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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Related: Capital Allocation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Related: What We’ve Learned About Inflation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Related: Demand for Treasuries and Trapped Liquidity and Raising Anchor

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Related: Collapsing Social Trust is Driving American Gun Violence

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Meanwhile, spending at stores, restaurants, and online excluding grocery stores and gas stations has been rising at a yearly rate of 7% each month on average since the spring, compared to 4% a year in 2017-2019. That is consistent with underlying wage growth, which is still rising about 2 percentage points faster than before the pandemic, despite the normalization in job market churn, the declining wage bump for people switching jobs, and the slowdown in the growth of posted wages on job boards.

Related: Breaking Down the Sources of US Economic Resilience and Soft Landing Summer and The Unresolved Tension Between Prices and Incomes

The United Auto Workers union for the first time ever went on strike at all three Detroit car companies, with about 12,700 workers hitting the picket lines shortly after midnight Friday in targeted work stoppages at plants in Michigan, Ohio, and Missouri. The UAW’s plans for targeted work stoppages would bring only a fraction of the overall workforce off assembly lines. That strategy would help preserve the union’s $825 million fund more than a full strike of all 146,000 workers, but stymie output and disrupt automakers’ production planning. It also could prove risky, because employees who remain on the job likely would be working without a contract, a prospect that has sparked concern among some members.

Related: Autoworkers Have Good Reason to Demand a Big Raise and The Q4 Pothole: Student Loans, Shutdown, and Strikes and EV Boom Remakes Rural Towns in the American South

Unions’ declining vote share combined with less dominant Democratic performances with union household voters have made all three Blue Wall states more competitive: after voting reliably Democratic from 1992 to 2012, each narrowly broke for Trump in 2016. Although Biden won all of them back in 2020, he did so by far smaller margins than Obama earned in 2012. In 2020, white, non-college voters constituted a majority of the electorate in Michigan (54%), Pennsylvania (53%), and Wisconsin (58%). While this demographic is still likelier than not to vote Republican, non-college white voters who are unionized were less likely to back Trump in 2020 compared to those who were not. And while these voters are often more culturally moderate or even conservative, many embrace economic populism and highly approve of unions, giving Biden and Democrats an opportunity to make greater inroads.

Related: Flanked by Union Allies, Biden Touts $36 Billion Pension Bailout and The ‘Summer of Strikes’ Isn’t Living Up to the Hype

By 2030 copper and nickel demand could rise by 50-70%, cobalt and neodymium by 150%, and graphite and lithium six- to seven-fold. All told, a carbon-neutral world in 2050 will need 35m tonnes of green metals a year, predicts the International Energy Agency. Industry oracles asked by The Economist predict copper-supply gaps of 2m-4m tonnes, or 6-12% of potential demand, by 2030. They also foresee a shortfall of lithium of 50,000-100,000 tonnes, a 2-4% deficit. Nickel and graphite—plentiful in theory—could cause problems because batteries require pure material. There are too few smelters to refine bauxite into aluminum. Outside China, next to no one produces neodymium.

Related: Glencore Says This Time Is Different for Coming Copper Shortage and Lithium Discovery in US Volcano Could be Biggest Deposit Ever Found and What Have We Learned About the Neutral Rate?

Recent studies from the US, Sweden, and Finland all demonstrate that although most people who move directly into new unsubsidised housing may come from the top half of earners, the chain of moves triggered by their purchase frees up housing in the same cities for people on lower incomes.  The US study found that building 100 new market-rate dwellings ultimately leads to up to 70 people moving out of below-median income neighbourhoods, and up to 40 moving out of the poorest fifth. Those numbers don’t budge even if the new housing is priced towards the top end of the market.  It’s a similar story in the American Midwest, where Minneapolis has been building more housing than any other large city in the region for years, and has abolished zones that limited construction to single-family housing. Adjusted for local earnings, average rents in the city are down more than 20% since 2017, while rising in the five other similarly large and growing cities.

