In this paper, we study the long-run effects of the largest R&D shock in U.S. history. In World War II, the newly-created Office of Scientific Research and Development (OSRD) led an expansive effort to develop technologies and medical treatments for the Allied war effort. From 1940 to 1945, OSRD engaged industrial and academic contractors in more than 2,200 R&D contracts at over $9 billion (2022 dollars), despite no pre-war tradition of funding extramural (externally-performed) R&D. At the height of the war, the U.S. government was funding the research behind nearly 1 of every 8 U.S. patents—more than five times pre-war and modern levels, and nearly twice the level at the peak of the Cold War in the 1950s and 1960s. The immediate effect of these investments was a range of technological advances which were not only instrumental to the success of the Allied campaign, but also of wide civilian value after the war ended. Its longer-run impact was to reshape the U.S. innovation system.

Related: Moonshot: Public R&D and Growth and Public R&D Spillovers and Productivity Growth and Pentagon Plans Vast AI Fleet to Counter China Threat

The figure shows the path through time of two interest rates. The lower line shows the path of the Fed’s policy rate going back to April 2022, and its projected path forward over the coming two years. The upper line shows what we call the “QT-equivalent policy rate,” which accounts for the effect of QT. The QT-equivalent rate is the policy rate needed without QT to have an effect on financial conditions equivalent to that produced by the actual policy rate with QT. What we find is that today’s policy rate of 5.375% is, under the current QT roll-off schedule, having roughly the same impact on financial conditions as a policy rate of 5.763% without QT. That’s a gap of 39bps, or 39 hundreds of a percent. But the effect of QT rises sharply going forward, as $95 billion in assets continue to roll off the balance sheet each month, before reaching a high of 100 basis points—or one full percent—in May 2025.

Related: The Grind Ahead and Inching Toward Equilibrium and Macro Outlook 2024: The Hard Part Is Over

Earlier this year, the New Tenant Rent Index (NTR) was showing significant disinflation in rent prices that have since begun passing through to decelerations in CPI shelter prices—and recently released NTR data through the third quarter suggests that even more stabilization is yet to come. Growth in Gross Labor Income—the aggregate wages and salaries of all workers in the economy—continues to decline as the labor market slows toward normal pre-pandemic growth rates. Given how tight the relationship between cyclical growth in employment/wages and housing inflation is, a deceleration in NTR has naturally followed the slower labor market of the last year.

Related: The Most Important New Disinflation Indicator and Where Is Shelter Inflation Headed? and Striking Similarities (and Differences) Between Inflation Today and In the 1970s

Affordability was worse in September than in August, as house prices and mortgage rates both increased. In September 2023, houses were the least “affordable” since 1982 when 30-year mortgage rates were over 14%. We already know affordability will be even worse in October since mortgage rates have increased further. For September: a year ago, the payment on a $500,000 house, with a 20% down payment and 6.11% 30-year mortgage rates, would be around $2,427 for principal and interest. The monthly payment for the same house, with house prices up 4.0% YoY and mortgage rates at 7.20% in September 2023, would be $2,822 - an increase of 16%. However, if we compare to two years ago, there is huge difference in monthly payments. In September 2021, the payment on a $500,000 house, with a 20% down payment and 2.90% 30-year mortgage rates, would be around $1,665 for principal and interest. The monthly payment for the same house, with house prices up 15.1% over two years and mortgage rates at 7.20% in September 2023, would be $3,125 - an increase of 88%!

Related: Higher For Longer and The 2024 Housing Outlook and America's Missing Empty Homes and With Housing, Millennials Have Much to Complain About

For decades, the biggest foreign holders of US Treasuries were central banks and sovereign wealth funds around the world.  Foreign official institutions were buying Treasuries because many countries, in particular emerging markets, were intervening to limit the appreciation of their domestic currencies because a domestic currency that is too strong hurts exports. In other words, the foreign official sector was not buying Treasuries for yield reasons but for FX reasons to support the US dollar and thereby domestic exports. With the Fed raising rates and the dollar going up, that has now changed. Foreign central banks no longer need to buy US Treasuries and US dollars to depreciate their currencies. And foreign private buyers find US yield levels attractive despite high hedging costs. The bottom line is that with the Fed raising rates and the dollar going up, yield-insensitive central banks have been selling Treasuries to limit the weakening of their domestic currencies.

Related: Preferred Habitats and Timing in the World’s Safe Asset and Resilience Redux in the US Treasury Market and Setser On Foreign Demand For Treasuries

To see how deeply Huawei and the Chinese government are now entwined, look no further than the launch in August of the new Mate 60 Pro smartphone. Huawei timed the release of the phone to coincide with US Commerce Secretary Gina Raimondo’s visit to China in part because of direct encouragement from a senior official at the top of the regime, according to a person familiar with the situation who asked not to be identified discussing sensitive matters. Huawei never disclosed technical details, but a teardown of the handset conducted by TechInsights for Bloomberg News found it was powered by SMIC’s advanced 7-nanometer processor. That suggests China is roughly five years behind the current most advanced technology. Export controls imposed by the Biden administration in 2022 were aimed at keeping China at least eight years behind.

Related: Huawei Building Secret Network for Chips, Trade Group Warns and China AI & Semiconductors Rise: US Sanctions Have Failed and China Imports Record Amount of Chipmaking Equipment

This paper’s main message is that historical mobility was lower than previously estimated in linked data. To show why, I account for two measurement issues: unrepresentative samples and measurement error. First, I account for unrepresentative samples by adding Black families, who historical studies routinely drop. Second, I address measurement error by using multiple father observations to more accurately capture his permanent economic status. Using linked census data from 1850 to 1940, I show that accounting for race and measurement error can double estimates of intergenerational persistence. Updated estimates imply that there is greater equality of opportunity today than in the past, mostly because opportunity was never that equal.

Related: Chetty and Saez Debunk the Claim That Income Mobility is Declining in the U.S. and The Inheritance Of Social Status: England, 1600 to 2022 and The Economics of Inequality in High-Wage Economies

Here is my take: In the US in 1982, the top of the first Forbes 400 list was Daniel Ludwig with nominal $2 billion. That was 85,000 times the then-median nominal family income of $23,430.  In 2023, the top of the Forbes 400 was Elon Musk with nominal $251 billion. That was 2,500,000 times the now-median nominal family income of $98,705. Now: ($251B/$99K)/($2B/$23K) = 29.8 How the f*** is the ratio of the top to the median to explode by a factor of 30 while the Auten/Splinter measures show “little change in after-tax top income shares”? Until someone comes up with an explanation for how this could be—how a 30x multiplication since 1982 of the ratio of the top of the Forbes 400 to median household income is consistent with “top income shares are lower and have increased less since 1980 than other studies… increasing government transfers and tax progressivity have resulted in… little change in after-tax top income shares…”—I am going to presume the chances are 99% that there are big things wrong in the numbers in Auten/Splinter.

Related: Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends and The Economics of Inequality in High-Wage Economies

According to the new BEA estimates, the share of GDP spent on health in 2022 declined to 17.1%  from 17.5% in 2021 and 17.9% in 2020. This marks the second consecutive year of decline in health spending as a share of GDP. The estimated share in 2022 represents the smallest share of the economy spent on health since 2014 and a smaller share that was spent on health in 2019, before the start of the pandemic. Adjusting for differences in overall and medical inflation, the share of GDP spent on health in 2022 was largely unchanged from 2020 and 2021. As such, the decline in health spending as a share of GDP in 2021 and 2022 was primarily driven by high inflation in sectors outside of health and a lagging medical inflation.

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

Remittances rose considerably in the aftermath of the balance sheet expansion following the global financial crisis of 2007-08; they went from 0.2% of GDP and 1.3% of government receipts in 2007 to 0.6% and 3.4%, respectively, in 2015. Remittances then fell due to the 2015-18 tightening cycle, but they rose again in 2020 as the Fed slashed interest rates and resumed its balance sheet expansion (additionally, GDP fell in 2020, which partly explains the positive jump). Between 2021 and 2022, remittances as a percent of GDP dropped from 0.5% to 0.3%. Once the Fed returns to earning a positive net income, it will pay down the value of the deferred asset until it reaches zero, at which point the Fed will resume sending remittances to the Treasury. As of Nov. 8, 2023, the Fed had accumulated a deferred asset of $116.9 billion. In April 2023, the New York Fed estimated that the Fed will return to positive net income in 2025. Combining those New York Fed projections with the latest data on net income, we estimate that the Fed will carry this deferred asset until mid-2027, after which it will resume transfers to the Treasury.

Related: There Is No "Stealth Fiscal Stimulus"

What we can say, with considerable certainty, is that while prices have gone up a lot since the pandemic began, most workers’ wages have risen significantly more. I’m told that real people know that inflation is still running hot, whatever the government numbers may say. Actually, the American Farm Bureau Association, a private group, tells us that Thanksgiving dinner cost 4.5% less this year than last. Gasbuddy.com, another private group, tells us that prices at the pump are down more than 30% since their peak last year. Neither turkeys nor gas prices are good measures of underlying inflation, but both show that the narrative of inflation still running wild is just not true. While the public’s negative view of the economy is a major puzzle, acknowledging that puzzle is no reason to soft-pedal the evidence that the U.S. economy is currently doing very well — indeed, much better than even optimists expected a year ago.

Related: The Economy Is Great. Why Are Americans in Such a Rotten Mood? and Are You Better Off Than You Were Four Years Ago? and Why Americans Dislike the Economy

We evaluate progress in the War on Poverty as President Lyndon B. Johnson defined it, which established a 20% baseline poverty rate and adopted an absolute standard. While the official poverty rate fell from 19.5% in 1963 to 10.5% in 2019, our absolute full-income poverty measure—which uses a fuller income measure and updates thresholds only for inflation—fell from 19.5% to 1.6%. However, we also show that relative poverty reductions have been modest. Additionally, government dependence increased over this time, with the share of working-age adults receiving under half their income from market sources more than doubling.

Related: Work Requirements and the Lost Lessons of 1996 and The Unexpected Compression: Competition at Work in the Low Wage Labor Market and The Economics of Inequality in High-Wage Economies

The data are quite clear: over the past 4 years, inflation-adjusted wages are up! This is also true if you start roughly right before the pandemic (December 2019 or January 2020 or thereabouts). And not only are inflation-adjusted wages up, they are up roughly the same amount as they were in the years before the pandemic. CPI-adjusted wages are a touch below: about 3% growth over 4 years, versus roughly 4% from 2015-2019. But PCE-adjusted wages are right on track, at around 5% cumulative 4-year growth. It’s true right now that if we start the data in January 2021, at the beginning of the Biden Presidency, CPI-adjusted wages are down slightly: about 1%. But PCE-adjusted wages are up slightly: also about 1%. But unless there is a major reversal of the trajectory of either wage or price growth, by next year these will both be positive (even if only slightly).

Related: Have Workers Gotten A Raise? and Are Real Wages Rising? and The Unexpected Compression: Competition at Work in the Low Wage Labor Market

To get a clearer picture of the economy, therefore, we need to adjust for the changing composition of the workforce and consider changes to wages in each type of job and industry. A BLS statistic, the National Compensation Survey’s Employment Cost Index, does just this. According to ECI, inflation-adjusted wages have shrunk by 3.7% since the end of 2020. While real wages rose in response to falling energy prices late last year, they have been roughly flat since. Worse, the drop in real wages erased all gains made in the late 2010s. Real wages today stand at 2015 levels, meaning Americans’ paychecks don’t go any further now than they did eight years ago.

Related: Have Workers Gotten A Raise? and Are Real Wages Rising? and The Unexpected Compression: Competition at Work in the Low Wage Labor Market

Nearly 50,000 people in the U.S. lost their lives to suicide in 2022, according to a provisional tally from the National Center for Health Statistics. The agency said the final count would likely be higher. The suicide rate of 14.3 deaths per 100,000 people reached its highest level since 1941. Suicide rates for children 10-14 and people 15-24 declined by 18% and 9%, respectively, last year from 2021, bringing suicide rates in those groups back to prepandemic levels.

Related: Suicide Rates Are up for Gen Z Across the Anglosphere, Especially for Girls and Comments On: "Accounting For the Widening Mortality Gap Between American Adults With and Without a BA" By Anne Case and Angus Deaton and How Disadvantage Became Deadly in America

Europeans are frustrated that European batteries and cars don’t qualify for U.S. consumer EV subsidies in a straightforward way (though the “leased vehicle” exception provides ample ground for trade), as well as the persistence of national security tariffs that apply to close security allies. Americans are frustrated by the contortions created by the EU’s desire to respond to China's distortions by only using measures that fit within the narrow confines clearly allowed by the WTO (The U.S. also takes a more expansive view than the EU about what the WTO allows). These competing approaches to managing the Chinese threat have led to the fracturing of the transatlantic markets for not only clean energy goods, but also dirty goods like steel that need to become clean to lower global carbon emissions.

Related: Can China Reduce Its Internal Balances Without Renewed External Imbalances? and China’s Auto Export Wave Echoes Japan's in the ’70s and Danish Weight Loss Drugs vs. Chinese Cars: Two Models of Export Booms

The China bloc accounts for half of the world’s (non-Antarctic) land mass, compared with 35% for the US bloc. It is also home to slightly more of the world’s people (46%, against 43%). But it still generates only 27% of the world’s GDP, nearly all of that in China itself, compared with 67% in the US bloc. Unsurprisingly, the China bloc is more important in industry than in GDP. Thus, its share of world industrial output was 38% in 2022, against 55% for the US bloc. Many countries wish to see the US and its allies, the dominant powers of the last two centuries, taken down more than just a peg or two. But they are more united and economically powerful than China’s group of malcontents. The event likely to change this balance quickly would be a US decision to tear its alliances to pieces.

Related: Why Xi Can No Longer Brag About the Chinese Economy and China Slowdown Means It May Never Overtake US Economy, Forecast Shows and Pettis On China's Export Strategy

Hyperglobalization refers to the exceptional period between 1992 and 2008 during which global exports grew at close to 10% a year in nominal terms while GDP increased by only 6% a year. As a result, the share of exports in national economies grew from less than 20% to more than 30% in a little bit more than 15 years. The hyper in hyperglobalization does not come from the level of trade relative to GDP, which remains high, or from levels compared with the theoretical potential of trade, which are low. Rather it comes from the change in the level of trade, which was positive before the Global Financial Crisis (GFC) and stagnant or slightly negative thereafter. After the GFC, a puzzling wedge emerged. China’s trade-to-GDP ratio plummeted by more than 30pp, from 71% to a trough of about 35%. But its global export market share continued to rise at the same heady pace, reaching nearly 15% of total exports and 22% of manufactured exports by 2022.

Related: China's Current Account Surplus Is Likely Much Bigger Than Reported and Managing Economic and Financial Entanglements With China and Pettis On China's Export Strategy

Some 75% of our planet is covered with water, but less than 1% is usable, and even this is depleting quickly. Why? Water demand is up approximately 40% over the past 40 years and is estimated to increase another 25% by 2050, yet supply has more than halved since 1970. Water supply is declining in both quality and quantity. Some 80% of global sewage is dumped into the sea without adequate treatment and microplastics have been found in 83% of tap water. Well over half (57%) of global freshwater aquifers are beyond the tipping point, and even poor infrastructure limits supply as one-third of all fresh water running through pipes globally is lost to leakage. For every +1°C increase in global temperatures, there is a 20% drop in renewable water sources. To put this in context, the average global temperature has increased by at least 1.1°C since 1880, and July 2023 was the hottest month on record.

Related: Texas Farmers Are Worried One of the State’s Most Precious Water Resources is Running Dry. You Should Be, Too and Arizona Is Running Out of Cheap Water. Investors Saw It Coming and America Is Using Up Its Groundwater Like There’s No Tomorrow

Our study builds on an intuitive idea: to recover its past investment, a lender has incentives to offer more favorable lending terms to a firm close to default to keep the firm alive. In contrast to standard intuition, we find that evergreening allows a firm with worse fundamentals—less productive and with more debt—to borrow at relatively better terms. Based on detailed U.S. loan-level data for the years 2014-19, we provide empirical support for our theory at a time when the banks were relatively well capitalized and the economy was growing steadily. Using a dynamic model of the U.S. economy, we find that evergreening has material effects on the performance of the overall economy, resulting in lower borrowing rates, higher levels of debt, and depressed overall productivity.

Related: The Grind Ahead and 40% of Companies in Russell 2000 Have Negative Earnings and Rates Are Up. We’re Just Starting to Feel the Heat

It now requires $119.27 to buy the same goods and services a family could afford with $100 before the pandemic. Since early 2020, prices have risen about as much as they had in the full 10 years preceding the health emergency. It’s hard to find an area of a household budget that’s been spared: Groceries are up 25% since January 2020. Same with electricity. Used-car prices have climbed 35%, auto insurance 33%, and rents roughly 20%.

Related: The US Consumer: Still Strong in 2024 and Fiscal Influences on Inflation in OECD Countries, 2020-2022 and Fiscal Arithmetic and the Global Inflation Outlook

The rupee has lost less than 1% of its value against the dollar this year, compared with a decline of more than 3% for the Chinese yuan, a roughly 9% fall in the South African rand, and an 11% slide in the Japanese yen. One dollar currently buys around 83 rupees. Solid management by the Reserve Bank of India, the country’s central bank, deserves much of the credit. The central bank spent decades building up the country’s foreign-exchange reserves to more than $600 billion by the first half of 2022, one the largest pools of central-bank reserves in the world. India’s central bank has had a lot of help. The economy is on track to grow more than 6% this year, bringing its gross domestic product close to $4 trillion—within reach of Germany’s, the world’s fourth-largest.

Related: Indian Stock Market Surges as Foreign Funds Buy Into National Growth Story and India Equity: An Unsung Long-Term Performance Story and India At The Centre

By the end of 2018, there was a decrease of 140,000 H-1B approvals (relative to trend) and an unprecedented spike in H-1B denial rates. Denial rates increased from about 6% in 2016 to 16% in 2018. Our event-study estimates imply that a 10 percentage point increase in H-1B denial rates increases Canadian applications by 30%. A back-of-the-envelope calculation suggests that for every four forgone H-1B visas, there is an associated increase of one Canadian application. We find that firms that were relatively more exposed to the immigrant inflow increased sales. Consistent with the increase in production, we find that a firm hired approximately 0.5 additional native workers per new immigrant. We also find that the earnings per native worker at relatively more exposed firms dropped. This result together with the fact that more exposed firms are intensive in occupations that were more impacted by U.S. restrictions, is consistent with earnings per native worker in more affected occupations declining compared to less affected ones.

Related: America’s Got Talent, but Not Nearly Enough and Top Talent, Elite Colleges, and Migration: Evidence from the Indian Institutes of Technology and The Economics of Inequality in High-Wage Economies

The massive outperformance of the “Magnificent 7” mega-cap tech stocks has been a defining feature of the equity market in 2023. The stocks should collectively outperform the remainder of the index in 2024. The 7 stocks have faster expected sales growth, higher margins, a greater re-investment ratio, and stronger balance sheets than the other 493 stocks and trade at a relative valuation in line with recent averages after accounting for expected growth. However, the risk/reward profile of this trade is not especially attractive given elevated expectations. Analyst estimates show the mega-cap tech companies growing sales at a CAGR of 11% through 2025 compared with just 3% for the rest of the S&P 500. The net margins of the Magnificent 7 are twice the margins of the rest of the index, and consensus expects this gap will persist through 2025.

Related: A Few Stocks Drive the Stock Market: Dot.com Vs. Today Vs. the Last 100 Years and Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks and Birth, Death, and Wealth Creation

The divergence between the S&P7 and the S&P493 continues. Investors buying the S&P 500 today are buying seven companies that are already up 80% this year and have an average P/E ratio above 50. In fact, S&P7 valuations are beginning to look similar to the Nifty Fifty and the tech bubble in March 2000.

Related: A Few Stocks Drive the Stock Market: Dot.com Vs. Today Vs. the Last 100 Years and Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks and 2024 US Equity Outlook: “All You Had To Do Was Stay”

Precommitment is, I think, the most powerful argument for dollarization (as for eurorization of, say, Greece): A country that dollarizes cannot print money to spend more than it receives in taxes. A country that dollarizes must also borrow entirely in dollars and must endure costly default rather than relatively less costly inflation if it doesn't want to repay debts. Ex post inflation and devaluation is always tempting, to pay deficits, to avoid paying debt, to transfer money from savers to borrowers, to advantage exporters, or to goose the economy ahead of elections. If a government can precommit itself to eschew inflation and devaluation, then it can borrow a lot more money on better terms, and its economy will be far better off in the long run. An independent central bank is often advocated for precommitment value. Well, locating the central bank 5,000 miles away in a country that doesn't care about your economy is as independent as you can get!

