related issue ends his campaign, and a 10% chance that legal jeopardy forces Trump to reconsider or compels Republicans to turn on him, even though they haven’t so far.

Related: Five Reasons Why Biden Might Lose in 2024 and For Some Key Voters, Trump Has Become Toxic and How to Interpret Polling Showing Biden’s Loss of Nonwhite Support

Since the 1970s, trust in government has been consistently higher among members of the party that controls the White House than among the opposition party. Republicans have often been more reactive than Democrats to changes in political leadership, with Republicans expressing much lower levels of trust during Democratic presidencies; Democrats’ attitudes have tended to be somewhat more consistent, regardless of which party controls the White House. However, the GOP and Democratic shifts in attitudes from the end of Donald Trump’s presidency to the start of Joe Biden’s were roughly the same magnitude.

Related: Collapsing Social Trust is Driving American Gun Violence

The pandemic led to a surge in new business formations. What is striking to us is that this elevated level has continued post-Covid. According to data from the Census Bureau, in July, high-propensity business applications, which include all those that are more likely to become businesses with a payroll, were 40% higher than the average level in 2019.  While not all of these businesses survive (the number of business deaths also rose in 2022 according to the Bureau of Labor Statistics), the net impact still points to strong growth in business formation. Business applications each year seem to be driven by a different sector. At the start of the pandemic, retail trade saw the biggest surge, driven largely by the growing demand for e-commerce, according to commentaries from the Census Bureau.

Related: Surging Business Formation in the Pandemic: Causes and Consequences and The Startup Surge Continues: Business Applications on Track for Second-Largest Annual Total on Record and Creative Destruction After the Pandemic

To get rates back up to the 12% pre-pandemic level would require adding 2.7 million new housing units—more than the entire housing stock of the state of Maryland or more than 1.5 years of construction at 2022 rates—and leaving them all empty. Assume half occupancy and America needs 6.2 million new units—more than currently exist in Pennsylvania. If you assume that 75% of units will get filled on net then America needs more than 18 million additional housing units—roughly as many as exist in California and Washington state combined. Actual construction stood at only 1.4 million in the first half of 2023, failing to keep up with demand and leading to further declines in unoccupied housing rates—in other words, the structural shortage of housing is keeping prices high and vacancies down.

Related: Repeat After Me: Building Any New Homes Reduces Housing Costs For All and On the Move: Which Cities Have The Biggest Housing Shortage? and Have Rising Mortgage Rates Frozen the Housing Market?

All these areas clearly do have much higher WFH shares than the nation as a whole. What else do they have in common? One striking characteristic, which I highlighted in the top-50 table, is that most are located in central cities of metropolitan areas, which are designated as such based on population and how many people commute to jobs there. What’s more, two non-central cities on the list — Cupertino, California, and Redmond, Washington — happen to be home to the headquarters of the two most valuable companies in the world, Apple and Microsoft, and several others are also home to large corporate headquarters. Working at home seems to be most popular in places close to lots of offices and other places of employment.

'Related: Remote Work, Three Years Later and Work From Home and the Office Real Estate Apocalypse and Real-Estate Doom Loop Threatens America’s Banks

Using UN votes to condemn Russia’s invasion of Ukraine as a filter, Bloomberg Economics found that the global share of greenfield foreign direct investment going to countries that didn't condemn the invasion averaged only 15% in the last two years, down from 30% in the decade to 2019. China's share, including Hong Kong, fell to less than 2% in 2022 from nearly 11% on average over 2010-19. The data point to US and other Western companies investing more in like-minded countries. Between the second quarter of 2020 and the first quarter of this year, US companies’ greenfield investments in China plunged 57.9% and those by European firms dropped 36.7% versus the five years leading up to the pandemic, an updated IMF analysis shared with Bloomberg found. Investments from the rest of Asia into China were down by more than two-thirds.

Related: Setser On Rumors Of Decoupling and How America Is Failing To Break Up With China and Global Firms Are Eyeing Asian Alternatives to Chinese Manufacturing

Xin Meng of the Australian National University appears to refute the “demographic dividend” as an explanation for China’s economic success.  Her analysis showed that between 1982 and 2015 China’s working-age population, defined as those aged between 16 and 65, grew from 600m to 1bn. During this same period, however, labour-force participation dropped from 85% to just over 70%. Much of the decline came from those with an urban hukou. Unlike holders of rural hukou, urbanites were subjected to mandatory retirement at the age of 55 for women and 65 for men. Compulsory education and greater university enrolment kept under-25s out of the workforce.

Related: Population Aging and Economic Growth: From Demographic Dividend to Demographic Drag? and The Chinese Century Is Already Over and The Neoclassical Growth of China

For decades now, the Chinese government has encouraged university enrollment, pushing the number of students in higher education from 22 million in 1990 to 383 million in 2021.  During the pandemic, it pressed even harder, expanding graduate-school capacity.  Master’s-degree candidates rose by 25 percent in 2021.  China’s Ministry of Education estimated that 10.76 million college students would graduate in 2022, 1.67 million more than in 2021—and it expects a further large rise in 2023. The message for China’s policymakers is clear: boosting graduate numbers while throttling services and subsidizing buildings is bad economics and worse social policy. 