Related: On the Move: Which Cities Have The Biggest Housing Shortage? and A $100 Billion Wealth Migration Tilts US Economy’s Center of Gravity South and Young Families Have Not Returned to Large Cities Post-Pandemic

First, we expect the resumption of student loan payments to subtract 0.5pp from quarterly annualized GDP growth. Second, the federal government looks more likely than not to temporarily shut down. A government-wide shutdown would reduce quarterly annualized growth by around 0.2pp for each week it lasted. Third, we estimate that reduced auto production from a potential UAW strike would reduce quarterly annualized growth by 0.05-0.10pp for each week it lasted, if all three companies currently undergoing contract negotiations are impacted. We expect quarterly annualized GDP growth to slow from +3.1% in Q3 to +1.3% in Q4 (vs. consensus of +2.9% and +0.6%). We expect the slowdown to be shallow and short-lived, with GDP growth rebounding to +1.9% in Q1 (vs. consensus of +0.1%) as these temporary drags abate and income growth reaccelerates on the back of continued solid job growth and rising real wages.

Related: Soft Landing Summer and Autoworkers Have Good Reason to Demand a Big Raise and The Economic Impact of the Student Loan Restart

The impact on markets of the government’s expanded financing need is largely still ahead of us. Over the past year, the government has funded essentially all of the increase in its deficit by issuing T-bills and spending down its cash reserves rather than significantly ramping up the issuance of duration to the market. As a result, Treasury issuance hasn’t needed to entice money out of other cash and asset markets, and thus the impact of the expanded deficit on liquidity has been minimal thus far. We think this pressure is delayed rather than eliminated: looking forward, we expect that the Treasury will shift its mix of issuance toward more duration, as the budget deficit remains elevated and the share of bills outstanding rises through the range that the Treasury generally prefers to target (though there is plenty of flexibility around the precise proportion).

Related: Soft Landing Summer and Has the Fed Tightened Enough? Guideposts to Consider and DM Debt - How to Move Mountains

The chart shows the % of Black families that are in three income groups, using total money income data. The data is adjusted for inflation. The progress is dramatic. In 1967, the first year available, half of Black families had incomes under $35,000. By 2022 that number had been cut in half to just one quarter of families (the 2022 number is the lowest on record, even beating 2019). Twenty-five percent is still very high, especially when compared to White, Non-Hispanics (it’s about 12 percent), but it’s still massive progress. It’s even a 10-percentage point drop from just 10 years ago. And Black families haven’t just moved up a little bit: the “middle class” group (between $35,000 and $100,000) has been pretty stable in the mid-40 percentages, while the number of rich (over $100,000) Black families has grown dramatically, from just 5% to over 30%.

Related: U.S. Incomes Fall for Third Straight Year and Who Won the Cold War? Part I

Last week Huawei quietly unveiled the Mate 60 Pro—its new smartphone that apparently comes with 5G capabilities. According to a teardown by industry research firm TechInsights, the main chip inside this new phone is made using technology comparable to the so-called 7nm process. It is possibly made by China’s leading chip foundry  Semiconductor Manufacturing International (SMIC).  That is still generations behind the market leaders. For example, TSMC has already been mass-producing more advanced 3nm chips. But that nonetheless is still a big step forward, especially given the limitations China’s chip makers are facing. While SMIC has no access to the most cutting-edge extreme ultraviolet lithography machines, it could use some older equipment to make advanced chips, likely using a process called multipatterning.

Related: China Imports Record Amount of Chipmaking Equipment and Japan to Join US Effort to Tighten Chip Exports to China

Put simply, Kirin 9000S is a better-designed chip than the West realizes. It has solid power and performance. Even with the lackluster export controls, this is a leading-edge chip that would be near the front of the pack in 2021, yet was done with no access to EUV, no access to cutting-edge US IP, and intentionally hampered. We cannot overstate how scary this is. There are steps that could be taken to ensure that China does not develop the ability to mass-manufacture the sorts of chips needed for high-end military applications in the coming year. Half measures will not work, but a full-scale assault will make it so the cost of replicating the semiconductor supply chain domestically is neigh on impossible. While we aren’t advocating for any of these specifically, it is clear the West can still stop China’s rise if decisive action is taken.