Related: Milei’s Challenge

[In the official reports] both the goods surplus, which is much smaller in the balance of payments than in the customs data, and balance on investment income, which remains in deficit even with the rise in U.S. interest rates, are suspicious. With reasonable adjustments, China's “true” current account surplus might be $300 billion larger than China officially reports. That's real money, even for China. The model implies China's overall income balance should now be back in a surplus of around $70 billion thanks to the rise in U.S. short-term interest rates. So without the unexplained deficit in investment income and the discrepancy between customs goods and balance of payments goods, and China’s current account surplus would now be around $800 billion, over 4 percent of its GDP.

Related: Managing Economic and Financial Entanglements With China and Can China Reduce Its Internal Balances Without Renewed External Imbalances? and Can China Reduce Its Internal Balances Without Renewed External Imbalances?

At the turn of the century, China produced one million college graduates. This represented 6% of the age cohort which we calculate by dividing graduates by births 24 years prior (the average age at college graduation is 23.7 in China). This has increased dramatically to 11.6 million graduates for the class of 2023, 63% of the age cohort. Over 40% of China’s college graduates are STEM majors. This compares to 18% in the US, 35% in Germany, and 26% in the OECD. While we await graduation statistics for 2024 and beyond, we believe recent university expansions have enrolled an additional 3 million students per year since 2017, taking them out of both the job and family formation market until graduation. This just so happens to coincide with both the sudden decline in births and the increase in youth unemployment.

Related: An Economic Hail Mary for China and Prominent Chinese Economist Justin Lin Paints a Rosy Picture of China’s Greying Population and A Revolution Is Coming for China’s Families

Due to population aging, GDP growth per capita and GDP growth per working-age adult have become quite different among many advanced economies over the last several decades. Countries whose GDP growth per capita performance has been lackluster, like Japan, have done surprisingly well in terms of GDP growth per working-age adult. Indeed, from 1998 to 2019, Japan has grown slightly faster than the U.S. in terms of per working-age adult: an accumulated 31.9% vs. 29.5%. Furthermore, many advanced economies appear to be on parallel balanced growth trajectories in terms of working-age adults despite important differences in levels. Motivated by this observation, we calibrate a standard neoclassical growth model in which the growth of the working-age adult population varies in line with the data for each economy. Despite the underlying demographic differences, the calibrated model tracks output per working-age adult in most economies of our sample. Our results imply that the growth behavior of mature, aging economies is not puzzling from a theoretical perspective.

Related: Fully Grown - European Vacation! and Population Aging and Economic Growth: From Demographic Dividend to Demographic Drag? and Growth in Working-Age Population Ends. That’s Not All Bad

We continue to expect the Fed’s balance sheet runoff to have modest effects on interest rates, broader financial conditions, growth, and inflation. Our rule of thumb derived from a range of studies is that 1% of GDP of balance sheet reduction is associated with a roughly 2bp rise in 10-year Treasury yields. In total, our projections for runoff imply that balance sheet normalization will have exerted around 20bp worth of upward pressure on 10-year yields since runoff started. Together with our rule of thumb that a 25bp boost to 10-year term premia from balance sheet reduction has roughly the same impact on financial conditions and growth as a 25bp rate hike, this implies that the total runoff process should have the effect of a little under one rate hike.

Related: The Grind Ahead and Resilience Redux in the US Treasury Market and A Beautiful Replenishment

The Fed’s recent Treasury market conference offered three notable insights that suggest Treasury market liquidity will continue its structural decline. First, dealer balance sheet constraints have moved from ones that could be solved through central clearing to those that would require other adjustments. Secondly, mandatory Treasury repo clearing may reduce market liquidity by raising the cost of financing due to higher collateral haircuts. Lastly, mutual funds may not become significant marginal investors in cash Treasuries as regulations encourage them to invest using Treasury futures. The official sector appears to be making adjustments that will make it more difficult for the market to absorb the upcoming deluge of Treasury issuance. At a high level, cash Treasuries can be held by investors using borrowed money or cash investors. The leveraged investors are more nimble participants as cash investor participation depend on asset inflows or the liquidation of other asset holdings. Going forward it looks like the costs of leveraged financing will increase due to mandatory cleared repo and a limited supply of repo financing that is constrained by regulatory costs. Major investors that could participate in the cash market remain incentivized to instead use Treasury futures. The Treasury market looks to continue its trend of becoming less liquid and more volatile.

Related: Resilience Redux in the US Treasury Market and How Has Treasury Market Liquidity Evolved in 2023? and Liquidity Event

The unauthorized immigrant population in the United States reached 10.5 million in 2021, according to new Pew Research Center estimates. That was a modest increase over 2019 but nearly identical to 2017. The number of unauthorized immigrants living in the U.S. in 2021 remained below its peak of 12.2 million in 2007. It was about the same size as in 2004 and lower than every year from 2005 to 2015. The U.S. foreign-born population was 14.1% of the nation’s population in 2021. That was very slightly higher than in the last five years but below the record high of 14.8% in 1890. As of 2021, the nation’s 10.5 million unauthorized immigrants represented about 3% of the total U.S. population and 22% of the foreign-born population. These shares were among the lowest since the 1990s.

Related: Monopsony, Efficiency, and the Regularization of Undocumented Immigrants and Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995 and Immigrants’ Share of the U.S. Labor Force Grows to a New High

China’s surplus in manufactured goods net of commodity imports has continued to grow relative to the economic output of China’s trade partners, thanks in large part to China’s growth relative to the rest of the world. Even though the value of Chinese exports fell in 2023, this has had no impact on China’s overall balance because the amount of money spent on imports is down as well. The past few years have even seen a renewed surge in China’s surplus (properly measured) relative to China’s own GDP thanks to exceptionally weak growth in consumer spending and the sustained plunge in homebuilding. Federal spending—financed in large part by borrowing—has helped shore up private sector balance sheets and sustain demand, even as some spending elements have contained provisions that should put a floor on sales for American producers. This policy mix helps explain why China’s growing surplus has not attracted much ire, or even notice, in the U.S.

Related: Danish Weight Loss Drugs vs. Chinese Cars: Two Models of Export Booms and Can China Reduce Its Internal Balances Without Renewed External Imbalances? and As Long As The US Is Outlet For China's Surplus Rumors Of Decoupling Are Overstated

More than three-quarters of the foreign money that flowed into China’s stock market in the first seven months of the year has left, with global investors dumping more than $25bn worth of shares despite Beijing’s efforts to restore confidence in the world’s second-largest economy. The sharp selling in recent months puts net purchases by offshore investors on course for the smallest annual total since 2015, the first full year of the Stock Connect programme that links up markets in Hong Kong and mainland China.

Related: The Threat from China's Capital Flight and Net Outflow of Funds from China Hits 7-Year High in September and The Rise & Fall of Foreign Direct Investment in China

All that matters for understanding the BCRA balance sheet is the fact that the interest on BCRA securities now exceeds 100% annualised—in fact, 133%. In other words, the value of LELIQs outstanding, measured in local currency, will more than double over the next 12 months. In fact, these are rolled every one or two weeks, so properly compounding the story is even worse. But let’s say it increases by 1.3 times over the next 12 months. Then the BCRA interest bill is nearly 20% of GDP. BCRA has no choice but to monetise their interest bill—creating yet more units of local currency, requiring even more money to be sterilised, acting like a dog chasing her tail. If Milei had not been elected, with his determination to fix the central bank balance sheet, it is possible that hyperinflation would have been the next phase of monetary madness.

Related: A Brief History of Dollar Hatred

The underlying level of interest rates cannot be observed but must be estimated. There are two well-known estimates. One, from the NY Fed, suggests that underlying interest rates are still very low, while the other, from the Richmond Fed, suggests that they have been rising recently. My reading of this is that the estimate from the NY Fed – at least for now – appears more robust. Low equilibrium interest rates have important implications. Let me conclude by mentioning at least two of them. If underlying equilibrium real interest rates had risen, monetary policy would not be tight right now and would explain why we have not yet experienced a recession. On the other hand, if r* has not risen, monetary policy is tight. I’m leaning towards the latter. I think the economy has been amazingly resilient because people saved a lot coming out of the pandemic, coupled with a very expansionary fiscal policy that is also supporting growth, not that monetary policy is not tight. Second, if underlying real interest rates are low, interest rates should fall when inflation is under control and monetary policy rates are lowered. Perhaps interest rates will not become quite as low as before the pandemic (e.g. negative interest rates in Europe), but should be significantly lower than today.

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

We re-run our analysis allowing for the changing structure of issuance as the Treasury leans more on bill and shorter tenor issuance in the near-term consistent with the signal from the most recent QRF round. Interest paid on debt increasing to about 3.8% in 2030. The average interest on debt approaches 3.5% at the end of the horizon. Of course, because debt-to-GDP is close to 100% throughout, these two measures are very similar. Debt-to-GDP is expected to increase to 113% of GDP by 2030 while the gross financing need (GFN), a measure of the rolling 4Q ahead deficit plus maturing securities including bills, at first increases to nearly 45% of GDP in 2025 as T-bill issuance accelerates, but declines to about 35% of GDP in the baseline as issuance shifts to longer tenors.

Related: If Markets Are Right About Long Real Rates, Public Debt Ratios Will Increase For Some Time. We Must Make Sure That They Do Not Explode and Resilience Redux in the US Treasury Market and Preferred Habitats and Timing in the World’s Safe Asset

Microsoft is currently conducting the largest infrastructure buildout that humanity has ever seen. While that may seem like hyperbole, look at the annual spend of mega projects such as nationwide rail networks, dams, or even space programs such as the Apollo moon landings, and they all pale in comparison to the >$50 billion annual spend on datacenters Microsoft has penned in for 2024 and beyond. This infrastructure buildout is aimed squarely at accelerating the path to AGI and bringing the intelligence of generative AI to every facet of life from productivity applications to leisure.

Related: The Growing Energy Footprint of Artificial Intelligence and The Race of the AI Labs Heats Up and Will A.I. Transform the Economy, and if So, How?

This fall, The Associated Press illustrated how school attendance has cratered across the United States, using data compiled in partnership with the Stanford University education professor Thomas Dee. More than a quarter of students were chronically absent in the 2021-22 school year, up from 15 percent before the pandemic. That means an additional 6.5 million students joined the ranks of the chronically absent. The problem is pronounced in poorer districts like Oakland, Calif., where the chronic absenteeism rate exceeded 61%. But as the policy analyst Tim Daly wrote recently, absenteeism is rampant in wealthy schools, too. Consider New Trier Township High School in Illinois, a revered and highly competitive school that serves some of the country’s most affluent communities. Last spring, The Chicago Tribune reported that New Trier’s rate of chronic absenteeism got worse by class, reaching nearly 38% among its seniors.

Related: NAEP Long-Term Trend Assessment Results: Reading and Mathematics and ACT Scores Fell for Class of 2023, Sixth Consecutive Decline and Looking For Flynn Effects on a Recent Online U.S. Adult Sample: Examining Shifts Within The SAPA Project

The number of Singapore-registered family offices, which manage tens of billions of dollars of private wealth, has leapt from just 50 in 2018 to 1,100 at the end of 2022, according to the Monetary Authority of Singapore. But lawyers and advisers involved in setting up family offices said the pace of new registrations has slowed, with demand now falling as processing times stretch from less than six months to in some cases as long as 18 months. The extended wait time, the people said, was the result of a backlog of existing applications and greater scrutiny under new, stricter criteria from Singaporean authorities.

Related: The Threat from China's Capital Flight and Net Outflow of Funds from China Hits 7-Year High in September and The Rise & Fall of Foreign Direct Investment in China

Early this year, China put to sea a nuclear-powered attack submarine with a pump-jet propulsion system instead of a propeller.  It was the first time noise-reducing technology used on the latest American submarines had been seen on a Chinese submarine. A few months earlier, satellite images of China’s manufacturing base for nuclear-powered submarines in the northeastern city of Huludao showed hull sections laid out in the complex that were larger than the hull of any existing Chinese submarine. A second modern construction hall at the plant was finished in 2021, indicating plans to boost output. At the same time, the western Pacific is becoming more treacherous for U.S. submarines. Beijing has built or nearly finished several underwater sensor networks, known as the “Underwater Great Wall,” in the South China Sea and other regions around the Chinese coast. The networks give it a much better ability to detect enemy submarines.

Related: Pentagon Accuses China of Accelerating Nuclear Build-Up and US Nuclear Submarine Weak Spot In Bubble Trail: Chinese Scientists and Nearly 40% of US Attack Submarines Are Out of Commission for Repairs

The U.S. Treasury market is in the midst of major supply and demand changes. The Federal Reserve is shedding its portfolio at a rate of about $60 billion a month. Overseas buyers who were once important sources of demand—China and Japan in particular—have become less reliable lately.   Meanwhile, supply has exploded. The U.S. Treasury has issued a net $2 trillion in new debt this year, a record when excluding the pandemic borrowing spree of 2020. “U.S. issuance is way up, and foreign demand hasn’t gone up,” said Brad Setser, senior fellow at the Council on Foreign Relations. “And in some key categories—notably Japan and China—they don’t seem likely to be net buyers going forward.” In response to recent demand weakness, Treasury has shifted to issuing shorter-term bonds that are in higher demand, helping to restore market stability. Foreigners, including private investors and central banks, now own about 30% of all outstanding U.S. Treasury securities, down from roughly 43% a decade ago.

Related: Setser On Foreign Demand For Treasuries and Preferred Habitats and Timing in the World’s Safe Asset and Resilience Redux in the US Treasury Market

The factor which is probably most relevant, which is what finance people call the term premium. You can think of it in two ways. The first one is in terms of [Treasury bond] flow supply and flow demand. At this stage, there is a lot of supply and for various reasons there is less demand. There is QT, which is increasing supply from the Fed. It’s conceivable that that’s part of it. And the fact that long rates vary so much on news about the US Treasury changing the maturity of its issuance makes me think that it is probably relevant. The second one is to think of the term premium as a risk premium. I don’t think that’s it, because in that case we would see the nominal rates go up, but not rates on inflation-indexed bonds. But these rates have gone up as well. As hard as it is to imagine, there might be an emerging credit spread on T-bonds or a failed auction. And then Congress and the president would have to sit down and decide to do the right thing.  A scary alternative scenario is that Donald Trump is elected, that he puts a lackey at the Fed, who monetises some of the debt, and we get high inflation.

Related: If Markets Are Right About Long Real Rates, Public Debt Ratios Will Increase For Some Time. We Must Make Sure That They Do Not Explode and When Does Federal Debt Reach Unsustainable Levels? and Living with High Public Debt

We expect the FOMC to deliver its first rate cut in 2024 Q4 once core PCE inflation falls below 2.5%. We then expect one 25bp cut per quarter until 2026 Q2, when the fed funds rate would reach 3.5-3.75%. While we see rate cuts next year as optional in that they are not necessary to avoid recession, we expect the FOMC to conclude that while neutral might not be as low as the 2.5% median longer run dot, it probably is not as high as 5.25-5.5%, so some amount of normalization makes sense as inflation falls. We expect the equilibrium rate to be higher than last cycle because the post-financial crisis headwinds are behind us, much larger fiscal deficits that boost aggregate demand are likely to persist, the funds rate is approaching equilibrium from above rather than below, and the r* narrative is changing.

Related: Macro Outlook 2024: The Hard Part Is Over and Inching Toward Equilibrium and Soft Landing Summer

Higher short and now long rates continue to flow through to credit and interest costs. This is setting up a dynamic that we are calling “the grind”— a gradual decline in growth and in the health of corporate and household balance sheets —that we expect to be a dominant driver of economies and markets over the next 12-18 months. Earlier in the tightening cycle, short-term interest rates rose and dragged long-term interest rates higher. Then, beginning in October 2022 and lasting almost a year, there was a reprieve. Hikes in short-term interest rates continued, but bond yields traded sideways, reflecting market expectations for future easing combined with the Treasury circumventing the pressure on long rates by issuing T-bills. In recent months both conditions have shifted, initiating the next stage of the tightening cycle, led by long rates.

Related: Macro Outlook 2024: The Hard Part Is Over and Inching Toward Equilibrium and Why No Recession (Yet)?

During recessions, the share of unprofitable firms rises. This is not surprising. But even before the economy has entered a recession, the share of companies in the Russell 2000 with no earnings is at 40%. The bottom line is that if the economy enters a recession, a lot of middle-market companies will be vulnerable to the combination of high rates and slowing growth.

Related: Credit Market Outlook: Default Rates Rising, But Credit Spreads Remain Tight and Where Are All the Defaults? and Can Corporate America Cope With Its Vast Debt Pile?

Btw 2012 and 2020, the Democratic share of the black vote fell from 97 to 91%, according to the gold-standard data on demographic voting patterns from Catalist. And this is not just the unwinding of the Obama effect — the decline between 2016 and 2020 was as large as that from 2012 to 2016. Polls put Biden’s share of the black vote at just 80% today, a record low, dipping to 70% among young black men.

Related: Why Less Engaged Voters Are Biden’s Biggest Problem and Consistent Signs of Erosion in Black and Hispanic Support for Biden and Why Biden Is Behind, and How He Could Come Back

Improvements in labor-saving (automation) technologies are negatively related to the wage earnings of workers in affected occupation–industry cells. For instance, an increase in our exposure measure from the median to the 90th percentile is associated with a 2.5 pp decline in the total earnings of the average worker over the next five years. These earnings losses are concentrated on a subset of workers, since exposed workers experience a 1.2pp increase in the probability of involuntary job loss over the next five years. Importantly, the magnitude of these wage declines or job loss probabilities are essentially unrelated to observable measures of worker skill—measured by age, level of wage earnings relative to other workers in the same industry and occupation, and college education. Perhaps surprisingly, but consistent with our model, new labor-augmenting technologies also lead to a decline in earnings for exposed workers, though the average magnitudes are smaller. An increase in our exposure measure from the median to the 90th percentile is associated with a 1.3pp decline in earnings growth and a 0.5pp increase in the likelihood of involuntary job loss. However, unlike in the case of labor-saving technology, the effects of exposure to labor-augmenting technologies are fairly heterogeneous: it disproportionately affects white-collar workers (defined as those with college degrees, or those employed in non-manufacturing industries or in occupations emphasizing cognitive tasks); older workers; and workers that are paid more relative to their peers (other workers with similar characteristics in the same industry and occupation).

Related: Perspectives on the Labor Share and AI Isn’t Good Enough and The Economics of Inequality in High-Wage Economies

The Federal Funds market has been in an undead state for over a decade, but may now finally wither away and allow Secured Overnight Funding Rate to become the official policy rate. Almost all lending in the funds market is from Federal Home Loan Banks, who are ineligible for interest on reserves and lend in the funds market to earn a return on their cash.  Regulators are encouraging Federal Home Loan Banks to shift the composition of their cash investments away from fed funds and into interest bearing deposit accounts. The Fed funds market will likely shrink as Federal Home Loan Banks shift their cash investments towards interest bearing deposit accounts.

Related: Neutralizing QT and Probing LCLoR

Pay disruptions have been rising over most of 2023 Using Bank of America data, we define the ‘Payroll Disruptions Rate’ as the proportion of customers who previously had 12 months of regular payroll payments into their accounts, but then had three months of no payments, relative to the total number of customers with 12 consecutive months of payroll. The rate has been rising over most of 2023. Even with a drop back in the latest October data, the Payroll Disruptions Rate is higher than the two years prior to the pandemic. Pay disruptions will likely occur for a number of reasons. Most obviously if someone loses their job and takes over three months to find another. If someone exited their job for other reasons, such as the need to take care of children, this would also increase the Payroll Disruptions Rate, as would someone taking over three months to set up a direct payment into their account. But a persistent rise in the rate, is likely to indicate a weakening labor market. It remains to be seen if the October drop is just noise, or a more consequential break in the upward trend.