Related: Why Has Youth Unemployment Risen So Much in China? and China Cannot Allow Jobless Young To ‘Lie Flat’ and China’s Defeated Youth

The path of policy rates priced into futures markets in major Advanced Economies became more in line with the cautious tone of central banks. The Federal Reserve and the ECB raised policy rates further in July, and emphasized in their communications that future decisions would be data-dependent. Officials also indicated that, while rates might not rise much more, they could stay at their current levels for a prolonged period if inflation remained above target. In accordance with these messages, futures markets in both in the US and the euro area priced in higher rates for 2024 than they had just a few months before. And the expected peak in policy rates was pushed higher and later. That said, investors still seemed to anticipate rate cuts as early as the second quarter of 2024, and much deeper in the US than the euro area.

Related: Adrift at Sea and What Have We Learned About the Neutral Rate? and Measuring the Natural Rate of Interest After COVID-19

While Treasuries remain the most liquid security in the world, they are structurally becoming less liquid. The average daily cash transactions in Treasuries has not come close to scaling with the overall growth in issuance. Although average daily cash volumes have increased slightly in recent years to $700b, that increase is in part due to the activity of principal trading firms whose strategy is to profit from small intraday fluctuations in price. These firms account for 20% of cash market volumes, but they disappear when volatility picks up so their provision of liquidity is illusory. Excluding their participation, cash market activity would be progressively thinning relative to the steady growth in issuance.

Related: Living with High Public Debt and Raising Anchor and Resilience Redux in the US Treasury Market

The hand-wringing about the Great Maturity Wall appears to have been wildly overdone. A year ago, the bear case held that interest rates were rising and the economy was deteriorating at the same time that a surfeit of high-yield debt was coming due. But ever since that point, companies have been quietly extending their debt calendars. At the start of 2023, high-yield issuers had about $878.4 billion in significant dollar-denominated bond and loan issues coming due through 2025. And since then, issuers have whittled the number down by about 38% to $542.3 billion. Most signs suggest they will continue to make plodding progress.

Related: Rates Are Up. We’re Just Starting to Feel the Heat and A Default Cycle Has Started and Credit Normalization

For the last several months, I have been part of a team of social scientists working with Boston Consulting Group, turning their offices into the largest pre-registered experiment on the future of professional work in our AI-haunted age. For 18 different tasks selected to be realistic samples of the kinds of work done at an elite consulting company, consultants using ChatGPT-4 outperformed those who did not, by a lot. On every dimension. Every way we measured performance. Consultants using AI finished 12.2% more tasks on average, completed tasks 25.1% more quickly, and produced 40% higher quality results than those without. [AI] works as a skill leveler. The consultants who scored the worst when we assessed them at the start of the experiment had the biggest jump in their performance, 43% when they got to use AI. The top consultants still got a boost, but less of one.

Related: Society's Technical Debt and Software's Gutenberg Moment and Generative AI at Work and AI, Mass Evolution, and Weickian Loops

The increase in disability reporting has been especially pronounced among people aged 25-54 (the so-called prime-age population). This group has also seen its disability rate rise by about 0.9pp but from a lower base. This increase brings the prime-age disability rate to 6.9% over the last three months, corresponds to nearly 1.3mm additional prime-age people with disabilities, and represents a 16% increase in that population. Even though cognitive difficulties are more common among older people, the increases in cognitive difficulties seen since the onset of the pandemic have been driven by younger people. Since February 2020, rates of cognitive difficulties have increased by about 1.1 percentage points among people 16-24 and 25-34 and by 0.7 percentage points among people 35-44, in each case representing at least a 25 percent increase in prevalence.

Related: The Teen Mental Illness Epidemic is International, Part 1: The Anglosphere and Youth Risk Behavior Survey

Italian Prime Minister Giorgia Meloni has appealed for greater European support as her country confronts a surge of people fleeing north Africa, amid growing tensions between Rome and other EU capitals over migration policy. More than 12,000 people have reached Italy in the past week, mostly to the island of Lampedusa, authorities said, with thousands more awaiting to make the relatively short journey from Tunisia’s port city of Sfax to the Italian island. The increased influx is a political headache for Meloni, who was elected on a promise to stop the flow of illegal migration to Italy. Instead, the number of those arriving on Italian shores has surged to more than 128,600 so far this year, up from around 66,200 at the same time last year.

Related: Saudi Forces Accused of Killing Hundreds of Ethiopian Migrants and How a Vast Demographic Shift Will Reshape the World and Demography Is Destiny in Africa

The over-80s for the first time accounted for more than 10% of Japan’s population, according to a government report.  Japan’s persistently low birthrate and long lifespans have made it the oldest country in the world in terms of the proportion of people aged over 65, which this year hit a record of 29.1%. Japan’s overall population fell by about half a million to 124.4 million, according to the report. It’s expected to tumble to less than 109 million by 2045.

Related: Inflation in The *Very* Long Run and Japan Demographic Woes Deepen as Birthrate Hits Record Low and More Than 40% of Japanese Women May Never Have Children