Similar to 2019/early 2020, hedge funds are again arbing away differences between Treasury futures and cash prices in large size; unwinding of the “cash-futures trade” likely contributed to the March 2020 Treasury market instability.
Hedge fund short futures positions in the 2-year, 5-year, and 10-year contracts rose by $411 billion between October 4th, 2022 and May 9th, 2023. Consistent with these empirical trends, spreads on the trade suggest it has been profitable at several points in recent months, without considering the value of options embedded in the trade (and whose value has likely increased as measures of Treasury market uncertainty have risen). The cash-futures basis trade is an arbitrage trade that involves a short Treasury futures position, a long Treasury cash position, and borrowing in the repo market to finance the trade and provide leverage. This trade presents a financial stability vulnerability because the trade is generally highly leveraged and is exposed to both changes in futures margins and changes in repo spreads. Hedge funds unwinding the cash-futures basis trade likely contributed to the March 2020 Treasury market instability.
According to surveys, Americans want larger families than they actually have. Ideal family size has changed very little since the mid-70s.
Most Americans still overwhelmingly stick to an ideal of two to three children. In fact, the share of people saying they want three or more children has risen as the actual number of children being born has dropped. By the mid-1990s, about one-third of Americans said the ideal family had three or more children. But since then, the share of respondents citing an ideal of three or more children has gradually climbed. Despite dipping briefly after the pandemic, that group rebounded again in 2022 to 44%, according to the General Social Survey, the more than 50-year-old survey of Americans’ social views conducted by the University of Chicago. Meanwhile, the share of people who say the ideal family consists of two children slipped to 51.7% in 2022 from 62% in 1998. On average, the ideal family is 2.5 children, which is up slightly from the 1990s but relatively little changed over the course of 50 years.
American firms have $600 billion in debt maturing this year. Between 2025 and 2028 over $1 trillion of corporate debt matures each year.
U.S. companies have $600 billion in corporate debt set to mature this year, a total that will grow to more than $1 trillion a year from 2025 until 2028. That stark data from Goldman Sachs points to a financial cliff that is coming for American corporations, which executives are trying to navigate by extending the dates their debts come due, refinancing borrowings or managing cash reserves. What’s at stake? The debt loads, coupled with the rising costs of new financing for companies, may cut into corporate profits, investor returns, spending on new ideas, hiring—and could lead to less-healthy balance sheets. Some analysts say there could be a swath of corporate credit-rating downgrades ahead.
Alan Auerbach @Kotlikoff argue that the global savings glut was a “myth.” The market return on capital, which would show a decline if there were a capital glut, increased in the 2000s and 2010s.
There has been no major increase in the US capital-output ratio, nor has there been a major decline in the US marginal product of capital – the economy’s real return to capital. The US capital-output ratio remains close to its postwar average and capital’s real return has remained roughly constant -- around 6%. During the 2000s the marginal product of U.S. capital (MPK) was a healthy 5.84%. In the 2010s it was even higher at 6.42%. The market return to capital would show a decline if there were a capital glut and investors expected lower rates of return, It shows no such decline. The market return to capital’s real return averaged 5.52% between 1950 and 1989. Btw 1990 and 2019 it averaged 6.95. Hence, the broadest market-based real return data shows a rise, not a fall in returns in the recent decades during which capital has allegedly been in vast oversupply. The real return to US wealth between 2010 and 2019 averaged 8.25% – the highest average return of any postwar decade.
The labor force participation rate for prime-age women (ages 25-54) is at an all-time high 77.8%, driven by mothers whose youngest child is under 5 years old. @laurenlbauer
Since February 2023, the labor force participation rate for prime-age women––those between the ages of 25 and 54––has exceeded its all-time high. As of the most recent jobs report, prime-age women had a labor force participation rate of 77.8%. We find that those who have contributed most to the rebound in overall labor force participation in April and May of 2023, three years after the nadir of pandemic-era participation, are in fact prime-age women. Moreover, among prime-age women and indeed among all groups, women whose youngest child is under the age of five are powering the pack’s upward trajectory.
Since 2018, auto manufacturers have announced at least $110 billion of EV-related domestic investment, about half in Southern states, driven by lower labor and energy costs. Unionizing southern auto workers is a priority for the UAW.
Auto companies have announced more than $110 billion in EV-related investments in the U.S. since 2018, with about half that sum destined for Southern states, according to the Center for Automotive Research. The rest is mostly planned for states in the Great Lakes region, including Michigan, Ohio and Indiana. Auto employment in the Great Lakes region, while still nearly double that of southern states, has slid 34% in the last two decades to 382,000 workers as of 2021, according to the Economic Policy Institute. Full-time unionized jobs in the industry currently range between $18 to $32 an hour. There is no guarantee the [southern] Ford plants will be unionized, and the company has said this decision is up to its workers. The United Auto Workers union is currently in talks with the Detroit automakers and is prioritizing organizing these joint-venture battery plants.
Despite spending at least $210 billion since 2006 to encourage marriage and children, South Korea’s fertility rate fell from 0.81 in 2021 to 0.78 last year, falling further to 0.70 in the April-to-June quarter.
South Korea’s fertility rate slumped to 0.78 last year, from 0.81 in 2021. The slide has worsened in recent months, falling to 0.70 in the April-to-June quarter. Since 2013, the country of 52 million has reported the lowest fertility rate among wealthy members of the OECD—where the average fertility rate stands at 1.58. No other OECD member has a fertility rate below 1. South Korea’s population began declining in 2020, with the number of deaths overtaking total births. Its military conscripts are expected to shrink by nearly half over the next two decades. The military has started to deploy more unmanned combat aircraft and increase the number of women serving. The country’s total student enrollment has shrunk for 18 years straight.
Ideologically driven donors of $200 or less are driving political polarization in the US, as small donors hold far more extreme views than those of the mean voter. @Edsall
A 2022 paper, “Small Campaign Donors,” documents the striking increase in low-dollar ($200 or less) campaign contributions in recent years. The total number of individual donors grew from 5.2mm in 2006 to 195mm in 2020. The appeal of extreme candidates can be seen in the OpenSecrets listing of the top members of the House and Senate ranked by the percentage of contributions they have received from small donors in the 2021-22 election cycle: Bernie Sanders raised $38.3mm, of which 70%, came from small donors; Marjorie Taylor Greene raised $12.5mm, of which 68% came from small donors; and Alexandria Ocasio-Cortez raised $12.3mm, of which 68%, came from small donors. House Republicans who backed Trump and voted to reject the Electoral College count on Jan. 6 received an average of $140,000 in small contributions, while House Republicans who opposed Trump and voted to accept Biden’s victory received far less in small donations, an average of $40,000.
A “Great Reallocation” of US supply chain activity is underway with Vietnam and Mexico being the largest beneficiaries. @lalfaro
Rather than signaling a trend towards deglobalization, the available data hints at a looming “great reallocation” of US supply chain activity. This shift is marked by a decline in direct US sourcing from China, with a corresponding rise in import share from low-wage locations, chiefly Vietnam, and regional trade areas, particularly Mexico. Recent policy efforts may ultimately not succeed in their objective to reduce US dependence on supply chains tied to China. Despite a decrease in US direct reliance on China, there has been an increase in China’s import share in “friendly” nations, including the EU, Mexico, and Vietnam. Chinese firms are stepping up FDI and production facilities in Vietnam and Mexico in critical sectors, albeit from a low base. This suggests that plants in which China is the ultimate owner may continue to play a significant role in US value chains.
The German economic model is under increasing stress due to higher energy costs, China’s import substitution strategy, and competition from American and Chinese electric car makers.
Germany will be the world’s only major economy to contract in 2023, with even sanctioned Russia experiencing growth, according to the International Monetary Fund. China was for years a major driver of Germany’s export boom. A rapidly industrializing China bought up all the capital goods that Germany could make. But China’s investment-heavy growth model has been approaching its limits for years. Growth and demand for imports have faltered. Energy prices in Europe have declined from last year’s peak as EU countries scrambled to replace Russian gas, but German industry still faces higher costs than competitors in the U.S. and Asia.
Jesper Rangvid notes that, so far this year, seven stocks generated 70% of the S&P 500 return; they now constitute 27.5% of the S&P 500.
In this analysis, I look at the performance of stocks referred to by some as the “Magnificent Seven” (Mag7). These are: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. The combined market value of all 500 stocks in the S&P 500 has increased by $5 trillion or 15.3% in 2023, as mentioned. Leaving Mag7 out of the equation, the value of the remaining 493 shares has risen from $26 trillion to $27 trillion today, a return of only 4.5%. Consequently, Mag7 stocks have provided a 10.8% increase in the S&P 500. This means that only 7 out of 500 stocks generated 10.8%/15.3% = 71% of the return of the S&P 500 in 2023. The remaining 493 stocks delivered the remaining 29%. One can only speculate whether these shares are bubbles. The spectacular performance of Nvidia, for example, is reminiscent of the performance of hyped stocks during the dot.com bubble at the turn of the millennium.
.@GoldmanSachs finds that 20-25% of US workers are working from home at least part of the week, well above the pre-pandemic average of 2.6%. This exerts upward pressure on office vacancy rates, partially offset by a decline in new office construction.
Work from home has reduced office utilization rates but has not yet led to substantial declines in office occupancy rates because most firms are locked in long-duration leases. Going forward, 17% of all office leases are scheduled to expire by the end of 2024, 47% between 2024-2029, and the rest after 2030. Our baseline estimates suggest that remote work will likely exert 0.8pp of upward pressure on the office vacancy rate by 2024, an additional 2.3pp over 2025-2029, and another 1.8pp in 2030 and beyond, though this is likely to be partially offset by a decline in new construction. The share of employees working remotely remains remarkably elevated in industries like information that require less face-to-face interaction, while it is much lower in contact-heavy sectors like retail and hospitality.
Depletion of groundwater reserves is causing significant reductions in crop yields and puts at risk one-third of America’s total volume of drinking water that comes from groundwater.
A wealth of underground water helped create America, its vast cities and bountiful farmland. Now, Americans are squandering that inheritance. The Times analyzed water levels reported at tens of thousands of sites, revealing a crisis that threatens American prosperity - 84,544 monitoring wells examined for trends since 1920. Nearly half the sites have declined significantly over the past 40 years as more water has been pumped out than nature can replenish. In the past decade, four of every 10 sites hit all-time lows. And last year was the worst yet.
The Gulf of Mexico is 3 degrees warmer than the mean with temperatures of nearly 88° becoming common at depths of 165 feet. A University of Miami hurricane scientist described the ocean heat as “other-worldly.”
The sea surface temperatures of the gulf have cooked, warming more than 3 degrees above the norm for the date. The water has also heated up far beneath the surface. In fact, temperatures of nearly 88° are common to depths of 165 feet below the surface, according to data from Kim Wood, a professor of meteorology at Mississippi State University. University of Miami hurricane scientist Andy Hazelton called the ocean heat “other-worldly.” While the Gulf of Mexico as a whole has cooled slightly compared with earlier this month, when it shattered records, it remains near all-time highs.
IBM researchers demonstrate a new technology that is 14 times as energy efficient as conventional chips at speech recognition, with potential for other AI applications.
Models of artificial intelligence (AI) that have billions of parameters can achieve high accuracy across a range of tasks but they exacerbate the poor energy efficiency of conventional general-purpose processors, such as graphics processing units or central processing units. Analog in-memory computing (analog-AI) can provide better energy efficiency by performing matrix–vector multiplications in parallel on ‘memory tiles’. However, analog-AI has yet to demonstrate software-equivalent (SWeq) accuracy on models that require many such tiles and efficient communication of neural-network activations between the tiles. We demonstrate fully end-to-end SWeq accuracy for a small keyword-spotting network and near-SWeq accuracy on the much larger MLPerf8 recurrent neural-network transducer (RNNT.)
Since 2007, the ratio of Treasuries outstanding to primary dealer assets has increased by a factor of four. @DuffieDarrell argues that this will drive increasing illiquidity in the Treasury market.
The total amount of Treasuries outstanding will continue to grow rapidly relative to the intermediation capacity of the market because of large and persistent US fiscal deficits and the limited flexibility of dealer balance sheets, unless there are significant improvements in market structure. Broad central clearing and all-to-all trade have the potential to add importantly to market capacity and resilience. Additional improvements in intermediation capacity can likely be achieved with real-time post-trade transaction reporting and improvements in the form of capital regulation, especially the Supplementary Leverage Ratio. Backstopping the liquidity of this market with transparent official-sector purchase programs will further buttress market resilience.
Noting high nominal wage growth, Bridgewater argues that inflation is likely leveling out at its current rate which implies downside risk to asset prices.
Today, about 2.5% wage growth would be consistent with 2% inflation, as recent-trend productivity growth has been low and other sources of income (from assets and government-deficit-financed transfers) are more neutral. With wage growth currently running at around 4.5%, we’re far away from this level. We’re more likely to see inflation level out at its current rate rather than continue to decline like it has over the past year. This would push the Fed to continue tightening and, with a short pause and return toward easing being priced in, could come through the form of either rate rises or holding rates at high levels. This makes assets especially vulnerable to another round of tighter policy.
Citing a rise in 5 and 10-year TIPS yields, @FedGuy12 notes some investors are pricing in a world with a higher r*.
One market based measure of longer dated real yields has steadily risen and appears to indicate such a possibility. Market pricing indicates that some investors have a clearer vision of the future. Market pricing of future inflation expectations and longer dated real rates have been creeping up, potentially pricing in some probability of both a higher inflation target and a higher r*. Together this implies that the higher nominal rates we see today are here to stay and may even trend higher as the future unfolds. The Fed is a conservative institution and would be hesitant to make any big changes to its approach to policy. If the future looks different from the past, the Fed will be among the last to know.
Torsten Slok @apolloglobal argues that reduced Japanese demand for Treasuries is a minor factor in rising long-term interest rates.
One way to better understand the impact of BoJ YCC exit on Japanese demand for US Treasuries is to look at how much of the recent increase in US long-term interest rates has happened during Tokyo trading hours. Since the BoJ YCC exit surprise in late July, the move higher in 10s has occurred almost entirely during New York trading hours. This suggests that US rates are not driven higher by Japanese investors during Tokyo trading hours. Hence, BoJ YCC exit doesn’t seem to be the reason long rates have increased over the past month. Instead, likely drivers of US rates over the past month are the US sovereign downgrade, fewer dollars for China to recycle in a falling exports environment, Fed QT, the significant budget deficit, the large stock of T-bills, and the Treasury’s intention to increase coupon auction sizes.
Historically monetary tightening has had an impact on risk capital: 100bps of tightening is associated with a 1-3pp decline in R&D spending and a 25% decline in VC investment over the following 1-3 year period.
We normalize the shock to tightening by 100bps. Investment in intellectual property products (IPP) in the national accounts (NIPA) declines by about 1%. The magnitude is comparable to the decline in traditional investment in physical assets. R&D spending in Compustat data for public firms declines by about 3%. VC investment is more volatile, and declines by as much as 25% at a horizon of 1 to 3 years after the monetary policy shock. Patenting in important technologies declines by up to 9% 2 to 4 years after the shock. An aggregate innovation index constructed using estimates of the economic value of patents also declines by up to 9%. Based on estimates of the output and total factor productivity (TFP) sensitivity to the aggregate innovation index, a 9% decline in the index can contribute to 1% lower real output and 0.5% lower TFP 5 years later.
According to current UN projections half of global population growth btw 2022 and 2050 will take place in sub-Saharan Africa. Current UN estimates project sub-Saharan Africa to have 33% of the global population by 2100 relative to 14% in 2019. @ashleyahn88
Half of the global population growth from 2022 to 2050 will occur in sub-Saharan Africa. The region’s population is currently growing three times faster than the rest of the world, and by the end of the century, it will be home to a third of all people in the world, compared to only 14% in 2019. This means that the burden of rapid population growth will fall on some of the poorest countries in the world, with nearly half of the region having a gross national income per capita below $1,135, and in places that are among the most vulnerable to climate change.
.@cwcalomiris argues high American public debt levels and chronic deficits may lead toward an era of “fiscal dominance,” in which the government forces banks to hold non-interest-bearing debt.
The essence of fiscal dominance is the need for the government to fund its deficits on the margin with non-interest-bearing debts. Inflation taxation has two components: expected and unexpected inflation taxation. Both are limited in their ability to fund real government expenditures. The expected component of inflation taxation (per period) is the product of the nominal interest rate and the inflation tax base, which consists of all non-interest bearing government debt. Unexpected inflation taxation occurs when the nominal value of outstanding government debt falls unexpectedly (thereby taxing government debtholders), and this component is also limited by the ability of government to surprise markets by creating unanticipated inflation. It is quite possible that a fiscal dominance episode in the US would result in not only the end of the policy of paying interest on reserves, but also a return to requiring banks to hold a large fraction of their deposit liabilities as zero-interest reserves.
.@B_Eichengreen argues that high public debt levels are here to stay and that methods to suppress interest rates are “less feasible than in the past.” This means chronic fiscal deficits will need to be reduced even in countries that issue safe assets.
Large, persistent primary budget surpluses are not in the political cards. It is difficult to imagine more favorable interest-rate-growth-rate differentials (favorable interest-rate-growth-rate differentials reducing debt ratios in an accounting sense). Real interest rates have trended downward to very low levels. It is hard to foresee them falling still lower. Faster global growth is pleasant to imagine but difficult to engineer. Inflation is not a sustainable route to reducing high public debts. Statutory ceilings on interest rates and related measures of financial repression are less feasible than in the past. Investors opposed to the widespread application of repressive policies are a more powerful lobby. Financial liberalization, internal and external, is an economic fact of life. The genie is out of the bottle. All of which is to say that, for better or worse, high public debts are here to stay.
.@PaulKrugman notes that after a long period of general agreement that r* was very low, there is now active disagreement about the level of r*, with some, including the Richmond Fed, believing that r* has increased substantially.
