“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
Democratic success may have more to do with the Republican nominees than abortion as mainstream GOP governors who signed restrictive abortion laws were reelected last year in Ohio and Georgia. @mbaharaeen
While Americans are fairly supportive of abortion access and largely oppose onerous restrictions on the procedure (and encroachments on their personal rights more broadly), it does not follow that all voters who hold this view will turn around and vote for the party that mostly shares it. Overall, Democrats have found success in their three Blue Wall states in part because Republicans have nominated candidates whose views on abortion fall way outside the mainstream. Yet, some GOP governors who signed strict abortion laws managed to successfully fashion themselves as moderates and secured re-election in 2022, signaling that while abortion may work to the advantage of Democratic candidates under the right circumstances, they should not view the issue as a silver bullet.
A new @NBERpubs paper shows that parents’ comparative skill advantage in math (vs. language) is significantly linked to the comparative skill advantage of their children. @EricHanushek @SimonWiederhold
Our analysis shows that comparative skill advantages are transferred across generations: Parents who were relatively better at math (vs. language) in childhood are more likely to have children with a similar comparative skill advantage in math. We also find that parents’ comparative skill advantage is a strong predictor of their own STEM choices and those of their children. The new Intergenerational Transmission of Skills (ITS) database that we develop permits matching skills of Dutch parents and children derived from similar tests taken at similar ages. We measure comparative skill advantage as the ordinal difference between math and language skills in the parent and child generation, respectively, each assessed by the percentile position in the nationwide skill distribution. We find that parents with a comparative advantage in math skills are significantly more likely to have children with a similar math skill advantage.
A KBW index of regional bank stocks was down at least 5% in the aftermath of JPM’s rescue of First Republic. The level of short interest in regional banks hasn’t increased in the past month.
The rescue of First Republic this week has failed to arrest a sell-off in regional bank shares, which plunged on Tuesday morning as investors digested JPMorgan’s takeover of the troubled Californian lender along with gloomy economic data. A KBW index of regional bank stocks slid more than 5 percent in morning dealings. Investors have been heavily betting on further share declines in some of the mid-sized banks, with short interest in California-based PacWest particularly high. However, the level of shorting activity is little changed over the past month, according to Markit data.
IBM will stop or slow hiring for jobs that it thinks it can replace with AI driven systems; this impacts 30% of its 26,000 workers in non-customer facing roles over the next 5 years. @markets
The speed of disruption brought on by a worldwide rush into artificial intelligence was on full display this week, sending shares of education-technology company Chegg Inc. plunging, prompting IBM to halt some hiring and prompting a chatbot ban at Samsung Electronics Co. Chegg shares plunged more than 40% in early trading on Tuesday after the company said OpenAI’s ChatGPT is threatening the growth of its homework-help services. International Business Machines Corp. Chief Executive Officer Arvind Krishna said in an interview with Bloomberg on Monday that the company is going to stop or slow hiring for jobs it believes will be replaced by artificial intelligence. That amounts to about 30% of its 26,000 workers in non-customer facing roles over a 5-year period, he said.
Scientists are firing up the US National Ignition Facility for the first time since its net positive fusion breakthrough last year. @Nature
In the long term, the goal is to increase the amount of energy generated by fusion reactions from the 3.15 megajoules created last year to hundreds of megajoules. Richard Town a physicist, sees a viable path to increasing US National Ignition Facility’ (NIF) energy yields to tens of megajoules by, among other things, further boosting the lasers’ energy going into the target. The old joke about fusion energy is that it’s 50 years away, and always will be. Many scientists now say the front end of that equation is closer to 20–30 years, but it’s really just a matter of funding, says Pravesh Patel, a former scientist at Lawrence Livermore National Lab who currently serves as scientific director at Focused Energy in Austin, Texas, a private laser-fusion firm.
Since 2021, 50mm birds have been killed in Europe, 58mm in the United States and 17mm in Japan, but, despite these large-scale culls, avian flu is endemic.
Although the response in Rolaing has been deemed a success by health officials, the challenge is clear. It took a full week for the infection to come to the attention of the government health system. The villagers didn’t think anything was amiss when a handful of dead chickens were found along the river, blaming hot weather for the deaths. It was only as the schoolgirl’s condition deteriorated that the connection was made. When she arrived at hospital on Feb. 21, doctors — unaware that two of the family’s four chickens, which lived largely underneath the room where she slept, had died — assumed she had a seasonal flu.
China has revised its conscription law to allow the government to quickly draft science and engineering students, especially those trained in artificial intelligence and robotics. @NikkeiAsia
China enacted revisions to its military service law that will allow retired military personnel to be reenlisted to secure experienced soldiers. The law also focuses on recruiting tech-savvy science and engineering students to prepare for warfare in new domains such as space and cyber, as the country tries to build its military strength to prepare for possible all-out war in the Taiwan Strait. The State Council and the Central Military Commission, the Chinese military's top decision-making body, approved the revised regulations on conscription, based on the Military Service Law. "We will build a military draft system that can respond, from peacetime to emergencies, swiftly and seamlessly," Tan Kefei, a spokesman at the Chinese defense ministry, said.
Using evidence from two large retailers @RDMetcalfe @ASollaci @ChadSyverson find that individual managers, outside of firm-wide management practices, explain 25-35% of variance in store level productivity.
Overall, managers explain between 25 and 35% of the variance of store-level productivity, which is about 50-70% of the explanatory power of store fixed effects. In the four largest connected sets across both companies, moving a manager from the 10th percentile to the 90th percentile increases overall productivity by between 22% and 82%. On average, this implies an effect on output equivalent to adding a fifth employee to a team of four. We estimate that replacing a manager at the bottom of the distribution by one at the top could increase a store’s productivity by at least 50%, and perhaps as much as doubling it, depending on the company and the relevant connected set.
JPM has acquired First Republic Bank. Commenting on recent banking instability in the aftermath of the SVB failure, Jamie Dimon said, “This is getting near the end of it.”
JPMorgan Chase & Co. agreed to acquire First Republic Bank in a government-led deal for the failed lender. “This is getting near the end of it, and hopefully this helps stabilize everything,” JPMorgan Chief Executive Officer Jamie Dimon said on a call with journalists Monday. Regional banks that reported first-quarter results in recent weeks “actually had some pretty good results,” the CEO said. “The American banking system is extraordinarily sound.” Dimon’s bank acquired about $173 billion of First Republic’s loans, $30 billion of securities and $92 billion in deposits. JPMorgan and the FDIC agreed to share the burden of losses, as well as any recoveries, on the firm’s single-family and commercial loans, the agency said in a statement.
Torsten Sløk @apolloglobal notes the median time from the start of the Fed’s hiking cycle until unemployment bottoms is 14 months. We are 13 months into the current hiking cycle.
The unemployment rate falls when the Fed hikes rates, see chart below. In fact, the declining unemployment rate is precisely the reason why the Fed is raising interest rates. And the chart below suggests that when the unemployment rate starts moving higher is when the Fed stops hiking. Looking back in history, the median time it takes from when the Fed starts hiking until the unemployment rate bottoms and moves higher is 14 months, and using this historical pattern as a guide, with the first Fed hike in March 2022, we should begin to see the unemployment rate increase within the next couple of months. The bottom line is that it usually takes 12 to 18 months for the Fed to soften the labor market, and today is no different.
While there are signs of a slowdown, the tightening cycle hasn’t yet had much of an impact on construction spending and employment. @WSJ
Construction spending and employment have risen to new records this year, boosted by government outlays for infrastructure, a domestic manufacturing renaissance and a wave of apartment building that got off to a slow start during the pandemic when prices for building materials, such as lumber, were sky high. There are signs of slowdown, to be sure. Apartment construction is expected to decline once the latest batch of buildings is finished. Problems at regional banks are drying up financing for some projects. Spending on home improvement and repairs is forecast to decline over the next year, the first contraction since the depths of the foreclosure crisis in 2010, according to a closely watched barometer of the remodeling industry.
Michael Lind argues that the earned-income tax credit slows productivity growth by subsidizing low-wage employers who in turn don’t need to invest in automation.
We can call the current American labor market system the low-wage/high-welfare model. It is a success from the perspective of employers who get to pay lower wages. It is also a success for some consumers, since lower wages mean lower prices. The losers include taxpayers, the working poor themselves and workers who are not poor but fear poverty. The low-wage model also saps the incentives for technological innovation, because cheap labor so often substitutes for labor-saving machinery. For the 2022 tax year, 31 million American workers and their children received an average of $2,043 in EITC benefits, for a cost to taxpayers of $63 billion. That is $63 billion in taxpayer money that could have been saved if employers had paid those workers a little more each month.
Real hourly earnings for the bottom 10% earners rose by 6.4% between January 2020 and September 2022. Real hourly earnings for the top 10% and median earners were down in real terms.
America’s lowest-earning workers are enjoying higher wage growth than top earners, after taking into account the effects of the recent bout of high inflation. Since 2020, real wages for the bottom 10 percent of the workforce have returned to their pre-pandemic level. In contrast, top earners and those on average incomes have taken a substantial hit once the effect of price growth is taken into account. Real hourly earnings for the lowest earners rose by 6.4 percent between January 2020 and September 2022.
Charlie Munger warns that investors should expect lower returns going forward. Adding he and Buffett were “creature[s] of a particular time and a perfect set of opportunities…[We lived in] a perfect period to be a common stock investor.”
Berkshire has generated compounded annual returns of nearly 20 percent, twice the rate of the benchmark S&P 500 stock index, since 1965. “We were a creature of a particular time and a perfect set of opportunities,” said Munger, adding that he had lived during “a perfect period to be a common stock investor”. He and Buffett had benefited “by and large [from] low interest rates, low equity values, ample opportunities”, he said. Munger warned that the golden age for investing was over, and investors would need to contend with a period of lower returns. “It’s gotten very tough to have anything like the returns that were obtained in the past,” he said, pointing to higher interest rates and a crowded field of investors chasing bargains and looking for companies with inefficiencies.
In an effort to improve India’s growth trajectory, India’s government is making significant investments in railroad and highway infrastructure.
India will spend 1.7% of GDP on transport infrastructure this year, around twice the level in America and most European countries. If such infrastructure were a central-government department, it would have the third-biggest budget after the finance and defence ministries. The stated aim of the splurge is to cut the cost of logistics within India from around 14% of GDP today to 8% by 2030.
The Employment Cost Index is consistent with annualized 4% PCE inflation. Real wages are now 5% below their pre-pandemic trend. @Jasonfurman
The Employment Cost Index weighs in on the side of the argument that wage growth is not slowing--suggesting that the average hourly earnings slowdown was a spurious result of composition. Over the last six months, ECI went up at a 4.7% annual rate, consistent with 4.0% PCE inflation. The previous showed private wages excluding incentive occupations, probably the best measure. All the measures consistent. At an annual rate over the last 3 months: Private comp +4.7%; Private wages +4.9%; Private wages ex incentive+ 5.1%. All are higher than any time in the last cycle. This leaves real wages and salaries 5 percent below their pre-pandemic trend.
In a survey of capital markets in the past two decades, @ft concludes that Europe has failed to take share from American capital markets. European firms that list in the US have raised 4x more money than American firms that list in Europe.
The value of European listings in 2022 dropped to its lowest point in a decade, according to Dealogic data. Just one deal — the €75bn listing of carmaker Porsche in Frankfurt — accounted for 60 per cent of the total amount raised. In the UK, newly listed companies raised 90 per cent less in 2022 than the heights of 2021, with just 45 companies listing in London, according to LSE data. Only six of those raised more than £100mn of new money. The massive outperformance of the US in recent years — both in terms of listing numbers and in the valuations that companies there can command — was a product of the two factors: the technology scene in Silicon Valley, and the ultra-loose monetary policy that drove cash into riskier assets such as equities.
Apple and Microsoft now make up 14% of the S&P 500 after adding $1T of combined market value since the start of the year. Including Alphabet, Amazon, Meta and Nvidia, 25% of the S&P 500 is in 6 firms.
Apple Inc. and Microsoft Corp. have never held more sway over the S&P 500 Index. The world’s two most-valuable companies saw their combined weightings in the benchmark jump to a record 14% this week after strong earnings reports from Microsoft and others fueled a rally in technology stocks. When you include Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Nvidia Corp, nearly aquarter of every dollar put into the S&P 500 is now split between just six names. Apple and Microsoft alone have added more than $1 trillionin combined market value in 2023, nearly halfof the gains for the entire S&P 500.
Germany may join the American export controls on China and limit the export of chemicals used to manufacture semiconductors. China is Germany’s largest trading partner. @markets
Germany is in talks to limit the export of chemicals to China that are used to manufacture semiconductors as Berlin steps up efforts to reduce its economic exposure to the Asian nation. While Germany does not have advanced chip-making technologies, Merck and BASF provide firms around the world with critical chemicals required for making semiconductors. Merck’s products or services are found in almost every single chip in the world, while BASF is a market leader in Europe and Asia, home to the world’s most important contract chipmakers including Taiwan Semiconductor Manufacturing Co. Without supplies from Merck and BASF, China could face more challenges in developing advanced chip technologies and even its capabilities to make semiconductors could be affected. Talks within the ruling coalition on such export controls are still at an early stage and officials are aware that any such decision could damage business ties with China, which has become Germany’s largest trading partner, the people said.
New research shows that a major increase in federal student loan funding that started in 2006 had the effect of dramatically increasing tuition without improving either inclusion or the future earnings of graduates. @JeffDenning @Econ_Sandy @AEI
In 2006, the federal government essentially uncapped student borrowing for graduate programs with the introduction of the Graduate PLUS loan program. We find that access to additional federal loans increased previously constrained students’ borrowing and shifted the composition of their loans from private to federal debt. However, the increase in borrowing limits had no effect on graduate student enrollment or the racial and gender composition of entering graduate students. We find little evidence of short or longer-run effects on the human capital accumulation of students who were or would have been constrained by federal borrowing limits in the absence of Grad PLUS, even though cumulative debt significantly increased for these students when they gained access to Grad PLUS loans. This suggests that access to additional liquidity did not constrain graduate student borrowers’ human capital investments prior to the implementation of Grad PLUS. We also find little evidence of an impact on later earnings, consistent with no change in human capital accumulation. Where we do see effects ison program prices. Grad PLUS-driven increases in federal student loans significantly increased program prices.
.@tylercowen argues that the diffusion of AI will enable important companies to run with a small number of employees managing automated AI-based systems.
Consider ChatGPT, which has been described as the most rapidly growing consumer technology product in history. It is produced by OpenAI, headquartered in San Francisco. Byone recent estimate the company has about 375 employees. By contrast, Meta, even after some layoffs, currently has more than 60,000. OpenAI will make more hires. Still, it may be time to reset expectations for what a major tech company looks like. Important businesses with a small number of employees will need to hire exactly the right people to oversee the larger automated and AI-managed superstructures. Talent selection will rise in importance as a skill, and the people in these smaller units will command very high compensation. Investing will evolve as well, with Americans less likely to own businesses in their stock portfolios. If businesses become smaller overall, they will not have the same need to go public to raise capital for expansion. They will be privately held. Venture capital will rise in importance, but since most solo investors face SEC restrictions on making venture investments, they will have to put their money elsewhere.
Higher defense spending accounted for 20% of US economic growth in Q1 2023. @markets
Higher defense spending accounted for about one-fifth of economic growth in the first quarter — 21 basis points out of the 1.1% annualized increase in GDP — a Commerce Department report showed. From the second quarter of 2022 to the first quarter of 2023, defense contributed an average of 13 basis points to GDP growth. That’sa sizeableswing from the previous five quarters when declining defense spending was slowing the economy down, with an average drag of 23 basis points over that period.
2023 Q1 GDP was .7% below the January 2020 CBO forecast. @jasonfurman notes: “If a Rip Van Winkle economist had GDP data through 2019 and then for 2023-Q1 they would not have thought anything particularly notable had occurred in the interim.”
Headline GDP slowed in Q1 but was pulled down by volatile inventories--absent that strong growth. Overall, the economy is a little below what CBO forecast prior to the pandemic. But that is not surprising given that the pandemic did lasting damage to the economy. Plus, it is well within the rounding error of the pre-pandemic forecast. Overall, most components of GDP are basically where they were expected to be prior to the pandemic. If a Rip Van Winkle economist had GDP data through 2019 and then for 2023-Q1 they would not have thought anything particularly notable had occurred in the interim. Finally, a reminder: everything above is wrong. These numbers will be revised many, many times in the coming quarters, years, and even decades.
.@Brad_Setser shows that China has reduced its reliance on manufactured imports while maintaining exports. Net of processing imports, exports are about 14% of GDP, and manufactured imports are now under 4% of GDP.
Despite all the talk about how the world is standing in the way of China's growth, the world (including the US) continues to supply China with one thing it cannot generate domestically -- demand for its manufactures. China's surplus again topped 10% of its GDP. Even with relatively high commodity prices, China's overall trade surplus (in goods) is approaching its pre-global financial crisis peak. As is the surplus in manufacturing. And of course, in dollars, the surplus is WAY bigger than it was prior to the global financial crisis (dollars are an OK proxy for scaling the surplus v the size of its trading partners). The world still supplies China with a ton of net demand. China simply doesn't import many manufactures for its own use (it imports chips for reexport) Net of processing imports, exports are about 14% of GDP and manufactured imports are now under 4% of GDP. This is true "deglobalization."
The boom in American manufacturing investment is being driven almost entirely by the computer/electronic/electrical sector, as the CHIPS Act facilitates semiconductor investments. @JosephPolitano
One thing is for sure so far—the CHIPS Act has already massively buoyed US semiconductor/computer/electronic manufacturing investment and by extension overall US manufacturing construction. At an annualized rate, more than $140B is now being plowed into new domestic manufacturing facilities with more than $60B going to new computer/electronic/electrical manufacturing alone. To put that number in perspective, the current combined value of all medical and educational construction in the US is only about $65B, and the total for all office buildings is only about $80B. Outside of CHIPS-related industries, nominal manufacturing construction spending has grown only marginally—which amidst elevated inflation almost certainly means that real US manufacturing construction would have been on the decline in the absence of CHIPS.
The next generation of extreme ultraviolet (EUV) lithography systems may be too complex to mass produce. @markets
Barred from selling many of its top-end machines in China, and a victim of data thefts, ASML is doing the only thing it can to preserve its almost insurmountable lead: building evermore sophisticated machines. Its next contraption, about the size of an Amsterdam studio apartment, is set to hit markets in 2025. With a price tag of more than $380 million — costlier than a Boeing 787 Dreamliner — it will be capable of etching delicate patterns on silicon wafers smaller than a virus. Already way ahead of rivals, ASML is making sure no one can do what it does for the foreseeable future. Its only real hurdle will be technological limits — building machines that are viable and economical for mass production. “The big long-term risk is that new lithography systems are too costly and unwieldy to produce,” said Chip War author Miller. “ASML will bring its high-NA systems online, but the generation after that, hyper-NA, is still in development. Some ASML staff have speculated it may be too difficult to mass-produce.”
.@paulkrugman’s favored inflation measure asks companies how much they expect their costs to rise over the next year, this metric is still elevated but is coming down without a rise in unemployment.
The best available inflation measure is probably the Atlanta Fed’s index of business inflation expectations, which asks companies how much they expect their costs to rise over the next year (a number they may actually know something about). This number is still elevated from pre-pandemic levels but not by a lot, and it has been coming down. Overall, the data seems to me to point to gradually falling inflation, even though unemployment hasn’t gone up. I’m hoping that as more data comes in, this view will be increasingly vindicated. But I’m going to try not to let my hopes color my analysis, and that’s why I’ve put my preferred measures on the record today.
Ruy Teixeira notes a “working-class sized hole in Biden’s re-elect strategy” that sets up a clear path for President Trump to win a rematch next year, should Trump be the nominee. @AEI
A reasonable guess is working-class class voters will be half again as large as college voters in 2024. That means that slippage in the working-class vote can have on outsize effect on the outcome. In 2020, Trump carried the overall working-class vote by 4 points. In 2022, Republicans carried the nationwide House vote by 13 points. If Trump replicated that 2022 margin in 2024, he would be very hard to beat. Absent a countervailing Democratic improvement in the college vote—which the Democrats already carried by 18 points in 2020—Trump would likely carry Arizona, Georgia, Nevada, Wisconsin, and even Pennsylvania and Michigan. A counter trend among the smaller college-educated group could still cancel these effects out but to completely do so it would have to be larger than the working-class shift, spiking Biden’s advantage among the college-educated to over 30 points. Possible, but a very heavy lift. Since Trump is regularly showing double digit advantages among working-class voters in trial heats and has a proven track record in attracting working-class support, the challenge for Biden’s campaign seems clear. They must at all costs prevent the kind of working-class slippage that could put Trump once again in the Oval Office.
Michael Cembalest argues that despite strong data in Q1/2 many longer horizon indicators are pointing to a slowdown. Excess savings should be down 60-70% by the end of the year. @jpmorgan
Despite strong US data in Q1 and Q2, the US still appears headed for a slowdown later this year. As shown above, many longer-horizon leading indicators point in that direction. Excess household savings are also being run down and should be 60%-70% depleted by the end of the year.
.@AzizSunderji notes record-breaking rates of new business formation since the pandemic but argues that we will not know if this translates into productivity gains for some time.
After peaking mid-way through 2020, “establishment deaths” rapidly dropped back to normal levels, and new establishments were launched. In the third quarter of 2020, a record-breaking 287,000 establishments were “born”. This rate continued to rise, peaking at 379,000 new establishments in the last quarter of 2021. The pace has cooled since then but remains far higher than anything on record before 2020. Much of this could merely be musical chairs, with new businesses replacing those that closed during the pandemic. Restaurants are a good example. New establishments have proliferated, but many also shuttered in 2020. Only in the past few months have the number of restaurants across the country surpassed the 2019 level. This intra-sector shuffling is part of the process of creative destruction, but it’s not clear that the new entrants are any more productive than the incumbents. We won’t know how many of the pandemic-born infant firms grew into toddlers for several years.
In real terms, the Case-Shiller national index (blue line) is 4.6% under its recent peak and 11% above the 2006 bubble peak. @calculatedrisk
In real terms (using CPI less Shelter), the National index is 4.6% below the recent peak, and the Composite 20 index is 6.4% below the recent peak in 2022. In real terms, national house prices are still above the bubble peak levels. There is an upward slope to real house prices, and it has been about 17 years since the previous peak, but real prices are historically high. Affordability was essentially unchanged in February as a slight increase in prices was offset by a slight decrease in mortgage rates. In October 2022, houses were the least “affordable” since 1982 when 30-year mortgage rates were over 14%.
.@LHSummers argues that getting to target inflation will be difficult without a “meaningful” economic downturn. He suggests that the Fed raise rates by 25 basis points at next week’s policy meeting.
Regarding the recent banking crisis, Summers said that the fallout is leading to a “constriction of credit” that is doing some of the work of the Fed’s rate hikes. “We don't need as much interest-rate increases as we would if the banking system were working smoothly,” he said. He's still optimistic about the US economy relative to the rest of the world: “I would rather be playing America’s hand than be playing the hand of any other major country in the world,” he said. “If you look at the collective value of all the American companies relative to all the non-American companies, that is at its highest level ever.”
Chinese police have visited the Shanghai offices of Bain & Company likely as a retaliatory step against American export controls. @FinancialTimes
Chinese police have visited the Shanghai offices of Bain & Company and questioned employees at the US management consulting group, in the latest case of heightened scrutiny of foreign businesses in China as tensions between Beijing and Washington rise. Six people familiar with the situation said Chinese police had made a surprise visit two weeks ago. Police took away computers and phones but did not detain any team members, according to two people briefed on the incident. The raid has particularly fuelled concern at American companies that were already worried about signs that Beijing may be stepping up retaliatory action because of measures taken against Chinese firms by the administration of Joe Biden. US Treasury secretary Janet Yellen last week voiced concerns about what she described as “a recent uptick in coercive actions targeting US firms.”
If China reached the current relative position of South Korea in PPP terms, its economy would be 50% larger than the US and EU combined. @martinwolf_
Measured in comparable terms (at “purchasing power parity”), the economies of the US and its allies remain some 80 per cent bigger than those of China and Russia together. Yet China is still a poor country: at PPP, China’s GDP per head in 2022 was still less than 30 per cent that of the US. Suppose it managed to reach the current relative position of South Korea. Its economy would then be almost half as big again as those of the US and EU, combined. Will this happen? Probably not. But, given past performance, it cannot be ruled out. In any case, China already has a potent economy, a big role in world trade and a huge military. The era of strategic confrontation we have entered is frightening. Somehow, we have to co-operate and compete, while also avoiding military conflict. Our starting point must be to achieve the greatest possible transparency over our aims and plans. We learnt the necessity of that after the Cuban missile crisis in 1962. But we will need far more than that and probably for longer.
.@pewresearch survey of U.S. adults finds 60% of Americans have “some” or “quite a lot” of confidence in America’s future, down from 66% in August of 2020.
Sizable majorities of U.S. adults say that in 2050 – just over 25 years away – the U.S. economy will be weaker, the United States will be less important in the world, political divisions will be wider and there will be a larger gap between the rich and the poor. Far fewer adults predict positive developments in each of these areas. And when Americans reflect on the country’s past, the present looks worse by comparison. Around six-in-ten (58%) say that life for people like them is worse today than it was 50 years ago, according to the survey, which was conducted from March 27 to April 2. Confidence in the future of the country has declined over the past year. In May 2022, 68% said they had at least some confidence in the country’s future, 8 points higher than the share who say this today. The share expressing at least some confidence in the future of the U.S. changed only modestly between August 2020 and May 2022.
.@FedGuy12 writes that multiple indicators suggest that the banking sector is largely back to normal, and he cites evidence that loan growth was not meaningfully impacted by the March panic.
A wide range of data and commentary indicate that both the banking panic is over and that it had only a limited impact on credit availability. The March panic was fundamentally a problem of a few poorly managed banks and not a crisis. Investors are no longer running to money funds and now appear comfortable again with the banking system. Overall bank lending activity was little changed in March and continues to grow in April. Out of an abundance of caution, the Fed scuttled a potentially higher rate path and the market priced in aggressive rate cuts in the second half of 2023. The realization that the banking sector is not collapsing has prompted some repricing, and the eventual realization that it is actually healthy may prompt a further repricing.
.@EthanYWu highlights a research note from GS’s Spencer Hill, which finds that real wage levels for bottom 50 percent earners were almost 10% higher than in 2017, supporting sustainably higher levels of consumer spending.
In a note to clients published on Sunday, Spencer Hill of Goldman Sachs argues that something has changed. “Sustainably stronger consumer finances” have created fresh spending power for people at the bottom of the income distribution. After adjusting for composition effects, Hill estimates that real wage levels for the bottom 50 percent of earners were 6.2 percent higher in the first quarter of this year than in 2019 — and 9.6 percent higher than in 2017. That implies something like $150bn per year in additional spending power for the bottom half. The number rises to $250bn once you throw in other disposable income sources such as social security payments. This matters for two reasons: lower-income consumers spend more of each extra dollar earned, and they spend more of each extra dollar earned on goods, specifically. So long as bottom-half consumers have money to spend, goods consumption should stay high.
Generative AI at WorkErik Brynjolfsson, Danielle Li and Lindsey RaymondNational Bureau of Economic Research
Using evidence from the roll-out of a new AI-based tool for customer support agents, @erikbryn @Danielle__Li @LindseyRRaymond found an overall 14% increase in productivity driven by low-skilled workers, with minimal impact on highly skilled workers.
We study the staggered introduction of a generative AI-based conversational assistant using data from 5,179 customer support agents. Access to the tool increases productivity, as measured by issues resolved per hour, by 14 percent on average, with the greatest impact on novice and low skilled workers, and minimal impact on experienced and highly skilled workers. We provide suggestive evidence that the AI model disseminates the potentially tacit knowledge of more able workers and helps newer workers move down the experience curve. In addition, we show that AI assistance improves customer sentiment, reduces requests for managerial intervention, and improves employee retention.
.@adwooldridge argues that tighter labor will require management teams to spend more time managing low-skilled workers.
The shrinking of the working-age population across the rich world means that companies will have to work harder to attract prime-age workers while also finding new demographic pools to fish in. The simultaneous rise in the number of older people will increase demand for caregivers and home helps. In March 2022, the United States suffered from 11 million job vacancies — most of them frontline jobs in retail, health care, hotels, restaurants, call centers, etc. Similar shortages emerged across the rich world. Zeynep Ton reports that in 2019-20 Nissan’s Smyrna, Tennessee, assembly plant suffered from a 38% turnover rate among its technicians; the direct cost of replacing each technician was $15,000.
China’s share of American imports of electrical and electronics declined from 36.1% in 2013 to 26.8% last year. During the same period, Mexico’s share increased 1.3pp and Vietnam’s increased 5.6pp as American firms start to pursue nearshoring strategies.
Mexico appears to be ideal for some companies seeking sites outside Asia to make goods more cheaply than in the U.S. It is close to American consumers, has a relatively cheap labor force compared with other North American workers and is a member of a free-trade agreement with the U.S. and Canada, saving the cost of tariffs that are imposed on a raft of imports from Asia. Importers say that although the cost of manufacturing in Mexico may be higher than in some parts of Asia, the country also delivers cost savings from shorter shipping distances that reduce the need to carry so much inventory and that offset the risk of production disruptions and lost sales because of freight delays.
China’s autarky drive continues with China aiming to grow 90% of its grain supply by 2032 up from its current level of 82%. @SCMPNews
The flagship Agricultural Outlook Report for 2023-32 by the Ministry of Agriculture and Rural Affairs sets out China’s plan to grow 88.4 per cent of the grain – mainly referring to rice, wheat, corn and soybeans – it needs within a decade from the current level of 82 percent. It also plans to reduce grain imports to 122 million metric tonnes from last year’s 146.9 million metric tonnes, according to the report released by the agriculture ministry’s outlook committee on Monday.
.@JavierBlas argues that shale investors’ capital losses, 50 cents on the dollar, were a powerful tailwind for the American economy as investors subsidized lower energy prices. Capital discipline and lower investment signal a end to this subsidy.
Over the last decade, the US shale industry had become a byword for capital destruction. Shale investors recovered about 50 cents for each dollar they invested during the 2010-2020 period. For nearly two decades, shale was ruinous for its shareholders, but it was hugely beneficial for the rest of America. It kept oil prices lower and provided jobs and investment. Just as significantly, shale gave the White House a powerful geopolitical lever to face oil-rich foes like Iran and Russia. Let me say this: The shale boom was the most profitable example of capital destruction the energy industry has ever seen. Investors lost, but the US and most of its allies won. As of last week, 590 rigs were drilling in the US, down from the most recent peak of 627 rigs set in November. That was already significantly lower than the 888 recorded in 2018 and the high point before that — 1,609 rigs in 2014. Goldman Sachs Group Inc. estimates that US publicly listed shale companies reinvested the equivalent of 120% of their operating cash flow into new wells in 2012. Ten years later, that rate plunged to 40%.
.@nfergus argues that the dollar will not be replaced as the global reserve currency anytime soon, citing @Brad_Setser data that shows the dollar share of international reserves is higher today than in 1995.
It’s true that, conventionally measured, the dollar now accounts for a smaller share of international reserves than it did in 1999 — down from just above 70% then to 59%. However, as Brad Setser of the Council on Foreign Relations has pointed out, if you take the X-axis back to 1995, you can see that the dollar share of international reserves is higher today than it was back then. The fact that the euro area countries joined the US in imposing financial sanctions on Russia greatly weakens the argument that it is American overuse of sanctions that is undermining dollar dominance. It is not hard to explain why the Chinese renminbi remains such a small share of international reserves: “capital controls” are the only two words you need to say to end the discussion. Former Treasury Secretary Larry Summers had a good line about all this back in 2019. “You cannot replace something with nothing,” he said. What other currency is preferable to the dollar as a reserve and trade currency “when Europe’s a museum, Japan’s a nursing home, China’s a jail, and Bitcoin’s an experiment?”
Doug Sosnik documents that voting behavior has polarized around educational attainment resulting in a new political geography of eight battleground states which have educational levels near the national average.
In a sharp contrast to a previous era, college educated voters are now more likely to identify as Democrats, and those without college degrees - particularly white voters, but increasingly all Americans – support Republicans. Culturally, a person’s educational attainment increasingly correlates with their views on a wide range of issues, including abortion, attitudes about LGBTQ+ rights, and the relationship between government and organized religion. This educational sorting has made the vast majority of states no longer politically competitive. It is the battleground states in the middle - where education levels are neither disproportionately high nor low - that will decide the 2024 presidential election. Democrats will likely enter the General Election with 222 electoral votes, compared to 219 for Republicans. That leaves only eight states, with 97 electoral votes – Arizona, Georgia, Michigan, New Hampshire, North Carolina, Nevada, Pennsylvania, and Wisconsin – up for grabs. The education levels in these states are at or near the national average - Pennsylvania (23rd), Georgia (24th), North Carolina (25th), Wisconsin (26th), Arizona (30th), and Michigan (32nd) - not disproportionately highly educated nor toward the bottom.
Millennial wealth is now keeping pace with prior generations at this point in their life cycles. @jean_twenge
Millennials, as a group, are not broke—they are, in fact, thriving economically. That wasn’t true a decade ago, and prosperity within the generation today is not evenly shared. But since the mid-2010s, Millennials on the whole have made a breathtaking financial comeback. The Federal Reserve Bank of St. Louis made big headlines in 2018 when it announced that among families headed by people born in the 1980s (older Millennials), median wealth was 34 percent lower than what you’d expect based on the wealth of previous generations at the same age. The report, which analyzed data through 2016, theorized that Millennials might be a “lost generation” when it came to wealth. But when the St. Louis Fed updated its analysis of Millennial wealth a few years later, using 2019 data, it found significant progress. By then, older Millennials lagged only 11 percent behind previous generations at the same age. That progress was uneven: The gap was larger for Millennials without a college degree (19 percent) and even more so for Black Millennials (50 percent). Younger Millennials (born in the ’90s and still in their mid-20s at the time) also faced a bigger gap. Still, since 2019, both housing and the stock market have increased in value, last year’s swoon notwithstanding. Recent analysis by the Fed, including data through the middle of 2022, has shown average Millennial wealth to be neck and neck with the wealth of Gen X at the same age.
There has been at least $5 billion in private investment into fusion with 75% of the funding taking place since 2021. Seven firms have raised at least $200M. @WSJ
The Fusion Industry Association, based in Washington, D.C., has tracked more than $5 billion in private funding, with seven firms raising at least $200 million. Around 75% of fusion fundraising has happened since 2021, according to PitchBook. “There’s a reasonable probability at least one, maybe two companies will demonstrate fusion conditions in this decade,” said Ernest Moniz, who is the chief executive of the nonprofit research group Energy Futures Initiative and a former U.S. Energy Secretary. Mr. Moniz, a physicist, said that improvements in large-scale machine learning have sped experiments and helped several companies achieve or approach the extreme temperatures and pressures needed for fusion reactions.
There is evidence that the ongoing avian influenza pandemic shows signs of adaptation to mammals according to the @CDCgov. @NYTScience
A sample of avian influenza isolated from a Chilean man who fell ill last month contains two genetic mutations that are signs of adaptation to mammals, officials from the Centers for Disease Control and Prevention said. In experimental animal studies, the mutations, both of which are in what is known as the PB2 gene, have previously been shown to help the virus replicate better in mammalian cells. The risk to the public remains low, health officials said, and no additional human cases have been linked to the Chilean man, who remains hospitalized. Moreover, the sample was missing other critical genetic changes that scientists believe would be necessary for the virus, known as H5N1, to spread efficiently among humans, including mutations that would stabilize the virus and help it bind more tightly to human cells
Spending from the Inflation Reduction Act is flowing into rural America in a way that could reshape local economies. @WSJ
Colleton County in South Carolina is a quiet rural district best known for its hunting, fishing and, recently, a sensational murder trial. Now it is also a player in America’s new gold rush: a scramble for $1 trillion in federal tax incentives and loans for green energy that is fueling a flood of corporate investments and reshaping local economies. The spending is one of the biggest outlays of taxpayer-financed industrial stimulus since Franklin D. Roosevelt’s New Deal. If successful, it could transform the nation’s economy by creating millions of jobs and driving up to $3 trillion in total clean-energy investments during the next decade. Estimates of the total private-sector and public spending over the next decade driven by the Inflation Reduction Act alone range from several hundred billion to about $3 trillion.
State media in the PRC is increasingly urging college educated workers to seek employment in blue collar fields as youth unemployment nears 20%, the second highest level on record. @FT
Unemployment in March among those aged 16 to 24 reached 19.6 per cent — the second-highest level on record — and has now stood above 16 per cent for a full year. By contrast, the country’s broader jobless rate has hovered at about 5 per cent. A record 11.6mn college graduates are expected to enter the already tight labour market this year. A survey last November of 100 China-based employers by 51job, a job listings website, found that more than half of respondents planned to reduce hiring in 2023. As appealing job opportunities dry up, Beijing has begun asking graduates to lower their ambitions and take up the kind of modest manual labour that drove China’s dramatic economic rise.
Arms manufacturers in both Europe and the United States are facing labor constraints. American manufacturers are increasingly working with apprentice schools and community colleges to train workers given a dearth of skilled workers. @WSJ
Russia’s invasion of Ukraine has turbocharged demand for weapons. Now arms makers face the challenge of hiring thousands of skilled workers to capitalize on an influx of orders. In the U.S., shipbuilding was one of the sectors hit hardest by pandemic retirements. General Dynamics Corp., a large U.S. Navy shipbuilder, hired 24,000 staff last year, yet attrition and retirements left its net head count up only 3,400 at 106,500. Chris Kastner, chief executive of Huntington Ingalls Industries Inc., which also makes Navy ships and submarines, said the company is focusing on recruiting from apprentice schools and community colleges rather than advertising jobs more widely.
The United States and the Philippines undertook their largest joint exercises in 30 years in the northern Philippines over the weekend. @FT
This past weekend, Batan hosted exercises where Philippine and US troops defended against an aggressor, part of the allies’ largest joint drill in more than 30 years as they seek to strengthen military ties in the face of an increasingly assertive China. As part of the effort, hundreds of Marines and soldiers from the US and Philippines were airlifted on to a grassy plateau to practise securing the terrain against a potential invader. Below, a US Army amphibious landing craft surveyed the beach for suitability to unload Himars mobile rocket systems, which have played a forceful role in the war on Ukraine, to keep enemy ships at bay. It is the first time Balikatan, the annual US-Philippine exercise, includes manoeuvres in the strategically located islands off northern Luzon. Last Friday and Saturday, the two militaries staged similar air assault drills on the neighbouring islands of Fuga and Calayan.
.@Bridgewater argues that we are in a moment of “Bearish Disequilibrium,” as Fed policy has made short rates too attractive relative to bonds and stocks.
With respect to the markets, bond yields are too low in relation to cash and discounted inflation rates are well below current and projected inflation rates, so there is no risk premium in bonds. There is a roughly normal risk premium in equities relative to bonds based on current earnings and the current bond yield. But if you get a recession as needed to get the desired inflation rate, earnings would be about 20% lower, making the earnings yield too low in relation to bonds at the same time as the bond yield is too low in relation to cash. In other words, in order to deal with today’s economic disequilibriums, central banks are having to make cash very attractive, which is making bonds and stocks unattractive in relation to cash.
Citing a decline in the employment-population ratios for out-of-school young Black and Latino adults @stlouisfed notes marginal workers are starting to be impacted by the tightening cycle.
In particular, the employment-population ratios for out-of-school young Black and Latino adults showed a decline from February 2022 to February 2023 but not as severe as initially seen at the end of last summer. Specifically, the ratios of Black and Latino young adults have fallen by 0.5 and 1.5 percentage points as compared with declines of more than 5 percentage points for both groups through August 2022. out-of-school young adults also face the pinch of earning less on average than other workers. The inflation-adjusted (February 2023 dollars) average hourly earnings for all workers from March 2021 to February 2023 was $24.87 per hour. The average for all out-of-school young adults was $15.34 per hour. Out-of-school young Black adults had the lowest average real hourly earnings among all vulnerable worker groups, sitting at $14.50 per hour. On balance, the most recent BLS jobs report and Census Bureau’s Household Pulse Survey suggest a squeezing of the economic prospects for low- to moderate-income families and out-of-school young adults.
Torsten Sløk @apolloglobal notes mentions of labor shortages on earnings calls have fallen significantly since their peak in Q4 2021 but are still elevated relative to pre-pandemic levels.
The Fed is trying to slow down hiring to dampen the upward pressure on wage and consumer price inflation, but cooling down the labor market takes time, and while corporate worries about labor shortages have declined, they are still well above pre-pandemic levels.
National housing prices have now fallen for two consecutive months for the first time in 11 years. The average 30-year fixed mortgage was 6.39% this week, up from 5.11% a year ago.
The housing market’s slowdown is now starting to weigh on prices, which have fallen on an annual basis for two consecutive months for the first time in 11 years. The national median existing-home price decline of 0.9% in March from a year earlier to $375,700 was the biggest year-over-year price drop since January 2012, NAR said. Median prices, which aren’t seasonally adjusted, were down 9.2% from a record $413,800 in June. Home prices in the western half of the U.S. experienced some of the biggest gains for many years but are now falling the fastest. Mortgage rates have fluctuated in recent months since hitting 20-year highs above 7% in the fall. The average rate for a 30-year fixed mortgage was 6.39% this week, up from 5.11% a year earlier and the first increase after five straight weeks of declines, according to Freddie Mac.
Although American gasoline consumption has peaked, gas prices could rise due to a decline in refining capacity. @foxjust
One side effect of the decline in consumption could be, paradoxically, higher gasoline prices. Worldwide supply and demand set oil prices, and peak oil demand has yet to arrive globally. Meanwhile, cutbacks in US refining capacity in the face of falling gasoline demand could bring bigger refiner profit margins. On the West Coast, where EV market share is highest (it was 17.1% in California in 2022), refinery capacity has fallen faster than gasoline consumption since 2010, which translates to fatter margins for refiners and higher and faster-rising gasoline prices in the region than elsewhere in the country.
Despite Starship’s failure yesterday, once the identified problems are fixed Starship is likely to dramatically bring down the cost of putting payloads into orbit. @TheEconomist
The good news is that SpaceX says it is building Super Heavies and Starships at a healthy clip; it should in principle be possible to rerun the test reasonably soon once the nature of the problem becomes clear and a fix is found. The bad news is that the structure which supports the Super Heavy as it launches seems to have been damaged to an extent that may well require a significant redesign rather than simply repair. That could entail significant delays. If SpaceX puts right both the problems that struck today and the others that the test programme will surely uncover, the Starship system will not just be able to put larger payloads into orbit than any competitor, it will be able to do so at a cost per tonne far lower than any the industry has seen before. A Starship launched by a Super Heavy will be capable of lifting 100-150 tonnes of cargo to orbit. That far exceeds the capacity of today’s most powerful commercial launcher, SpaceX’s Falcon Heavy, which is basically three Falcon 9s strapped together so as to be able to lift up to 64 tonnes. The cargo which could be lifted with a space shuttle was just 24 Tonnes. That low cost is one of the advantages offered by a system with just two parts, both of which are fully reusable. Another is that a system which can take off, land, and take off again in short order opens up a new range of possibilities for flights beyond Earth orbit.
SpaceX’s Starship rocket, the most powerful ever launched, managed to take off but failed to reach orbit during its first test launch. @FT
SpaceX’s giant Starship rocket exploded after its first launch on Thursday in a setback for Elon Musk’s company and its effort to build a spacecraft capable of flying to Mars. The nearly 400-foot-tall rocket, the most powerful ever launched, left its base along the Gulf coast in south Texas at about 8.30am local time. It rose on a ball of flame from its 33 Raptor engines and reached an altitude of nearly 40km before tumbling back towards Earth and exploding. “It was partial success, it was not a large setback,” said Laura Forczyk, a former Nasa official and now a space consultant at Astralytical. “The most important part was that it launched—that is quite the accomplishment for a new rocket, particularly one as complex as Starship.”
A new @USCBO analysis finds that in Alabama an expansion of the TANF work requirement increased the employment rate by ~ 12pp within a year of families entering the program.
CBO‘s Justin Falk finds that Alabama’s work requirement increases the employment rate by about 12 percentage points over the first year after families enter the program, which elevates average income by boosting earnings and tax credits. But the requirement reduces the amount of cash assistance families receive, primarily by removing nonworking families from the program. On net, my analysis suggests that average income increases, but so does the frequency with which families have neither earnings nor cash assistance. Those results are inferred from families whose youngest child is between 6 months and 11 months old, although I find suggestive evidence that the results generalize to families with older children.