Related: Gig Work Back In Favor As Wages Slide and The Low-Wage Pay Surge Is Over, Threatening the Consumer Boom and U.S. Wage Growth Is Slowing, Somewhat

China’s manufacturing prowess is also a formidable military asset. Its gigantic and modernized shipyards already build 46% of the world’s ships, enabling it to churn out several new warships and submarines a year. By contrast the U.S. shipbuilding industry, despite a century of protection, has less than 1% of world capacity, leaving the Navy to rely on just a handful of shipyards that lack the necessary workforce to handle rising demand. Deliveries are consistently late and over budget. The shift in warfare toward cheaper, unmanned vehicles also favors China, the world’s largest producer of drones. Dan Wang, a visiting scholar at Yale Law School’s Tsai China Center said the U.S. leads mainly in knowledge-intensive technologies such as artificial intelligence and biotech rather than physical products. “Imagine a future scenario in which these countries are in serious conflict and trade stops, who do you want to bet on: the country with all the large language models and biotech and business software, or the country with large and adaptive manufacturing base? My money would be on the latter.”

Related: Pentagon Plan to Buy Thousands of Drones Faces Looming Snags and U.S. Weapons Industry Unprepared for a China Conflict, Report Says and Breaking Down China’s Manufacturing

Chinese President Xi Jinping has told his US counterpart Joe Biden to stop arming Taiwan and denied Beijing has imminent plans for military aggression, in a candid exchange on the “most dangerous” issue in the bilateral relationship. During his four-hour meeting with Biden on Wednesday in California, Xi said Beijing’s preference was for peaceful reunification with Taiwan, but went on to talk about conditions in which force could be used, according to a senior US official.

Related: US To Provide Taiwan With Weapons From Its Stockpiles For First Time and US To Link Up With Taiwan and Japan Drone Fleets To Share Real-Time Data and Nearly 40% of US Attack Submarines Are Out of Commission for Repairs

The decade-long expansion starting in 2009 combined near constant inflation with continuing declines in unemployment from 10% to 3.5%. Phillips curves constructed with constant natural rates and constant slopes became untenable as this process unfolded. Our investigation of the recovery starting in 2009 concludes in favor of a declining natural rate. The logical basis for this conclusion is that the anchored inflation rate must have converged to the Fed’s target rate of 2% over such a long period of stable inflation so close to that target. A bedrock principle of the New Keynesian model is that in an economy with actual inflation equal to its anchor, the observed unemployment rate must equal the natural rate.

Related: How Far Is Labor Force Participation from Its Trend? and The Dual U.S. Labor Market Uncovered

When a Republican is in the White House, Republican survey respondents feel about 15 index points better than predicted about the economy, whereas Democrats feel around 6 index points worse. When a Democrat is President, Republicans feel about 15 index points worse than the economy, but Democrats only feel around 6 index points better. This roughly +/- 15 point swing for Republicans versus the +/- 6 point swing for Democrats is what we term asymmetric amplification. (Independents’ views are roughly halfway between those of Republicans and Democrats.) We find that adjusting for asymmetric amplification shrinks the current gap between observed and predicted consumer sentiment by 30 percent.

Related: The Economy Is Great. Why Are Americans in Such a Rotten Mood? and The Pandemic Has Broken a Closely Followed Survey of Sentiment and Why Less Engaged Voters Are Biden’s Biggest Problem

Inflation, we just learned, eased in October, extending a two-week rally in stocks and bonds. And yet the University of Michigan’s index of consumer sentiment keeps falling. Gasoline is down about a third since its mid-2022 peak. Grocery prices haven’t fallen, but they are only up 2% in the past year; dairy, eggs, chicken, and meat are flat. Even if they don’t drop, maybe a long spell of not going up will loosen their grip on our psyche. Housing is an entirely different matter. Since January 2021, home prices, despite a late 2022 dip, have risen 29%, according to the S&P/Case-Shiller national home price index, and mortgage rates have nearly tripled. The buyer of the typical home thus faces a monthly principal and interest payment of nearly $2,200, more than double the level of early 2021, the National Association of Realtors calculates.

Related: Inflation Adjusted House Prices 3.1% Below Peak and Higher For Longer and The 2024 Housing Outlook and US Housing Market Crash Turns Not-So-Sweet 16

Central banks must look ahead and remember the lags between their actions and economic activity. In doing so, they might also cast one eye on monetary data. Annual growth of broad money (M3) is firmly negative. Monetary data cannot be targeted. But it must also not be ignored. In brief, it looks increasingly plausible that this tightening cycle has come to an end. It also looks quite likely that the beginning of the subsequent loosening is closer than central banks are suggesting. If that turns out not to be the case, there is some risk that it will come too late to avoid a costly slowdown and even a return to too low inflation. Yet none of this is certain: policymaking is now at a truly difficult point in the cycle.

Related: Macro Outlook 2024: The Hard Part Is Over and Inching Toward Equilibrium and U.S. Wage Growth Is Slowing, Somewhat

What was each generation’s work ethic like when they were young? Nationally representative surveys like Monitoring the Future can show us this – it has asked U.S. 12th graders, most of whom are 18 years old, about their work attitudes since 1976. Up until a few years ago, the work ethic news was positive for Gen Z (those born 1995-2012, and 18 years old 2013-2030). After declining from Boomers to Millennials, work ethic made a comeback among Gen Z 18-year-olds in the 2010s. Until it didn’t. The number of 18-year-olds who said they wanted to do their best in their job “even if this sometimes means working overtime” suddenly plummeted in 2021 and 2022. In early 2020, 54% of 18-year-olds said they were willing to work overtime. By 2022, it was 36%. That’s a (relative) drop of 33% in just two years.

Related: Young Men Are Gaming More. Are They Working Less? and Is Technology Changing the Value of Leisure? and Do 60 Percent Of American Workers Have Insecure Jobs?

Private equity firms that amassed more than $1.5 trillion of assets in China in just two decades are now struggling to offload once-promising investments they were counting on for hefty returns. With public markets in a slump and offering unattractive valuations, buyout firms are exploring private sales. But mounting concerns about the risks of investing in mainland China have left so-called secondary buyers demanding discounts of 30% to more than 60%, according to people familiar with the market. Haircuts in Europe and the US are closer to 15%.

Related: The Threat from China's Capital Flight and China Suffers Plunging Foreign Direct Investment Amid Geopolitical Tensions and The Rise & Fall of Foreign Direct Investment in China

Labor market tightness following the height of the Covid-19 pandemic led to an unexpected compression in the US wage distribution that reflects, in part, an increase in labor market competition. Disproportionate wage growth at the bottom of the distribution reduced the college wage premium and reversed almost 40% of the rise in 90-10 log wage inequality since 1980, as measured by the 90-10 ratio. The Unexpected Compression as measured by the fall in the 90-10 log wage ratio was nearly half of the Great Compression of the 1940s. The rise in wages was particularly strong among workers under 40 years of age and without a college degree. The post-pandemic rise in labor market tightness—and the consequent wage compression— represent a profound shift in US labor market conditions, seen most clearly in the rise of the wage-separation elasticity among young non-college workers.

Related: Perspectives on the Labor Share and Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends and The Economics of Inequality in High-Wage Economies

We continue to see only limited recession risk and reaffirm our 15% US recession probability. We expect several tailwinds to global growth in 2024, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity, and an increased willingness of central banks to deliver insurance cuts if growth slows. More disinflation is in store over the next year. Although the normalization in product and labor markets is now well advanced, its full disinflationary effect is still playing out, and core inflation should fall back to 2-2½% by end-2024. The market outlook is complicated by compressed risk premia and markets that are quite well-priced for our central case.

Related: Soft Landing Summer and Inching Toward Equilibrium and U.S. Wage Growth Is Slowing, Somewhat

Energy risks to the US are generally much lower than in the 1970’s. The US is a net energy exporter vs its net import position in the 1970s. The oil intensity of US GDP growth is 65% lower than it was in the 1970’s. Annual global oil consumption growth has declined from 8%-10% in the early 1970s to 0%-2% today. Geopolitical benefits to OPEC of an oil embargo would be less clear now: 75% of Saudi oil exports go to Asia, China gets half its oil from the Middle East and the US gets most of its imported oil from Canada, Mexico, and other non-OPEC sources. Saudi Arabia also has spare capacity to bring online if needed. The Biden Administration, in an act of geopolitical malpractice, opted not to refill the Strategic Petroleum Reserve before the conflict erupted; the SPR is down ~50% from its peak and at its lowest level since 1983.

Related: The Economic Consequences of the Israel-Hamas War and US Shale: The Marginal Supplier Matures and U.S. Oil Boom Blunts OPEC’s Pricing Power

What accounts for the large increase in the deficit during the pandemic recession? As Figure 2 implies, [the pandemic] spending increase, especially in 2021, was largely the result of discretionary policy. In particular, several major spending bills, including the $2 trillion Coronavirus Aid, Relief, and Economic Security Act, were enacted over the course of 2020. These pieces of legislation included spending on small business support, unemployment benefits, and other household transfers, aid to state and local governments, and health care. To be clear, this spending surge and the resulting “excess” cyclical response of the deficit do not say anything about whether this was good or bad policy. Nonetheless, the large increase in the deficit was likely a strong tailwind to stimulate economic growth during the pandemic recovery.

Related: Fiscal Arithmetic and the Global Inflation Outlook and Fiscal Influences on Inflation in OECD Countries, 2020-2022

Using a unique firm-level dataset with patent and balance-sheet information covering 70 years (1950-2020), I estimate the impact of the decline in public R&D in the US on long-run productivity growth. I first document three new facts about publicly-funded innovations: they are (i) more reliant on science, (ii) more likely to open new technological fields, and (iii) more likely to generate knowledge spillovers, especially toward smaller firms. I then use two instrumental variable strategies–a historical shift-share IV and a patent examiner leniency instrument–to estimate the impact of the decline in public R&D on the productivity of firms through spillovers. I find that a 1% decline in public R&D spillovers causes a 0.17% decline in productivity growth. Public R&D spillovers are three times as impactful as private R&D spillovers for firm productivity and their impact persists at the sector level. Moreover, smaller firms experience larger productivity gains from public R&D spillovers.

Related: Moonshot: Public R&D and Growth and Bottlenecks: Sectoral Imbalances and the US Productivity Slowdown and The Productivity Slowdown in Advanced Economies: Common Shocks or Common Trends?

The CPI data was a pleasant surprise. Headline was 0 inflation in October, which happened because volatile gasoline fell 5%. More important, core CPI (excluding food and energy) was 2.8% annualized in October, lower than expected. Not out of woods: still 3%+ over 3/6/12 months. Looking at core but with new rents instead of all rents you get annual rates of: 1 month: 1.8% 3 months: 1.3% 6 months: 0.8% 12 months: 1.6% (Would caution that I don't expect all rent ever to slow to this extent since marginal rent still above all rent.) Here is overall inflation. Annual rate: 1 month: 0.5% 3 months: 4.4% 6 months: 3.1% 12 months: 3.2%. Overall this is reassuring about no reacceleration of inflation. But it remains true that we've only had two unambiguously good inflation prints in 2-1/2 years (June & July). And IF inflation is running at 3%+ that would mean more work to do. A slowing economy may do that work.

Related: Inching Toward Equilibrium and Macro Outlook 2024: The Hard Part Is Over and Fiscal Influences on Inflation in OECD Countries, 2020-2022

The headline estimate for the United States is a roughly 5pp decline of the labor share between 1929 and 2022. The decline after World War II is even larger, at around 7pp. The great majority of U.S. industries exhibited labor share declines in recent decades. The United States is not unique, as we observe labor share declines in most countries of Europe and Asia and in emerging markets. It helps to organize factors affecting the labor share in five categories: technology, product markets, labor markets, capital markets, and globalization. The factors that have contributed to the labor share decline are intertwined. My view is that the most plausible causes have technological origin. Developments such as the information age and automation, manifesting through changes in the cost of capital and the structure of product markets, caused the labor share to decline.  If technological advancements continue to favor capital indefinitely, the natural outcome is a transition to a world in which capital on its own produces the entire global income.

Related: The Unexpected Compression: Competition at Work in the Low Wage Labor Market and Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends and The Economics of Inequality in High-Wage Economies

Cumulative growth in hourly compensation has exceeded inflation since the end of 2019, though it remains slightly below the trend of strong growth seen in the latter half of the 2010s. The real wage distribution has compressed—that is, lower-wage workers have seen proportionally larger gains than higher-wage workers, although this effect is lessened by the fact that low-income households have faced greater inflation than high-income households.

Related: Have Workers Gotten A Raise? and Is the Fed Peaking Too Soon? and The Economy Is Great. Why Are Americans in Such a Rotten Mood?

Workers in the bottom quarter of the wage distribution received a 5.9% raise in October compared with a 7.2% increase in January, according to data from the Federal Reserve Bank of Atlanta. Workers overall saw a smaller decline over the same time frame, from growth of 6.3% to 5.8%. The measure is based on the 12-month moving average of median wage growth, on an hourly basis.

Related: Have Workers Gotten A Raise? and Is the Fed Peaking Too Soon? and The Economy Is Great. Why Are Americans in Such a Rotten Mood?

Examined our favorite quality metric, gross profit/assets (GP/A), over time by sector for “small” US companies, which we define as between $400M and $4B in market cap today, or the equivalent percentile rank by market cap historically. We made the decision to exclude the health-care industry entirely given the significant proliferation of unprofitable pharma and biotech stocks, which tripled in proportion from 5% of small stocks in 1995 to 16% of stocks in 2021. We were curious whether the degradation in quality still held once we excluded this mix shift impact. The chart below shows the contribution to aggregate small-cap US GP/A by sector (e.g., IT GP/A multiplied by IT proportion of total market cap). Most notable is the broad-based decline in quality from the early 2010s to today. The most impacted sectors include IT, consumer discretionary, and industrials. We find it notable that US large caps trade at a premium to the rest of the world, while the median US small cap stock.

Related: Inching Toward Equilibrium and Market Bipolarity: Exuberance versus Exhaustion and Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks

Now that Europe's current account is back in balance, and Japan is back in surplus, the question of who balances China's current account surplus begs to be answered. There is a risk here, namely that the global economy -- albeit with frictions -- remains relatively integrated. Global politics is far more fractured. There isn't an easy way to solve this dilemma so long as China and others need outlets for their surpluses and equally the US external deficit far exceeds what now can be financed by G-7 countries. Politics and economics diverge, even if the mechanics of measuring bilateral trade and financial flows don't quite capture it.

Related: Hidden Exposure: Measuring U.S. Supply Chain Reliance and How America Is Failing To Break Up With China and The Global Constraints To Chinese Growth

Our analysis of micro-data of the provinces and aggregate data from previous censuses, as well as sample surveys of 1 percent of the population, showed that a shrinking and ageing population has no significant negative impact on economic growth. In 2001, China officially entered an ageing society [with 7 percent of the population over 65 years old]. Since then, many people in China have become increasingly wary that they may ‘get old before becoming affluent.’ China is ushering in a new and higher-quality human capital dividend that is conducive to technological innovation and industrial upgrading.

Related: An Economic Hail Mary for China and The Global Constraints To Chinese Growth and Can China Catch Up with Greece?

There are enough oddities within China’s official balance of payments statistics to suggest that the country’s actual current account surplus may be nearly 3x the official figure. If so, that would make China’s current account surplus not just the largest that it has ever been in absolute terms, but about as large as it has ever been relative to the rest of the world’s economy. Perhaps surprisingly, the emergence of this massive surplus has coincided with downward pressure on the Chinese yuan, with the People’s Bank of China (PBOC) selling $43 billion in foreign exchange reserves in 2023 Q3. The likeliest explanation is that the Chinese are now pulling about $500 billion/year out of the country. In other words, capital flight pressures have intensified over the past few years, perhaps in response to the Chinese government’s increasingly arbitrary exercises of power against its subjects.

Related: Net Outflow of Funds from China Hits 7-Year High in September and The Rise & Fall of Foreign Direct Investment in China and China’s Age Of Malaise

Boston Consulting Group staff randomly assigned to use GPT-4 when carrying out a set of consulting tasks were far more productive than their colleagues who could not access the tool. Not only did AI-assisted consultants carry out tasks 25% faster and complete 12% more tasks overall, their work was assessed to be 40%  higher in quality than their unassisted peers. Employees right across the skills distribution benefited, but in a pattern now common in generative AI studies, the biggest performance gains came among the less highly skilled in their workforce. This makes intuitive sense: large language models are best understood as excellent regurgitators and summarisers of existing, public-domain human knowledge. The closer one’s own knowledge already is to that limit, the smaller the benefit from using them.

Related: Centaurs and Cyborgs on the Jagged Frontier and AI, Mass Evolution, and Weickian Loops, and The Short-Term Effects of Generative Artificial Intelligence on Employment: Evidence from an Online Labor Market    

Across the board, we find that freelancers who offer services in occupations most affected by AI experienced reductions in both employment and earnings. The release of ChatGPT led to a 2% drop in the number of jobs on the platform and a 5.2% drop in monthly earnings. The results are robust to several alternative tests, including a similar reduction in the employment outcomes of freelancers offering design and image-editing services following the introduction of image-focused generative AI. In addition, we find that offering high-quality service does not mitigate the negative effect of AI on freelancers, and in fact, present suggestive evidence that top employees are disproportionately hurt by AI.

Related: Here’s What We Know About Generative AI’s Impact On White-Collar Work and Centaurs and Cyborgs on the Jagged Frontier and Generative AI at Work

Lower-income households showed the biggest slowdown in Y/Y spending growth with card spending per household close to zero Y/Y for those with a household income below $50k, down from +1.75% Y/Y in September. In contrast, spending growth for higher-income households (above $125k) fell 0.2% Y/Y in October. from -0.1% Y/Y in the prior month. Some of this narrowing reflects falling gasoline prices, which tend to benefit lower-income cohorts relatively more as they have a higher weight of gasoline in their overall spending. One possible explanation for the narrowing gap between lower- and higher-income spending growth may be the converging after-tax wages and salary growth for these two cohorts. According to Bank of America's internal data, after-tax wages and salaries were up 0.4% Y/Y in October for higher-income households and grew by 2.6% Y/Y for lower-income households.

Related: U.S. Wage Growth Is Slowing, Somewhat and Inching Toward Equilibrium and Why No Recession (Yet)?

Slowing growth would produce a peak U.S. population of almost 370 million before an ebb to 366 million in the final years of the century, according to the bureau. The projections outline a nation growing slowly compared with recent decades. Annual growth rates have fallen from 1.2% in the 1990s to 0.5% today and would fall to 0.2% by 2040. Small differences add up through compounding: The projected U.S. population in 2040 is 355 million, 25 million fewer than projected for that date in 2015. The difference is more than the current population of Florida. In 2022, preliminary data showed the U.S. birthrate was about 19% lower than in 2007. Death rates remain about 9% higher than 2019, the last year before the pandemic. By 2038, deaths would exceed births under the most likely scenario.

Related: Why Americans Are Having Fewer Babies and Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995 and Millennials Aren’t Having Kids. Here Are The Reasons Why

America’s GDP jumped by 4.9% at an annualised rate in the third quarter of the year. Nearly 80% of output is now made up of services, but one might expect manufacturing at least to pull its weight, given its supposed powers. In fact, labour productivity in manufacturing fell by 0.2% at an annualised rate, meaning that the boost to growth was driven by services. To make matters worse, productivity in the manufacturing sector has been in secular decline since 2011—the first decade-long fall in the available data. During the 1990s and 2000s manufacturing productivity soared, with the production of computers and electronics, especially semiconductor chips, leading the way. Gains seem to have topped out at around the time things went wrong more broadly, in the early 2010s. All told, more than a third of the overall slowdown in manufacturing since 2011 is accounted for by computers and electronics.

Related: The Productivity Slowdown in Advanced Economies: Common Shocks or Common Trends? and Bottlenecks: Sectoral Imbalances and the US Productivity Slowdown and American Labor’s Real Problem: It Isn’t Productive Enough

Figure 5 shows different vintages of CBO’s federal-debt projections to offer additional perspective on how those downturns (as well as other factors) affected federal debt. Looking at just the actual realizations of debt to date, shown by the solid portion of the red line, one can see the surges in debt that occurred during the Great Recession period and during the COVID-19 pandemic. The other lines in Figure 5 show CBO’s projections just prior to these episodes. The level of federal debt and its projected trajectory remained higher after each episode, even though, in both cases, the deficit (not shown) shrank considerably as the economy normalized.