Related: Huawei Building Secret Network for Chips, Trade Group Warns and China Imports Record Amount of Chipmaking Equipment and Japan to Join US Effort to Tighten Chip Exports to China

We had 2 consecutive unqualifiedly good CPI reports. I was hoping for a 3rd but this one is only qualifiedly good. Not a huge concern but some. I'm focused on core CPI which grew at a 3.4% annual rate after 2 months <2%. Here is swapping new rents instead of all rents for core. The most reassuring of the bunch because new rents are actually falling. Is a useful gut check but I would not actually assume that we're going to see substantial falls in all rents anytime soon. Overall I still feel better than I did a few months ago about the possibility of a soft landing. But I feel a bit worse than I did yesterday. And if you over-updated based on the noisy June and July data you should probably be over-updating back again based on the August data. One month of data will not and should not change what the Fed does next week. But if we get two more months like this then I would hope they hike again at the December meeting.

Related: The Unresolved Tension Between Prices and Incomes and Has the Fed Tightened Enough? Guideposts to Consider

Using a debt accounting exercise, we show that periods of sustained debt reduction are typically driven by strong primary balances and above-average growth. Following 1980, inflation has played little role in debt reductions. Current fiscal projections and current market interest rates on average do not point to declines in debt-to-GDP ratios across developed markets. We estimate that market implied r - g, the difference between real interest rates and growth rates, is now positive for many countries. Japan provides an example of high debt peaceably coexisting with low interest rates. However, given current high inflation, wider deficits, and rising interest costs, we think it unlikely that we return to the era of structurally low interest rates in the US, UK, or Europe. As a result, we see the risks to term premia skewed higher as fiscal risks simmer.

Related: Living with High Public Debt and American Gothic and Is a U.S. Debt Crisis Looming? Is it Even Possible?

The decline in marriage and the rise in the share of children being raised in a one-parent home has happened predominantly outside the college-educated class. Over the past 40 years, while college-educated men and women have experienced rising earnings, they continue to get married, often to one another, and to raise their children in a home with married parents. Meanwhile at the same time, the earnings among adults without a college degree have stagnated or risen only a bit. And these groups have become much less likely to marry and more likely to set up households by themselves.So just mechanically, these divergent trends in marriage and family structure mean that household inequality has widened by more than it would have just from the rise in earnings inequality.

Related: US Births Are Down Again, After the COVID Baby Bust and Rebound and Wage Inequality and the Rise in Labor Force Exit: The Case of US Prime-Age Men and Bringing Home the Bacon: Have Trends in Men’s Pay Weakened the Traditional Family?

Americans’ inflation-adjusted median household income fell to $74,580 in 2022, declining 2.3% from the 2021 estimate of $76,330, the Census Bureau said Tuesday. The amount has dropped 4.7% since its peak in 2019. Wage growth for the typical worker outstripped inflation starting in December 2022, with inflation-adjusted wages rising about 3% in July, according to data from the Atlanta Fed Wage Tracker and the Labor Department.

Related: Jason Furman On Employment Cost Index and Real Wage Growth at the Individual Level in 2022 and The Unexpected Compression: Competition at Work in the Low Wage Economy

Brussels will launch an anti-subsidy investigation into Chinese electric vehicles that are “distorting” the EU market. The probe could constitute one of the largest trade cases launched as the EU tries to prevent a replay of what happened to its solar industry in the early 2010s when photovoltaic manufacturers undercut by cheap Chinese imports went into insolvency. If found to be in breach of trade rules, manufacturers could be hit with punitive tariffs.

Related: China Set to Overtake Japan as World’s Biggest Car Exporter and China’s Auto Export Wave Echoes Japan's in the ’70s

The positive-sum vision of global economic integration is that rising production in one place does not need to displace existing production elsewhere because demand and living standards will rise commensurately. Novo Nordisk’s scientists invented something new and valuable, simultaneously creating both supply and demand. They did not pivot from selling to Danes to selling to Americans. The negative-sum vision is the one of businesses burdened by persistent “overcapacity” (really, underconsumption) are forced to fight for market share in a world without growth. The U.S. effectively preempted the influx of Chinese-made electric vehicles with the Inflation Reduction Act, which boosts total demand while reserving a share for local producers. Europe is far more exposed and has yet to formulate a response. The common belief in certain circles that Europeans are more “open to trade” than Americans may not survive this experience.

Related: How Weight Loss Drugs Stopped a Danish Recession and China Set to Overtake Japan as World’s Biggest Car Exporter

By my calculations, if the government could directly or indirectly transfer roughly 1.5% of GDP every year to households, it could drive growth in household income – and with it, household consumption – to around 7% annually. This, in turn, could generate GDP growth of 4-5% even as investment growth dropped sharply. The arithmetic of rebalancing is unassailable. Given its status as the world’s second-largest economy, and by far the world’s largest investor, China simply cannot maintain its current investment share of GDP while continuing to grow relative to the rest of the world.