Torsten Sløk @apolloglobal reports the American household balance sheets are strong; the ratio of liabilities to net worth is down 50% from the crisis.
US households are in excellent shape, the ratio of liabilities to net wealth has declined 50% since the 2008 financial crisis, and household leverage is currently at levels last seen in the early 1980s, see chart below. If the unemployment rate rises, consumer spending will slow down, but the starting point for US households is very strong.
Over half of millennials, 51.5%, now own homes. According to a survey from Apartment List, 25% of millennials plan to remain a renter, up from 14% three years earlier.
The millennial homeownership rate hit 51.5% in 2022, US Census data show. It’s been a slog to get there for the generation that came of age during the financial crisis — by age 30, 42% of millennials owned their homes compared to 48% of Gen X and more than half of baby boomers. Those who’ve managed to buy a home are mostly in more affordable cities, with 63% of millennials in Grand Rapids, Michigan, owning homes, compared to just 27% in Los Angeles. Nearly one in four millennials plans to rent forever, up from one in seven just three years earlier, according to a survey from real estate site Apartment List.
Nationwide, the difference between Republican vote share in rural vs urban areas increased to 21 percentage points in 2020, up from 10 pp in 2000 and 2pp in 1996. @SuzanneMettler1
Throughout the mid-twentieth century and as recently as the 1970s and 1980s, presidential candidates received fairly equivalent support from rural and urban dwellers, nationwide. Since the 1990s, however, the rural-urban political cleavage has grown steadily as shown in Figure 1. Although the rural-urban political divide in presidential voting has increased the most in the South, by 27 points between 1976 and 2020, it has widened in all regions over the same period, by seven points in the Northeast, 18 points in the West, and a striking 20 points in the Midwest. Urban areas captured a full 97% of all employment growth between 2001 and 2016. As the economic conditions in rural and urban areas diverged, the rural-urban political divide emerged.
.@martinwolf_ predicts that inflation will decline to 2-3% with an equilibrium real rate of interest of 0-2%; this implies short rates between 2-5% and long rates between 3-6%.
We are, in my view, more likely than not to return to inflation at around 2 per cent a year, or perhaps just a little bit higher. This is also what markets expect: according to the Federal Reserve Bank of Cleveland, US expected inflation is 2.1 per cent, almost exactly in line with the target. This shows confidence that the target will be delivered. The inflation risk premium is also estimated at 0.5 percentage points, which is in line with historic valuations. There are two (overlapping) arguments why this might prove too optimistic. One is that supply conditions have become more inflationary. De-globalisation and other shocks have permanently lowered the elasticity of supply of key inputs. That will raise the costs of keeping inflation down. The other is that the political economy of curbing inflation has worsened. Thus, the public cares less about inflation now, partly because it has no memory of a long period of high inflation.
.@rbrtrmstrng examines Andrew Smithers’ view that profits are reverting to long-term means. This analysis projects that profit margins for all companies are likely to fall from 26.1% in 2022 to 22.0%.
Andrew Smithers makes the simple point that it only makes sense to talk about corporate profit margins being too high or too low if profit levels revert to a stable mean. And interpreted in one straightforward way, they do. This is corporate profits as a proportion of total economic output. It makes sense, broadly, that competition would force profit into a stable equilibrium relative to output, and data from the US national accounts does seem to suggest that this ratio varies around a stable mean. There is not (as far as I know of) a good economic account of why profit as a percentage of sales — the more usual sense of “margins” — should revert to a stable mean.
.@TheEconomist reports on a new study that quantified the impact of Dobbs. Between July and Dec 2022 there were 31,180 fewer abortions relative to pre-Dobbs, a national decline of 6% but there are major variations between states.
A report released this month by the Society of Family Planning (SFP), a non-profit, quantifies the effect of the Dobbs ruling. From July to December 2022 there were 31,180 fewer abortions than pre-Dobbs rates would suggest, a decline of 6%. That is despite a rise in abortions administered by virtual clinics, which prescribe abortifacient drugs like mifepristone. The overall decline understates the effect Dobbs has had in much of the country. Across the 22 states where new restrictions took effect following the ruling, the number of abortions fell by 67,040 (63%). Even in states with tight pre-Dobbs restrictions, the decision’s impact has been vast. After Texas implemented a law in 2021 that banned abortions once a fetal heartbeat could be detected, its abortion rate fell from 5,400 per month to 2,200. In April 2022 SFP recorded 2,700 abortions in the state. But between July and December 2022 it has logged fewer than 100. Abortion has also all but disappeared in seven other states, including four in the South. In states with more permissive rules, in contrast, abortions rose by 35,860 (12%). This suggests that slightly more than half of women who would have had abortions in restrictive states before Dobbs travelled elsewhere to obtain them. The remaining 31,180 either carried their pregnancies to term, or obtained abortions by methods that do not appear in SFP’s data.
Unfilled orders for defense capital goods are approaching $200B, as American arms makers are taking longer than expected to expand production of arms and munitions. @WSJ
Big U.S. arms makers are taking longer than expected to boost production despite billions of dollars in support from the Pentagon. Defense-company executives said rocket motors continue to be a problem for missile makers including Lockheed Martin and Raytheon Technologies Corp. Northrop Grumman Corp. has now been hired to produce more rocket motors and supplement one-time sole supplier Aerojet Rocketdyne Holdings Inc. Pentagon acquisition chief Bill LaPlante said last month it would be a five- or six-year effort to rebuild and expand munitions stocks to prepare for any potential conflict with China over Taiwan.
.@WhiteHouseCEA argues that the 0.7% decline in labor force participation since February 2020 is a function of population aging, not Covid. Prime age LFP is above pre-pandemic levels, and overall LFP is back at its pre-pandemic forecast.
The prime-age labor force participation rate, which had taken more than a decade to recover to pre-Great Recession levels, has now returned to those very high levels. Throughout the economic recovery from the pandemic, there was much speculation about the “missing workers” who had not yet returned to the labor market. Numerous theories were offered to explain this apparent shortfall of workers. Analysts speculated that an epidemic of long Covid was keeping workers on the sidelines, that individuals were sitting out the labor market due to excess savings built up during the pandemic, that a “Great Resignation” was occurring as workers reassessed work/life balance or that the country had experienced a collective loss of work ethic. Yet despite the enormous disruptions of the pandemic, these “missing workers” are now largely back in the labor market.
Chris Satterthwaite notes that Treasury volatility is at a level that was previously seen only during crises. He notes, “High volatility—and therefore high uncertainty about credit availability—can have pernicious downstream consequences.”
Treasurys—the same safe-haven asset that might have brought down Silicon Valley Bank—saw a nearly four standard deviation rise in volatility. Figure 1 below shows realized volatility in 10-year Treasurys reaching levels previously only seen in March 2020, during the Eurozone debt crisis, and during the 2008 financial crisis. The failure of Silicon Valley Bank caused a significant downward shift in the forward implied curve. We believe this led a strong rally in Treasurys as rate expectations came down. In fact, the two-year Treasury note had the single largest weekly move (-72bps) in over 10 years. This kind of Treasury volatility can have a chilling effect on corporate credit issuance, much of which is priced off Treasurys. High volatility—and therefore high uncertainty about credit availability—can have pernicious downstream consequences.
Stock-based compensation was around 6-8% of total compensation for public American firms, up 5x from 2006. At approximately 1.2% sales, stock-based compensation was up 6X since 2000. @mjmauboussin
In 2006, the year that companies had to reflect SBC as an expense on the income statement, total SBC expense for companies in the Russell 3000 was about $25 billion. The Russell 3000 is an index that tracks the largest stocks by market capitalization in the United States. We estimate that SBC was about $270 billion in 2022, or 6- 8 percent of total compensation for public companies in the U.S. Sales over the same period went from $11.5 to $21.1 trillion. Stock-based compensation (SBC) in 2022 was nearly 5 times what it was in 2006, measured as a percentage of sales, although total SBC remains less than 10 percent of total employee pay.
Taiwan is buying up to 400 land-launched Harpoon missiles intended to repel a potential Chinese invasion. @markets
Taiwan will buy as many as 400 land-launched Harpoon missiles intended to repel a potential Chinese invasion, completing a deal that Congress approved in 2020, according to a trade group’s leader and people familiar with the issue. Taiwan has previously purchased ship-launched versions of the Harpoon, which is made by Boeing Co. Now, a contract with Boeing issued on Taiwan’s behalf by the US Naval Air Systems Command marks a first for the mobile, land-launched version, according to Rupert Hammond-Chambers, president of the US-Taiwan Business Council. Three other people familiar with the deal, including an industry official, confirmed the contract is for Taiwan.
According to the UN, India’s population will overtake China’s this year if it hasn’t already. India’s population isn’t expected to peak until 2063.
The United Nations has said India’s population is projected to surpass China’s sometime this year. Many demographers estimate it could happen this month, if it hasn’t already. India’s population is expected to reach 1.429 billion by the end of the year, according to the U.N. China will fall to second place, with 1.426 billion people. Both dwarf the U.S. at a projected 340 million. India’s population is expected to keep growing for the next four decades, peaking at nearly 1.7 billion in 2063.
Apple made almost 7% of its iPhones in India last fiscal year, up from 1% in 2021 as it moves production out of China.
Apple assembled more than $7 billion of iPhones in India last fiscal year, tripling production in the world’s fastest-growing smartphone arena after accelerating a move beyond China. The US company now makes almost 7% of its iPhones in India through expanding partners from Foxconn Technology Group to Pegatron Corp., people familiar with the matter said. That’s a significant leap for India, which accounted for an estimated 1% of the world’s iPhones in 2021.
The @FT has identified more than 75 large-scale manufacturing projects announced in the US in the aftermath of the passage of the Chips and Inflation Reduction Acts. More than 75% of this investment is heading to GOP-held Congressional districts.
The US appears poised for a manufacturing boom as companies tap into Biden administration subsidies with pledges to spend tens of billions of dollars on new projects, according to Financial Times research. The FT identified more than 75 large-scale manufacturing announcements in the US since the passage of the Chips Act and the Inflation Reduction Act. Companies have committed roughly $204bn in large-scale projects to boost US semiconductor and clean-tech production as of April 14, promising to create at least 82,000 jobs. While not all these projects were a direct result of the passage of these bills, they will probably be eligible for the tax credits. The amount is almost double the capital spending commitments made in the same sectors in 2021 and nearly 20 times the amount in 2019.
Germany’s Mittelstand are well positioned to continue to thrive as their relatively small global niches may help insulate them from new entrants. @markets
The real engine of the German economy is not the big corporations but middle-sized companies that you’ve probably never heard of — companies that management gurus have dubbed “mighty minnows” (Tom Peters), or “hidden champions” (Herbert Simon) and the Germans call the “Mittelstand.” Germany only had 28 companies in the Fortune 500 in 2020 compared with China’s 134, America’s 130, Japan’s 62 and France’s 40. But it has more than a thousand companies that rank in the top three in their respective markets. Poeschl Tabak GmbH has 50% of the world market in snuff, for example; Flexi has 70% of the market for retractable dog leads. All told, the Mittelstand accounts for the overwhelming majority of businesses in Germany, and some 60% of all jobs. These companies are “hidden” in three senses: They dominate tiny global niches; they prefer to keep themselves to themselves and they are usually located in small towns.
The French constitutional court approved Macron’s pension reform. Protests are still ongoing but have dissipated in recent weeks. @ft
Emmanuel Macron’s plan to raise France’s retirement age cleared a final hurdle on Friday after the highest constitutional authority validated most of the draft law, marking a political victory for the president after months of protests over his unpopular reform. France’s nine-member constitutional council ruled that most of the proposed law, whose central measure is to raise the minimum retirement age from 62 to 64, was valid under the constitution and enacted legally. Some of the clashes have since dissipated, and turnout for the labour-led marches and strikes has shrunk in recent weeks, fuelling the government’s hopes that they could wait out the anger.
The number of Chinese citizens attempting to enter the United States illegally hit an all-time high, with 2,410 apprehensions along the southwest boarder through February 2023. @WSJ
The United Nations refugee agency counted 116,868 Chinese seeking asylum around the world at a point measured in mid-2022, up from 15,362 at the end of 2012, the year Mr. Xi took power. The U.N. numbers don’t include Chinese who enter other countries using work, tourist or other types of visas—often people with more assets and education—which have also increased in the past decade. China has a population of around 1.4 billion. In the first three months of this year, 3,855 Chinese migrants crossed the Darién Gap, the 60 miles or so of treacherous terrain connecting South and Central America. That compares with 2,005 for the full year in 2022, and just 376 Chinese total in the years from 2010 to 2021, according to Panama migration data. Chinese nationals were the fourth-largest group making the Darién crossing from Colombia in the three months, the data showed. The Chinese taking the Latin America route are generally those with low incomes, education levels and skills, who have little to no chance of securing a U.S. visa.
The Monetary Authority of Singapore is trying to limit public discussion of Chinese capital flight as it increasingly becomes a domestic political issue in the city-state. @ft
Singapore has asked the world’s biggest banks to avoid discussing the origins of the significant sums of money flowing into the city over the past year, as wealthy Chinese funnel billions into the Asian financial hub. The tacit directive from the Monetary Authority of Singapore was given during a February 20 meeting of an industry group made up of bankers and regulators, according to multiple people who attended. The flow from China into Singapore has become a politically sensitive issue domestically, and the MAS wants banks to keep public discussion of the phenomenon to a minimum, said three people with knowledge of the talks. Lawyers and industry groups estimate Singapore had 1,500 family offices by the end of last year, with a large chunk of them from China.
Between 1992 and 2017 the shift from manufacturing to the service sector reduced local employment concentration, even as national concentration rose. @davidautor @johnvanreenen
The structural transformation of economic activity in the US and other advanced economies is well known. What has potentially escaped attention is that this force pushes concentration downward due to the simple fact that both sales and employment concentration are greater in manufacturing on average than other sectors. At the national level, this de-concentrating effect is modest. It looms large at the local level, however, offsetting by half the effect of rising sales concentration within sectors and more than fully offsetting the effect of rising employment concentration within county by industry cells. National industrial concentration in the U.S. has risen sharply since the early 1980s, but there remains dispute over whether local geographic concentration has followed a similar trend. Using near population data from the Economic Censuses, we confirm and extend existing evidence on national U.S. industrial concentration while providing novel evidence on local concentration. We document that the Herfindhahl index of local employment concentration, measured at the county by- NAICS six-digit-industry cell level, fell between 1992 and 2017 even as local sales concentration rose.
The cost of insuring against a US default via credit default swaps is at its highest level since 2012 as traders position for a protracted debt ceiling fight. @ft
The cost of buying insurance against a US government default has shot to its highest level in more than a decade, in an early sign of market concerns about the political impasse in Washington over the debt ceiling. At 46 basis points, the price of five-year credit default swaps remains well below levels hit during the 2008-09 financial crisis, but the bond market has also indicated nerves about the possible default date.
The French government reported that France had much lower income mobility than the US btw 2003-2019, with little movement in the top and bottom quintiles. Among those in the top 1% in 2003, 41% were still there in 2019. @markets
According to the first long-term study by France’s statistics agency Insee, there was a 71% correlation between the position of French people on the income scale between 2003 and 2019, with the richest and poorest groups least likely to change bracket. That inertia is greater than in the US, where a deeper history of income mobility studies has shown a higher probability of ascending or descending, the authors of the French report said. Among the lowest 20% in terms of income in 2003, 62% were still in that group in 2019. Only 2% of the group rose to the level of the 20% highest incomes.
The US is about to deploy $52B in direct subsidies to arrest a slide in US semiconductor production from 37% in 1990 to 12% in 2022. @FinancialTimes
Last year’s US Chips Act committed $52bn in direct subsidies to support semiconductor manufacturing and boost research and development, along with an estimated $24bn worth of tax credits over the next eight years. Intel has announced a spate of giant new manufacturing plants, known as fabs, with the economies of scale needed to justify the capital-intensive processes. There are two fabs planned outside Phoenix, two more in Ohio and a new €17bn mega plant in Germany that represents the country’s biggest investment since the second world war. The cost for the first phases of these developments has already reached around $60bn, and the German government is pushing Intel to expand its plans in exchange for the higher subsidies the company is seeking. Under the Chips Act, Intel could receive up to $12bn to support its new US facilities, with extra subsidies for an advanced chip packaging plant in New Mexico and further tax credits.
.@TheEconomist reports that, between the Inflation Reduction Act and the Infrastructure bill, the American government could spend $800B on decarbonization-related sectors, through a combination of direct spending and tax credits.
The Inflation Reduction Act funnels at least $369bn in direct subsidies and tax credits to decarbonisation-related sectors. It came on the heels of the Bipartisan Infrastructure Law, which also shovels billions in subsidies towards clean infrastructure. Some of the provisions offer generous tax credits, with no caps on the amount of spending eligible for the incentives. A mad investment rush, should it materialise, could lead to public expenditure of $800bn over the next decade. An official at a big utility says her firm has projects in the works across America that, if successful, will secure a staggering $2bn in funding from the two laws.
Noting an uptick in both leveraged loan default rates and bankruptcy filings, Torsten Sløk @apolloglobal argues that “a default cycle has started.”
Data for leveraged loan default rates and bankruptcy filings show that a default cycle has started. This is not surprising. The entire goal of the Fed with raising interest rates is to slow the economy down to slow down inflation, and adding tighter bank lending standards increases the risk that the slowdown could come faster.
Growth in the US has outpaced growth in other advanced peer economies. In 1990, the US accounted for 40% of the nominal GDP of the G7, today it accounts for 58%. @TheEconomist
America’s $25.5trn in GDP last year represented 25% of the world’s total—almost the same share as it had in 1990. On that measure China’s share is now 18%. In 1990 America accounted for 40% of the nominal GDP of the G7, a group of the world’s seven biggest advanced economies, including Japan and Germany. Today it accounts for 58%. In PPP terms the increase was smaller, but still significant: from 43% of the G7‘s GDP in 1990 to 51% now. America’s outperformance has translated into wealth for its people. Income per person in America was 24% higher than in western Europe in 1990 in PPP terms; today it is about 30% higher. It was 17% higher than in Japan in 1990; today it is 54% higher. America’s labour-force participation rate has been falling this century, largely because of men dropping out of the workforce. But this American oddity is not large enough to make up for the country’s advantage in raw numbers. Even with lower participation, the past three decades have seen America’s labour force grow by 30%. In Europe the number is 13%, in Japan, just 7%. America’s working-age population—those between 25 and 64—rose from 127m in 1990 to 175m in 2022, an increase of 38%. Contrast that with western Europe, where the working-age population rose just 9% during that period, from 94m to 102m.
Torsten Sløk @apolloglobal writes that “it is getting more difficult to argue that the banking crisis is not having a negative impact on the economy,” given that credit conditions for small businesses are at their worst levels since 2012.
Credit conditions have tightened significantly for small businesses after SVB failed, and firms with less than 500 employees account for almost 50% of total employment in the US economy. Small businesses borrow from small banks, and it is getting more difficult to argue that the banking crisis is not having a negative impact on the economy.
According to Pew, the husband is the primary or sole breadwinner in 55%, of marriages down from 85% in 1972. In 16% of marriages, the wife is the primary breadwinner. @pewresearch
While men remain the main breadwinner in a majority of opposite-sex marriages, the share of women who earn as much as or significantly more than their husband has roughly tripled over the past 50 years. In 29% of marriages today, both spouses earn about the same amount of money. Just over half (55%) of marriages today have a husband who is the primary or sole breadwinner and 16% have a breadwinner wife. Far fewer husbands are the sole breadwinner in their marriage these days. The share of marriages where the husband is the primary or sole breadwinner has fallen steadily in recent decades, driven mainly by the declining share of marriages where the husband is the sole provider – this was the arrangement in 49% of marriages in 1972, while today that share is 23%.
The Biden administration is likely to cut the water allocations of California, Arizona and Nevada by 25% each. The Colorado’s flows are down 1/3 relative to its historical average.
After months of fruitless negotiations between the states that depend on the shrinking Colorado River, the Biden administration proposed to put aside legal precedent and save what’s left of the river by evenly cutting water allotments, reducing the water delivered to California, Arizona and Nevada by as much as one-quarter. The size of those reductions and the prospect of the federal government unilaterally imposing them on states have never occurred in American history. The river’s flows have recently fallen by one-third compared with historical averages.
Sodium-ion batteries might be around the corner. Sodium is 1-3% of the price of lithium. The US has 90% of the world’s readily mined soda ash reserves, the primary source of sodium.
China is positioning itself to command the next big innovation in rechargeable batteries: replacing lithium with sodium, a far cheaper and more abundant material. Sodium, found all over the world as part of salt, sells for 1 to 3 percent of the price of lithium and is chemically very similar. Recent breakthroughs mean that sodium batteries can now be recharged daily for years, chipping away at a key advantage of lithium batteries. The energy capacity of sodium batteries has also increased. Research into using sodium for batteries began in earnest in the 1970s, led then by the United States. Japanese researchers made crucial advances a dozen years ago. Chinese companies have since taken the lead in commercializing the technology. Out of 20 sodium battery factories now planned or already under construction around the world, 16 are in China, according to Benchmark Minerals, a consulting firm. In two years, China will have nearly 95 percent of the world’s capacity to make sodium batteries. Lithium battery production will still dwarf sodium battery output at that point, Benchmark predicts, but advances in sodium are accelerating. The United States accounts for over 90 percent of the world’s readily mined reserves for soda ash, the main industrial source of sodium. Deep under the southwestern Wyoming desert lies a vast deposit of soda ash, formed 50 million years ago. Soda ash there has long been extracted for America’s glass manufacturing industry.
Warren Buffett sold his stake in Taiwan Semiconductor Manufacturing Company, citing geopolitical risk. @markets
The billionaire investor took credit for Berkshire’s investment in TSMC amid speculation that one of his investing deputies picked the stock. He said the decision to reduce its stake in the business by 86% in the fourth quarter—which could have fetched $3.7 billion assuming the shares were sold at the average price over the period—resulted from concerns over geopolitical tensions between China and Taiwan, conditions he described as being outside of the company’s control. “I re-evaluated that part of it,” Buffett said. “I didn’t re-evaluate the business, the management, or anything of the sort.”
.@jasonfurman argues that inflation is running at ~4% pace, and that the FOMC should lean towards a 25bp increase in the fed funds rate.
In sum, the PCE has been running at about a 4.5% underlying pace, is preferable because it is what the Fed focuses on and is less sensitive to the treatment of housing. The CPI has been running at about a 4% (equivalent) underlying pace. Wages telling us anything from 2-5%. Some reasons to expect inflation to slow, like lagged shelter & possibly labor cooling. But would be a mistake to extrapolate from the fact that inflation is slower now than 6 months ago to predict it will be even slower 6 months from now. Best to think of a ~4% pace. As for what the Fed should do in May, I lean towards a 25bp increase but I'm not 100% sure of it because I would want to understand better what is happening to credit conditions and how much work that is doing to cool the economy.
Michael Cembalest @jpmorgan argues that the banking system is now stabilizing, with the pace of drawdowns slowing from mid-March.
The presence of unrealized losses on bank balance sheets is not abnormal, and is entirely consistent with a rising interest rate cycle. The problem this time: some banks were flooded with so many stimulus-related deposits at a time of low rates that their balance sheets are stuffed with low-yielding assets. And to reiterate, this is only a problem when large deposit outflows cause unrealized losses to be realized. The Fed’s new rules for the Discount Window allow banks to borrow against securities at book value rather than market value, so that should help. But it doesn’t address banks with underwater, high-quality loans or the flood of deposits departing for higher money market fund yields. Many system indicators are now stabilizing, but one news story, one rating agency action or an announcement from a single bank could reignite market/depositor concerns.
.@martinwolf_ argues that a savings glut in Japan significantly constrains its policy options and makes loose monetary policy and high deficits its best overall option. Japan’s private sector gross savings averaged 29% of GDP from 2010-19 vs 22% in the US.
Ultra-low interest rates are, for example, intended to raise private investment and reduce private savings. But in practice, the private savings surplus, especially the corporate surplus, has remained huge. Loose monetary policy has facilitated crucial absorption (and offsetting) of surplus private savings via the excess of government investment over savings. These deficits averaged 5 per cent of GDP from 2010 to 2019. Finally, an average of 3 per cent of GDP went into net acquisition of foreign assets via Japan’s current account surpluses. So long as Japan continues to run huge excess private sector savings, policy has to find ways of either reducing or offsetting them. Japan’s economy is still trapped. It also has no easy way out.
China is aging rapidly and local government pension systems are under extreme stress; retirement ages will likely hike quickly as pension funds are depleted. @WSJecon
China has one of the lowest retirement ages among major economies. Under a policy unchanged since the 1950s, it allows women to retire as early as at age 50 and men at 60. Now, local governments are running out of money just as a wave of retirees hits. The Ministry of Human Resources and Social Security estimates that more than 40 million Chinese—more than the population of Canada—will retire over the five-year period ending in 2025. The working-age population—usually defined in China as those between 16 and 59—is expected to drop by 35 million in the same period, illustrating the lack of young people to make up for the shortfall in older workers. In February, a reform that threatens to cut into retirees’ medical benefits drew protests in the central Chinese city of Wuhan.
As the cost of capital rises and supply chains restructure, small and medium-sized manufacturers in both China and the US are “at risk of becoming collateral damage.”
The factory renaissance in North America is real: Melius Research has tabulated some $380 billion of “mega-projects” — defined as an investment greater than $1 billion — with almost 60% of those planned facilities already breaking ground. In China, while credit is flowing hard and fast, it’s mostly going toward large state-owned firms. That’s crowding out small and medium-sized manufacturers in the private sector, which account for a significant chunk of China’s industrial might. While the performance of these companies has improved in recent months, they remain on weaker financial footing and their profit margins are getting squeezed as China’s labor cost advantage erodes and larger companies seek to protect their own bottom lines by turning the screws on suppliers. It’s hard to see how global supply chains will bifurcate without pain, but the brunt of the financial strain may be felt by smaller companies just trying to keep up.
Japan is planning to increase its defense budget by 60% in the next five years. It authorized the development of four new missile, including a new submarine-launched cruise missile and a hypersonic glide vehicle. @markets
The Japanese Defense Ministry has signed four missile-development and procurement contracts with the country’s biggest defense firm, Mitsubishi Heavy Industries. The contracts include one for development of a submarine-launched cruise missile and another for mass production of a hypersonic glide vehicle for island defense, which is expected to be delivered in 2026-27. In this year’s budget, the Defense Ministry set aside more than ¥1.4 trillion ($10.5 billion) to develop its missile capabilities. Japan is also set to buy Raytheon Technology Corp.’s Tomahawk missiles and Lockheed Martin Corp.’s Joint Air-to-Surface Standoff Missile as part of its build-up.
.@IMFNews writes that the core drivers of the decline in the natural rate of interest, population aging and slower total factor productivity growth, have not gone away. The IMF expects the natural rate to revert to pre-pandemic levels.
Looking through cyclical fluctuations and term premiums, real rates have fallen steadily, by about 5 percentage points over the last four decades across all [US Treasuries] maturities. Given that the natural rate of interest is a long-term attractor for real rates, this suggests that the natural rate of interest has also fallen, at least in the United States. Long-term forces driving the natural rate suggest that interest will eventually converge toward pre-pandemic levels in advanced economies. While low natural rates may ease pressure on fiscal policy, they do not negate the need for fiscal responsibility. Important government support during the pandemic has strained public accounts, requiring some budget consolidation to ensure long-term debt sustainability.
Torsten Sløk @apolloglobal reports that last week saw the largest two-week cut in bank lending in US history. “In short, the credit crunch has started.”
Weekly Fed data released every Friday at 4:15 pm shows how banks are responding to the SVB collapse and subsequent deposit outflows. The largest 2-week cutback in bank lending in US history. The largest 2-week cutback in bank lending to corporates in US history. Largest decline in lending to real estate on record. Fed hikes were already cooling the economy, and the latest weekly Fed data shows that the banking sector response since SVB is magnifying the speed of the slowdown. The bottom line is that the immediate risks in the banking sector are starting to fade, but the behavioral change in the banking sector is beginning to weigh on the economic outlook.
.@MichaelRStrain @jeffreypclemens report that wage gains for near minimum-wage workers in states that increase the mandated minimum wage are similar to states without a minimum wage.
We find that state minimum wage changes account for a modest fraction of the wage gains realized by minimum wage workers. Improvements in macroeconomic conditions and progression across occupations and industries appear to play a more significant role. We find that wage increases are the norm among minimum-wage workers, even in the absence of minimum wage increases. The twelve-month time horizon we can analyze in the Outgoing Rotation Groups of the Current Population Survey is quite far from being a career. Even over this relatively short horizon, fewer than one-third of those employed at the time of both interviews remain employed in minimum wage jobs at the time of their second interview. Second, the fact that this fraction has been quite stable over time suggests the operation of the labor market, at least with respect to the wage gains it delivers to low-wage workers, has not changed substantially over the last several decades. interview. Second, the fact that this fraction has been quite stable over time suggests the operation of the labor market, at least with respect to the wage gains it delivers to low-wage workers, has not changed substantially over the last several decades. It may be that some workers churn into and out of minimum wage jobs over a period of years.
.@crampell notes that 56% of Americans say that they pay “more than” their fair share of taxes. She argues that paying for current commitments solely by taxing the rich requires “mathematical jiujitsu,” and therefore taxes will go up across the board.
Most Americans — 56 percent — say they pay more than their “fair share” of taxes, Pew Research Center’s latest data shows. This belief is held by a majority or a plurality of every major demographic group. Democrats still wish to expand the social safety net, however, which requires — you guessed it! — more tax revenue. Democrats square the circle with some mathematical jiujitsu, by claiming that all those safety-net expansions can be paid for solely by soaking “the rich.” Who counts as rich, you ask? It’s a vanishingly small sliver of the population. According to Biden, only the top 3 percent of households (i.e., those earning more than $400,000 a year) can afford to pay higher taxes; according to Ocasio-Cortez, it’s instead only roughly the top 0.03 percent (i.e., those with a net worth above $100 million). Alas, there’s not remotely enough money on those would-be money trees to pay for all the things that Democrats want.
Interest payments on deposits lag the Federal Funds rate but the “deposit beta” (or the pass-through of fed funds rate raises to deposit rates) is approaching levels not seen since the financial crisis. @NYFedResearch
Deposit rates tend to lag changes in the fed funds rate, particularly during a rising interest rate environment. In 2022:Q4, the average fed funds rate reached 3.7 percent and interest-bearing deposit rates reached 1.4 percent. The deposit beta is the portion of a change in the fed funds rate that is passed on to the deposit rate. Deposit betas can be calculated for individual changes in the fed funds rate or as a cumulative measure over a tightening cycle. The charts below summarize the cumulative change in deposit rates relative to the cumulative change in the fed funds rate over the last five tightening cycles. Deposit rates continue to lag the fed funds rate, but the pass-through of policy rates is quickly approaching levels not seen since the early 2000s.
Chinese firms now make up 4 of the top 25 leading firms in research and development spending, according to a @foxjust analysis.
When I last compiled one of these lists five years ago, mobile infrastructure and device maker Huawei Investment & Holding Co. was in sixth place behind Microsoft, just as it is here, but it was the only Chinese company in the global top 25. It has been joined by TikTok owner ByteDance Ltd., WeChat owner and gaming giant Tencent Holdings Ltd. and e-commerce, payments and cloud-computing purveyor Alibaba Group Holding Ltd.
Payrolls are now 3mm workers above the pre-pandemic level. Peer economies recovered from the pandemic even more rapidly; peak American prime-age employment still lags peer economies. @JosephPolitano
Today, three short years after the first spike in unemployment caused by the COVID-19 pandemic, American prime-age employment rates have fully recovered and even exceeded 2020 levels. It marks one of the most rapid, comprehensive, and broad-based labor market recoveries in US history, with the unemployment rate dropping from nearly 15% in April 2020 to near-historic-lows of 3.5% today. Across nearly every relevant age and demographic group, as many or more people are working today than in 2019. America’s employment rates have fallen well behind those in peer countries over the last two decades, and during the pandemic that gap has only increased. Japan, Germany, Canada, Australia, and more saw smaller employment shocks from the initial effects of COVID and more rapid labor market expansions than the US over the last three years.
The American working-age immigrant population is now back to its pre-pandemic trend. @Apolloglobal
Over the past 2½ years, immigration into the US labor market has increased by 4 million workers, and the working age immigrant population is now back at its pre-pandemic trend. High immigration contributes not only to solid job growth, including in leisure and hospitality, but also to increasing the participation rate and limiting the upside pressures on wages. The bottom line is that high immigration is helpful for the Fed as it tries to cool down the labor market and slow down inflation.
Construction spending on American manufacturing facilities hit $108B in 2022, the highest level on record. @wsj
Production at U.S. factories rose last year, but few things were produced at a more furious pace than factories themselves. Construction spending related to manufacturing reached $108 billion in 2022, Census Bureau data show, the highest annual total on record—more than was spent to build schools, healthcare centers or office buildings. Much of the growth is coming in the high-tech fields of electric-vehicle batteries and semiconductors, national priorities backed by billions of dollars in government incentives. Other companies that once relied exclusively on lower-cost countries to manufacture eyeglasses and bicycles and bodybuilding supplements have found reasons to come home.
As spending on nonresidential construction surges, contractors are increasingly constrained by their workforce. The number of construction-industry carpenters is under the 2019 pre-pandemic level, while the number of electricians is just above the 2019 level. @WSJ
Spending on nonresidential construction for February, the most recent month available, totaled $982 billion, nearly 17% higher than a year earlier and steady with January, according to the U.S. Census Bureau. The number of U.S. nonresidential construction workers in March increased by 3.3%, or 149,100 workers, from the same month last year, the Bureau of Labor Statistics said Friday. Contractors have been ramping up hiring of entry-level laborers in an attempt to compensate for shortages of other workers. These newer workers are contributing to bigger backlogs and jobs taking longer to finish because they are typically less productive than the older, higher-skilled workers they are replacing.
The Social Security and Medicare Board of Trustees estimate that the trust fund for Medicare will be exhausted by 2031. This is three years later than their previous estimate (due to savings from Covid deaths). The Social Security trust fund will be exhausted in 2033. @TheEconomist
The trust fund that pays for hospital insurance for patients of Medicare, the health-insurance scheme for the elderly, will run out of money by 2031; that is actually a reprieve from the previous estimate of 2028, because of the deadliness of covid-19. The fund that pays old-age benefits for Social Security, the state pension scheme, will be exhausted by 2033. These mandatory programmes are the behemoths of federal spending, costing $2.2trn (8.6% of GDP) in total in 2022. This already eclipses the total of the discretionary spending approved in the federal budget—including on housing, education and even defence—that causes so much argument on Capitol Hill.
.@nomadj1s and @ernietedeschi present evidence showing that the expansion of the child tax credit in 2021 didn’t significantly reduce labor supply in the short term.
We compare labor market outcomes—labor force participation and hours worked—for families who qualified for smaller and larger Child Tax Credit (CTC) transfers, before and after the credit was paid out. Using a difference-in-differences and triple difference approach, we do not detect significant labor supply differences in response to variation in the size of the CTC. When framed as an increase in cash-on-hand, our confidence intervals rule out a labor force participation rate decline of 0.3 percentage points in response to a 10 percentile increase in CTC relative to income, or when cast as a change in the return to entering employment, we rule out an extensive labor supply elasticity of 0.005.
Some analysts contend that the Fed’s reverse repo program, which pays a 4.8% annualized rate, presents an overly attractive alternative for money market funds that wish to park funds; the result has been a consumer shift from banks to money market funds.
Money-market fund assets are increasing at a record clip. Much of that cash is making its way to the Fed’s overnight reverse repurchase facility, which borrows from money funds and other firms in exchange for securities such as Treasurys and then returns the money the next day. The program, known on Wall Street as reverse repo, allows financial firms and others to earn interest on large cash balances. But some analysts contend it also is effectively draining funds from the banking system, where it otherwise could be invested or lent out. As of Wednesday, more than $2.2 trillion sat in the Fed’s reverse repo facility, paying a 4.8% annualized rate. Bank deposits have fallen $363 billion to $17.3 trillion since the beginning of March, Fed data show. Assets in money-market funds have risen $304 billion to a record $5.2 trillion, according to Investment Company Institute data.
Torsten Slok @apolloglobal notes that the largest 20 stocks in the S&P 500 have gained $2T in value since the start of the year with the remaining 480 stocks gaining only $170B.
The rally in the S&P500 since the beginning of the year has been driven by 20 stocks, the market cap of the remaining 480 stocks has basically not gone up, see chart below. The implication for investors is that this market is not driven by broad-based higher growth expectations but instead by what has happened with rates, in particular after SVB went under.
.@jburnmurdoch checks the pulse of millennials and finds that their inflation-adjusted per capita wealth is tracking boomers, but “boomers got there first and bought the best houses in a cheaper market.”
Today, almost one in four US millennials — the cohort born between 1981 and 1997 — say their lives are materially worse than their parents’ were, a record high for any generation of Americans asked that question. If we compare inflation-adjusted per capita wealth within each generation over time, millennials are in fact almost perfectly tracing boomers’ footsteps. So, are millennials wrong to complain? I fear not. The per capita measure is a beautifully simple rejoinder, but it misses one crucial detail. Wealth accumulation — just like income — matters primarily to millennials today as a means to home ownership, especially as we move into an era of high interest rates. If we deflate wealth by the index of house prices instead of the CPI, millennials’ assets only go about half as far as boomers’ once did. We’re left with a smaller millennial deficit than the original chart implied, but a deficit nonetheless. Millennials have no less money in their thirties than boomers did at the same age — but boomers got there first and bought the best houses in a cheaper market.
.@michaelxpettis argues that without a significant rebalancing towards consumption China’s growth rate is unlikely to exceed 2-3% annually over the next decade.
China currently invests around 42–44 percent of its GDP, and it has invested similar or larger shares for decades. For more mature, capital-intensive economies, investment can comprise roughly 15–20 percent of GDP. China should probably bring investment levels closer to the 20 percent of GDP typical of highly-capital-intensive economies. For the purposes of this exercise, however, I will assume a more favorable path for China in which the appropriate goal is to reduce the investment share of GDP to 30 percent. As investment declines to 30 percent of GDP in ten years, China’s GDP growth rate depends mainly on the pace of consumption growth. We can model a simple but robust description of the Chinese economy by setting investment at 42 percent of GDP (a little better than the current 43–44 percent); net exports at 4 percent of GDP; and consumption at 54 percent of GDP. In this case, growth in China’s GDP over the ten-year period is just the weighted average growth of investment and consumption (assuming net exports are flat) and so will depend primarily on the assumptions we make for investment growth and consumption growth. I summarize below the five broad scenarios under which China can rebalance.
China is considering prohibiting exports of rare-earth magnet technology in an effort to retain control over the rare earth’s supply chain. @NikkeiAsia
China is considering prohibiting exports of certain rare-earth magnet technology in a move that would counter the U.S.'s advantage in the high-tech arena. The revisions would either ban or restrict exports of technology to process and refine rare-earth elements. There are also proposed provisions that would prohibit or limit exports of alloy tech for making high-performance magnets derived from rare earths. Washington has since moved to forge a rare-earth supply chain on U.S. soil. China's share of all rare earths produced globally dropped to roughly 70% last year from about 90% a decade earlier, according to the U.S. Geological Survey. At the same time, China still holds a tight grip on processing rare earths. Most rare earths extracted in the U.S. go to China for refining before being shipped back to the U.S.
Alan Wolff, Robert Lawrence and Gary Clyde @PIIE make the case that job losses from trade should be offset by transfer payments. “The best answer is almost never long-term protection,” they conclude.
According to one estimate, between 2001 and 2015—a period that covers the “China shock”—expanding imports hurt about 312,000 workers a year on average. This number is large. It calls for a meaningful response, even if it represents under 2 percent of the total number of periods of involuntary unemployment experienced by workers during those years. Almost 6 million manufacturing jobs were lost in the United States between 2000 and 2010. This loss was overwhelmingly caused by two recessions as well as relatively faster productivity growth, but trade did play a role. The correct policy answer to job losses resulting from trade is having in place adjustment programs that are equal to the task of meeting dislocations. Two great strengths of the US economy are its flexible prices and flexible labor market. It would be a mistake to introduce rigidities through excessive protection that would make US industries less competitive when what is needed are more effective, fully funded, labor programs.
Globally, large cap profit net profit margins are returning to their long run average of 13.5%. However, 52% of the firms are still earning above their 10-year mean margin with an average excess return of 2.15%. @FTAlphaville
Here’s a very simple screen of margins across more than 1,000 global large-caps. We’ve taken the quick and dirty approach and used only reported net profit, where the previous periods are the year-ago figure rather than annualised. Anyone contesting the value of this methodology is invited to share their own. The screen shows net margins recently returning to a long-run average of 13.5 per cent, having been suppressed during the 2017 tech nonsense then inflated through the late-stage pandemic. But on a granular view it also shows 52 per cent of global companies are still earning above their 10-year average margin, with the average excess of 2.15 percentage points.
Apple’s decoupling strategy is increasingly focused on India. Apple plans to shift 25% of iPhone production to India by 2025.
The company is moving carefully. Apple’s leadership is concerned that China might retaliate if it moves too much capacity to other countries, or transitions too rapidly. Customers in China could turn against US-designed products amid heightened nationalism. Apple’s efforts center on India as a location for production of iPhones and accessories, Vietnam for AirPods and Mac assembly, Malaysia for some Mac production, and Ireland—where suppliers currently build the relatively easy-to-produce iMacs—for a range of simpler products. Managers in Apple’s operations department have instructed employees to focus on sourcing additional components and locating production lines outside China for more new products coming in 2024, though the company also plans to retain extensive operations in the country.
Americans are working about 30 minutes less per week relative to before the pandemic. This is equivalent to a loss of 2.4 million employees. @markets
The average US workweek has dropped by more than a half hour over the last three years, according to new research by former Bureau of Labor Statistics Commissioner Katharine Abraham and Lea Rendell. That’s enabled some Americans to emulate their European counterparts and spend more time on leisure and other activities. But it’s also meant a shortfall of labor – equivalent to 2.4 million employees, according to the paper.
.@QuantaMagazine reports on a @Nature study that tracked the tempo of evolution across 68 species and found that the mutation rate per year was higher than expected.
A massive analysis of 68 diverse vertebrate species, from lizards and penguins to humans and whales, has made the first large-scale comparison of the rates at which species mutate — a first step toward understanding how quickly they can evolve. The findings, published in the journal Nature, unearthed surprising insights into how the tempo for mutations can change and what sets that pace. The most surprising finding that emerged from the data was the wide range of germline mutation rates. When the researchers measured how often the mutations occurred per generation, the species varied by only about fortyfold. But when they looked at the mutation rates per year rather than per generation, the range increased to about 120-fold, which was larger than previous studies had suggested. The study authors found that the higher the average effective population size for a species, the lower its mutation rate. That provided good evidence for the “drift-barrier hypothesis” devised a little over a decade ago. “Selection is relentlessly trying to reduce the mutation rate because most mutations are deleterious,” Michael Lynch, an evolutionary biologist at Arizona State University explained. But in species with smaller effective population sizes, natural selection gets weaker because genetic drift—the effect of pure chance on the spread of a mutation—gets stronger. That allows the mutation rate to rise.
.@ngoldschlag @ufukakcigit find that inventors are increasingly concentrated in large incumbent firms, and that incumbents often catch and kill young inventors. An inventor hired by an incumbent firm sees their earnings increase and productivity decrease.
Our paper uses novel data on the employment history of over 760 thousand inventors, to investigate the model’s predictions. We show empirically that (i) inventors are increasingly concentrated in large incumbents, less likely to work for young firms, and less likely to become entrepreneurs, (ii) when an inventor is hired by an incumbent, compared to a young firm, their earnings increases by 12.6 percent and their innovative output declines by 6 to 11 percent over four years. Our analysis has documented that inventor reallocation toward large incumbents, at least the way it happened in recent decades, might be lowering the growth capacity of the country.
Requested redemptions on Blackstone Real Estate Income Trust ($70 billion in assets) were up 15% in March to $4.5 billion. Blackstone paid out only $666 million in redemptions; it was the fifth straight month that they had limited redemptions.
Blackstone clients asked to pull $4.5bn from a closely followed real estate fund in March, even as the company’s executives were promoting investment opportunities in the sector that they said would arise from US economic turbulence. At the Spring Place private members club in Manhattan, Blackstone said the unfolding financial crisis could bolster Breit’s earnings because it would constrain bank financing for new real estate construction, crimping supply and providing upward pressure on rents at its properties, according to four people who attended. Blackstone executives told the group that a big crop of new apartments coming into the market will only crimp profits for a short time. Regional banks, the major financier of US apartments, will cut back on new lending commitments as they feel pressure from deposit outflows and rising interest rates, Blackstone predicted.