Many of us thought we had a pretty good understanding of the forces behind low r* before Covid struck. Investment demand is largely driven by expectations about future economic growth, and prospects for U.S. growth seemed low in part because of demography — growth in the working-age population has stalled — and in part because, despite all the hype about technology, productivity has grown slowly since the mid-2000s. The demographic story hasn’t changed. There are a couple of other forces that might have increased r*. Budget deficits have gotten bigger, which could be providing a fiscal boost. The Biden administration’s industrial policies seem to be catalyzing a boom in manufacturing investment. But manufacturing investment isn’t that big a part of overall investment spending, so it’s not clear how much this matters for interest rates. One possible reason to think that r* may have risen is the surprising resilience of the economy in the face of Fed rate hikes.
Half the world’s oceans are experiencing a marine heatwave. As the Gulf of Maine warms, the lobster catch has fallen by 26% since 2016 and is now “162 miles northward and nearly 70 feet deeper.”
This summer, nearly half the world’s oceans are experiencing a marine heatwave, defined as warmer than 90% of previous temperature observations on the same date. There are other possible explanations in addition to climate change and the El Niño/La Niña cycle. New pollution rules have cut airborne sulfur aerosol particles released by commercial ships over parts of the ocean, clearing the air and allowing more sunlight to reach the ocean surface. That in turn might be heating the water along some shipping routes, although the amount is in dispute. In January 2022, an underwater volcano near Tonga blasted 50 million tons of water vapor into the stratosphere. Some researchers believe that vapor might be acting as a planet-warming greenhouse gas and nudging up ocean temperatures. Both theories are still under investigation, and their overall impact is up for debate.
The UAW is making demands of the Big Three that would cost an additional $80 billion over the course of the contract. Bloomberg notes total hourly pay and benefits expenses would rise from about $64 now to $150.
Shawn Fain, president of the United Auto Workers union since March, has declared “war” on the Detroit Three automakers, with contract demands that even he calls “audacious,” including proposals for a 46% raise, a return to traditional pensions and a 32-hour work week. The automakers counter that meeting those demands would threaten their existence, driving up labor costs by $80 billion and increasing total pay and benefit expenses to more than $150 an hour, from about $64 now, Bloomberg has reported. Higher labor costs contributed to Chrysler, Ford and GM’s lack of price competitiveness against foreign brands in the 1990s and 2000s.
According to a Bloomberg analysis, Apple’s suppliers are following Apple out of China with Vietnam and India being the biggest winners. 7% of iPhones were manufactured in India last year.
Data compiled by Bloomberg on more than 370 suppliers and their factory locations reveals which of Apple’s manufacturing partners are building new capacity and where. The result is the clearest picture yet of all the ways the Cupertino, California-based company’s network of producers increasingly crisscrosses the developing world. Vietnam and India are the biggest winners, with smaller production hot spots appearing elsewhere in Asia. Producers from the US and Japan have reduced their footprint in China, even as Chinese firms join the supplier list at a rapid clip. China still houses the majority of Apple’s device-making factories, and will remain an integral part of the company’s supply chain. But the shift to a more diffuse production network is undeniable and accelerating.
Xi Jinping is opposed to domestic consumption growth, according to well-sourced reporters @Lingling_Wei and @yifanxie. This implies that persistent imbalances with the West are a goal of the central government.
Xi Jinping has deep-rooted philosophical objections to Western-style consumption-driven growth, people familiar with decision-making in Beijing say. Xi sees such growth as wasteful and at odds with his goal of making China a world-leading industrial and technological powerhouse. Chinese officials also emphasized avoiding a current-account deficit, which would signal greater dependence on the outside world at a time of simmering tensions between Beijing and the West. Chinese officials told their counterparts at multinational institutions that the many hardships Xi survived during the Cultural Revolution—when he lived in a cave and dug ditches—helped shape his view that austerity breeds prosperity, the people said. “The message from the Chinese is that Western-style social support would only encourage laziness,” one person familiar with the meetings said.
Improvement in the US debt-GDP ratio from 1946-1974 was driven primarily by primary government surpluses and distortions of real interest rates from surprise inflation and from pegged nominal rates, not overall economic growth. @AcalinJulien
We decompose the movements of debt/GDP into the effects of primary surpluses and deficits; distortions of real interest rates from surprise inflation and from pegged nominal rates; and the difference between the undistorted real interest rate and the growth rate of output (r⋆ − g). For the period up to 1974, we find that the fall in the debt-GDP ratio is explained mostly by primary surpluse and interest-rate distortions. Absent those factors, with the path of the ratio determined entirely by r⋆ − g, the ratio of 106% in 1946 would have fallen only to 74% in 1974 rather than the actual trough of 23%. As of the end of fiscal year 2022, the actual debt/GDP ratio stands at 102%, close to its peak of 106% in 1946. Over the last 76 years, however, g > r⋆ has contributed only modestly to debt reduction. History should not make us optimistic that the U.S. will grow out of its debt.
.@jburnmurdoch notes that American and British infrastructure costs are far higher than other advanced economies. He cites research that attributes this to “Nimbyism” such as environmental reviews.
New motorway bridges in the UK cost more than three times as much per lane mile than in France, Denmark, or Norway, and additional lanes on existing British roads are twice as expensive as in Germany. In both cases, only the US faces even higher costs.
The average home insurance cost for Floridians has tripled in the past five years. Homebuilders in California and Florida are reporting insurance costs are “somewhat slowing sales.”
Almost a third of house builders in Florida said buyers’ concerns about home insurance were “somewhat slowing sales.” The proportion in Southern California was very similar, at 29%, the survey by John Burns Research & Consulting found. That is much higher than the national figure of 9% of builders reporting sales affected by insurance concerns. The risks of disasters haven’t been fully priced into property markets, partly because of flaws in the way federal flood insurance was priced, researchers say. If flood risks were taken into account, U.S. residential properties would be worth at least $121 billion less, according to a study earlier this year by nonprofit the First Street Foundation, the Federal Reserve and others. In Florida alone, properties in flood zones are overvalued by more than $50 billion.
Chinese imports of chipmaking equipment in June and July were up 70% vs. 2022, potentially in anticipation of additional export controls by Japan and the Netherlands.
China’s imports of semiconductor equipment have surged to record highs ahead of the implementation of export curbs by US allies. Chinese customs data shows the country’s chip production tool imports in June and July totalled nearly $5bn, up 70% from $2.9bn in the same period last year. Most of the imports came from the Netherlands and Japan, two countries that have imposed export restrictions on chipmaking equipment as they work with the US to slow China’s technological advancement.
.@nberpubs analysis finds that a 1% increase in the working age share of population raises per capita income by ~ 1% and forecasts a 0.4-0.8pp drop in growth of income per capita from population aging.
The results document that shifts in population age structure significantly affect economic growth. A 1% increase in the working-age share raises income per capita by about 1%. A 1% greater working-age share amplifies growth by 0.1–0.4% in subsequent periods. These patterns are stable for both OECD and non-OECD countries. We combine the empirical estimates with demographic predictions and project economic growth in 2020–2050. Without population aging, income per capita in OECD countries is projected to grow on average by 2.5% annually between 2020 and 2050. With population aging, growth is projected to slow by 0.8 pp if we measure working ages retrospectively but only by 0.4 pp if we measure [changes in age patterns of health]. In contrast, population aging is projected to spur average growth of income per capita in non-OECD countries.
Torsten Sløk @apolloglobal notes higher interest payments aren’t flowing back into the American economy as foreigners and the Fed own 50% of Treasuries.
When interest rates increase, holders of fixed income get a higher cash flow. The problem is that the Fed and foreigners own 50% of Treasuries outstanding, and foreigners own 28% of [investment grade and high-yield corporate] credit outstanding, so a lot of the additional cash flow created by higher US yields is not boosting US GDP growth. The bottom line is that higher interest rates are a net negative for the US economy.
.@mattsclancy @ArnaudDyevre argue large firms have different incentive structures for innovation than small firms, causing large firms to emphasize high-volume process innovation vs. patent applications and new product development.
In the figure above, the gap in patent applications and earnings between inventors who go to incumbents and entrants are indistinguishable before the job change, and then begin to diverge after they start working in different types of firms. Two equally productive inventors, one working for a young/small firm and another working for an incumbent/large firm, will be told to work on problems that are different. The inventor in the large firm might be asked to work on innovations that are less likely to threaten the firm’s existing product lines, and therefore less likely to lead to patents (let alone high-impact patents). Akcigit and Goldschlag (2023) suggest that’s because large firms are paying their inventors better but asking them to work on projects less likely to lead to new patents and products.
.@TheEconomist notes that American firms collect 41% of “excess profits” globally as measured by firms’ return on invested capital above a hurdle rate of 10%.
Out of some 900 sectors in America the number where the four biggest firms have a market share above two-thirds grew from 65 in 1997 to 97 by 2017. The Economist has come up with a crude estimate of “excess” profits for the world’s 3,000 largest listed companies by market value (excluding financial firms). Using reported figures from Bloomberg we calculate a firm’s return on invested capital above a hurdle rate of 10% (excluding goodwill and treating research and development, R&D, as an asset with a ten-year lifespan). This is the rate of return one might expect in a competitive market. In the past year excess profits reached $4trn, or nearly 4% of global GDP. American firms collect 41% of the total, with European ones taking 21%. The energy, technology and, in America, health-care industries stand out as excess-profit pools relative to their size.
Since Russia invaded Ukraine in February 2022 approximately 1% of the Russian labor force has emigrated, exacerbating an acute labor shortage. @TheEconomist
Re: Russia, an analysis and policy network, has examined various estimates and available data from countries that have accepted large numbers of Russian émigrés. They found that between 817,000 and 922,000 people have left Russia since February 2022. Re: Russia reckons that the wartime emigrants account for roughly 1% of Russia’s workforce, exacerbating an acute labour shortage. The Gaidar Institute, a think-tank in Moscow, said that 35% of manufacturing businesses did not have enough workers in April, the highest figure since 1996. Shortages of specialists are especially severe: according to one Kremlin official, at least 100,000 IT professionals left the country in 2022.
Huawei has received $30B in state funding to build secret semiconductor fabrication facilities across China in an effort to evade US semiconductor sanctions. @markets
Huawei moved into chip production last year and acquired at least two existing plants and is building at least three others. The Semiconductor Industry Association estimates there are at least 23 fabrication facilities in the works in the country with planned investments of more than $100 billion by 2030. By 2029 or 2030, China is on track to have more than half the industry’s global capacity in older-generation semiconductors. “China is roughly spending as much in subsidies as the rest of the world combined,” said Chris Miller, author of “Chip War.”
As the American workforce shrinks relative to the economy @pkedrosky @defrag argue the number of workers is a limiting constraint on economic growth. He notes that the current generation of AI isn’t mature enough yet to offset this headwind.
If the labor force had continued to grow more or less in line with history and GDP, we’d have almost 5M more workers out there. But we don’t. The gap is shrinking—it was closer to 7M a year ago—but it is still a very large number, and, given retirements, skill mismatches, and aging, it seems unlikely we will close that gap quickly, if ever. Absent a wave of immigration, which creates its own problems, politically and otherwise, and doesn’t necessarily fill the observed skill gaps, something needs to change. Historically, when this has happened—labor became more expensive than capital—economies have responded with automation, so we should expect that again today. We think, contrary to hyperbole, we are already at the tail end of the current wave of AI. We need to look past the limits of current AI technology if we are to break free from the past few decades of tech—enabled automation, where there is high worker displacement without commensurate productivity gains impact—where minimal human flourishing is created.
Torsten Sløk @apolloglobal argues that higher debt servicing costs will make it difficult to keep interest rates elevated.
The annual debt servicing cost of the US government is close to $1 trillion, and the net interest expense as a share of total government revenues is near all-time high levels. Higher rates are not only slowing down consumers and corporates through higher borrowing costs. Higher rates are also a drag on growth through higher debt servicing costs for the government. In other words, higher debt servicing costs are impacting not only consumers and corporates but also the government. The bottom line is that when government debt levels are high, it is more difficult for interest rates to stay elevated for a long time because the negative impact on the economy of higher rates is also working through higher debt servicing costs for the government.
.@BankofAmerica notes deposits as a % of personal disposable income remains 9.8pp above 2019 levels. Over 50% of these deposits are held by middle- and lower-income households who may use them to support overall consumer spending.
The ratio of deposits to disposable income is currently relatively high, at least compared to over the past 30 years. Our estimated ratio of deposits to disposable income in 2023 Q2 would be around 9.8pp above the average in 2019 and around 11.5pp higher than the average over 2010-19. Using Bank of America internal data, we can estimate where the overall rise in deposits relative to 2019 is currently (as of 2023 Q2) held across the income distribution. On this basis, just under a quarter of the rise in total deposits is held by those households on incomes of less than $50,000, with another 30% of households on incomes between $50,000 and $100,000. Therefore, a reasonably large proportion of the remaining deposit buffers appears to be held by middle- and lower-income households, which implies they can still make a meaningful contribution to overall consumer spending.
India became the first nation to land a probe near the Moon’s South Pole, which contains water ice that could be a resource for future missions.
India has landed an uncrewed probe near the Moon’s unexplored South Pole, a milestone in the country’s efforts to become an international power in space exploration. The high-profile mission came days after a Russian attempt to land at the South Pole, Moscow’s first lunar mission since 1976, ended in failure. The uncrewed Luna-25 spacecraft spun out of control and crashed into the surface on Sunday. Moscow and New Delhi had been racing to become the first to explore the Moon’s South Pole. Scientists have said the region is of particular interest because it could contain water, which would make it crucial to any ambitions to inhabit the Moon.
A Chinese firm can now manufacture carbon fibre an important defense material. China has largely been blocked from large-scale production of carbon fiber by American and Japanese export controls. @SCMPNews
China has developed technology for the mass production of ultra-strong carbon fibre, which could help break international monopolies to supply materials for the aerospace and defence industries. Changsheng Technology worked with Shenzhen University to produce high-performance carbon fibre on a production line that can make 1,700 tonnes of the material per year. Carbon fibre is indispensable for the aerospace, defence, transport, new energy and marine engineering industries. China had been largely blocked from carbon fibre production because of US and Japanese bans on exports of manufacturing equipment to the country.
The Fortune 500 is less dynamic than many think: only 52 of the firms that make up the Fortune 500 were born after 1990. However, this likely reflects the dynamism of the component firms.
We found that only 52 of the [Fortune] 500 were born after 1990, our yardstick for the internet era. That includes Alphabet, Amazon and Meta, but misses Apple and Microsoft. Merely seven of the 500 were created after Apple unveiled the first iPhone in 2007, while 280 predate America’s entry into the second world war. In 1990 just 66 firms in the Fortune 500 were 30 years old or younger and since then the average age has crept up from 75 to 90. One explanation is that the digital revolution has not been all that revolutionary in some parts of the economy. Another is that inertia has slowed the pace of competitive upheaval in many industries, buying time for incumbents to adapt to digital technologies. A third explanation is that [incumbents’] scale creates a momentum of its own around innovation.
Expected earnings for S&P 500 firms “fully explain observed stock market fluctuations from 1980-2022,” and help explain macroeconomic boom-bust cycles @NBERpubs
The present value of short and long term expected earnings for S&P 500 firms, computed using a constant required return, fully explains observed stock market fluctuations btw 1980-2022. When long term earning growth (LTG) is high relative to historical standards, analyst forecasts of short and long term profits are systematically disappointed in the future, inconsistent with rationality. High LTG also correlates with higher survey expectations of stock returns, in contrast with standard theories, in which investors expect low returns in good times. High LTG thus proxies for excess optimism: it points to investors being too bullish about future profits and stock return. This evidence offers additional support to the hypothesis that boom-bust dynamics in non-rational expectations about the long-term act as an important driver of the volatility of key asset prices. A one standard deviation increase in LTG fuels an investment boom. Crucially, the investment boom sharply reverts 2 years later, and that reversal is fully explained by the predictable disappointment of the initially high LTG.
Yields on 10-year Treasuries rose to 4.35%, a level last seen in 2007. 10-year TIPS yielded over 2% for the first time since 2009.
The yield on 10-year inflation-protected Treasuries on Monday pushed over 2% for the first time since 2009, extending its ascent from year-to-date lows near 1%. Not long after, the yield on 10-year Treasuries without that protection surpassed October’s peak, climbing nearly 10 basis points to as much as 4.35%, a level last seen in late 2007, before slightly paring the gain.
American Airlines pilots approved a new contract boosting compensation by 46% over four years. The deal will cost the airline $9.6 billion.
American Airlines pilots approved a new contract that would provide 46% in cumulative pay raises and retirement contributions over its four-year term, along with a bonus, improved scheduling, sick leave, and insurance benefits. The pact will add about $9.6 billion in incremental costs for the airline over its duration, the Allied Pilots Association said in a statement Monday. That makes it the most expensive labor contract ever for a US carrier, topping the $7.2 billion value of an accord Delta Air Lines Inc. pilots secured in March.
Saudi security forces have reportedly killed hundreds of Ethiopian migrants seeking to enter the KSA. The migrants are largely motivated by higher earning potential in the kingdom.
Saudi border forces have killed hundreds of Ethiopian migrants attempting to cross into the kingdom from Yemen over the past 18 months, according to a human rights group. New York-based Human Rights Watch alleges in a 73-page report that the security forces “fired explosive weapons” at migrants and in some cases asked them which of their limbs they would prefer to be shot. The kingdom is home to hundreds of thousands of Ethiopian workers.
Treasury yields are 75bps above the CBO’s baseline projection. If rates remain at this level interest costs will exceed defense spending in 2024.
The ten-year Treasury Note interest rate closed at 4.30% on Thursday, the highest since 2007. Meanwhile, the three-month Treasury Bill rate closed at 5.56% and the 30-year Treasury Bond at 4.41%. All three are at or near their highest level in 16 years. CBO's most recent baseline projections are based on a ten-year rate of 3.9% and a three-month rate of 4.6% this quarter. Based on this, we estimate that interest rates across the yield curve average about 75bps above baseline projections. If rates remain 75bps above CBO’s projections, it could add $2.3T (6% of GDP) to the debt over the next ten years and $350B (0.9% of debt-to-GDP) to the deficit in 2033. Under that scenario, interest costs would exceed combined spending on Medicaid, SSI, and SNAP as well as spending on defense by next year. By 2026, the cost of interest would reach a record high 3.3% of the economy.