Related: If Markets Are Right About Long Real Rates, Public Debt Ratios Will Increase For Some Time. We Must Make Sure That They Do Not Explode and When Does Federal Debt Reach Unsustainable Levels? and Living with High Public Debt

The 6 Largest Deficit Reduction Deals Since 1983 Were:1983 Social Security Deal (Saved 0.52% of GDP). The 1985 Gramm-Rudman Hollings Act (1.72%). The 1990 Bush “Andrews Air Force Base” Deal (1.45%). The 1993 Clinton Budget Deal (1.08%). The 1997 Balanced Budget Deal (0.72%). The 2011 Budget Control Act (1.01%) Savings scored at the time of enactment. Many cuts were later reversed, and the 1985 law was invalidated by the Supreme Court and replaced with a 1987 version.

Related: When Does Federal Debt Reach Unsustainable Levels? and Living with High Public Debt and Did the U.S. Really Grow Out of Its World War II Debt?

American teenagers are increasingly less likely to have a romantic partner—a boyfriend or girlfriend—than they once were 56% of Gen Z adults report having had a boyfriend or girlfriend as a teenager, while 41% say they did not have this experience. Nearly seven in 10 (69%) millennials and more than three-quarters of Generation Xers (76%) and baby boomers (78%) say they had a boyfriend or girlfriend for at least some part of their teen years. Working a part-time or summer job was once a ubiquitous experience for cash-strapped teenagers, but today’s teens are less likely to take on these responsibilities. 58% of Gen Z adults say they had a part-time job at some point during their teen years. Close to four in 10 (38%) Gen Z adults say they did not have a part-time job as a teenager. For previous generations, part-time work was much more prevalent. Seven in 10 (70% ) millennials, nearly eight in 10 (79%) Generation Xers, and 82% of baby boomers worked in a part-time position as a teenager.

Related: Is There Really a Generational Difference in Identifying as Lesbian, Gay, or Bisexual? and Millennials are Shattering the Oldest Rule in Politics and Young Adults in the U.S. Are Reaching Key Life Milestones Later Than in the Past

The polls showed the Democrat winning Kentucky. They showed abortion rights and marijuana legalization prevailing in Ohio — and showed them to be popular in many red states all over the country. They also show that voters disapprove of Mr. Biden and that Mr. Trump leads in the battleground states. If the polls were right about Ohio, Kentucky, and elsewhere, perhaps they’re right about the president as well. Tuesday night’s Ohio exit poll was a good example. Mr. Biden had a 39% approval rating among the voters who made abortion and marijuana legal in the state. Only 25% said he should even run for re-election, less than the 35% who said the same for Mr. Trump. Democratic advantage in low-turnout elections is a big deal. It probably explains the entire Democratic overperformance in special elections over the last year, based on an analysis of the nearly two dozen special elections with sufficient data for analysis, using a combination of Times/Siena polling and records from L2, a voter file vendor. The Ohio exit poll offers yet another piece of evidence: Self-reported Biden voters outnumbered Trump voters by two points, even in a state Mr. Trump won by eight points.

Related: Why Biden Is Behind, and How He Could Come Back and Why Less Engaged Voters Are Biden’s Biggest Problem and Buzzfeed’s Ben Smith on My Views About Trumponomics & The Future of the GOP

The short-term interest rate is a key variable in managing these conditions and is once again the central bank’s primary policy lever (since interest rates are far enough above zero). The central bank pulls the lever in order to steer the economy toward equilibrium. This is challenging when you start from a major disequilibrium because policy actions affect changes in spending, output, and inflation with significant lags (the process can take years), and in the meantime, markets are responding to central bank actions and having their own impact on the path of the economy.  Recently, equity yields have changed little as bond yields have risen significantly, such that equity pricing has moved further from equilibrium. The last time we were here was 2000, which was followed by a decade of poor equity returns.

Related: An Update from Our CIOs: Entering the Second Stage of Tightening and Soft Landing Summer and Why No Recession (Yet)?

Using administrative tax data in combination with the Survey of Consumer Finances and other data sources, this paper develops new estimates of the distribution of income in the U.S. since the 1960s. Our analysis examines levels and trends in all parts of the distribution in addition to top income shares. Our estimates for pre-tax income, based on distributing total national income, show that the top one percent share declined from 11.1% to 9.4% from 1962 to 1979 and then increased to 13.8% by 2019. Viewed over the full period, the top share increased by only 3 percentage points. While our pre-tax income measure includes labor and investment income, it provides an incomplete picture of economic resources available to individuals. A broader measure that includes Social Security benefits and other transfers lowers top one percent shares and results in a smaller increase. Our estimates for after-tax income indicate that the top one percent share increased only 1.4 percentage points since 1979 and only 0.2 percentage points since 1962.

Related: The Cost of Thriving Has Fallen: Correcting and Rejecting the American Compass Cost of Thriving Index and New Evidence Eviscerates Relevancy of Piketty’s Claim Capital Has Grown at Expense of Labor and The Economics of Inequality in High-Wage Economies

There is a lot of interest in foreign demand for US Treasuries (and US bonds generally) these days, given the scale of forthcoming issuance. And in aggregate foreign demand for US bonds has actually been pretty strong, in line or above the post-global crisis norm. The higher frequency data from the Fed (and now the Treasury) based on the valuation-adjusted monthly survey data tells the same story -- solid overall demand, with a modest shift toward Agencies in the last 12ms. Treasury demand appears to be coming largely from private investors -- which makes sense given that reserve growth has been weak and Treasuries offer an absolute yield pickup. China on net has sold Treasuries in the last 12ms of data even adjusting for Belgium/Euroclear. Foreign demand for long-term Agencies has been quite strong -- and China was a net buyer there over the last 12ms of data.

Related: Just One More and Preferred Habitats and Timing in the World’s Safe Asset and Resilience Redux in the US Treasury Market

If you want a measure that’s closer to how people currently spend their money, you want the Harmonized Index of Consumer Prices.  “Core” inflation is actually the highest, because owners’ equivalent rent, for technical reasons, tends to lag far behind actual market rents — which rose a lot last year but have leveled off. One reason the Fed prefers that P.C.E. deflator over the Consumer Price Index, by the way, is that it puts less weight on those questionable housing prices. The bottom line is that disinflation is real — indeed, spectacular. Are we all the way back to 2 percent inflation? Probably not, although there’s a real angels dancing on the head of a pin feel to the debate over the right measure of underlying inflation, and even over what that term really means. But we’ve gotten most of the way there, without a recession or even a large rise in unemployment.

Related: U.S. Wage Growth Is Slowing, Somewhat and An Update from Our CIOs: Entering the Second Stage of Tightening and Why No Recession (Yet)?

The American overdose crisis has claimed nearly 110,000 lives last year. More than two-thirds of those deaths were caused by fentanyl, a synthetic opioid 50 times as potent as heroin.  A kilogram of precursor can be purchased from Chinese manufacturers for about $800, which is enough to manufacture 415,000 fentanyl pills. Each pill can be sold wholesale for as low as 50 cents in the US. Street dealers can make as much as $3 per pill in New York City, say US prosecutors. US efforts to disrupt the fentanyl supply chain are resulting in increased seizures. Analysis by the Wilson Center in August showed that fentanyl seizures at the US-Mexico border increased 164% from 2020 to 2022. By the end of August, there had already been seizures of nearly 10,000kg in 2023 — far surpassing last year’s total of 6,400kg. Most experts believe fentanyl seizures are up because the overall volume of smuggling is increasing rather than any sustained success in the battle against the cartels.

Related: Why Are Americans Dying So Young? and Drug Overdose Deaths Topped 100,000 Again in 2022 and Comments On: "Accounting For the Widening Mortality Gap Between American Adults With and Without a BA" By Anne Case and Angus Deaton

We show for a sample of 21 economies—20 non-Euro-zone OECD countries and an aggregated version of 17 Euro-zone countries—that headline and core inflation rates in 2020-2022 responded positively to a theory-motivated government-spending variable. This variable includes cumulated increases in spending-GDP ratios divided by the pre-pandemic level of the debt-to-GDP ratio and by the average duration of the outstanding debt. In contrast, across 17 Euro-zone countries, differences in the government-spending variable do not generate significant differences in inflation rates. We also find in the sample of 21 economies that, while positive and statistically significant, the coefficient that gauges the response of the inflation rate to the scaled measure of government spending is significantly less than one, the value predicted when all of the extra spending is “paid for” through surprise inflation. The point estimates of coefficients of 0.4-0.5 suggest that 40-50% of the extra spending was financed through inflation, whereas the remaining 50-60% was paid for through the more conventional method of intertemporal public finance that involves increases in current or prospective government revenue or cuts in prospective future spending.

Related: What We’ve Learned About Inflation and Fiscal Arithmetic and the Global Inflation Outlook and When Will There Be No More Excess Savings Left?

Stabilizing the debt ratio implies reducing primary deficits to zero. For both economic and political reasons, there is no way governments can do this quickly. A drastic, immediate consolidation would most likely be catastrophic, both economically in triggering a recession, and politically, by increasing the share of votes going to populist parties. In the United States, where the primary deficit is around 4 percent and (r - g) looks positive at this point, the challenge is even stronger. And, given the current budget process dysfunction, one must worry that the adjustment will not take place any time soon. Thus, the debt ratio is likely to increase for quite some time. We have to hope that it will not eventually explode.

Related: R versus G and the National Debt and Living with High Public Debt and Is the Fiscal Picture Getting Better or Worse? Yes.

UST yields declined sharply over the course of the week—the benchmark 10y yield, which was only 5bp below its recent high as of last Tuesday’s close is now over 40bp lower. This move lower was aided by a trio of factors. First, the refunding meeting suggested less duration supply was in the offing relative to what many investors expected. We have been of the view for a while now that investors were overestimating the effects of supply on market-clearing yield levels, and the dominance of price-sensitive marginal investors meant more volatility in longer-term bond yields with swings in the macro outlook rather than simply higher yields. Second, following last month’s strong economic momentum, macro data have finally begun to show signs of cooling—both ISM reports and the labor market report surprised to the downside. Third, we think positioning was somewhat short in at least a portion of the investor base, particularly at the long end (we do think there are substantial structural overweights at shorter maturities).

Related: Just One More and Preferred Habitats and Timing in the World’s Safe Asset and Resilience Redux in the US Treasury Market

The biggest source of underlying inflationary pressure in the U.S. economy—unusually rapid wage growth—has been receding rapidly in recent months, although not by enough (yet) for policymakers to be confident that they are on track to reaching their 2% yearly inflation goal. The question is whether this process will continue, and if not, what that would mean for interest rates. American workers’ wages are still rising faster than in the decade before the pandemic, but the pace of increases has slowed sharply and is now comparable to the late 1990s and 2006-2007. So far, wage growth has slowed substantially without much increase in joblessness or precarity. That is good news for workers, as well as a welcome vindication for those of us who believed that much of the outsized pay gains in 2021H2-2022H1 were one-offs associated with job market churn, reset expectations of working conditions, and sectoral shifts. The question is whether the slowdown we have already experienced is sufficient to satisfy Fed officials—and if not, what it would take for wage growth to slow even more.

Related: Is the Fed Peaking Too Soon? and Why No Recession (Yet)? and An Update from Our CIOs: Entering the Second Stage of Tightening

Delinquency rates on most credit product types have been rising from historic lows since the middle of 2021. The transition rate into delinquency remains below the pre-pandemic level for mortgages, which comprise the largest share of household debt, but auto loan and credit card delinquencies have surpassed pre-pandemic levels and continue to rise. While the growth in auto loan delinquency has appeared to moderate over recent quarters, credit card delinquency rates have risen at a sharper pace. Even though the increase in delinquency appears to be broad-based across income groups and regions, it is disproportionately driven by Millennials, those with auto or student loans, and those with relatively higher credit card balances.

Related: When Will There Be No More Excess Savings Left? and Accumulated Savings During the Pandemic: An International Comparison with Historical Perspective and Excess No More? Dwindling Pandemic Savings

While China accounts for 18% of global GDP, it accounts for only 13% of global consumption and an astonishing 32% of global investment. Every dollar of investment in the global economy is balanced by $3.2 dollars of consumption and by $4.1 in the world excluding China. In China, however, it is offset by only $1.3 of consumption. What is more, if China were to grow by 4-5 percent a year on average for the next decade, while maintaining its current reliance on investment to drive that growth, its share of global GDP would rise to 21% over the decade, but its share of global investment would rise much more — to 37% . Alternatively, if we assume that every dollar of investment globally should continue to be balanced by roughly $3.2 dollars of consumption, the rest of the world would have to reduce the investment share of its own GDP by a full percentage point a year to accommodate China.

Related: Can China Reduce Its Internal Balances Without Renewed External Imbalances? and Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and China’s Auto Export Wave Echoes Japan's in the ’70s 

Hundreds of thousands of migrants from all over the world are making their way to the Southwest border, with U.S. and Mexican authorities reporting a surge in apprehensions of people from Asia and Africa as human smuggling networks widen their reach across the globe. Arrests at the Southwest border of migrants from China, India, and other distant countries, including Mauritania and Senegal, tripled to 214,000 during the fiscal year that ended in September from 70,000 in the previous fiscal year, according to U.S. Customs and Border Protection data. Fewer than 19,000 migrants from Asia and Africa were apprehended in the fiscal year ended September 2021. “The increase in migration from Asia and Africa is remarkable,” said Enrique Lucero, head of the migrant support unit of the Tijuana city government, across from San Diego. “These days, we are dealing with 120 nationalities and 60 different languages.”

Related: Why Illegal Border Crossings Are at Sustained Highs and Illegal Immigration Is a Bigger Problem Than Ever. These Five Charts Explain Why and Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995

We show that Japan’s government has engineered a sizeable duration mismatch on its consolidated balance sheet. The Japanese government implements a sizeable carry trade, and it earns high realized asset returns while its borrowing rates decline. Japan’s government has realized an ex-post excess return of about 2.13% per annum above its funding cost by going long in long-duration risky assets, financed with mostly short-duration funding in the form of bank reserves, T-bills, and bonds. This investment strategy has allowed the government to earn more than 3% of GDP from its risky investments.

Related: The Bank of Japan’s Seductive Widow-Maker Trade and Japan Demographic Woes Deepen as Birthrate Hits Record Low and Inflation in The *Very* Long Run

The share of bills is set to gradually rise next year, but the trajectory of the increase may not be aggressive enough to support the market. Under Treasury Borrowing Advisory Council’s recommendation, the amount of new money raised next calendar year through coupons would be around $1.8t. Assuming $2.5t in privately held borrowing for 12 calendar months, net bill issuance next year looks to be around $700b. This would take some pressure off the market by increasing the share of bills to around 22% of marketable debt outstanding. A recession and rate cuts would likely boost Treasury demand, but current U.S. economic strength suggests they are more likely to occur later next year after the market is forced to digest a significant amount of issuance. The more likely sequence may be a sharp rise in yields that then leads to both a recession and rate cuts, which together finally create strong demand for Treasuries.

Related: US Treasury To Slow Pace Of Longer-Dated Debt Issuance and Preferred Habitats and Timing in the World’s Safe Asset and Resilience Redux in the US Treasury Market

A decade ago, foreigners owned 33% of US government debt. That number has now declined to 23%.

Related: Preferred Habitats and Timing in the World’s Safe Asset and US Treasury To Slow Pace Of Longer-Dated Debt Issuance and Resilience Redux in the US Treasury Market

Average funding costs for the $8.6tn market in the highest quality corporate bonds, known as investment grade, are now above 6%, according to Ice BofA data. Although that is three times their lows of below 2% in late 2020, market participants are relatively sanguine about the health of these high-quality companies. There is more concern about less creditworthy borrowers in the $1.3tn non-investment grade market, often called junk or high-yield. Coupons now average 9.4%, more than double their lows in late 2021.  Moody’s predicts the US default rate will peak at 5.4% in January, but if conditions worsen it could soar as high as 14%.

Related: Credit Market Outlook: Default Rates Rising, But Credit Spreads Remain Tight and Rates Are Up. We’re Just Starting to Feel the Heat and The Corporate Debt Maturity Wall: Implications for Capex and Employment

Our model shows a rise of about a pp from a trough of 1.7% in the mid-2010s to 2.7% by 2050. In nominal terms, that means 10-year Treasury yields could settle somewhere between 4.5% and 5%. And the risks are skewed toward even higher borrowing costs than our baseline suggests. If the government doesn’t get its finances in order, fiscal deficits will stay wide. The fight against climate change will require massive investment. BloombergNEF estimates getting the energy network in shape to achieve net-zero carbon emissions will cost $30 trillion. And leaps forward in artificial intelligence and other technologies might yet boost productivity—resulting in faster trend growth. High government borrowing, more spending to fight climate change, and faster growth would all drive the natural rate higher. According to our estimates, the combined impact would push the natural rate to 4%, translating to a nominal 10-year bond yield of about 6%.

Related: Are High Interest Rates the New Normal? and Global Natural Rates in the Long Run: Postwar Macro Trends and the Market-Implied r* in 10 Advanced Economies and Measuring the Natural Rate of Interest After COVID-19

Foreign firms yanked more than $160 billion in total earnings from China during six successive quarters through the end of September, according to an analysis of Chinese data, an unusually sustained run of profit outflows that shows how much the country’s appeal is waning for foreign capital. The torrent of earnings leaving China pushed overall foreign direct investment in the world’s second-largest economy into the red in the third quarter for the first time in a quarter of a century.

Related: China Suffers Plunging Foreign Direct Investment Amid Geopolitical Tensions and The Rise & Fall of Foreign Direct Investment in China and China’s Age Of Malaise

Women in their early 20s embraced childlessness first, with a sharp rise beginning around 2002. That happens to be when the first millennials, born in 1981, entered that age group. For women in their later 20s, the jump in childlessness happened in 2006, just as the first millennials arrived. As you ascend the age spectrum, the millennial echo follows. When the oldest millennials hit their 40s, even 40-year-olds become more likely to go childless. Just about every source we consulted pointed to the broader economic climate. If women are able to follow through on their delayed family plans, much of the rise in childlessness could be erased, but with older millennials in their 40s, time for a reversal may be running out.

Related: Young Adults in the U.S. Are Reaching Key Life Milestones Later Than in the Past and A Visual Breakdown of America’s Stagnating Number of Births and Why Americans Are Having Fewer Babies

The deterioration in Mr. Biden’s standing is broad, spanning virtually every demographic group, yet it yields an especially deep blow to his electoral support among young, Black, and Hispanic voters, with Mr. Trump obtaining previously unimaginable levels of support with them. Mr. Biden barely leads at all among nonwhite voters under 45, even though the same voters reported backing Mr. Biden by almost 40 points in the last election. 

Related: Can Democrats Survive the Looming Crisis in New York City’s Outer Boroughs? and Trump’s Electoral College Edge Seems to Be Fading and Why Less Engaged Voters Are Biden’s Biggest Problem

While there has been a significant deceleration in the rate of price increases from around 6% a year to 3% a year, the growth rate of the dollar value of spending and incomes has slowed by much less (from 7% a year to 6% a year). So far, this has translated into a massive acceleration in the growth rate of Americans’ living standards. I can think of two basic reasons why the (simple-minded) benign forecast that we will stay in a world with 6% nominal and 3% real growth might not turn out to be correct: Financial constraints force nominal spending to slow. Real constraints worsen the tradeoff between total spending and inflation.  The short version is that while real growth may slow, it is much less clear why nominal growth would slow.

Related: An Update from Our CIOs: Entering the Second Stage of Tightening and What Have We Learned About the Neutral Rate? and Why No Recession (Yet)?

Women now make up 35% of workers in the United States’ 10 highest-paying occupations – up from 13% in 1980. They have increased their presence in almost all of these occupations, which include physicians, lawyers, and pharmacists. Women remain the minority in nine of the 10 highest-paying occupations. The exception is pharmacists, 61% of whom are women. More broadly, the share of women across all 10 of these occupations (35%) remains well below their share of the overall U.S. workforce (47%). Women remain in the minority among those receiving certain bachelor’s degrees required for some high-paying occupations. Mathematics or statistics: 42% of recipients today are women, unchanged from 1980. Physics: 25% of recipients are women, versus 13% in 1980. Engineering: 23% of recipients are women, versus 9% in 1980.

Related: Harvard Study Finds 11% MBTA Gender Pay Gap Despite Guaranteed Equal Pay and Prime-Age Women Are Going Above and Beyond In the Labor Market Recovery and Women’s Evolving Careers Helped Shrink the Gender Pay Gap

You don’t double your vote share and surge into the lead simply by not being the other guy. Instead, the explanation appears to lie in a bold and explicitly pro-youth policy position: the Canadian Conservatives have come out as the party of housebuilding. Housing affordability crises are widespread across the West, but Canada’s is especially acute, now ranking as the second most important issue facing the country behind the wider cost of living crisis. For months, Canadian voters have said they don’t think the government is focused enough on tackling the problem, creating space for the opposition to make its own pitch. Canadian Tory leader Pierre Poilievre has grasped the opportunity with both hands. The 44-year-old, who assumed the party leadership just over a year ago, has made housing one of his principal causes, outlining proposals that would withhold funds from cities that don’t build enough houses, and give extra money to those that do.