Michael Spence argues that the Sino-American decoupling “are as far-reaching as they are severe.” He argues that such decoupling will likely lead to higher inflation, which might compound fiscal pressure in the west.
Make no mistake: the economic consequences of this lurch toward confrontation are as far-reaching as they are severe. As global supply chains become less elastic, less efficient, and more costly, their ability to counteract inflationary pressures will decline. Central banks will thus be left to manage price growth alone, by suppressing excess demand. The combination of higher interest rates and heavy sovereign-debt burdens will compound fiscal pressures. Though lower inflation could ease those pressures, interest rates are likely to remain elevated for a while, especially if suboptimal global economic trends and secular forces like population aging cause supply-side conditions to deteriorate. Nor is the downward trend in productivity growth – which has become particularly pronounced in the last decade – likely to be reversed in a fragmented global economy with barriers to technology development and diffusion.
Research group Drewry notes that China has 76 port terminals able to accommodate the large ships that make up 2/3 of the shipping capacity btw Europe and Asia. South and south-east Asian countries have only 31 such port terminals.
Ports in the rest of Asia will need significant investment to match the capacity of Chinese harbours, according to analysis that shows how western businesses could struggle to loosen ties with the world’s largest exporter. More than 80 per cent of goods are transported by ship, according to the UN. But data from research group Drewry shows that other Asian manufacturing hubs have a dearth of harbours able to accommodate the largest ships that have become essential for transporting goods from east to west. While China has 76 port terminals able to support large ships carrying more than 14,000 20ft containers, south and south-east Asian countries have just 31 between them. Large vessels make up about two-thirds of the shipping capacity for services between east Asia and Europe, according to data provider MDS Transmodal.
Btw 1985-2021 the capital intensity of the American economy was relatively flat as a rise in intangible investment was offset by a decline in tangible investment. @stevebogden makes the case that this dynamic is about to end.
The U.S. economy is about to become more capital-intensive. Demand for intangible investment will continue to grow to meet the needs of a tech-driven economy. Artificial intelligence will likely enable much cheaper software to diffuse faster throughout the economy. But for the first time in decades, demand for investment in tangible capital will have to rise to meet emerging economic challenges. From 1985 to 2021, tangible investment—including property, factories and equipment—decreased from 12.5% to 8.5% of private gross domestic product. That decrease was more than compensated for by growth in intangible investment—including intellectual property, software and process knowledge—which rose from about 11.5% to 16.75% to meet the demands of an increasingly digital economy. Overall, the rate of total private capital investment from 1985 to 2021 grew only 1%.
.@fuxianyi argues that evidence from demographically older provinces northeastern China (where the economy is the same size as in 2012) foreshadows the future impact of demographic change on southern and western China.
While population aging may not directly cause economic recession, a higher aging index – the number of people aged 59 and over per 100 individuals younger than 15 – has a strong negative correlation with GDP growth, as does a higher median age and proportion of people over 59. A higher proportion of children aged 14 and under correlates positively with GDP growth. These dynamics are already apparent across Chinese regions. With relatively younger populations, southern and western China are still growing. But in the Heilongjiang, Liaoning, and Jilin provinces of northeastern China – where fertility rates fell a decade ahead of the rest of the country – the economic engine has stalled. Though China’s government claims that northeastern China’s economy grew by 5% annually in 2013-19 and by 3% annually in 2020-22, the fourth national economic census showed that the region’s GDP in 2019 was the same size as in 2012.
.@NicoleMaestas2 @KathleenJMullen @thedavidpowell use state-by-state variation to estimate the decline in productivity growth caused by an older population; they find that a 10% increase in the 60+ population decreases per capita GDP growth by 5.5%.
Population aging is expected to slow US economic growth. We use variation in the predetermined component of population aging across states to estimate the impact of aging on growth in GDP per capita for 1980–2010. We find that each 10 percent increase in the fraction of the population age 60+ decreased per capita GDP by 5.5 percent. One-third of the reduction arose from slower employment growth; two-thirds due to slower labor productivity growth. Labor compensation and wages also declined in response. Our estimate implies population aging reduced the growth rate in GDP per capita by 0.3 percentage points per year during 1980–2010.
The first few attention-getting applications and services [of AI] have largely been wrappers, whether around marketing (click here to build a blog post for teenagers promoting XYZ), image creation (here is a prompt to create pictures of happy skiers), or office activities, like spreadsheets and presentations (create a six-slide deck for a typical hardware product go-to-market plan). At the same time, the feedback loops are changing. You can see this in the Discord server of the popular and controversial generative AI service Midjourney, where people can see one another’s image creation prompts, and the results, and then they rapidly iterate in real-time on top of each other’s prompts, moving rapidly to fringe ideas, as well as much higher levels of sophistication and verisimilitude. You are seeing, for the first time, real-time, mass evolution, as people and groups are de facto creating increasingly complex applications right in front of you.
.@verdadcap_quant argues that the European market, with a Price/Earnings valuation of 13X vs 22x in the Nasdaq, looks like the better buy, given the likelihood of long-term convergence in growth rates between European and American firms.
University of Chicago professors Luboš Pástor and Pietro Veronesi note that “the value of $1 invested in the Nasdaq quadrupled between 1996 and March 2000, then fell back to the 1996 level by October 2002” after the internet bubble had burst and a critical threshold of widespread internet access had been reached in the United States in 2002. On the other hand, productivity growth in the US economy accelerated sharply after the internet revolution ended in 2002. According to Pástor and Veronesi’s analysis of data from the Bureau of Labor Statistics, total productivity growth in the US economy “averaged about 1% per year in the 1990s, but it increased sharply after 2002: from 1% per year in 2002 to 1.5% in 2003 and 2.5% in 2004 and 2005.” It appears most of the surprise productivity gains in the US after 2002 went to the old economy sectors. Rather than paying bubble prices today in hopes of a bubble extension through AI, we think investors could benefit most from this revolution over the long term by siding with Europe’s proletariat old-economy sectors that are undervalued by global capitalists today and could see an uprising of productivity in the future.
Credit creation in the Eurozone is now negative, and M1 has experienced its sharpest decline ever. @GeneralTheorist
Monetary statistics are of growing importance post-pandemic, but are difficult to interpret since there are many shocks playing out at the same time. Eurozone M1 is indeed collapsing as demand deposits are moved to longer maturities. But this is part of the necessary adjustment as rates normalise and the ECB balance sheet shrinks. Aggregate deposit dynamics are less dramatic than the trends in sight deposits (= checking deposits) alone. On the credit side, banks are still providing net net loans to households and non-financial corporates, but in very small size. And the credit impulse (the 6-month change in the flow of credit, the second derivative of the stock over the past year) is very negative, since we came from a period of elevated credit growth.
.@rbrtrmstrng notes despite headlines of deposit flight US bank deposits are a third higher than they were relative to 2020 but bank deposit rates will compress bank margins.
There are 16 trillion dollars of deposits in domestic banks. US bank deposits are a third higher than they were at the start of 2020, which makes worries about a banking system liquidity crisis seem a little overwrought (though, to be fair, it is changes in liquidity, not absolute liquidity levels, that matter most to markets). There was a one-time outflow of about $185bn, or about 3 per cent of small banks’ deposits. The next week, however, small bank deposits were stable. US banks do not seem to have a deposit outflow problem. The problem we worry about (to return to a theme we have banged on about for some weeks now) is not deposits flows but deposits costs. The concern is that until a few weeks ago businesses and households were doing what they usually do, and sleepily ignoring the rate they were earning on their bank accounts. Then stupid SVB went and woke everyone up. Already, deposit rates had been rising slowly (from roughly nothing), and may accelerate now, crimping bank margins even as the economy slows.
Between April 2022 and January 2023, the AUM of the Money market fund industry increased from $4.31T to $4.62T. Historical lags between rate increases and flows into money market funds suggest that this growth will continue. @NewYorkFed
The size of the MMF industry tracks the monetary policy cycle, albeit with a lag. The chart above shows the assets under management (AUM) of the MMF industry, along with the EFFR and the spread between the MMF yield and the three-month retail CD rate. As the chart shows, the MMF industry did indeed expand following the monetary policy tightening cycles of 2004-08, 2015-18, and 2022 onward. The expansions, however, took place with a lag of one to two years. During the current tightening cycle, MMF yields have increased by 4.13 percentage points, in line with our previous estimate of the beta on MMF shares between 2002 and 2020; in contrast, deposit rates have remained flat. Moreover, consistent with these results, the AUM of the MMF industry has increased as the Federal Reserve has tightened rates, from $4.31 trillion in April 2022 to $4.62 trillion in January 2023. The relatively small magnitude of this increase in the size of the MMF industry, against a rate hike of 4.25 percentage points, is likely due to a lag with which monetary policy affects investor flows in MMFs; the recent monetary policy tightening, in fact, could lead to a further expansion of the MMF industry in the near future.
According to a @WSJ analysis, the strongest job markets in the country are in Sunbelt cities such as Nashville and Austin.
To find the best job markets in America, head to the South. Nashville, Tenn., topped the list of 2022’s hottest job markets, followed by Austin, Texas, and Jacksonville, Fla. The Wall Street Journal, working with Moody’s Analytics, assessed about 380 metro areas. The rankings determined the strongest labor markets based on five factors: the unemployment rate, labor-force participation rate, changes to employment levels, the size of the labor force and wages in 2022. Larger areas, with more than one million residents, were ranked separately from smaller ones.
Younger Chinese workers have much higher educational attainment than older cohorts. Older workers lack the skills to shift to lower-intensity work as they age. “I am going to keep working until I die,” said a 61-year-old cementer. @FT
Older workers also disproportionately lack advanced education and skills that would allow them to transition into higher-paid or lower-intensity work as they age. More than two-thirds of migrant workers born in the 1960s only finished middle school, according to official data, while just one-fifth have received professional training. That compares with two-thirds of those born in the 1980s and 1990s who have attained at least a high school education. “I haven’t had a chance to pick up any tradable skills since I began working at 18,” said Meng Yuhong, a 56-year-old day labourer.
Jan Hatzius @GoldmanSachs thinks the credit contraction increases the odds of a recession inside of the next 12 months to 35%, well below the consensus of 60%.
We have estimated the impact of tighter credit in three ways. The first is an accounting exercise that makes judgmental assumptions about new credit extension by banks with less than $250bn in assets and suggests a 0.25pp hit to growth. The second is an extension of our financial conditions impulse model that adds a role for bank lending standards and delivers a 0.5pp hit to growth. The third is a review of the academic literature on the effects of declines in both bank stock prices and accounting measures of equity capital on loan growth and GDP, which implies a 0.3-0.5pp hit to growth. On the back of these estimates, we have reduced our Q4/Q4 growth forecast by 0.4pp (from 1.5% to 1.1%).
.@Nouriel argues that that the Fed “must not delude themselves into thinking they can still achieve both price and financial stability.” He concludes, “everyone should be preparing for the coming stagflationary debt crisis.”
The credit crunch caused by today’s banking stress will create a harder landing for the real economy, owing to the key role that regional banks play in financing small and medium-size enterprises and households. Borrowers are facing rising rates – and thus much higher capital costs – on new borrowing and on existing liabilities that have matured and need to be rolled over. But the increase in long-term rates is also leading to massive losses for creditors holding long-duration assets. As a result, the economy is falling into a “debt trap,” with high public deficits and debt causing “fiscal dominance” over monetary policy, and high private debts causing “financial dominance” over monetary and regulatory authorities. In a debt trap, higher policy rates will fuel systemic debt crises that liquidity support will be insufficient to resolve. Since liquidity support cannot prevent this systemic doom loop, everyone should be preparing for the coming stagflationary debt crisis.
Citing the 20% fall in US’s ratio of the market value of public debt to nominal GDP, @adam_tooze argues we are living through one of the “most powerful episodes of financial repression ever.”
The truly systemic question is how we see our financial institutions through this giant trillion-dollar rebalancing. That is what will define this historical episode. Though debtors benefit from inflation and the revaluation of debts, they need to brace for the surging costs of debt service. Those who did not stretch the maturity of their obligations in the era of low rates now face an interest rate cliff. But if we can adjust to higher debt service and avoid a rash of bank crises, the one-off shock to the price level opens up unexpected fiscal space. We must use this wisely. We need public investment so as to escape the reactive cycle we are locked in and to begin anticipating the challenges of the polycrisis, whether in public health, climate change or destabilising geopolitics.
One in 25 or 4% of American 5-year-olds today will not live to 40; these deaths are largely due to drug overdoses, gun violence, and driving related deaths. @jburnmurdoch
America’s mortality problem is driven primarily by deaths among the young. One statistic in particular stood out: one in 25 American five-year-olds today will not make it to their 40th birthday. No parent should ever have to bury their child, but in the US one set of parents from every kindergarten class most likely will. These young deaths are caused overwhelmingly by external causes—overdoses, gun violence, dangerous driving and such—which are deeply embedded social problems involving groups with opposing interests.
.@LeaRendell argues the labor force is 700,000 workers below expectations based on changing demographics and pre-pandemic trends. She attributes these workers’ absence to fear of COVID and long COVID.
The labor market has changed significantly since the start of the pandemic. Over the 12 months ending December 2022, the labor force participation rate was about 0.9 percentage points below the 12-month average ending in February 2020. This is a shortfall of close to 2.4 million workers. The 0.6 hour reduction in the moving average level of average weekly hours over the same period contributed an additional labor supply shortfall that is the equivalent of about another 2.4 million workers. As shown in the table, much of the decline in labor force participation over the past three years should have been anticipated even absent the pandemic
Citing measures of trade, capital flows, and immigration, @PennyG_Yale argues there is evidence of a slowdown but not a reversal of globalization.
First, it is clear that the growth of trade as percent of GDP has stalled since the financial crisis, and even declined in some cases. However, trends in capital and labor markets tell a different story. Taken together, these trends suggest that it is premature to talk of “deglobalization” – the slowdown of global trade seems a natural development following its earlier, fast growth and reflects partly the growth of the domestic markets of two large, formerly low-income countries, China and India. Second, deglobalization trends are highly heterogeneous across countries. While the United States and China – the world’s two largest economies which by virtue of their economic size drive aggregate trends – seem to be gradually decreasing their reliance on global markets, this is not true for the rest of the world.
.@TaxFoundation analysis finds that for every dollar earned by the lowest quintile of American households, they receive an additional $1.27 from the government. @tevermeer @ericadyork @alex_durante_ @JaredWalczak
The U.S. system of taxes and transfers is highly progressive. The lowest quintile experienced a combined tax and transfer rate of negative 127.0 percent, meaning that for each dollar they earned, they received an additional $1.27 from the government, netting transfers (gains) and taxes (losses), while the top quintile had a rate of positive 30.7 percent, meaning on net they paid just under $0.31 for every dollar earned. The top quintile funded 90.1 percent, or $1.6 trillion, of all government transfers in 2019. For each dollar of taxes paid, the top quintile received $0.11 in gross government transfers. Government transfers account for 59 percent of the bottom quintile’s comprehensive income. For each dollar of taxes paid by the bottom quintile, they received $6.17 in gross government transfers.
Banks with less than $120B in deposits have lost over $108B in deposits since SVB’s collapse, which should restrict credit availability. Banks with <$10B in deposits account for almost 43% of small business loans. @WSJ
The 25 biggest U.S. banks gained $120 billion in deposits in the days after SVB collapsed, according to Federal Reserve data. All the U.S. banks below that level lost $108 billion over the same period. It was the largest weekly decline in smaller banks’ deposits in dollar terms on record. Meanwhile, more than $220 billion has flowed into money-market funds over the past two weeks, according to data from Refinitiv Lipper. Banks with less than $10 billion in assets accounted for nearly 43% of small loans to businesses outstanding at the end of 2022, according to Prof. Cole’s analysis of federal banking data. The 13 largest banks, by contrast, accounted for less than 23% of small- business loans, much of which represents credit-card balances, he said.
Back of the envelope math suggests banks should be able to weather the decline in offices values; small banks face losses of $140B on offices, which is only 10% of their equity capital. @TheEconomist
At the end of 2022, the commercial-property industry owed $5.6trn in debt to investors and financial institutions. According to Trepp, a data provider, half of this was to banks. Brookfield and funds of its size might need to repay big institutions, but the vast majority are on the hook to lenders with below $250bn in assets—ones which are already under severe stress after the collapse of Silicon Valley Bank. Even the worst-case scenario would have limited impact. Roughly a quarter of the $2.2trn of commercial-property loans owed to small banks are office loans. Imagine thatlandlords hand back the keys on half these loans this year—some $280bn in total. If banks could recover just half the value of the loans by selling off the assets at deep discounts (say, a third of their value three years ago) they would be wearing losses of $140bn. That is just 10% of the equity capital that small banks hold. The blow would be unevenly distributed, however, and could imperil some institutions.
Suburbs of big and medium sized cities are driving the US’s population growth while the flight from big cities slowed. @WSJ
The suburbs of big cities and small and medium-size metropolitan areas continued to claim most of the country’s growth, according to a Wall Street Journal analysis of population estimates released Thursday for the year that ended June 30. Rural areas and small towns collectively remained nearly flat. The core counties of large metro areas had an estimated net loss of more than 800,000 movers to the rest of the country, but that was an improvement from a 1.2 million drop in the preceding year, the Journal analysis shows. After a sharp falloff in immigration at the peak of the pandemic, the latest data shows a revival that has helped bolster large urban counties, with about 500,000 net arrivals from abroad last year. A rise in births and fewer deaths also helped offset moves out of urban counties, leaving their collective population little changed for the year.
An analysis from the @NewYorkFed shows that adjusting the labor force participation rate for population aging and excess retirements raises “the LFPR by 1.1 percentage point from 62.5% to 63.6%, more than making up for the participation gap.”
The gold line in the chart below shows this age-adjusted participation rate. Removing the effect of aging can explain the entire participation gap, lifting LFPR by 0.9 percentage point in February 2023. This big effect arises because the large baby boomer cohort is right at the retirement cutoff. As the chart above shows, the retirement share rises dramatically with age around the age of 65. Consequently, the aging of the baby boomers between 2020 and 2022 led to a significant rise in retirements, reducing participation. We analyze the effect of excess retirements on participation, in addition to the effect of aging. To do so, we analyze how the overall age-adjusted retirement share would change if we went back to the retirement shares in each age group of 2018-19. Overall, our results imply that undoing the effects of population aging and excess retirements would raise the LFPR by 1.1 percentage point from 62.5 percent to 63.6 percent, more than making up for the participation gap.
John Fernald @sffed argues that slower total factor productivity growth is likely not a function of the business cycle or scarring due to the crisis, as growth slowed in advance of 2008 across advanced economies.
TFP is the main factor accounting for differences in labor productivity growth across countries and over time. Since the mid-2000s, TFP growth has been lackluster across the large economies we analyze here. At the level of the market economy, productivity slowed because the productivity frontier (the U.S.) slowed, with similar slowdowns elsewhere. At a more disaggregated level, the frontier economy is sometimes different, but the pattern of slow TFP growth since the mid-2000s is evident in both manufacturing and market services. Qualitatively as well as statistically, the evidence suggests that, following that mid-1990s pickup, U.S. TFP growth slowed before the Great Recession.
.@JonHaidt reports the deterioration in teens mental health across the Anglosphere is seemingly following the same basic pattern which he suspects is being driven by smartphones and social media.
n sum, all five Anglosphere countries exhibit the same basic pattern: A) A substantial increase in adolescent anxiety and depression rates begins in the early 2010s. B) A substantial increase in adolescent self-harm rates or psychiatric hospitalizations begins in the early 2010s. C) The increases are larger for girls than for boys (in absolute terms). D) The increases are larger for Gen Z than for older generations (in absolute terms). At this point, there is only one theory we know of that can explain why the same thing happened to girls in so many countries at the same time: the rapid global movement from flip phones (where you can’t do social media) to smartphones and the phone-based childhood. The first smartphone with a front-facing camera (the iPhone 4) came out in 2010, just as teens were trading in their flip phones for smartphones in large numbers. (Few teens owned an iPhone in its first few years). Facebook bought Instagram in 2012, which gave the platform a huge boost in publicity and users.
Ruy Teixeira @AEI notes that “Republicans are, in a strict quantitative sense, the party of the American working class. That is, they currently get more working-class (noncollege) votes than the Democrats”
Republicans are, in a strict quantitative sense, the party of the American working class. That is, they currently get more working-class (noncollege) votes than the Democrats. That was true in 2022 when Republicans carried the nationwide working-class House vote by 13 points. That was true in 2020, when Trump carried the nationwide working-class presidential vote by 4 points over Biden. Moreover, modeled estimates by the States of Change project indicate that Trump carried the working-class vote in 35 out of 50 states, including in critical states for the Democrats like Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin, as well as in states that are slipping away from the party like Florida, Iowa, Ohio and Texas.
.@WhiteHouseCEA draws a connection between fiscal policy in 2020 and the uptick in inflation in 2021.
Figure 2-15 plots the Hutchins Center’s Fiscal Impact Measure (FIM), which uses information on the Federal Government’s spending on goods and services, sate and local government spending on goods and services, and taxes and benefit programs to approximate the contribution of fiscal policy to total real GDP growth each quarter. A positive fiscal impulse means that the contribution of fiscal policy to real GDP is larger than it was the quarter before. Figure 2-15 shows that the FIM spiked in 2020:Q2, mainly due to an expansion of transfer programs, and was positive for two of the next three quarters, but was a significant drag throughout 2022 and is projected to remain negative in 2023 and 2024, using projections for fiscal policy by the Congressional Budget Office in its current baseline.
.@pkedrosky argues that Goldman’s new AI report understates potential for productivity-enhancing software development that was previously too expensive to develop, which implies lots of “low-hanging economic fruit.”
We caution that Goldman’s approach is fairly traditional, in that it treats the prospective productivity gains across various disciplines as a function of the ease of applying these generative AI technologies, as opposed to the availability of low-hanging economic fruit. We think the gains from making it easier to produce presentations and documents and emails are much less than touted. On other hand, we stand by our argument that the gains of generative AI in other occupations are large and larger than Goldman anticipates in this report. Again, and more specifically, we think that the gains from producing software are very large, given that, as we’ve argued, we have underproduced for decades, and software sits in the sweet spot with respect to its combination of a clean grammar and logical structure, and given that it has been too costly to produce for most of its existence, hence why it’s been so slow to “eat the world,” as has sometimes been said is happening.
.@greg_ip argues that small and medium sized banks could face a “prolonged period of pressure on their deposits” that could reduce the supply of credit to the economy.
Compared with the past, the bigger problem for banks isn’t the asset side of their balance sheets but the liability side. That is in part due to the fiscal and monetary-policy response to the pandemic. The Federal Reserve restarted purchases of bonds, and the Treasury sent big stimulus and other relief payments directly to household bank accounts. As a result, deposits ballooned. The ratio of bank loans to deposits fell to a 50-year low of around 60% in September 2021, Moody’s Investors Service said in a report. While a growing share of banks’ deposits were uninsured, they were assumed to be relatively “sticky,” or less prone to flee than other types of wholesale funding. But social media and smartphone banking apps seem to have changed that. Small and medium-size banks could be in for a prolonged period of pressure on their deposits, which could in turn force them to be acquired, or limit their lending.
Commercial real estate (CRE) fundamentals are, outside of offices, “sturdy enough.” Loan-to-value ratios are relatively low, meaning that falling prices aren’t likely to translate into defaults. @rbrtrmstrng @EthanYWu
Valuations look very stretched and a reversion to the mean suggests a harsh correction. Falling prices, however, are not nearly as worrisome as defaults. And outside of offices, fundamentals seem sturdy enough. Distress remains rare. Unlike in the CRE bust of the early 1990s, when loan-to-value ratios were treacherously high, regional banks’ CRE loans have an average LTV around 66 per cent, according to MSCI Real Assets. Offices’ soaring vacancy rates are not showing up elsewhere. With the possible exception of recession-exposed retail, net operating income growth looks healthy (though this is somewhat exaggerated by inflation).
Protests directed at Macron’s pension reform proposal were smaller Tuesday with the CGT labour union estimating 450,000 people protested in Paris down from 800,000 Thursday. @FinancialTimes
Smaller crowds turned out across France on Tuesday in the tenth nationwide protest held by labour unions against President Emmanuel Macron’s unpopular plan to raise the retirement age, while strikes disrupted transportation and shut down the Eiffel Tower and the palace of Versailles. The CGT labour union estimated that 450,000 people had turned out in Paris compared with 800,000 at the previous union-led demonstration on Thursday, with declines also reported in Marseille, Rennes and Toulouse. Police figures put the nationwide crowds at 740,000 people compared with more than a million last week. The lower turnout is a boost for Macron’s government, which has rejected union attempts at mediation to ease the crisis and vowed to hold firm on finalising the reform by mid-April once it has been reviewed by the constitutional court. But unions are also maintaining their position: another nationwide protest is set for April 6.
A review of shareholder letters from 1955 and 2020 finds that corporations “pick and choose the stakeholders they want to focus attention on, while emphasizing long-term shareholder value, especially in how they compensate.” @zingales
In spite of the proliferation of corporate goals, we find that executive compensation remains overwhelmingly focused on shareholder value, as measured by stock prices and financial performance. While we do observe an increase in the use of environmental and social metrics in compensation, especially by firms that announce such goals, the magnitude of this relationship is still small. We also find corporate statements of ESG goals are associated with policies and programs that favor those goals, but there is little evidence that it improves the firm’s measurable ESG outcomes. These findings cast doubt on the hope that self-regulation would suffice to undertake a green transition. Firms seem very responsive to the public mood in words and programs. Better outcomes? Not yet! There is no evidence that a focus on shareholder value is detrimental (or beneficial) to the long-term health of a corporation, whether that health is measured with profits, dividends, or stock market returns.
Matt Pottinger and @JEPomfret note that Xi Jinping recently urged senior military leaders to “dare to fight.” China has also started building or upgrading air raid shelters and at least one “wartime emergency hospital.”
Chinese leader Xi Jinping says he is preparing for war. At the annual meeting of China’s parliament and its top political advisory body in March, Xi wove the theme of war readiness through four separate speeches, in one instance telling his generals to “dare to fight.” His government also announced a 7.2 percent increase in China’s defense budget, which has doubled over the last decade, as well as plans to make the country less dependent on foreign grain imports. Since December, the Chinese government has also opened a slew of National Defense Mobilization offices—or recruitment centers—across the country, including in Beijing, Fujian, Hubei, Hunan, Inner Mongolia, Shandong, Shanghai, Sichuan, Tibet, and Wuhan. At the same time, cities in Fujian Province, across the strait from Taiwan, have begun building or upgrading air-raid shelters and at least one “wartime emergency hospital,” according to Chinese state media. In March, Fujian and several cities in the province began preventing overseas IP addresses from accessing government websites, possibly to impede tracking of China’s preparations for war.
.@orvilleschell argues that business leaders in Europe and the United States are myopic not to move “ferociously in the direction of decoupling, even though that process is neither easy nor welcome” given the risk of war in the Western Pacific.
My own view is that, whether you are from Blackstone or Morgan Stanley, you would have to be deluded not to see which way the wind is blowing. Despite ongoing reliance on China for many supply chains, deeper economic ties are not in the offing, because such co-dependence now comes with huge geopolitical risks. It is hard to imagine that even Elon Musk, who has made a fortune in China with his Tesla factory, will be able to maintain this success over the long term. China now wants to develop its own electric-vehicle industry, and it does not want to rely on Musk anymore. So, the wind is blowing more and more ferociously in the direction of decoupling, even though that process is neither easy nor welcome. Yes, some US and foreign companies – such as the stalwarts of Germany’s auto industry – have not yet reconciled themselves with the new reality. CEOs do not like to countenance gloomy and disruptive scenarios. But all they have to do is look at what has happened in Ukraine. If China were to move against Taiwan, it would make the fallout from the war in Eastern Europe look like child’s play.
Michael Cembalest @jpmorgan argues that effective load carrying capacity (ELCC) is a better metric than the levelized cost of energy (LCOE) since this metric reflects the intermittent availability of wind and solar power.
One example: assume that California builds a deeply decarbonized system with 20 GW of wind, 150 GW of solar and 75 GW of storage. This system would only have 50 GW of reliable load with which to meet demand (ELCC=50 GW). Alternatively stated: if this system needed 50 GW of reliable power and was designed with renewables only, it would need 245 GW of wind, solar and storage to make it work. The marginal ELCC of wind, solar and storage are at their highest when renewables are first added to the system; their contribution to system reliability falls rapidly after that. LCOE reflects none of these realities, which is why the ISOs and utilities shown in the text box look at ELCC instead.
Using data from 2000-2019, @sffed researchers conclude that after a 1% mortgage rate increase generated by a policy shock, there is an immediate 1% reduction in house prices and a 3% total reduction after three weeks.
We examine how mortgage rates change in response to monetary policy shocks. We use data on 30-year fixed-rate mortgages from the Primary Mortgage Market Survey. We find that monetary policy surprises affect house prices far more quickly than commonly thought. Monetary policy impacts housing prices through list prices—the prices of properties for sale posted by sellers—within a matter of weeks instead of years. The response is driven largely by unanticipated policy changes to forward guidance and large-scale asset purchases. We find that a 1 percentage point increase in the mortgage rate generated by a monetary policy shock is associated with house prices falling immediately by 1%. Prices continue declining in the weeks following a monetary policy announcement and ultimately settle 3% lower three weeks after the shock.
.@martinwolf_ notes that, while extremely low interest rates have had some unfortunate consequences, it is not correct to place the blame entirely on central banks; demographics, the rise of China, and a global savings glut were major factors.
Central banks alone, however demented they may have been, could not deliver a decline of more than eight percentage points in real interest rates over three decades. If this huge fall in real interest rates were incompatible with the needs of the economy, one would surely have seen surging inflation. So, what was going on? The big background changes were financial liberalisation, globalisation and the entry of China into the world economy. The latter two not only lowered inflation. They also introduced a country with colossal surplus savings into the world economy. In addition, rising inequality within high-income countries, combined with ageing populations, created huge surplus savings in some of them, too, notably Germany.
Phil Gramm and @cwcalomiris draw a parallel btw the current instability in the banking system and the Savings and Loans crisis which also played out against a hiking cycle.
The 1980s offer a better perspective on our current banking instability. Losses on securities at Silicon Valley Bank, Signature Bank and many others still waiting to be addressed reflect the risk from borrowing short and lending long—reminiscent of thrift strategies of the 1970s and the government’s decision to ignore losses from pursuing those strategies in the early 1980s. Between 1980 and 1994, 1,617 banks and 1,295 thrifts either were closed or received government assistance. For thrifts, the story began with a government mandate forcing them to specialize in long-term mortgage loans funded with deposits. As the Federal Reserve raised rates, funding costs rose and many thrifts became insolvent. The difference today, in contrast with the 1980s, is that SVB and Signature Bank relied largely on uninsured deposits, whereas thrifts and banks then had relatively few such deposits. As their risk of failure grew, uninsured depositors (who were slow to respond) still responded fast enough to prevent the banks from becoming deeply insolvent. If those deposits had been insured ex ante, we might now be quietly experiencing resurrection risk-taking from SVB and Signature Bank, with much larger losses to come in those banks and throughout the banking system. The failures of SVB and Signature illustrate the usefulness of what remains of market discipline, which comes from limiting deposit insurance. Regulation failed, but the market didn’t.
.@FedGuy12 notes that there are several trillion in uninsured dollar deposits abroad that aren’t FDIC insured. If these depositors shift their money to the American banking system, it could create contagion risk.
Dollar deposits in U.S. banks are now de facto fully protected by the U.S. government, but that protection does not extend to the trillions of dollar deposits in foreign banks. The dollar is unique in that there is an extensive network of foreign banks that offer dollar banking services throughout the world. These banks take dollar deposits and make dollar loans but are outside the purview and protection of U.S. regulators. They are supervised by their home country regulators, who usually do not and cannot offer insurance on dollar deposits. Note that even the U.S. branches of foreign banks tend to be uninsured by the FDIC. Concerns over large foreign banks could easily spark a realization that dollars can only be safe within the U.S. That would be a crisis that could not be easily papered over.
The length of time people spend in retirement has grown across the rich world. In 1970 in OECD countries men retired at 66 and had 12 years life expectancy. By 2020 they retired at 64 and could expect to live another 20 years. @TheEconomist
The combination of fewer births and longer lives means that the old-age dependency ratio—the proportion of people aged 65 and older to those aged between 20 and 64—is expected to rise from one in five in 1990 to one in two by 2050 across the OECD, a club of mostly rich countries. And the time people spend in retirement has shot up in the past 50 years. In 1970 men, on average, retired at 66 and could expect to live another 12 years. In 2020 they retired at 64 and had 20 years ahead of them. French men, in particular, have some of the lengthiest retirements—some 25 years on average, double that of the previous generation (see chart). By contrast, although their life expectancy at retirement has also doubled over the same period, Mexican men today spend 16 years in retirement.
.@EuroBriefing argues that if French protests continue, they are likely to intensify, risking France becoming “ungovernable.”
Since Emmanuel Macron triggered Art. 49.3 to pass the pension reform without a vote in parliament, there is not one day without some clashes between violent protesters and the police. Today, another general mobilisation will test how far this showdown can go. Transport will be severely interrupted, while rubbish continues to pile up in Paris as bin collectors and workers at an incineration plant close to Paris stopped working. About 15% of petrol stations are now without fuel due to strikes at refineries. A vast contingent of police has been mobilised today, with a show of force likely to be tested by black-hooded protesters. According to the interior minister, there were about 1500 of those ready to use violence last week. Marianne looked at their profile and found that while those black-hooded protesters were classically precarious intellectuals, they also increasingly include young working-class people. What will happen today will be a precursor to how protests evolve. So here we are, a necessary reform that all of a sudden has turned explosive, all reason and proportionality lost.
.@PatrickRuffini argues that Wall Street Journal/NORC recent poll results likely overstate the degree of change due to a shift in methodology to an online survey for 2023 vs. phone surveys in prior years.
The point here is not that the Wall Street Journal and NORC released bad data. The dramatically different results we see from 2019 and 2023 are because the data was collected differently. The March 2023 survey was collected via NORC’s Amerispeak, an extremely high-quality online panel. In the fine print below the chart, we can see that data from previous waves was collected via telephone survey. Surveying the exact same types of respondents online and over the phone will yield different results. And it matters most for exactly the kinds of values questions that the Journal asked in its survey. The basic idea is this: if I’m speaking to another human being over the phone, I am much more likely to answer in ways that make me look like an upstanding citizen, one who is patriotic and values community involvement.
As Belt and Road borrowers have come under increasing financial stress China is serving as a lender of last resort providing at least $240B of emergency financing, including at least $40.5B since 2021 @Ch_Trebesch @carmenmreinhart
This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. The swaps bolster gross reserves and are mostly drawn by distressed countries with low liquidity ratios. In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China's Belt and Road Initiative. These findings have implications for the international financial and monetary architecture, which is becoming more multipolar, less institutionalized, and less transparent.
.@FTAlphaville reports on a @GoldmanSachs note forecasting that AI could add 1.5pp to annual US labor productivity growth, or double the current pace, and that the “AI growth bonus” could add almost $7T to global GDP over 10 years.
Goldman’s base case is for 7 percent of workers to lose their jobs entirely in the decade after generative AI reaches half of employers, but that most will find something nearly as productive to do. That’s set against broad improvements in workforce efficiency that can add around 1.5 percentage points to US labour productivity — which would be about double the current rate. The AI growth bonus globally may be 1.4 percentage points, representing almost $7tn in extra annual global GDP over 10 years, it estimates.
.@stlouisfed finds that nominal wage growth did not keep pace with inflation for 54% of US workers.
Both the mean and median worker experienced negative real wage growth in 2022, meaning the growth of their wages did not keep up with the growth of prices in their consumption baskets. Altogether, this was the case for 54% of workers. Workers younger than 25 years old experienced a positive real wage growth rate of 4.3%, while other age groups experienced negative real wage growth rates. In fact, the older the age group, the lower the real wage growth. Similarly, individuals with less than a high school diploma experienced smaller declines in their real wages than those in all other education groups.
.@TheEconomist examines data from an American dating site aimed at educated professionals. They find that, when users do apply filters, they mostly reflect familiar dating preferences that long predate the internet.
The League’s data cover 80,000 users across ten cities in January 2023. The site chooses pairs of users who pass each other’s filters and present them as “prospects”. If these users both “like” each other, they can chat. Users see a fixed number of candidates per day. This makes it possible to distinguish explicit dating desires (filters) from implicit ones, revealed by how often users like their prospects. Filtering choices follow demographic patterns. Women block 70% of potential matches, compared with 55% for men, mostly because they tend to exclude users who are shorter or younger. Because users with strict filters weed out most unsuitable people pre-emptively, you might expect them to like many of the remaining candidates. But the data show the opposite. For both sexes, the share of prospects liked by the 10% of users with the tightest filters is 11-13 percentage points lower than by the 10% with the broadest ones.
Over the past 25 years the number of Americans reporting “patriotism” was “very important” to them declined from 70% to 38% and “having children” declined from 59% to 30%. The number reporting “money” climbed from 31% to 43%. @WSJ
Patriotism, religious faith, having children and other priorities that helped define the national character for generations are receding in importance to Americans, a new Wall Street Journal-NORC poll finds. Some 38% of respondents said patriotism was very important to them, and 39% said religion was very important. That was down sharply from when the Journal first asked the question in 1998, when 70% deemed patriotism to be very important, and 62% said so of religion. The only priority the Journal tested that has grown in importance in the past quarter-century is money, which was cited as very important by 43% in the new survey, up from 31% in 1998.
Between 2015-19 private equity and venture capital investment into aerospace and defence averaged $10.4B annually. Investment reached $20B in 2022 after peaking at $34B in 2021. @FT
Global deal activity in aerospace and defence companies by private equity and venture capital investors stood at $20bn in 2022 and $34bn in 2021, according to data compiled by PitchBook for the FT. That represents an uplift from before the pandemic when money flowing into the sector averaged $10.4bn annually from 2015 to 2019. European private equity deal activity in defence-focused companies reached €3.8bn in 2021, according to data from PitchBook, the second highest over the past decade after €5.3bn in 2019. The two top PE defence deals by value were done by Advent International, which bought UK-listed groups Cobham for £4bn in 2019 and Ultra Electronics for £2.8bn in 2022.
The Pentagon has abandoned some of the cost-cutting changes embraced at the end of the Cold War, and President Biden has invoked the Defense Production Act to accelerate development of several hypersonic weapons systems. @NYT
Procurement budgets are growing. The military is offering suppliers multiyear contracts to encourage companies to invest more in their manufacturing capacity and is dispatching teams to help solve supply bottlenecks. More generally, the Pentagon is abandoning some of the cost-cutting changes embraced after the end of the Cold War, including corporate-style just-in-time delivery systems and a drive to shrink the industry. President Biden has also turned to the Defense Production Act — used during the pandemic to speed up the manufacturing of respirators and vaccines — to move ahead with new missile programs faster, including a number of hypersonic weapons being developed for the Air Force, the Army and the Navy.
Evidence from investment in robots suggests robots are complementary to production workers and their adaptation is concentrated in hubs. @erikbryn @CathyBuffington @ngoldschlag @jmirandal
We present results on the distribution of robots in U.S. manufacturing by establishment characteristics and geography using new establishment-level data collected by the U.S. Census Bureau’s Annual Survey of Manufacturers for reference year 2018. This is the first establishment-level analysis of the use of robots in U.S. manufacturing, leveraging data on approximately 35,000 establishments. We find that establishments with robots tend to be larger, have higher earnings per worker, have a larger share of production workers, and spend more on capital expenditures, including IT, than establishments without robots. We also find that the distribution of robots is highly skewed across locations, even after accounting for the different mix of industry and manufacturing employment across locations. Some locations, which we call Robot Hubs, have far more robots than one would expect after accounting for industry mix.
.@Brad_Setser notes that in 2022 foreign demand for American Treasury and Agency bonds was strong, though official demand fell off in Q4.
On a trailing 4q basis (so for the full year 2022) foreign demand for "safe" US bonds remained strong ... Bondmageddon (the mark to market losses on low yielding bonds) didn't seem to impede total foreign demand for US bonds (new inflows get the new higher rate.) Official demand (from foreign central banks and SWFs) did fall off in 2022 -- and clearly shifted toward Agencies (cough, China) But foreign demand for US bonds decoupled from reserve growth ... and that is reflected on the US side of the global data as well. Overall foreign demand for US bonds (which has been surprisingly strong in 2022 when judged relative to global reserve growth) from both public and private sources tailed off in q4 as well. It does seem that demand for US assets fell a bit faster than the goods deficit in q4 ... so a potential source of dollar weakness (then) is in the data.
Capital markets have been closed since the SVB failure with the highest rated borrowers issuing debt at only 33% of the 5-year avg for March. Goldman Sachs estimates that tighter lending standards will reduce US growth by 25 to 50 basis points in 2023.
The capital markets have been on ice since the collapse of Silicon Valley Bank two weeks ago. No companies with investment-grade credit ratings sold new bonds over the seven business days from March 9 through March 17, the first week in March without a new high-grade bond sale since 2013. The market for new junk-bond sales has largely stalled this month. Those with the highest ratings have sold $59.9 billion in new bonds this month, compared with March’s five-year average of $179 billion. Companies have raised some $5 billion of junk bonds this month versus the five-year average of $24 billion. In the base case for Goldman Sachs Group Inc., tighter lending standards will subtract one-quarter to one-half of a percentage point from U.S. GDP growth in 2023, equivalent to the impact of Fed rate increases of the same size.
.@johnauthers notes declines in the KBW Bank index are historically associated with broader market declines and argues that “the combination of deeply troubled banks and strong performance for the rest of the stock market cannot persist much longer.”
The following chart, from the terminal, shows banks’ performance on one axis, and the S&P 500 on the other, both on a log scale. When banks fall badly relative to everyone else, the broader market tends to decline, as I’ve tried to mark with the colored rectangles. That’s because banks matter to the economy. When they’re in trouble, it’s much harder for anyone else to make a profit. So how to justify the continued strength of the market while bank investors are so obviously worried? Maybe there’s hope for a bailout in some form that will hurt banks’ shareholders but rescue everyone else. That’s not outlandish. Or possibly, everyone else thinks that the investors are unnecessarily panicking — in which case we should expect a banking rebound pretty quickly.
A Spanish antipoverty program that gave recipients a cash transfer equivalent to almost 50% of the national minimum wage had strong negative labor market effects, with primary recipients 20% less likely to work relative to the control group. @iza_bonn
In this paper, we studied the employment effects of an antipoverty program that does not include any such conditions. The two-year program, implemented in Barcelona (Spain), consisted of a monthly cash transfer to households with income below the subsistence level. The benefit level depended on the household income, size, and composition. On average, households received roughly e500 ($792 PPP) per month, equivalent to nearly 50 percent of the national minimum wage. Although the benefit was household-based, transfers were made to the account of a designated household member, the main recipient. Our findings for overall impacts can be summarized in four parts. First, we find strong evidence for sizeable negative labor supply effects. After two years, households assigned to the cash transfer were 14 percent less likely to have at least one member working compared to households assigned to the control group; main recipients were 20 percent less likely to work. Second, negative employment effects persisted until at least six months after the last payment. Third, we find tentative evidence that effects are mainly driven by households with care responsibilities. Fourth, there is no evidence of effects on social participation and education-related activities.
.@NikkeiAsia notes demographic parallels between China and Japan. Japan’s population peaked in 2008, relative to 2022 in China.
Experts point out a lag of only 15-20 years between Japan and China in terms of demographic maturation: the working-age population started falling in 2015 in China vs. in 1995 in Japan; the population decline began in 2022 in China vs. 2008 in Japan. At the time the population began moving toward decline, the median age of the Japanese population was 37, the same median age as China's population in 2020. "China's population structure [now] is similar to Japan's around 1990, when Japan entered a long-term decline," points out Chi Hung Kwan, senior fellow at Nomura Institute of Capital Markets Research.
.@jburnmurdoch argues the leftward swing of Anglophone millennials relative to their peers in other advanced economies suggest culture war issues will only benefit the right in the short term.