The Fed is still projecting a neutral rate of .5% though some of their models show a rising r* in line with arguments that increased capital investment and chronic deficits will lead to a higher r*.
Every quarter, Fed officials project where rates will settle over the longer run, which is in effect their estimate of neutral. The median estimate declined from 4.25% in 2012 to 2.5% in 2019. After subtracting inflation of 2%, that yielded a real neutral rate (sometimes called “r*” or “r-star”) of 0.5%. In June, the median was still 0.5%. That also happens to track a widely followed model co-developed by New York Fed President John Williams that also puts neutral at 0.5%. A model devised by the Richmond Fed, which before the pandemic closely tracked Williams’s model, put the real neutral rate at 2% in the first quarter. Larry Summers has recently suggested neutral has gone up because of higher deficits and the investment to transition to a lower-carbon economy.
Noting the Fed’s view that r* hasn’t gone up relative to pre-pandemic @FedGuy12 anticipates rate cuts and further QT, “The financial system needs an upwards-sloping curve to work well.”
By any measure real rates have steadily risen as both actual and expected inflation have trended lower and nominal rates have trended higher. Without any change, policy would be unnecessarily tightening. Rates cuts and QT would together have a steepening impact on the curve and help address some concerns in the banking sector, whose margins have been squeezed by curve inversion. The Japanese experience with a persistently flat or inverted curve was poor growth and potential financial stability concerns as some investors reached for risk. This in part motivated the BOJ’s 2016 foray into YCC, which steepened the curve by raising 10 year JGB yields above the deposit rate. The financial system needs an upward-sloping curve to work well, so the Fed may be nudging it in that direction.
.@jasonfurman argues that once the Fed has stabilized inflation below 3% for six months it should change the target rate from 2% to 3% “to give the Fed more scope to cut interest rates and thereby stimulate the economy.”
In the short run, the Fed should be aiming to stabilize inflation below 3% for at least six months. If it can achieve this goal, then it should shift to a higher target range for inflation when it updates its overall strategy around 2025. We have spent nearly half of the past 20 years with interest rates at the zero lower bound. Considerations led policy makers to conclude that 2% was the right number in the 1990s would lead them to consider something higher, like 3%, today to give the Fed more scope to cut interest rates and thereby stimulate the economy.
Noting that inflation has fallen without a rise in unemployment @paulkrugman argues the disinflation has been driven by improved supply as opposed to reduced demand.
The National Federation of Independent Business survey shows a sharp rise in 2021-22, then a steep fall that has brought us most of the way back to prepandemic inflation. This really doesn’t sound like an economy in which businesses are forgoing price hikes because of weak demand. It sounds like an economy in which inflation is coming down because of improved supply, not reduced demand. Does this mean that the Fed was wrong to raise rates? Not necessarily. If it hadn’t raised rates, the economy might be running really, really hot. The Atlanta Fed’s GDPNow tracker currently shows the economy growing at 5.8 (!!!), which isn’t really plausible but does suggest a lot of heat; so the Fed may not have caused disinflation, but rate hikes may have been necessary to permit disinflation caused by other forces.
Meta Platforms is preparing to launch open-sourced software to help developers automatically generate programming code, a move that could accelerate AI adoption and challenge proprietary software from OpenAI, Google, and startups. @theinformation
[Meta’s] Code Llama will make it easier for companies to develop AI assistants that automatically suggest code to developers as they type, and it could siphon customers from paid coding assistants such as Microsoft’s GitHub Copilot, which is powered by OpenAI. Generating automated code suggestions has been among the most popular uses of LLMs, as code is based on language. LLMs also power conversational text services like ChatGPT. GitHub a year ago began charging developers $10 per month for Copilot, and a slew of other coding assistant companies have raised venture funding in recent months. Companies might gravitate to using an open-source coding model to develop their own coding assistant in order to safeguard their source code, said one person who has worked on Code Llama.
As the dollar strengthens relative to the yuan China’s GDP is declining as a percent of US GDP. In real terms China’s GDP is still growing as a percent of US.
American nominal growth is clocking a 6.5% pace this year against 4.8% for China, according to Bloomberg Economics, which still sees the world's second-biggest economy expanding faster in real terms. The strengthening US dollar against the yuan has also contributed to China’s rival pulling away, for now, in the global race when GDP is measured in dollars.
China’s leadership is suspicious of growing household consumption as a % of GDP at the expense of building industrial capacity and “girding for potential conflict with the West.”
Xi and some of his lieutenants remain suspicious of U.S.-style consumption, which they see as wasteful at a time when China’s focus should be on bolstering its industrial capabilities and girding for potential conflict with the West, people with knowledge of Beijing’s decision-making say. The leadership also worries that empowering individuals to make more decisions over how they spend their money could undermine state authority, without generating the kind of growth Beijing desires.
.@fuxianyi expects fewer than eight million newborns in China this year, based on indicators including marriage and newborn-medical-checkup data, less than half the number in 2016 when China scrapped its one-child policy.
China’s total fertility rate—a snapshot of the average number of babies a woman would have over her lifetime—fell to 1.09 last year, from 1.30 in 2020, according to a study by a unit of the National Health Commission cited this week by National Business Daily, a media outlet managed by the municipal government of Chengdu, the capital of Sichuan province. At 1.09, China’s rate would be below the 1.26 of Japan. Yi Fuxian, a scientist at the University of Wisconsin who has studied China’s demographics expects fewer than eight million newborns in China this year, based on indicators including marriage and newborn-medical-checkup data. That would be less than half the number in 2016, when China scrapped its one-child policy and recorded around 18 million births. By last year, the figure had fallen below 10 million.
Tom Lawler argues in support of recent work by Lubik and Matthes at the Federal Reserve that shows that r* has risen over the last year. He thinks that interest rates will be persistently higher.
There is in fact evidence that the natural rate of interest, or r-star, has in fact risen over the last year, and by some measures, it would appear as if r-star may be at levels not that far from those seen just prior to the financial crisis of 2008. If that were the case, then a “soft-landing scenario where inflation fell back to 2% would be one where the Federal Fund Rate fell back to the 3 ½-4% level, rather than the 2 ½-2 ¾ % level implied by the HLW model or the FOMC’s “dot plots.” In addition, if r-star has risen significantly, then recent Federal Reserve policy has not been as “restrictive” as many have suggested. If that were the case, then one would have expected the economy to have performed better than the “consensus” forecast, which in fact has been the case. Related: The Evolution of Short-Run r* After the Pandemic and What Have We Learned About the Neutral Rate? and The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet)
.@JosephPolitano argues that the uptick in mortgage rates from 2.7% in 2021 to 7% two years later won’t “lock in” homeowners as fully as many expect, given that 42% of Americans own their homes outright.
What if higher mortgage rates have turned the low-rate mortgages of 2021 into golden handcuffs, locking owners into their existing homes? 42% of American homeowners own their homes with no mortgage. Most existing homeowners with mortgages have large equity cushions by virtue of purchasing before the massive pandemic-era home price appreciation. Excluding people who owned their homes free and clear, the median level of housing debt is only 52% of the value of the home, and those homeowners with large equity cushions should also be less affected by lock-in. Related: The "New Normal" Mortgage Rate Range and The Great Pandemic Mortgage Refinance Boom
Nicholas Lardy @PIIE argues that concerns about the Chinese economy are overstated, given that core consumer prices in July rose by 0.8% once volatile food and energy prices are stripped out.
A careful reading of the present situation does not support the view that China's growth is now gripped by a severe cyclical downward spiral that will persist for several years. Falling retail prices could lead households to postpone consumption on the expectation that goods would become cheaper tomorrow. That would reduce consumption and economic growth. But the widely noted 0.3% decline in consumer prices in July 2023 compared with a year ago was mostly due to elevated food prices in the same period of 2022. Stripping out volatile prices of food and energy, core consumer prices in July rose by 0.8%, up from the 0.4% increase in June. It may be premature to raise the specter of deflation based on one month of data. Related: The Neoclassical Growth of China and China Stops Reporting Youth Unemployment as Economic Pressures Mount and China Cannot Allow Jobless Young To ‘Lie Flat’
Analysts at @sffed argue that as of June households have spent 90% of $2.1T in excess savings accumulated during the pandemic. They estimate that excess savings will be fully depleted by the end of Q3 2023.
.@hboushey46 of President Biden’s CEA argues public spending is “crowding in” private investment by “de-risking” ventures through tax credits and direct government support.
When goods have strong positive externalities—such as decreasing our carbon emissions, improving supply chain resilience, or promoting national security—the market can underprovide, as private actors do not experience all of the social benefits of their production. In these instances, government action, such as by lowering the cost of production for the firm, can correct the failure of the market to provide sufficient supply and improve overall welfare. These funding streams, combined, are designed to de-risk new technologies, support the development of necessary infrastructure, and more, making new technologies and domestic manufacturing cost-competitive. Related: Making Manufacturing Great Again and Factory Boom Sweeps US With Construction at Record $190 Billion and Republican Districts Dominate US Clean Technology Investment Boom
.@LHSummers forecasts 10-year T-bills yielding an average of 4.75% over the next decade relative to an average of 2.9% over the last 20 years.
Inflation is likely to trend at a faster pace than in the past, perhaps 2.5%. A real return, which could be 1.5% to 2% over time when thinking of the government’s increasing borrowing needs — driven by the need for more defense spending, the likelihood of some Trump administration tax cuts getting extended, and higher average interest costs on outstanding debt. A term premium, which is the compensation investors get for buying a longer-term security rather than rolling over investments in short-term ones. Typically this has averaged about 0.75 to 1 percentage point. Adding up the three components, then it’s likely investors over the next decade will be “looking at 4.75 on the 10-year — and it obviously could end up being higher than that.” Related: What Have We Learned About the Neutral Rate? and The 2023 Long-Term Budget Outlook and US Fiscal Alarm Bells Are Drowning Out a Deeper Problem
By 2050 at least 38% of China’s population will be older than 60.
China’s aging society problem will accelerate over the next decade, with the number of citizens aged over 60 expanding by an average of 10 million per year, according to a leading demographer, adding further strain to the state pension fund, elderly care facilities, and medical services. The acceleration will push the number of senior citizens to 520 million by 2050, or 37.8% of the population, according to Renmin University of China vice-president Du Peng. China had 209.78 million people aged over 65 last year, accounting for 14.9% of the population, up from 200 million in 2021, according to official data. Last year, 29.1% of Japan’s population were aged over 65, with 17% in the United States and South Korea and 7% in India, according to World Bank data. Related: China Is Facing a Moment of Truth About Its Low Retirement Age andChina Is Dying Out and China’s Population Likely Fell in 2022 as Births Hit New Low
.@AswathDamodaran argues that central banks are rate takers, not rate makers. Rates, in his view, are ultimately set by inflation and real growth. He notes, “The fundamentals will win.”
There is no better way to show the emptiness of "the Fed did it" argument than to plot out the US treasury bond rate each year against a crude version of the fundamental risk-free rate, computed by adding the actual inflation in a year to the real GDP growth rate that year. No one (including central banks) cannot fight fundamentals: Central banks and governments that think that they have the power to raise or lower interest rates by edict, and the investors who invest on that basis, are being delusional. While they can nudge rates at the margin, they cannot fight fundamentals (inflation and real growth), and when they do, the fundamentals will win. Related: The Fed and the Secular Decline in Interest Rates and What Have We Learned About the Neutral Rate? and The Evolution of Short-Run r* After the Pandemic
The United Auto Workers are coming closer to a strike in September. Their demands would cost carmakers $80 billion over the four years of the deal.
The leader of the United Auto Workers union on Tuesday asked members to grant him the ability to call a strike, arguing contract talks with the three major Detroit carmakers are moving too slowly. Earlier this year, the UAW gave each carmaker a list of demands that included pay raises of more than 40%, inflation protection, better treatment of temporary workers, and improved perks for retirees. The UAW also wants all workers paid the same wage, regardless of the job they do or whether they work on electric vehicles. If the union got everything it demanded it would cost carmakers $80 billion over the four years of the deal, Bloomberg has reported. Related: The ‘Summer of Strikes’ Isn’t Living Up to the Hype and Unions’ Inflation Warning? and Everyone Wants to Work at UPS After Teamsters Deal
.@calculatedrisk notes that a rise in the neutral rate vs. the pre-pandemic period would imply that 30-year fixed mortgage rates “will be in current range for some time.”
Goldman Sachs economists argued the neutral rate will likely be higher than the Fed currently expects. "We expect the funds rate to eventually stabilize at 3-3.25%." If the neutral rate is in that range then the 30-year fixed mortgage rate will be in the low to mid 6% range. With a 3.25% Fed Funds rate, a 4.45% 10-year yield, we’d expect 30-year mortgage rates around 6.45%. Recent buyers, with 7%+ mortgage rates, might be able to refinance, but most buyers will be locked into their current rate. The bottom line is it appears 30-year mortgage rates will be in current range for some time (barring a crisis). Related: Could 6% to 7% 30-Year Mortgage Rates be the "New Normal"? and What Have We Learned About the Neutral Rate? and Rate Cuts
40% of America’s high-quality scientific papers involve international collaborations, and China is the #1 partner in producing scientific research, though security concerns threaten the relationship going forward.
The American economy is now growing faster than China’s. @M_C_Klein notes agency debt might come under pressure as China moves to support the yuan.
In July the PBOC and other banks collectively sold more foreign currency and FX forwards than in any month since January 2017. Is this meaningful? It depends on perspective. One potentially interesting question is how this might affect spreads on mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. After all, Chinese entities have been big buyers of agency MBS even when they were reducing (maybe) their holdings of U.S. Treasury notes and bonds. If they have now switched to selling reserve assets, or are simply buying less than before, that could have potential ramifications for convexity premiums and interest rate volatility. Related: Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and The Neoclassical Growth of China and The Rise & Fall of Foreign Direct Investment in China
Researchers at Wharton project the true cost of the Inflation Reduction Act will be over $1T, with the uptake of uncapped tax credits higher than initial CBO projections.
Most of the [IRA’s] spending comes in the form of tax credits that are uncapped, and those unlimited credits are designed to be rolled out over a 10-year span. In September 2022 CBO estimated the clean energy and climate portions of the bill would cost about $391 billion between 2022 and 2031. A team of researchers at the University of Pennsylvania’s Wharton School, working with Goldman Sachs, updated their own earlier estimate of $385 billion with a staggering new figure in excess of $1 trillion. The report’s authors cited “newer implementation” details and more optimistic assumptions about how much private capital will pour into the economy, particularly electric vehicles, in response to the promise of leveraging tax credits. Related: Making Manufacturing Great Again and Republican Districts Dominate US Clean Technology Investment Boom and Unpacking the Boom in U.S. Construction of Manufacturing Facilities
.@BankofAmerica reports that in Q2 ‘23 San Antonio, Dallas, and Orlando have the most constrained housing supplies as buoyant labor markets continue to attract people.
Our analysis suggests that in 2Q, San Antonio, Dallas, and Orlando have the most constrained housing supply as buoyant labor markets continue to attract people. St. Louis, Detroit, and Miami seem to have the highest housing stock relative to their population. The good news is that cities with lower housing supply are already seeing higher construction trends but if the current population dynamics are maintained there will continue to be a strong housing need in the growing parts of the country. Looking more broadly at population flow, Bank of America internal data suggests that in 2Q, 13 out of the 27 Metropolitan Statistical Areas (MSAs) we track continue to see positive year-over-year growth in population with Jacksonville and Columbus leading the gain. Charlotte, Nashville, and Las Vegas saw accelerating pace of increase in residents than in 1Q. Related: A $100 Billion Wealth Migration Tilts US Economy’s Center of Gravity South and What’s the Matter With Miami? and Young Families Have Not Returned to Large Cities Post-Pandemic
A @WSJ analysis finds that the number of homeless people in America jumped 11% vs. 2022. According to homeless advocates, this was driven by rising housing costs and the winding down of pandemic-era relief policies.
The [homeless] data so far this year are up roughly 11% from 2022, a sharp jump that would represent by far the biggest recorded increase since the government started tracking comparable numbers in 2007. The next highest increase was a 2.7% jump in 2019, excluding an artificially high increase last year caused by pandemic counting interruptions. The Journal reviewed available data from more than 300 entities that count homeless people in areas ranging from cities to entire states, accounting for eight of every nine homeless people counted last year. The Journal’s tally thus far includes more than 577,000 homeless people. The biggest driver remains high housing costs, which are now taking a heavier toll following the wind down of pandemic-era relief spending and policies such as eviction moratoriums, according to advocates for the homeless.
Labor force participation is down 1pp since the start of the pandemic. A @sffed analysis finds that two-thirds of the decline was driven by changes in population, largely aging, and forecasts a further 1pp decline between 2022 and 2032.
.@jasonfurman argues that underlying inflation has fallen from 4-4.5% to 3-3.5% over the past year, driven by the fading of idiosyncratic pandemic-related factors, though a decline in labor market tightness is also contributing.
Underlying inflation has fallen by only about one pp – much less than the six pp decline in headline inflation. Moreover, this has happened while labor markets – understood broadly – have loosened considerably, although in a relatively benign manner, with job openings falling instead of unemployment rising. It is not clear how much further this cost-free disinflation can go. And, in fact, today many of the temporary factors appear to be mitigating inflation rather than fueling it. If inflation does painlessly fall to 2%, we should celebrate – and engage in more serious soul-searching regarding the standard economic models. But if it does not, the US Federal Reserve will need to be prepared to go further to bring inflation down to an acceptable range. Related: The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet) and What We’ve Learned About Inflation
.@M_C_Klein argues that current per-worker income growth of ~5% a year is inconsistent with ~2% inflation.
It remains extremely difficult for me to reconcile persistent per-worker income growth of ~5% a year with any credible forecast of ~2% inflation. Just as investors and policymakers were right to look through the “transitory” inflation of 2021-2022, they should also strip out the “transitory” disinflation of 2022-2023 to get a handle on where such pressures will settle in the years ahead. Since inflation is just the difference between changes in nominal spending and real production, that means focusing on wage trends: the largest and most reliable source of financing for consumer spending…This explains Fed officials’ continued focus on “softening” the job market via higher interest rates. That presents a risk that interest rates may not come down as quickly as implied by market prices, which in turn could affect other asset valuations. Related: The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet) and What Have We Learned About the Neutral Rate? and Rate Cuts
.@GoldmanSachs baseline forecast includes a rate cut in Q2 2024 with a terminal fed funds rate of 3-3.25% but notes a rising likelihood the Fed holds rates steady.