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

Last year, the added value of strategic emerging industries such as new-generation information technology, high-end equipment, and new energy vehicles made up more than 13% of GDP, according to the Ministry of Industry and Information Technology. Chang, from Fitch Bohua, said the automotive industry is particularly notable as China became the largest exporter of vehicles in the first half of 2023. The total number of exported cars reached 2.34 million, an increase of 77% compared to the same period last year. The added value of the automobile manufacturing industry increased by 11.4%, year on year, in the first nine months of 2023, 7.4pp higher than the added value of all industries with annual revenue above 20 million yuan (US$2.73 million) in the same period. As of the end of September, China had 18.2 million new energy vehicles on the road, leading the EV revolution with a 60% share of global electric car sales.

Related: Can China Reduce Its Internal Balances Without Renewed External Imbalances? and Why Are China’s Households in the Doldrums? and Danish Weight Loss Drugs vs. Chinese Cars: Two Models of Export Booms

Chinese policy-makers are trying to prevent property-sector contraction from forcing them to cut back on overall investment by shifting investment from the degraded property sector towards manufacturing. But manufacturing already accounts for an outsized 27% of China's GDP, compared to 14% for the rest of the world, and absorbs a huge amount of low-cost investment. What's more, its biggest constraint is weak demand, not scarce capital. What is more, while expansion in property must be absorbed internally, expansion in manufacturing can only be absorbed internally if there is an equivalent expansion in consumption. Otherwise, it must be absorbed by the rest of the world. China comprises roughly 18% of global GDP but already accounts for 30% of global manufacturing. If manufacturing replaces property as the engine of economic activity, this suggests China's share of global manufacturing must rise faster than its share of global GDP.

Related: EU To Launch Anti-Subsidy Probe into Chinese Electric Vehicles and China’s Auto Export Wave Echoes Japan's in the ’70s and Breaking Down China’s Manufacturing

Chinese factories are replacing Western chemicals, parts, and machine tools with those from home or sourced from developing nations. China’s trade with Southeast Asia surpassed its trade with the U.S. in 2019. China now trades more with Russia than it does with Germany, and soon will be able to say the same about Brazil. German and Japanese automakers like Volkswagen and Toyota now account for about 30% of China’s auto market, down from almost 50% three years ago, as Chinese brands have expanded, according to the China Association of Automobile Manufacturers. U.S. imports from China in mid-2018 accounted for as much as 22% of all its imports. In the 12 months through August, that had shrunk to 14%, according to Census Bureau data, though in dollar terms bilateral trade has grown.

Related: Politics Poses the Biggest Threat to Economic Growth in China and How America Is Failing To Break Up With China

Our results have implications for a pressing question as we transition to a post-QE world: Who will buy Treasuries as the Fed reduces the size of its portfolio? Perhaps foreign governments, but they have not materially added to their Treasury portfolios in almost a decade. Moreover, they tend to hold shorter duration bonds, while the Fed’s portfolio is tilted more towards longer durations. More likely it will be private investors, whether U.S. or foreign, whose purchases react to yields and whose portfolios are tilted towards longer duration bonds.

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

The Treasury said on Wednesday that it would continue to increase issuance of shorter-dated notes at the pace it set three months ago while slowing the pace of 10- and 30-year bond issues. To satisfy its borrowing needs, the Treasury will raise the auction sizes of the two- and five-year notes by $3bn per month, with a rise in 10-year note auctions by $2bn and in 30-year bond auctions by $1bn. In August, the Treasury had increased its 10-year auctions by $3bn and its 30-year auctions by $2bn. In its quarterly refunding auctions next week, the Treasury Department will sell $112bn worth of debt, lower than the $114bn put on offer in the previous quarter. Primary dealers had anticipated the Treasury would auction $114bn this quarter too.

Related: Resilience Redux in the US Treasury Market and Maxing Out and Interest Expense: A Bigger Impact on Deficits than Debt

Debt Sustainability = When national debt grows slower than gross domestic product (GDP) or expected to stop growing before getting too high. Average interest rate on government debt (R) describes the growth of current debt, while G the average growth rate of U.S. economy represents its erosion (relative to GDP). When R<G, debt may be sustainable even when non-interest spending exceeds revenue. When R<G, one-time borrowing has little effect on long-term debt-to-GDP. For the last 15 years, R has been below G.

Related: When Does Federal Debt Reach Unsustainable Levels? and Are High Interest Rates the New Normal? and Living with High Public Debt

Cumulative real GDP growth over the last year to 2.9%, continuing to bounce back from its 2022 lows and returning to levels more in line with the high growth years of the 2010s. In fact, these numbers are so strong that GDP could shrink by 0.8% annualized in Q4 and still match the median FOMC participants’ growth projections from last month. Year-on-year growth in nominal, non-inflation-adjusted, economic output picked up again to 6.3%, but even still the inflation gap between real and nominal GDP growth shrank to the smallest level since early 2021.

Related: An Update from Our CIOs: Entering the Second Stage of Tightening and Why No Recession (Yet)? and Will A.I. Transform the Economy, and if So, How?

If you accept the premise that regulation locks in incumbents, then it sure is notable that the early AI winners seem the most invested in generating alarm in Washington, D.C. about AI. This despite the fact that their concern is apparently not sufficiently high to, you know, stop their work. No, they are the responsible ones, the ones who care enough to call for regulation; all the better if concerns about imagined harms kneecap inevitable competitors. In short, this Executive Order is a lot like Bill Gates’ approach to mobile: rooted in the past, yet arrogant about an unknowable future; proscriptive instead of adaptive; and, worst of all, trivially influenced by motivated reasoning best understood as some of the most cynical attempts at regulatory capture the tech industry has ever seen.

Related: Artificial Intelligence Is A Familiar-Looking Monster, Say Henry Farrell and Cosma Shalizi and Will A.I. Transform the Economy, and if So, How? and The Outlook for Long-Term Economic Growth

It does seem as if employers in the sector have made peace with having fewer workers — and not unreasonable to think that higher minimum wages are playing some role in their calculations. The shock of the pandemic and the accompanying labor shortages allowed for and in many cases required a rethinking of how to do business in a way that the pre-pandemic wage increases did not, and restaurants overall appear to have found a way to do this with less labor. The best measure of this is real output per hour worked, aka labor productivity. After years of little to no growth at full-service restaurants, it rose at a 1.2% annualized rate from 2014 to 2020, then jumped 21% in 2021. It receded a little last year, but most of its gains are still intact.

Related: Detroit Is Paying Up to End the UAW Strike. Now Carmakers Will Live With the Costs and The Unexpected Compression: Competition at Work in the Low Wage Labor Market and Wendy’s, Google Train Next-Generation Order Taker: An AI Chatbot

In collaboration with Bloomberg Economics, Bloomberg Businessweek took a dive into trade and investment data and found five nations straddling the new geopolitical fault lines: Vietnam, Poland, Mexico, Morocco, and Indonesia. As a group, these countries logged $4 trillion in economic output in 2022—more than India and almost as much as Germany or Japan. Despite their very different politics and pasts, they share an opportunistic desire to seize the economic windfall to be had by positioning themselves as new links between the US and China—or China, Europe, and other Asian economies. They represent 4% of global gross domestic product, yet they’ve attracted slightly over 10%, or $550 billion, of all so-called greenfield investment since 2017.

Related: How America Is Failing To Break Up With China and Hidden Exposure: Measuring U.S. Supply Chain Reliance and Sester On Kearney Reshoring Index

The World Bank envisages scenarios with small, medium, and big disruptions to supplies: the first would, it assumes, reduce supply by up to 2mn barrels a day (about 2% of world supply), the second would reduce it by 3-5mn barrels a day and the last would reduce it by 6-8mn barrels a day. Corresponding oil prices are estimated at $93-$102, $109-$121 and $141-157, respectively. The last would bring real prices towards their historic peaks. If the Strait were to be closed, the outcomes would be far worse. We are still in the fossil fuel era. A conflict in the world’s biggest oil-supplying region could be very damaging.

Related: The Changing Nexus Between Commodity Prices and the Dollar: Causes and Implications and US Shale: The Marginal Supplier Matures and U.S. Oil Boom Blunts OPEC’s Pricing Power

Some 69% of respondents to a Wall Street Journal survey in August said the country is headed in the wrong direction. Can inflation be the whole story? After all, since peaking at 9.1% in June last year, based on the consumer-price index, inflation has fallen to 3.7%. Some gauges put underlying inflation at around 3%, and the Federal Reserve thinks it is headed gradually to 2%, relieving it of any need to raise interest rates for now. And yet, sentiment is up only moderately since inflation began falling. The puzzle deepens when I plot the University of Michigan index since 1978 against the “misery index”—the simple sum of inflation and the unemployment rate. Based on historic correlations, sentiment has been more depressed this year than you would expect given the level of economic misery. I suspect a lot of pessimism about the economy is “referred pain.” Just as part of your body can hurt because of injury to another, pessimism about the economy may reflect dissatisfaction with the country as a whole.

Related: Why Less Engaged Voters Are Biden’s Biggest Problem and Have Workers Gotten A Raise? and The Unexpected Compression: Competition at Work in the Low Wage Economy

I’ve put together my own affordability index. I used median income from the Census Bureau (estimated 2023), assumed a 15% down payment, and used a 2% estimate for property taxes, insurance, and maintenance. For house prices, I used the Case-Shiller National Index, Seasonally Adjusted (SA). For mortgage rates, I used the Freddie Mac PMMS (30-year fixed rates). For August: a year ago, the payment on a $500,000 house, with a 20% down payment and 5.22% 30-year mortgage rates, would be around $2,201 for principal and interest. The monthly payment for the same house, with house prices up 2.6% YoY and mortgage rates at 7.07% in August 2023, would be $2,749 - an increase of 25%. However, if we compare to two years ago, there is huge difference in monthly payments. In August 2021, the payment on a $500,000 house, with a 20% down payment and 2.84% 30-year mortgage rates, would be around $1,652 for principal and interest. The monthly payment for the same house, with house prices up 15.9% over two years and mortgage rates at 7.07% in August 2023, would be $3,107 - an increase of 88%!

Related: US Housing Market Crash Turns Not-So-Sweet 16 and The "New Normal" Mortgage Rate Range and Could 6% to 7% 30-Year Mortgage Rates be the "New Normal"?

One notable innovation has been the accumulation of large foreign exchange reserves to fend off liquidity crises in a dollar-dominated world. India’s forex reserves, for example, stand at $600 billion, Brazil’s hover around $300 billion, and South Africa has amassed $50 billion. Crucially, emerging-market firms and governments took advantage of the ultra-low interest rates that prevailed until 2021 to extend the maturity of their debts, giving them time to adapt to the new normal of elevated interest rates.  But the single biggest factor behind emerging markets’ resilience has been the increased focus on central-bank independence. Once an obscure academic notion, the concept has evolved into a global norm over the past two decades. This approach, which is often referred to as “inflation targeting,” has enabled emerging-market central banks to assert their autonomy, even though they frequently place greater weight on exchange rates than any inflation-targeting model would suggest. Owing to their enhanced independence, many emerging-market central banks began to hike their policy interest rates long before their counterparts in advanced economies. This put them ahead of the curve for once, instead of lagging behind. Moreover, emerging markets never bought into the notion that debt is a free lunch, which has thoroughly permeated the US economic-policy debate, including in academia. The idea that sustained deficit finance is costless due to secular stagnation is not a product of sober analysis, but rather an expression of wishful thinking.

Related: BIS International Banking Statistics and Global Liquidity Indicators at End December 2022 and Dollar Deleveraging

Chinese scientists have produced a chip that is significantly faster and more energy efficient than current high-performance AI chips when it comes to performing some tasks such as image recognition and autonomous driving, according to a new study. Although the new chip cannot immediately replace those used in devices such as computers or smartphones, it may soon be used in wearable devices, electric cars, or smart factories and help boost China’s competitiveness in the mass application of artificial intelligence, researchers wrote in a paper published in the journal Nature.

Related: China AI & Semiconductors Rise: US Sanctions Have Failed and Huawei’s Breakthrough Still Shows China’s Limits in Tech Race and US Restricts Nvidia Made-for-China Chips in New Export Rules

We study the employment consequences of deindustrialization for 1,993 cities in six countries: France, Germany, Italy, Japan, the United Kingdom, and the United States. We focus on former manufacturing hubs—defined as Local Labor Markets that in the year of their country’s manufacturing peak have a manufacturing employment share in the top tercile of their country’s distribution. While on average former manufacturing hubs lost employment after their country’s manufacturing peak, a surprisingly large share in each country was able to fully recover. We find that in the two decades before the relevant country’s manufacturing peak, cities with a high share of college-educated workers experienced a similar rate of employment growth as those with a low share of college-educated workers. By contrast, in the decades after the manufacturing peak, the employment trends diverge: cities with a high initial share of college-educated workers experience significantly faster employment growth.

Related: Are Manufacturing Jobs Still Good Jobs? An Exploration of the Manufacturing Wage Premium and Bottlenecks: Sectoral Imbalances and the US Productivity Slowdown and The Economics of Inequality in High-Wage Economies

The tentative agreements, to be voted on in the coming weeks, include a 25% general wage increase over four years, which with cost-of-living increases would boost the top pay for production workers to about $42 an hour. By the end of the contract’s term in 2028, most of the Detroit companies’ unionized workers would make in the mid-$80,000s annually, before overtime pay. Ford executives are already talking about the need to offset the higher expenses in this latest deal. The automaker has said the UAW contract would add $850 to $900 per vehicle in additional costs. “We have work to do,” Ford Chief Financial Officer John Lawler said last week. “We have to identify efficiencies. We have to increase productivity. It is a record contract.”

Related: The Unexpected Compression: Competition at Work in the Low Wage Labor Market and Autoworkers Have Good Reason to Demand a Big Raise and Union Workers Score Big Pay Gains As Labour Action Sweeps US

The horizontal axis is age, from birth to 85-plus. The vertical axis compares consumption at each age with the average labor income of people ages 30 to 49 in that year. So, for example, people age 40 in 2021 had total consumption of 0.7, which is to say around 70 percent of average labor income for people ages 30 to 49. The last data point in each chart covers all ages 85 and up, not just age 85. (That’s why there’s such a jump in 2021 from age 84.) Here’s why that matters for the economy: When a larger share of resources are in the hands of the elderly — those eager to spend sooner rather than later — the economy’s saving rate, which provides funds for new investment, drops.

Related: The US Capital Glut and Other Myths

China has spearheaded record levels of central bank purchases of gold globally in the first nine months of the year, as countries seek to hedge against inflation and reduce their reliance on the dollar. The “voracious” rate of buying has helped bullion prices defy surging bond yields and a strong dollar to trade just shy of $2,000 a troy ounce. Overall, gold demand excluding bilateral over-the-counter flows was 6% weaker year-on-year at 1,147 tonnes.

Related: The New Gold Boom: How Long Can It Last? and Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency and Setser On Chinese "De-Dollarizing"

Using Current Population Survey data, we find evidence that the incidence of underpayment rises substantially for workers across all racial and ethnic groups, in particular among the young, in the wake of minimum wage increases. The overall rise in the underpayment in the wake of minimum wages is equivalent to between 10 and 20% of realized wage gains across the full sample. In addition, we find evidence of two sources of heterogeneity in the rise in underpayment experienced by members of different racial and ethnic groups. Among young workers (those ages 16 to 21), we find evidence that the burden of underpayment falls disproportionately on African American workers. Underpayment may thus blunt the impact of minimum wage increases on wage gaps between young African American workers and other groups of young workers.

Related: Studies Debunk Evidence that Higher Minimum Wages Don’t Hurt Low-skilled Employment and Part II: CBO Report Shows Increasing the Minimum Wage Hurts Marginal Workers

According to the Times/Siena data, the 2020 general electorate was probably more Democratic and more supportive of Mr. Biden in 2020 than the 2022 midterm electorate, since a slightly higher proportion of Democrats and Biden ’20 voters skipped the midterms than Republican or Trump ’20 voters. On that basis, one would ordinarily assume that a higher-turnout election in 2024 would help Mr. Biden and Democrats, by drawing those drop-off voters back to the polls. Yet according to the same data — the same survey respondents — a higher-turnout election would not help Mr. Biden today, even though it would draw more Biden ’20 and more Democratic voters to the polls.

Related: Consistent Signs of Erosion in Black and Hispanic Support for Biden and How to Interpret Polling Showing Biden’s Loss of Nonwhite Support and Trump’s Electoral College Edge Seems to Be Fading

Britons who left the education system at 18 without a degree were paid an average of £14 an hour in 2022 (about $18 after adjusting for price differences). Their US counterparts earned only marginally more, at $19 an hour. Last year [British graduates’] median hourly earnings were £21, or just over $26. US graduates pocketed almost $36 an hour. On the eve of the global financial crisis 15 years ago, British graduates made just 8% less than US grads; that gap has ballooned to 27%. Across most of Britain, more than a third of graduates are working in jobs that do not require a degree — even in London, the figure is 25%. America has mountains of highly lucrative and skilled jobs chasing the best candidates, while Britain has mountains of skilled candidates chasing a small number of world-class graduate employment opportunities.

Related: Why Do Wages Grow Faster for Educated Workers? and Falling College Wage Premiums by Race and Ethnicity and The Economics of Inequality in High-Wage Economies

Declining RRP [reverse repo] balances will eventually overwhelm QT and lead to a net increase of money in the financial system. After [money market funds] lend money to the Treasury, the money moves from the RRP to the Treasury General Account [TGA] and then into the banking system through fiscal spending. In our two-tiered monetary system, this mechanically increases reserves (money for banks) and deposits (money for non-banks) in a manner similar to QE. However, the Fed’s QT program has also been pushing in the opposite direction and draining reserves at a rate of around $240b a quarter. The interaction between the two forces has resulted in a modest increase in bank reserves.

Related: A Beautiful Replenishment and Probing LCLoR

Inflation and excess savings have followed remarkably similar trends after the pandemic. Figure 6 shows excess savings (based on the 2016-2019 trend) and core CPI inflation one year later (note that inflation refers to the 2nd y-axis and the upper x-axis). The correlation is striking. Core inflation follows accumulated excess savings with a lag of one year. One year after excess savings started rising in 2020, inflation rose. Excess savings peaked in autumn 2021, as mentioned, and inflation peaked a year later. Since then, excess savings have declined and so has inflation with a one-year lag. It is tempting to conclude that excess savings caused this inflation episode. As you may recall, I agree that fiscal stimulus (which increased people’s disposable income and thus caused the accumulation of excess savings) contributed to this inflation episode, although I also believe that monetary policy and supply chain challenges played a role.

Related: Accumulated Savings During the Pandemic: An International Comparison with Historical Perspective and Excess No More? Dwindling Pandemic Savings and Spending Down Pandemic Savings Is an “Only-in-the-U.S.” Phenomenon

Foreign direct investment into China is falling across multiple measures, adding to pressure on Beijing and local governments as they seek to counter an economic slowdown. Financial Times calculations based on Chinese commerce ministry data compiled by Wind show that FDI fell 34% to Rmb72.8bn ($10bn) year on year in September, the biggest decline since monthly figures became available in 2014. The weakness in FDI has been part of a steady march of disappointing economic readings since China lifted pandemic restrictions at the start of the year. While FDI leapt 15% in January on the previous year, it has recorded double-digit percentage declines every month since May. 

Related: The Rise & Fall of Foreign Direct Investment in China and China’s Brain Drain Threatens Its Future and China’s Age Of Malaise

The Fed has since the beginning of 2023 steadily increased its estimate of the long-run fed funds rate. The implication for investors is that the Fed is beginning to see the costs of capital as permanently higher. A permanent increase in the risk-free rate has important implications for firms, households, and asset allocation across equities and fixed income.

Related: Global Natural Rates in the Long Run: Postwar Macro Trends and the Market-Implied r* in 10 Advanced Economies and The Price of Money Is Going Up, and It’s Not Because of the Fed and What Have We Learned About the Neutral Rate?