Across continental Europe, millennials continue to follow their ancestors gradually rightward, but from the UK and US to Canada, Australia and New Zealand, they have veered away from the traditional path. This is a smoking gun. Continental multi-party systems allow voters to switch their allegiances away from anti-immigrant parties while still staying within the right or leftwing bloc in a way that the predominantly two-party Anglosphere system does not. If millennials were being alienated solely by economic injustice, we might see the same desertion of the right in Europe as in the English-speaking world. A growing cultural disillusionment makes more sense. In 2009, views on immigration were not delineated according to party or age divides. But 10 years and several culture battles later, younger adults are now far more pro-immigration than their elders, and those on the left are far less anti-immigration than the right. The same is true with attitudes to LGBT issues, where a divide between progressives and conservatives now neatly maps on to age. In both cases, conservatives successfully drove a wedge between one generation and the rest — but the cohort they discarded is growing steadily larger.
In a recent @WSJ poll, 78% of adults said they don’t feel confident that their kid’s generation will be better off than they had been, the highest share since the survey began asking the question in 1990.
The WSJ-NORC poll surveyed 1,019 adults from March 1 to 13, largely before the collapse of Silicon Valley Bank and subsequent turmoil in the financial industry. A plurality of respondents, 44%, said their finances are in worse condition than they expected for this stage in life, and more than a third said they are not at all satisfied with how they are getting along financially. Fewer than 3 in 10 agreed that people like them and their family have a good chance of improving their standard of living. For more than three decades, NORC has asked Americans whether life for their children’s generation will be better than it has been for their own using its General Social Survey. White respondents were more likely to say they are not confident than Black and Hispanic respondents.
Evidence from an online personality test suggests that the Flynn effect reversed in the United States between 2006-2018 for all levels of education attainment, with the most significant decline for individuals without a college degree.
Thirteen years of cross-sectional data from a subsample of adults (n = 394,378) were obtained from the Synthetic Aperture Personality Assessment Project (SAPA Project) to examine if cognitive ability scores changed within the United States from 2006 to 2018. Regardless of education, gender, and age, lower annual scores were observed for composite cognitive ability measured by 35 items, and the matrix reasoning and letter and number series scores measured across the 13 years of assessment. A reverse Flynn effect was also present across all levels of educational attainment, with the rate of decreasing scores being steeper for those with less than a 4-year college degree.
Nicholas Eberstadt and Peter Van Ness @AEIecon find significant variation in labor force participation across metropolitan areas. Notably, they find no correlation between local LFP and the change in manufacturing jobs’ share of employment since 2000.
For many years, a stylized fact floating in the economic policy ether (on both the left and the right) has been the now widely accepted notion that deindustrialization has driven down post-war LFPRs for American men. The figure above squarely challenges that assumption. Less ephemerally, careful studies by David Autor of the Massachusetts Institute of Technology and his colleagues have detailed the devastating impact of the "China shock" — the shift in worldwide trade patterns that followed China's accession into the World Trade Organization in 2001 — on the U.S. manufacturing sector. That immediate shock was, alas, very real, but our chart suggests it was also temporary. This figure, we believe, should be taken as an invitation to reexamine a matter many scholars and policymakers consider settled.
Though not yet at the scale of the 2018 gilets jaunes protest, France is facing widespread protest after President Macron pushed through an unpopular pension reform without a parliamentary vote. @FinancialTimes
In his first public statement since ramming through his unpopular pensions reform without a parliamentary vote, Macron defended both the policy and the method and tried to calm public anger that has sparked spontaneous nightly protests from Paris to Rennes. “We must move forward,” he said in a televised interview on Wednesday. “We have to restore calm and rebuild a parliamentary and reform agenda by re-engaging with labor unions and any political parties who are ready to do so.” Macron’s approval ratings have fallen 4 percentage points in the past month to 28%, according to an IFOP poll, their lowest since the gilets jaunes crisis.
Commercial property loans are an increasing risk for American banks with the stress falling on smaller banks, commercial real estate lending makes up 43% of small banks total lending versus 13% for large banks. @FinancialTimes
Strains in the $5.6tn market for commercial real estate (CRE) loans have deepened in recent months as the Federal Reserve’s year-long series of interest rate rises leads to sharply higher borrowing costs and weakening property valuations. Thousands of small and medium-sized banks that make up the bulk of US lenders account for about 70 per cent of so-called CRE loans, according to JPMorgan analysts. Most of the products are not repackaged for the asset-backed securitization markets so remain on banks’ books. CRE loans make up 43 per cent of small banks’ total lending, against just 13 per cent for the biggest banks. About 17 per cent of office loans are held in CMBS, according to Goldman Sachs, making the market joint-top funder alongside regional and local banks.
North American trade in goods and services has quadrupled in nominal value since the North American Free Trade Agreement went into force in 1994. @TheEconomist argues that as the US pulls away from China, it needs its neighbors more than ever.
North America's trade in goods and services has quadrupled in nominal value since the North American Free Trade Agreement (NAFTA) went into force in 1994, to more than $7trn, or roughly 30% of GDP. As tensions between the United States and China increase, companies that had come to rely on China for manufacturing are shifting to other bases. Production snafus during the covid-19 pandemic illustrated the fragility of globally dispersed supply chains. And the embrace by President Joe Biden’s administration of industrial policy, fueled by generous subsidies for electric vehicles (EVs) and clean energy, has super-charged investment in the United States. That inevitably is spilling over into Canada and Mexico.
Citing data from Echelon Insights @PatrickRuffini argues political polarization is largely a white phenomenon particularly pronounced across college graduates and non-college republicans.
Here, we’re measuring policy views on a granular 0-100 scale based on how people answered more than 50 different policy questions on the 2020 CES. A score of 100 means that one gave the most conservative possible answer on all questions, and a score of zero would mean the same thing for the most liberal possible answer. The index itself was calibrated to reflect a rough 50-50 balance between right- and left-leaning voters, reflecting the reality of a closely divided politics. The original questions selected by the academic team behind the CES tended to yield more liberal-leaning responses. In spite of that, the CES is a very good survey for this kind of analysis, with 60,000 interviews that allow for robust subgroup analysis. Another way to boil this down is to bucket people into different ideological camps based on a 75-percent cutoff for ideological consistency. So, giving the conservative or liberal answer more than 75 percent of the time places you in each of those camps. Otherwise, you’re in a non-ideological middle ground. The 75 percent cutoff is an important one. Above we find Assad-like margins for Donald Trump or Joe Biden in 2020 of more than 98 percent. If you’re above this threshold, you’re not persuadable in the slightest. In the middle, your vote is basically up-for-grabs, progressing from one candidate to other in sliding scale fashion according to your policy views.
.@jpmorgan reports Treasury liquidity is at the lowest level since 2020; maturities between 7 and 10 years have been most impacted. However, JPM concludes “we do not see the low level of liquidity as a source of concern for financial stability.”
The Federal Reserve can look past low liquidity in the Treasuries market and continue with its rate hikes, according to strategists at JPMorgan Chase & Co. “The footprint of each trade in the market, as measured by price impact, has been elevated for the past year but has not risen appreciably in recent weeks and remains below crisis levels,” the analysts wrote. “Dislocations have increased but are far from distressed levels.” Treasuries with maturities between 7 and 10 years have seen the largest liquidity dislocations, suggesting that is where the bulk of liquidations are occurring. “Treasury market liquidity has deteriorated amid high volatility, but we do not see the low level of liquidity as a source of concern for financial stability,” they said.
.@paulkrugman argues the Fed should pause its rate hikes, citing estimates from Goldman Sachs and Apollo Global Management that banking turmoil is equivalent to a hike of .25 to 1.5pp.
In effect, banking turmoil will act a lot like a rate hike by the Fed. But how big an effective rate hike? I’m seeing smart, well-informed people produce numbers that are all over the place. Goldman Sachs says we’ll see the equivalent of a rate hike of 0.25 to 0.5 percentage points; Torsten Slok of Apollo Global Management says 1.5 percentage points. I have no idea who’s right. What this probably means in practice is that the Fed should pause its rate hikes until there’s more clarity about both the inflation picture and the effects of the banking mess — and it should be clear that that’s what it is doing.
.@MichaelRStrain argues that, while tighter financial conditions might bring down the ultimate terminal rate, the Fed should still hike 50bps today to signal that “its resolve in fighting inflation is unshakable.”
While the failures of Silicon Valley Bank (SVB) and Signature Bank are significant market events, they should not knock the Fed off course. Tighter financial conditions might reduce the terminal federal funds rate. But the terminal rate was likely around 6% before SVB failed. The Fed still has some way to go. A lower terminal rate is no reason to avoid a 25 or 50 bps increase at this week’s meeting. By raising rates this week, the Fed has the opportunity to send two important signals: first, that it has confidence in the stability of the financial system, and second, that its resolve in fighting inflation is unshakable.
.@samquinones7 argues that the drug cartels’ shift to synthetics such as fentanyl and methamphetamine is allowing them to drive down prices, which has led to increased usage.
"Two-thirds of the 107,000 overdose deaths in 2021 involved fentanyl or synthetic opioids like it. Agents seized more than 50 million fentanyl-laced pills in 2022, the Drug Enforcement Administration announced in December, and over 10,000 pounds of fentanyl powder — enough to kill a quarter of the world’s entire population. The quantities of meth coming out of Mexico, spurred by easy access to ingredients from world chemical markets, have driven prices for the drug to historic lows. In Fresno, Calif., a wholesale pound of meth went for $20,000 in 2008; now it goes for $800. In Nashville six years ago, a pound wholesale sold for $16,000; today, it’s $2,000.
.@Edsall reports on new research disproving the conventional “basket of deplorables” narrative of Trump’s 2016 win: his supporters were “less xenophobic, less sexist, and [had] lower levels of racial resentment” than prior Republican candidates’.
We find that lottery wealth increases the short- and medium-run probabilities of marriage. The overall wealth effect on marriage formation is driven by male winners. While the overall average treatment effect on marriage dissolution is not statistically distinguishable from zero, there is a consistent pattern of divergence between the estimated effects for husbands and wives. Specifically, when the winning player is a married woman, our estimates suggest that a 1M-SEK windfall almost doubles the baseline short-run divorce rate. This estimated effect appears to fade away in the long-run. We speculate that the positive wealth shock accelerates the exit from marriages whose dissolution was already underway.
In Sweden men who won the lottery saw an increase in marriage formation and lower divorce risk. Female winners saw a near doubling of short-term divorce rates. @eriklindqvist1 @robertostling @Asia_terskaya
We find that lottery wealth increases the short- and medium-run probabilities of marriage. The overall wealth effect on marriage formation is driven by male winners. While the overall average treatment effect on marriage dissolution is not statistically distinguishable from zero, there is a consistent pattern of divergence between the estimated effects for husbands and wives. Specifically, when the winning player is a married woman, our estimates suggest that a 1M-SEK windfall almost doubles the baseline short-run divorce rate. This estimated effect appears to fade away in the long-run. We speculate that the positive wealth shock accelerates the exit from marriages whose dissolution was already underway.
.@pkedrosky argues that AI like ChatGPT is going to bend the cost curve on software production allowing us to run off “immense, society-wide technical debt,” resulting in significant consumer surplus as better software diffuses through the economy.
There is immense hyperbole about recent developments in artificial intelligence, especially Large Language Models like ChatGPT. Observers are missing two very important things. Every wave of technological innovation has been unleashed by something costly becoming cheap enough to waste. Software production has been too complex and expensive for too long, which has caused us to underproduce software for decades, resulting in immense, society-wide technical debt. This technical debt is about to contract in a dramatic, economy-wide fashion as the cost and complexity of software production collapses, releasing a wave of innovation What if the cost of software production is following similar curves, perhaps even steeper curves, and is on its way to falling to something like zero?
.@johnauthers cites work by @willdenyer of Gavekal Research whose gauge of financial conditions suggests that financial conditions are now extremely tight.
How exactly should financial conditions be measured? It proves to be a difficult issue. The most widely cited benchmarks incorporating a range of market indicators, produced by Goldman Sachs and by Bloomberg, both suggest that conditions were relatively easy until very recently, and then tightened rapidly. Neither is particularly extreme. But what exactly are we (and Goldman) measuring? Will Denyer of Gavekal Research suggests that these indexes are of limited use. Discussing the Bloomberg index, he said: “It comprises credit spreads in the money and bond markets, the S&P 500, and volatility measures including the VIX index. As a result, it is probably better thought of as an indicator of financial market risk appetite, rather than as a measure of whether or not conditions in the real economy are conducive to credit growth.” He offers his own gauge, which he dubs the “true financial conditions index,” an ambitious undertaking that incorporates money supply growth, the yield curve, metrics of vitality in the banking sector, the spread between the rate of return on corporate investments in real assets and the real cost of financing those investments, and measures of housing affordability (using real mortgage rates, deflated by inflation expectations). Put all of this together, and it looks like money was already very tight last week, ahead of the Credit Suisse weekend, when this chart was produced.
.@greg_ip notes that between 2007 and 2022 the share of Treasurys as a percentage of banks total assets went from 12% to 20% over the same period the uninsured share of domestic deposits rose from 28% to 45%.
Between 2007 and 2022, banks boosted their holdings of Treasurys and federally backed mortgage securities to 20% from 12% of total assets, while the uninsured share of domestic deposits rose to 45% from 38%. SVB and Signature Bank went to extremes, with uninsured deposits at 94% and 90%, respectively, according to S&P Global Market Intelligence.
Chart from @martinwolf_ shows in nominal terms bank failures in 2023 at $330b are on par with 2008’s $374b if you net out Bear Stearns and Lehman’s assets.
Banks are designed to fail. And so they do. Governments want them to be both safe places for the public to keep their money and profit-seeking takers of risk. They are at one and the same time regulated utilities and risk-taking enterprises. The result is costly instability. Yes, leverage of banking systems has fallen since the crisis. But it remains dangerously high. According to the Federal Reserve, on March 8 2023, the difference between the book value of the assets and debt liabilities of US commercial banks was $2,137bn. This slice of equity backed assets that were notionally worth $22,800bn. At this stage, it is still not clear how bad this crisis is going to be. But it is already evident that the reforms after the last one, though vastly better than nothing, were not enough. They have not guaranteed a crisis-proof system. They have not provided a smooth way to resolve a bank in crisis, especially if the latter risks becoming systemic.
Matt Weidinger @AEIecon highlights how continued extension of Covid-era emergency declarations, and not counting pandemic payments against means tests, allowed the Biden administration to expand welfare rolls despite very tight labor markets.
Welfare rolls are supposed to grow in bad times and shrink when jobs and incomes recover. Instead, they’ve recently continued growing even as unemployment plunged to historic lows. One major reason is that welfare programs didn’t count as “income” more than $1 trillion in stimulus checks and other pandemic benefits. That allowed people who weren’t poor and wouldn’t normally qualify to end up on welfare. That includes three rounds of stimulus checks ($869 billion), expanded child-tax-credit checks ($110 billion), and unprecedented expansions in unemployment checks ($449 billion). The federal government turned a blind eye to all $1.4 trillion in determining eligibility for Medicaid and to more than $1 trillion of it in calculating eligibility for food stamps. The nationwide unemployment rate peaked at 14.7% in April 2020 and had fallen to 3.7% by October 2022 (the most recent month for which benefit data are available). During the same period, the number of food-stamp recipients rose by 1.4 million and the number of Medicaid recipients by 18.5 million.
.@DaleMaharidge reports on silt that has been settling in Lake Powell. He argues that Lake Powell should be returned to its natural state and the water stored in Lake Mead.
In 1963, humans stopped time, when the brand new Glen Canyon Dam on the Utah-Arizona border cut off the reddish sediment that naturally eroded the Grand Canyon. Today the river runs vodka clear from the base of the dam. But the silt never ceased arriving in Lake Powell, the reservoir above the dam. Each day on average for the past 60 years, the equivalent of 61 supersize Mississippi River barge-loads of sand and mud have been deposited there. The total accumulation would bury the length of Manhattan to a depth of 126 feet — close to the height of a 12-story building. With Lake Powell just 23 percent full, and Lake Mead, outside of Las Vegas, at 28 percent capacity, it’s time to stop trying to “save” Lake Powell. It should be abandoned and its water stored in Lake Mead.
.@krogoff argues that we can’t count on the low borrowing rates associated with secular stagnation to reassert themselves. Given inflation near 5% and extreme stress in the banking system, Rogoff thinks the Fed decision on Mar 21-22 is especially tough.
Ultra-low borrowing rates are not something that can be counted on this time around. If one looks at long-term historical patterns in real interest rates major shocks — for example, the big drop after the 2008 financial crisis — tend to fade over time. There are also structural reasons: for one thing, global debt (public and private) exploded after 2008, partly as an endogenous response to the low rates, partly as a necessary response to the pandemic. Other factors that are pushing up long-term real rates include the massive costs of the green transition and the coming increase in defence expenditure around the world. The rise of populism will presumably help alleviate inequality, but higher taxes will lower trend growth even as higher spending adds to upwards pressure on rates. What this means is that even after inflation abates, central banks may need to keep the general level of interest rates higher over the next decade than they did in the last one, just to keep inflation stable.
The Fed’s balance sheet expansion through March 15th offset fifteen weeks of quantitative tightening but doesn’t signal a return to quantitative easing. @GeneralTheorist
Following a week of turmoil in the banking system, starting with the tension around Silicon Valley Bank, this week (through Weds. 15th) the Federal Reserve’s balance sheet expanded USD297bn (though still falling USD315bn over the past year). This is equivalent to offsetting 15 weeks of quantitative tightening (QT) in about half a week. It is tempting to conclude that the resumption of balance sheet expansion reflects a return of QE. A brief inspection of the transactions involved reveals this is not the case. In the case of QE, asset purchases and reserves created can be expected to remain in place for an extended period, at the discretion of the central bank. It represents outside money for the private sector, an asset with no associated liability, which cannot be disposed of in the aggregate but to which all must adjust.
The Federal Reserve has set up swap lines with other major central banks to improve dollar liquidity, running daily dollar auctions for the first time since the 2020 Covid crisis @FinancialTimes.
The Federal Reserve and five other leading central banks have taken fresh measures to improve global access to dollar liquidity as financial markets reel from the turmoil hitting the banking sector. In a joint statement on Sunday, the central banks said that from Monday, they would switch from weekly to daily auctions of dollars in an effort to “ease strains in global funding markets”. The daily swap lines between the Fed and the European Central Bank, Bank of England, Swiss National Bank, Bank of Canada and Bank of Japan would run at least until the end of April, the officials said. The Fed’s swap line network, first set up in 2007, has provided an important funding backstop for global banks during periods of acute market stress. Lenders outside the US can use the swap lines to access dollars in exchange for their domestic currencies by pledging collateral at their respective central banks.
Banks unrealized losses increased in 2022 as the Fed continued its hiking cycle. @WSJecon
One way to understand what is happening in the financial sector is to look at banks’ unrealized gains and losses, or how much their securities holdings have risen or fallen in value. In 2021, it was a mix of gains and losses, and interest rates were relatively low. Last year, as the Federal Reserve raised interest rates, the value of banks' bind portfolios declined. Unrealized losses are shown as a share of each bank's total assets.
The foreign sales of American firms have grown 2% a year since 2010 relative to 8% annually in the previous decade. American multinational’s sales were flat in China btw 2017-2020 during the same period they grew 6% annually in India. @TheEconomist
Since 2010 the foreign sales of listed American and European companies have grown by a meager 2% per year, down from 8% in the 2000s and 10% in the 1990s. Look across all industries, and China is responsible for less than one-eighth of Western firms’ foreign revenues, according to Morgan Stanley, an investment bank—a much smaller share than American and European sales across the Atlantic or to the rest of the emerging world. Only 8% of European companies’ total revenues come from China. For their American counterparts, the figure is 4%. According to bea figures, American multinationals’ sales in China were flat between 2017 and 2020. In India they grew by 6% a year in the same period. Western multinationals are, then, becoming somewhat less Chinese. Between 1990 and 2021 the average return on equity of American and European listed companies with less than $1bn in sales fell from 8% to 4%. That for firms with revenues of $10bn or more rose from 12% to 18%. And being big is easier if you are international. In 2021 American and European listed companies with $10bn-plus in revenue generated 43% of their sales abroad on average, compared with just 32% for those with sales below $1bn. Global reach is, in other words, more important than ever.
New @BankofAmerica research shows 7% fewer customers were spending money on child care relative to the start of 2020 suggesting the higher cost of childcare is keeping lower earning workers out of labor force.
Caregiving responsibilities have prevented some from returning to the workforce. In the latest Household Pulse Survey with data as of January 17, 2023, a combined 7% of respondents not working reported caregiving as the reason. This was broken down further: 5% were looking after children and 2% elderly relatives. The lack of affordable and quality childcare has forced some parents to stay at home instead of returning to work. According to the Consumer Price Index, daycare and preschool costs have increased by more than 10% since the start of the pandemic. This is an even bigger burden for lower-income households, which could partly explain the larger labor force exits at the lower end of the income spectrum. However, across the board, it seems that fewer parents are sending their kids to daycare relative to prepandemic days. Bank of America internal data shows that the number of customers making childcare payments as of December 2022 was 7% lower than at the beginning of 2020
.@mtkonczal updates @Mark_J_Perry price changes graph and argues the implication isn’t government regulation drives price shifts but that goods have deflated and services have inflated.
In our version of the AEI chart the number one item isn’t health care but ‘delivery services,’ which is “fees for delivery of items such as letters, documents, and packages at non-US Postal Services facilities.” Think UPS or FedEx. This is pretty far from a government monopoly, indeed it’s the private sector alternative to a government program. But it is services and it is labor intensive. The biggest thing, to me, isn’t “regulations” but whether it’s a service or a good. This is academically well known, check out The Missing Inflation Puzzle: The Role of the Wage-Price Pass-Through, which finds that the low inflation of pre-pandemic era “can be traced to a growing disconnect between unemployment and core goods inflation” and that “increased import competition and rising market concentration reduce pass-through from wages to prices” when it comes to goods.
Nuclear power generation capacity will increase in the US for the first time since 2016 as Georgia’s Vogtle plant comes online. @GregorMacdonald
Nuclear power generation in the United States will finally bump up a little this year, as 2.2 GW of new capacity comes online at Georgia’s Vogtle. The last new nuclear capacity to come online in the US was the second phase of Watts Bar, in 2016; and then twenty years prior with the first phase of Watts Bar, in 1996, and before then the second phase of Comanche Peak in 1993. The US has of course lost a great deal of nuclear capacity as plants like Pilgrim in Massachusetts and San Onofre in California simply got too old, and retired. Accordingly, US power generation from nuclear has been on a treadmill of no-growth for decades. To set the context, compare nuclear’s output since 2010 with combined wind and solar. Vogtle is currently ramping up, and achieved initial criticality earlier this month. By summer, output will be flowing and will produce about 17-18 new TWh per year. You can visit the interactive version of the above chart and roughly see that these new 17-18 TWh per year will likely push total US output back towards 800 TWh per year, without quite getting there.
.@HalScott_HLS argues the Federal Reserve failed to stem the on SVB by not serving as the lender of last resort early on, using its authority under Section 10B of the Federal Reserve Act via the discount window. #Federal Reserve #SVB
In February, the labor-force participation rate for Americans ages 25 to 54 hit 83.1%, surpassing its pre-pandemic, pre-recession peak — which never happened during the past two economic expansions. The 25-to-54 age group is the core of the labor force, often referred to as “prime age.” But there are 58 million working Americans outside of it, 21 million younger and 37 million older. Teenagers are now substantially more likely to be in the labor force than before the pandemic, so they’re not the issue. But participation rates for those ages 20 to 24 and above 55 are still well short of where they were in February 2020. The decline among young adults is a different story. As the second chart above makes clear, it’s not just the 20-to-24 group that’s affected, with those in their late 20s seeing even bigger declines in participation and employment. There haven’t been big shifts in the age distribution within either group, so composition effects aren’t to blame. It’s simply more than 400,000 Americans in their 20s missing from the labor force, people who should be at the beginning of long careers, not fading into the sunset.
Labor force participation for workers aged 25-54 hit 83% in Feb, surpassing its pre-pandemic peak. However, participation for those aged 20-24 remains well below pre-pandemic levels, with 400k Americans missing from the labor force. @foxjust
In February, the labor-force participation rate for Americans ages 25 to 54 hit 83.1%, surpassing its pre-pandemic, pre-recession peak — which never happened during the past two economic expansions. The 25-to-54 age group is the core of the labor force, often referred to as “prime age.” But there are 58 million working Americans outside of it, 21 million younger and 37 million older. Teenagers are now substantially more likely to be in the labor force than before the pandemic, so they’re not the issue. But participation rates for those ages 20 to 24 and above 55 are still well short of where they were in February 2020. The decline among young adults is a different story. As the second chart above makes clear, it’s not just the 20-to-24 group that’s affected, with those in their late 20s seeing even bigger declines in participation and employment. There haven’t been big shifts in the age distribution within either group, so composition effects aren’t to blame. It’s simply more than 400,000 Americans in their 20s missing from the labor force, people who should be at the beginning of long careers, not fading into the sunset.
Anglosphere countries have a strong preference for low density housing. This has led to much more expensive housing in Anglosphere countries and supply of 400 homes per 1k residence vs. 540 per 1k in western Europe.
Forty years ago, the UK, US, Canada, Australia, New Zealand, and Ireland had roughly 400 homes per 1,000 residents, level with developed continental European countries. Since then the two groups have diverged, the Anglosphere standing still while western Europe has pulled clear to 560 per 1,000. Unsurprisingly, the same pattern is reflected in house prices, which have risen further and faster in most anglophone countries since the global financial crisis than elsewhere. There appears to be a deep-seated aversion to urban density in anglophone culture that sets these countries apart from the rest.
Migrants, including a sharp increase in Chinese, are surging into Panama as they seek entry into the United States. Border Patrol agents have arrested 4,271 Chinese nationals since Oct, a 12-fold increase from the same period a year earlier. @WSJ
The number of migrants crossing into Panama after trudging through the treacherous Darien Gap jungle reached record levels in the first two months of the year, data from Panama showed, posing a fresh challenge to their destination country, the U.S. In January and February, 49,291 people from as near as Haiti and as far away as China have crossed the Darien, a span of rainforest separating Panama from Colombia. That is more than a fivefold increase from the 8,964 migrants in the same period last year, according to Panama’s immigration office. About 2,200 Chinese migrants were among those crossing the Darien Gap in the first two months of 2023, a sharp increase in a group that usually has made up a much smaller proportion of migrants through the area. During the same period last year, 71 Chinese migrants were recorded passing through Panama.
Texas’ population grew 18% from 2010-2021. If trends continue, it may surpass California’s population in the 2040s. With a $2tn 2022 GDP, Texas would rank as the world’s 9th largest economy if independent. @TheEconomist
The population of Texas as a whole grew by 18% from 2010 to 2021. The state’s economy grew by 39%, one and a half times faster than the national one. The first boom, in people, is remarkable by any standard. In the 12 months starting in July 2021 Texas added a net 471,000 residents, the most of any state. That is equivalent to 1,290 new Texans each day, or around 9,000 a week. Only a quarter of those came from natural increase (the difference between births and deaths). Another quarter were immigrants from abroad. But roughly half were arrivals from elsewhere in America. California still has more people than Texas, although, if current trends persist, Texas will eclipse it as the most populous state at some point in the 2040s
Recent rain and snowfall in California have replenished reservoirs, helping the state better manage its long-term drought. @nytimes
Torrential rain and snow have again drenched California in recent weeks, amplifying an already wet winter season. The extreme precipitation has begun to ease the state’s long-term drought, the driest three-year stretch on record. The recent storms have quickly refilled many of California’s reservoirs. A number of them have returned to or even surpassed average levels for this time of year, compared with previous years where reservoir levels remained below the historical average.
.@johnauthers points to the relative stability of the gap between the rate of inter-bank loans and Treasury bills and argues that broad stress in the banking system is limited.
The “TED Spread” — the gap between the rate at which banks lend to each other, traditionally captured by Libor (the London Interbank Offer Rate) and the equivalent Treasury bill yield. The higher the spread, the greater the distrust between banks. There is no particular evidence that confidence has broken down at present, and certainly nothing remotely comparable to the GFC.
Chinese imports from the US have fallen far short of the $200B commitments in President Trump’s “Phase One” agreement in 2020 and are now 23% below the trend prior to the 2017 start of the trade war. @ChadBown
Newly released data from 2022 show that US exports are falling farther and farther behind foreign peers also selling into the Chinese market. Once major US manufacturing exports—like automobiles and Boeing jets—have all but disappeared. Even where US exports appear to be doing alright—US farm sales to China in 2022 hit record highs—worrying signs have emerged. Much of the agricultural gains were not the result of increased shipments but simply higher prices and concerns over global food insecurity associated with the Russia-Ukraine war. A useful comparison is to examine US exports to China relative to their projected levels had they grown at the same rate as China’s imports from the world each year over 2018–22. US exports to China in 2022 are now 23 percent lower than that trend.
An @TheEconomist analysis notes slowing growth in capital investments in 2022, and forecasts that large, listed US and European firms will reduce capex by 1% in 2023.
In 2021 and 2022 firms in the S&P 500 index of large American firms spent $2.5trn, equivalent to 5% of the country’s GDP, on capex and R&D, a real-terms rise of around a fifth compared with 2018-19. An American capex “tracker” produced by Goldman Sachs, a bank, offers a picture of businesses’ outlays, as well as hinting at future intentions. It is currently registering close to zero growth, year on year. A global tracker produced by JPMorgan Chase, another bank, also points to a sharp deceleration. The Economist analysed capital-spending data from 33 OECD countries. In the fourth quarter of last year capex fell by 1% from the previous quarter. Our analysis of the plans of around 700 big, listed American and European firms suggests real-terms spending will fall by 1% in 2023.
.@Edsall highlights the risk of downward spirals for major American cities, as higher-income workers take advantage of hybrid work schedules to move to suburbs, leaving cities with declining populations that are both lower-income and more non-white.
The men and women most likely to move to the suburbs are among the highest-paid key sources of income and property tax revenues: workers with six-figure salaries in technology, finance, real estate and entertainment. Those least likely to move, in turn, are paid much less, working in service industries, health care, hospitality and food sales. There is a striking interaction between the Covid-driven exodus from the cities and changing racial and ethnic urban populations. From 2020 to 2021, the nation’s 56 largest metropolitan areas saw a cumulative decline of 900,000 in their white populations William Frey, a demographer and senior fellow at the Brookings Institution reported. The challenge facing cities is that dysfunction tends to engender dysfunction; downward spirals accelerate. Covid and remote work have transformed the face of urban America, just as the nation’s cities were becoming increasingly racially and ethnically diverse.
Over 10% of job listings in the Anglosphere countries now allow for remote work for at least one day a week. @I_Am_NickBloom @StephenEKHansen @pj_lambert @raffasadun @Bledi_Taska
The share of postings that say new employees can work remotely one or more days per week was tiny before the pandemic: 1% or less in Australia, Canada and New Zealand as of 2019, about 3% in the U.K., and about 4% in the U.S. From 2019 to 2022, this remote-work share rose more than three-fold in the U.S and five-fold or more in the other countries. As of January 2023, the remote-work share exceeds 10% of postings in Australia, Canada, the U.K, and the U.S., and it appears to be on an upward trajectory in all five countries. These developments are highly non-uniform across and within cities, industries, occupations, and companies. Even when zooming in on employers in the same industry competing for talent in the same occupations, we find large differences in the share of job postings that explicitly offer remote work.
Robert Hall argues that a substantial rise in the volatility of costs can free the prices of a significant fraction of goods and services prices from the grip of New Keynesian “zone of inaction.” @NBERpubs
The basic idea of this paper is that a substantial rise in the volatility of costs and other determinants of prices can completely free the prices of a significant fraction of goods and services from the grip of New Keynesian stickiness, when the volatility of cost rises. There is a critical configuration of the model such that at lower values of the of the cost volatility, the price is a constant over time—resetting never occurs, except possibly to bring the price into the zone of indifference at the beginning of time. The surprising implication of this investigation is that an increase in the volatility of cost that leaves the average level of cost unchanged can trigger a near collapse of price stickiness. The next section of the paper presents an empirical analysis demonstrating a large increase in cost volatility around the time of a burst of inflation during and after the pandemic, followed by a reversal.
Bid-ask spreads for treasuries are widening with the 10-year yield moving 34bps Monday, the largest gap since the start of the pandemic. @markets
Liquidity in the world’s largest bond market is evaporating as the US banking crisis muddies the outlook for the Federal Reserve’s monetary policy. Bid-ask spreads on two-, 10- and 30-year US government bonds jumped to the highest level in at least six months on Tuesday, according to data compiled by Bloomberg. The 10-year yield swung in a 34-basis point range on Monday, the biggest gap since the onset of the pandemic in 2020.
Mark-to-market losses in the banking system are concentrated in large banks but not the global systemically important banks. @EXjiang
The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent-- unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs.
.@johnauthers worries about the highly leveraged commercial real estate sector. Vornado’s market cap is back at its January 2000 level and Bloomberg Office Property REIT index has halved in the past year. @markets
The market cap of Vornado Realty Trust, one of the biggest developers of office property in New York City is now worth barely any more than it was at the turn of the millennium. Bloomberg’s index of office property real estate investment trusts (REITs) is still above its worst level from the GFC, but it’s halved in the last 12 months to a point it first reached in September of 1996. Few people are terribly bothered by the prospect of property developers losing money. The problem is that such developers tend to be heavily leveraged. If they’re not able to repay their loans, that could be a problem for everyone. Keep an eye on the skyscrapers.
.@JohnHCochrane notes that SVB failure is a feature of Fed policy, not a bug as “constricting credit” and “tightening financial conditions” are the mechanisms through which monetary policy addresses inflation.
There is much commentary that bank troubles will interfere with the Fed's plan to lower inflation by raising rates. Actually, this is a feature not a bug. The main mechanism by which, in the Fed's view, raising interest rates slows the economy and lowers inflation is by "constricting credit," "tightening financial conditions," lowering borrowing that finances investment and consumer durables purchases. The Fed didn't want runs, no, but it wants the result. If you don't like that, well, we need to think of other ways to contain inflation, like taking the fiscal gasoline off the fire.
Ruling out tax hikes, the French government is attempting to raise the retirement age to extend the viability of the country’s pay-as-you-go retirement system. France spends about 14.5% of economic output on pensions relative to 7.5% in the US. @WSJ
French President Emmanuel Macron has proposed an overhaul of the country’s pension system centered on raising the legal age of retirement by two years to 64. The legislation, which is currently before parliament, has triggered waves of protests and strikes that have taken a toll on France’s economy. Mr. Macron says the changes are necessary to save France’s pension system from collapse and maintain fiscal discipline. He wants to bring the national deficit—which was 5% of gross domestic product last year—back in line with the European Union’s 3% target while also boosting France’s military budget amid the war in Ukraine. France spends around 14.5% of its economic output on pensions, compared with 7.5% in the U.S. and 10.4% in Germany, according to the Organization for Economic Cooperation and Development, a club of rich nations. France ranked second out of 38 OECD countries in terms of tax-to-GDP ratio in 2021, according to the OECD, at 45.1%, compared with the OECD average of 34.1% and 26.6% in the U.S.
.@RayDalio argues that the SVB bank run is evidence we are in the early stage of the debt-contraction cycle.
[SVB] is a very classic event in the very classic bubble-bursting part of the short-term debt cycle (which lasts about seven years, give or take about three) in which the tight money to curtail credit growth and inflation leads to a self-reinforcing debt-credit contraction that takes place via a domino-falling-like contagion process that continues until central banks create easy money that negates the debt-credit contraction, thus producing more new credit and debt, which creates the seeds for the next big debt problem until these short-term cycles build up the debt assets and liabilities to the point that they are unsustainable and the whole thing collapses in a debt restructuring and debt monetization (which typically happens about once every 75 years, give or take about 25 years).
CPI rose at the slowest rate since September 2021 in February increasing 6% y/y a decline from 6.4% in December. @WSJecon
The consumer-price index, a closely watched inflation gauge, rose 6% in February from a year earlier, versus a 6.4% gain the prior month, the Labor Department said Tuesday, the slowest pace since September 2021. When excluding volatile food and energy prices, consumer prices advanced 5.5% from a year earlier in February compared with 5.6% in January. Economists view so-called core prices as a better indicator of future inflation. Core prices increased by 0.5% in February compared with a 0.4% monthly gain in January.
.@jasonfurman notes that by every measure CPI inflation has peaked but CPI is “still way too high and no sign of falling…But for the banking turmoil this would have been a lock for a 50bp increase at the next mtg.”
The broad story remains the same: goods prices are flat, but core services are rising strongly. (Overall CPI) has come down a lot from the scary times. Economists focus less on it because it is a poor indicator of the "signal" of what future inflation will look like. Every measure of CPI inflation is down from its peak over the summer, partly because some of that inflation was truly transitory and partly because the Fed's rate hikes has kept the economy from getting much hotter and kept long-run inflation expectations anchored. That is good. But, still way too high and no sign of falling. But for the banking turmoil this would have been a lock for a 50bp increase at the next mtg. I don't recommend or expect that to happen. But I would be surprised & disappointed if the Fed pauses after 2 hot CPI reports in a row.
.@M_C_Klein questions the policy of unlimited deposit insurance, and suggests that the public would be better off “If instead we maintain the $250,000 deposit insurance limit and let uninsured deposits migrate to money-market funds.”
For the FDIC-insured banking system as a whole, uninsured domestic deposits were worth $7.7 trillion at the end of 2022, while insured deposits were worth $10 trillion. Uninsured deposits have been leaving the banks since the end of 2021, down about 9% ($780 billion) whereas insured deposits continue to rise. As it happens, insured deposits in the banking system correspond almost perfectly to banks’ outstanding loans to the real economy. If, hypothetically, all of the uninsured deposits in the U.S. left the banks and went into money funds, the banks could still do the valuable work that they ostensibly do. Moreover, the holders of those uninsured deposits would end up with safer and higher-yielding assets that do not require implicit and explicit transfers to bankers and bank shareholders. The transition could be disruptive if it happened all at once, but there is no inherent reason to fear a world where the banking sector has shrunk substantially.
The Biden administration has given a green light to an Alaskan oil drilling project that will eventually produce 180,000bpd which is about 40% of current Alaskan output. @WSJ
The Biden administration approved the massive Willow oil-drilling project in the Alaskan Arctic over the objections of environmentalists and many Democrats who wanted the project scuttled. The green light means Houston-based ConocoPhillips can start construction on its roughly $7 billion project in Alaska’s National Petroleum Reserve, which the company expects will produce about 180,000 barrels of oil a day at its peak—equivalent to about 40% of Alaska’s current crude production.
The US, Australia and the UK formally announced the Aukus agreement; in the short term American submarines will start operating out of Perth in 2027, with new submarines coming on line in the early 2040s. @FT
The US, UK and Australia have unveiled a decades-long project to supply Canberra with nuclear-powered submarines, entering a historic partnership that binds the allies more tightly as they counter China in the Indo-Pacific. Under the three-stage plan, Australia and Britain will co-build a new submarine. The UK and Australia each plan to build at least eight of the multibillion-dollar submarines. The first Australian boats will not enter service until the early 2040s, with the full fleets being built over the following two decades. Australia will also invest in the US and UK’s defense industrial base, an unprecedented move aimed at boosting manufacturing capacity at strained shipyards.
Both extreme droughts and periods of increased rainfall have increased in frequency over the 2002-2021 period. @Nature
Distortion of the water cycle, particularly of its extremes (droughts and pluvials), will be among the most conspicuous consequences of climate change. Here we applied a novel approach with terrestrial water storage observations from the GRACE and GRACE-FO satellites to delineate and characterize 1,056 extreme events during 2002–2021. Dwarfing all other events was an ongoing pluvial that began in 2019 and engulfed central Africa. Total intensity of extreme events was strongly correlated with global mean temperature, more so than with the El Niño Southern Oscillation or other climate indicators, suggesting that continued warming of the planet will cause more frequent, more severe, longer and/or larger droughts and pluvials. In three regions, including a vast swath extending from southern Europe to south-western China, the ratio of wet to dry extreme events decreased substantially over the study period, while the opposite was true in two regions, including sub-Saharan Africa from 5° N to 20° N.
.@paulkrugman argues that higher marginal taxes rates won’t be enough to close the long-run fiscal gap. “We’ll eventually have to raise taxes, at least somewhat, on people making less than $400,000.”
Very high marginal tax rates create problematic incentives. Conservatives emphasize how taxes reduce the incentive to work and create wealth; this effect is surely overrated, but it does exist. More important, high tax rates encourage extraordinary efforts to avoid taxes (which is legal) or evade them (which isn’t). Estimates of the revenue-maximizing top tax rate tend to be in the range of 70 percent to 80 percent, well above the federal maximum of 37 percent — but bear in mind that many high earners also face state and local taxes that raise their effective marginal rate to something like 50 percent. So, the amount of additional revenue we can raise from taxing the rich, while substantial, is considerably less than their remaining untaxed income.
A research piece by Michael Cembalist @JPMorgan calculates capital ratios for key banks assuming that all unrealized securities losses were realized. Silicon Valley Bank (SIVB) was an outlier.
The irony of SIVB [Silicon Valley bank] is that most banks have historically failed due to credit risk issues. This is the first major one I recall where the primary issue was a duration mismatch between high quality assets and deposit liabilities. As shown below, being flooded with deposits from fast-money VC firms and other corporate accounts at a time of historically low-interest rates might have been more of a curse than a blessing. Between Q4 2019 and the first quarter of 2022, deposits at US banks rose by $5.4 trillion and due to weak loan demand, only ~15% was lent out; the rest was invested in securities portfolios or kept as cash.
.@Fedguy12 argues “there is little risk of a crisis in the banking sector” noting “SVB was particularly poorly run” but QT is set to pull over $1T of liquidity out of the banking system, challenging bank liquidity over the next two years.
The level of liquidity in the banking system is exceptionally high but is set to steadily decline from higher rates and QT. Higher interest rates reduce the market value of bank assets, which reduces the amount of cash that a bank can raise. A secular upward swing in interest rates can potentially impose huge losses on both the securities and loan portfolios of banks. At the same time, QT is set to steadily withdraw over a trillion in liquidity out of the banking system over the next two years. This is not a problem today, but it may be in the coming years.
.@tylercowen speculates that the SVB resolution will likely “push additional resources outside the formal banking system altogether,” as the formal banking system now has to accommodate increased regulations and higher deposit insurance premia.
Raising the FDIC protection limit from $250,000 to ??? raises political eyebrows in a dramatic manner. For one thing, the FDIC would then be seen as guaranteeing a much larger part of the financial system. Over time, the pressures for the government to protect yet additional parts of the financial system will grow, just as they did after the bailouts from the 2008-2009 financial crisis. Furthermore, if the FDIC keeps on increasing its protections in the quest for financial stability, that means a larger FDIC, a larger regulatory apparatus, perhaps higher capital requirements, and over time higher premia for banks to pay to the FDIC. As that scenario unfolds, there will be all the more incentives to supply more lending and also deposit-taking services outside the formal and more heavily regulated banking sector. Rather than pushing more resources into the larger banks, this policy would push additional resources outside the formal banking system altogether.
.@JohnHCochrane writes, “The Silicon Valley Bank failure strikes me as a colossal failure of bank regulation,” and argues that duration risk at banks will now be an additional constraint on the Fed’s hiking cycle.
The Fed faces many headwinds in its interest rate-raising effort. For example, each point of higher real interest rates raises interest costs on the debt by about $250 billion (1 percent x 100% debt/GDP ratio). A rate rise that leads to recession will lead to more stimulus and bailout, which is what fed inflation in the first place. But now we have another. If the Fed has allowed duration risk to seep in to the too big to fail banking system, then interest rate rises will induce the hard choice between yet more bailouts and a financial storm.
.@jasonfurman argues that it’s “hard to believe that jobs 275K above steady state of 75K is compatible with inflation falling to 2% or even 3%.”
The American economy continues to create an extraordinary number of jobs--311,000 in February, an average of 351,000 over the last three months. This does not look like anomalous data. Average hourly earnings growth slowed a lot. Last month the three-month annualized average was 4.6%. Largely because of slow growth in February (but also small revisions) the 3-month growth rate is now 3.6%. The unemployment rate went up, but the participation rate also went up, so employment was unchanged. What does this mean? Hard to believe that jobs 275K above steady state of 75K is compatible with inflation falling to 2% or even 3%. My view was the default should be hiked by 50bp and the totality of this release should not change that. But the market disagrees with me with rates down on the news.
.@lymanstoneky @ModeledBehavior find that remote work has had a positive impact on the likelihood of near-term pregnancy for women, particularly for those >35 whose financials are improving.