Why might the FOMC not cut? The simplest reason is that inflation might not come down quite enough. Another possible reason is that even if it does, if GDP growth is above potential, the unemployment rate is pushing below its 50-year low, and financial conditions have eased further on enthusiasm about a soft landing, then stimulating an already-strong economy by cutting might seem like an unnecessary risk, especially with the memory of the recent inflation surge still fresh. In that scenario, the FOMC could say that the short-run neutral rate is higher than common estimates of the medium-run neutral rate, and as a result the monetary policy stance is actually not so restrictive and the need to cut is not so immediate. Related: What Have We Learned About the Neutral Rate? and The Evolution of Short-Run r* After The Pandemic and The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet)
.@FedGuy12 argues that the “slight deterioration” in credit quality is a story of mean reversion, not the start of a default cycle.
Excluding Treasuries, there are over $30t of debt securities outstanding. Credit spreads have widened since the lows of 2021, but remain within historical ranges. The slight deterioration seen recently in credit quality across a range of metrics most likely indicates normalization rather than the beginning of financial distress. Looking at bankruptcy filings, filings notably increased in 2023 but only from historically low levels. Given elevated inflation, nominal GDP growth remains high that thus supportive of further revenue growth to support interest expense payments. Interest expense burdens may also further ease next year as the Fed potentially cuts rates next year in line with declining inflation. The overall picture thus suggests a continued benign credit environment. Related: A Default Cycle Has Started and How Is the Corporate Bond Market Functioning as Interest Rates Increase? and Settling Into 4% Inflation?
.@FT finds that over 80% of large-scale clean energy and semiconductor manufacturing investment pledged since last year’s Inflation Reduction and Chips Acts is destined for Republican congressional districts.
China accounted for 13.3% of U.S. goods imports during the first six months of 2023, below a peak of 21.6% for 2017. China’s share is currently at the lowest level since 2003.
China accounted for 13.3% of U.S. goods imports during the first six months of this year, below a peak of 21.6% for all of 2017. The current level is the lowest since 12.1% for the year in 2003, two years after China’s accession to the WTO. Starting in early 2019, China’s share of U.S. imports fell below the total share from a basket of 25 other Asian nations including India, Thailand, and Vietnam. That group of nations accounted for 24.6% of U.S. imports in the 12 months ending in June, compared with 14.9% for China, according to census data. When the dollar values of exports and imports are combined, Mexico is now the U.S.’s No. 1 trading partner, followed by Canada, pushing China to third place. Related: How America Is Failing To Break Up With China and Setser On China's Trade Surplus and Sester On Kearney Reshoring Index
.@M_C_Klein notes that Europe’s large current account surpluses are largely due to chronic German underinvestment in housing, public goods, and productive capacity.
Trade surplus that had emerged in the wake of the euro crisis has returned with a vengeance, although the distribution of the surplus has shifted somewhat. At the European aggregate level, Germany’s investment slump and stagnant consumption were offset by building booms in Spain, Greece, and central and eastern Europe. Since the beginning of 1999, there has been more investment in fixed capital (buildings, equipment, R&D, etc) net of depreciation in Spain than in Germany, even though Spain has only half of Germany’s population and has had almost no net investment since 2010. There was just as much net investment in Italy from 1999 through 2011 as in Germany—and Italy was far from booming in the 2000s, as well as far smaller. Related: The New Geopolitics of Global Finance and Germany's Industrial Slowdown and Pettis On Pozsar
China has reclaimed at least 170,000 hectares of land since 2021 as part of a campaign to gain self-sufficiency in food supplies. Currently, ¾ of Chinese soybean supply comes from the US and Brazil.
Xi Jinping said authorities must take “hard measures that grow teeth” to maintain 120mn hectares of cultivated land across the country — the level widely seen by Beijing as necessary to secure self-sufficiency. Authorities have reclaimed more than 170,000 hectares since 2021 as Beijing tries to reduce its reliance on imported food amid fears confrontation between China and the US could disrupt global supply chains. "China is preparing for the worst-case scenario in which it couldn’t buy any food from abroad”, said Yu Xiaohua, an agricultural economics professor at the University of Göttingen. “The authority is counting on the reclamation drive to improve the country’s grain self-sufficiency.” Related: Could Economic Indicators Signal China’s Intent To Go To War? and China Ups Food Security Drive, Plans To Grow 90 Percent Of Its Grain By 2032, Warning For US And Thai Farmers
A @jburnmurdoch analysis shows that excluding, London, per capita GDP of the rest of the UK would be lower than Mississippi, the poorest American state.
Removing London’s output and headcount would shave 14% off British living standards, precisely enough to slip behind the last of the US states. Britain in the aggregate may not be as poor as Mississippi, but absent its outlier capital it would be. By comparison, amputating Amsterdam from the Netherlands would shave off 5%, and removing Germany’s most productive city (Munich) would only shave off 1%. Most strikingly, for all of San Francisco’s opulent output, if the whole of the bay area from the Golden Gate to Cupertino seceded tomorrow, US GDP per capita would only dip by 4%. Related: From Strength To Strength and The Economics of Inequality in High-Wage Economies and Europe Has Fallen Behind America and the Gap Is Growing
In 2022, purchases of US securities by Middle East oil exporters, China, India, and Mexico were significantly higher than their 2013-2021 averages, despite talk of “financial fragmentation.” @dismaleconomist
In 2022, foreign investors purchased nearly $670 billion of long-term U.S. securities and short-term Treasury bills. Not only were the purchases by China, India, and the Middle East oil exporters in 2022 large compared to those by other countries, they were also sizable when measured against these countries' average purchases over the previous nine years. Net purchases in 2022 were well above average annual net purchases from 2013-2021 in every case. As before, under increased financial fragmentation, one would not expect these countries to be making larger purchases of U.S. assets compared to purchases in previous years. Related: How Was the U.S. Current Account Deficit Financed In 2022? and The New Geopolitics of Global Finance and Saudi Arabia's PIF and the New Petrodollar Recycling
A new @AEIecon analysis suggests that, as a result of the low-productivity healthcare sector’s growing share of the economy, America’s debt-to-GDP ratio will be 134% in 2032 relative to CBO’s 115% projection.
Within the next ten years, the federal government budget deficit relative to national income will grow significantly beyond historical experience. We project that debt-to-GDP will be 134% in 2032 and 263% in 2052, compared to CBO’s 115% and 189%, respectively. Real interest rates rise in the long run in a ratcheting cycle of higher interest payments and growing deficits and debt. Our projection of national health expenditures relative to GDP in 2072 is 29.6%, compared to 28.4% by the Centers for Medicare & Medicaid Services used by the Medicare Trustees. These higher rates of healthcare inflation arise from labor shortage effects in an aging economy because healthcare is produced in a low productivity, labor-dependent sector. This rise in healthcare expenditures further deteriorates the federal budget and lowers consumer welfare. Related: The 2023 Long-Term Budget Outlook and US Fiscal Alarm Bells Are Drowning Out a Deeper Problem and Interest Costs Will Grow the Fastest Over the Next 30 Years
.@calculatedrisk argues that the shift of the American population’s center of gravity to the southwest is likely to slow if not reverse due to climate change and water supply issues.
Although most projections are for the southwestward trend for the median center of US population to continue, without additional sources of water, changes in housing policy, and progress on climate change the southwestward trend will slow - or maybe even reverse. Climate change might make some areas further north more desirable. Perhaps the Carolinas (away from the coast), TN, and KY will see more growth. And maybe even areas further north that have more affordable housing will experience new growth. Climate change might make those areas - from MO to WV on up to the Great Lakes - more attractive over the next 50 years. For the southwestward trend to continue, there will have to be an increase in water supply, progress on global warming, and changes to housing policies (to make housing more affordable). Related: What’s the Matter With Miami? and Climate Change and the Geography of the U.S. Economy and A $100 Billion Wealth Migration Tilts US Economy’s Center of Gravity South
.@jasonfurman argues today’s CPI print which leaves core 12-month CPI at 4.7% leaves the Fed room to skip a rate hike in September, though more might be needed.
2-month CPI rose from 3.0% in June to 3.2% in July. Overall real average hourly earnings (both private and production and non-supervisory which excludes managers) continue to rise. But they are 4% and 3% below their immediate pre-pandemic trend respectively. Overall, assuming August is relatively moderate as well there is no reason for the Fed to raise rates at their September meeting. I outlined my views on this earlier. If some of the good news proves transitory, however, they'll need to go back & do more. Related: Settling Into 4% Inflation? and What We’ve Learned About Inflation and The Second Great Experiment Update
Chinese car exports are surging; China is now exporting more than 10,000 cars a day.
In 2021 China exported nearly 1.6m cars. By 2022 it hit 2.7m. International sales are set to rev up further in 2023. Customs data show that the country shipped nearly 2m cars in the first six months of the year, or more than 10,000 a day. For all its manufacturing might, China never mastered internal-combustion engines, which have hundreds of moving parts and are tricky to assemble. The arrival of battery-powered vehicles, which are mechanically simpler and easier to build, helped China catch up. State investment in the EV technology, an estimated $100bn between 2009 and 2019, put the country in pole position. Today battery-powered vehicles account for a fifth of car sales in China and a third of exports. In Japan and Germany only 4% and 20% of exports, respectively, are electric. Related: China’s Auto Export Wave Echoes Japan's in the ’70s and Can Volkswagen Win Back China? and The Chinese Carmakers Planning to Shake Up The European Market
Over the last year, FDI flows into China have turned negative, as foreign multinationals have repatriated Chinese earnings they had previously reinvested. @jnordvig @EtraAlex @martin_lynge
Net FDI into China has been negative for four consecutive quarters (from Q3 2022 to Q2 2023). The bottom line is that foreign investors have shifted in recent quarters from reinvesting their earnings on their Chinese operations to repatriating those earnings. Whether this simply reflects cash management and carry considerations or is a harbinger of a slowdown in future foreign direct investment in China is too soon to say. If the recent trend to repatriate earnings is a signal about future investment intentions, it could have implications for future Chinese production and export capacity and economic growth. Either way, the repatriation of foreign investors’ profits from their Chinese operations is negative for the CNY. Related: The Mysterious $300 Billion Flow Out of China and NYC Becomes One Billionaire Family’s Haven From China Property Crash and Singapore Asks Banks to Keep Quiet on Wealth Inflows During China Boom
.@greg_ip notes that the US will spend 10% of federal revenue on interest by 2025, compared with just 1% for the average triple-A-rated country and 4.8% for double-A rated.
The variable that best captures the change in circumstances is the real Treasury yield—what investors expect to earn on a 10-year note after inflation. It was around zero in August 2011, soon to go negative. Today, it is 1.7%, near the highest since 2009. One takeaway is that the global saving glut—the wall of money in search of safe assets that kept yields down a decade ago—is no more. independent economist Phil Suttle estimates private investors will be asked to absorb government debt worth 7.7% of developed economies’ GDP this year and 9.2% next, more than double the 4.3% of 2011. Private borrowers thus face competition from governments for capital, which in the long run hurts investment and growth. We got a taste of that last week when yields jumped on news of larger-than-expected quarterly Treasury auctions. Related: Raising Anchor and American Gothic and Is a U.S. Debt Crisis Looming? Is it Even Possible?
.@foxjust notes that the poorest regions of the US in 1949 largely remain poorest, even though their real median household income has doubled.
Only three of the 15 most affluent metro areas in 1949 (San Francisco, New York and Washington) are still in the top 15, two (Buffalo and Cleveland) have fallen into the bottom 15 and four (Toledo, Dayton, Akron and Youngstown) have median incomes low enough to make the bottom 15 but not enough inhabitants to qualify. So there seems to be a lot more persistence at the bottom than the top. There’s also regional persistence, with Southern metros in the majority on the least affluent list in 1949 and now. On a regional level, things weren’t always so static — from 1929 until the 1970s, there was a lot of convergence in the BEA's estimates of state and regional per-capita personal income (that is, average income, as opposed to the median incomes). But they stopped coming together after that, and the Southeast and Southwest were the country’s poorest regions in 2022 just as they were in 1929. Related: The Economics of Inequality in High-Wage Economies and Young Families Have Not Returned to Large Cities Post-Pandemic and Sunbelt Cities Nashville and Austin Are Nation’s Hottest Job Markets
.@gideonrachman argues Trump started a “lasting revolution” in America’s China, trade, and industrial policies, all of which Biden is building out in a more systematic way.
For many, Trump’s legacy will be his assault on the American democratic system. But, in important respects, Trump brought about a lasting revolution in US foreign and domestic policy. Trump repudiated the previous 40-yr pro-globalization consensus, argued that US policy towards China has failed, and that the Communist party will never be a “responsible stakeholder” in the int’l system. He made “great-power competition” with China the centerpiece of his approach to the world, pulled America out of the TPP, made a deliberate effort to hobble the WTO, imposed a raft of tariffs on China, and renegotiated NAFTA. The Biden administration has retained most of these Trump-era policies. Biden made no attempt to rejoin the TPP and continues to block the WTO's appellate court. Trump’s victory in 2016 also forced Democrats to take the plight and anger of US workers more seriously. “Bidenomics” are driven by a Trump-like desire to reindustrialize America and rebuild the middle class. Related: Bidenomics and Its Contradictions and Aukus Allies Unveil Plan to Supply Australia With Nuclear-Powered Submarines and US and India Launch Ambitious Tech and Defence Initiatives
China has massive economies of scale that have helped it corner the market on “clean tech.” China has 90% of rare earth production, 80% of all stages of solar panel construction, and 60% of wind turbines and electric-car battery production.
Even if Europe has a colder winter than 2022-2023 the continent is in a good position to get through this winter without major gas shortages according to a @federalreserve analysis.
We consider three scenarios for the one-year period spanning 2023:H2 and 2024:H1. The first scenario ("Baseline") assumes that Europe maintains gas imports from Russia and all other sources at the same average level as in 2022:H2 and that gas consumption in each month is the same as its 2015–2021 average level.4 The second scenario ("Harsh Winter") is the same as the baseline, except that it assumes that next winter will be historically cold and, as a result, gas consumption in each month reaches its maximum 2015–2021 level. The third scenario ("Adverse Scenario") is the same as the baseline, except that it assumes that Europe's imports from non-Russian sources fall back to their 2015–2021 average in each month, while natural gas imports from Russia are the same as in the baseline. Related: How Europe is Decoupling from Russian Energy and Germany Opens Floating Gas Terminal at North Sea Port and War in Ukraine Drives New Surge of U.S. Oil Exports to Europe
While there is evidence American firms are “decoupling” from mainland China, many of the alternatives are still Chinese-owned firms with production shifting to countries that have deep links with the PRC.
Look at the countries that benefit from reduced direct Chinese trade with America. Caroline Freund of the University of California, San Diego found that countries which had the strongest trade relationships with China in a given industry have been the greatest beneficiaries of the redirection of trade, suggesting that deep Chinese supply chains still matter enormously to America. This is even truer in categories that include the advanced-manufacturing products where American officials are keenest to limit China’s presence. When it comes to these goods, China’s share of American imports declined by 14pp between 2017 and 2022, whereas those from Taiwan and Vietnam—countries that import heavily from China—gained the greatest market share. In short, Chinese activity is still vital to the production of even the most sensitive products. Related: Setser On Rumors Of Decoupling and US-China Trade is Close to a Record, Defying Talk of Decoupling and Global Firms Are Eyeing Asian Alternatives to Chinese Manufacturing
.@SpaceX has launched just shy of 5,000 Starlink internet satellites since 2019, and more than 4,500 are currently working.
SpaceX launched 15 more of its Starlink internet satellites Monday night and landed the returning rocket on a ship at sea. A Falcon 9 rocket topped with the Starlink spacecraft lifted off from California's Vandenberg Space Force Base. The Falcon 9's first stage came back to Earth as planned, landing on the SpaceX drone ship Of Course I Still Love You about 9.5 minutes after launch. This was the second Starlink launch for SpaceX in as many days. A Falcon 9 lofted 22 of the satellites from Cape Canaveral Space Force Station in Florida on Sunday night. SpaceX has now launched 4,918 Starlink spacecraft to date, and more than 4,500 of them are currently functional. Related: Despite An Explosion, Elon Musk Is Closer to His New Space Age and SpaceX Rocket Explodes Before Reaching Orbit
A model from the @sffed forecasts “year-over-year shelter inflation will continue to slow through late 2024 and may even turn negative by mid-2024.”
The dashed line presents our baseline forecast of year-over-year shelter inflation over the next 18 months based on the average of cumulative shelter inflation forecasts at the CBSA level. Blue shading shows the area in which 95% of the model’s out-of-sample forecast errors fall, indicating the range of confidence regarding the accuracy of our model estimates. The solid line plots actual year-over-year shelter inflation. Our baseline forecast suggests that year-over-year shelter inflation will continue to slow through late 2024 and may even turn negative by mid-2024. This would represent a sharp turnaround in shelter inflation, with important implications for the behavior of overall inflation. The deflationary component of this forecast would be the most severe contraction in shelter inflation since the Global Financial Crisis of 2007-09. Related: Rangvid On Housing Inflation and New Tenant Repeat Rent Index
Since the start of the pandemic major urban counties’ federal tax base has declined by at least $68B, with large declines in San Francisco and New York City. @cojobrien
The country’s large urban areas were hit hard by the pandemic and subsequent economic recovery on a number of fronts. Between 2020 and 2021, IRS data shows that net migration subtracted more than $68 billion (Adjusted Gross Income, or AGI) from large urban counties’ aggregate taxable income. Meanwhile migration added to taxable income in all other types of counties, even smaller urban peers. The scale of decline in large urban areas was equivalent to nearly two percent of total taxable incomes in such counties. In contrast, newcomers to rural counties have added more than 1.5% to taxable income in each of 2020 and 2021. Manhattan alone lost more than $16 billion in federally-taxable income (spread across more than 37,000 returns) through net migration, equivalent to more than 13% of remaining residents’ combined taxable incomes. Net migration out of San Francisco left that city’s federal income tax base more than $8 billion—or 20% —smaller between 2020 and 2021 alone. Related: Young Families Have Not Returned to Large Cities Post-Pandemic and Sunbelt Cities Nashville and Austin Are Nation’s Hottest Job Markets and Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy
Treasury’s new buyback program will allow the Treasury to “add and remove duration into the market,” an ability previously only held by the Fed. @FedGuy12
Treasury plans to issue a bit more debt at each auction with the understanding a portion of the proceeds would be used to purchase old debt. In effect, the composition of Treasuries outstanding would be tilted towards the more liquid new issues. The program could one day be deployed to influence monetary conditions. For example, Treasury could effectively ease financial conditions by issuing short dated debt to purchase longer dated debt. There is no indication of this today, but treasuries and the central banks do not always have the same goal, and conflicts between the two are common in history.