In 1950, Africans made up 8% of the world’s people. A century later, they will account for one-quarter of humanity, and at least one-third of all young people aged 15 to 24, according to United Nations forecasts. The median age on the African continent is 19. In India, the world’s most populous country, it is 28. In China and the United States, it is 38. Within the next decade, Africa will have the world’s largest work force, surpassing China and India. By the 2040s, it will account for two out of every five children born on the planet. Adjusted for population size, Africa’s economy has grown by 1 percent annually since 1990, according to the global consulting firm McKinsey & Company. Over the same period, India’s grew 5% per year and China’s grew 9%.

Related: Demography Is Destiny in Africa and Giorgia Meloni Calls For EU Help To Deal With Surge In Migrant Arrivals and Saudi Forces Accused of Killing Hundreds of Ethiopian Migrants

The housing plan was announced in 2018 by a conservative government, but it only started to take a tangible form more recently. It was part of a broader package signed into law that its supporters vowed would dismantle “parallel societies” by 2030. Among its mandates is a requirement that young children in certain areas spend at least 25 hours a week in preschools where they would be taught the Danish language and “Danish values.” The law mandates that in neighborhoods where at least half of the population is of non-Western origin or descent, and where at least two of the following characteristics exist — low income, low education, high unemployment, or a high percentage of residents who have had criminal convictions — the share of social housing needs to be reduced to no more than 40% by 2030. That means more than 4,000 public housing units will need to be emptied or torn down. At least 430 already have been demolished.

Related: Progressives Are Winning the Immigration Debate — But It Doesn’t Feel Like It and Giorgia Meloni Calls For EU Help To Deal With Surge In Migrant Arrivals and French Riots Show How Entrenched Inequalities Have Become

For the second year in a row, the number of illegal crossings at the U.S.-Mexico border surpassed two million, historic highs, according to government data released this month. Title 42, passed during the Trump Administration, had been used to quickly expel illegal migrants. The policy expired in May. Since then, the number of illegal border crossings has increased. Historically, most migrants have come from Mexico, Guatemala, Honduras, and El Salvador. More recently, migrants from other countries have accounted for nearly half of illegal border crossings. The Biden administration also ended the practice of detaining families in 2021. Families may be responding. Families crossing the border made up about a fifth of total border apprehensions. In both August and September, that share rose to about half.

Related: Monopsony, Efficiency, and the Regularization of Undocumented Immigrants and Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995 and The Hard Truth About Immigration

After examining data from the Anglosphere (U.S., UK, Canada, Australia, and New Zealand), I’ve found that one trend stands out above all others: the spike in anxiety, depression, and self-harm among adolescent girls that began in the early 2010s. Since 2010, rates of self-harm episodes have increased for adolescents in the Anglosphere countries, especially for girls. By 2015, self-harm episodes were at record-high levels in all five countries. I have added a shaded area on all graphs from 2010 to 2015, which is the period that Jon calls “The Great Rewiring of Childhood” in his forthcoming book, The Anxious Generation. It’s the five-year period when adolescence changed to a phone-based form; adolescents went from nearly all owning flip phones (or other basic phones) to nearly all owning smartphones with high-speed data plans and continuous (and nearly unlimited) access to the internet and social media.

Related: Chinese Youth Suicide Rate Quadruples In Over A Decade and Suicide Rates for Girls Are Rising. Are Smartphones to Blame? and Is There Really a Generational Difference in Identifying as Lesbian, Gay, or Bisexual?

Middle-class Americans are richer than ever before, with real median US net worth rising a staggering 37% over the last three years and finally recovering from the 2008 recession. Wealth inequality, while still extremely high, fell to some of the lowest levels in the last decade.  It is actually hard to oversell just how central the housing market has been to rising middle-class wealth—the median renter saw their real net worth increase by about $3.1k since 2019 while the median homeowner saw their real net worth increase by $101k, of which $63k came directly from home price appreciation.

Related: Median Income Is Down Again. Are There Any Silver Linings in the Data? and Unlike Others, the Top Earners See Strong Pay Growth Beyond Age 35 and Income Ladder Is Difficult to Climb for US Metro Areas

Year-on-year wage growth for union members reached 4.6% in the second quarter, according to the Bureau of Labor Statistics, catching up with higher pay rises that non-union workers had enjoyed since 2021. For union contracts ratified in the first two quarters of this year, first-year pay increases were especially strong at 7 and 6.1%, respectively, according to Bloomberg Law. The average increase over the preceding 10 years was 3%, records compiled by the legal research platform showed. The data, based on wage information from 425 contracts analysed by Bloomberg Law, provide an incomplete picture as companies are not required to make their agreements public. But they offer a snapshot of how workers have been able to command higher wages in the US’s post-pandemic economy.

Related: American Air Pilots Approve Record Contract With Higher Pay and Ford Agrees to 25% Wage Hike in Tentative Deal to End UAW Strike and The ‘Summer of Strikes’ Isn’t Living Up to the Hype

According to Bank of America internal data, average monthly childcare payments per household have increased steadily over the past three years. As of September, an average family spent over $700 per month, 32% higher than the 2019 average. Moreover, prices could rise further as the Child Care Stabilization program, which subsidized childcare providers and was part of the American Rescue Plan in 2021, expired on September 30. This could have a meaningful impact on consumers because over 12% of US households pay for childcare on a regular basis, according to the Department of Health & Human Services, and any further increase in prices would disproportionally weigh on families with young children. According to a recent survey by Care.com, for parents that pay for childcare, 67% are already spending 20% or more of their annual household income on such services.

Related: How Child Care Impacts Parents’ Labor Force Participation and Understanding The Missing Millions and Why Americans Are Having Fewer Babies

Private credit came of age after the 2008 financial crisis as an alternative to banks at a time when regulators were clamping down on risky lending by deposit-taking institutions. Today it’s become a serious rival to mainstream lending for all kinds of businesses, from real estate firms to tech startups. Data company Preqin said closed-end private debt funds using the five lending strategies [Direct lending, Distressed debt, Venture debt, Mezzanine finance, and Special situations] had around $1.6 trillion of assets under management globally as of March 2023, up from around $500 billion at the end of 2015.

Related: Where Are All the Defaults? and Higher Cost of Capital Continues and Credit Normalization

For the EU as a whole, GDP per hour worked has risen from about 72% of US levels back in the early 2000s to about 82% of US levels (blue dashed line). For Germany, with its very low level of average hours worked, GDP per hour worked was roughly equal to the US level back in the mid-1990s, then dropped off, and has now caught up again. For the EU as a whole, the lower per capita GDP–28% below the US level–is roughly two-thirds due to the fact that GDP per hour worked is below US levels, and one-third due to fewer hours worked. But for Germany (and for some other western and northern EU economies), the lower per capita GDP compared to the US level is entirely due to fewer hours worked.

Related: The Slowdown in Europe via Human Capital and Productivity Has Grown Faster in Western Europe than in America and Europe Has Fallen Behind America and the Gap is Growing

We find that, for neighborhoods in the same metropolitan-area income quartile, the denser the block group, the higher the share of teleworkable jobs. This surprising finding could arise for a number of reasons. First, if workers in industries with greater telework potential enjoy more leisure time in equilibrium, their willingness to pay for amenities that complement leisure increases, and such amenities may not be available in lower-density areas. Second, if workers value social interactions and interactions at work are less frequent, they may seek out social interactions in nonwork settings. Nonwork social interactions are more readily found in population dense areas. Third, and similarly, if in-person contact drives agglomeration effects, a shift to remote work makes such contact outside the workplace more valuable. Again, in-person contact is easier in more population dense areas. All these explanations point toward increased telework leading to a greater willingness to pay for housing in high-density places.

Related: Remote Work Is Less Common Than We Thought and Remote Work, Three Years Later and The Geography of Working From Home Begins to Shift Again

The homeownership rate as customarily reported by the Census Bureau is measured by household. Of the 25-to-34-year-olds who are heads of a household, 52.7% own their own homes. But of all the 25-to-34-year-olds in the US, only 32.6% do, down 20 percentage points from the late 1970s and almost 10 points since the mid-2000s.  However you measure or slice it, there has been a modest resurgence in young-adult homeownership since 2016. It appears to have stalled earlier this year amid rising interest rates. A recession would almost certainly throw it into reverse. Let’s hope that doesn’t happen.

Related: Young Adults in the U.S. Are Reaching Key Life Milestones Later Than in the Past and Higher For Longer and The 2024 Housing Outlook and There’s Never Been a Worse Time to Buy Instead of Rent

The United Auto Workers reached a tentative labor agreement with Ford Motor Co., putting pressure on the carmaker’s two chief rivals to end a protracted strike that has cost the industry billions of dollars. Ford agreed to a record 25% hourly wage hike over the life of the contract, which exceeds four years. With cost-of-living allowances, the top wage rate is expected to increase by 33%. The top pay will be over $40 an hour, the union said.

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 and Kaiser Workers Launch Largest-Ever US Health Care Strike

Copper prices have dropped 4% this year to about $8,000 a tonne, down from more than $10,000 at their peak last year, as the growth in the world economy has cooled off and production at new mines in Peru and Chile has been increasing. Yet demand for the commodity is expected to take off to supply the green economy, as well as to support the economic rise of India and other developing nations. The living standards of the average westerner requires 200-250 kilogrammes of copper per person, versus 60kg on average globally, according to Anglo American, one of the world’s largest miners. It is used in everything from electrical wiring and household appliances to infrastructure such as trains. Its use will become ever greater as the world goes green, resulting in it being dubbed the “metal of electrification.”

Related: How to Avoid a Green-Metals Crunch and Copper Is Unexpectedly Getting Cheaper and Glencore Says This Time Is Different for Coming Copper Shortage

We first survey the pattern of trade changes between 2019 and 2022 (skipping the acute pandemic years of 2020 and 2021) and then define assumptions to estimate potential trade changes and decoupling between 2022 and 2025 under two scenarios: (1) no real trade growth and (2) trade growth at the same rate as nominal GDP growth.  As trade growth has historically outpaced GDP growth, we estimate that US-China trade will likely expand between now and 2025, to around $855 billion (under the second scenario). Despite potential US “friendshoring”—reducing investments and supply dependencies in China and channeling them instead to “friendly” countries—it is not likely that aggregate US imports from alternative sources will increase dramatically over the next three years.

Related: Can China Reduce Its Internal Balances Without Renewed External Imbalances? and Breaking Down China’s Manufacturing and Mexico Seeks to Solidify Rank As Top U.S. Trade Partner, Push Further Past China

The trade policy actions introduced under Donald Trump and continued under Joe Biden have had no significant effect on China’s overall trade. In 2022, it ran substantial trade surpluses with every big economic region, including North America. Its ratio of trade to GDP has fallen, but is still high for such a large economy. Its share of world exports has stopped rising. But it is still far higher than those of the EU (excluding internal trade) or the US. Lack of export earnings will not stop China from buying what it needs.

Related: Can China Reduce Its Internal Balances Without Renewed External Imbalances? and China's Surplus Again Topped 10% Of GDP and China’s Age Of Malaise

China’s Semiconductor Manufacturing International Corp. used equipment from ASML to manufacture an advanced processor for a Chinese smartphone that alarmed the US, according to people familiar with the matter. In a suggestion that export restrictions on Europe’s most valuable tech company may have come too late to stem China’s advances in chipmaking, ASML’s so-called immersion deep ultraviolet machines were used in combination with tools from other companies to make the Huawei Technologies Co. chip, the people said, asking not to be identified discussing information that’s not public. ASML declined to comment. There is no suggestion that their sales violated export restrictions.

Related: China AI & Semiconductors Rise: US Sanctions Have Failed and China Imports Record Amount of Chipmaking Equipment and Huawei Building Secret Network for Chips, Trade Group Warns

Exhibit 2 shows the total shareholder return (TSR) for the S&P 500, an index that tracks the results of the stocks of the 500 largest companies listed in the U.S., on an annualized basis from 2012 through 2021. The annual TSR over that period was 16.6%. We can see how the drivers contribute to the total. Net income growth was 6.7% and the reduction in shares outstanding was 0.7%, leading to EPS growth of 7.4%. The P/E multiple expanded during this period, adding 6.9pp. The combination of EPS growth and multiple expansion led to price appreciation of 14.3%. The dividend yield averaged 2.0% and reinvesting the dividend chipped in an additional 0.3pp. The sum of 14.3 percent from price appreciation and 2.3% from dividends and dividend reinvestment is 16.6%. The right column in Exhibit 2 shows the percentage contributions of each of the drivers. Earnings per share growth was 44%, multiple expansion 42%, and dividends and dividend reinvestment 14%.

Related: Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks and 7 or 493 Stocks: What Matters for the S&P 500? and Birth, Death, and Wealth Creation

The cost of buying a home versus renting one is at its most extreme since at least 1996. The average monthly new mortgage payment is 52% higher than the average apartment rent, according to CBRE analysis. In theory, buying and renting costs should be roughly matched, according to Matt Vance, head of multifamily research at CBRE. Although owners benefit when house prices go up, they also put more cash into their homes than tenants for things such as repairs and refurbishments. From 1996 to mid-2003, the average cost to buy or rent did indeed work out more or less equal. The current hefty ownership premium reflects the surging cost of debt, as rates on a 30-year mortgage reach 8%, as well as high house prices since pandemic lockdowns raised the value of domestic space.

Related: The "New Normal" Mortgage Rate Range and Higher For Longer and The 2024 Housing Outlook and US Housing Market Crash Turns Not-So-Sweet 16

The uptick in default-free discount rates has been more than offset by a substantial decline in the risk premiums available on assets relative to cash. This helps explain why consumer and corporate borrowing is still roughly in line with pre-pandemic norms. It is certainly possible that the recent run of rapid growth is a one-off that will peter out on its own.  It is difficult to overstate the (apparent) strength of consumer spending in the retail sales data. While these numbers may be revised in the future, the current reading is that total spending at stores, bars, and restaurants in September was 0.7% higher than in August on a seasonally-adjusted basis, which is equivalent to a yearly growth rate of 9%. Moreover, monthly growth rates in July and August were 0.6% and 0.8%. Over the past 6 months, retail sales have been growing at a yearly average rate of 7%.

Related: An Update from Our CIOs: Entering the Second Stage of Tightening and Soft Landing Summer and Why No Recession (Yet)?

We see a near doubling of profits (ordinary, as defined above, as a percent of GDP). The key drivers of this increase (compared to the lost decades) were a rise in dividends and a further decline in household savings (each accounting for roughly 40% of the difference in profits performance). The decline in household savings is perfectly consistent with the argument used previously (that deleveraging has reduced the interest expense for Japanese corporates). Recall that interest expenses are paid to someone – ultimately a household as a form of income. Hence, given a fall in income (due to lower interest expenses paid by firms), to keep consumption levels unchanged, a fall in household savings would be required. So once again we see the very clear impact of the role of deleveraging in improving Japanese profitability.

Related: The Curious Incident of the Elevated Profit Margins and Slow Burn Minsky Moments (And What To Do About Them) and Japan Demographic Woes Deepen as Birthrate Hits Record Low

Toyota says it is close to being able to manufacture next-generation solid-state batteries at the same rate as existing batteries for electric vehicles, marking a milestone in the global race to commercialise the technology. Its headway in manufacturing technology follows a “breakthrough” in battery materials recently claimed by the world’s largest carmaker by vehicles sold. It would allow Toyota to mass-produce solid-state batteries by 2027 or 2028.  Solid-state batteries have long been heralded by industry experts as a potential “game-changer” that could address EV battery concerns such as charging time, capacity, and the risk of catching fire. If successful, Toyota expects its electric cars powered by solid-state batteries to have a range of 1,200km — more than twice the range of its current EVs — and a charging time of 10 minutes or less.

Related: Toyota Says Solid-State Battery Breakthrough Can Halve Cost And Size and Your Next Electric Vehicle Could Be Made in China and China Set to Overtake Japan as World’s Biggest Car Exporter

The International Monetary Fund’s latest projections estimate Germany’s nominal gross domestic product at $4.43 trillion this year, compared with $4.23 trillion for Japan. That would leave Germany lagging only the United States and China in terms of economic size. The projections come as the yen teeters close to the 160 mark against the euro and remains within striking distance of the 33-year low against the dollar that sparked a second round of currency intervention in October last year. The euro last reached 160 yen in August 2008. The IMF figures show that Germans are likely feeling a lot better off than Japanese, too. Average gross domestic product per person in Germany is projected at $52,824 compared with $33,950 in Japan.

Related: Germany's Industrial Slowdown and Germany Is Losing Its Mojo. Finding It Again Won’t Be Easy and Japan Demographic Woes Deepen as Birthrate Hits Record Low

According to China's State Administration of Foreign Exchange, which tracks monthly international financial transactions by domestic banks on behalf of businesses and households, the net outflow reached $53.9 billion in September. This is the largest amount since January 2016, when China logged a net outflow of $55.8 billion triggered by a sudden devaluation of the yuan called the "renminbi shock," among other factors. The exodus of funds related to direct investment, such as construction of manufacturing plants, was noticeable in the September figures. Wealthy Chinese are also shifting their assets abroad out of concern over the future of China, according to many analysts.

Related: Singapore Asks Banks to Keep Quiet on Wealth Inflows During China Boom and The Rise & Fall of Foreign Direct Investment in China and The Mysterious $300 Billion Flow Out of China

More than three hundred thousand Chinese moved away last year, more than double the pace of migration a decade ago.  Some are resorting to extraordinary measures. In August, a man rode a Jet Ski, loaded with extra fuel, nearly two hundred miles to South Korea. According to rights activists, he had served time in prison for wearing a T-shirt that called China’s leader “Xitler.” Others have followed arduous routes through a half-dozen countries, in the hope of reaching the U.S. This summer, authorities at America’s southern border reported a record 17,894 encounters with Chinese migrants in the previous ten months—a thirteenfold increase from a year earlier.

Related: China’s Brain Drain Threatens Its Future and Singapore Asks Banks to Keep Quiet on Wealth Inflows During China Boom and The Mysterious $300 Billion Flow Out of China

Sustained higher mortgage rates will have their most pronounced impact in 2024 on housing turnover. Nearly all mortgage borrowers have interest rates below current market rates, strongly disincentivizing them from moving. As a result, we expect the fewest annual existing home sales since the early 1990s at 3.8mn. Limited available housing supply has kept homebuilding resilient to higher interest rates: despite 3½pp higher mortgage rates today, housing starts were 5% above 2019 levels in September. While vacancy rates remain at historic lows, we expect housing starts to decline by 4% to 1.34mn in 2024, reflecting sharply fewer multifamily starts.

Related: Have Rising Mortgage Rates Frozen the Housing Market? and The "New Normal" Mortgage Rate Range and US Housing Market Crash Turns Not-So-Sweet 16

Generally speaking, we find measures of typical and aggregate pay, adjusted by PCE inflation, have grown since 2019 and have kept pace with or exceeded longer-term trends. Results are more mixed when those measures are deflated by CPI; we still see gains since 2019, but Average Hourly Earnings and Total Compensation are below longer-term trend levels. In other words, nominal pay by these measures has done relatively well in keeping up with overall costs of living, measured by the PCE. In contrast, nominal pay has done less well in keeping up with increases in the costs of goods and services that are much more salient to consumers, measured by the CPI. For higher-wage workers, the ECI suggests that nominal pay has grown about in line with or more slowly than prices, while Average Hourly Earnings and Weekly Earnings show roughly no change or some small positive changes for higher-wage workers. Again, we see that deflating by CPI points to weaker pay growth across all groups.

Related: U.S. Incomes Fall for Third Straight Year and The Unexpected Compression: Competition at Work in the Low Wage Economy and Jason Furman On Employment Cost Index

The IMF expects combined deficits of eurozone governments will fall to 3.4% of GDP this year from 3.6% in 2022, and further to 2.7% in 2024. Those countries that were in crisis a decade ago are expected to have much smaller budget gaps. In Greece, the deficit is forecast to fall to 1.6% of GDP from 2.3% last year, while Portugal’s is expected to fall to 0.2% of GDP from 0.4%. Ireland is forecast to have a budget surplus for the second straight year. Italy and France, among others, continue to have deficits of roughly 5% of GDP.

Related: US Fiscal Alarm Bells Are Drowning Out a Deeper Problem and France Ready to Accelerate Spending Cuts as it Battles Persistent Deficits and Europe's Imbalances in Pandemic and War

Federal assistance generated fairly small (jobs) multipliers.  We found that each $878,000 in federal assistance created or preserved one state or local job-year. About a third of the effect size is driven by spillovers from other states. More important than the point estimate itself, however, are the values we can rule out on the basis of our estimates’ confidence intervals. We can rule out an estimate that federal fiscal assistance saved a state or local government job-year at a cost of less than $428,000, making fiscal assistance far less effective at supporting employment during the pandemic than during the global financial crisis.