We assess whether women are pregnant or trying to become pregnant. This question is a good indicator of very near-term fertility outlooks, since respondents generally have a pretty clear and stable idea whether they are pregnant or trying to conceive, or not. When looking directly at the impact of remote work on this variable with the same controls, we find that remote workers are indeed more likely to be pregnant or trying; however, the difference is not statistically significant. When we focus on the subset of workers who are doing relatively well, we see a larger and more statistically significant impact of remote work on fertility. Remote work seems to help women in improving circumstances to capitalize on those improvements and convert financial success into family life.
An increase in time spent on social media is associated with a decline in mental health, with the gradient steepest for girls. @jburnmurdoch.
Something is going very wrong for teenagers. Between 1994 and 2010, the share of British teens who do not consider themselves likable fell slightly from 6% to 4%; since 2010 it has more than doubled. The share who think of themselves as a failure, who worry a lot, and who are dissatisfied with their lives also kicked up sharply. The same trends are visible across the Atlantic. The number of US high school students who say their life often feels meaningless has rocketed in the past 12 years. And it’s not just the anglosphere. In France, rates of depression among 15- to 24-year-olds have quadrupled in the past decade. The more time teens spend on social media, the worse their mental health is. The gradient is steepest for girls, who also spend much more time on social media than boys, explaining the sharper deterioration among girls’ mental health than boys’.
Nicholas Eberstadt and Ashton Verdery @AEIecon make the case that a “crisis of the Chinese family” is underway. They project by 2050 living parents and in-laws will outnumber children for middle aged Chinese.
China is now on the cusp of a severe and unavoidable “kin crash,” driven by prolonged sub-replacement fertility. The implosion of consanguineous family networks, by our reckoning, means that China’s rising generations will likely have fewer living relatives than ever before in Chinese history. A “kin famine” will thus unfold unforgivingly over the next 30 years—starting now. As it intensifies, the Chinese family—the most important institution protecting Chinese people against adversity in bad times and helping them seize opportunity in good times—will increasingly falter in both these crucial functions.
California snowpack is nearly double average levels for this time of year and the state is racing to try to capture the precipitation to offset the record drought. @wsj
California is nearing record precipitation this winter after the three driest years on record left reservoirs drained all over the state. Landowners along with state and local water managers are rushing to harvest as much runoff as they can before it escapes into the Pacific Ocean. Gov. Gavin Newsom in February ordered the state to accelerate its efforts to corral storm runoff, such as by facilitating projects to inject more water in underground aquifers. Los Angeles city officials say they have diverted 25 billion gallons so far this winter, or enough to meet the annual needs of 308,000 households. That was made possible partly by improvements such as deepening a group of pool-like basins in the San Fernando Valley so they could hold more rainwater. Runoff was also collected in streets that have been redesigned to include swales of open ground alongside to give water a place to seep underground.
Texas-based @fervoenergy has conducted an experiment suggesting that geothermal power plants could provide long-term energy storage and play a critical role in a carbon-free electrical grid. @techreview
Fervo Energy, a geothermal power startup, began conducting an experiment deep below the desert floor of northern Nevada. It pumped water thousands of feet underground and then held it there, watching for what would happen. The readings from gauges planted throughout the company’s twin wells showed that pressure quickly began to build, as water that had nowhere else to go actually flexed the rock itself. When they finally released the valve, the output of water surged, and it continued pumping out at higher-than-normal levels for hours. The results from the initial experiments suggest Fervo can create flexible geothermal power plants, capable of ramping electricity output up or down as needed. Potentially more important, the system can store up energy for hours or even days and deliver it back over similar periods, effectively acting as a giant and very long-lasting battery.
Using the example of Coke and Pepsi, Samuel Rines argues that American firms still have a large degree of pricing power suggesting profit margins aren’t going to compress anytime soon. @tracyalloway @TheStalwart
The return to cognitive skills has declined since 2000 and there has been rising demand for “social skills.” “Jobs with the most employment and earnings growth are those where both types of skill are required.” @ProfDavidDeming
The return to cognitive skills has declined since 2000. A one standard deviation increase in the Armed Forces Qualifying Test (AFQT) score – a widely-used measure of cognitive skill – was associated with about 10 percent higher hourly wages in the 1980s and early 1990s but only 4.5 percent in the 2000s and early 2010s. In contrast, the economic return to a bachelor’s degree increased by 6 percentage points unconditionally and by nearly 15 percentage points after controlling directly for cognitive skills in both waves. What are the implications of the growing importance of social skills for the wage structure? Social skill-intensive occupations grew by nearly 12 percentage points as a share of all jobs in the U.S. economy between 1980 and 2012, and real hourly wages for these jobs grew around 25 percent compared to less than 10 percent for other occupations. This suggests growing relative demand for social skill, and flat or declining demand for cognitive skill. However, because these skills are complements, the jobs with the most employment and earnings growth are those where both types of skill are required. Evidence suggests that cognitive skills and social skills are conceptually distinct and that they work together in non-obvious ways to explain an important recent trend in the wage structure – rising returns to education and social skills, but declining returns to cognitive skills.
Between 2017-2022 the American working age population grew by just 1.7mm people, an 86% decline from growth of 11.9mm between 2000-05. @markets
The ultratight labor market is often treated as a pandemic-driven aberration. But there’s a strong case to be made that it’s really the product of demographic trends that predated, and accelerated with, Covid-19. Experts say that without meaningful government intervention, America’s worker deficit could become a tax on growth and trigger a new wave of offshoring, like the one the Chips and Science Act of 2022 is trying to reverse. The US working-age population shrank in 2018 for the first time since at least 1960, as baby boomer retirements picked up and fewer young people entered the labor force. The cohort, which covers those aged 15 to 64, also contracted in the two years that followed and has edged up since only because of a bounce back in international immigration.
.@AswathDamodaran notes that firms that buy back stock have lower debt levels than firms that don’t, as measured by both the debt to capital ratio and the debt to EBITDA multiple.
I looked at companies in the US (because this critique seems to be directed primarily at them), broken down by whether they did buybacks in 2022, and then examined debt loads within each group. You can be the judge, using both the debt to capital ratio and the debt to EBITDA multiple, that companies that buy back stock have lower debt loads than companies that don't buy back stock, at odds with the "debts fund buybacks" story. Are there firms that are using debt to buy back stock and putting their survival at risk? Of course, just as there are companies that choose other dysfunctional corporate finance choices. In the cross section, though, there is little evidence that you can point to that buybacks have precipitated a borrowing binge at US companies.
Announced buybacks are running at a record pace this year with 2/3 of them driven by five firms. @markets
US buyback announcements are running at a record pace this year, though more than two-thirds of the $261 billion in commitments are spread across only five companies, according to JPMorgan Chase & Co. strategists. Chevron Corp.’s $75 billion leads the way, followed by Meta Platforms Inc. with $40 billion, Goldman Sachs Group Inc. with $30 billion, and Booking Holdings Inc. and Salesforce Inc. with $20 billion each, a team led by Dubravko Lakos-Bujas wrote in a note.
Researchers at the University of Rochester report in @Nature that they have created a superconductor that can operate at room temperature, which would have significant implications for batteries and electrical transportation. @WSJ
A group of researchers at the University of Rochester report that they have created a new superconductor that can operate at room temperature and a much lower pressure than previously discovered superconducting materials. Superconductors demonstrate what physicists call the Meissner effect, when a material expels its magnetic field. If you put a superconductor near a magnet, it will levitate. For the new study, which was published Wednesday in the journal Nature, the researchers tweaked their superconductor recipe—adding nitrogen and a rare-earth metal known as lutetium to the hydrogen instead of sulfur and carbon—and once again heated and squeezed it in the diamond anvil cell. They named the resulting material “,” after observing how the material’s hue changed from blue to pink to red as it got compressed. The Rochester lab found that “reddmatter” could exist at 69 degrees Fahrenheit and 145,000 pounds per square inch, or psi, of pressure—about 1/360th of the pressure in Earth’s core. That is about a 10-degree Fahrenheit increase in temperature and a drop to about 1/1000th of pressure compared with its predecessor from 2020.
Some researchers are suspect of the new University of Rochester “reddmatter” given previous retractions by the authors; however, others argue @Nature has a rigorous review process. @QuantaMagazine
Dias strongly denies all allegations of wrongdoing and continues to make efforts to rigorously establish his claims of finding superconductivity at everyday temperatures and what counts as almost-everyday pressures in the high-pressure physics community. He stresses that today’s paper describing low-pressure superconductivity in the lutetium material underwent an unusually rigorous peer review process involving multiple rounds of review over the better part of a year. Dias also said that he shared all of his raw data with Nature, and that it will be published alongside the new result. Multiple independent experts voiced confidence in Nature’s ability to make sure that the result was as rigorous as possible.
China has logged a formal complaint with Dutch authorities as the Netherlands, home to ASML, introduces new export restrictions on semiconductor production equipment. @SCMPNews
The Netherlands, a key player in chipmaking technology, said it planned to introduce restrictions on exports of some semiconductor technology over national security concerns. Beijing has formally protested against Dutch plans to restrict semiconductor exports, with the Netherlands set to be the first country to join the US drive to hobble Chinese hi-tech development. In a statement, ASML said the new restrictions would require the company to apply for export licenses in order to ship its “most advanced” immersion DUV systems. Plans are also in the works to target other key sectors, such as 5G and artificial intelligence. Washington stopped issuing export licenses for US companies to sell to Huawei in January, moving towards a total ban on doing business with the Chinese tech giant.
Larry Summers argues over the next decade “short rates will run in the four range on average and longer-term rates if traditional spreads reassert themselves running 100 basis points above that. So, four and five.” @LHSummers @ojblanchard1
Larry Summers, "I think today my expected value of inflation would be 2.5 or a bit larger given the tail risk of 4 or 5. And given that, I'd assign a very low likelihood to it being well below two. So, if you take a 1.5% to 2% real rate, a 2.5% inflation rate and some risk and term premium, you're sort of looking at short rates running in the four range on average and longer-term rates if traditional spreads reassert themselves running 100 basis points above that. So, four and five."
The share of mothers with school aged children who are in the labor force is above January 2020 levels, whereas their male counterparts are under the 2020 level. @WSJ
Women have gained more jobs than men for four straight months, including in January’s hiring surge, pushing them to hold more than 49.8% of all nonfarm jobs. The recent labor-force recovery has been particularly pronounced among mothers. The share of mothers with school-age children employed or seeking work surpassed January 2020 levels in November. The participation rate among fathers of school-age children retreated at the end of last year and is down from January 2020. Participation among women who don’t have children or who have children age 18 or above also remains depressed, in part reflecting early retirements during the pandemic.
The rate of increase of shale production is slowing. Domestic oil output last year grew at one-third of the annual average pace seen in shale’s heyday from 2017-2019. @WSJ
Recent results out of the Permian, are mimicking the onset of a production plateau that has taken place at other, more mature U.S. shale plays. Oil production from the best 10% of wells drilled in the Delaware portion of the Permian was 15% lower last year, on average, than top 2017 wells, according to data from analytics firm FLOW Partners LLC. Meanwhile, the average well put out 6% less oil than the prior year, according to an analysis of data from analytics firm Novi Labs. Oil production in the U.S. rose from about 7.2 million barrels a day a decade ago to a high of about 13 million barrels a day before the pandemic. But domestic output last year grew at one-third of the annual average pace seen in shale’s heyday from 2017 to 2019, and hasn’t yet caught up with prepandemic levels. The slowdown was mostly because of investor pressure on companies to curtail spending and limit growth in favor of generating higher returns. At the same time, weaker well results in the Delaware basin contributed to flattening output.
.@M_C_Klein speculates that one reason we didn’t see a post pandemic boom was that the current reflation isn’t associated with private sector deleveraging.
The wartime reflation worked better because it was so much larger. Recall that private indebtedness fell by roughly 70 percentage points of NGDP between 1940 and 1945. The private debt stock fell somewhat during the war, but the real magic was the 122% increase in incomes. That gave the private sector a clean slate to spend the next six decades levering back up—until the global financial crisis. This time around, private indebtedness has been flat. The nominal income surge that we actually experienced was large enough to be inflationary, but too small to reset private borrowing capacity. Would we have enjoyed more investment and more productivity gains if the private sector had shed its legacy debt constraints? Or would that simply have made inflation even worse by allowing nominal spending to rise even faster relative to real output?
15% of American workers are independent contractors, according to a Gallup survey that was carefully constructed to avoid data problems that had previously plagued the space. @kgahome @BHershbein @bethtruesdale
We find that, upon probing, roughly one in 10 workers who initially reports working for an employer on one or more jobs (and thus is coded as an employee) is in fact an independent contractor on at least one of those jobs. Incorporating these miscoded workers into estimates of work arrangement on the main job nearly doubles the share who are independent contractors, to about 15 percent of all workers. Young workers, less educated workers, workers of color, multiple-job holders, and those with low hours are more likely to be miscoded. Taking these workers into account substantively changes the demographic profile of the independent contractor workforce. Our research indicates that probing in household surveys to clarify a worker’s employment arrangement and identify all low-hours work is critical for accurately measuring independent contractor work.
Over the past decade the EU’s economy has grown more inward facing: exports outside the EU as a share of all exports have declined from 43% in 2014 to 38% in 2022. @martinwolf_
Difficulties are only likely to grow in this more nationalist and more fragmented world economy. The open world markets on which Germany, in particular, depended are becoming less so. That is bound to be costly. Moreover, the US is moving towards an interventionist and protectionist industrial policy. For the EU, such a shift creates existential problems. Similar efforts there are bound to be more national than European. This would threaten the single market and give the whip hand to the member countries with the most resources. Germany will be the best positioned. At the same time, the higher costs of energy in Europe than in the US are a threat to its own heavy industry. (
Firms that adopted robots in the Netherlands between 2009-2020 increased output by 14.9% relative to non-adopting firms. Workers who were directly affected saw income reductions of about 1.5%. @DrDaronAcemoglu @nberpubs
Robot-adopting firms increase output by about 14.9%, increase employment (hours worked) by 4.3%, and reduce the labor share by 4.6 percentage points, relative to comparable non-adopting firms. The quantitative magnitudes of these estimates are very similar to those from France and Spain. As in these countries, we find negative effects on non-adopting rivals in the same industry. For example, a non-adopting firm experiences a 6.2% decline in hours worked when competitor robot adoption - that is, the share of sales by robot adopters in the same four-digit industry - increases by one standard deviation. The negative effects of robot adoption on workers employed in routine production work and replaceable occupations are predominantly through lower wages.
The global stock of industrial robots is relatively low. In South Korea, there are ten manufacturing workers for every industrial robot whereas there are 25-40 manufacturing workers per robot in the US, China, Europe and Japan. @TheEconomist
As a result of better technology and lower prices, the global stock of industrial robots grew from 1m in 2011 to nearly 3.5m in 2021. Though down from the frothy peaks of 2021, when bosses sought alternatives to human workforces incapacitated by covid-19, robot-makers’ share prices remain a fifth higher than before the pandemic. For all that growth, however, absolute levels of adoption remain low, especially in the West. Even South Korean firms, by far the world’s keenest robot-adopters, employ ten manufacturing workers for every industrial robot. In America, China, Europe and Japan the figure is 25-40 to one. The $25bn that, according to consultants at Boston Consulting Group, the world spent on industrial robots in 2020 was less than 1% of global capital expenditure (excluding the energy and mining sectors). People spent more on sex toys.
.@GregorMacdonald argues policy has had little impact on US energy production, which is driven by price and technological change. Fossil fuels expanded under Biden despite his pivot towards green policy, and coal declined under Trump.
The big surprise however was that Trump was not able to do anything for the coal industry, a major reversal of expectations. US coal production continued to fall, from 774,609 thousand short tons in 2017 to 535,434 thousand short tons in 2020. The continued collapse of coal consumption was even more dramatic under Trump, falling over 33% from 716,856 thousand short tons in 2017 to 476,693 thousand short tons. Joe Biden came to office as the most vocal, aggressive US executive on the need to take action on climate change. And yet, there has been no meaningful federal legislation that curtails the output of US oil and gas—both of which just reached (again) all-time highs. That’s why the [flipping] in the US energy balance sheet, moving ever more deeply into the black in 2021 and 2022, will surely steamroll onward. And US petroleum production, which suffered a hit from the pandemic demand collapse globally, has taken a very standard 12-24 months to not just recover, but reach a new high. A classic example of the free market, not policy, in full control.
Voters in Asian neighborhoods shifted their support towards Republicans by 23pp between 2018 and 2022. @NYTimes
In last year’s governor’s election, voters in Asian neighborhoods across New York City sharply increased their support for Republicans. Though these areas remained blue overall, they shifted to the right by 23 percentage points, compared with 2018, after more than a decade of reliably backing Democrats. It was the largest electoral shift in Asian neighborhoods in the period from 2006 to 2022, the longest available span of election results by precinct, according to a New York Times analysis.
The wave of murders associated with the pandemic has seemingly crested. Homicide rates are still well above the pre-pandemic level, but 2022 homicides were down 5% from 2021. @foxjust
The shocking rise in murders that began in the summer of 2020 looks as if it may have played out. In the nearly complete tally of 2022 homicide statistics from 93 US cities compiled by AH Datalytics, murder and non-negligent manslaughter was down 5% from the year before. There were still many more people murdered in the US in 2022 than before the pandemic in 2019 — going by the AH Datalytics estimates it was 4,764, or 28.7%, more. Murder rates are also much, much higher in the US than in other wealthy nations. But with weekly crime statistics from the three biggest US cities showing a continuing and possibly accelerating murder decline so far in 2023, it does look as if a return to the awful conditions of the 1970s through early 1990s probably isn’t in the cards.
Xi Jinping is accusing the United States of attempting to suppressing China’s development. @SCMPNews
Chinese President Xi Jinping has directly accused the United States of leading other Western nations to suppress China’s development. “Western countries, led by the United States, have implemented all-round containment and suppression of China, which has brought unprecedented severe challenges to the country’s development.” A key agenda for the ongoing legislative sessions in China is to provide a strategy to cut reliance on the US. As part of that plan, the central government proposed on Sunday to raise science and technology spending by 2 per cent in 2023 to 328 billion yuan (US$47 billion).To that end, China will overhaul its mechanisms for allocating and using government research funds and will “grant scientists a greater say when it comes to determining technological road maps and spending research funds”, according to a budget report released by the Ministry of Finance.
Legislation is moving in Congress to give the government authorities that would enable it to restrict access to the TikTok app. @markets
The US is moving closer to restricting access to the popular video-sharing app TikTok, with Senate Intelligence Committee Chairman Mark Warner set to unveil a bill Tuesday that the Biden administration is poised to support, according to people familiar with the issue. The measure, one of many being proposed in Congress to restrict Bytedance Ltd.’s TikTok but isn’t expected to pinpoint the company by name, would give the US the power to ban or prohibit foreign technologies or companies when necessary, said one of the people, who asked not to be identified discussing private deliberations. Lawmakers say the measures are intended to counter security threats from apps like TikTok, which they say can be used to gather user data or as tools for propaganda. Last week, legislation authorizing the US to ban TikTok in the US advanced through the House Foreign Affairs Committee, led by Michael McCaul, a Texas Republican.
.@Dimi reports that Washington is starting to reform security rules that would undercut the Aukus security pact. The US and Australia are expected to shortly announce the plan for production of Australian nuclear submarines.
President Joe Biden, Australia’s prime minister Anthony Albanese and UK PM Rishi Sunak are expected to reveal how and where the submarines will be built at a joint event in the US on March 13. Officials are optimistic the US has found ways to share closely guarded nuclear-propulsion secrets with Australia. But there is concern that the second pillar, which includes undersea capabilities and electronic warfare, faces obstacles that have slowed its momentum. These hurdles relate to technology transfer, licensing requirements under the International Traffic in Arms Regulations (ITAR), and a classification called “NoForn” that bars information sharing with non-US nationals.
In the aftermath of the pandemic, real hourly wage gains for non-college workers have reversed a quarter of the rise in wage inequality since 1980. @davidautor @nberpubs
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. Rapid relative wage growth at the bottom of the distribution reduced the college wage premium and counteracted approximately one-quarter of the four-decade increase in aggregate 90-10 log wage inequality. Wage compression was accompanied by rapid nominal wage growth and rising job-to-job separations—especially among young non-college (high school or less) workers. Seen through the lens of a canonical job ladder model, the pandemic increased the elasticity of labor supply to firms in the low-wage labor market, reducing employer market power and spurring rapid relative wage growth among young non-college workers who disproportionately moved from lower-paying to higher-paying and potentially more-productive jobs.
.@paulkrugman weighs the evidence of the direction of inflation in light of recent revisions (red line on chart) concluding underlying inflation “probably” has come down since early 2022 but “we don’t know how much it has come down.”
Underlying inflation probably has come down since early 2022 — you really have to work hard to find measures that don’t say that. But we don’t know how much it has come down. Inflation is still, however, running significantly above the Fed’s 2 percent target. Elevated inflation isn’t a mystery: The economy still seems to be running hot, despite a series of interest rate hikes from the Fed. So far there is no evidence that inflation is becoming entrenched, such that we would have to go through an extended period of high unemployment to get it back down. I’m not saying that it can’t happen, but as far as I can tell, there is no evidence supporting fears of ’70s-style stagflation. Given this picture, I don’t see how the Fed can avoid continuing to raise interest rates until it’s more or less unmistakable that inflation is coming under control.
American commercial bank deposits fell in 2022 for the first time since 1948 as depositors seek yield. CD rates are starting to rise in response. @markets
After years of earning next to nothing, depositors are discovering a trove of higher-yielding options like Treasury bills and money market funds as the Federal Reserve ratchets up benchmark interest rates. The shift has been so pronounced that commercial bank deposits fell last year for the first time since 1948 as net withdrawals hit $278 billion. The very biggest banks can afford to slow-walk their rate increases, simply because they still have relatively high deposit levels. Overall, the average rate on a one-year CD is roughly 1.5%. That’s up from 0.25% a week before the Fed began raising rates a year ago, but still well below inflation.
Persistently loose monetary policies are associated with financial crises. A 1pp lower mean in a five-year window increases the probability of a financial crisis in the next 5 to 7 years by 5.5pp and by 15.5 in the following 7-9 years. @MSchularick @sffed
We are the first to show that, as a causal matter, a loose stance has strong implications for medium-term financial instability. The sample consists of 18 advanced economies over the period from 1870 until 2020. Since the unconditional probability of experiencing a crisis in a 3-year window is 10.5%, these effects are big. Moreover, these results are robust to alternative measures of stance and alternative definitions of financial stability. Lower interest rates in general and loose monetary policy in particular imply, ceteris paribus, higher asset valuations. This opens the door for collateral-driven credit booms. Such credit and asset price booms, in turn, have been identified by the literature as harbingers of financial turmoil.
.@TheEconomist estimates that between the pandemic, war and emigration Russia has lost more than 2m people relative to the pre-2020 baseline with the life expectancy of Russian males aged 15 falling by almost five years to the same level as Haiti.
Over the past three years Russia has lost around 2m more people than it would ordinarily have done, as a result of war, disease and exodus. The life expectancy of Russian males aged 15 fell by almost five years, to the same level as in Haiti. The number of Russians born in April 2022 was no higher than it had been in the months of Hitler’s occupation. And because so many men of fighting age are dead or in exile, women outnumber men by at least 10m. According to Western estimates, 175,000-200,000 Russian soldiers have been killed or wounded over the past year. Somewhere between 500,000 and 1m mostly young, educated people have evaded the meat grinder by fleeing abroad. If you add pandemic mortality to the casualties of war and the flight from mobilization, Russia lost between 1.9m and 2.8m people in 2020-23 on top of its normal demographic deterioration.
.@greg_ip argues that Indian policy is pivoting towards the United States and is seeking to reduce trade friction with Europe, America, Canada, Japan, and Korea.
India’s trade barriers have long been among the highest of major economies. Its average “most favored nation” [MFN] applied tariff in 2021 stood at 18.3%, one of the highest among major economies. That’s actually up from 2014, a result of Mr. Modi’s efforts to encourage domestic and foreign companies to manufacture more in India. The high MFN tariff is aimed at “nontransparent economies who are dumping really low-quality, substandard goods at really low prices, which is hurting the Indian economy and Indian manufacturing,” Piyush Goyal, India’s minister of commerce and industry, said in an interview, in a reference to China. “The tariffs are not meant to be a detriment, ideally, to…Europe or America or Canada or Japan or Korea. We are looking at having more trading relationships, bilaterally or collectively, with the developed world with whom we want more and more open borders.” India wants more protection from China, and freer trade with everyone else.
In his annual letter @danwwang notes a change in animal spirits in China in the aftermath of 2022’s Covid policy and regulatory attacks on business “I perceive a fading sense of enthusiasm among businesspeople and youths.”
What I did not sufficiently appreciate is that a state that would so casually decapitate a sector like online tutoring would also have the will to visit catastrophe upon whole cities. And fear of those moves is wearing on people. I perceive a fading sense of enthusiasm among businesspeople and youths. The residue of resentment won’t wear on their faces; and I expect that the state will keep a lid on wide-scale protests. But there will be more foot-dragging and less self-initiative in response to Beijing’s centralized campaigns of inspiration. The picture I see for the next few years however is that growth will slow further. The economy won’t return to the 2019 mid-single digit levels of growth, but something closer to US levels. I believe that China is likely to succeed on many technological endeavors, but these bright spots can’t compensate for broad deceleration. The major source of risk is that the political system is more likely to squash growth in the longer run.
China is increasing military spending by 7.2% in 2023, 2.2 percentage points above the government’s 5% growth target. @FT
China’s military spending will grow at its fastest pace in four years in 2023 and outpace other categories of expenditure, underscoring Beijing’s reweighting towards security over development. Defense expenditure will increase by 7.2 per cent in 2023, well ahead of the 5.7 per cent increase in general public expenditure, according to a draft budget presented to the National People’s Congress, the country’s rubber-stamp legislature. China’s proposed rise in 2023 defense expenditure is 2.2 percentage points above the government’s 5 per cent economic growth target.
.@jasonfurman argues that January’s inflation data suggests the Fed should raise rates by 50bps at the next meeting and “shift expectations toward a terminal rate of around 6%.”
Wage growth is currently running at an annual rate of about 5%. Sustaining such wage growth with 2% inflation would require a large increase in productivity growth or continually falling profit margins. I’d root for either outcome, but I wouldn’t bet on them. Falling wage growth could bring down inflation, but in an economy with nearly two job openings for every person looking for work, don’t expect it to happen. Instead, the most probable outcome is that if the unemployment rate doesn’t rise, wages will continue to grow at that pace, which historically is associated with about 4% inflation. Monetary policy operates with long and variable lags. Given that most of the tightening in financial conditions was already in place 10 months ago and, if anything, the real economy and demand have strengthened in recent months, it would be foolish to sit and wait for the medicine to work. In fact, lags are precisely why the Fed should do more now —considering it will take months for whatever the central bank does next to have a meaningful effect on inflation.
.@alanbeattie writes that Indian trade policy drifts towards “protectionism and import substitution,” and therefore India is poorly positioned to take advantage of decoupling from China. Manufacturing value added as a % of Indian GDP has been declining.
Arvind Subramanian, an academic at Brown University in the US and former chief economic adviser to the Indian government calculates that in the decade or so since the global financial crisis, China gave up about $150bn of global market share in labor-intensive goods, of which India attracted no more than 10 per cent. The share of manufacturing in the Indian economy actually declined over that period. Calling yourself a globalizer doesn’t make you one. Modi sounds a lot more ambitious about competing in the world economy than many of his predecessors. But despite his government’s professed outward-looking export policy, it’s still too allergic to two-way trade to take full advantage of the huge space in global supply networks that is being opened up as China moves on.
Apple’s primary manufacturer Foxconn is considering a major expansion in India, potentially assembling 20M units in 2024. Apple shipped 225M iPhones globally in 2022. @WSJ
Apple’ main manufacturer, Foxconn is considering a major expansion in India, including possibly assembling millions more iPhones and setting up new production sites as it seeks to further diversify beyond China. Foxconn is set to expand production of iPhones at its existing plant near Chennai, in the southern Indian state of Tamil Nadu, people familiar with the matter said. It aims to boost iPhone production to around 20 million units annually by 2024, and roughly triple the number of workers to as many as 100,000, said the people, including a senior Indian government official. In addition, Foxconn is considering building a new production site in the southern city of Hyderabad as well as a silicon carbide fabrication plant and packaging facility in India for its semiconductor business, some of the people said.
Between 2012 and Q2 2022 the private equity sector has grown by ~ 15% a year to $12.8T total assets under management. @BainAlerts
The number of US public companies has declined by about a third over the last 25 years, and the remaining pool is dominated by a handful of large tech firms that hold disproportionate sway over the indexes. That makes it increasingly difficult to find adequate diversification in the public markets. Private market returns, meanwhile, are outpacing public returns over every time horizon, while alternative funds provide access to the broad global economy and the fullest range of asset classes. These advantages explain why private markets continue to grow relative to the public markets.
.@calculatedrisk reports affordability is at it’s lowest point since 1982 when 30-year mortgage rates were over 14%. On his chart, lower is more affordable.
I’ve put together my own affordability index using median income from the Census Bureau (estimated 2021 and 2022), assuming a 15% down payment, and used a 2% estimate for property taxes, insurance and maintenance. This is probably low for high property tax states like New Jersey and Texas, and too high for lower property tax states. For house prices, I used the Case-Shiller National Index, Seasonally Adjusted (SA). Here is what the index looks like (lower is more affordable like the FirstAm index): Affordability improved slightly in December as both mortgage rates and house prices declined. In October, houses were the least “affordable” since 1982 when 30-year mortgage rates were over 14%. Note that by this index, during the early ‘80s, homes were very unaffordable due to the very high mortgage rates. During the housing bubble, houses were at about the same level of unaffordability using 30-year mortgage rates, however, during the bubble, there were many “affordability products” that allowed borrowers to be qualified at the teaser rate (usually around 1%) that made houses seem more affordable.
.@M_C_Klein reports that construction spending by the computer and electronics industry is running at 6x its pace in mid-2021.
Construction spending on manufacturing facilities has been surging. In dollar terms, spending as of January 2023 was double what it was as recently as mid-2021. Moreover, this growth is entirely attributable to surging spending by the computers and electronics industry, which is currently running 6x the recent average. These numbers are not large relative to total U.S. construction spending ($152 billion January on a seasonally-adjusted basis) but they are worth paying attention to. Ideally, this investment should eventually lead to more domestic productive capacity that will boost long-term growth and reduce inflationary constraints on spending.
.@SamuelAbramsAEI notes a recent survey that found over half of college professors are concerned about losing their job over a misunderstanding or something they said in the past.
As the academy gets younger it grows more authoritarian, according to a new survey of over 1,400 faculty members conducted by the Foundation for Individual Rights and Expression (FIRE). More than half of faculty—52 percent—say they're afraid they'll lose their job or reputation over a misunderstanding of something they said or did, or because someone posted something from their past online. While almost three-quarters of conservative faculty expressed this year, 40 percent of even liberal faculty agree. That's staggering: two in five professors who are a part of the prevailing orthodoxy on campus are fearful of losing their jobs over a misunderstanding.
.@Noahpinion argues that smartphones and social media are increasing social isolation and driving the rise in teenage unhappiness.
The first reason smartphones should be our prior is that the timing just lines up really well. The smartphone was invented in 2007, but it didn’t really become commonplace until the 2010s, exactly when teen happiness fell off a cliff: Younger Americans adopted the technology more quickly than older ones; 2010-11 seems to have been an especially important moment. And of course, the “killer app” for smartphones was social media. When you had to go to a computer to check Facebook or Twitter, you could only experience it intermittently; now, with a smartphone in your pocket and notifications enabled, you were on every app all the time. Why would that make us unhappy? There’s an obvious reason: social isolation.
.@seba_hill documents that almost all the decline in real interest rates since 1980 occurred in a 3-day window around Fed announcements.
A narrow window around Fed meetings fully captures the secular decline in U.S. Treasury yields since 1980. By contrast, yield movements outside this window are transitory and wash out over time. This is surprising because the forces behind the secular decline are thought to be independent of monetary policy. Why did the secular decline in interest rates occur around FOMC meetings? While the Fed might have no direct control of long-term yields, it seems possible that the Fed provides information to the market about the long-run level of interest rates. This long-run Fed information effect might therefore explain why long-term interest rates move around FOMC meetings. In recent decades, this would imply that the market learned about secular interest rate decline – including the trend in r∗– from the Fed.
Nicholas Eberstadt @AEIecon argues that the 46% plunge in China’s birth rate over the last six years is driven by a new national pessimism among young people.
In 2022, China had only about half as many births as just six years earlier (9.6 million vs. 17.9 million). We see millions of young people joining spontaneous movements expressing alienation from work — tang ping (lying flat) — and from Chinese society itself — bai lan (let it rot). Last year, during one of the regime’s innumerable, drastic pandemic lockdowns, a video went viral in China before authorities could memory hole it. In the video, faceless hazmat-clad health police try to bully a young man out of his apartment and off to a quarantine camp, even though he has tested negative for the coronavirus. He refuses to leave. “Don’t you understand,” they warn, “if you don’t comply, bad things can happen to your family for three generations.” “Sorry” he replies mildly. “We are the last generation. Thank you.” That moment prompted the spread in China of a despairing social media hashtag: #Lastgeneration.
The Communist Party is warning Chinese bankers to “abandon pretensions of being the ’financial elite.’” @markets
Bankers in China are being told to rectify their mindsets, clean up their “hedonistic” lifestyles and stop copying Western ways. The directives, part of a 3,500-word commentary last week from the country’s top anti-graft watchdog, are just the latest sign that President Xi Jinping’s campaign to tighten the Communist Party’s grip on the financial system has a long way to go. China’s Central Commission for Discipline Inspection said bankers should abandon pretensions of being the “financial elite.”
A new @ChicagoBooth paper suggests that “raising the inflation target today would be a serious mistake.” The authors estimate that sustaining a disinflation will require unemployment to rise to 5% from January’s 3.4%.
We start by analyzing the large disinflations that occurred since 1950 in the United States and several other major economies. We estimate and simulate a standard model over several time periods, using various linear and nonlinear measures of labor market slack. We draw three main lessons from the analysis: (1) there is no post-1950 precedent for a sizable central-bank-induced disinflation that does not entail substantial economic sacrifice or recession; (2) regardless of the Phillips curve specification, models estimated over a historical period that includes episodes of high and variable inflation do a better job of predicting the post-pandemic inflation surge than those estimated over the stable inflation period from 1985 to 2019; and (3) simulations of our baseline model suggest that the Fed will need to tighten policy significantly further to achieve its inflation objective by the end of 2025. We see that the model using the full historical period (1962-2022; red line in the graphic above,) implies that inflation will fall only gradually to 3.7 percent by the end of 2025. By contrast, the model estimated over the stable inflation period (1985-2019; blue line in the graphic above,) has inflation falling quickly to the 2 percent target in the first quarter of 2024.
.@GregObenshain notes that for the first time in 30 years the trailing 3yr correlation between stocks and long-term government bonds turned positive. Regimes in which the correlation btw stocks and bonds were high have been good for equities and oil.
For the past 30 years, the correlation between stocks and bonds has been negative. But last year, the trailing three-year correlation turned positive for the first time since November 2000. We classify regimes by the standard deviation of the trailing stock-bond correlation, measured with a 30-day half-life, with an absolute deviation of 0.5 or greater needed to mark a positive or negative correlation regime. While the effect is not the strongest, it shows that neutral and positive-correlation environments tend to be good for equities and oil, while Treasurys and gold benefit from negative-correlation environments.
.@mattyglesias notes that young liberals’ depression rates have increased compared to younger conservatives’ and suggests that this may be caused by a progressive tendency to “catastrophize” political issues.
A 2021 paper by Catherine Gimbrone, Lisa Bates, Seth Prins, and Katherine Keyes titled “The politics of depression: Diverging trends in internalizing symptoms among US adolescents by political beliefs.” The CDC survey doesn’t ask teens about their political beliefs, but Gimbrone et. al. find not only divergence by gender, but divergence by political ideology. Breaking things down by gender and ideology, they find that liberal girls have the highest increase in depressive affect and conservative boys have the least. But liberal boys are more depressed than conservative girls, suggesting an important independent role for political ideology. Mentally processing ambiguous events with a negative spin is just what depression is. And while the finding that liberals are disproportionately likely to do it is interesting and important, it’s not sound practice to celebrate that or tell them that they are right to do it. Progressive institutional leaders have specifically taught young progressives that catastrophizing is a good way to get what they want. Leaning into the language of “harm” creates and reinforces feelings of harm, and while using that language may give a person some short-term power in progressive spaces, It’s pretty bad for most people’s long-term ability to regulate their emotions, to manage inevitable adversity, and to navigate a complicated world.
The Cambodian girl who died of the bird flu last week had been infected with a different strain than the one that is circulating globally. @Nature
An 11-year-old girl in southern Cambodia who died last week after being infected with avian influenza A (H5N1) had a different strain than the one causing mass deaths in wild and domestic birds globally, says the scientist who led the effort to sequence viral samples from the girl. Scientists were initially concerned that the girl might have been infected with the widely circulating virus that is now spreading in some mammal species and has infected a handful of people since 2020.
A strong rebound in immigration in 2022 helped offset tight U.S. labor markets, contributing to a 6-percentage point reduction in the ratio of job vacancies to unemployed workers. @sffed
Immigration flows into the United States slowed significantly following immigration policy changes from 2017 to 2020 and the onset of the COVID-19 pandemic. Analysis of state-level data shows that this migration slowdown tightened local labor markets modestly, raising the ratio of job vacancies to unemployed workers (V-U) 5.5 percentage points between 2017 and 2021. More recent data show immigration has rebounded strongly, helping to close the shortfall in foreign-born labor and ease tight labor markets. Data for 2022 show a strong rebound in immigration that has helped offset tight U.S. labor markets by contributing a 6-percentage point reduction in the V–U ratio.
.@tylercowen notes that America’s low personal savings rate of 4.7% in January 2023 is offset by higher corporate savings which results in a gross savings rate of 17-18% of GDP.
At the household level, Americans have long been poor savers. Are such low savings rates unsustainable for an advanced economy? Not in view of America’s business saving. Looking at the US Federal Reserve’s series on undistributed business profits, it starts to rise significantly in the 1970s, and takes off around 2000 (with a dip for the financial crisis), and currently stands a bit above $1.2 trillion. There are other ways to measure business savings rates, but generally they show a significant upward move over the last few decades. On net, gross US savings rates are hovering between 17% and 18% of GDP. This asymmetric distribution of the savings burden can lead to wealth distribution problems over time.
.@RobinWigg notes a Deutsche Bank report that the Bank of Japan may have purchased “more than 100 per cent of some Japanese government bonds” after accounting for bonds the bank lends to short sellers and subsequently repurchases.
Deutsche Bank’s tidbit that the BoJ “may” have bought more than 100 per cent of some Japanese government bonds, as it buys the JGBs, lends them out again to ensure the market still has some supply, short sellers borrow it and dump them in the market, only for the BoJ to buy it once more. Here is a killer chart from Oxford Economics’ Norihiro Yamaguchi that puts more flesh on the bone. After buying a record ¥20tn of JBGs last month, the BoJ now owns more than 100 per cent of all on-the-run 10-year Japanese government bonds. In fact, it owns almost 140 per cent of the most recent issue.
.@danwwang argues that US technological competitiveness depends on mass production, “an activity that depends on the kinds of deep process knowledge that can only come from the better training and integration of workers, engineers, and scientists.”
To get better at scaling up, the United States will also have to learn to think differently about the value of manufacturing work. Policymakers must resist the urge to scorn manufacturing as a mere “commoditized activity” that can be done overseas. Instead, the mass production of new technologies needs to be seen as equal in importance to the innovations themselves. For the United States to regain its lead in emerging technologies, it will have to treat manufacturing as an integral part of technological advancement, not a mere sideshow to the more thrilling acts of invention and R & D.
A shortage of electricians is likely to be a headwind to the energy transition. 30% of union electricians are btw 50-70 years old and close to retirement. The average annual electrician salary rose from $50k to $60k btw 2018 and 2022. @WSJ
The current total of more than 700,000 electricians in the U.S. is expected to grow about 7% over the next decade, slightly faster than the nationwide average of 5%, according to the Bureau of Labor Statistics. The climate law will put several hundred billion dollars’ worth of incentives into the economy designed to accelerate the energy transition and boost clean-energy supply chains in the U.S. Electricians say they are booked several months out and struggling to find enough workers to keep up with demand. Many are raising wages and prices and worried that they won’tbe able to keep up as government climate incentives kick in. “I’m tired of telling people I can’t help them,” said Brian LaMorte, co-owner of LaMorte Electric Heating and Cooling in Ithaca, N.Y., which does residential heat-pump installations and electric-service upgrades.
Apple’s suppliers are likely to move capacity out of China faster than Bloomberg Intelligence currently projects, according to a senior executive at GoerTek who manufactures AirPods for Apple. @markets
Apple Inc.’s Chinese suppliers are likely to move capacity out of the country far faster than many observers anticipateto preempt fallout from escalating Beijing-Washington tensions, according to one of the US company’s most important partners. AirPods maker GoerTek is one of the many manufacturers exploring locations beyond its native China. It’s investing an initial $280 million in a new Vietnam plant while considering an India expansion, Deputy Chairman Kazuyoshi Yoshinaga said in an interview. Behind the scenes, 9 out of 10 of Apple’s most important suppliers may be preparing large-scale moves to countries like India, which is dangling incentives to drive Narendra Modi’s Make in India initiative. Bloomberg Intelligence estimates it could take eight years to move just 10% of Apple’s capacity outside of China. The GoerTek executive argues it’ll be far quicker.
.@WSJ reports an expected increase this year over the 10,800 wealthy Chinese who left the country in 2022. A recent expatriate noted, “We thought if we don’t leave sooner, we may never be able to.”
Around 10,800 wealthy Chinese left the country in 2022, according to estimates from New World Wealth, a research firm that tracks the movements and spending habits of the world’s high-net-worth citizens. The company expects around 125,000 people with net assets of more than $1 million to move this year, exceeding the 2019 record of 110,000. Chinese nationals usually account for 8% to 10% of the total. New World Wealth tracks the behavior of around 150,000 individuals in a database to derive its estimates for total migration.
.@GeneralTheorist writes, “The ‘Great Reflation’ in the US has not yet run its course.” He notes of rent, owners’ equivalent rent, and adjusted services (2/3 of the Core CPI basket collectively): “None has definitely peaked.”
Another way of looking at the Fed’s predicament is by showing the YoY% inflation of Rent (9% weight in Core), Owner Equivalent Rent of Primary Residence (weight 30%), and our Adjusted Services (that is, ex. OER, Rent, Medical services, hotels and airfares; 28% weight.) These three items represent two-thirds of Core CPI and none has definitely peaked in YoY% terms—and all are running above 7.5%YoY, as in the chart below. Of course, a sequential read on these might be different. But the experience in the Jan. CPI print is that if disinflation has begun, the run rate is not yet materially lower than that recorded last summer or the YoY% print.
. @M_C_Klein notes, “The average American’s disposable income has been rising 10%/yr since last summer thanks to falling tax payments (lower cap gains obligations), huge increases in Social Security benefits, and—most importantly—soaring employment income.”
Worker pay matters for inflation because it is the largest and least volatile source of financing for consumer spending. The old data implied that wages and salaries paid to private sector workers were rising about 6% a year throughout 2022. The new data imply that wage and salary income has been rising 10% annualized since June. But this mostly seems to reflect upward revisions to estimates of the number of people working (and the length of their workweeks), rather than how much each worker is getting paid. That should mute the potential impact on inflation—assuming the extra employees are doing useful things with their time.
As American energy exports to Europe surge, @DanielYergin notes that, “America is back in the most predominant position it has been in world energy since the 1950s.” @WSJ
Since February 2022, when Russia invaded Ukraine, average monthly seaborne cargoes to the continent jumped 38% compared with the previous 12-month period, according to ship-tracking firm Kpler. According to the White House, U.S. natural gas shipments to Europe more than doubled last year, cushioning the continent’s households and manufacturers after Russia throttled supplies. A fleet of skyscraper-size tankers carried more crude to Germany, France and Italy—the European Union’s largest economies—as well as Spain, which alone boosted purchases by about 88% over the period. The pull of oil shipments from the Gulf Coast to Europe, which Kpler pegged at 1.53 million barrels a day in January, has in recent months made the continent a larger destination for U.S. crude than Asia.