If all planned investment in domestic chipmaking comes online, by 2025 the US will produce enough cutting-edge chips to meet only 1/3 of domestic demand.
Chipmakers have announced more than $200bn-worth of investments in America. By 2025 American chip factories will be churning out 18% of the world’s leading-edge chips. TSMC is splurging $40bn on two fabs in Arizona. Samsung of South Korea is investing $17bn in Texas. Intel, America’s chipmaking champion, will spend $40bn on four fabs in Arizona and Ohio. If all the planned investments materialise, America will produce enough cutting-edge chips to meet barely a third of domestic demand for these. Apple will keep sourcing high-end processors for its iPhones from Taiwan. So, in all likelihood, will America’s nascent AI-industrial complex. Related: Can Intel Become The Chip Champion The US Needs? and TSMC Delays Start of First Arizona Chip Factory, Citing Worker Shortage and The Extreme Shortage of High IQ Workers
.@ChrisStirewalt argues that MAGA base turnout may be key to 10 competitive 2024 Senate races: only 2 are currently held by Republicans and half are in states Trump won in 2020.
To deny Trump the nomination, even if unsuccessful, could alienate the 1/3 of Republican voters who are strong supporters of Trump. They might not show up for Senate races without Trump on the ballot. Even if the quarter of Republicans who vehemently opposed Trump vote against Trump, they will [likely] revert to the GOP down ballot. That’s what happened in 2020. A nominee other than Trump might have a better chance of winning the presidency but could imperil hopes of winning back the Senate. A lot of Republicans would be okay with that outcome: Trump gets his comeback shot, loses, but does so with enough clout in Congress to rein in the Democratic president. And if Trump pulls off an upset, he does so with a Republican Senate and probably the House. But, given the narrowness of the current GOP House majority, if Trump gets thrashed in the general election, it could deliver both chambers of Congress and the White House for Democrats. Related: For Some Key Voters, Trump Has Become Toxic and The Road to A Political Realignment in American Politics and What Happened In 2022
.@GoldmanSachs notes the mean interest rate on corporate debt will rise from 4.2% this year to 4.5% in 2025, adding that “for each additional dollar of interest expense, firms lower their capital expenditures by 10¢ and labor costs by 20¢”
We estimate that the average interest rate on the current stock of corporate debt will rise from 4.20% in 2023 to 4.30% in 2024 and 4.50% in 2025, based on our assumptions about the future path of Fed policy and market interest rates. This would imply that private sector interest expense as a share of current private sector gross output will rise from 3.35% in 2023 to 3.40% in 2024 and 3.60% in 2025, an increase of 0.25pp from 2023 to 2025. The increase in interest expense that we estimate would therefore reduce capex growth by 0.10pp in 2024 and 0.25pp in 2025 and labor cost growth by 0.05pp in 2024 and 0.15pp in 2025. Related: Data Update 3 for 2023: Interest Rates and Bond Returns
Chris Satterthwaite notes the overperformance of the top-5 market cap stocks is historically unusual and speculates that technological advances ranging from AI and superconductors will likely drive significant churn over the next decade.
The phenomenon of the largest stocks delivering the best returns is new, in our opinion. In fact, from 1994 to 2013, an annually rebalanced portfolio of the largest 5 stocks (“Big 5”) in the US had a comparable return to the entire S&P 500. But both portfolios significantly lagged a large-cap value portfolio (per Ken French). The last 10 years have seen a concentration of returns to the tech sector and to a few companies within that sector. This is both notable and unusual. With the advent of exciting new technologies like AI and superconductors, we think it’s plausible that the top 5 largest companies 10 years from now may look quite different from the top 5 today. In which case, a diversified portfolio would likely serve investors better than a highly concentrated size-defined portfolio. Related: Birth, Death, and Wealth Creation and Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOs and The Economics of Inequality in High-Wage Economies
.@paulkrugman argues that at the current interest rate of inflation-protected 10-year U.S. bonds of 1.83%, economic growth makes a runaway debt spiral unlikely.
You can get a debt spiral if r is significantly larger than g; in that case rising debt leads to faster accumulation of debt, and we’re off to the races. Even after the rate surge of the past few days, the interest rate on inflation-protected 10-year U.S. bonds was 1.83%, which is close to most estimates of the economy’s sustainable growth rate. If you take the low end of such estimates, we could possibly face a debt spiral, but it would be a very slow-motion spiral. Put it this way: If r is 1.8, while g is only 1.6, stabilizing the debt ratio with debt at 100% of G.D.P. would require a primary surplus of 2% of G.D.P.; increase debt to 150%, and that required surplus would increase only to 3%. Related: Summers and Blanchard Debate the Future of Interest Rates and Interest Costs Will Grow the Fastest Over the Next 30 Years and US Fiscal Alarm Bells Are Drowning Out a Deeper Problem
.@JohnHCochrane notes that excluding the cost of housing, US inflation is already back at target, consistent with the fiscal theory of the price level.
CPI and PCE core inflation (orange and gray) are how the US calculates inflation less food and energy, but including housing. We do an economically sophisticated measure that tries to measure the "cost of housing" by rents for those who rent, plus how much a homeowner pays by "renting" the house to him or herself. You can quickly come up with the plus and minus of that approach, especially for looking at month to month trends in inflation. Europe in the "HICP core" line doesn't even try and leaves owner occupied housing out altogether. Jesper's point: if you measure inflation Europe's way, US inflation is already back to 2%. The Fed can hang out a "mission accomplished" banner. (Or, in my view, an "it went away before we really had to do anything serious about it" banner.) And, since he writes to a European audience, Europe has a long way to go. Related: Striking Similarities (and Differences) Between Inflation Today and In the 1970s
A @FederalReserve working paper argues that the decline in construction productivity is largely a mismeasurement issue and the sector’s productivity was “essentially flat” between 1987 and 2019.
We find that mismeasurement error has biased construction-sector productivity growth downward by 3⁄4pp per year at the very most. This brings an estimate of average productivity growth from 1987 to 2019 up to positive territory, but just barely (from negative 0.5% to positive 0.2%), and still about 1pp below productivity growth of the next-lowest major industries and more than 11⁄2pp below the average for the nonfarm business sector. Consequently, we conclude that productivity growth may well have been quite low in the construction industry, even if it has not been as low as implied by the official statistics. While this estimated growth rate is higher than the growth rate of the published data, it does not change the qualitative result that productivity growth in this sector has been quite low. And our estimate of productivity growth in the construction sector remains much lower than in other industries. Related: The Strange and Awful Path of Productivity in the U.S. Construction Sector and Construction Industry Has Work, Needs More Workers
.@SCMPNews reports Chinese state media is airing a high-profile documentary that highlights the PLA’s willingness to fight and die in pursuit of “reunification.”
Beijing is trying to send strong signals about its preparation for an attack on Taiwan, with People’s Liberation Army soldiers pledging to sacrifice themselves. The pledges are part of the eight-episode documentary series Zhu Meng, or “chasing dreams”, aired on state broadcaster CCTV from Tuesday to mark the PLA’s 96th anniversary and show the readiness of military personnel to fight “at any second”. In one instance, a pilot in one of the PLA’s most advanced stealth fighter jets vows to launch a suicide attack if necessary.
Based on first-half new business formation, 2023 will be just shy of 2021’s record number of new firms likely to hire employees. @InnovateEconomy
Early-stage business activity across the United States remains robust through the first half of 2023, as the pace of new business formation strengthened over last year. Individuals filed nearly 2.7 million applications to start a business between January and June of this year, a 5% increase over 2022 and a staggering 52% increase over the same period in 2019. One-third of those filings were for new businesses likely to hire employees—a key subset of applications from the Census Bureau’s Business Formation Statistics demonstrating a “high propensity” to hire staff, if and when the business becomes operational. The volume of likely employer applications also remained well above prepandemic levels, surpassing the total from the first six months of 2019 by 36%. Related: Startup Surge Stood Firm Against Economic Headwinds in 2022 and Like the Broader Economy, the High Tech Sector is Becoming Less Dynamic and The Economics of Inequality in High-Wage Economies
Rebecca Patterson argues US equity outperformance is likely to continue as US firms are positioned to capture a sizable share of productivity benefits from new technologies like AI, and the US is likely to experience stronger relative economic growth.
American equity exceptionalism is possible, for at least two reasons. First, the US is set to capture a sizeable share of productivity benefits from technology such as artificial intelligence. Second, a moderating global economy could work against more cyclically biased equity markets overseas, favouring those geared towards organic growth drivers. Over multi-year periods, domestic growth has been found to dominate local equity returns. A 2011 study by Clifford Asness, Roni Israelov and John Liew suggests that 39% of 15-year returns could be explained by domestic economic performance. Growth is fundamentally a function of labour and productivity. Given that most of the developed world (and China) faces at least directionally similar labour constraints, the US seems likely to be a relative growth winner thanks to prospects for greater productivity gains. Related: Market Resilience or Investors in Denial: The Market at Mid-Year 2023 and Most Global Economies Remain in Disequilibrium, Requiring Policy Action and Birth, Death, and Wealth Creation
Florida’s growth relative to the population decline in Miami is driven by affordable housing and the baby boomers retiring. @paulkrugman notes that between 2010-20 the US population grew 7.4% but the share over age 65 grew 38.6%.
.@Brad_Setser argues tax reform is needed as the American pharmaceutical sector has optimized its corporate structure to shift almost all of its domestic profits overseas paying an effective tax rate of 3%.
The six major US pharmaceutical firms that provide fairly detailed data reported making $215 billion worth of sales in the US for 2022. Given America's systematically higher prices, their sales abroad were logically more modest — totaling $170 billion. Despite this discrepancy, the companies reported earning very, very little in profits — in some cases, absolutely nothing — in the US. Of their $100 billion combined profit, the companies said $90 billion was made abroad, while a paltry $10 billion came from their US operations. That comes out to a profit margin of 5% in the US and a margin of over 50% abroad.
While wages are still accelerating, @jasonfurman notes cooling jobs/hours and thinks today’s job report is consistent with a soft landing.
The unemployment rate fell back to 3.5%. Has been in a 3.4% to 3.7% band for 17 straight months. The last time this happened was Nov 2007. Given the recovery in the (age-adjusted) participation rate this has brought the employment-population rate for prime age workers (25-54) above the pre-pandemic rate. The wage growth slowdown earlier this year has largely gone away. Earlier this year average hourly earnings were growing at a 3.5% annual rate, now they're up to a 5% annual rate--unchanged since early 2022. Note, these are noisy and can be revised a lot. Overall this report is mixed for the inflation outlook: Jobs/hours: Cooling Unemployment rate: Neutral Wages: Heating I tend to think the order I listed them above is roughly right for what signals matter so think this report is slightly favorable for inflation.
Michael Cembalest notes that, “There’s still plenty of liquidity in the system,” as central banks have removed only 1/3 of the $11 trillion in liquidity created during the pandemic period.
While a simple read of the yield curve points to recession, the health of the US corporate sector does not: the corporate sector financial balance is still in surplus, a condition which has never preceded a recession. Central banks have only removed around one third of the $11 trillion in global liquidity they created in 2020/2021. There’s still plenty of liquidity in the system and the cost of money is not prohibitive. Excess US household savings are projected to run out sometime in 2024, and while current economic indicators are robust, there’s weakness in Conference Board leading indicators. The overall pulse does not point to a significant contraction, just to modestly weaker US conditions in 6-9 months. Related: Most Global Economies Remain in Disequilibrium, Requiring Policy Action
The increase in the US federal deficit has been driven by higher net interest costs, lower remittances to the Treasury from the Federal Reserve, and lower capital gain income. @M_C_Klein
The U.S. federal budget deficit has widened by about 3-4pp of GDP since the start of 2022. The downturn in revenues is mostly attributable to the plunge in capital gains tax receipts after the windfall of 2021/2022, as well as the collapse in dividends paid by the Federal Reserve to the Treasury. Meanwhile, the increase in outlays is almost entirely attributable to the surge in interest payments on Treasury debt. Related: Net Interest Payments On External US Debt and The Budget and Economic Outlook: 2023 to 2033
.@JohnHCochrane argues that Fitch was right to downgrade the US as inflation is effectively a default. “If you only repaid 87.6% of your mortgage, you can be sure the bank would see you as a worse credit risk going forward.”
Inflation is the economic equivalent of a partial default. The debt was sold under a 2% inflation target, and people expected that or less inflation. The government borrowed and printed $5 Trillion with no plan to pay it back, devaluing the outstanding debt as a result. Cumulative inflation so far means debt is repaid in dollars that are worth 12.4% less than if inflation had been 2%. That's economically the same as a 12.4% haircut. If you only repaid 87.6% of your mortgage, you can be sure the bank would see you as a worse credit risk going forward. The probability that the US inflates again, that in the next crisis they do the same thing, is unquestionably larger. The world's appetite for boundless amounts of US debt is unquestionably smaller. Related: What We’ve Learned About Inflation
As firms have stayed private longer wealth creation has shifted from public to private markets. @mjmauboussin
The median age at IPO was 7.9 years from 1976 to 2000 and rose to 9.5 years from 2001 to 2022. One implication of companies staying private longer is that wealth creation has shifted to private markets from the public markets. To illustrate the point, Amazon’s market capitalization was $749 million when it went public in 1997 and $1.3 trillion as of June 30, 2023 (in 2022 dollars). The company was three years old when it did its IPO. Essentially all of its wealth creation occurred when it was public. Hendrik Bessembinder, a professor of finance, has measured the wealth creation of more than 28,000 U.S.listed companies since 1926. A company creates wealth if it generates returns in excess of one-month Treasury bill rates. He found that from 1926 to 2022, just under 60% of them destroyed $9.1 trillion and the other 40% or so created $64.2 trillion. Just 2% of the sample created $50 trillion of the net total of $55.1 trillion, and the top 3 firms (Apple, Microsoft, and ExxonMobil) created almost $6 trillion. Related: Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOsand The Economics of Inequality in High-Wage Economies
Despite net migration from California between 2019 and 2021, California added more than 116,000 millionaire taxpayers. The top 1% of earners account for roughly 50% of personal income tax revenue.
California has more billionaires — 113 — than in any country except China. The ranks of mere millionaires have grown as well, far outpacing any loss of high-net-worth taxpayers during the pandemic. From the end of 2019 through 2021, California added more than 116,000 millionaire taxpayers, according to the state’s Department of Finance. The number of residents making more than $50 million surged 158% to 3,182. And that likely underestimates the riches. While the tax data reflects salaries along with income from stock and real estate sales, the ultra-wealthy often avoid income taxes by borrowing against their wealth instead of selling assets that would incur a tax burden. In total, more than 288,000 Californians, or 0.7% of residents, reported over $1 million in income in 2021. Related: The Population of California Declined, Again and Taxes, Revenues, and Net Migration In California and Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy
After remaining relatively stable and actually growing between 1976 to 2014, Antarctic sea ice is at a record low, six standard deviations below the 1991-2020 levels.
One of the leading short-term explanations is unusual patterns of wind and waves. Throughout June and July, gusts traveling from the Bellingshausen Sea towards the South Pole prevented ice from forming near the Antarctic Peninsula. Weather systems emanating from storms in the Indian Ocean—brought about by shifts in two regular atmospheric fluctuations, the El Niño Southern Oscillation and the Southern Annular Mode—may also have broken up sea ice as it began to form in East Antarctica. The ring of sea ice around Antarctica holds in place the continent’s coastal ice shelves, which in turn do the same for its glaciers and ice sheets. If those ice shelves were to collapse—as the Conger shelf in east Antarctica did in 2022—the gates would open for continental ice to flow rapidly into the oceans. The west Antarctic ice sheet alone contains enough water to increase global sea level by 11 feet. Related: Antarctic Sea Ice Levels Dive In 'Five-Sigma Event', As Experts Flag Worsening Consequences For Planet and Antarctic Sea Ice Has Shrunk By An Area Nine Times The Size Of Britain
Last week a buoy off the coast of Florida recorded a reading of 101.1°F which might be a record for sea surface temperature.
The planet’s average sea surface temperature spiked to a record high in April and the ocean has remained exceptionally warm ever since. The North Atlantic has seen some of the most exceptional warmth, with recent temperatures consistently reaching more than 2°F higher than what is typical for this time of year. Last week, one reading from a buoy recorded a stunning 101.1°F, possibly a world record for sea surface temperatures. The eruption of an underwater volcano in the Pacific Ocean near Tonga last year, which spewed tens of millions of tons of water vapor into the stratosphere, may have also influenced this year’s ocean temperatures. Water vapor, like carbon dioxide, is a greenhouse gas that traps heat near Earth’s surface. Scientists expect warm ocean conditions to continue into the fall, with El Niño intensifying in the months ahead. Related: Florida Ocean Temperatures At ‘Downright Shocking’ Levels
.@JohnHCochrane takes a victory lap, arguing that the fiscal theory of the price level is the most descriptive theory of inflation.
A one-time $5 trillion fiscal blowout causes a one-time rise in the level of prices, just enough to inflate away the value of the debt by $5 trillion. Then inflation stops, even if the Federal Reserve does nothing. The Fed is still important in fiscal theory. The Fed bought about $3 trillion of the new debt and converted it to interest-paying reserves. Giving people checks backed by reserves is arguably a more powerful inducement to spend than giving people Treasury bonds. Now, by raising interest rates, the Fed lowers current inflation but at the cost of more-persistent inflation. That smoothing is beneficial. These are core propositions of fiscal theory, stated ahead of time and at odds with conventional theories. Related: Waning Inflation, Supply and Demand and The Second Great Experiment Update
.@charlesmurray argues that urban disorder has increased since 2013, when cities abandoned broken-windows policing.