One-third of the children of the very richest families scored a 1300 or higher on the SAT, while less than 5 percent of middle-class students did, according to the data, from economists at Opportunity Insights, based at Harvard. Relatively few children in the poorest families scored that high; just one in five took the test at all.  The researchers matched all students’ SAT and ACT scores for 2011, 2013 and 2015 with their parents’ federal income tax records for the prior six years.

Related: 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? and Multidimensional Human Capital and the Wage Structure

Some reports have suggested that increases appear primarily in LGB identification, but not much in behavior. In other words, more young adults identify as LGB, but they are not necessarily acting on it. At least in the data from the General Social Survey, that does not appear to be true: There has also been a significant increase in young adults having homosexual sex (men with men and women with women). In fact, slightly more American young adults have had sex with a same-sex partner — 20% (see Figure 4) than identify as gay, lesbian, or bisexual — 18.5% (see Figure 2). The increases are even larger for 27- to 41-year-olds (the next older age group), perhaps because they have had more time to accumulate sexual partners since age 18.

Related: Young Adults in the U.S. Are Reaching Key Life Milestones Later Than in the Past and Is the Surge to the Left Among Young Voters a Trump Blip or the Real Deal?

Border agents made 2.05 million arrests in the federal fiscal year that ended in September, new government data show, the second year in a row that figure has exceeded two million. In the past, the numbers have risen and fallen based on significant economic and policy changes like recessions and pandemic-era border restrictions. But they never exceeded 1.7 million and never stayed at an elevated level as long as they have the past few years. In the past, most migrants were single adults from Mexico looking for work. If caught by the Border Patrol, they could easily and quickly be deported. Now, a fast-growing share are families with children, who are difficult to deport to their home countries. The change started around 2014 and has exploded in the past two years.

Related: Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995 and Rebound in Immigration Comes to Economy’s Aid and U.S. Will Build Stretch of Border Wall and Begin Deportations to Venezuela

Immigration has not been the dominant cause of post-1970s wage stagnation, despite the suspicious timing. You do not need to be able to read peer-reviewed articles in an academic journal to grasp this conclusion, although those articles support it. You simply need to notice that the regions attracting the largest number of immigrants are not the ones suffering the worst wage stagnation. But the story does not end here. The same evidence suggests that immigration has played a meaningful, if secondary, role in holding down wages.  People sometimes claim that immigrants work in jobs that native-born Americans do not want. But Christopher Jencks, a social-policy professor at Harvard University, has pointed out that this statement is incomplete: Immigrants typically work in jobs that native-born Americans do not want at the wages that employers are offering. One reason that employers can offer such wages, Jencks adds, is the availability of so many immigrant workers.

Related: Why Immigration Is an Urban Phenomenon and Monopsony, Efficiency, and the Regularization of Undocumented Immigrants and Immigration and U.S. Labor Market Tightness: Is There a Link?

This paper combines administrative tax data and a model of global investment behavior to evaluate the investment and firm valuation effects of the Tax Cuts and Jobs Act (TCJA) of 2017.  We have five main findings. First, the TCJA caused domestic investment of firms with the mean tax change to increase by roughly 20% relative to firms experiencing no tax change. Second, the TCJA created large incentives for some U.S. multinationals to increase foreign capital, which rose substantially following the law change. Third, domestic investment also increases in response to foreign incentives, indicating complementarity between domestic and foreign capital in production. Fourth, the general equilibrium long-run effects of the TCJA on the domestic and total capital of U.S. firms are around 6% and 9%, respectively. Finally, in our model, the dynamic labor and corporate tax revenue feedback in the first 10 years is less than 2% of baseline corporate revenue, as investment growth causes both higher labor tax revenues from wage growth and offsetting corporate revenue declines from more depreciation deductions. Consequently, the fall in total corporate tax revenue from the tax cut is close to the static effect.

Related: Who Gains from Corporate Tax Cuts? and End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns and Is the Tax Cut Paying For Itself? By a Mile

A potential surge in net bill issuance will likely ease upward pressure on longer dated yields, but the impact may not be significant. The 2024 deficit is estimated to be around $1.5t and Treasury has guided towards raising coupon sizes over the next few quarters to meet its financing needs. A willingness to raise the share of bill issuance means Treasury could at the minimum maintain coupon sizes, and instead issue more bills. Treasury could even be more aggressive and slightly reduce coupon issuance. In effect, this would lower the expected issuance of coupon securities for a period of time. Some prospective investors will look past this as a temporary measure, but at the end of the day there will be less immediate supply for the market to digest.

Related: Resilience Redux in the US Treasury Market and When Does Federal Debt Reach Unsustainable Levels? and The NY Fed Trading Desk's Time to Shine?

Bloomberg’s team of economists estimates that, adjusted for inflation, the natural rate of interest for 10-year US government notes fell from 5% in 1980 to a little less than 2% over the past decade. How much higher will the natural rate go? Bloomberg Economics’ model shows a rise of about a percentage point, from a trough of 1.7% in the mid-2010s to 2.7% in the 2030s. In nominal terms, that means 10-year Treasury yields could settle somewhere between 4.5% and 5%. And the risks are skewed toward even higher borrowing costs than that baseline suggests. According to Bloomberg Economics estimates, the combined impact of persistently high levels of government borrowing, more spending to fight climate change and faster growth would lift the natural rate to 4%, translating to a nominal 10-year bond yield in the region of 6%.

Related: What Have We Learned About the Neutral Rate? and Global Natural Rates in the Long Run: Postwar Macro Trends and the Market-Implied r* in 10 Advanced Economies and In Search of Safe Havens: The Trust Deficit and Risk-free Investments!

We find that the elasticity of US supply has fallen over time, and is much smaller for public producers than for privates. We estimate that a 10% oil price increase boosts US liquids supply by around 1% or 200kb/d. Consolidation is likely to further depress the supply elasticity as inelastic public producers gain market share, and efficiency gains push the US lower on the cost curve. We see two takeaways. First, the trends in the Permian and ongoing capital discipline support our forecasts that US liquids supply growth slows in 2024 to 0.6mb/d (vs.1.4mb/d in 2023), and that Brent reaches $100/bbl in June. Second, our estimates imply that the US supply response to higher prices—caused by any geopolitical supply shock—would offset only about 20-25% of the initial shock, which underscores OPEC’s key role in balancing the market. While core OPEC countries currently have nearly 4mb/d of spare capacity, physical or political barriers to deploying spare capacity are the key upside risk to oil prices.

Related: The Changing Nexus Between Commodity Prices and the Dollar: Causes and Implications and Monday Chart and Portfolio Nuclear

The speed at which people can get from one place to another is one of the most basic measures of a society’s sophistication. It affects economic productivity and human happiness; academic research has found that commuting makes people more unhappy than almost any other daily activity. Yet in one area of U.S. travel after another, progress has largely stopped over the past half-century. The scheduled flight time between Los Angeles and New York has become about 30 minutes longer [since 1959.] In 1969, Metroliner trains made two-and-a-half-hour nonstop trips between Washington and New York. Today, there are no nonstop trains on that route, and the fastest trip, on Acela trains, takes about 20 minutes longer than the Metroliner once did.

Related: Leonhardt On Investment and US Capital is Depreciating Faster and Capital Allocation

US chips and green energy subsidies don't make anything cheaper, faster, or better. They just do what we already do in the US, at vastly greater cost, and in a different way. Even if electric cars did save carbon, they would not get you to the airport any faster. The problem with US public investment is not just lack of money. It is that the money we do spend goes down ratholes, so not spending is wise. Public teacher unions that deliver generations of children, mostly already disadvantaged, who cannot read or count. $4 billion per mile subways. Leonhardt mentions other countries' success with high-speed trains, without mentioning the poster child for all that is wrong with US public investment: the California railroad. 15 years and counting, $100+ billion dollars, not a mile of track laid yet.  If it were not so perfectly obvious to voters that money will be wasted, they might support a lot more investment.

Related: Longer Commutes, Shorter Lives: The Costs of Not Investing in America and US Capital is Depreciating Faster and Capital Allocation

An estimated 900 million people around the globe face hunger or severe food insecurity daily. More than 1.4 billion additional people lack vital micronutrients, affecting their health and life expectancy. Globally, the prevalence of moderate to severe food insecurity was estimated at 29.6% in 2022, up from 22.7% in 2016. In Africa, the number of severely and moderately food insecure people rose almost 25% from 695 million in 2019 to 868 million in 2022. In Asia, the same group went from 982 million in 2019 to over 1.1 billion in 2022. The Food & Agriculture Organization of the United Nations (FAO) estimates that the pandemic increased incidence of hunger and lack of access to adequate food by over 300 million people from 2019 to 2020 alone.

Related: Feeding the Future: How Climate and Agriculture Intersect and China Ups Food Security Drive, Plans To Grow 90 Percent Of Its Grain By 2032, Warning For US And Thai Farmers and Saudi Forces Accused of Killing Hundreds of Ethiopian Migrants

A Chinese reprint of a book about an emperor who ran his realm into the ground before committing suicide nearly 400 years ago has abruptly disappeared from book shelves in China and searches for it have been censored online. The Book Chongzhen: the Diligent Emperor of a Failed Dynasty, republished last month, recounts how the last emperor of the 1368-1644 Ming dynasty purged senior officials and mismanaged his kingdom before finally hanging himself on a tree outside the Forbidden City as rebels closed in on Beijing. The blurb on the book’s cover declares that the harder Chongzhen worked, the faster he brought about the collapse of the empire. “A series of foolish measures [and] every step a mistake, the more diligent [he was] the faster the downfall,” it says. The disappearance of a reprint of a previously published book, which would have been vetted by state propagandists before publication, is not common, publishers say.

Related: As China Ramps Up Scrutiny of Culture, the Show Does Not Go On and China’s Defeated Youth and The Root of China’s Growing Youth Unemployment Crisis

An analysis of observed maximum changes in wind speed for Atlantic Tropical Cyclones (TCs) from 1971 to 2020 indicates that TC intensification rates have already changed as anthropogenic greenhouse gas emissions have warmed the planet and oceans. Mean maximum TC intensification rates are up to 28.7% greater in the modern era (2001–2020) compared to the historical era (1971–1990). In the modern era, it is about as likely for TCs to intensify by at least 50 kts in 24 h, and more likely for TCs to intensify by at least 20 kts within 24 h than it was for TCs to intensify by these amounts in 36 h in the historical era. Finally, the number of TCs that intensify from a Category 1 hurricane (or weaker) into a major hurricane within 36 h has more than doubled in the modern era relative to the historical era.

Related: Analyzing State Resilience to Weather and Climate Disasters and Gulf Coast Temperatures Surge to Highest Levels Ever Observed and Why California and Florida Have Become Almost Uninsurable

In sharp contrast to this prior experience, from 2007 into 2021 the U.S. NFA position declined precipitously — by 60pp of U.S. GDP — before bouncing back somewhat in the first three quarters of 2022. And this has occurred despite the fact that U.S. current account deficits have narrowed relative to the early 2000s. We document that this unprecedented decline in the U.S. NFA position has been driven by a boom in the market valuation of the non-financial assets in U.S. corporations. Because foreigners’ gross holdings of equity in U.S. corporations have grown to be very large, this boom has mechanically increased the market value of U.S. liabilities to the rest of the world (henceforth, ROW). There has not been a similar boom in the valuation of corporations in the ROW over this time period, so U.S. residents have not enjoyed a similar revaluation of their gross foreign equity assets.

Related: The Economics of Inequality in High-Wage Economies and The Case For Continued American Equity Exceptionalism and Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks

People are seeing something that is making them more optimistic about the future—and are spending. They think r* is higher, and if people permanently think r* is higher, it is, whether or not there is good reason for their thoughts. This is a very, very hard argument to refute, or even to think about. It is that the market-equilibrium interest rate is much more a social fact, without secure grounding in technologies, or in permanent or persistent factors affecting human utilities and behavior, at least as we neoclassical economists think of it. I, at least, can get no purchase on this argument. So I throw it over the wall to the sociologists and psychologists, and hope someone over there catches it.

Related: What Is the Ten-Year Real Rate Going to Be? I: How We Got Here and Why We Should, but Won’t, Reduce the Budget Deficit and What Have We Learned About the Neutral Rate?

The Penn Wharton Budget Model (PWBM) notes that the only reason a debt crisis has not already occurred is that market participants assume a tax and spending correction is coming at some point. The PWBM brief also outlines the effects of real interest rate increases on future debt projections. In the base case, the authors project federal debt rising from 98% of GDP in 2023 to 189% in 2050. The Congressional Budget Office (CBO) forecast shows debt reaching 169 percent of GDP that same year. If the real average interest rate for U.S. borrowing rises by 50 basis points above the PWBM forecast of 2.3%, then federal debt would climb to 208% of GDP in 2050.

Related: When Does Federal Debt Reach Unsustainable Levels? and Interest Expense: A Bigger Impact on Deficits than Debt and Living with High Public Debt

Up in quality: With the Fed keeping rates higher for longer, higher debt costs will continue to weigh on earnings and interest coverage ratios over the coming quarters, and both IG and HY companies will experience higher refinancing costs. Large cap: A default cycle has started with bankruptcy filings rising, and default rates will continue to rise over the coming quarters, impacting in particular middle market companies. Lend to firms with low leverage and high interest coverage ratios: Lagged effects of monetary policy are slowing consumer credit growth with auto and credit card delinquencies rising and bank lending conditions tightening, leading to a significant slowing of loan growth impacting consumers and firms with weak balance sheets.

Related: Where Are All the Defaults? and Rates Are Up. We’re Just Starting to Feel the Heat and How Is the Corporate Bond Market Functioning as Interest Rates Increase?

An annual survey of Chinese military capabilities mandated by Congress said its stockpile of operational nuclear warheads reached 500 by May 2023, putting it on track to exceed projections. It forecast that China would likely have more than 1,000 operational nuclear warheads by 2030. The US has 1,550 deployed strategic nuclear warheads, as permitted under the New Start arms control treaty. Dennis Wilder, a former top CIA China expert, said the warning about conventional ICBMs was very concerning because they could destabilise the military balance and complicate the situation for military planners. “China could, in a US-China crisis, for the first time threaten strikes against major US population centers without having to cross the nuclear threshold, which risks a massive US nuclear barrage in response.”

Related: Japan Raises Military Spending To Counter China With More Missiles and Ships and Pentagon Plan to Buy Thousands of Drones Faces Looming Snags and US Nuclear Submarine Weak Spot In Bubble Trail: Chinese Scientists

Global electricity demand is projected to increase at a rate of 2.7% per year in the APS, more than doubling from just under 25,000 TWh in 2021 to nearly 54,000 TWh in 2050. The buildings sector continues to consume the most electricity, followed closely by industry, each accounting for more than one-third of total demand throughout the period. Transport makes up just 2% of global electricity demand currently, but this rises to 15% in 2050. Hydrogen production via electrolysis adds significantly to electricity demand growth, from less than 2 TWh in 2021 to over 5,700 TWh in 2050 in the APS. More rapid electrification of end uses in the NZE Scenario further accelerates electricity demand growth to 3.2% per year to 2050, reaching over 62,000 TWh in 2050. Demand growth is expected to be accompanied by improvements in efficiency. Hydrogen production and EVs account for more than half the growth in electricity demand to 2050.

Related: Gridlock: How a Lack of Power Lines Will Delay the Age of Renewables and Elon Musk’s Latest Mission: Rev Up the Electricity Industry and What Have We Learned About the Neutral Rate?

A large amount of structural renormalization has occurred across the globe as market economies move towards their long-run tendency of surplus. Meanwhile, budget constraints haven’t had to harden significantly—financial conditions aren’t meaningfully much tighter than they were this last time last year, if anything they’re a tad looser. That powerful combination is what has allowed optimism and economic expectations to improve so much over the last year—and is a large part of why the Fed feels more confident in keeping rates “higher for longer.”

Related: Supply-Side Expansion Has Driven the Decline in Inflation and The "Easy Disinflation" Is (Mostly) Over. The Fed Grapples With What Comes Next

Small business payments to hiring firms, a leading indicator for payrolls, are gradually returning to 2019 levels. This is in line with the view that the labor market is normalizing to its trend growth. Overall, small businesses continue to face crosscurrents. On the positive side, US consumer spending has held up well, according to Bank of America internal data, which, in turn, points to healthy revenues for small businesses. However, higher interest rates and quality of labor have become more of a concern relative to a year ago.

Related: The Impact of Higher Rates on Small Businesses and Business Formation Boom and Surging Business Formation in the Pandemic: Causes and Consequences?

The strongest reason for weighing this slice towards India is not just that the country has averaged real GDP growth of more than 6% a year for the past 30 years; that growth has also translated into stock market returns in a way that China’s growth, for example, has not. Over the past 30, 20, 10, and five years, the Sensex has performed as well or better than the S&P 500, leaving other big markets far behind. India’s growth story is built on its remarkable increase in total factor productivity, the economy’s ability to generate output from a given amount of labour and capital. Aditya Suresh of Macquarie notes that TFP’s contribution to headline growth has averaged 1.3% between 2007 and 2022, against 0.9% in 1990-2006, far outpacing other EMs.  Partly, the TFP boost has come from efficiency improvements in certain sectors, such as services exports (think ecommerce or consulting). But the biggest improvement is undoubtedly from better basic infrastructure.

Related: Indian Stock Market Surges as Foreign Funds Buy Into National Growth Story and India Equity: An Unsung Long-Term Performance Story and The Path to 2075 — Capital Market Size and Opportunity

China is likely heading into a messy and protracted debt debacle that will be at least equal in magnitude to the state-owned enterprises (SOEs) debt drama in the late 1990s. Except the outcome this time will likely be a prolonged economic malaise. At a fundamental level, most if not all economic crises are essentially debt crises in various guises. China’s is no exception. We believe the property sector crisis, which has largely peaked, is just a preview of the main event, which will see around 40% of local government financing vehicles (LGFVs) default on their debt. Defaults of this magnitude will affect regional banks that are most exposed to LGFV lending. We estimate total loss for LGFV creditors (including financial institutions such as banks and LGFV supplier/contractors) to be in the neighborhood of $5 trillion, or ~30% of China’s GDP.

Related: Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and The Neoclassical Growth of China and China’s Defeated Youth

We expect reduced contributions from labor and capital to hold income growth below 4% absent an offsetting acceleration in TFP (total factor productivity) growth. A surge in TFP growth, however, seems unlikely, since productivity growth in China is already quite high, averaging 1.8% since 2009. Only five of the forty-three countries that reached China’s current income level in the past saw TFP growth that high over the subsequent thirteen years. Not one managed to exceed this pace by more than a few tenths of a percentage point. In short, China will need to achieve TFP growth in excess of the fastest historical precedents to meet official income goals. Moreover, these estimates assume that the official growth figures are accurate. If the lower growth rates of Harry Wu's work are correct, TFP growth has already fallen to about zero.

Related: China Slowdown Means It May Never Overtake US Economy, Forecast Shows and How Soon and At What Height Will China’s Economy Peak? and After Years of Sharp Decline, Will China’s Birth Rate Rebound?

The second stage of the tightening cycle can be clearly seen in the market action. Earlier in the tightening cycle, short-term interest rates rose and dragged long-term interest rates higher. Then, beginning in October 2022 and lasting almost a year, there was a reprieve. Hikes in short-term interest rates continued, but bond yields traded sideways, reflecting market expectations for future easing, combined with the Treasury circumventing the pressure on long rates by issuing T-bills funded by excess central bank reserves. In the third quarter, both conditions shifted as described above, initiating the next stage of the tightening cycle, led by long rates. 

Related: Soft Landing Summer and Why No Recession (Yet)? and Fool Me Once

The P/E ratio for the S&P493 has fluctuated around 19 in 2023. And the P/E ratio for the S&P7 has increased from 29 to 45. The bottom line is that returns this year in the S&P500 have been driven entirely by returns in the seven biggest stocks, and these seven stocks have become more and more overvalued. What is particularly remarkable is that the ongoing overvaluation of tech stocks has happened during a year when long-term interest rates have increased significantly. Remember, tech companies have cash flows far out in the future, which should be more negatively impacted by increases in the discount rate. In short, something has to give. Either stocks have to go down to be consistent with the current level of interest rates. Or long-term interest rates have to go down to be consistent with the current level of stock prices.