Money flowing into startups globally fell by a third in 2022 as valuations declined; however, there is still $300B of VC dry powder in the US alone. @TheEconomist
The tech-heavy Nasdaq index fell by a third in 2022, making it one of the worst years on record and drawing comparisons with the dotcom bust of 2000-01. According to the Silicon Valley Bank, a tech-focused lender, between the fourth quarters of 2021 and 2022, the average value of recently listed tech stocks in America dropped by 63%. And the plunging public valuations dragged down private ones. The value of older, larger private firms (“late-stage” in the lingo) fell by 56% after funds marked down their assets or the firms raised new capital at lower valuations. What new VC funding there is increasingly flows into mega-funds. Data from PitchBook, a research firm, show that in America in 2022 funds worth more than $1bn accounted for 57% of all capital, up from 20% in 2018.
.@JohnHCochrane reports on a @caseybmulligan presentation that explains how opioid consumption increased despite higher prices.
There are two ways to buy opioids, 1) legally or semi-legally; i.e. get opioids that come from pharmaceutical companies and are prescribed to someone by a doctor or 2) illegally. There is a fixed cost of entering the illegal market. So, imagine a drug user starting at B. At that price for legal (red) and illegal (black) drugs, the user chooses legal drugs at point B. Now raise the price of legal drugs, as shown by the arrow. If the user stayed with legal drugs, he or she would use less. But now there is an option, incur the fixed cost and buy illegal drugs on the black line. At the higher price for legal drugs that makes sense. But since the marginal cost of illegal drugs is lower, once the user has overcome the fixed cost, he or she uses more. Raise the price, and they consume more (of a substitute).
China’s household savings rate was 33% in 2022, 3pp above the pre-pandemic trend, and big industrial companies added $1.1 trillion in liquid assets on average each year, more than double the $467 billion annual increase in the five years before Covid. @WSJ
Chinese families, constrained by Covid lockdowns, hoarded cash and pushed up the country’s household saving rate to a multiyear high of 33% in 2022. Economists from HSBC and Morgan Stanley say the end of China’s strict zero-Covid policies will at minimum fuel a strong recovery in services spending, lifting consumption growth to at least its prepandemic rate of around 8% a year. A large portion of new deposits accumulated by Chinese households last year was locked up in three-year to five-year deposit instruments, which can’t as easily be converted into spending as short-term deposits can, according to a study by research firm Rhodium Group.
A Citigroup analysis highlights parallels between the late ‘80s Japanese investment bubble and recent investment trends in China: capital formation as an outsized proportion of GDP and a development strategy reliant on large current account surpluses.
Citigroup identifies several areas of similarity. Both countries entered extended phases of strong GDP growth via investment in infrastructure and the encouragement of exports. Between 2010 and 2020, capital formation represented an average 43% of Chinese GDP growth, according to the World Bank. When its bubble burst in 1990, Japan’s capital formation proportion was at roughly 36%, and considered very high. Japan and China also financed their growth in a similar way. Japan’s bubble era was fuelled by indirect financing provided by commercial banks, which were nudged by the authorities into funnelling soft loans towards favoured industrial sectors. Similarly, says Citigroup, China has developed a financial system mainly dependent on indirect financing. As well as the tools available to the People’s Bank of China, the government can direct the lending activities of commercial banks via a series of mechanisms.
Core-PCE rose to 4.7% y/y up from 4.6% in December. Consumer spending rose just over 1% from the prior month, the most in two years. @markets
The Federal Reserve’s preferred inflation gauges unexpectedly accelerated in January and consumer spending surged after a year-end slump, adding pressure on policymakers to keep ratcheting up interest rates. The personal consumption expenditures price index rose 5.4% from a year earlier and the core metric was up 4.7%, both marking pickups after several months of declines. Consumer spending, adjusted for prices, jumped 1.1% from the prior month, the most in nearly two years, after consecutive declines.
.@jasonfurman thinks that the tight labor market means that “6% inflation is much more likely than 2% inflation,” and concludes, “If I were the FOMC I would be raising rates by 50bp at the next meeting and signaling a terminal rate around 6%.”
The economy is very overheated. We have made little if any progress on inflation. There is little if any reason to expect a large slowdown going forward. Core PCE at an annual rate: 1 month: 7.1% 3 months: 4.7% 6 months: 5.1% 12 months: 4.7%. In some ways it is cleaner just to exclude housing and used cars. Which gives [approximately] the same story as core inflation. We still have lagged rent but that is probably only worth about 0.5 to 1pp off the rate. Possibly lagged monetary policy effects coming too. So yes, more likely than not that inflation falls from its 4.7% pace. Maybe even into the 3's. But there are still forces going in the direction of high inflation. In recent months goods prices have fallen, but that likely won't continue. And the extremely tight labor market has lagged effects on inflation. 6% inflation is much more likely than 2% inflation. If I were the FOMC I would be raising rates by 50bp at the next meeting and signaling a terminal rate around 6%.
.@BIS_org argues aggregate global demand might be more sensitive to higher rates given elevated debt levels.
Monetary policy is tightening globally while private debt levels stand at historical highs. When private debt to GDP is high, aggregate demand may be more sensitive to interest rate hikes. Yet, after a decade of low rates, the maturity of private debt has generally lengthened, the prevalence of variable rates has fallen, and household net worth has increased. This should counteract the higher demand sensitivity stemming from elevated debt. Both the level and composition of private debt are important factors, although not the only ones, for the calibration of monetary policy in the current economic environment.
.@DailyMail reports that 8% of very wealthy New Yorkers (those earning >$25 million per year) left the state during 2021.
The number of those earning more than $25 million that fled the state in 2021 is 1,453, just 520 less than the amount that left at the height of lockdowns and intense social distancing [implying 17% of this cohort over two years]. The top one percent of earners in New York account for close to half of the state's income tax revenue. Between 2019 and 2020, New York City lost six percent of those earning between $150,000 and $750,000. EJ McMahon of the Empire Center for Public Policy claimed the data showed a 1.3 percent decline in the number of New Yorkers with adjusted gross annual income of more than $1 million. The precise figure fell from 55,100 to 54,370 - 730 individuals, while the national number climbed from 554,340 to 608,549 - a nearly 10 percent jump. According to new Census Bureau data, New York experienced the largest population decline of any US state this year - losing 0.9 percent of its residents.
Pedestrians’ deaths in America have risen 57%, in part because Americans prefer larger cars (fully half a ton larger than the European average). @jburnmurdoch
43,000 people died on America’s roads in 2021, the highest mortality rate in the developed world by some margin. The average new American car purchased in 2021 weighed 1.94 tons, fully half a ton more than the European average. Purchases of SUVs and “light” trucks together now account for four out of every five new vehicles bought in the US, up from one in five 50 years ago. This would all be a mere curiosity except that these vehicles have a variety of lethal qualities. As American cars have bulked up, the number of fatalities for the drivers and passengers inside these rolling fortresses has fallen by 22 per cent. But the number of pedestrians killed has risen by 57 per cent. According to an estimate by Justin Tyndall, assistant professor of economics at the University of Hawaii, the lives of 8,000 pedestrians could have been saved between 2000 and 2018 if Americans had stuck to smaller vehicles.
A new @NBERpubs paper shows that newer firms have more earnings dispersion than older firms, and that this pattern accounts for a large fraction of the aggregate rise in between-firm earnings inequality. @WallskogMelanie
We plot the between-firm variance of earnings within a cohort over time. We find two striking patterns. First, within a cohort, between-firm earnings inequality declines as the cohort ages. Second, each subsequent cohort of firms enters with a higher level of between-firm earnings inequality before declining on a path approximately parallel to previous cohorts. We find that between-firm pay dispersion declines within a cohort. Second, there are striking cohort patterns: more recent cohorts are more dispersed than older cohorts. This pattern accounts for a large fraction of the aggregate rise in between-firm earnings inequality. As older cohorts are replaced with cohorts with inequality “technology” of the more recent vintage, we expect inequality to continue to rise, even without a change in that underlying technology.
.@NewYorkFed presents evidence that services inflation leads wage growth. The model suggests that services inflation peaked in the early months of 2022 and then started to decline.
We inspect how the trend in wage growth relates to the trend in price inflation in core services (excluding housing) recovered from PCE data. Both trends are estimated using the methodology described earlier, so their timing can be compared as they are both expressed in terms of annualized monthly growth. Our results not only suggest that the persistent component of core services inflation started to increase before trend wage growth did, but also show that it has come down faster, despite the fact that both trends peaked around the beginning of 2022. Persistent services inflation markedly slowed down between June and October, although it seems to have levelled off since. A further deceleration in trend wage growth may ease inflationary pressures, but considerable uncertainty about the speed of this decline remains.
Bob Prince and Aaron Goone @Bridgewater argue that earnings have not yet fallen enough to stabilize inflation at target suggesting either “continued rise in short-term interest rates or at least a period of sustained higher interest rates.”
Earnings need to fall in order to induce the layoffs needed to cool the labor market and bring down wage growth, which is a prerequisite for a sustainable 2% inflation rate. After cooling late last year, our weekly reading of earnings growth has bounced rather than accelerating downward. Given current conditions and the cause/effect linkages, odds favor that there will be a third stage and that it will mostly likely take the form of an economic downturn. And if that doesn’t happen, inflation is likely to remain above central bank targets, prompting a continued rise in short-term interest rates or at least a period of sustained higher interest rates than what the markets are now discounting.
Michael Cembalest @JPMorgan thinks that the likely severity of a future recession is decreasing, despite continued weakness in their favorite leading indicator (ISM new orders minus inventories).
Despite the fastest Fed tightening cycle on record, real US 3-month and 10-year yields are still negative when based on trailing inflation measures. Consumer and producer price increases are falling as we expected they would but it’s too soon for the Fed to pause here. It also seems unlikely that the Fed or ECB will be able to cut rates later this year, unless they overshoot first. Will economic resilience prompt the Fed to tighten even more than markets expect? I think it would take more than a couple of months of positive surprises for the Fed to hike by 50 bps. We still see weakness ahead in our preferred leading indicator (new orders vs inventories) and deflation in the housing pipeline. Bottom line: 2-3 more Fed hikes ahead, and a mild US recession whose likelihood and possible severity may be shrinking.
An @EconUS analysis suggests that if rates follow their current trajectory, total interest costs globally will rise from 12% of GDP in 2021 to 17% by 2027. Their analysis covered 58 countries representing 90% of global GDP.
The Economist has estimated the interest bill for companies, households and governments across 58 countries. Together these economies account for more than 90% of global GDP. In 2021 their interest bill stood at $10.4T, or 12% of combined GDP. By 2022 it had reached a whopping $13T, or 14.5% of GDP. Our analysis suggests that, if rates follow the path priced into government-bond markets, the interest tab will hit around 17% of GDP by 2027.Interest costs in America exceeded 20% of GDP during the global financial crisis of 2007-09, the economic boom of the late 1990s and the last proper burst of inflation in the 1980s. Yet an average bill of this size would mask big differences between industries and countries.
The value of American homes declined by $2.3T or 4.9% in the second half of 2022 the largest decline since the second half of 2008 when homes were down 5.8%. Notably home values are still up ~ $13T since February 2020. @Markets
After peaking at $47.7 trillion in June, the total value of US homes declined by $2.3 trillion, or 4.9%, in the second half of 2022, according to real estate brokerage Redfin. That’s the largest drop in percentage terms since the 2008 housing crisis, when home values slumped by 5.8% from June to December. “The housing market has shed some of its value, but most homeowners will still reap big rewards from the pandemic housing boom,” said Redfin economics research lead Chen Zhao, adding that the total value of homes remains roughly $13 trillion higher than it was in February 2020.
.@fuxianyi reviews declining birth rates and increasing old-age dependency ratios and concludes that Chinese GDP growth rate will be below the US in 2031-35. “If the US is overtaken as the world’s largest economy, it will be by India, not China.”
Assuming that China is lucky enough to stabilize its fertility rate at 1.1 children per woman, its population in 2049 will be just 2.9 times that of the US, and all its key indicators of demographic and economic vitality will be much worse. In 1980, China's median age was 21, eight years younger than America’s, and from 1979 to 2011, its GDP grew at an average annual rate of 10%. But China’s prime-age labor force (15-59) began to shrink in 2012, and by 2015, GDP growth had decelerated to 7% before slowing further, to 3%, as of 2022. An average of 23.4 million births per year from 1962 to 1990 made China “the world’s factory.” But even China’s own exaggerated official figures put last year’s births at just 9.56 million. By 2030, China’s median age will already be 5.5 years above that of the US, and by 2033, its old-age dependency ratio will begin to exceed America’s. Its GDP growth rate will begin to fall below America’s in 2031-35, at which point its per capita GDP will hardly have reached 30% of its rival’s – let alone the 50-75% predicted by Chinese official economists. If the US is overtaken as the world’s largest economy, it will be by India, not China.
An 11-year-old girl in Cambodia died from H5N1 after falling ill February 16. The WHO reports there have been at least 870 human infections from the H5N1 avian flu strain, with a 52% mortality rate. @markets
An 11-year-old girl in Cambodia has died from bird flu in the country's first known human H5N1 infection since 2014, health officials said. The girl from the rural southeastern province of Prey Veng became ill Feb. 16 and was sent to be treated at hospital in the capital, Phnom Penh. She was diagnosed Wednesday after suffering a fever up to 39 Celsius (102 Fahrenheit) with coughing and throat pain and died shortly afterward, the Health Ministry said in a statement Wednesday night. Globally, about 870 human infections and 457 deaths have been reported to the WHO in 21 countries. But the pace has slowed, and there have been about 170 infections and 50 deaths in the last seven years.
The incoming chief scientist of the WHO tells the @FinancialTimes “If there was an outbreak tomorrow of H5N1 in humans, we wouldn’t be able to vaccinate the world within 2023.”
Infectious disease experts say the risk remains largely contained to the animal population — 50mn birds, including poultry, have been killed by the virus or culled in this outbreak, according to the European Centre for Disease Prevention. Large-scale culling has been carried out in dozens of countries including Japan, France and the US. H5N1 is “a big worry,” said Jeremy Farrar, flu expert and outgoing director of the Wellcome Trust. “You would hate to look back in the midst of an H5N1 pandemic and say: ‘Hold on, didn’t we watch this avian population die all over the world and we started to see mammals dying and what did we do about it?’” He said more vigorous action was needed both to build up H5N1 vaccine stocks and prevent circulation of the virus among mammals. “If there was an outbreak tomorrow of H5N1 in humans, we wouldn’t be able to vaccinate the world within 2023,” added Farrar, who will become chief scientist at the World Health Organization in May.
The United States plans to deploy 100-200 troops in Taiwan to expand military training programs, up from 30 a year ago. Taiwanese military personnel are also participating in training programs in the US. @WSJ
The U.S. is markedly increasing the number of troops deployed to Taiwan, more than quadrupling the current number to bolster a training program for the island’s military amid a rising threat from China. The U.S. plans to deploy between 100 and 200 troops to the island in the coming months, up from roughly 30 there a year ago, according to U.S. officials. The larger force will expand a training program the Pentagon has taken pains not to publicize as the U.S. works to provide Taipei with the capabilities it needs to defend itself without provoking Beijing. Beyond training on Taiwan, the Michigan National Guard is also training a contingent of the Taiwanese military according to people familiar with the training.
.@paulkrugman argues that Medicare financing is on stable ground as health spending is leveling off: “since 2010 we’ve already done quite a lot to ‘bend the curve.’”
Historically health spending has risen faster than GDP. Excess cost growth has slowed considerably since around 2010 the leveling off is unmistakable. Here’s national health spending as a percent of G.D.P. C.B.O. projections now show social insurance spending as a percentage of G.D.P. eventually rising by about 5 points, which is still a lot but not unimaginably large. And here’s the thing: Half of that is still the assumed rise in health care costs. Since 2010 we’ve already done quite a lot to “bend the curve.” It’s not at all hard to imagine that improving the incentives to focus on medically effective care could limit cost growth to well below what the C.B.O. is projecting, even now.
After plunging during the pandemic, the number of Americans working a second job is climbing with 5% of workers now working two jobs. @markets
The number of multiple jobholders spiked at the end of last year to more than 8 million, with the share reaching 5% of all employed for the first time since the start of pandemic, according to US Labor Department data.
Under a new proposed rule which will take effect in 30 days, migrants will be ineligible for asylum if they enter the country unlawfully. @nytimes
In a bid to prevent a surge of migrants at the southern border when a pandemic measure is lifted in May, the Biden administration on Tuesday announced its toughest policy yet to crack down on unlawful entries. The proposed rule, which has been opened for 30 days of public comment before taking effect, would presume that migrants are ineligible for asylum if they entered the country unlawfully, a significant rollback in the country’s traditional policy toward those fleeing persecution in other countries. It would allow rapid deportation of anyone who had failed to request protection from another country while en route to the United States or who did not notify border authorities through a mobile app of their plans to seek asylum.
.@Birdyword reports that Asian alternatives to China (including India, Indonesia, Bangladesh, and Vietnam) have larger working age populations and exported more goods to the United States in the 12 months ending Q3 ‘22: $634B vs. China’s $614B.
Chinese labor is no longer that cheap: between 2013 and 2022 manufacturing wages doubled, to an average of $8.27 per hour. More important, the deepening techno-decoupling between Beijing and Washington is forcing manufacturers of high-tech products, especially those involving advanced semiconductors, to reconsider their reliance on China. Alternative Asian supply chain—call it Altasia—looks evenly matched with China in heft, or better. Its collective working-age population of 1.4bn dwarfs even China’s 980m. Altasia is home to 154m people aged between 25 and 54 with a tertiary education, compared with 145m in China—and, in contrast to ageing China, their ranks look poised to expand. In many parts of Altasia wages are considerably lower than in China: hourly manufacturing wages in India, Malaysia, the Philippines, Thailand, and Vietnam are below $3.
The billionaire founder of investment bank China Renaissance was in the process of setting up a family office in Singapore when he disappeared in February. @FT
Missing Chinese investment banker Bao Fan was preparing to move some of his fortune from China and Hong Kong to Singapore in the months leading up to his disappearance, according to four people with knowledge of his plans. The billionaire founder and chair of investment bank China Renaissance, who brokered some of China’s biggest tech deals, was establishing a family office in the city-state to manage his personal wealth in the final months of 2022, the people said. The number of family offices has grown from a handful in 2018 to an estimated 1,500 by the end of last year, according to Singaporean data analysis firm Handshakes.
US Navy Secretary Carlos Del Toro argues that the US lacks the capacity to keep up with China’s plan to field up to 400 ships vs. the US fleet’s 300. “One [Chinese] shipyard has more capacity than all of our shipyards combined.” @CNN
Speaking at the National Press Club in Washington, DC, US Navy Secretary Carlos Del Toro said China’s People’s Liberation Army Navy could be fielding up to 400 ships in the coming years, up from about 340 now. Meanwhile, the US fleet sits at under 300 ships. Del Toro said Tuesday that US naval shipyards can’t match the output of Chinese ones. As with fleet size, it’s about numbers. “They have 13 shipyards, in some cases their shipyard has more capacity – one shipyard has more capacity than all of our shipyards combined."
South Korea’s fertility rate, the world’s lowest for years, has fallen again. The number of babies expected per woman fell to 0.78 last year, from .81 in 2021. @bloomberg
South Korea’s fertility rate, the world’s lowest for years, has fallen again the number of babies expected per woman fell to 0.78 last year, according to data released by the statistics office on Wednesday. At 0.81 in 2021, it was already the lowest among more than 260 nations tracked by the World Bank. The working-age population peaked at 37.3 million in 2020 and is set to fall by almost half by 2070, according to Statistics Korea. The number of newborns declined last year to 249,000 from 260,600 a year earlier, the statistics office said. That’s less than 5% of the population. In contrast, about 373,000 people died last year, extending what one policymaker called a “death cross.”
.@M_C_Klein sees signs of stress in Russian government financing: federal spending up 67% year-over-year in December ’22, and the government withdrew $47B from the national wealth fund in Q4 ‘22, leaving assets worth $155B.
Russian government spending is soaring. Federal spending was 40% higher in 2022 than in 2021 in U.S. dollars, while spending by subnational governments was up at least 32% as of November. Federal spending in December 2022 was 67% higher than in December 2021. In practice, this additional spending has been (and will continue to be) financed by seizing resources from the Russian private sector, which will become increasingly painful as the economy continues to stagnate. Conscription—forced labor at below-market rates—is holding down some of the fiscal costs of the war. But forced labor cannot care for Russia’s rapidly growing population of widows, orphans, and the disabled, nor can it be employed to build the machinery and equipment the military will need to keep fighting against the motivated and heavily-armed Ukrainians. And forced labor cannot compensate for the long-term costs of emigration.
A “demand reallocation shock” associated with the pandemic was responsible for 3.5 percentage points of the rise in inflation. @FedResearch
Our main finding is that the shift in consumption demand from services towards goods can explain a large proportion of the rise in U.S. inflation between 2019:Q4 and 2021:Q4. This demand reallocation shock is inflationary due to the costs of increasing production in goods-producing sectors and because such sectors tend to have more flexible prices than those producing services. The aggregate labor supply shock provides a smaller inflationary impulse, despite the fact that it explains the majority of the decline in employment. The sectoral productivity shocks actually lower inflation slightly, as average productivity grew strongly over this period. Our confidence in the model and its predictions is boosted by the fact that it provides an excellent description of cross-sectional developments in prices and quantities
Drug overdoses are now the leading cause of death for Americans under age 45, driven by illicit fentanyl. There is now one overdose fatality every five minutes in the US. @FinancialTimes
Tens of thousands of American parents are mourning the deaths of their children amid an unprecedented drugs crisis, which has claimed 107,000 lives in the year to August 2022. About two-thirds of those deaths were caused by fentanyl. Illicit fentanyl has displaced legally prescribed painkillers as the main cause of overdoses in the US. The skyrocketing death rate — equivalent to one American overdosing every five minutes alongside Covid-19, has helped drive US life expectancy down to a 25-year low of 76.4 years. Unintentional overdose deaths among 15- to 19-year-olds surged by 150% between 2018 and 2021. Overdoses have replaced suicide as the leading cause of death for Americans under 45 years of age, according to Centers for Disease Control and Prevention data.
Labor’s share of output is shrinking across advanced economies as inflation continues to outpace wage gains. US average hourly earnings growth in the 12 months ending January was 4.4% vs. consumer price inflation of 6.4%. @WSJecon
Workers’ purchasing power—their average inflation-adjusted wage—was lower last year than in 2019, before the pandemic, according to the report. So, despite strong demand for workers and ultralow unemployment, labor’s share of economic output shrank in many advanced economies. Average hourly earnings for private-sector nonfarm workers rose 4.4% in the 12 months through January, down from 5.6% last March and less than the 6.4% rise in consumer prices in the year through January.
.@M_C_Klein notes that, relative to pre-pandemic, there are more Americans in higher wage jobs and fewer in lower paid jobs. This helps explain strong wage growth, but “the puzzle is why productivity has not increased commensurately.”
In theory, the shifting mix of employment towards higher-value jobs and industries should be supporting more production and help attenuate the link between aggregate pay growth and inflation. But that has not happened yet, even if overall productivity growth remains broadly on trend, despite the volatility attributable to the pandemic. The net result is that the U.S. economy is growing briskly, adding millions of jobs, and producing more goods and services—but with persistently faster inflation (about 1-2pp) than recent generations are used to. That could be a sustainable outcome, if Fed officials are willing to tolerate it, but it is probably not sustainable with the set of interest rates and asset price multiples we became accustomed to in the 2010s.
Lake Powell, the second largest US reservoir, dropped to a new record low, raising the risk for 40M people who depend on the reservoir for water and 5M who depend on its hydroelectric power. @Sltrib
Water levels in Lake Powell dropped to a record low last week, with continued pressure from climate change and steady demand pushing the nation’s second-largest reservoir to the lowest level since it was first filled in the 1960s. The lake fell to 3,522 feet above sea level, just below the previous record set in April 2022. The reservoir is currently about 22% full, and is expected to keep declining until around May, when mountain snowmelt rushes into the streams that flow into the lake. At 3,490 feet, the “minimum power pool” level, the bureau may be unable to generate hydropower from the dam. At 3,370 feet, the reservoir hits “dead pool,” at which point water is no longer able to pass through the dam through gravity.
The @NewYorkFed introduces the Net Global Supply Chain Pressure Index (Net GSPCI), which shows that global supply chain pressure is now lower than pre-pandemic levels.
In a January 2022 post, we first presented the Global Supply Chain Pressure Index (GSCPI), a parsimonious global measure designed to capture supply chain disruptions using a range of indicators. The spirit of our index was to isolate supply factors, such as shutdowns in response to the pandemic, that put pressure on the global supply chain. Here we describe an auxiliary index, the Net GSCPI, which differs from the GSCPI by not filtering out demand factors. This “net” index is meant to capture global supply chain stress from both the supply and demand sides. Currently, a mix of supply and demand forces is driving the easing of net pressure at the level of the global supply chain.
.@MichaelRStrain argues that if Biden’s reelection campaign follows the roadmap laid out in his State of the Union address his campaign will share “much, in both contour and tone, with Trump’s brand of economic nationalism.”
Biden’s re-election roadmap shares much, in both contour and tone, with Trump’s brand of economic nationalism. First, he advocated “buy American” policies for government contracts, championed domestic manufacturing workers, and criticized previous administrations for not doing enough on this front. Second, Biden championed the “record number of personnel working to secure the border, arresting 8,000 human smugglers and seizing over 23,000 pounds of fentanyl in just the last several months.” Third, he took a hawkish tone on China, arguing that the US is now “in the strongest position in decades to compete with” the Chinese. Lastly, Biden criticized Republicans for allegedly wanting to cut spending on Medicare and Social Security, thus positioning himself as the protector of those programs.
.@Dimi reports that senior Taiwanese security officials are in Washington this week holding secret talks with American officials. @ft
The White House will hold secret talks this week with Taiwan’s foreign minister Joseph Wu and national security adviser Wellington Koo as part of a special diplomatic dialogue intended to remain private to avoid sparking an angry reaction from China. The special channel meeting also comes just days after Michael Chase, the top Pentagon China official, traveled to Taiwan in what was only the second visit to the country by a senior US defense policymaker since 1979 when Washington switched its diplomatic recognition for China from Taipei to Beijing.
.@GregObenshain highlights Edward McQuarrie research showing that, after a full account of survivorship bias, stocks only modestly outperform bonds, with most of the outperformance concentrated in 1943-1982 (where stocks outperformed bonds by 8.4%/yr).
For stocks, McQuarrie made major revisions to the pre-1871 data by including more stocks, cap-weighting returns, and, most importantly, correcting significant survivorship bias in the original data. According to McQuarrie, “Banks failed during panics, turnpikes and canals succumbed to railroads, and struggling railroads went bust in the 1840s and 1850s to an extent not previously understood. In short, Jeremy Siegel’s sources had left out the bad parts, producing an overly rosy picture of antebellum stock returns.” For bonds, McQuarrie engages in an impressive forensic effort to build a new and more accurate data set of investment-grade bonds available to the public. The first observation is that [geometric real] stock returns are lower (5.9% versus Siegel’s 6.6%) and bond returns are higher (4.1% versus 3.6%) in the revised data.
Households earning under $50,000 a year expect to increase their spending by 8% next year, while households earning $100,000 a year are expecting their spending to increase by only 5%. @wsj
Early in the pandemic, several rounds of government relief allowed Americans in general, and lower-income Americans in particular, to build up their finances. Then the job market came roaring back and poorer workers found they could get paid a lot more than they did before. Many white-collar professionals haven’t seen their wages outstrip inflation, but people doing lower-paying work have, and the latter group’s wealth has risen more, too.
The median return on capital for an American firm in January 2023 is 7.4%, which is above the 5.6% cost of capital at the start of 2022, but below the 9.6% cost of capital at the start of 2023. @AswathDamodaran
The after-tax returns on capital, at least in the aggregate, are unimpressive, with the median return on capital of a US (global) firm being 7.44% (5.19%). There are a significant number of outliers in both directions, with about 10% of all firms having returns on capital that exceed 50% and 10% of all firms delivering returns that are worse than -50%. A combination of rising risk-free rates and surging risk premiums (equity risk premiums and default spreads) has conspired to push the cost of capital of both US and global companies more than any year in my recorded history (which goes back to 1960). A company generating a 7.44% return on capital (the median value at the start of 2023) in the US, would have comfortably cleared the 5.60% cost of capital that prevailed at the start of 2022, but not the 9.63% cost of capital at the start of 2023.
.@fuxianyi estimates that the Chinese population is currently 1.28 billion (vs 1.43 billion estimated by World Population Prospects).
While the United Nations’ 2022 World Population Prospects puts the Chinese population at 1.43 billion people, I estimate that it is now smaller than 1.28 billion. Even if China succeeds in increasing its fertility rate to 1.1 and prevents it from declining, its population will likely fall to 1.08 billion by 2050 and 440 million by 2100. The country’s share of the world’s population, which declined from 37% in 1820 to 22% in 1950-80, will fall to 11% in 2050 and 4% by 2100. The share of Chinese people aged 65 and older will rise from 14% in 2020 to 35% in 2050. Whereas five workers aged 20-64 supported every senior citizen aged 65 and older in 2020, the ratio will continue to decline to 2.4 workers in 2035 and 1.6 in 2050.
Credit Suisse forecasts that the Inflation Reduction Act could generate investments of $800B in public spending and another $900B of private spending generated by loans and grants by 2031. @FinancialTimes
Last year’s colossal Inflation Reduction Act [IRA] and its hundreds of billions of dollars in cleantech subsidies are designed to spur private-sector investment and accelerate the country’s decarbonization effort. All told, the IRA offers $369bn of tax credits, grants, loans, and subsidies, many of them guaranteed past 2030. The credits can be sold, too, allowing deep-pocketed investors with enough tax liability to buy the credit — a way to get more capital to developers, quickly. Credit Suisse thinks the public spending enabled by the IRA could eventually reach $800bn, and $1.7tn once the private spending generated by the loans and grants is included.
The US Geological Survey finds evidence of large stores of natural hydrogen, a source of carbon-free energy which might be enough to meet global demand for thousands of years. @erichand @ScienceMagazine
Contrary to conventional wisdom, large stores of natural hydrogen may exist all over the world, like oil and gas—but not in the same places. These researchers say water-rock reactions deep within the Earth continuously generate hydrogen, which percolates up through the crust and sometimes accumulates in underground traps. Critically, natural hydrogen may be not only clean, but also renewable. It takes millions of years for buried and compressed organic deposits to turn into oil and gas. By contrast, natural hydrogen is always being made afresh, when underground water reacts with iron minerals at elevated temperatures and pressures. There might be enough natural hydrogen to meet burgeoning global demand for thousands of years, according to a U.S. Geological Survey (USGS) model that was presented in October 2022 at a meeting of the Geological Society of America.
.@JosephPolitano notes that short term inflationary expectations are still largely consistent with the Fed’s target despite the Intercontinental Exchange’s inflation expectations index rising to almost 3% relative to 2.5% at the start of the year.
Market-based measures of 5-year inflation expectations are nearly square in the midrange of what would be consistent with the Fed’s target, and longer-run expectations actually remain below target. But the path to disinflation now looks longer and a bit bumpier than before. Revisions to seasonal adjustments have made recent inflation data look stronger than we thought, nominal income and spending growth remain elevated, and nearly all of the rate cuts previously expected for 2023 have been priced out by financial markets. Intercontinental Exchange’s inflation expectations index, derived from a variety of market data, now expects CPI inflation to end the year at nearly 3% instead of the 2.5% it expected in early January. Inflation may still not look permanent and structural, but it looks a bit more common and persistent.
The @sffed estimates that historically a 1pp increase in the federal funds rate reduced rent inflation by 3.2pp over two and a half years suggesting the current tightening will bring rent inflation down.
We estimate that, during the period from 1988 to 2019, a policy tightening equivalent to a 1 percentage point increase in the federal funds rate can reduce rent inflation—measured by 12-month percentage changes in the personal consumption expenditures (PCE) housing price index—by about 3.2 percentage points, but the full impact takes about 2½ years to materialize. Based on housing costs’ share in total PCE, this translates to a reduction in headline PCE inflation of about 0.5 percentage point over the same time horizon. Although average rents are slow to respond to policy changes, growth of asking rents on new leases has started to slow following recent monetary policy tightening. Our finding suggests that this tightening will gradually bring rent inflation down over time, thereby helping to reduce overall inflation.
The @USCBO now projects the 2023 deficit to be $1.4T (vs $1T in the 2022 forecast) and revises the ten-year deficit projection (2023-2032) to $18.8T, $3.1T higher than was projected in 2022.
In CBO’s projections, the deficit amounts to 5.3% of gross domestic product (GDP) in 2023. Deficits fluctuate over the next four years, averaging 5.8% of GDP. Starting in 2028, they grow steadily; the projected shortfall in 2033 is 6.9% of GDP—significantly larger than the 3.6% of GDP that deficits have averaged over the past 50 years. In CBO’s projections, net interest outlays increase by 1.2% of GDP from 2023 to 2033 and are a major contributor to the growth of total deficits. Primary deficits (that is, revenues minus noninterest outlays) increase by 0.4% of GDP over that period. Federal debt held by the public is projected to rise from 98% of GDP in 2023 to 118% in 2033. Over that period, the growth of interest costs and mandatory spending outpaces the growth of revenues and the economy, driving up debt. Those factors persist beyond 2033, pushing federal debt higher still, to 195% of GDP in 2053.
.@michaelxpettis argues that “rising income inequality pushes up the savings of the rich, and if this cannot be matched with higher investment or a lower trade deficit, it must be matched with either higher unemployment or higher debt.”
While there are many reasons for the surge in US debt over the past four decades, one of the main reasons has to do with the economic impact of the rise in US income inequality during this period. Rising debt was the nearly automatic consequence of rising income inequality. Because the rich save a larger share of their income, rising income inequality tends to force up ex-ante savings. But this increase in the savings of the rich must be balanced. Today what mainly drives investment are increases in expected demand, and rising income inequality normally reduces expected demand by reducing the share of income that goes to consumption (all income is either consumed or saved). If the higher savings of the rich cannot be balanced by higher investment or lower trade deficits, they must be balanced by lower savings elsewhere in the economy. Policymakers don't want to see higher unemployment, so either the Fed will respond by encouraging a surge in household borrowing, or Washington will respond by increasing the fiscal deficit.
The quantity of reserves held by banks on deposit at the Fed is 30% lower than the pandemic era peak of ~$4.3T as savers move money out of banks in favor of higher yielding assets. @M_C_Klein
The end of 2021 was also when the quantity of reserves held by banks on deposit at the Fed began to shrink from the pandemic-era peak of ~$4.3 trillion. As of this writing, reserves are about $1.2 trillion (30%) lower now than then. The underlying explanation for all this seems to be that U.S.-based banks are refusing to raise the rates they offer on deposits. As savers move cash from zero-yielding deposits to higher-yielding money funds, banks have to sell assets (mainly reserves, apparently) and/or find alternative sources of financing to replace the lost deposits. Since the start of 2022, U.S. commercial banks have lost almost $400 billion in deposits and replaced them with about $400 billion of “borrowings”.
Researchers at @NewYorkFed report that delinquencies rates for credit card borrowers under age 50 are now above the pre-pandemic level, and they suggest that this may be driven by higher prices and higher interest rates.
Total debt balances grew by $394 billion in the fourth quarter of 2022, the largest nominal quarterly increase in twenty years. As borrower-level delinquency rates approach or surpass pre-COVID norms, many look to the historical culprit: the labor market. However, employment and income gaps are not likely triggers for this recent trend. The Bureau of Labor Statistics reported that there were just under 6 million unemployed in the fourth quarter of 2022, roughly unchanged from the previous quarter and near a fifty-year low (even as the population and labor force have grown). Meanwhile, there were 18.3 million borrowers behind on a credit card at the end of 2022 compared to 15.8 million at the end of 2019. Instead, the evidence suggests that higher prices and higher interest rates are the more likely culprits driving delinquencies. While person-level delinquencies are high, we do not anticipate widespread stress for lender portfolios as balance weighted delinquencies remain at or below pre-pandemic levels. But, on a person-level, this financial distress is real, and the delinquent marks will impact their access to credit for years to come.
As American crude exports hit new records West Texas Intermediate “has become the most important marginal pricing barrel on the globe,” said Peter Keavey, CME Group’s global head of energy. @WSJecon
Crude exports hit a record of 5.1 million barrels a day the week that ended Oct. 21, according to the U.S. Energy Information Administration, a roughly 10-fold increase since President Barack Obama signed a bill opening the door to such shipments. West Texas Intermediate crude, or WTI, “has become the most important marginal pricing barrel on the globe,” said Peter Keavey, CME Group’s global head of energy and environmental products. “We have gone from a very domestically focused market into an international powerhouse,” he added.
.@davidfickling notes that Saudi Aramco drilling activity is 30% below pre-Covid levels and argues that the company’s reduced capex spend is consistent with an internal forecast of declining global oil consumption by 2030. @bloomberg
Saudi Aramco's operating cashflows in the 12 months through September came to $181 billion — more than was posted in the same period by Exxon Mobil, Shell and Chevron put together. Saudi Aramco could never do anything but paint a bright future for oil consumption — but its revealed preference is more cautious. If it invests too aggressively now, it risks flooding a market that is gradually turning its back on petroleum, driving down prices and the kingdom’s own oil revenues. Its warning that oil supply will fall to about 80 million daily barrels in 2030 without more capex is pretty much in line with the levels of demand that BP expects at that point, in a world which manages to keep global warming well below 2 degrees Celsius.
In an interview with the @ft, General Mark Milley noted one lesson from the Russo-Ukranian War is a “very high consumption rates of conventional munitions,” which may require increased spending to augment munitions stocks.
The Pentagon is reviewing its weapons stockpiles and may need to boost military spending after seeing how quickly ammunition has been used during the war in Ukraine. General Mark Milley said the return of 20th-century ground warfare tactics in Europe was forcing US planners to reconsider assumptions made in recent decades that had led military strategists to retool capabilities for counter-terrorism and irregular combat. “One of the lessons of this war is the very high consumption rates of conventional munitions, and we are re-examining our own stockages and our own plans to make sure that we got it right. We’re trying to do the analysis so that we can then estimate what we think the true requirement would be. And then we have to put that in the budget. Ammunition is very expensive.”
.@akorinek reports on how large language models (LLMs) such as ChatGPT could increase productivity in economics research by focusing human effort on posing questions and providing feedback and editing of drafts from LLMs.
LLMs have become useful research tools for tasks ranging from ideation, writing and background research to data analysis, coding, and mathematical derivations. In the short term, cognitive automation via LLMs will allow researchers to become significantly more productive. I expect that a growing number of researchers will incorporate LLMs into their workflow. This could help to increase the overall speed of progress in economics, although it risks leaving behind those who do not take advantage of LLMs. In the medium term, I anticipate that LLM-based assistants and tutors will become increasingly useful for generating the content that makes up research papers. Human researchers will focus on their comparative advantage by posing the questions, suggesting directions for obtaining answers, discriminating which parts of the produced content are useful, editing, and providing feedback, akin to an advisor.
.@johnauthers notes that net of food and energy, goods inflation is now under the Fed’s target, but services inflation remains high and disinflation in services has not yet started.
Disinflation is well under way for goods, but services inflation is looking obdurate. If we strip out food and energy, goods inflation surged and then plummeted. It’s now below the Fed target of 2%. Services inflation keeps rising. Goods inflation was indeed transitory, but that’s no longer what matters.
The @AtlantaFed Wage Growth Tracker shows that less than 50% of workers in the sample saw real wage growth relative to CPI during most of 2021 and 2022.
The Wage Growth Tracker in terms of median wage growth, has been below the average rate of inflation for most of 2021 and 2022. Prior to that period, the last time the real WGT had been negative was during 2011—a short period when CPI inflation reached 4 percent while the WGT was hovering around 2 percent. The fact that the real WGT is negative tells us that less than 50 percent of the people in the WGT sample had real wage increases, relative to the CPI.
.@EtraAlex reports that the OPEC+ current account surpluses likely peaked in Q3 of 2022.
We think the current account surpluses of other major OPEC+ members likely peaked in Q3/Q4 as well. Obviously, the outlook is heavily dependent on oil prices remaining in their current range around $80/bbl. For now, however, the terms of trade have swung back against energy exporters. The chart below, which is based on Exante Data’s Trade Balance Nowcast shows the projected changed in countries’ annualized current account balance based on current commodity prices. For the first time in 18 months, it is net commodity importers that are seeing their external positions improving. Whether this remains the case will depend on the extent of the recovery in Chinese demand following reopening, recession (or lack thereof) in major advanced economies, and of course the production decisions of OPEC+.
.@mjmauboussin notes the mean weighted average cost of capital for companies in the Russell 3000 at the end of 2022 was 8.8%, up from the 1985-2022 average of 7.9%.
The average weighted average cost of capital for companies in the Russell 3000, a good proxy for the overall U.S. equity market, from 1985 to 2022 was 7.9 percent, and the estimate at the end of 2022 was 8.8 percent. Financial executives rely heavily on the capital asset pricing model (CAPM) but the investment community, led by quantitative funds, uses six factors widely. These include beta (stocks of companies with high betas earn higher returns than those with low betas), size (stocks of companies with small capitalizations generate higher returns than stocks of companies with large capitalizations), value (stocks with low multiples outperform those with high multiples), momentum (stocks that have done well continue to do well in the short term), quality (companies of high quality provide higher returns than companies of low quality), and asset growth (companies with low asset growth outperform those with high asset growth). Fama and French now recommend a five-factor model that includes all of the factors above except for momentum.
.@caseybmulligan estimates that decarbonization in the US will result in recurring costs of up to $483Bper year, including $186B for auto fuel efficiency standards, and will lower real GDP by between 2-3% by 2035.
Advocates in several countries have promoted a “green recovery” from the pandemic, with an emphasis on measures to address climate objectives. We evaluate proposals for the United States and find that as stated, ambitious plans to further cut emissions from transportation and electricity will require more inputs to produce the same outputs, resulting in recurring costs of up to $483 billion per year. We forecast that real GDP and consumption will be 2-3 percent less in the long run if policies are implemented as stated, underscoring the opportunity costs of achieving green objectives when resources might be more efficiently deployed. We quantify the opportunity costs of four climate policies that are likely the most impactful among Biden’s proposals. The first would reduce fossil fuel consumption by light- and medium-duty vehicles by raising average fuel economy regulations, in an effort to erode the reliance of the transportation sector on petroleum and avoid associated emissions. The second would increase the share of electricity generation from renewable sources, displacing fossil generation in an effort to reduce emissions. The third would require additional renewable electricity generation to help satisfy the electrification of transport. A fourth, holding companies financially liable for historically emitted carbon and other pollutants, may help finance subsidies for renewables, but would impose additional opportunity costs, such as the impact of the implied higher uncertainty regarding future after-tax profits.
CPI was up 6.4% year-over-year in January. Core CPI at 5.6% year-over-year is running well above the Fed’s target. @WSJ
The consumer-price index, a closely watched measure of inflation, climbed 6.4% in January from a year earlier, down from 6.5% in December. That marked the seventh straight month of cooling in annual inflation since peaking at 9.1% in June, the highest reading since 1981. January’s inflation rate was still much higher than the 2.1% average in the three years before the pandemic. Core CPI, which excludes volatile energy and food prices, rose 5.6% from a year earlier, down from 5.7% in December. Many economists see the core measure as a better predictor of future inflation. Core prices rose 0.4% on the month in January, the same as in December. Core prices increased at a 4.6% annualized rate in the three months ended in January, reversing a trend of steady decline at the end of the year.
.@jasonfurman notes, “Most anyway you look at it underlying inflation is well above 3%. And underlying inflation may not even be coming down.”
A month ago, 3-month-annualized supercore inflation (i.e., ex food, energy, shelter and used cars) was 1.8%. Now with new seasonal adjustment and an additional month of data it is 3.7%. Time to update your inflation views. Most anyway you look at it underlying inflation is well above 3%. And underlying inflation may not even be coming down. And that is even before you start to think about the upward pressure that could be exerted from the extremely tight labor market. I have a hard time seeing how the implied market breakeven of 2% inflation this year makes any sense. Absent a recession inflation below 3% is unlikely. And even with [a recession,] inflation below 3% is far from guaranteed.
.@Brad_Setser suggests that, while China is running down its Treasury portfolio, it is adding to its holdings from government-sponsored agencies.
China is on track to buy around $75 billion of Agencies—likely accounting for nearly all central bank demand for Agencies and for about half of all foreign demand for Agencies. In some deep sense, the relationship between China, the housing Agencies (U.S. policy banks, in effect), and the Federal Reserve has come full circle. In late 2008 and 2009, China sold Agencies and the Fed stepped in and bought them. Then in 2022, the Fed stopped buying Agencies and now is letting its portfolio run down—and China is buying many of them. A small irony of financial history.