I created a “broken-windows arrest rate” analogous to the violent and property crime rates by summing arrests in the eight categories, dividing them by the size of the city’s population, and expressing the result as the number of arrests per 100,000 population. To ensure that all these qualified as minor crimes, I included only arrests that were charged as misdemeanors, violations, or infractions, excluding arrests charged as felonies. The graph below shows the proportional change in those arrest rates using 2013 as the baseline. In New York and Los Angeles, the fall in arrests for broken-windows offenses was steep and steady from 2013 to 2020. Washington is different, with a sudden rise in broken-windows arrests in Washington in 2019. The anomaly was created entirely by a one-year spike in arrests for prostitution and solicitation, the result of a policy decision to clear the streets of prostitutes near hotels. If arrests for prostitution and solicitation are deleted from the Washington data, the trendline of broken-windows offenses shows the same unbroken decline as the trendlines for New York and Los Angeles. As of 2022, arrests for broken-windows offenses since 2013 had fallen by 74% in New York, 77% in Washington, and 81% in Los Angeles. There was no apparent “Floyd effect” in New York or Los Angeles. A case for a small effect can be made for Washington. Related: Pandemic Murder Wave Has Crested. Here’s the Postmortem
.@WendyEdelberg notes the current 4.6% personal savings rate and argues that households must either cut spending or undermine financial health by borrowing to maintain current spending levels.
The rate at which households saved out of income saw large fluctuations during the COVID-19 pandemic. In 2019 the saving rate hovered around 9%. After the saving rate spiked to unprecedented levels in 2020 and 2021, it fell dramatically in 2022. In June 2022 households saved less than 3% of DPI, which was close to a historically low level. As of May 2023, the saving rate remains low at 4.6%. Some households may be on a precipice where real income and real wealth do not show marked improvement. To maintain relatively healthy balance sheets, such households can moderate the pace of consumer spending (particularly goods spending). Alternatively, households can maintain the current trends in spending, increasingly financing spending with borrowing, and financial health could deteriorate in a worrying way. Related: Accumulated Savings During the Pandemic: An International Comparison with Historical Perspective and The Rise and Fall of Pandemic Excess Savings
.@paulkrugman notes the slow recovery from the Great Recession cost Americans $4.5 trillion and argues that the rapid recovery from the post-pandemic recession suggests Great Recession fiscal policy was too constrained.
You can draw comparable charts for many other economic variables, some of them just showing levels like the two figures above, others showing deviations from the pre-2008 trend. Their consistent shapes all tell the same story: The U.S. economy remained significantly depressed for many years — indeed, a decade or so, after the financial crisis — and this lost decade could have been avoided with the right policies. How do we know that it could have been avoided? Because of what happened the past few years, when the U.S. economy, boosted by major federal spending programs, came roaring back from the Covid slump, regaining all the lost ground in just over three years. If America had done as well after the financial crisis, we would have been back on trend by mid-2011. Related: Unintended Consequences Accurately Predicted The Slow Recovery
Between UPS reaching a tentative deal with the Teamsters and the Yellow Corp bankruptcy, August won’t be the “Summer of Stikes” but @foxjust notes recent labor activity is increasingly in the private, not the public sector.
The strikers in 2018 and 2019 were mostly teachers and other state and local government employees, while this year most are employees of private companies. A lot of current private-sector organizing is on a location-by-location basis with strikes that don’t show up in the BLS counts because they involve fewer than 1,000 workers, with the more inclusive Cornell-ILR Labor Action Tracker counting 224,000 workers involved in stoppages last year, nearly double the BLS tally of 120,600. The 340,000 workers who didn’t go on strike at UPS because the company gave into their wage demands should probably count as a significant union victory even if doesn’t show up in the strike statistics. And according to the US BLS other main measure of strike activity, days on strike divided by total working time, this year may still prove a standout, at least by post-1980 standards. Related: America Is Barreling Toward a Summer of Strikes and Unions Inflation Warning
The United States is South Korea’s largest export market for the first time since 2004 as Korean firms quietly pivot away from China.
In June, Xing Haiming, China’s ambassador in Seoul, publicly warned South Korea against “decoupling” from the Chinese economy under the influence of the US. South Korea has already embarked on an unmistakable — albeit untrumpeted — pivot away from the Chinese economy. According to data released by the Bank of Korea in June, South Korea exported more goods to the US in 2022 than it did to China for the first time since 2004 when China’s nominal gross domestic product was still less than that of the UK.
.@FedGuy12 argues that “Treasury yields will continue to drift higher,” as higher Japanese yields will move the marginal Japanese buyer out of the Treasury market just as Treasury issuance is increasing.
The BOJ’s low interest policy remains an anchor of global bond yields, but that anchor will soon be set at a higher level. U.S. bonds will appear even more unattractive to Japanese investors, whose exit from the market would allow U.S. bond yields to drift higher. The eventual Fed rate cuts would reduce FX hedging costs and potentially bring back some Japanese investors, but until then it looks like one more marginal source of demand is evaporating even as Treasury supply is set to increase. This suggests that Treasury yields will continue to drift higher. Related: American Gothic and China Isn't Selling Treasuries
Bloomberg’s @TomOrlik writes that Mexico and Vietnam have been the biggest beneficiaries of the realignment of global supply chains, a process that he thinks “has barely begun.”
Bloomberg calculates that US imports of tariffed goods from China are down about $150 billion from where they’d otherwise be. Mexico is filling much of the gap. The share of manufacturing in India’s gross domestic product stands at 13%, well below Modi’s 25% goal. China outperforms India in making sophisticated technology—the so-called value-add that leads consumers to pay more for items such as electronics. Chinese manufacturers’ value-add is currently 49%, compared with 20% for India’s, the government says. Related: Mexico Seeks to Solidify Rank As Top U.S. Trade Partner, Push Further Past China and Take Away China, and a Stealth Bull Market Emerges
Research from Lawrence Berkeley National Lab @sineatrix suggests that the potential superconductivity breakthrough announced by South Korean researchers is plausible.
A recent report of room temperature superconductivity at ambient pressure in Cu-substituted apatite (‘LK99’) has invigorated interest in the understanding of what materials and mechanisms can allow for high-temperature superconductivity. Here I perform density functional theory calculations on Cu-substituted lead phosphate apatite, identifying correlated isolated flat bands at the Fermi level, a common signature of high transition temperatures in already established families of superconductors. I elucidate the origins of these isolated bands as arising from a structural distortion induced by the Cu ions and a chiral charge density wave from the Pb lone pairs. These results suggest that a minimal two-band model can encompass much of the low-energy physics in this system. Related: Korean Team Claims To Have Created The First Room-Temperature, Ambient-Pressure Superconductor
.@BjornLomborg argues that the narrative around forest fires has been distorted by the media. He notes that the percentage of the globe that burns each year has been declining since 2001.
For more than two decades, satellites have recorded fires across the planet’s surface. The data are unequivocal: Since the early 2000s, when 3% of the world’s land caught fire, the area burned annually has trended downward. In 2022, the last year for which there are complete data, the world hit a new record-low of 2.2% burned area. While the complete data aren’t in for 2023, global tracking up to July 29 by the Global Wildfire Information System shows that more land has burned in the Americas than usual. But much of the rest of the world has seen lower burning—Africa and especially Europe. Globally, the GWIS shows that burned area is slightly below the average between 2012 and 2022, a period that already saw some of the lowest rates of burned area. Related: Canada Sees Its Farthest-North 100-Degree Temperature As Wildfires Rage
.@elonmusk predicts US electricity consumption will triple by 2045. PG&E forecast electrical demand will be up 70% over next 20 years, while McKinsey expects demand will double by 2050.
Elon Musk is predicting U.S. consumption of electricity will triple by around 2045. “I can’t emphasize enough: we need more electricity however much electricity you think you need, more than that is needed.” He anticipates an electricity shortage in two years that could stunt the energy-hungry development of artificial intelligence. For the past 20 years, U.S. electricity demand has grown at an average rate of 1% each year, according to a Deloitte study. PG&E expects electricity demand will rise 70% in the next 20 years, which, the California company notes, would be unprecedented. Similarly, McKinsey expects U.S. demand will double by 2050.Deloitte estimates the largest U.S. electric companies together will spend as much as $1.8 trillion by 2030. Related: Gridlock: How a Lack of Power Lines Will Delay the Age of Renewables and Summers and Blanchard Debate the Future of Interest Rates
.@JosephPolitano notes that real per-capita consumption briefly caught up with the pre-crisis trend, and argues the post-crisis period of persistent underinvestment, low employment, and sluggish growth is over.
Not only has real per-capita consumption recovered to pre-COVID levels, but it has actually broadly returned to its pre-COVID trend at the fastest pace of any modern recession—in stark contrast to the permanent scars on consumption left by the 2008 recession. In fact, growth in real consumption of durable goods has not only vastly exceeded the pre-pandemic trend but briefly caught up with the pre-Great Recession trend, and remains high even as it hasn’t grown in several years. The 2010s saw durable goods’ share of spending sink by roughly 3% in 3 years and barely recover afterward. Not until the pandemic did durable goods consumption spending climb back to its pre-recession share of household budgets. That meant more than a decade of, effectively, household underinvestment in some of the most-important big-ticket items that provide long-term welfare and enhance people’s economic productivity—and that is being partially undone today.
.@M_C_Klein notes strong nominal wage growth and increased demand for investment aren’t consistent with a deflationary process and notes the “neutral” rate of interest may have risen relative to pre-pandemic levels.
The overall picture is that occupations where pay rose the fastest in 2021-2022 have since seen pay growth normalize, while jobs in the rest of the economy are still experiencing persistently faster pay growth. There has been some deceleration relative to the peak at the beginning of 2022, but it has been very modest. One good reason to think that the “neutral” policy rate has gone up is that the post-2000 investment drought is finally ending thanks in no small part to the U.S. government’s subsidies. In this environment, short-term interest rates of 5.5%—which is what the U.S. endured in the second half of the 1990s without problems when inflation was slower—do not seem particularly high. If that is correct, then 4% yields on 10-year Treasury notes could be too low, which could also have implications for the appropriate discount rates for stocks. Related: What Have We Learned About the Neutral Rate?
Demand for high-voltage cables outside China is increasingly supply-constrained which will soon start to delay major renewable energy projects.
Sending electricity at very high voltage is more efficient, if more expensive, with losses potentially as low as 3% per 1,000km for direct current systems, which have less resistance. This is about 30-40% lower than for alternating current systems. “HVDC [high-voltage direct current] becomes economic at about the 60km mark” for subsea systems, says Ian Douglas, chief executive of cable company XLCC. Demand for high-voltage cables is booming, with the market climbing from a typical $3bn of new projects awarded per year between 2015-20 to $11bn in 2022. This year, the estimated value of new orders is likely to exceed $20bn before settling at $18bn-$20bn per year, according to Massimo Battaini, incoming chief executive of Prysmian. “We are fully booked until 2026/27,” he says. Related: Gridlock: How a Lack of Power Lines Will Delay the Age of Renewables
The first new US nuclear facility in 30 years will start to deliver power this summer; however, cost overruns have led to diminished investor interest in future projects.
When Plant Vogtle unit 3 finally delivers commercial electricity to the Georgia power grid, it will be the first nuclear reactor the country has built from scratch in more than three decades. The 1,100-megawatt Vogtle unit 3 was initially supposed to enter service in 2016. Georgia Power, the utility driving the project, most recently said it would start commercial operations in July after the latest delay caused by a degraded seal in its main generator. The $14bn original cost of Vogtle units 3 and 4 has now ballooned to more than $30bn. The cost for Georgia Power, with a 45% share of the project, will be about $15bn. Related: Pricey Things
Citing the rise in the frequency of extreme heat globally, @nfergus argues investors should “short shores, long hills” as changes in temperature increasingly impact financial markets and politics.
Global warming no longer needs to be a theory; it’s a reality. Extreme heat is significantly more common in major cities these days (2019-23) than it was in the early 1950s. To be precise, there are 2.7 times as many days with mid-afternoon temperatures above 30 C in Athens; 3.7 times in Barcelona; 8.1 times in Paris; and an amazing 10.4 times in London. The mountains are seeing temperatures rise roughly as much as the beaches. The effects on snow cover in the Alps are all too familiar to European skiers. Short shores, long hills may not turn out to be the trade of the century. But short shores, long hills feels right. Related: Climate Change and the Geography of the U.S. Economy and Global Temperatures Have Broken Records Three Times In A Week
Chinese hackers have hidden malicious computer code in US computer networks that control power grids and water supplies to military bases globally. The code is not designed for intelligence gathering but for offensive operations.
Using the same “presidential drawdown authority” used to send arms to Ukraine, the Pentagon is directly providing weapons to Taiwan for the first time. Last year Congress approved a $1 billion of drawdown support to Taiwan.
The US will provide Taiwan with $345mn in weapons, marking the first time the Pentagon will send arms directly to the country. The White House on Friday announced its plan to provide weapons from US stockpiles in the first tranche of an annual $1bn “presidential drawdown authority” (PDA) Congress approved last year to support Taiwan. Successive US administrations have approved the sale of weapons to Taiwan. But this is the first time the arms have been directly provided under the PDA — the same authority that the Biden administration has been using to send weapons to Ukraine. Related: US To Link Up With Taiwan and Japan Drone Fleets To Share Real-Time Data and US Effort to Arm Taiwan Faces New Challenge With Ukraine Conflict
.@JoshZumbrun, evaluating the differences between @OppInsights recent research on elite schools and Krueger’s earlier findings, shows that elite schools don’t have that much impact outside of lottery-like tail outcomes.
Dale and Krueger had classified everyone who earned more than $200,000 into the same category, making no distinction between an affluent doctor earning $250,000 and Jeff Bezos. Chetty and his authors use a slightly different approach. They classify everyone’s income into percentiles—80th, 81st, etc. Among top students, 19% who attend the top schools make it to the richest 1% of the income distribution, versus 12% who didn’t attend. Chetty’s co-author Deming compares those upper-tail outcomes to winning the lottery: Elite schools have lots of lottery tickets lying on the ground, whereas most other colleges only have a few. For most people, the lottery ticket will be worth nothing. For a few, it is a jackpot. Related: Diversifying Society’s Leaders? The Determinants and Causal Effects of Admission to Highly Selective Private Colleges
.@BobbyJindal argues that simple reforms in Medicare billing could save patients and taxpayers somewhere between $346B and $672B over the next 10 years.
Currently, Medicare pays hospital-owned facilities two to three times as much as independent physician offices for the same service, according to the Alliance for Site Neutral Payment Reform. This creates an enormous incentive for large hospital chains to acquire outpatient practices. A report by the Physician Advocacy Institute found that the share of hospital-owned physician practices more than doubled, from 14% to 31%, between 2012 and 2018. By 2020 more than half of physicians worked directly for a hospital or at a physician practice owned by a hospital, according to the American Medical Association. Removing these perverse incentives could save patients and taxpayers between $346 billion and $672 billion over the next decade.
.@jasonfurman notes the Fed’s preferred inflation measure, Core-PCE, came in very low, running at 4.1% y/y. He says that this “Confirms the good June CPI news (but no real new info).”
Core PCE inflation came in very low (albeit a touch above expectations), the second lowest pace of the inflationary period. If you swap in new rents for all rents you see a more pronounced slowdown (although not nearly as dramatic as the same adjustment for the CPI). This is a 2.3% annual rate over the last 3 months. In sum, this tells the same story as the CPI: inflation is slowing, there is reason to believe there will be further slowing as shelter comes down but also some worries about some of the good news being transitory. But overall the June inflation data was good news. Related: A June Inflation Surprise and Is This Disinflation "Immaculate" or "Transitory"?
.@TheEconomist argues that increasing stockpiles of imported food and energy could signal China’s intent to invade Taiwan.
China imports nearly three-quarters of the oil it uses. The substance accounts for only 20% of the country’s energy use, but it would be crucial to any war effort. If China were to start increasing its reserves—it currently has enough to last three months at today’s consumption rate—that would be one of the best indicators that it is preparing for war. China imports more agricultural produce than any other country. Obsessed with food security, it already has enormous stockpiles. In 2021 an official said its wheat reserves could meet demand for 18 months. Over the past decade, China has greatly increased its purchases of wheat, corn, rice, and soybeans.
On Wednesday, Jerome Powell said Fed staff economists are no longer predicting a recession in 2023. @jeannasmialek notes such optimism has been wrong in the past: 1994-95 was the only true soft landing.
The historical record may not be particularly instructive in 2023, said Michael Feroli, the chief U.S. economist at J.P. Morgan. This has not been a typical business cycle, in which the economy grew headily, fell into recession, and then clawed its way back. Instead, growth was abruptly halted by coronavirus shutdowns and then rocketed back with the help of widespread government stimulus, leading to shortages, bottlenecks and unusually strong demand in unexpected parts of the economy. All of the weirdness contributed to inflation, and the slow return to normal is now helping it fade.
.@michaelxpettis argues that high US income inequality leads to structurally low US demand, as the wealthy are prone to save. As a result, the US is forced to choose between more debt and more unemployment.
The wealthy save a much larger part of their income than do workers or the middle class, and use a much smaller part for consumption, rising income inequality automatically reduces overall consumption and forces up savings by effectively transferring income from high consumers to high savers. If lower consumption is not balanced by higher investment, total demand must decline. To prevent this from happening, Washington typically does one of two things. First, the Federal Reserve can implement policies that encourage household borrowing to fund additional consumption. In that case, the reduction in the income share of ordinary Americans is balanced by an increase in their borrowing, so the same level of consumption can be maintained. Second, Washington can itself borrow and use the proceeds to replace the demand lost by the reduction in household consumption. Related: Pettis On CBO Numbers
After adjusting for population aging, the employment-to-population ratio is within .1% of its Feb 2020 level and labor force participation ratio is at its highest level since 2001. @ernietedeschi
The employment-to-population ratio (EPOP) has returned to its age (and gender)-adjusted prepandemic trend. The labor force participation rate (LFPR) age-adjusted in June 2023 was consistent with rates last seen in 2001. When looking over extended periods of time, labor market indicators should be age-adjusted to distinguish between secular demographic trends versus other cyclical economic effects. Second, after accounting for demographic shifts in labor supply and demand, the current U.S. labor market is unusually strong from a historical perspective, posting elevated and even record measures of participation and employment. Related: Unions’ Inflation Warning?