Related: Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks and 7 or 493 Stocks: What Matters for the S&P 500? and A Few Stocks Drive the Stock Market: Dot.com Vs. Today Vs. the Last 100 Years

Manhattan was the biggest loser at $16.5 billion of outflows to other states, with nearly 28 cents of every dollar—equaling $4.6 billion in total going to the state of Florida. California saw the greatest losses at the state level, while Florida was the biggest beneficiary with a net gain of $39 billion from other states.  Meanwhile, Manhattan saw huge outflows to surrounding suburbs and out-of-state destinations, the largest of which being Florida’s coast. Those seeking warmer weather and sunny beaches led the pack, as former New Yorkers took more than $2.9 billion to Miami-Dade County and $1.1 billion in taxable income decamped for Palm Beach County, FL. In fact, 27.7 cents of every dollar leaving Manhattan went to the state of Florida, equaling $4.6 billion in total.

Related: Tax Data Reveals Large Flight of High Earners from Major Cities During the Pandemic and Young Families Have Not Returned to Large Cities Post-Pandemic and Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy

France’s proposed budget for 2024 will lead to a deficit of 4.4% of national output — well above the EU’s 3% target.  The government expects the deficit to fall below that level by 2027, making it one of the last EU countries to comply. By the government’s own estimates, the cost of servicing the debt will rise to around €75bn annually in 2027, which would be the single biggest expense in the budget and more than is spent on education or defence.  While France has shortened unemployment compensation from 24 months to 18 months in some cases and tweaked other aspects of the unemployment insurance programme, Finance Minister Le Maire said there was a “legitimate question” as to whether the country should go further as it seeks to induce people to go back to work.

Related: Europe Has Fallen Behind America and the Gap is Growing and From Strength To Strength and Productivity Has Grown Faster in Western Europe than in America

Here are the rates for the three non-homicide violent crimes. I’ve kept the cities in the safest-to-least-safe order determined by the Gallup poll. New York City is no longer such a standout on the safe side, although it still is on the safe side by every measure. Minneapolis is worst for robbery, New Orleans for rape, and Detroit — by a mile — for aggravated assault. After my experience compiling these statistics I have to say I’m not super-confident in their reliability. At the national level the errors seem mostly to cancel out, with the FBI data usually showing similar trends to those found in the Bureau of Justice Statistics’ annual crime victimization surveys. Then again, in 2022 the FBI statistics showed a decline in violent crime and the BJS survey a substantial increase, and the local data can be a mess.

Related: New York’s Subways Have Less Crime but More Violence and The Collapse of Broken-Windows Policing in New York City, Los Angeles, and Washington, DC, 2013–22 and “New York, Just Like I Pictured It”

The study, published in Nature on October 18th, looked at changes to the virus’s genome over time and used data on reported outbreaks to track how it spread. In 2020, the rate of spread among wild birds was three times faster than that in farmed poultry, because of mutations that allowed the virus to adapt to diverse species. Outbreaks are usually seasonal, synchronizing with bird migration in Northern Hemisphere autumn. But since November 2021, they have become persistent. In 2022, the virus killed millions of birds across five continents and seeded outbreaks among farmed mink and various marine mammals.

Related: Bird Flu's Surge Has Scientists Seeking Clues to Prevent the Next Pandemic and Bird Flu Sample from Chilean Man Showed Some Signs of Adaptation to Mammals

The 2023 observations (in gray) fall in line with the historical relationship. That is, the association between liquidity and volatility in 2023 has been consistent with the past association between these two variables. This is true for the ten-year note as well, whereas for the two-year note the evidence points to somewhat higher-than-expected price impact given the volatility (as also occurred in fall 2008, March 2020, and 2022). While Treasury market liquidity has not been unusually poor given the level of interest rate volatility, continued vigilance by policymakers and market participants is appropriate. The market’s capacity to smoothly handle large trading flows has been of concern since March 2020.

Related: Liquidity Event and Resilience Redux in the US Treasury Market and Living with High Public Debt

Widely followed households surveys find that median inflation expectations are trending towards 2%, but they also show that the median is fragile. The New York Fed’s Survey of Consumer Expectations, a monthly survey of a nationally representative group of 1300, finds that around 40% of respondents expect inflation to be higher than 4% in the medium term. That result is notably higher than pre-2020 levels and has remained stable to rising over the past several months. A potential spike in commodity prices from geopolitical developments could very quickly push inflation upward and tip median expectations comfortably above 2%. A shift in expectations is not yet happening, but it would almost certainly prompt aggressive policy action.

Related: Inflation Expectations, the Phillips Curve, and Stock Prices and What We’ve Learned About Inflation and Rate Cuts

The strategy that identifies firms owner's incidence using the reduced-form effect on labor demand of incumbent firms delivers an estimate of 61.9% (SE = 11%). The second strategy that uses the effects of business taxes on local productivity (TFP) yields an estimate of the firm's owner share of 52.3% (SE = 34%). Our second main finding is that our extended structural model that incorporates these new moments delivers an estimate for firm owners of 53.3% (SE = 12%). Overall, our central estimate is that firm owners bear roughly half of the incidence, while workers and landowners bear 35-40 percent and 10-15 percent, respectively.

Related: End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns and Who Gains from Corporate Tax Cuts? and The Economics of Inequality in High-Wage Economies

The US is restricting the sale of chips that Nvidia designed specifically for the Chinese market and curbing exports to two Chinese artificial-intelligence chip firms, as part of sweeping updates to export controls that are designed to block China’s access to highly advanced semiconductor technology. The tighter controls will target Nvidia’s A800 and H800 chips, a senior US official said, which the American firm created for export to the Asian country after the Biden administration introduced its initial restrictions last October. Those curbs, including the updated rules released Tuesday, aim to prevent China from accessing cutting-edge technology with military uses.

Related: China AI & Semiconductors Rise: US Sanctions Have Failed and Huawei Building Secret Network for Chips, Trade Group Warns and China Imports Record Amount of Chipmaking Equipment

Most of Russia’s cumulative current account surplus reflects capital flight by both Russians and non-Russians, with perhaps at most ~1/3 of the surplus ($90 billion out of $262 billion) reflecting anything resembling the accumulation of sovereign wealth or “shadow reserves”. Russia’s net international investment position, which accounts for changes in asset valuation, paints the same basic picture even more starkly. According to the CBR, the value of Russia’s foreign assets as of June 30 2023 was $100 billion lower than on December 31, 2021, while the value of Russia’s liabilities to the rest of the world was down by $432 billion. These persistent pressures help explain why the ruble has depreciated so much—down by half against the U.S. dollar since June 2022—after Russia’s access to imports was restored.

Related: Pollution Reveals What Russian Statistics Obscure: Industrial Decline and Russians Have Emigrated in Huge Numbers Since the War in Ukraine and Russian Power in Decline

At age 25, individuals in the lowest lifetime earnings (LE) bracket earned an average of approximately $12,000, while those in the median and top brackets earned $28,000 and $39,000, respectively. As a result, the earnings gap between the highest and lowest earners—measured as the ratio of their average earnings—already stands at around 3.25 at the beginning of their working lives. Those at the top of the LE distribution witness a remarkable 435% surge in their incomes between ages 25 and 35. In contrast, median earners undergo a comparatively modest increase of over 65%, while those at the bottom experience minimal earnings growth, a mere 16% uptick. Interestingly, during the subsequent 10-year period (ages 35-45), the median LE group witnesses a significant deceleration in their earnings growth, plummeting from the previous decade’s 65% increase to approximately 15%. Meanwhile, the bottom LE group continues to undergo a gradual but consistent earnings growth of around 15%. The top LE group deviates substantially from the rest of the workforce. They once again experience surge in earnings, exceeding 150%, and by the time they reach age 45, they earned more than half a million dollars annually. Consequently, the earnings gap between the highest and lowest earners widens further, expanding from 15.3 to 33.1.

Related: The Economics of Inequality in High-Wage Economies and The Inheritance Of Social Status: England, 1600 to 2022

We estimate that higher rates will increase the interest burden for small businesses by just over 1pp by 2024, from roughly 5.8% of revenues in 2021 to around 7% in 2024. Under our current rates forecasts, we forecast this share would increase further to just under 8% as term loans gradually mature—above the pre-pandemic share of 6.8% but similar to that of the mid-1990s.  In 2023, we expect small business interest payments as a share of output to increase by a little under 1pp. Since this sector accounts for around 15% of private-sector gross output and the ratio between private-sector gross output and US GDP is a little under 1.6, this implies a drag on economywide GDP growth of around 0.1pp.

Related: Higher Cost of Capital Continues and Credit Normalization and Soft Landing Summer

One reason we believe high-yield spreads haven’t spiked yet is the migration of lower-quality borrowers—those most likely to default—out of high yield and into the private credit market. According to Moody’s, the number of issuers with B3 debt has fallen as these issuers have departed for private credit. According to Moody’s, 62% of its rated universe, which includes both loans and bonds, is rated B2 (also known as B) or below, and, “In general, the high-yield bond market favors better-quality Ba [Moody’s term for BB] issuers, while the leveraged loan market is concentrated in LBOs that have had liquidity constraints on the heels of the Federal Reserve’s aggressive tightening.”

Related: Higher Cost of Capital Continues and Credit Normalization

The top panel in Figure 7 shows the r∗ estimates. Natural rates have fallen over time in all countries, but not monotonically, consistent with previous works documenting the decline of real rates over the long run. As recently as the 1990s, natural rates in these countries were between 100 and 600 bps. By the end of the sample 4 out of 10 countries have a negative r∗, and most others are between 0 and 50 bps. There is cross-country correlation, and natural rates have a positive correlation with the “global” component, and a considerable local component at high frequency. These comovements may reflect forces of market integration to some degree, as well as the effects of common factors.

Related: Measuring the Natural Rate of Interest After COVID-19 and In Search of Safe Havens: The Trust Deficit and Risk-free Investments! and Hitch Your Wagon to R-Star

What are the odds that bond rates are going to return to the 2010s normal? Low. But some mean-reversion is highly likely. How much? My guess is 0.5%-points, plus whatever in the recent interest-rate rise is an overreaction to shifts in the fundamental flow-of-funds supply-demand balance—but I run out of space here before I can even start analyzing that.  Emerging market-rich, sovereign wealth fund, and exchange-reserve demand for US Treasuries continues to scale with the wealth of the world, or rather with the wealth of the world’s rich and the wealth and power of the world’s governments. I simply do not see the safe-asset shortage component of secular-stagnation low U.S. Treasury rates as being over.

Related: Why We Should, but Won’t, Reduce the Budget Deficit and 23% Increase in Treasury Auction Sizes in 2024 and Resilience Redux in the US Treasury Market

NYC has unique advantages regarding its outright size (output, labor force, purchasing power), business sector diversification, and global financial sector dominance. Many measures have now reached pre-pandemic levels, including the labor force, airport utilization, and seated diners. NYC residential and industrial vacancy rates are low, and NYC crime stats also compare favorably to other cities which sometimes comes as a surprise. But mass transit use is still 73% of 2019 levels, which is unsustainable given required capital and operating costs. NYC office vacancy rates of 18% are the highest since the early 1990s, leased-but-underutilized space is high and ~35% of work days are still done from home; office to residential conversions are unlikely to materially reduce the stock of underutilized office space given cost and complexity.

Related: Central Business Districts: City Strugglers and Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy and Tax Data Reveals Large Flight of High Earners from Major Cities During the Pandemic

The black line shows the level of American labor productivity. The blue dashed line is a statistically estimated trend, estimated through 2019 and then extended. The trend is allowed to change after 2004; the slowdown in trend captures the end of the late-90s/early 2000s Internet-led boom. Starting in 2020, you can see the sizeable productivity boom, as the black line moved well above the trend. Press discussions at the time were often quite exuberant about the possibilities. Unfortunately, since that bump, productivity has retreated right back to its pre-pandemic trend or, even, by early 2023, a little below the trend.

Related: The Productivity Slowdown in Advanced Economies: Common Shocks or Common Trends? and Will A.I. Transform the Economy, and if So, How? and The Economics of Inequality in High-Wage Economies

AI will flow through to productivity faster than past general-purpose technologies, but the peak impacts remain far off. AI will likely proceed more quickly for a few reasons. First, the uses of AI typically require less capex, so the marginal cost per unit of labor saved is lower than for past technologies. Second, that capex is more concentrated among major software players and therefore easier to coordinate; much of the adoption will take the form of AI tools being rolled out to software-as-a-service platforms that businesses already use. Finally, secularly low unemployment and high wage growth today may also increase the incentive to automate, although temporary cyclical pressures are unlikely to have a major impact on this decades-long process. Much of the impact of AI could come from accelerating the highest-value research and development work.

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

Given our forecast that labor market rebalancing continues to unfold in a relatively controlled manner, we expect wage growth to gradually decelerate through end-2024, before stabilizing at levels roughly consistent with 2% target inflation. This slow deceleration in nominal wage growth—combined with a sharper deceleration in headline inflation—should lead real wage growth to swing comfortably into positive territory, thereby providing a strong tailwind for real income, consumer spending, and overall GDP growth in 2024.

Related: U.S. Incomes Fall for Third Straight Year and Growth in Working-Age Population Ends. That’s Not All Bad and The Unexpected Compression: Competition at Work in the Low Wage Economy

The percentage of Bank of America customers who received income from gig platforms through direct deposits or debit cards reached 3% in August 2023, up from 2.7% in April. This increase was driven particularly by ridesharing jobs and younger people, the former of which can be largely explained by strong travel-related spending. We also found that ridesharing gig workers do not tend to also have a traditional job and an increased supply of these workers has driven average monthly ridesharing gig pay down in recent months. Millennials and Gen Z have seen the biggest increase in gig work as they tend to be more exposed to the rising cost of living. But it seems gig work may not provide enough support: younger generations' credit and debit card spending growth has consistently lagged that of Baby Boomers since mid-March, according to Bank of America internal data.

Related: Do 60 Percent Of American Workers Have Insecure Jobs? and Upward Mobility Is Alive and Well in America

My calculations suggest the average age of death in [the shortest-lived 10%] is just 36 years old, compared with 55 in the Netherlands and 57 in Sweden. It hasn’t always been this way. In the 1980s, the most disadvantaged Americans lived about as long as their counterparts in France. By the early 2000s, lives at the bottom had lengthened considerably, and while a deficit was opening up, it wasn’t worrisome. But in the past decade, the lives of America’s least fortunate have shortened by an astonishing eight years. Wealthy Americans who live in the parts of the country with high opioid use and gun violence live just as long as those who live where fentanyl addiction and gunshot incidents are relatively rare. But poor Americans live far shorter lives if they grow up surrounded by guns and drugs than if they don’t.

Related: Comments On: "Accounting For the Widening Mortality Gap Between American Adults With and Without a BA" By Anne Case and Angus Deaton and  Accounting for the Widening Mortality Gap Between American Adults With and Without a BA and Why Are Americans Dying So Young?

With about 66,000 students — more than the public school enrollment in Boston or Seattle — the Pentagon’s schools for children of military members and civilian employees quietly achieve results most educators can only dream of. On the National Assessment of Educational Progress, a federal exam that is considered the gold standard for comparing states and large districts, the Defense Department’s schools outscored every jurisdiction in math and reading last year and managed to avoid widespread pandemic losses. While the achievement of U.S. students overall has stagnated over the last decade, the military’s schools have made gains on the national test since 2013.

Related: ACT Scores Fell for Class of 2023, Sixth Consecutive Decline and NAEP Long-Term Trend Assessment Results: Reading and Mathematics and Looking For Flynn Effects on a Recent Online U.S. Adult Sample: Examining Shifts Within The SAPA Project

We use an event study approach, examining what happens when a firm begins supplying a foreign multinational for the first time.  We uncover a sharp increase in productivity (which rises by about 8% after three years) and other performance measures (e.g. sales to firms other than the new multinational partner). The fraction of aggregate value accounted for by multinationals declined by about ten percentage points in Belgium in our sample period (2002 and 2014), which would suggest a strong headwind against productivity growth. However, in a novel result we are also able to document that when we look at similar events of starting a serious relationship with other “superstar firms” - defined as those who are in the top thousandth of the size distribution and/or export intensively - we find very similar performance impacts.

Related: The Economics of Inequality in High-Wage Economies and The National Economic Council Gets It Wrong on the Roles of Big and Small Firms in U.S. Innovation and Mega Firms and Recent Trends in the U.S. Innovation: Empirical Evidence from the U.S. Patent Data

The average score on the ACT dropped to a new 30-year low, indicating fewer high-school seniors are ready for college, the organization behind the college admissions test said. Test takers had an average score of 19.5 out of 36 in 2023, down 0.3 points from 2022, according to ACT. About 1.4 million high-school seniors took the ACT in 2023, up slightly from the year before, but still down from the more than two million who took it in 2017, according to ACT.  Scores for the class of 2023 were down across all the subjects its test covers, ACT said. They fell 0.3 points for math, reading and science. They were down 0.4 points for English.

Related: Krugman’s Misleading Scandinavian Comparison and Looking For Flynn Effects on a Recent Online U.S. Adult Sample: Examining Shifts Within The SAPA Project and NAEP Long-Term Trend Assessment Results: Reading and Mathematics

About 4 million baby boomers, or 2% of the working-age population, are turning 65 each year, and while the number of Gen Zers turning 15 each year is 200,000 to 300,000 higher than that, more than 820,000 Americans ages 15 through 64 died last year, and about 700,000 died annually in the years leading up to the pandemic. Immigration is thus the only thing keeping the working-age population from shrinking. Immigration spurs economic growth while in some cases depressing wages for some native-born workers. But in the US, if the forecasts are correct, immigration will only keep the 15-to-64 population just about constant through 2100 (as opposed to the 20% decline forecast for the world’s high-income countries overall and the 62% decline forecast for China). We truly have entered a new era for working-age population growth.

Related: The Unexpected Compression: Competition at Work in the Low Wage Economy and Kaiser Workers Launch Largest-Ever US Health Care Strike and Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995

Paul Romer’s original model of economic growth assumed that a constant population of researchers would produce a constant growth rate in the economy. For example, if our economy has a million researchers working every year, its output should grow by 1% every year. Bloom et al noticed that the number of researchers in our economy has grown to 23 times its size in 1930 but the growth rate of the economy has been constant, even decreasing, over that period. So Paul Romer’s assumption that constant research input ==> constant growth rate seems unsupported by the data. Bloom et al explain the divergence between growing research input and constant economic growth by assuming that ideas get harder to find as we discover more of them.  “Are Ideas Getting Harder To Find?” documents a serious problem with economic growth: our investments into research are growing fast but the rate of economic growth is constant at best.

Related: The Economics of Inequality in High-Wage Economies

Nonparticipation rates have increased with each generation of prime-age men. Millennials experience a notably different nonparticipation rate trajectory over their lifetime compared with previous generations, with rates starting at a higher level and declining more steeply until their mid-30s. This temporarily higher level of nonparticipation is driven by school enrollment. Even though nonparticipation rates for millennials are still higher than in previous generations, given the increasing educational attainment for younger generations and the trends we observe by education groups, the pace of the sustained rise in male nonparticipation rates may slow in the future, which could benefit economic growth.

Related: Wage Inequality and the Rise in Labor Force Exit: The Case of US Prime-Age Men and 20-40% of Declining Workforce Participation from Prime Working-Age Men Dropping Out (for Less Than 2 Years) to Increase Their Leisure and Econ Focus: Melissa Kearney

Even if there’s no immediate crisis, high-interest rates will almost surely crowd out private investment, hurting our long-term prospects. I’m especially concerned about the effects of high rates on investments in renewable energy, which are of existential importance. The federal government is essentially an insurance company with an army. Look at spending in fiscal 2023: Social Security, health care and other safety net programs accounted for most government spending. Add military spending and interest payments, and what’s left — NDD, for “nondefense discretionary” spending — is a small slice of the total. Furthermore, NDD has been squeezed by past austerity. So there’s no possibility for major spending cuts unless we slash programs that are extremely popular. The point is that the economics of deficit reduction are straightforward. It can be accomplished either by reducing social benefits or by raising taxes. Given that America has weak social spending compared with other countries, taxes are the most plausible route. But I don’t see any plausible political path to a tax increase that would make a large dent in the deficit.

Related: U.S. Deficit Explodes Even As Economy Grows and American Gothic and The Limits of Taxing the Rich

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.

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