Bain, the global consultancy, estimates that manufacturing exports from India could more than double from $418bn in 2022 to more than $1tn in 2028. Bain expects electronics exports alone will grow at an annual rate of up to 40 percent. @ft
Apple is hitting stumbling blocks in its effort to increase production in India, as the US tech giant faces pressure to cut its manufacturing reliance on China. At a casings factory in Hosur run by Indian conglomerate Tata, one of Apple’s suppliers, just about one out of every two components coming off the production line is in good enough shape to eventually be sent to Foxconn, Apple’s assembly partner for building iPhones, according to a person familiar with the matter. This 50 per cent “yield” fares badly compared with Apple’s goal for zero defects. Two people that have worked in Apple’s offshore operations said the factory is on a plan towards improving proficiency but the road ahead is long.
The price of shipping goods from eastern China to the west coast of the United States on a short-term basis has returned to pre-COVID levels, down 85% from the March 2022 peak. @FT
The price of shipping goods on vital global trade routes has fallen 85% below its peak as the cost of living crisis hits consumer spending and pandemic-related supply chain disruption eases. In the US, spending on goods is now down 5.4% in real terms from the March 2021 peak. This month it cost $1,444 to ship a standard 40ft steel container from eastern China to the US west coast at short notice, according to shipping data specialist Xeneta, down from a peak of $9,682 in March last year. The widespread delays and queues, which hit ports at the height of the pandemic, have also dissipated.
Quantitative tightening shifts investors into financial assets that are more sensitive to the Federal Funds rate. @FedGuy12
The Fed cannot force banks to offer depositors higher rates, but QT side steps them and does the job by brute force. Every month $60b in deposits yielding around 0% are replaced with $60b in Treasuries yielding around 4%, and deposit rates are also slowly rising. The sizable yield upgrade being forced onto the market may indicate a more impactful QT. When rates were low, Treasuries and deposits were plausible substitutes. But rates are not low anymore.
According to a @CDCgov survey, 57% of female high school students in 2021 experienced persistent feelings of sadness or hopelessness up from 36% in 2011. Male students saw only an 8 percentage point increase.
As we saw in the 10 years prior to the COVID-19 pandemic, mental health among students overall continues to worsen, with more than 40% of high school students feeling so sad or hopeless that they could not engage in their regular activities for at least two weeks during the previous year—a possible indication of the experience of depressive symptoms. We also saw significant increases in the percentage of youth who seriously considered suicide, made a suicide plan, and attempted suicide. Across almost all measures of substance use, experiences of violence, mental health, and suicidal thoughts and behaviors, female students are faring more poorly than male students. These differences, and the rates at which female students are reporting such negative experiences, are stark.
.@TheEconomist argues that “The crunch caused by the war in Ukraine may, in fact, have fast-tracked the green transition by an astonishing five to ten years” via increased subsidies.
The crunch caused by the war in Ukraine may, in fact, have fast-tracked the green transition by an astonishing five to ten years. Last year global capital expenditure on wind and solar assets grew from $357bn to $490bn, surpassing investment in new and existing oil and gas wells for the first time. America’s Inflation Reduction Act earmarks $369bn of subsidies for green tech; the European Commission has unveiled a “Net-Zero Industry Act”, which will provide at least €250bn ($270bn) to clean-tech companies. China’s 14th five-year plan for energy, released in June, for the first time sets a goal for the share of renewables in power generation (of 33% by 2025). All told, the IEA expects global renewable-energy capacity to rise by 2,400gw between 2022 and 2027, an amount equivalent to China’s entire installed power capacity today. That is almost 30% higher than the agency’s forecast in 2021, released before the war. Renewables are set to account for 90% of the increase in global generation capacity over the period. Carbon-dioxide emissions look set to fall considerably faster than expected just 12 months ago. S&PGlobal, a data firm, thinks emissions from energy combustion will peak in 2027, at a level the world would still be producing in 2028 had the war not happened.
Analysts from the @NewYorkFed argue that while climate policies will assuredly impact the relative prices of clean and dirty energy, these policies will not cause a change in the general price level in the absence of price rigidities.
In terms of price developments, the outcome of these policies is to raise the price of dirty sectors such as oil and gas, and lower those of green sectors such as renewable energy, relative to those of the rest of the economy. But since these are adjustments in relative prices, not absolute ones, they can in principle take place with any level of overall inflation. In fact, if prices in the rest of the economy fall, and prices for green sectors fall even more, we could even have deflation for the economy as a whole and still achieve the required adjustment in relative prices.
.@GeneralTheorist notes that the prevalence of 30-year fixed mortgages makes the US less sensitive to policy rate changes than peer economies.
The average maturity of household debt differs across countries due to structural characteristics. This is reflected in the share of fixed and flexible rate mortgages, for one. But the average maturity of fixed-rate mortgages also differs—being only 5 years in the UK, for example, but about 30 years in the US. The US shows limited sensitivity to the policy rate through mortgage payments historically—though the marginal buyer could be impacted still, impacting house prices through this channel.
.@stlouisfed researchers examined components of the CPI since 2000 and found wide differences by sector: the overall basket increased 1.8X from January 2000 to December 2022, while education prices grew to 2.6X and communication prices fell to 0.8X.
The figure below shows the U.S. consumer price index (CPI) for various expenditure types, as computed by the Bureau of Labor Statistics. For each series, the units are chosen to equal $1 in January 2000 so that their evolution over time can be compared. The “All” line (solid red) increased from $1 in January 2000 to about $1.80 in December 2022. This means that a person needed about $1.80 in December 2022 to purchase the same basket as he or she could have purchased with $1 in January 2000. One extreme case is that of education-related expenditures (solid gray line): Their prices have multiplied by 2.6 since January 2000. Another extreme case is communication-related expenditures (solid blue line): Their prices have decreased from $1 to about $0.80.
.@paulkrugman argues that while he’s “cautious… about fully embracing the doctrine of immaculate disinflation, inflation does seem to be coming down as quickly and easily as it went up, and without too much economic pain.”
A lot of effort has been going into estimating how many angels can dance on the head of a pin — I mean, “true” underlying inflation. Everyone working with the data these days knows that traditional core has become problematic in the plague years. The numbers have been buffeted by new sources of volatility, such as used car prices; the official measure of shelter prices, which mostly reflect rents but with a long lag, has been distorted by a huge rent surge in 2021-22 that ended months ago but is still filtering into the published numbers. The bigger picture is the speed with which inflation, however one imperfectly defines it, first soared, then plunged. My point is that we obviously aren’t rerunning the ’70s. While I’m cautious, on the other hand, about fully embracing the doctrine of immaculate disinflation, inflation does seem to be coming down as quickly and easily as it went up, and without too much economic pain.
.@JonHaidt cites the percent of undergraduates diagnosed with a mental illness and argues that an epidemic of anxiety and depression started impacting young Americans in 2012.
There was no sign of a problem before 2010, and the epidemic is well underway by 2015. You can also see that the rate of depression is much higher in girls, as is the absolute increase (since 2010 an additional 18% of girls suffered from depression in 2021, compared to an additional 6% of boys), however, the relative increase is similar in both sexes: around 150%. The rate had more than doubled before the covid epidemic. The 2020 data were collected in early 2020, just before covid restrictions, and the 2021 data were collected a year later before vaccines were widely available. You can see that covid accelerated the rise in depression in that last year, but it was already rising really fast.
.@M_C_Klein argues about $300B may have left China in the past two years that isn’t reflected in the balance of payments statistics, suggesting capital flight possibly to the UK.
One possibility is that the “net errors and omissions” in the balance of payments have been understated. These unexplained financial flows, generally corresponding to capital flight and other surreptitious efforts to get money out of the country, have been relatively low in recent years, but that could be an illusion caused by SAFE’s reporting. Official NEO estimates only go through 2022Q3, but the picture is illustrative. It is not easy to find corresponding unexplained financial flows in other countries that would line up with these numbers. But there is one intriguing case: the U.K. has experienced a surge in net errors and omissions in 2022.
.@robinsonmeyer argues that Biden’s decarbonization based industrial policy faces three significant challenges: spending money efficiently, coordinating across multiple government agencies, and making policy adjustments over time.
The U.S. financial system persistently struggles to fund projects that take a long time to turn a profit and that can expect to have only modest returns. Unfortunately, the biggest and most important physical infrastructure—factories, transmission lines—often fall under that category. Second, the government may lack the ability to coordinate its own actions. Late last year, the Biden administration declined to help reopen a “green” aluminum factory in Ferndale, Wash., that was exactly the kind of low-carbon industry it wants to champion. Never mind the right hand not knowing what the left hand is doing: The right hand couldn’t get the left hand to plug the cord in. Finally, the government may not understand enough about the companies it’s trying to help. In Taiwan and South Korea, industrial-policy agencies... constantly gather information from the private sector and use it to adjust goals and policies over time. The I.R.A.’s main incentives are tax credits, which are hard to repeal once they’re in place and hard to fix if they’re not working. They are an unusually mindless way to incentivize companies to change their behavior.
The Taiwanese military has tracked dozens of Chinese military balloon flights in its airspace in recent years likely used for optimizing “radar and missile systems.” @FinancialTimes
Taiwan has observed dozens of Chinese military balloon flights in its airspace in recent years. “Some of the balloons are fielded by the PLA Air Force and some by the Rocket Force,” said one Taiwanese official, adding that military aircraft were regularly sent up to observe the balloons. According to people briefed on the matter in Taiwan and one US ally, the balloons have been collecting atmospheric data for use in radar and missile systems.
Evidence from Finland suggests that expansion of a home care allowance decreases maternal employment in both the short and long term and results in lower educational attainment and increased youth crime for impacted children. @nberpubs
We study the impacts of a policy designed to reward mothers who stay at home rather than join the labor force when their children are under age three. We use regional and over time variation to show that the Finnish Home Care Allowance (HCA) decreases maternal employment in both the short and long term. The effects are large enough for the existence of home care benefit system to explain the higher short-term child penalty in Finland than comparable nations. Home care benefits also negatively affect the early childhood cognitive test results of children, decrease the likelihood of choosing academic high school, and increase youth crimes. [Our analysis shows a] dynamic DiD for two key long term outcomes, enrolling to academic high school (instead of vocational high school or dropping out completely) at ages 15 to 17 years old, and committing a youth crime between ages 15 to 18 years old. The two outcomes occur at similar ages, although those who respond in the margin may be very different individuals. The pre-trend for high school enrollment is relatively flat, but there are some deviations from zero for youth crime, although not statistically significant. After an increase in supplement when one year old, enrolling to academic high school declines and committing a youth crime increases. There is some decline in the effect of enrolling to academic high school three years after the supplement change which we cannot fully explain but may be due to consequent change in supplement policies. For youth crime there is a clear upward shift at year 0; the noise in pre-trends likely reflects the much smaller incidence of this outcome, with a baseline youth crime rate of only 4%. We confirm that the mechanism of action is changing work/home care arrangements by studying a day care fee reform that had the opposite effect of raising incentives to work – with corresponding opposite effects on mothers and children compared to HCA. Our findings suggest that shifting childcare from the home to the market increases labor force participation and improves child outcomes.
Treasury’s spending on the interest on the debt is up 41% year-over-year (to $198 billion from $140 billion) for the first four months of the fiscal year. CBO will update their estimate of net interest on the debt as a percentage of U.S. GDP next week. @wsj
The Treasury’s spending on interest on the debt is up 41% to $198 billion in the first four months of this fiscal year compared with $140 billion in the same period last year, according to a Congressional Budget Office estimate of spending through January. In projections last year, the CBO said that spending on net interest on the debt as a percentage of U.S. gross domestic product would roughly double from 1.6% in 2022 to 3.3% in 2032. Those estimates, which the nonpartisan agency will update next week, assumed that the Fed would raise the federal-funds rate to 1.9% by the end of 2022 and reach 2.6% by the end of 2023.
.@B_Eichengreen argues that projected debt levels are sustainable, noting that CBO’s real GDP growth rate of 1.7% over the next ten years exceeds their 1.2% real interest rate forecast (3.6% ten-year bond rate less 2.4% inflation forecast).
Interest costs are not exploding. To be sure, inflation remains elevated, which pushes up short-term interest rates. But, because the US Treasury issues long-term bonds, debt-servicing costs depend on long-term rates, which have risen by less. Currently, the interest rate on ten-year government bonds is 3.6%, while the CBO’s inflation forecast for that horizon is 2.4%, so the real (inflation-adjusted) interest rate relevant for calculating the interest burden is still only 1.2%. What matters is the difference between the real interest rate and the growth rate of the economy. If the real interest rate is lower than the growth rate of inflation-adjusted GDP, then the debt ratio can fall even when the government runs budget deficits. The CBO’s forecast for growth over the next ten years is 1.7% – higher than the real interest rate. This is not a license to engage in unlimited spending. But it implies that, given a debt-to-GDP ratio of 100%, the federal government can run deficits of 0.5% of GDP (the difference between 1.7% and 1.2%) over and above its interest payments without causing the debt ratio to rise.
Since 2011 Google has generated $300B in cash, but their dominant position in search under threat as Microsoft announced plans to supplement Bing search results with an AI-generated side box summarizing pertinent information. @TheEconomist
The revenue of Google’s parent company, now called Alphabet, has grown at an average annual rate of over 20% since 2011. In that period, it has generated more than $300bn in cash after operating expenses. On February 7th Microsoft, which recently announced an investment of $10bn in OpenAI, showed off how it plans to go after those profits. Results from the software giant’s search engine, Bing, will now be accompanied by an ai-generated side box summarizing pertinent information. Alphabet this week unveiled its own chatbot, Bard, and has reportedly invested $300m in Anthropic, a generative-ai startup. On February 8th, while presenting some non-chatty ai search features, it confirmed that Bard will be integrated into search within weeks. Investors were unimpressed; Alphabet’s share price tumbled by 8% after the announcement. Google’s share of revenue from search advertising in America will fall to 54% this year, down from 67% in 2016, according to eMarketer, a research firm.
.@pmarca argues there’s a “massive supply-demand imbalance between the amount of capital that needs to generate a return and the actual number of viable investable projects and great entrepreneurs to actually create those projects.”
Andreessen: “The nature of the modern economy is we have what Ben Bernanke called the global savings glut. We've just got this massive oversupply of capital that was generated by the last few hundred years of economic activity, and there's only one Elon. There's just this massive supply-demand imbalance between the amount of capital that needs to generate a return and the actual number of viable investable projects and great entrepreneurs to actually create those projects We certainly don’t have enough flying car startups, we also don't have enough art startups. We need more of all of this. I don't think there's a trade-off, we need more of all of it.”
China has withdrawn from a new cable project linking Asia to Europe after an American firm was selected to lay the Sea-Me-We 6 pipeline. @ft
China has cut its participation in an internet cable project to link Asia with Europe. Two of China’s biggest telecoms groups, China Telecom and China Mobile, withdrew their combined investment of roughly 20 per cent from the subsea cable project last year after a US company was selected to build the line over Hengtong Marine, the country’s biggest provider in the sector. Their exit from the Sea-Me-We 6 pipeline — which is estimated to cost around $500mn to lay 19,200km of cables connecting south-east Asia to western Europe. Since 2020, the US has denied permission for several subsea telecoms cables that involved Chinese companies or directly connected the US to mainland China or Hong Kong, citing national security concerns.
.@ernietedeschi builds a new measure of average hourly earnings (AHE) gains in non-housing services (NHS) sectors. The measure suggests that wage growth is coming down rapidly, contributing to declining overall inflation.
This blog post presents a wage measure that Council of Economic Advisors has constructed to be specific to NHS industries, called “NHS AHE.” To summarize, NHS AHE [non-housing services average hourly earnings] is a weighted average of the hourly wage in 175 detailed nonfarm payroll sectors from the monthly Establishment Survey, weighted by each sector’s share of 2019 labor costs in final demand consumption of services excluding food, energy, and housing. Because the weights are based on NHS labor costs, the index better reflects the dynamics of wages serving as inputs into NHS production than commonly-cited wage measures like AHE and ECI. And because the weights are fixed to 2019 levels, the index is less sensitive to compositional shifts than unadjusted average measures like AHE. Figure 2 plots the yearly percent change in the NHS wage series for production and nonsupervisory workers and NHS inflation.
.@greg_ip reports on @ernietedeschi new wage tracking measure which finds “supercore” wage growth has declined from 9.7%, annualized in the three months ended October 2021 to 4% in January 2023.
CEA economists constructed a wage series tracking only wages that go into “supercore” prices. By this measure, supercore wage growth for nonmanagement workers has ebbed significantly in the past year, from 8% on a 12-month basis last March to 5.2% in January, the CEA calculates. That is much steeper than the drop in wage growth for all private-sector workers from 5.9% to 4.4%, in the same period, and for nonmanagement workers, from 7% to 5.1%. The drop is even sharper looking at shorter periods. According to the CEA’s measure, such wages were growing at 9.7%, annualized, in the three months ended October 2021. By January, growth had slowed to 4%, below that for all private-sector workers, at 4.6%, and private production workers, at 4.4%, in the same period. (
The 13M Americans working in the manufacturing sector in January surpassed the peak set during the previous business cycle in February of 2020, a first since the 1970s. This growth has been accompanied by a decline in real output per hour worked. @foxjust
For the first time since the late 1970s, US employment in manufacturing has surpassed the peak set during the previous business cycle. This happened in May 2022, according to the revised 2022 payroll jobs data released last week by the US Bureau of Labor Statistics. As of January 2023, the sector employed just short of 13 million Americans on a seasonally adjusted basis, the biggest number since November 2008. The huge manufacturing productivity gains of the 1990s and 2000s appear to have given way to a situation where producing more stuff actually requires hiring more workers.
Between October ‘22 and February ‘23 over 100M chickens have died or been culled, more than 3X the rate in the previous season. The virus has spread to minks, sparking questions about potential transmission to humans. @bloomberg
Just over 100 million poultry died or were culled due to avian influenza between the start of October and Feb. 3, according to the World Organization for Animal Health. That’s more than triple the number in the same period in the previous season, which ended with record losses from the disease. There have also recently been signs of the virus adapting to different animal species, including minks in Spain — sparking questions of whether the outbreak could spread to humans.
The share of single men who are looking for a relationship and/or casual dates has declined from 61% in 2019 to 50% in 2022. 32% of American men and 28% of women were single in 2022. @pewresearch
The percentage of single Americans who are looking for a relationship or casual dates is lower than in 2019, especially among men. Some 42% of single Americans say they’re looking for a committed romantic relationship and/or casual dates, down from 49% in 2019 (but similar to the proportion found in the Center’s February 2022 survey). This drop is largely driven by single men, who are now 11 percentage points less likely than in 2019 to say they are looking for a committed relationship and/or casual dates (50% in July 2022, down from 61% in 2019). During the same time frame, there has been no significant change in the share of single women who are looking for a relationship or casual dates: 35% said this in 2022, compared with 38% in 2019.
A new @NBERpubs study finds that in 2020 ~ 1/3 of children between the ages of 18-34 lived with their parents, but found no clear evidence that this impacts parents’ current or future labor market choices, or their wealth, health, or life satisfaction.
The share of U.S. adult children living with their parents has increased since the 1960s. Figure 1 shows that in 2020, approximately one-third of children between ages 18 and 34 lived with their parents, with men and 18-24 year-olds, respectively, more likely to co-reside than women and 25-34 year-olds. We examine the relationship between adult children returning home and parental retirement outcomes using data from the Health and Retirement Study (HRS), a nationally representative panel of individuals over the age of 50 and their spouses; the HRS also tracks children of respondents. Our child-level analysis suggests that a boomerang event is likely associated with negative shocks to a child’s marriage, income, and employment. The event study analysis suggests that many of these shocks are temporary, and correspondingly most boomerang events are transitory. At the parent level, we find no clear, statistically significant association between boomerang children and parental health, wealth, probability of working, hours worked, or well-being. However, we do find an increase in the self-reported probability of working full-time after age 65. That increase is concentrated among men, those under the age of 62, and those in the top half of the initial wealth distribution. Overall, our results provide evidence that parents may delay their anticipated retirement when children return home.
According to @sffed, the pace of the current tightening cycle has been unprecedented, and the magnitude of the tightening cycle ranks second in the postwar era (as proxied by the increase in the 10-year Treasury rate), with possibly more to run.
The current increase in the 10-year Treasury rate is the second largest increase of all tightening cycles, shown by the blue bars. Moreover, the green bars show that the speed of this increase has been unprecedented. Current increases in the federal funds rate are expected to reverse a historically large negative real funds rate gap at the beginning of the cycle. We compute the real funds rate gap by subtracting the inflation rate and the real neutral rate from the nominal federal funds rate. The smaller or more negative the real funds rate gap is, the more monetary accommodation is in the economy. Successfully closing the real funds rate gap will hinge on substantially reducing the inflation rate.
.@JosephPolitano argues that financial conditions might be loosening, citing the decline in the Chicago Fed’s National Financial Conditions Index since October 2022.
Over the last four months, the Chicago Fed’s National Financial Conditions Index has eased considerably from its very tight readings in early October. While there have been some improvements in credit conditions, thanks in part to improvements in mortgage rates and bond spreads—the bigger contributor has been the improvements in risk sentiment. Longer-term real interest rates have fallen slowly over the last couple of months, and are now only a bit above early-2019 levels. The real yield curve is still very flat, with 5-year real yields moving alongside 30-year real yields, indicating weak growth expectations and relatively tight short-run monetary policy, but the fact that real rates are declining alongside corporate bond spreads suggests a partial easing of financial conditions.
.@M_C_Klein notes that China has been pursuing successful import substitution for some time. As of 2018 (the last year with comprehensive data), China could domestically produce 81% of critical manufactured goods, up from 67% in 2004.
As of 2018—the last year for which we have comprehensive data—Chinese production of critical manufactured goods is now sufficient to cover more than 81% of its domestic demand, up from 67% in 2004. The Chinese shift towards self-sufficiency since 2004 was unmatched by any of the other major economies, developing or advanced. China’s transition was achieved via forced technology transfer (including theft), massive subsidies for domestic producers, and a range of (often hidden) restrictions on imports. Combined, China’s investment slowdown and its push for self-sufficiency have driven down total trade (exports plus imports) from nearly 65% of Chinese GDP in 2007 to less than 40% as of 2022.
Taiwan is testing a domestically developed cruise missile with the capacity to hit targets in mainland China. @SCMPNews
Taiwan’s top weapons builder has test-fired a missile believed to be capable of hitting mainland China, as cross-strait tensions show no sign of abating. The surface-to-surface missile is an extended-range version of the Hsiung Feng IIE, which is able to hit targets up to 1,200km (746 miles) – far enough to reach major mainland cities such as Qingdao on the east coast or Wuhan in the center.
.@DrDaronAcemoglu finds that negative externalities and excessive focus on high-margin technologies can distort the path of innovation and reduce welfare gains by 10-50%. @nberpubs
In the presence of markup differences, externalities and other social considerations, the equilibrium direction of innovation can be systematically distorted. This paper builds a simple model of endogenous technology, which generalizes existing comparative static results and characterizes potential distortions in the direction of innovation. From a positive perspective, the framework links the direction of technology to relevant market sizes (supplies of factors of production working with these technologies and consumer demand), the price of other inputs into the production process (for example, natural resources used in different sectors), markups and regulations. I show that empirical findings across a number of different areas are consistent with this framework's predictions and I use data from several studies to estimate its key parameters. Combining these numbers with rough estimates of differential externalities and markups, I provide suggestive evidence that equilibrium distortions in the direction of technology can be substantial in the context of industrial automation, health care, and energy, and correcting these distortions could have sizable welfare benefits.
The US trade deficit hit a record $948.1B in 2022 as a strong dollar hurt American exporters and encouraged Americans to buy more imported goods. @WSJ
The U.S. trade deficit for all of 2022 rose 12.2% to $948.1 billion, the widest gap on record, as the U.S. continued to depend heavily on imports from other countries to meet domestic demand. Exports also rose last year as global demand for U.S.-made products picked up. A U.S. dollar rally last year drove up the cost of U.S. goods and helped widen the annual deficit. A wider trade deficit is consistent with a U.S. economy growing faster than other parts of the world, as people with higher incomes in the U.S. buy more imported goods.
.@Brad_Setser notes while measured imports have shifted towards other Asian trading partners, US trade with China is “basically unchanged (in aggregate) despite the pandemic and trade war.”
The persistence of the pandemic distortions makes assessing broad structural shifts - notably with respect to China - difficult. There is no doubt that measured imported (on the US side) have shifted toward other Asian trade partners. There is no doubt that the increase in imports from Asia (setting China aside) is actually pretty broad based. Vietnam has outperformed but it is far from alone. On the other hand I don‘t think anyone would have forecast back in early 2019 that the intensification of Trump‘s tariffs and a global pandemic would leave US trade with China basically unchanged (in aggregate). So while there is no doubt that the post-pandemic surge in US goods demand (which is now fading) led to a large increase US demand for a host of imports, I at least am not convinced that there has (yet) been a significant shift away from the Chinese supply chain. And I do expect the traditional drives of US trade -- including the (still) strong dollar -- to reassert themselves in 2023.
Evidence from Norway shows internet expansion reduced friction associated with finding a job and reduced the steady state unemployment rate by 14%. @AndreasKostol @nberpubs
We found that the internet led more firms to recruit online. It further caused a 9% decline in the duration of posted vacancies and 13% fewer unsuccessful hiring attempts. Next, we showed that the expansion increased job finding rates by 2.4% and starting wages by 6% among the unemployed. However, we found no evidence of changes in job-to-job mobility or wage growth for the employed. Through the lens of the calibrated model, we found that search technology is the primary mechanism behind the quasi-experimental evidence. Our calculations indicated that the broadband internet expansion may have caused a 14% decline in the steady-state unemployment rate. Our paper sheds light on two recent macroeconomic trends. First, the falling rates of worker mobility in the US have fueled a concern about the causes and consequences of declining labor market mobility. Our results suggest that online job search and recruitment may have improved match quality by providing more information about potential jobs and better tools to screen potential candidates. In turn, this improvement may have reduced the need to switch employers in search for a better match – consistent with a more optimistic view of recent trends in job mobility. Second, our evidence helps explain the inward shift in the Beveridge curve observed in Norway and in other countries from the 1990s to the early 2000s. Our evidence suggests that without the near-universal internet adoption rates, the unemployment rate after the Great Recession would have reached even higher levels.
Goldman Sachs estimates that American’s monthly savings rate will rise to 4.5% by end of year from 2022’s 3.3%. Wage gains and declining inflation will reduce pressure to tap savings to maintain real consumption levels @wsj
Early in the pandemic, Americans were socking away money at unprecedented rates. In 2020, they collectively saved 16.8% of their disposable income, well above the 8.8% they saved in 2019. But in 2022, the saving rate fell to 3.3%. Americans have spent down about 35% of the extra savings they accumulated during the pandemic as of mid-January, according to an estimate from Goldman Sachs. By the end of the year, the company forecasts that they will have exhausted roughly 65% of that money. “At the exact same moment you lost the government transfer payments, you got hit with very high inflation, which made your real spending power lower,” said David Mericle, Goldman Sachs’s chief U.S. economist.“ You shouldn’t need to tap your wealth as much, hopefully, in 2023 as you needed to in 2022 in order to avoid a big decline in your real consumption level,” he said. His team at Goldman Sachs estimates that the monthly saving rate will rise modestly by the end of the year, to about 4.5%.
.@martinwolf_ notes that M2 is now 2.5% under its March 2022 peak which suggests inflation could soon fall – but notes by most measures core inflation remains “sticky” and suggests a “monetary overhang.”
Measures of US broad money are now actually falling. In December 2022, for example, US M2 was 2.5 per cent below its peak in March. Data on broader measures provided by the Center for Financial Stability show the same picture. This suggests that inflation might fall faster than expected. It is even possible that if the aim is only to stabilize inflation rather than make the price level fall back, policy is too tight. Yet there still seems to be a monetary overhang. Inflation might also prove stickier downwards than hoped. Whatever happens, do not repeat what happened in the 1970s: get inflation down and then keep it down.
An analysis of obituaries of elite Chinese scientists and engineers finds that during December 2022 and January 2023 they were dying at 4x the rate of the previous four years, giving a glimpse into the scale of Chinese covid surge. @nytimes
We examined the obituaries published over the past four years by the state-backed Chinese Academy of Engineering and the Chinese Academy of Sciences. The academies’ members, who are drawn from research institutions across the country, help shape national policy and steer research priorities. The engineering academy currently has about 900 members, and the science academy about 800, according to their websites. The obituaries did not specify the scholars’ causes of death beyond “illness,” and the academies did not answer requests for more specifics. But the spike late last year coincided with the coronavirus’s rapid spread across the country. From 2019 to 2021, the Harbin Institute of Technology, one of the top engineering schools in the world, had published between one and three obituaries for professors and staff members in those months. Between December and last month, it announced 29 deaths.
Evidence from Sweden finds a strong relationship between cognitive ability and earnings up to annual earnings of ~$64k. There are no significant differences among the top three income percentiles. @ECSR_Soc
The figure above shows cognitive ability levels expressed with annual wage on the horizontal axis. Cognitive ability plateaus at high levels of occupational success. Precisely in the part of the wage distribution where cognitive ability can make the biggest difference, its right tail, cognitive ability ceases to play any role. Cognitive ability plateaus around €60,000 [$64,200] at under a standard deviation above the mean. There are no significant differences in ability between the three top income percentiles, despite there being 594 cases in each percentile bin and despite those in the 100th percentile earning more than double the wage of those in the 98th percentile. Past a certain wage threshold, having a higher wage is no longer telling of cognitive ability. The average score individuals in the top percentile achieved as adolescents on the cognitive-ability test is 7.15 ± 0.11 (95% confidence interval). On a stanine scale this amounts to less than a standard deviation (+0.86) above average.
.@generaltheorist notes that during the pandemic for every additional $1T in currency and deposits, American households saw $6T in non-monetary wealth driven by equities and real estate.
Household net worth expanded by USD34 trillion from end-2019 through end-2021, an increase of >150% of end-2019 GDP in only 2 years. This wealth increase was mainly due to the increase in financial and non-financial assets (housing). The chart below shows the change in the value of outstanding assets held by households for select items from end-2019. Currency and deposits held by households began the sharp increase in the first quarter of 2020, during the initial lockdowns, and increased by about USD4½ trillion in total. The increase in equity and real estate assets, mainly due to valuation adjustments, followed—and in value terms was a much larger influence on household net worth. At its peak, equity and investment fund shares, which fell in value by USD6 trillion by end-March 2020, increased nearly USD18 trillion by end-2021 on end-2019, or USD24 trillion peak-to-trough. The declines experienced last year during the interest rate normalization have weighed on such wealth since, but the levels remained above pre-pandemic norms. Real estate assets continued to increase in value still in 2022Q3, though at a diminishing pace as housing feels the strain of higher rates. Still, nearly USD13 trillion was added to household wealth through real estate since end-2019. Put another way, at its peak, every additional USD1 trillion in monetary wealth during the pandemic came to be reflected in roughly USD6 trillion in non-monetary wealth, mainly equities and housing.
.@TheEconomist reports that between mid-2020-2022 America’s lower earners saw cumulative inflation of 13.5% whereas middle earners saw 15.5%. The difference was largely driven by car prices and fuel expenditures. @XJaravel
Middle-income earners, not the poorest, appear to have borne the brunt of America’s current bout of inflation. Research by Xavier Jaravel of the London School of Economics has yielded a distinctive shape—an inverted-U curve—that illustrates the distributional effects of inflation in America from mid-2020 to mid-2022. For the lowest earners, inflation was about 13.5%. For those in the middle of the spectrum, inflation was closer to 15.5%. The wealthiest faced inflation of about 14%. Since 2020 nominal wages have increased at an average annual rate of about 4.2% for Americans as a whole. The lowest-earning quartile, however, has seen the biggest gains, with their wages up by 5.3% on average during the same period.
Michael Spence and Belinda Azenui note that labor productivity between the tradable and non-tradable sectors started to diverge in 1998, and by 2021 per-employee value-added in tradable sectors was nearly double the non-tradable sectors. @ProSyn
Value-added per employee is a measure of labor productivity. In America’s tradable sector, it has risen steadily over the last two decades in both manufacturing and services, reaching roughly $185,000 (in chained 2012 dollars) in 2021. Over the same period, productivity growth in this sector averaged nearly 3%. The non-tradable economy [net government] is just 0.57% per annum over the last 20 years. This reflects below-average productivity levels and, in most cases, low-to-moderate productivity growth in the large-employment sectors. There was not always a large gap between the tradable and non-tradable sectors. On the contrary, as the chart shows, labor productivity was about $100,000 across the economy in 1998. But by 2021, after more than two decades of steady divergence, per-employee value-added in the tradable sector was nearly double the level in the non-tradable sector.
.@zeynep argues that given the increasing spread of the H5N1 bird flu, which has a 56% mortality rate, the United States and WHO should expand their influenza surveillance networks.
Bird flu — known more formally as avian influenza — has long hovered on the horizons of scientists’ fears. This pathogen, especially the H5N1 strain, hasn’t often infected humans, but when it has, 56 percent of those known to have contracted it have died. Its inability to spread easily, if at all, from one person to another has kept it from causing a pandemic. But things are changing. The virus, which has long caused outbreaks among poultry, is infecting more and more migratory birds, allowing it to spread more widely, even to various mammals, raising the risk that a new variant could spread to and among people.
.@Dimi reports that one purpose of the Chinese balloon campaign is collecting data to improve the accuracy of their over-the-horizon radar systems that are used for long-range targeting for missile, air, and naval operations.
In February last year, four groups of high-altitude balloons were detected over northern Taiwan, home to most of the country’s population and some of its most important air defense sites. The same month, the US Air Force scrambled fighters to intercept an unmanned balloon off Kauai, a Hawaiian island that has a key missile-testing range. The PLA’s balloons have been doing much more than spy on whatever country they are flying over. According to a military official from another Asian country, one focus area in the Chinese military’s balloon flights in recent years is to collect data that can enhance the accuracy of over-the-horizon and other radar systems used for targeting in wartime. Military analysts said data points such as atmospheric density would help the PLA develop software tools known as advanced refractive effects prediction systems, which are critical for advanced radars that aid missile, air, and naval operations.
CIA Director William Burns notes that Xi ordered the Chinese military to be ready to conduct an invasion of Taiwan by 2027, “as a matter of intelligence.” @Reuters
U.S. Central Intelligence Agency Director William Burns said that Chinese President Xi Jinping's ambitions toward Taiwan should not be underestimated, despite him likely being sobered by the performance of Russia's military in Ukraine. Burns said that the United States knew "as a matter of intelligence" that Xi had ordered his military to be ready to conduct an invasion of self-governed Taiwan by 2027. "Now, that does not mean that he's decided to conduct an invasion in 2027, or any other year, but it's a reminder of the seriousness of his focus and his ambition," Burns told an event at Georgetown University in Washington.
.@KaplAnalysis examines large US companies purchased in LBO transactions and finds that 71% of the companies hired new CEOs, and more than 75% of these were external hires. He concludes that “firm-specific human capital is relatively unimportant.”
We study the market for CEOs among larger U.S. companies (enterprise value greater than $1 billion) purchased by private equity firms between 2010 and 2016. More than 70% of those companies hire new CEOs. Of these, more than 75% are external hires with 67% being complete outsiders. These results are strikingly different from studies that look at public companies, who find that 72% of new CEOs are internal promotions while 80% are internal promotions, former executives, or board members. The most recent experience of 70% of the outside CEOs was at a public company with 32% at an S&P 500 company. Almost 50% of the external hires have some previous experience at an S&P 500 company. The median and average buyout in our sample earned roughly 2.5 times on its equity investment. This is interesting given that the public-to-private deals in our sample were not particularly poor performers before they were bought. Because private equity investors are paid strongly for performance (through their carried interest or profit share of 20% on most funds), private equity investors have strong incentives not to provide rents to their CEOs. The pay of CEOs in private-equity funded companies, therefore, should be relatively rent-free. Using the performance of the buyouts and survey evidence on buyout equity incentives, we estimate the compensation buyout CEOs earn and find that the magnitude is much higher than that for similar-sized public companies and comparable to or slightly lower than that of S&P 500 CEOs. The results that top executives move from public companies to private equity funded companies at competitive compensation levels suggest that the broader market for CEOs is quite active and that, at least for private equity-funded companies, firm-specific human capital is relatively unimportant.
The unemployment rate fell to a 53-year low at 3.4%, but nominal average hourly earnings slowed to 4.4% year-over-year down from 4.8% in December. @WSJ
U.S. hiring accelerated sharply to 517,000 jobs in January and the unemployment fell to 3.4%, the lowest rate in more than 53 years, the Labor Department said Friday. Average hourly earnings grew 4.4% in January from a year earlier, down from a revised 4.8% in December, the Labor Department said Friday. Wage increases have been gradually slowing, suggesting employers are finding it easier to recruit new workers.
.@M_C_Klein notes that PCE is running at ~4.5% a year vs. 2% before the pandemic, and suggests that the Fed needs to do more if it is to reach its 2% target. There has been a reversal of temporary factors,” but services PCE inflation remains stubborn.
If excessive price increases were “transitory” on the way up, then they are also “transitory” on the way down. Monthly data suggest that the price impact of normalization in the production, distribution, and demand for manufactured goods may already have peaked. Fed officials have repeatedly said that they are now focusing on PCE services prices excluding energy and housing. This is a relatively broad swathe of the economy that should be relatively—although not completely—shielded from idiosyncratic forces and should therefore represent underlying inflationary conditions.
.@JohnHCochrane argues that our existing tax system of “high statutory rates with a Swiss cheese of exemptions, immense cost, unfairness and distortion” should be replaced; he thinks a consumption tax would be more transparent and efficient.
Our income and estate tax system is broken. It has high statutory rates with a Swiss cheese of exemptions, immense cost, unfairness, and distortion. A consumption tax, with none of the absurd complexity of our current taxes, is the answer. It funds the government with the least economic distortion. A consumption tax need not be regressive. It’s easy enough to exempt the first few thousand dollars of consumption or add to the rebate. Taxes overall must finance what the government spends. Collecting it in one tax rather than lots of smaller taxes doesn’t change the overall rate. It’s better for voters to see how much the government takes.
US Secretary of State Antony Blinken has canceled a weekend visit to China after a Chinese spy balloon violated American airspace. @Dimi
US secretary of state Antony Blinken has canceled his weekend visit to China after the Pentagon said it discovered a Chinese spy balloon that has been flying over sensitive nuclear missile sites in the western state of Montana. China rejected suggestions that it was a spy balloon, saying it is rather a “civilian airship used for research, mainly meteorological, purposes” that deviated from its planned course because of winds and “limited self-steering capability” “The Chinese side regrets the unintended entry of the airship into US airspace due to force majeure,” it said in an unusual statement. American officials said China had previously flown spy balloons over the country but that this one spent more time overhead. Canada separately said it was monitoring a “potential second incident” without providing any details. Canada’s foreign ministry said it had summoned China’s ambassador to Ottawa to protest against the balloon and that it would “continue to vigorously express our position to Chinese officials through multiple channels.”
The PLA used a social media post to announce the performance of its new anti-ship missile with a terminal speed of Mach 10, claiming the missile cannot be intercepted by any anti-missile weapons systems. @SCMPNews
For the first time, the PLA has officially revealed the performance of its advanced anti-ship hypersonic missile, sending a warning to the US amid high tensions in the Taiwan Strait, Chinese analysts said. China’s YJ-21, or Eagle Strike-21, has a terminal speed of Mach 10, cannot be intercepted by any anti-missile weapons system in the world, and can launch lethal strikes toward enemy ships, according to an article posted by the official Weibo account of the People’s Liberation Army Strategic Support Force.
Matt Rognlie @ludwigstraub @a_auclert argue that it will take up to five years for excess savings to work though the systems as individuals with higher marginal propensity to consume generate income for individuals with higher savings rates.
Deficit-financed fiscal transfers generate excess savings. One person’s spending is another person’s income. As we show, taking this fact into account implies that excess savings from debt-financed transfers have much longer-lasting effects than a naive calculation would suggest. In a closed economy, unless the government pays down the debt used to finance the transfers, excess savings do not go away as households spend them down. Instead, the effect of excess savings on aggregate demand slowly dissipates as they “trickle up” the wealth distribution to agents with lower MPCs. Tight monetary policy speeds up this process, but this effect is likely to be quantitatively modest. The partial equilibrium scenario summarizes the conventional wisdom according to which the effect of excess savings will dissipate in a few quarters. By contrast, our benchmark scenario suggests that these effects will stick around for roughly 5 years.
Phil Gramm and Michael Solon argue that officially ending the pandemic emergency, clawing back unspent emergency funds, and eliminating eligibility expansions would save at least $255 billion in 2023-24 alone. @WSJ
The Covid health emergency, like a war, enabled the government to vastly expand its power and spending. Now that the “war” is over, government resists receding to its pre-pandemic level. The debt-limit amendment should not only claw back unspent funds from the $6 trillion pandemic spending orgy, which would save $255 billion in 2023-24 alone. By repeatedly extending the pandemic emergency every 90 days, the Biden administration has expanded the number of households eligible for food stamps and dramatically increased average benefits, more than doubling food-stamp spending. The administration has used the Covid emergency to add 20 million people to the Medicaid and State Children’s Health Insurance Program rolls, sending costs up by $135 billion. The administrative deadline for the moratorium on student-debt payments has been extended eight times, at a cost approaching $275 billion.
.@TheEconomist cites World Management Survey data showing that American firms are better managed than their peers. @I_Am_NickBloom and @johnvanreenan argue that half of the productivity gap btw Britain and US can be attributed to poor management.
Since 2003 John Van Reenen and Nicholas Bloom have been developing and running the World Management Survey (WMS). To date, the WMS has carried out over 20,000 interviews with medium-sized firms, hospitals, and schools in 35 countries, some rich economies, and others emerging markets. The results allow for a ranking of countries based on differences in their firms’ management practices. Such differences are not just large; they also persist across borders. Among the WMS’s findings is the fact that companies’ offices abroad tend to be managed as well as those in their home country, meaning that the London branch of an American business, say, will typically be managed to the same standard as its offices in New York or Chicago. (Multinationals achieve higher management scores than domestic firms wherever they locate.)
Noting that globalization has had ebbs and flows, @IMFNews argues that “geoeconomic fragmentation” (GEF) or policy-driven deglobalization is underway that could put an end to 2008-2021 “Slowbalization” period.
The “Slowbalization” that followed the global financial crisis (2008–10) has been characterized by a slower expansion of cross-border lending and trade. Globalization has plateaued. While fragmentation may entail strategic advantages for some countries in selected cases, it is very likely to involve significant economic costs in the aggregate. The costs would include higher import prices, segmented markets, diminished access to technology and to both skilled and unskilled labor, and ultimately reduced productivity which may result in lower living standards. GEF is likely to complicate multilateral cooperation in critical areas such as climate change mitigation and pandemic preparedness.
China’s private sector share of the top 100 firms’ market capitalization declined to 42.8% at the end of 2022, down from 55.4% in 2021. @PIIE
Latest data from PIIE’s semiannual tracker, “China’s state vs. private company tracker: Which sector dominates?”—which tracks market value of China’s top 100 listed companies (ranked by market value)—show a continued decline of the share of the private sector, from 44.5 percent at mid-2022 to 42.8 percent at year-end, continuing the downward trend of the previous two half-year periods from the 55.4 percent peak observed in mid-2021. Still, the private sector share remains higher than it was throughout the 2010s, when it rose dramatically from 8 percent at end-2010 to 36 percent at end-2019.
In real terms the Case-Shiller National Index is 3.6% below last year’s peak, but remains 14% above its prior peak level in 2006. @calculatedrisk
In real terms, the National index is 3.6% below the recent peak, and the Composite 20 index is 5.2% below the recent peak in 2022. In real terms, house prices are still above the bubble peak levels. There is an upward slope to real house prices, and it has been about 17 years since the previous peak. Affordability improved slightly in November as both mortgage rates and house prices declined. In October, houses were the least “affordable” since 1982 when 30-year mortgage rates were over 14%.
Officials are increasingly confident the technology transfer hurdles to the Australia/UK/US (Aukus) nuclear submarine deal will be overcome, and that the partners are “close to an announcement. @ft”
Australian deputy prime minister Richard Marles told the FT that the partners were “close to an announcement” following an 18-month planning phase to determine how and where to build the boats and what US technology and information would be required. But the planning has been complicated by longstanding US curbs on technology and information sharing, which apply to Australia and the UK even though the countries are members of the Washington-led Five Eyes intelligence sharing network that also includes Canada and New Zealand. Two crucial decisions will be the choice of submarine design and where the submarines will be built, given concerns that America’s shipyards do not have the capacity to take on more work.