The rapid rise of China and South Korea’s household debt to GDP ratio has strong parallels to EU and North American real-estate boom-bust cycles in 2007. @profsufi
The Chinese and Korean booms are comparable with the booms that occurred in the United States and United Kingdom from 2001 to 2007. [Going forward] in both countries, consumer spending could be quite weak. This is an especially pronounced problem in Korea, where the debt service ratio has risen substantially and is now at an exceptionally high level. A rise in the debt service ratio during a household debt boom portends slower growth in the historical data, and Korea appears likely to follow that historical pattern. The allocation of production to real estate and construction activities over the past decade in China is historically unprecedented. It is difficult to imagine that the rate of activity in the real estate sector is sustainable, and it is difficult to see what sectors can take up the production slack if there is a continued decline in real estate activity. Related: Can China’s Long-Term Growth Rate Exceed 2–3 Percent?
Earlier work by Ranga Dias, the researcher who claimed a breakthrough on room-temperature superconductors, has been retracted due to willfully submitted false data.
A major physics journal is retracting a two-year-old scientific paper that described the transformations of a chemical compound as it was squeezed between two pieces of diamond. Such an esoteric finding — and retraction — would not typically garner much attention. But one of the leaders of this research is Ranga Dias, a professor at the University of Rochester in New York who made a much bigger scientific splash earlier this year, touting the discovery of a room-temperature superconductor. While Dr. Dias continues to defend the work, to some scientists, there is now clear evidence of misconduct. “There’s no plausible deniability left,” said N. Peter Armitage, a professor of physics and astronomy at Johns Hopkins University in Baltimore who is among the scientists who have seen the reports. “They submitted falsified data. There’s no ambiguity there at all.” Related: The Scientific Breakthrough That Could Make Batteries Last Longer and Room-Temperature Superconductor Discovery Meets with Resistance
In a preprint a team in South Korea claims to have created a room-temperature/ambient-pressure superconducting material.
In their papers, the team claims to have measured samples of LK-99 as electricity was applied and found its sensitivity fell to near zero. They also claim that in testing its magnetism, it exhibited the Meissner effect—another test of superconductivity. In such a test, a sample should levitate when placed on a magnet. The team has provided a video of the material partially levitating. They claim that the levitation was only partial because of impurities in their material.
.@MichaelRStrain highlights the fact that monetary policy slows the economy by tightening overall financial conditions, and yet financial conditions have not tightened much in 2023. He predicts more rate increases and a recession.
According to my calculations, the real (inflation-adjusted) interest rate is around 1.5%, which is one percentage point higher than the Fed’s estimate of the neutral real policy rate (which neither stimulates nor reduces economic activity). Prior to previous recessions, the real rate has been higher. While current market pricing suggests that the Fed will increase the federal funds rate once more this cycle, I think that is optimistic. Between stubborn and high underlying inflation, financial conditions that aren’t tightening, and real interest rates that are lower than is typical before a significant economic slowdown, there are ample reasons for the Fed to raise rates more than economists and investors currently seem to expect. If that happens, the risk of recession will increase. Related: Furman On CPI Report and A Default Cycle Has Started
New research projects that the Atlantic Meridional Overturning Circulation current will weaken this century which could have a cooling effect on the Northern Hemisphere and reduce rainfall in the monsoon regions of Asia.
The last time there was a major slowdown in the mighty network of ocean currents that shapes the climate around the North Atlantic, it seems to have plunged Europe into a deep cold for over a millennium. That was roughly 12,800 years ago when not many people were around to experience it. But in recent decades, human-driven warming could be causing the currents to slow once more. New research published in Nature Communications [projects] the Atlantic Meridional Overturning Circulation, or AMOC could collapse around midcentury. Were the circulation to tip into a much weaker state, the effects on the climate would be far-reaching, though scientists are still examining their potential magnitude. Much of the Northern Hemisphere could cool. The coastlines of North America and Europe could see faster sea-level rise. Northern Europe could experience stormier winters, while the Sahel in Africa and the monsoon regions of Asia would most likely get less rain. Related: Antarctic Sea Ice Has Shrunk By An Area Nine Times The Size Of Britain and Florida Ocean Temperatures At ‘Downright Shocking’ Levels
China is now the leader in car export volume, but the value of its net exports remains lower than Germany and Japan. @JosephPolitano
“No one noticed—but we noticed,” said Ford CEO James Farley on an earnings call last month, “something monumental happened in our industry, where China became the number one exporter of vehicles globally. It had always been the Germans or the Japanese.” Despite the record-setting rise in gross exports and China’s newfound motor vehicle trade surplus, net exports still remain below Japanese and German levels. The per-car value of Chinese vehicles still tends to be lower than their foreign competitors, and a lot of the rise in exports has been matched by a rise in imports. Related: China’s Auto Export Wave Echoes Japan's in the ’70s and The Chinese Carmakers Planning to Shake Up The European Market
Between 1996-2019 French firms responded to energy shocks by initially reducing exports and employment but over time they increased their energy efficiency and the negative effects faded. @martinph01
The energy price shock also generates a fall in production and employment: a 10% increase in electricity price translates into a 1.6% fall in production and a 1.5% fall in employment. Energy efficiency increases at the firm level. Profits fall but modestly or only for the most gas-intensive firms. However, these negative impacts wane over time. Our interpretation is that during 1995–2019, firms adapted their technology and production processes to higher energy prices and a selection process eliminated those not able to adjust. All in all, these results suggest that firms are able to adjust and adapt strongly to energy shocks but that the competitiveness impact is significant.
Seven major automakers are investing $1 billion in a joint venture that will almost double the number of EV chargers in the United States.
Seven major automakers announced a plan on Wednesday to nearly double the number of fast chargers in the United States in an effort to address one of the main reasons that people hesitate to buy electric cars. The carmakers — BMW Group, General Motors, Honda, Hyundai, Kia, Mercedes-Benz Group,, and Stellantis — will initially invest at least $1 billion in a joint venture that will build 30,000 chargers on major highways and other locations in the United States and Canada. The United States has about 32,000 fast chargers — those that can replenish a drained battery in 10 to 30 minutes. The chargers will have plugs designed to use the connections used by most carmakers other than Tesla, as well as the standard developed by Tesla that Ford, G.M.,, and other companies have said they intend to switch to in 2025.
Michael Smolyansky @federalreserve argues the decline in interest and corporate tax rates mechanically explains 40% of real growth in corporate profits between 1989-2019 suggesting lower returns going forward.
The reduction in interest and corporate tax rates was responsible for over 40% of the growth in real corporate profits from 1989 to 2019. Moreover, the decline in risk-free rates over this period explains the entirety of the expansion in price-to-earnings (P/E) multiples. These two factors therefore account for the majority of this period’s exceptional stock market performance. From 1989 to 2019, real corporate profits grew at the robust rate of 3.8% per year. This was almost double the pace seen from 1962 to 1989. The difference in profit growth between these two periods is entirely due to the decline in interest and corporate tax rates from 1989 to 2019. One way to see this is to compare the growth of earnings before subtracting interest and tax expenses (EBIT). In fact, real EBIT growth was slightly lower from 1989 to 2019 compared to 1962 to 1989: 2.2% versus 2.4% per year. The outlook for stock price growth is bleak. Related: The Curious Incident of the Elevated Profit Margins and Charlie Munger: US Banks Are ‘Full of’ Bad Commercial Property Loans
.@M_C_Klein argues the Chinese government is managing the Yuan real exchange rate to boost exports and insulate domestic firms from foreign competition.
The Bank for International Settlements (BIS) measure of China’s inflation-adjusted trade-weighted exchange rate (based on differences in consumer prices) is down by roughly 14% since the recent peak last March, which is the largest decline out of 64 countries tracked by the BIS. This appears to be a policy choice. While China’s official foreign reserves are substantially lower now than at the peak in 2014, the consolidated position of the PBOC and the state-run banks looks a bit different. As I suggested two years ago, there are good reasons to think that the PBOC has deliberately outsourced reserve management to Chinese banks (which among other things helps explain the continued reductions in reserve requirements). After the PBOC mostly stopped buying foreign currency reserves, it switched to lending increasingly large sums to the domestic banking system. Related: Setser On China's Trade Surplus and China's Surplus Again Topped 10% Of GDP
Large banks are seeing a funding advantage as competition for deposits increases. @FedGuy12
A wide range of banks have reported a squeeze on net interest margins as deposit funding costs have surprised to the upside. In a typical rate hiking cycle, interest income on bank assets tend to rise more quickly than interest paid on deposits. This led to a steady expansion of net interest margins over the past quarters that is suddenly reversing. Banks now see customers both shifting out of non interest bearing deposits and demanding higher interest for interest bearing deposits. This was widely reported in recent earnings calls by all but the largest banks. Related: All Clear and Bank Funding during the Current Monetary Policy Tightening Cycle
Torsten Sløk @apolloglobal notes an uptick in bond defaults and argues that we are at the start of a default cycle. He argues market sentiment will change when a “household name” defaults.
Markets are not taking the ongoing rise in default rates for HY and loans seriously. The reality is that more and more companies are defaulting because the cost of capital is higher, and Fed Chair Powell says that interest rates will stay at these levels “for a couple of years,” so tight monetary policy will continue to have a greater negative effect on the economy and capital markets. In fact, higher costs of capital is precisely how monetary policy works: By making it more difficult to get financing. Once there is a default by some household name in credit, we will likely see an overnight change in market sentiment from bullish to bearish. Related: Small Bank Thoughts John Cochrane and Credit Allocation and Macroeconomic Fluctuations
Current annual US demand for fentanyl is the equivalent of one truckload, making interdiction very difficult. The equivalent US heroin demand would weigh 25X more.
In the last decade, fentanyl has become the leading cause of death for young adults in the US. Fentanyl now causes most of the more than 85,000 annual opioid overdose deaths in the US and Canada. All the fentanyl needed to supply the US for one year weighs the equivalent of 5 tonnes and would easily fit into one lorry, according to researchers at Rand Corporation. That compares with about 125 tonnes for heroin and even more for cocaine. Related: Only One Thing Will Solve the Fentanyl Crisis and Drug Overdose Deaths Topped 100,000 Again in 2022
The American semiconductor industry trade association reports the industry is facing a likely shortfall of 60% of the 115,000 new positions they will need through 2030. @markets
Chipmakers are on course to add about 115,000 jobs by 2030 [according to] Semiconductor Industry Association (SIA). Based on a study of current degree completion rates, though, about 58% of those projected positions could remain unfilled. Not enough Americans are studying science, engineering, math and technology-related subjects, according to the SIA. And people from other countries who are acquiring those skills are leaving, the group said. At US colleges and universities, more than 50% of master’s engineering graduates and 60% of those with a Ph.D. in engineering are citizens of other countries. About 80% of those master’s graduates and 25% of those who earn doctorates depart the US — either by choice or because immigration policy doesn’t allow them to stay. Related: The Extreme Shortage of High IQ Workers and TSMC To Send Hundreds More Workers To Speed U.S. Plant Construction
According to oceanographer Edward Doddridge the decline in Antarctic ice this winter is “a five-sigma event,” i.e. once every 7.5 million years.
The sea ice around Antarctica is in sharp decline, scientists observed an all-time low in the amount of sea ice around the icy continent, following all-time lows in 2016, 2017 and 2022. Usually, the ice has been able to recover in winter but this year is different. For the first time, the sea ice extent has been unable to substantially recover this winter, leaving scientists baffled. Physical oceanographer Edward Doddridge said vast regions of the Antarctic coastline were ice free for the first time in the observational record. "To say unprecedented isn't strong enough, for those of you who are interested in statistics, this is a five-sigma event. So it's five standard deviations beyond the mean. Which means that if nothing had changed, we'd expect to see a winter like this about once every 7.5 million years." Antarctic Sea Ice Has Shrunk By An Area Nine Times The Size Of Britain and Earth Keeps Breaking Temperature Records Due to Global Warming
.@paulkrugman argues deflation to this point has been driven by “recombobulation,” or the fading of pandemic-related shocks, not tighter monetary policy.
Normally there is a fairly close inverse relationship between unemployment and quits, a quit-rate version of the famous Beveridge Curve linking unemployment to vacancies. During the pandemic and its aftermath, however, quits were much higher than the normal relationship to the unemployment rate would have predicted, presumably reflecting the dislocation of labor markets in a time of wild and crazy changes. Here too we see recombobulation, with the relationship of quits to unemployment moving back toward the historical norm, which is probably the main reason wage growth appears to be slowing. Stories about recombobulation — the fading away of pandemic-era distortions — driving disinflation are clearly supported by the data. Claims that Fed tightening drove it are sketchier and much more speculative. Which is not to say that the Fed was wrong to raise rates. Related: When Should We Declare Victory Over Inflation? and The Second Great Experiment Update and Fiscal Arithmetic and the Global Inflation Outlook
The June CPI print shows steady deflation after removing volatile items; however, the reading is still well above target. @GeneralTheorist
Adjusted durables remain volatile, of course, but over 3 months are now close to typical pre-pandemic lows. Services remain elevated, about 2ppts above pre-pandemic norms. Overall, the Fed can be encouraged by the disinflation of underlying core inflation—though the reading is still well above 2%. There may be two risks ahead. The first would be if durables goods begin to show even sharper deflation, perhaps portending more general price pressures. The second is if service inflation becomes entrenched at current levels—lower than a year ago, but well above a rate consistent with the Fed’s target.
The unemployment rate is at or near a record low in half of American states.
The unemployment rates in 25 states are currently at or within 0.1 percentage point of a record low [according to] Bureau of Labor Statistics data. In a dozen states and DC, the number of people on payrolls remains below pre-pandemic levels. That includes New York and Hawaii. Idaho, Utah, Texas, and Florida were among the states with the biggest gains in employment since February 2020. Related: Labor Inelasticity and Unions’ Inflation Warning? and America Is Barreling Toward a Summer of Strikes
Americans aged 25-54 are employed or looking for jobs at rates not seen in two decades, helping counter the exodus of older baby boomers from the workforce.
American prime age 25-54 labor force participation is at a two decade high of 83.5% as an uptick in prime age female LFP has offset a decline in male prime age LFP since 2000. In the first months of the pandemic, nearly four million prime-age workers left the labor market, pushing participation in early 2020 to the lowest level since 1983—before women had become as much of a force in the workplace. Prime-age workers now exceed prepandemic levels by almost 2.2 million. The resurgence of midcareer workers is driven by women taking jobs. The labor-force participation rate for prime-age women was the highest on record, 77.8% in June. That is well up from 73.5% in April 2020. Related: The Labor Supply Rebound from the Pandemic and Where Are the Missing Gen Z Workers
.@OppInsights finds that the “Ivy-Plus” (Ivy League, plus UChicago, Duke, MIT, Stanford) admit students from the highest income families scoring in the top 1% of SAT/ACT at far greater rates than those from lower-income families.
Children from families in the top 1% are more than twice as likely to attend an Ivy-Plus college (Ivy League, Stanford, MIT, Duke, and Chicago) as those from middle-class families with comparable SAT/ACT scores. Two-thirds of this gap is due to higher admissions rates for students with comparable test scores from high-income families; the remaining third is due to differences in rates of application and matriculation. The high-income admissions advantage at private colleges is driven by three factors: (1) preferences for children of alumni, (2) weight placed on non-academic credentials, which tend to be stronger for students applying from private high schools that have affluent student bodies, and (3) recruitment of athletes, who tend to come from higher-income families. Highly selective public colleges that follow more standardized processes to evaluate applications exhibit smaller disparities in admissions rates by parental income than private colleges that use more holistic evaluations. Related: Why Do Wages Grow Faster for Educated Workers? and Multidimensional Human Capital and the Wage Structure and The Economics of Inequality in High-Wage Economies
California’s Department of Finance forecast the state’s population will be smaller in 2060 than it was in 2020.
More than a century of long-term population growth in California could be over, according to new projections that show the state will have about the same number of people in 2060 as it does now. The California Department of Finance predicts that there’ll be 39.5 million people in the state by 2060. Just three years ago, forecasters were expecting the number to be 45 million — and a decade ago, the population was seen surging to almost 53 million. If there’s a bright spot in the forecast, the state is at least expected to recoup its pandemic population decline in the coming years — returning to its 2020 population level in the 2030s, before peaking in 2044. Related: Taxes, Revenues, and Net Migration In California and The Population of California Declined, Again
Fervo Energy is building a commercial geothermal facility that will power 300,000 Utah homes; the firm has started permitting on another half dozen facilities.
In a landmark step for enhanced geothermal technology’s potential as a dependable carbon-free energy source, startup Fervo Energy has wrapped up a full-scale, 30-day well test at its Project Red site in northern Nevada, which was able to generate 3.5 megawatts of electricity. (One megawatt can power roughly 750 homes at once.) Project Red will connect to the grid later this year and power Google's data centers and infrastructure throughout Nevada. With the demo complete, Fervo is attempting to repeat its success at its southwest Utah site, which is currently under construction. With design improvements maximizing power output as expected, the Utah site is predicted to deliver about 400 megawatts by 2028, roughly enough electricity to power 300,000 homes at once. Related: This Geothermal Startup Showed Its Wells Can Be Used Like a Giant Underground Battery
The increase in reported pain among Americans wasn’t a linear trend over decades but was almost entirely concentrated in the 2007-2010 period among the less educated. @ramoffitt4
We show that, rather than resulting from a smooth upward trend, the increase was almost entirely concentrated in the 2007-2010 period, the time of the Great Recession, a result not uncovered in prior work. The disproportionate increase in pain among the less educated is also shown to have occurred primarily at the time of the Recession, with either little or no trend before or after. The Recession jump occurred only at older ages and primarily only at the points during each cohort’s lifetime when they experienced the Recession. However, we too find the jump difficult to explain, for while there is necessarily a temporary decline in employment during a Recession, why there should be a permanent increase in pain as a result is unclear. Related: Drug Overdose Deaths Topped 100,000 Again in 2022 and America’s Work Ethic Is Under Assault
TSMC’s new Arizona fab is pushing back the start of production by a year, citing a shortage of skilled workers.