Related: Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and Chinese Professor Says Youth Jobless Rate Might Have Hit 46.5% and China Cannot Allow Jobless Young To ‘Lie Flat’

For the first time, the new iPhone model you buy on the launch day could be made in India. Apple plans to make the India-built iPhone 15 available in the South Asian country and some other regions on the global sales debut day, people familiar with the matter said. While the vast majority of iPhone 15s will come from China, that would be the first time the latest generation, India-assembled device is available on the first day of sale, they said, asking not to be identified as the matter is private.

Related: Apple India iPhone Output Soars to $7 Billion in China Shift and Top Apple Supplier Foxconn Plans Major India Expansion and Apple’s Complex, Secretive Gamble to Move Beyond China

The federal budget deficit was $1.5 trillion in the first 11 months of fiscal year 2023, the Congressional Budget Office estimates—$0.6 trillion more than the shortfall recorded during the same period last year. Revenues were 10% lower and outlays were 3% higher from October through August than they were during the same period in fiscal year 2022. Receipts collected through August 2023, net of refunds, were about $350 billion less than CBO projected, mainly because of smaller-than-anticipated collections of individual and corporate income taxes.  Net outlays for interest on the public debt rose by $149 billion (or 30 percent), mainly because interest rates are significantly higher than they were in the first 11 months of fiscal year 2022.

Related: The 2023 Long-Term Budget Outlook and Interest Costs Will Grow the Fastest Over the Next 30 Years and US Fiscal Alarm Bells Are Drowning Out a Deeper Problem

While the vast majority of U.S. mortgages are 30 year fixed rate, many other countries rely on either variable rate or short dated fixed rate mortgages. U.S. mortgage debt servicing ratios have thus remained around historical lows due to robust wage growth and a large existing stock of mortgages taken out at low rates. In contrast, households in many other countries are beginning to see their disposable income disappear. The dollar strengthened significantly in 2022 as the Fed moved more aggressively than other major central banks, but sold off when other countries caught up. The scenario may replay in a slightly different way as interest rate differentials widen because other central banks retreat first.

Related: Soft Landing Summer and Has the Fed Tightened Enough? Guideposts to Consider and  The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet)

Using a measure of nonfinancial corporate profits from the national income accounts [before tax profits with capital consumption adjustment] we find that nonfinancial corporate profit margins, or profits over gross value added, increased sharply to about 19% in 2021 Q2 and slipped back to 15% in 2022 Q4, compared to about 13% in 2019 Q4. Our analysis shows that much of the increase in aggregate profit margins following the COVID-19 pandemic can be attributed to (i) the unprecedented large and direct government intervention to support U.S. small and medium-sized businesses and (ii) a large reduction in net interest expenses due to accommodative monetary policy.  Without the historically outsized government fiscal intervention and accommodative monetary policy, non-financial profit margins during 2020-2021 would have been more in line with past episodes of large economic downturns.

Related: The Curious Incident of the Elevated Profit Margins and "Greedflation" and the Profits Equation

China is set to become the world’s biggest car exporter this year, overtaking Japan. Driving China’s global ascendancy are deep structural problems in the domestic auto industry, which threaten to upend car markets across the world. A stark mismatch between production at Chinese factories and local demand has been caused, in part, by industry executives mis-forecasting three key trends: the rapid decline of internal combustion engine car sales, the explosion in popularity of electric vehicles and the declining need for privately owned vehicles as shared mobility booms among an increasingly urbanised Chinese population. The result has been “massive overcapacity” in the number of vehicles produced in factories across the country, said Bill Russo, former head of Chrysler in China and founder of advisory firm Automobility. “We have an overhang of 25mn units not being used.”