February 1, 2023
Profit PuzzlesCarter Davis, Alexandre Sollaci and James Traina Social Science Research Network
Public firms’ returns on the book value of assets are down ~ 50% from 1980 and private firms’ returns have doubled. @EconTraina @ASollaci @CarterDavisFin
Why have US aggregate profit rates increased while financial market rates decreased since 1980? We propose a mismatch hypothesis: Profit rates in the national accounts track the return on capital for all firms, while financial market rates track the cost of capital for public firms only. We show public-firm profit rates halved since 1980, matching trends in financial markets and suggesting low market power. Mechanically, this residual private capital return series shows private capital returns had to have increased substantially to account for this secular break between aggregate and public firm profitability. The degree of this shift is significant: Private firms’ profit rates are on average 10% higher than public firms’ in the post-2000 period. Nonfinancial domestic private-firm profit rates doubled, suggesting high market power or risk. Size and sector differences cannot explain the divergence, though intangible-intensity might. Our results indicate substantial biases in extrapolating public-firm trends to the aggregate economy.
.@ScottSumnerTMI argues the employment cost index (ECI) running at 4% annualized is consistent with roughly 3% trend inflation. Scott thinks getting the ECI down another 1% will require “something closer to 4% or 5% unemployment.”
Once the public adjusts its expectations to the high trend inflation, the economy returns to the natural rate. This explains why the economy today is more overheated than before the Volcker disinflation. By the early 1980s, the public had adjusted to a long period of high inflation and unemployment had returned close to its natural rate. Each year, both wages and prices rose rapidly—but the economy was not in “disequilibrium”. In contrast, today’s economy has still not adjusted to the very fast NGDP growth of 2022. Thus, the labor market is more overheated than in early 1981, despite much less inflation. I still believe that some pain will be imposed on the labor market in bringing inflation down, but perhaps something closer to 4% or 5% unemployment, not the double-digit unemployment of late 1982.
.@JosephPolitano notes real fixed investments have dropped persistently throughout 2022 which raises the risk of a recession in 2023-2024. Recent data “raises the chances of a soft landing,” though “recession risks remain high.”
Over the last year aggregate real consumption growth has moderated, but real private fixed investment declined substantially. Housing was the big casualty with single-family residential investment falling to an 8-year low amidst rapid increases in mortgage rates, but fixed investment in nonresidential structures also sank while investment in equipment and R&D stagnated. Higher interest rates, macroeconomic uncertainty, global growth drags, and weakening US real consumption have hurt domestic investment the most—a worrying sign given how critical fixed investments are to increasing long-run economic capacity. Fixed investment is a key economic signal and an important growth indicator, but it is unfortunately not a be-all-end-all recession indicator.
.@mattsclancy highlights evidence that major productivity gains in research result from allowing scientists & researchers to cluster with other highly skilled inventors. Allowing more high-skilled immigration could boost per capita GDP growth rates by 9%.
Moving to the USA raises citations to math publications four-fold, or 2.5-fold if you restrict attention to people who become a math academic at home or abroad. Comparing New Zealander migrants who return or stay abroad - the ones who stay abroad get up to four times as many citations as those who return. PhD students who stay in the USA get 4-6 times as many citations to their work as their peers in the same program who end up moving back to a country with GDP per capita outside the top 25%. That’s a pretty consistently large effect. And we get similar kinds of results when we look at other proxies for scientific achievement, whether it’s counting publications, patents, or becoming an invited speaker to the International Congress of Mathematicians. A model of the innovation/immigration/trade economy between the US and EU...implies if the USA doubled the H-1B visa cap from 65,000 to 130,000, it would raise the real GDP per capita growth rate in each region by 9% in the long run.
Foreign direct investment in Mexico reached $32B during the first 9 months of 2022 relative to $31B in 2021, suggesting that nearshoring might be underway. @WSJ
After a decline to $28.2 billion in 2020 during the pandemic, foreign direct investment in Mexico rose to $31.4 billion in 2021 and reached $32.1 billion during the first nine months of 2022, the most for the period since 2013. Of that amount, around $11.6 billion was in manufacturing, similar to 2021 levels. The Mexican government says more than 400 companies currently have shown interest in moving production from Asia to Mexico. “This is an enormous opportunity for Mexico, one that only happens once in a generation,” said Carlos Capistrán, chief economist for Mexico and Canada at Bank of America. “It’s starting to happen, but we don’t know if it will be a home run or just a hit.”
The US government is deepening security ties with India. Plans include joint weapons production in India, as well as cooperation in areas including quantum computing, artificial intelligence, 5G wireless networks, and semiconductors. @ft
The US is launching a series of ambitious technology, space and defense initiatives with India, in an effort designed to counter China in the Indo-Pacific and wean New Delhi off its reliance on Russia for weapons. The Initiative on Critical and Emerging Technologies marks the latest move by US President Joe Biden to work more closely with allies and partners to counter China. The two countries unveiled cooperation in a number of areas, including quantum computing, artificial intelligence, 5G wireless networks and semiconductors. They also created a mechanism to facilitate joint weapons production.
.@RyanDEnos argues the Democratic coalition is not stable as college-educated white’s interests diverge from the rest of their working class coalition. @Edsall
College-educated whites, especially those with higher incomes, are not clear coalitional partners for anyone — they don’t favor economic policies, such as increasing housing supply or even higher taxes on the rich, that are beneficial to the working class, of any race. And many college-educated whites are motivated by social issues that are also not largely supported by the working class, of any race. It’s not clear that, with their current ideological positions, socially liberal and economically centrist or rightist college-educated whites are natural coalition partners with anybody but themselves. My sense is that much of the college-educated liberal political rhetoric is focused on social signaling to satisfy their own psychological needs and improve their social standing with other college-educated liberals, rather than policies that would actually reduce racial gaps in economic well-being, civil rights protections, and other quality of life issues.
.@jasonfurman notes the new employment cost index numbers are not consistent with target inflation of 2%. “If the labor market stays in the same shape,…I would expect inflation to be 3.5% and likely drifting up from that.”
Good news for prospects for sustained lower inflation from the latest Employment Cost Index (ECI) data. But, the growth in Q4 was still higher than any quarter in the previous cycle. So still not likely to be compatible with 2% inflation and probably not even 3% inflation. In terms of the well-being of the average worker, ECI wages are 2% below their pre-COVID peak and 5% below their pre-COVID trend. This is an average--wages up more for lower-wage workers and down more for higher-wage workers. Real wages are lower today than they were in December 2019 for every industry except retail trade and leisure and hospitality. And they are below trend in every industry. If the labor market stays in similar shape (measured in terms of the unemployment rate, job openings and the quits rate) then I would expect inflation to be 3.5% and likely drifting up from that--nothing says this need to continue its monotonic decline.
.@AswathDamodaran estimates the cost of capital at the start of 2023 for the median American firm rose 3.86pp from 5.77% to 9.63% year over year, making it more difficult to fund new investments and acquisitions.
Bringing in the changes in both components, debt, and equity, into the assessment, we computed the costs of capital for US and global companies in US dollar terms. The cost of capital for a median US (global) company rose from 5.77% (6.33%) at the start of 2022 to 9.63% (10.60%) at the start of 2023. To understand the implications of a rising cost of capital, it is worth remembering that the cost of capital is the Swiss Army knife of corporate finance, affecting almost every decision within a business.
.@M_C_Klein argues that the decline in excess savings has largely been driven by high-income households. In 2022, these households had above-normal spending, low interest and dividend receipts, and high tax payments for 2021 capital gains.
Americans liquidated more than $1Tof “excess” savings in 2022, eliminating more than half of the surplus accumulated since the pandemic began. If the current pace continues, the entire stock will vanish by the end of this year. The great dissaving of 2022 can be explained by the (relative) misfortunes afflicting high earners as society normalized. First, dividend and interest income were unusually weak. U.S. post-tax corporate profits in 2022 were roughly 40% higher than in 2019, but dividend payments to shareholders were up just 14% because companies opted for buybacks. Meanwhile, the combination of soaring asset values and the relative preference for buybacks has meant that wealthy Americans owed substantial taxes in 2022 based on 2021 capital gains. Personal income tax payments, which include capital gains, are currently running 26% above what would be expected based on the 2018-2019 trend. Employee pay is 2% above trend while payroll tax receipts are about 0.5% above trend.
The @economist notes that “almost all” recent AI breakthroughs have come from large firms, in large part due to their access to the computing power required to develop state-of-the-art AI models.
Almost all recent breakthroughs in artificial intelligence globally have come from large companies, in large part because they have the computing power. Amazon, whose AI powers its Alexa voice assistant, and Meta, which made waves recently when one of its models beat human players at “Diplomacy,” a strategy board game, respectively produce two-thirds and four-fifths as much AI research as Stanford University, a bastion of computer-science eggheads. Alphabet and Microsoft churn out considerably more, and that is not including DeepMind, Google Research’s sister lab which the parent company acquired in 2014, and the Microsoft-affiliated OpenAI.
Central banks purchased the largest amount of gold since 1967 as Middle Eastern nations and China sought to diversify their reserves. @ft (130)
Annual gold demand increased 18 per cent last year to 4,741 tonnes, the largest amount since 2011, driven by a 55-year high in central bank purchases, according to the World Gold Council, an industry-backed group. Central bank purchases of gold hit 417 tonnes in the final three months of the year, roughly 12 times higher than the same quarter a year ago. It took the annual total to more than double of the previous year at 1,136 tonnes. Only about a quarter of the fourth-quarter central bank purchases were reported to the IMF. Reported purchases in 2022 were led by Turkey taking in almost 400 tonnes, China, which reported buying 62 tonnes in November and December, and Middle Eastern nations.
.@adwooldridge worries that America’s work ethic can be destroyed by cultural change, pointing to the 11%, or 7M men 25-64 who have left the labor market and are not working or looking for a job.
Is that ubiquitous smell in America’s great cities the smell of sensible liberal drug policy? Or is it the smell of America’s work ethic going up in smoke? If the work ethic is the product of cultural change, it can be destroyed by cultural change. America is the world’s leading example of the power of the work ethic. “The US work ethic is really strong and healthy,” Nicholas Eberstadt of the American Enterprise Institute quipped to me in an interview, “except where it isn’t.” The post-work revolution was led by men without college degrees. Eberstadt produces some astonishing statistics on the number of prime-age men (25 to 64) who have fallen out of the labor market. More than 11% of these men — some seven million souls — are neither working nor looking for a job. Barely half of native-born prime-age men with no high school degree are in the job market. The “not in labor force” number has gone up by a percentage point every seven years since 1965 regardless of the state of the economy or the number of job vacancies.
The United States is set to gain access to bases on Luzon in the Philippines which would be strategically important in a Sino-American conflict. @washingtonpost
The U.S. military is poised to secure expanded access to key bases in the Philippines. While negotiations are still ongoing, an announcement is expected as soon as this week when Defense Secretary Lloyd Austin meets in Manila with his counterpart and then with President Ferdinand Marcos Jr. The expansion involves access to Philippine military bases, likely including two on the northern island of Luzon — which, analysts said, could give U.S. forces a strategic position from which to mount operations in the event of a conflict in Taiwan or the South China Sea.
The James Webb Space Telescope may have captured evidence of the universe’s first generation of stars. @QuantaMagazine
A group of astronomers poring over data from the James Webb Space Telescope (JWST) has glimpsed light from ionized helium in a distant galaxy, which could indicate the presence of the universe’s very first generation of stars. These long-sought, inaptly named “Population III” stars would have been very large balls of hydrogen and helium sculpted from the universe’s primordial gas. Theorists started imagining these first fireballs in the 1970s, hypothesizing that, after short lifetimes, they exploded as supernovas, forging heavier elements and spewing them into the cosmos. Xin Wang, an astronomer at the Chinese Academy of Sciences in Beijing, and his colleagues think they’ve found them. “It’s really surreal,” Wang said. Confirmation is still needed; the team’s paper, posted on the preprint server arxiv.org on December 8, is awaiting peer review at Nature.
In 2022 consumer spending, which makes up about 70% of the American economy, has outpaced price increases by 2pp, but has fallen for three of the last four months. @WSJ
Retail purchases have fallen in three of the past four months. Spending on services, including rent, haircuts, and the bulk of bills, was flat in December, after adjusting for inflation, the worst monthly reading in nearly a year. The saving rate has fallen to roughly 3% of monthly income, from more than 30% at the start of lockdowns. In 2019, the year before the pandemic, the rate was 8.8%. Credit-card balances were up 15% on the year in the third quarter, according to the Federal Reserve Bank of New York, the largest increase in more than two decades.
.@davidautor finds that foreign-born populations were more likely than native workers to leave commuting zones that were most impacted by the China Shock. However, the foreign-born population was concentrated in zones with low China trade exposure.
U.S. commuting zones (CZs) that were more exposed to the China trade shock had substantially larger net reductions in the population of foreign-born workers but not in the population of native-born workers. The small and insignificant native-born responses have narrow confidence intervals, which is suggestive of modest heterogeneity in native-born adjustment across places. For foreign-born workers, comparing CZs at the 75th versus 25th percentiles of exposure to the trade shock, the more exposed CZ would have seen 1.7 and 2.3 percentage-point larger [10 yr] reductions, respectively, in the foreign-born population with a high school education or less and in the foreign-born population with some college education or more. Within trade-exposed CZs, foreign-born and native-born workers had comparably sized reductions in employment-population ratios. These trade-induced reductions in employment rates were larger in CZ initial foreign-born population shares were above (relative to below) the nation median. At the time of the surge in import competition from China, foreign-born workers were in the wrong locations to contribute much to regional changes in labor supply.
.@BIS_org finds that the relationship between money growth and inflation during periods of high inflation is close to “one to one” during periods of high inflation, but they find little relationship during non-inflationary periods.
The strength of the link between money growth and inflation depends on the inflation regime: it is one-to-one when inflation is high and virtually non-existent when it is low. Panel A illustrates the long-run relationship between inflation and “excess money growth” – the difference between money growth and real GDP growth. The graph displays the relationship between these two variables based on non-overlapping 10-year averages. When the observations from all countries are pooled, the standard relationship emerges clearly: there is a precisely estimated one-to-one link between excess money growth and inflation. But, as shown in panel B, if we split the observations into high- and low-inflation ones using different 10-year average inflation rate thresholds, we see that this relationship exists only when inflation is relatively high. As expected, the difference narrows noticeably as the inflation threshold increases.
According to a @Bloomberg analysis, 2022 saw global investment in green energy sources equal investments in fossil fuels for the first time (both were $1.1T.)
2022 was the first year when investment in the energy transition equaled global investment in fossil fuels, according to the latest data released from clean energy research group BloombergNEF. The money flowing into the upstream, midstream, and downstream segments of oil and gas, and into fossil fuel-fired power generation without emissions reduction technology, was $1.1 trillion last year. Likewise, annual investment in renewable energy, electrified transport and heat, energy storage and other technologies reached $1.1 trillion.
The commodity sector will require an investment of $300-$500B in working capital going forward due to higher interest rates and volatility related to the Russo-Ukrainian War, according to @McKinsey. @ft
Changing trade patterns have made the global flow of raw materials less efficient and more costly to finance and are also likely to push up the price of commodities for consumers, according to a new study by consultancy McKinsey. “Since the end of 2020, we have seen a doubling of the working capital requirements in the commodity trading sector,” said Roland Rechtsteiner, McKinsey partner and lead author of the report. The McKinsey report predicts average shipping times will increase by 8%, energy prices will rise three-fold, and interest costs will rise seven-fold, between the end of 2020 and 2024, and that working capital requirements for commodity trading globally will increase between $300bn and $500bn as a result.
A four-star American air force general fears that the US and China may go to war in 2025. In a leaked memo to his top commanders, he wrote, “I hope I am wrong. My gut tells me we will fight in 2025.“ @ft @dimi
General Mike Minihan, head of US Air Mobility Command, said the two military powers were likely to end up at war because of a series of circumstances that would embolden Chinese president Xi Jinping. “I hope I am wrong. My gut tells me we will fight in 2025,” Minihan wrote in a private memo to his top commanders. As head of Air Mobility Command, Minihan oversees air-related logistics across the US military. The four-star general previously served as deputy head of Indo-Pacific Command, which would be directly responsible for commanding US forces in any conflict with China.
As rates rise the percentage of subprime auto borrowers who are delinquent on their bills rose to 5.7%, higher than the Great Recession peak of 5.0% in January 2009. Though repossessions are still under pre-pandemic levels. @Bloomberg
In December, the percentage of subprime auto borrowers who were at least 60 days late on their bills rose to 5.67%, up from a seven-year low of 2.58% in April 2021, according to Fitch Ratings. That compares to 5.04% in January 2009, the peak during the Great Recession. Higher interest rates are making it even more difficult to make the monthly payments. The average new auto loan rate was 8.02% in December, up from 5.15% a year earlier, according to Cox Automotive. The rate can be much higher for subprime borrowers. While the number of vehicle repossessions is rising, it’s still below pre-pandemic levels. At Manheim, an auto auction company, the number of repossessed cars increased 11% in 2022 compared to the prior year, but that was still down 26% from 2019.
.@calculatedrisk argues housing prices in real terms will be under pressure for some time as the bottom in prices can lag the bottom in investment by years. He expects at least 10% decline in nominal prices from peak with 2.4% already having occurred.
My expectation is residential investment will decline further in 2023, although the largest percentage decline was in 2022. If we look at the most comparable period to the current cycle, the 1978 to 1982 period, we see that real house prices bottomed several years after activity bottomed. Activity bottomed in 1981 or early 1982, but house prices didn’t return to the previous peak (inflation adjusted) until mid-1986. The timing and extent of nominal price declines is difficult to predict. I’ve guessed that we will see 10%+ in nominal price declines nationally. We’ve already seen national price declines of 2.4% seasonally adjusted (Case-Shiller National Index) as sellers appear to be willing to give back some of the extraordinary gains over the last two years (not completely “sticky”). The bottom line is that there will be two bottoms for housing: one for activity and the other for prices. Existing home sales may have already bottomed, but we will see further declines in residential investment. Prices - especially in real terms - will be under pressure for some time.
The Colorado’s River’s flow has averaged less than 10M acre-feet a year in the past three years vs. a long-term average of under 15M. The reduced flows may force the Federal government to impose water use restrictions affecting 40M Americans. @Cflav
The states that rely on water from the shrinking Colorado River are unlikely to agree to voluntarily make deep reductions in their water use which would force the federal government to impose cuts for the first time in the water supply for 40 million Americans. The Colorado River Compact apportioned the water among two groups of states. The so-called upper basin states would get 7.5 million acre-feet a year. The lower basin got a total of 8.5 million acre-feet. A later treaty guaranteed Mexico, where the river reaches the sea, 1.5 million acre-feet. The premise that the river’s flow would average 17.5 million acre-feet each year turned out to be faulty. Over the past century, the river’s actual flow has averaged less than 15 million acre-feet each year. From 2000 through 2022, the river’s annual flow averaged just over 12 million acre-feet; in each of the past three years, the total flow was less than 10 million.
Japan and the Netherlands are finalizing plans to join American exports controls designed to limit Chinese semiconductor production. @Bloomberg
Japan and the Netherlands are poised to join the US in limiting China’s access to advanced semiconductor machinery. The Netherlands will expand restrictions on ASML Holding NV, which will prevent it from selling at least some of its so-called deep ultraviolet lithography machines, crucial to making some types of advanced chips and without which attempts to set up production lines may be impossible. Japan will set similar limits on Nikon Corp.
Between 2010 and 2010 the share of Chinese women 20-24 who were unmarried rose from 67.5% to 80.4% as young Chinese delay marriage. @ft
This week, an estimated 200mn unmarried Chinese returned home to celebrate the lunar new year greeted by relatives brimming with questions about when they plan to get married and start a family. The annual inquisition is such a predictable part of life for young Chinese that social media channels are filled with viral how-to guides coaching people on how to bat away pushy parents. “Everyone has their own technique,” said a Beijing teacher in her late 20s, who has been keeping her boyfriend a secret from her family for years as a pre-emptive strategy against demands for marriage. Young people who do get married are doing so later, while the total pool of China’s marriageable youth continues to shrink annually. The number of women of childbearing age, defined as those between 15 and 49 years old, fell by more than 4mn last year.
.@Brian_Riedl notes that the eight largest deficit reduction bills since 1985 were attached to debt-limit bills and offers some plausible goals for the negotiation such as ending all pandemic related emergency spending.
There are several plausible policy goals. Conservatives could seek to end the Covid-emergency designation and end all pandemic-related emergency spending (a chance for Democrats to declare victory over the pandemic, too). Several Democrats have also expressed openness to the TRUST Act, which would create a congressional commission to extend Social Security and Medicare solvency. Conservatives could seek to freeze discretionary spending for the year (which may mean trimming domestic programs to accommodate any defense or veterans’ health hikes). If progressives want to eliminate the debt limit, they can make a deal to provide other tools to address unrestrained mandatory spending, such as statutory fiscal targets.
.@Jasonfurman notes GDP is “basically at CBO’s pre-pandemic forecast.” Consumer spending, which has enjoyed “huge fiscal support in 2020 and 2021,” is running well ahead of the CBO’s pre-pandemic forecast, while residential investment declined by 26.7%/yr.
Overall GDP is basically at CBO's pre-pandemic forecast. The big story for economic growth was the consistent strength of consumer spending, which is more than two-thirds of the economy. It has been consistently running well ahead of CBO's pre-pandemic forecast. Likely continued impact of huge fiscal support in 2020 and 2021. The countervailing story is the collapse of residential investment. It has fallen for 7 straight quarters, fell 19.3% over the last four quarters, with a decline of 26.7% (annual rate) in Q4. Biggest since the financial crisis. And the third story is that over the pandemic recovery the huge increase in US demand was partly accommodated by rising imports and production shifted from exports to domestic consumption. But the large increase in the trade deficit has been narrowing.
.@EthanYWu offers support to the Charles Goodhart and Manoj Pradhan view that population aging is inflationary as retirees create more demand than supply.
An ageing population, and the dependency it creates, will hamper supply and stoke inflation. Mikael Juselius and Elod Takats of BIS’s core insight: “The young and the old are inflationary, while the working-age cohort is disinflationary.” That is, prime-age workers create more supply than demand, while their elders and juniors do just the opposite.
The cost of moving money out of China has surged to 12 cents on the dollar relative to 1 cent prior to the pandemic. Nevertheless, Natixis SA estimates capital flight in 2023 will be greater than the pre-pandemic level of $150B per year. @Bloomberg
Before the pandemic, China faced capital flight of about $150 billion annually from people going overseas, but the amount is likely to be higher in 2023 since they haven’t been able to travel for the last three years, according to Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA. Her calculation — worked out by looking at unexplained differentials in global tourism data — is an estimate of funds left abroad permanently by Chinese nationals who travel. About 10,800 rich Chinese migrated in 2022, the most since 2019 according to New World Wealth, a global data intelligence partner of investment migration consultant Henley & Partners. According to one private banker, wealthy individuals told him the cost of moving money offshore has risen to 12 cents on the dollar late last year from 1 cent in the years before the pandemic, as the government clamped down on money transfers.
.@MattThomasNYC argues the GOP’s performance in New York in last year wasn’t driven by suburban voters but by minority voters in NYC who accounted for 2/3 of the decline in democratic margins btw 2018-2022.
The suburbs account for just over a third of the decline in the Democratic margin of victory between 2018 and 2022. The people of New York City, through a combination of defection and abstention, account for most of the rest. Narrowing our focus to only those precincts where at least three-quarters of residents share the same racial identity – which I’ll refer to as racial enclaves – the trends are even more pronounced. Between 2018 and 2022, Hispanic and Asian enclaves swung fifty-eight and fifty-two points toward the GOP, respectively. Their turn to the right was far more decisive than that of white enclaves, which swung thirty-two points toward the GOP. For their part, black enclaves moved just eight points to the right over the same period. Between 2014 and 2022, the swings were as follows: six points in black enclaves, forty-two points in white enclaves, fifty-six points in Hispanic enclaves, and fifty-eight points in Asian enclaves. Now that’s what I call a revolt.
New @FedResearch finds that a 1pp policy-induced increase in mortgage rates lowers the presence of low-income households in the population of home buyers by 16%, and of low- and moderate-income households by 7.5%.
I identify the effects of monetary policy by exploiting the timing of high-frequency observations of mortgage rate locks around unanticipated monetary policy shocks conveyed in Federal Open Market Committee (FOMC) announcements. I find that a contractionary policy shock which increases mortgage rates by 1 percentage point would reduce the share of home purchase loans going to low- and moderate-income (LMI) borrowers by 2.1 percentage points (or 7.5%) in the weeks following the announcement. The share going to low-income borrowers alone would fall by 1.1 percentage points (16%). While low-wealth households may not experience an immediate appreciation of financial assets when the stance of monetary policy is expansionary, that stance can allow them to get their foot in the door of homeownership.
In 2022 there were 1.7M applications for new businesses that are likely to hire workers. These applications – labeled “high propensity applications” by the Census Bureau – were up 28% over the pre-pandemic baseline. @kenanfikri
Americans filed nearly 1.7 million applications to start new likely employer businesses in 2022. These applications—labeled “high propensity applications” by the Census Bureau—make up a subset of total business applications, capturing those with a higher likelihood of hiring employees in the future based on their industry or other information in the filing. Over the course of the year, there were 359,000 more filings from likely employers in 2022 than in 2019—a 27.8 percent increase over the pre-pandemic baseline. While 2022’s count was 6.5 percent lower than 2021’s, it still ranked as the second-largest haul of the series. These applications are particularly noteworthy because they represent the businesses most likely to lead to lasting job growth and innovation, if and when they become operational.
.@paulkrugman argues that the run-up in debt in the aftermath of the financial crisis and pandemic is likely a better outcome than the counterfactual where debt wasn’t incurred.
My preferred measure — because it avoids some distortions associated with recessions — is debt as a percentage of potential G.D.P., an estimate of what the economy could produce at full employment. The big rise in debt from 2007 to the late 2010s was actually justified by economic events, and any attempt to avoid that rise would have done more harm than good by slowing our recovery even further. Did we borrow too much money? Probably not. During the economic crises of Covid and the Great Recession, adding to the debt was more than justified.
The aging of the American population has left the US short 1.9M workers relative to 2019. A decline in labor force participation of older workers is responsible for a drop of another 500,000 workers. @gelliottmorris @S_Rabinovitch
The labor-force participation (LFP) rate of prime-age workers (aged 25-54) and the foreign-born workforce have almost fully recovered. Neither explains the current squeeze. The biggest shortfall comes from Americans getting older and leaving work behind. Since 2019 those aged at least 65 have gone from less than 16% of the population to nearly 17%. Moreover, unlike prime-age workers, many people who retired early as covid-19 struck have not come back to work. LFP among older Americans, which rose from 12.5% in 2000 to 20.7% in early 2020, has dipped to 19.3%, the same as in 2016. The aging of the population accounts for the loss of 1.9m workers (0.7% of people aged at least 16), while the overall drop in LFP, mainly among the old, is responsible for a further 0.5m (0.2%).
According to a new @USCBO forecast, US population growth after 2033 will be driven by immigration, which will account for all American population growth in 2042. @Bloomberg
US population growth will be driven entirely by immigration within two decades, according to the latest forecasts by the Congressional Budget Office. The projections, published on Tuesday, show a population of 373 million by 2053 — about 3 million more than the CBO was expecting a year ago. That’s partly due to a sharp increase in the forecast for immigration in 2023 and the following two years, after pandemic travel restrictions eased — adding some 1 million to the population over that period. Much of the growth is projected to come in the so-called prime-age bracket, between 25 and 54, that is the core of the workforce. The CBO expects that cohort to increase by about 1.1 million people, or 0.9%, each year.
.@Edsall argues that a “white rural red wave” is the driving force of the Republican party today and cites shifts in Wisconsin suburban and rural voting patterns between 2016 and 2022.
In 2016, Ron Johnson rode Trump’s coattails and the Republican trail blazed by the former governor Scott Walker to a 3.4 point (50.2 to 46.8) victory and swept into office, in large part by running up huge margins in Milwaukee’s predominantly white suburbs. That changed in 2022. Craig Gilbert, a fellow at Marquette Law School conducted a detailed analysis of Wisconsin voting patterns and found that Johnson, "performed much worse in the red and blue suburbs of Milwaukee than he did six years earlier in 2016. So again, how did Johnson win? The simple answer: white rural Wisconsin. As recently as 17 years ago, rural Wisconsin was a battleground. In 2006, Jim Doyle, the Democratic candidate for governor, won rural Wisconsin, about 30 percent of the electorate, by 5.5 points. “Then came the rural red wave,” Gilbert writes. “Walker carried Wisconsin’s towns by 23 points in 2010 and by 25 points in 2014.” In 2016, Johnson won the rural vote by 25 points, but in 2022, he pushed his margin there to 29 points.
.@ojblanchard1 argues that the secular stagnation environment – where real interest rates were low, often negative, and much lower than the economy’s rate of growth – will soon reassert itself and will then be the “prevalent regime for some time to come.”
Summers has argued that the increase in public debt due to the fiscal response to COVID will lead, other things equal, to an increase in r [real return on capital]. He is right about the sign of the increase in public debt’s impact on r, but the effect is likely to be quite small. The debt-to-GDP ratio in advanced economies has increased only from 75 percent in 2019 to 82 percent in 2022; under standard assumptions, this implies an increase in r of no more than 15–30 basis points. That would be insufficient to offset the pre-COVID downward trend in safe rates, let alone to close the gap between r and g [growth rate of output.]
Michael Cembalest @jpmorgan notes that it has been difficult for legislators to increase tax receipts beyond 19% of GDP, and yet entitlement spending plus interest is likely to exceed that level by 2032.
The above chart plots the history of US tax increases since 1950 (as % of GDP and vs Federal receipts as a % of GDP). While there have been tax increases of 2% of GDP or more, they occurred when overall tax receipts were much lower. The red square shows the required increases in taxes, which if spent entirely on increasing discretionary spending, would reduce the ratio of entitlements to non-defense discretionary spending back to 2.2x (its 2006 level). The Sanders high net worth income and capital gains tax plan and the Warren wealth tax plan appear as well.
.@WSJ reports that year-over-year wages for the bottom 10% of earners increased 9.8% relative to 7.4% for the median for all workers. Workers in the top 10% of earnings saw a 5.7% gain.
Median weekly earnings for all workers were 7.4% higher, year-over-year, at the end of 2022, according to an analysis of newly released Labor Department data. The bottom 10th of wage earners—those that make about $570 a week—saw their pay increase by nearly 10%. Better pay increases late last year went to workers who attended college, a reversal from earlier in the pandemic when those who hadn’t completed high school saw outsize gains. The annual rate of wage growth for workers with less than a high school diploma touched a recent peak in the second quarter of 2022, when it was up 11.1% over the prior year, higher than the 7.6% wage growth during that period for workers with a bachelor’s degree or higher. The median raise for Black Americans employed full-time was 11.3%, compared with the prior year.
.@jan_eeckhout suggests that, when the underlying inflation data is not especially noisy, it might be appropriate to use “instantaneous” measures of inflation, which consider only very recent data. “Instantaneous inflation” hit 2% in Dec ‘22.
Current practice to measure inflation for monetary policy uses the average annual inflation rate. When inflation changes fast, whether increasing or decreasing, the annual average rate is biased towards data from too far in the past and conveys the true price level with six months delay. I propose to use instantaneous inflation as a more adequate measure of the price change. The measure trades off noise in the data with the precision of the instantaneous price change. Using the latest inflation numbers, it shows that instantaneous inflation in the US and the Eurozone is back to the target of 2% and that the high inflation period is over. Instantaneous core inflation, which excludes food and energy, is falling, but at 4%, it remains higher than the inflation target of 2%. The conventional measure of core inflation is at 5.7%.
A @nberpubs analysis finds workers who are working from home in the US save an average of 55 minutes with 39% of those time savings being devoted to a primary or secondary jobs and 33% for leisure activities. @I_Am_NickBloom
The pandemic-induced shift to work from home yielded large private benefits in the form of commute time savings. To gauge the magnitude of these benefits, we turn to the Global Survey of Working Arrangements and consider data on commute times and the extent of work from home in 27 countries. We estimate that work from home saved about two hours per week per worker in 2021 and 2022, and that it will save about one hour per week per worker after the pandemic ends. That amounts to 2.2 percent of a 46-hour workweek, with 40 paid hours plus six hours of commuting. As we discussed, the after-tax wage rate is a reasonable benchmark for the private value of commute time savings. Thus, we estimate that the private value of the commute time savings associated with work from home will be about 2.2 percent of after-tax earnings in the post-pandemic economy.
Jeremy Grantham predicts that the S&P 500 will likely hit 3,200 at some point this year, noting that “valuations are still nowhere near their long-term averages.” @GMOInsights
The first and easiest leg of the bursting of the bubble we called for a year ago is complete. While the most extreme froth has been wiped off the market, valuations are still nowhere near their long-term averages. Further, in the past, they have usually overcorrected to below trend as fundamentals deteriorated. My calculations of trendline value of the S&P 500, adjusted upwards for trendline growth and for expected inflation, is about 3200 by the end of 2023. I believe it is likely (3 to 1) to reach that trend and spend at least some time below it this year or next. Not the end of the world but compared to the Goldilocks pattern of the last 20 years, pretty brutal.
A new @CSIS study warns that the Russo-Ukrainian conflict has stressed the American defense industrial base and argues that the surge capacity needed for a potential Taiwan conflict is lacking. @SethGJones
“The bottom line is the defense industrial base, in my judgment, is not prepared for the security environment that now exists,” said Seth Jones, a senior vice president at the Center for Strategic and International Studies. Industry now is operating in a manner “better suited to a peacetime environment.” Mr. Jones recommends that the U.S. reassess its total munition requirements, urging Congress to hold hearings on the matter. Chairman of the Joint Chiefs of Staff Army Gen. Mark Milley said in November that such an effort is already underway. The study also suggests reassessing American requirements for replenishing its stockpiles, creating a strategic munitions reserve, and determining a sustainable munitions procurement plan to meet current and future requirements.
.@Brad_Setser shows that Chinese exports are still at a record level relative to global output and concludes, “Graph is clear; China never deglobalized.”
It is hard to “reglobalize” when there hasn’t yet been any real deglobalization. The world will start deglobalizing when Chinese exports of global manufactures are no longer at a record level relative to global output and when China no longer needs to draw a record amount of net demand from the world to sustain its unbalanced economy. The graph is clear; China never deglobalized.
Tim Krupa from @GoldmanSachs reports that the foreign-born labor force is rebounding from 2.8M below trend in September 2020 to 1.2M below trend in March 2022.
Starting in 2019, tighter immigration policies under the Trump Administration followed by pandemic disruptions depressed the US foreign-born working-age population. The foreign-born labor force fell 2.8 million below its long-term trend level in April 2020 and remained 1.2 million below trend in March 2022. The foreign-born population has grown 137k per month in the past 18 months, compared to 68k per month from Jan. 2010 to Jan. 2019. The chart above shows the foreign-born labor force has grown 110k per month in the past 18 months, compared to 42k per month during the prior period.
.@jimtankersley notes that “America’s debt is now six times what it was at the start of the 21st century” and outlines how America added $25 trillion in debt over the past two decades.
In just two decades, America has added $25 trillion in debt. The biggest — and often bipartisan — drivers of debt have been the federal responses to two sharp economic downturns: the 2008 financial crisis and the 2020 pandemic recession. Shortly after Mr. Obama took office in 2009, inheriting a recession, he pushed Congress to approve a nearly $800 billion package of tax cuts and stimulus spending. Safety-net spending continued at high levels for the next several years as the economy recovered sluggishly. Mr. Trump approved a much larger collection of aid packages, totaling more than $3 trillion after Covid-19 swept the world in 2020. Mr. Biden took office the next year and signed a $1.9 trillion stimulus plan soon after.
Charles Blahous @mercatus notes that America’s long-term Federal fiscal imbalance was largely set between 1965-72. The cost of programs enacted during that period is growing faster than economic output and neither party has made an effort to address this.
Over two-thirds of the structural fiscal imbalance derives from the unsustainable growth rates of federal health programs, most especially Medicare and Medicaid. Irrespective of future policy decisions in other areas such as tax policy, income security, and annually appropriated domestic and defense spending, federal finances will not be stabilized until Medicare and Medicaid’s growth rates are moderated. A survey of fiscal stewardship records produces the unsurprising result that more recent officeholders have tended to run far higher federal deficits than those countenanced by previously elected officials. The largest average federal deficits were operated during the Trump administration, followed, in turn, by the Obama, Ronald W. Reagan, and George H. W. Bush administrations.
.@Brian_Riedl offers practical suggestions on how Republicans could permanently stabilize the American debt at 95% of GDP, a goal that would start with running deficits at 3% of GDP relative to the current baseline of 6% over the next decade.
Fiscal conservatives should aim to permanently stabilize the debt at 95 percent of GDP. This goal would mean keeping deficits near 3 percent of GDP, compared to the baseline deficits rising past 6 percent of GDP over the next decade and 11 percent of GDP in three decades. In the short run, this means: Freezing annual discretionary appropriations. Building momentum for mandatory spending reforms with a modest package of savings (perhaps $400 billion over the decade) that address lower-hanging fruit such as leftover pandemic spending, program overpayments, and federal spending benefits for upper-income families. Begin working toward Social Security and Medicare reform—which drive nearly 100 percent of long-term deficits—by building bipartisan working groups behind the scenes.
Last year @Brian_Riedl compared Trump, Obama, and George W. Bush’s fiscal records and found that Trump’s policies in one term cost $7.8T over a decade, relative to $5T for Obama and $6.9T for Bush.
President Trump’s record on fiscal responsibility does not compare favorably to his immediate predecessors. Surely, it would not be fair to judge President Trump simply by the total budget deficits under his watch, however, as the $10 trillion 10-year baseline deficit that he inherited dwarfed the $4 trillion projected baseline deficit inherited by President Obama and the $6 trillion projected baseline surplus inherited by President Bush. That is far from a level playing field. On the other hand, President Trump also received the largest automatic deficit reductions from his inherited baseline. During his presidency, economic and technical factors that fall mostly outside of political control produced $3.9 trillion in 10-year deficit reduction, mainly through falling interest rates on the federal debt.
.@JBSay notes there have been at least 400,000 unexpected deaths among the US working-age population since 2020. Netting out Covid deaths and unnatural deaths (homicide, suicide, overdose, etc.) he finds a spike starting in 2021.
In 2021 group life [insurance] payments exploded by 20.7% over the five-year average and by 15% over the acute pandemic year of 2020. If we remove both Covid-19 and unnatural deaths (homicide, suicide, overdose, etc.), we see a dramatic spike of natural, non-Covid-19 deaths among working-age people beginning in the spring and summer of 2021. To overgeneralize: In 2020, the vulnerable died of Covid at unusually high rates. In 2021 and 2022, Covid continued its assault, but the young, middle-aged, and healthy also died in aberrantly high numbers of something else.
.@stlouisfed finds that for workers in the bottom 65% of lifetime earnings, an additional year of work experience increases wages by 2-3% versus 8% for workers in the top 35%.
Bottom earners are employed about 25% less than those at the median, underscoring a less stable job ladder for them with fewer opportunities to learn on the job and to switch to better-paying firms. The average returns to each additional year of work experience across the lifetime earnings (LE) distribution; the returns are relatively flatter in the bottom half of LE distribution and increase steeply toward the top. An additional year of work experience increases male workers’ wages by around 2% to 3% for workers below the 65th percentile of the income distribution, versus 8% for those at the top.
.@billjaneway argues that the procurement power of government can play an important role in reducing innovators’ and investors’ market risk. @ProSyn
One recurring feature of that history has been the procurement power of governments. Freed from the necessity of abiding by a neat cost-benefit calculation, the state has repeatedly helped overcome market risk by pulling innovative suppliers down the learning curve to the point where they can offer low-cost and reliable products to commercial markets. In these cases, “product-market fit” results from a state-initiated dynamic process that succeeds in aligning an immature “product” with a nascent “market.”
According to @M_C_Klein, Russian imports have recovered as exports of goods delivered to Russia’s friendly neighbors have increased beyond pre-war levels suggesting export restrictions are being evaded.
The pressure on Russia from sanctions is fading. Exports of manufactured goods to Russia have been rising rapidly in recent months, while exports of goods delivered to Russia’s friendly neighbors are soaring far beyond pre-invasion norms. If export restrictions and sanctions enforcement cannot be tightened further, the Russians may be able to restock some of their lost military equipment—and prolong the war. The overall trend is that exports of dual-use goods are rising, including from Europe. Moreover, the Chinese data show that exports of dual-use goods continued to jump in December, even if Korean exports of dual-use goods has retreated somewhat from the surge in October. The detailed data from Turkey are not yet available, but it is possible that their exports of dual-use goods also jumped in December.
Zoltan Pozsar of @CreditSuisse argues that the American dollar’s global role is under threat as the rise in Chinese, Russian and Saudi Arabian current account surpluses are not flowing into Treasuries as they have historically.
The current account surpluses of China, Russia, and Saudi Arabia are at a record. Yet these surpluses are largely not being recycled into traditional reserve assets like Treasuries, which offer negative real returns at current inflation rates. Instead, we have seen more demand for gold, commodities, and geopolitical investments such as funding the [Belt and Road Initiative.] Leftover surpluses are held increasingly in bank deposits in liquid form to retain much-needed options in a changing world. If less trade is invoiced in US dollars and there is a dwindling recycling of dollar surpluses into traditional reserve assets such as Treasuries, the “exorbitant privilege” that the dollar holds as the international reserve currency could be under assault.
.@michaelxpettis argues that Zoltan Pozsar is wrong about the dollar’s global role. Chronic surplus countries’ dependence on American deficits, and in turn the dollar’s global role, is growing.
The irony is that while Pozsar correctly notes that China's trade surplus is bigger than ever, he doesn't realize that this makes China even more dependent, and not less dependent, on the willingness of China and the rest of the world to hold dollars. The key to global currency "domination" is not how excited the political elite say they are about having their currency dominate. It is how willing they are to allow clear and transparent foreign ownership of domestic assets and, even more importantly, how willing and able they are to give up control of their capital and trade accounts. Can we at least agree that China is reducing the dollar component of its reserves? Even that is questionable. China's reserve accumulation since 2017 has occurred indirectly, through state-bank purchases of dollars. We have no idea whether or not the amount of dollars China is holding has increased or decreased, but simple B-o-P arithmetic tells us that China's rising accumulation of foreign assets was mostly matched by rising foreign accumulation of US assets.
Researchers at @sffed argue that higher transportation costs related to supply chain issues have had a negative impact on American labor force participation with the impact peaking this year.
Our model suggests that overall U.S. labor supply declines during the years when trade costs are elevated and then begins to recover. The biggest cumulative drop of 0.7% occurs in 2022 and the recovery is slow. By 2027, labor supply is projected to still be 0.2% lower than its pre-shock level. The fall in labor supply occurs because, while trade costs are higher, focusing on home production activities that are not reliant on the labor market temporarily becomes more attractive for some people than working in industries that are affected by the trade disruption. The blue line in Figure 2 for the cumulative change in employment since 2019 combines the separate effects from labor force participation and unemployment (green and red lines). Even though the low point for labor supply occurs in 2022, our model does not project that the low point for employment will happen until 2023, due to the additional unemployment that is generated when the trade-cost shock dissipates.
Raj Chetty and his @OppInsights team find that America’s workforce earning <$29k/year is down about 20% relative to its January 2020 level. Adjusting for workers now earning over $29k, the low-wage workforce was 13.5% under its pre-pandemic level. @BSteverman
The US is missing about a fifth of its pre-pandemic low-income workforce. At least some of those workers moved to higher-paying jobs, but, after adjusting for wage growth, researchers found employment for the poorest quarter of the workforce was still 13.5% below pre-pandemic levels at the end of 2021. Analyzing local trends, researchers found an important clue to where those missing workers went: Low-wage workers are scarcest where 2020’s devastation was worst. “It is clear there are large swaths of the population who are still not employed, and these are low-wage workers who lost their jobs in precisely the places where high-income people cut back on spending so sharply a couple of years ago,” Chetty said.
.@GeneralTheorist notes that, while durable goods are deflating, service inflation has decelerated from 7.2% in the three months ending October to 4.7% in December, but remains well above the 2% pre-pandemic run-rate.