Related: China’s Auto Export Wave Echoes Japan's in the ’70s and Can Volkswagen Win Back China? and How China Became A Car-Exporting Juggernaut

When the core inflation rate averages above 4%, the stock-bond correlation has been positive with few exceptions. Core inflation has averaged 4.5% for the past three years and is currently 4.7%.  Even in periods of high stock-bond correlations, stocks, and bonds can be negatively correlated over shorter periods. In fact, over the first eight months of this year, stocks and bonds moved opposite one another in May, June, and July. This also helps explain how in the 1970s during a period of sustained positive stock-bond correlations, Treasurys still had positive returns in recessions.  The stock-bond correlation can be seen as an indicator of what is the dominant risk—inflation or growth—and how it is changing.

Related: Stock-Bond Correlations and Do Stocks Always Outperform Bonds?

Mr. Trump’s made huge gains among white voters without a college degree in 2016, a group that was overrepresented in the key Northern battleground states. The polls so far this cycle suggest that the demographic foundations of Mr. Trump’s advantage in the Electoral College might be eroding. Mr. Biden is relatively resilient among white voters, who are generally overrepresented in the battleground states. Mr. Trump, meanwhile, shows surprising strength among nonwhite voters, who are generally underrepresented in the most critical battleground states. As a consequence, Mr. Trump’s gains among nonwhite voters nationwide would tend to do more to improve his standing in the national vote than in the battleground states. Overall, 83% of voters in Wisconsin, Michigan, and Pennsylvania were white in the 2020 election compared with 69% of voters elsewhere in the nation.

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 Can Democrats Survive the Looming Crisis in New York City’s Outer Boroughs?

Twelve insurers that write homeowners coverage in Louisiana were declared insolvent between July 2021 and February 2022, according to the Insurance Information Institute. Those closures sent insurance prices spiraling out of control, in both absolute terms and also in prices relative to local median incomes that are among the lowest in the nation. The average premium rose 6.7% in 2021 and then 18.5% in 2022, according to the Louisiana Department of Insurance. Louisiana Citizens Property Insurance Corp., the state-backed insurer of last resort, went from 45,000 policies in 2020 to 130,000 currently. That’s despite the fact that, by law, it charges 10% above market rate and raised rates 65% at the beginning of this year.

Related: Analyzing State Resilience to Weather and Climate Disasters and How a Small Group of Firms Changed the Math for Insuring Against Natural Disasters and Home Insurers Are Charging More and Insuring Less

The latest government data released just last month points to a second year of increases in 2022 after years of declines. The trend is sparking resentment as house prices in the top 10 rural counties that have seen the biggest population increases surged more than 40% over the past three years. The number of people living in non-metro areas outgrew the urban population for the first time in three decades in 2021, and the rural population expanded again last year. But growth wasn’t evenly distributed, with the top 10 counties with the largest population gains growing by an average 5%, according to Census data. That’s more than the national average of 0.4%.

Related: Young Families Have Not Returned to Large Cities Post-Pandemic and Tax Data Reveals Large Flight of High Earners from Major Cities During the Pandemic

Sweden, which has applied for Nato membership, announced on Monday that it planned to raise defense spending by more than  25%  to meet the military alliance’s target of 2% of GDP.  Currently, only 11 of 31 members do.  Persuading voters of the sacrifices required to make such commitments a reality represents a seismic reordering of the budget and electoral priorities. In Denmark, the government opted to fund its increase in public spending by cancelling a public holiday — to much chagrin from voters. "Leaders have signed up to a generational shift in defence policy. But I do wonder if they fully understand, or have told their finance ministers,” a senior Nato official said.

Related: The Age-Old Question: How Do Governments Pay For Wars? and The Cost of the Global Arms Race and Military Briefing: Ukraine War Exposes ‘Hard Reality’ of West’s Weapons Capacity

The federal deficit for the first 3/4 of the fiscal year 2023 was almost 3x as high as a year before. Very little of it was the result of new spending programs (although money is starting to flow out the door under the Biden administration’s industrial policies).  It was mainly about two things: a sharp fall in tax receipts and rising interest payments. What’s happening on taxes is that the federal government in effect got a windfall from stock prices and inflation, which is now going away. We’re not looking at any fundamental deterioration. The U.S. government really shouldn’t be running budget deficits this big at full employment. Yet we don’t want to reduce deficits by cutting essential spending. America collects a lower share of its income in taxes than other major economies, so more revenue — partly from the rich, but also from the middle class — would be a reasonable policy.

Related: Is a U.S. Debt Crisis Looming? Is it Even Possible? and American Gothic and Living with High Public Debt