TSMC Chairman Mark Liu said construction in Arizona is hampered by a shortage of skilled workers and that the company might have to bring in experienced technicians temporarily from Taiwan. He said this would delay the start of mass production of 4-nanometer chips in the first factory until 2025. Previously TSMC described the 4-nanometer chip as the leading product of the first Arizona factory and said production would start in 2024. Overall, it expects to invest $40 billion in Arizona. “We are now entering a critical phase of handling and installing the most advanced and dedicated equipment. However, we are encountering certain challenges,” Liu said. Related: TSMC To Send Hundreds More Workers To Speed U.S. Plant Construction and The Semiconductor Trade War
According to @RobAtkinsonITIF, the public discourse around startups downplays the importance of large firms in driving American innovation.
While small firms account for 49% of U.S. employment, they account for just 16% of business spending on R&D, while firms of more than 25,000 workers account for 36%. Likewise, small firms account for 18.8% of patents issued, while the largest firms account for 37.4% of patents. When ITIF surveyed almost 1,000 U.S. scientists and engineers involved in filing triadic patents (patents filed in the United States, Europe, and Japan), they found that approximately 75% of materials science and IT patents and 60% of life science patents were filed by firms with more than 500 employees. Countering the popular narrative that large firms are sluggish copiers and small firms the true innovators, firms with 500 or fewer workers in the sample accounted for only around 30% of patents, yet they employed 48.4% of workers. Related: Mega Firms and Recent Trends in the U.S. Innovation: Empirical Evidence from the U.S. Patent Data and The Economics of Inequality in High-Wage Economies
.@NidhiSubs cites research by @DunnHappyLab showing that most studies on happiness have lacked scientific rigor. Only 57 of 494 peer-reviewed papers evaluated met minimal standards for good research.
Dunn and Folk gathered 494 peer-reviewed papers, in which one of the five happiness strategies was evaluated against a control group. When they weeded out weakly designed work, only 57 studies were left. The vast majority of papers were too poorly designed to support their conclusions. The remaining subset of studies met at least one of two conditions for good science: They included sufficient numbers of study participants or the researchers committed to hypotheses or study plans before analyzing their data. These studies failed to confirm that three of the five activities made people happy. “The evidence melts away when you look at it,” Dunn said. A handful of scandals in psychology in the 2010s—including a bombshell paper that demonstrated the danger of p-hacking—sent shock waves through the field and forced researchers to re-examine the status quo. This reform isn’t limited to psychology. “Every field that has bothered to look at issues of rigor and reproducibility in their evidence has found challenges."
Peking University professor Zhang Dandan estimates that China’s youth unemployment rate could be as high as 46.5% if one includes 16mm young non-working non-students who are living with their parents.
If 16 million non-students "lying flat" at home or relying on their parents were included, the rate at that time could have been as high as 46.5%, Zhang Dandan wrote in an online article in respected financial magazine Caixin. The article by Zhang, associate professor of Economics at the university's National School of Development, was published on Monday but has since been removed. The official youth jobless rate, which only includes people actively seeking work, rose further to a record 21.3% in June after the world's second-biggest economy lost steam in the second quarter. Related: Why Has Youth Unemployment Risen So Much in China? and China’s Youth Left Behind As Jobs Crisis Mounts
.@EtraAlex documents the shift in petrodollar recycling from FX reserves at central banks to sovereign wealth funds, most notably Saudi Arabia’s Public Investment Fund (PIF).
While clearly not all of the foreign asset allocation that was previously done by Saudi Central Bank is now being done by the Public Investment Fund (PIF), some significant portion of it does seem to be. Hence a look at PIF’s Annual Reports can provide some basic insights into some aspects of the new form of petro-dollar recycling. In particular, we focus on the more transparent and traditional assets PIF shows on balance sheet. Of the roughly $777bn in total assets at end 2022, $305bn are listed as current assets, and $472bn are listed as non-current assets. However, of the non-current assets, nearly half—$225bn—are held as investment securities. Related: The New Geopolitics of Global Finance
.@_seulakim documents the importance of the 50 largest US firms in generating novel patents that combine technical components in new ways.
The share of mega firms in novel patent applications had been declining for almost two decades but there has been a turnaround since the early-mid 2000s. By the mid-2010s, the share of mega-firms was the highest since 1980 when our sample starts. We show that mega firms are more likely to apply for novel patents even after controlling for various firm characteristics including size, industry, and the total number of patents. This finding also holds within firms––firms produce more novel patents than before as they become mega firms. This suggests that closing on market leadership is associated with more, not less new combinations. We also examine the opposite side of the spectrum, the not-yet-public VC-backed startups, and find that those also play a disproportionately large role in generating novel patents, especially “hit” novel patents, so that successful novel patents appear to be produced in a bi-modal pattern, both by super large mega firms and relatively small startups. Related: The Economics of Inequality in High-Wage Economies and Where Have All the "Creative Talents" Gone? Employment Dynamics of US Inventors
While only 6% of American private sector workers are unionized, as many as 650,000 workers might soon be on strike according to a Bloomberg tracker. @markets
More than 650,000 American workers are threatening to go on strike this summer — or have already done so — in an avalanche of union activity not seen in the US in decades. The combined actors and writers strikes in Hollywood are already a once-in-a-generation event. Unions for UPS and Detroit’s Big Three automakers are poised to join them in coming weeks if contract negotiations fall through. One Bank of America Corp. analyst put the odds of a United Auto Workers strike at more than 90%. And while logistics experts and financial analysts expected the Teamsters to reach a deal with UPS, their confidence has dwindled as the July 31 deadline approaches. Even before the 100,000-plus actors joined in last week, both the number of strikes and workers on strike were up in the first half of this year. Related: Unions Inflation Warning
.@swinshi Thomas O’Rourke @AEIecon find that the Southeastern/Southwestern US have the lowest levels of social capital, while the Upper Midwest, Mountain West, and northern New England regions have the highest levels.
Consider the Social Capital Index developed by the Joint Economic Committee. States shaded red and orange have the lowest levels of social capital, whereas states shaded green and blue have the highest levels of social capital. Each of the five states in the lowest decile of social capital—Louisiana, Nevada, New Mexico, Florida, and Arizona—consistently rank below the median on each subindex, suggesting that each subindex captures related features of social capital. Similarly, the six states in the highest decile of social capital—Utah, Minnesota, Wisconsin, New Hampshire, Vermont, and Colorado—tend to rank above the median across subindexes. Of the 21 cross-state correlations among the seven subindexes, all but one are positive.
New @NBERpubs paper finds that there is no empirical evidence that government spending related to the space race contributed to excess economic growth on the national level.
Figure 1 shows that the ambitious mission to send a manned crew to the Moon led to a massive expansion of federal investment in R&D – NASA received over 0.7 percent of GDP at the peak of the Space Race. Space Race spending was economically large so we might expect local effects through a fiscal multiplier channel even without technological spillovers. We compare the fiscal multiplier for NASA contractor spending implied by our estimates to the literature to get a sense of this. We find that R&D contractor spending on the Space Race had a similar impact as typical government expenditures. There is no credible empirical estimate of the space mission’s contribution to economic growth. The magnitudes of the estimated effects seem to align with those of other non-R&D types of government expenditures.
.@JosephPolitano argues the resumption of student loan payments will only have a minor impact on consumers’ balance sheets.
46 million Americans owe some money to the Department of Education for their student loans. The vast majority of borrowers also have comparatively small balances remaining, with 3/4 of debtors having balances less than $40k and 1/2 having balances under $20k. The small contingent of borrowers with large balances holds a disproportionately large share of the outstanding debt—although they make up only 16% of total borrowers, those with balances in excess of $60,000 hold the majority of student loan debt. Related: Debt Moratoria: Evidence from Student Loan Forbearance
.@joshrauh & Gregory Kearney of @HooverInst argue academic research suffers from a feedback loop that encourages economists to produce left-leaning research to achieve widespread coverage in the mainstream media.
Social sciences researchers hoping to become public influencers have one clear path: through the mainstream media. Unfortunately, journalists aren’t unbiased arbiters. For more than a decade, the media has praised economists Saez, Zucman and Piketty. Their data purport to show the income share of the top 1% of [US] earners climbed to 21% in 2019 from 9% in 1970. In a recent paper that has received far less attention, Auten of the U.S. Treasury and Splinter of Congress’s Joint Committee on Taxation find the income share of the top 1% climbed to 13.7% in 2019 from 9.2% in 1970. and, incorporating increases in redistributive government policy, the income share of the top 1% only increased to 8.8% in 2019 from 6.8% in 1970. In 2017, [Harvard’s Raj Chetty] published findings that U.S. trends in the likelihood of children achieving a higher income status than their parents has grown progressively worse, a point that received intense media coverage. Research published by Scott Winship of the American Enterprise Institute shows the fall in mobility was a direct consequence, not of inequality, but of slowing economic growth that began in the 1970s. Journalists’ propensity to ignore research that refutes their beliefs encourages academics to pander to the liberal tilt of mainstream news organizations, leading to the general public’s misunderstanding of important policy issues.
.@danwwang notes that China’s strength is its ability to manufacture complex goods. Wang is not worried about slowing growth and a demographic drag affecting China’s manufacturing dominance, but he does see China’s nonliberal environment as a threat.
The general political environment poses perhaps the greatest threat to technological momentum. In the last few months, I’ve chatted with a good number of Chinese undergrads in the US, who almost to a person tell me that their parents are urging them not to return to the mainland. China retains considerable strengths, one which doesn’t depend so much on slowing economic growth or demographic drags. The main one is its entrenched workforce that continues to advance manufacturing complexity. I think about the humming engine that is outlined by Kevin Kelly’s concept of the “technium” that describes an ecosystem of intertwined, co-dependent, and complex technologies with a mind of its own. But I grow less certain that a third-Xi term China will sustain an innovative drive. Related: 2022 Letter and U.S. Bound Migrants Surge at Darien Jungle Crossing in Panama
Despite the end of Covid Zero, Chinese growth remains anemic. There is no evidence of “revenge spending” from Chinese consumers. @M_C_Klein
Chinese growth in 2023 has been anemic, especially relative to the starting point. So far this year, economic output was just 5.5% higher than in the first half of 2022, which in turn was up only 2.5% compared to the first half of 2021. Officially, China’s Gross Domestic Product (GDP) grew just 0.8% between 2023Q1 and Q2 compared to the 2017-2019 quarterly average of 1.6%. That would be bad enough, but there is also reason to think that output may actually have shrunk in the most recent quarter. Nominal spending in March-June 2023 was 16.6% higher than in March-June 2019, which corresponds to an average yearly growth rate of just 3.9%. Before the pandemic, Chinese consumer spending was rising about 7.4% a year. Related: Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and The Neoclassical Growth of China
The American current account deficit is mainly financed via portfolio debt flows, a change from the pre-GFC period when the deficit was funded by reserve accumulation. @IMFNews data shows a declining role for China.
The US current account deficit, the largest deficit of all, is mainly financed via portfolio debt flows. Geographically, the financing of the US current account deficit has become increasingly mediated by financial centers in recent years. This contrasts with the pre-GFC period, when the US current account deficit was financed largely through reserve accumulation from surplus countries. Balance-of-payments data show a declining role for China. Related: Brad Sester On The Balance Of Payments and How Was the U.S. Current Account Deficit Financed In 2022?
.@wilson_daniel_j @sffed argues that rising temperatures between now and 2050 will drive a shift in population and employment away from the Sunbelt and toward the North and Mountain West.
The link between extreme heat and population growth was strongly positive in the 1980s. That relationship weakened substantially over the subsequent two decades and vanished entirely over 2010-2020. The projections for the decades ahead show a continuation of this pivot. “Hot” climate counties have gotten considerably hotter - to a point where they are no longer as tolerable. The 90th percentile county over 1951-1980 averaged about 62 days per year of daily average temperatures above 80◦F. That number grew to 72 days from 1991-2020. The projected climate changes are predicted to cause a general shifting of population from the Southeast and parts of the Southwest to the North, the Mountain West, and most of the Pacific coastline. Related: Sunbelt Cities Nashville and Austin Are Nation’s Hottest Job Markets and Young Families Have Not Returned to Large Cities Post-Pandemic
David Mericle and Ronnie Walker @GoldmanSachs make the case that artificial intelligence, like the deflationary impact of the 1990s tech boom, might help offset inflationary drivers such as deglobalization and the green transition.
Artificial intelligence could exert downward pressure on consumer prices if it provides the sort of large, sustained boost to productivity growth that we expect. In the late 1990s and early 2000s, a similar productivity boom led by the technology sector enabled the Fed to let the labor market become quite tight by historical standards without running into an inflation problem. A future productivity boom should have similar effects. Artificial intelligence is likely to boost productivity by lowering production costs and improving consumer goods and services in more qualitative ways. These effects should also lower measured consumer prices. Related: Summers and Blanchard Debate the Future of Interest Rates and What Have We Learned About the Neutral Rate?
George Borjas finds that a 1981 French program giving legal status to undocumented workers who represented about 1% of all workers resulted in increased employment and wages for low-skill native and immigrant men and raised GDP 1%.
This paper documents the economic consequences of a large amnesty program implemented in France. In July 1981, the newly elected government of President François Mitterrand proposed to regularize all undocumented workers. The regularized workers were predominantly male, low-skill, and lived disproportionately in the Paris region. The regularized immigrants composed 2.0% of workers in Paris and nearly 1% of all workers in France. In short, by reducing monopsony power in the undocumented labor market, a regularization program improves labor market efficiency and can generate a substantial increase in output, a “regularization surplus.” Our empirical analysis of employment, wage, and output data in the French labor market confirms that the regularization program indeed had positive effects on the employment and wages of many groups, and particularly for male, low-skill workers. Moreover, there was a sizable jump in the growth rate of per-capita GDP in the affected region, suggesting an increase in total French GDP of around 1%. Related: Immigration to Drive All US Population Growth Within Two Decades and Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995
Excess deaths in the United States have returned to pre-pandemic levels. According to the CDC, the weekly excess death level is less than 1%. @DLeonhardt
The total number of Americans dying each day — from any cause — is no longer historically abnormal. During Covid’s worst phases, the total number of Americans dying each day was more than 30% higher than normal, a shocking increase. For long stretches of the past three years, the excess was above 10%. But during the past few months, excess deaths have fallen almost to zero, according to three different measures. The Human Mortality Database estimates that slightly fewer Americans than normal have died since March, while The Economist magazine and the Center for Disease Control both put the excess-death number below 1% percent. Related: Our Model Suggests That Global Deaths Remain 5% Above Pre-Covid Forecasts
Michael Cembalest @jpmorgan notes the 2020/20221 IPO class has performed extremely poorly relative to the overall equity market. IPO returns since 2010 were highly skewed; if the top 5% were removed, returns were strongly negative vs the market.
Since 40%-60% of IPOs generate negative returns even in good times, their value proposition is whether a small subset of winners offsets all the losers. A highly skewed investment universe is characterized by average returns that are much higher than median. As shown below, IPOs are an example of that; in many years, average net returns were positive while median net returns were close to zero. But these positive average returns are highly skewed: look how quickly they decline when excluding the best 3%, 5%, and 7% of IPOs. Even when only excluding the top 3%, average net returns become negative, and average absolute returns fall by more than half. In other words, long-term IPO survival odds are low and skewed to a small number of mega-winners.
In 27 years, people aged 65+ will make up 40% of the population in some parts of East Asia and Europe, almost 2X the share of 65+ adults currently living in FL.
In East Asia and Europe, extraordinary numbers of retirees will be dependent on a shrinking number of working-age people to support them. Not only are Asian countries aging much faster, but some are also becoming old before they become rich. While Japan, South Korea, and Singapore have relatively high income levels, China reached its peak working-age population at 20 percent the income level that the United States had at the same point. Vietnam reached the same peak at 14 percent the same level. Slightly higher fertility rates and more immigration mean the United States and Australia, for example, will be younger than most other rich countries in 2050. In both the United States and Australia, just under 24 percent of the population is projected to be 65 or older in 2050, according to U.N. projections — far higher than today, but lower than in most of Europe and East Asia, which will top 30 percent. Related: The Forever Labour Shortage and Fully Grown - European Vacation!
.@M_C_Klein notes the credit contraction hasn’t slowed down the real economy as it’s been offset by strong nominal income growth.
At the end of 2021 and the beginning of 2022, nominal consumer spending was rising about 7% annualized. So far this year, nominal PCE is rising about 6% annualized. The change in spending has been negligible compared to the slowdown in inflation, which suggests that improvements in the match between real production and demand have been more important than any shift in monetary policy. None of this is to suggest that interest rates should have stayed at zero, but it does suggest that the bulk of the disinflation that we have experienced so far can be attributed to benign developments in businesses’ ability to produce the real goods and services that consumers want.
.@JosephPolitano argues that newly-signed rents show rapidly declining rent inflation which suggests significant disinflation over the next three quarters.
The New Tenant Repeat Rent (NTRR) Index uses the same underlying microdata as the CPI to look at price changes for only the subset of units where new tenants have signed leases. That gives a much better picture of where the housing market is right now, and by proxy where official rent inflation is headed. Critically, the NTRR tends to lead the official CPI rent components by one year—and right now, it is saying we should expect significant disinflation over the next three quarters. Inflation is now mostly a housing phenomenon—rising rents are the single-largest contributor to the CPI by a wide margin, and outside of shelter headline inflation has completely flatlined over the last year. Related: New Tenant Repeat Rent Index
Since 2019, adjusted for PPP and inflation, wages are down 3% in Germany, 3.5% in Italy and Spain, and 6% in Greece. Over that same period, US wages were up 6%.
The eurozone economy grew about 6% over the past 15 years, measured in dollars, compared with 82% for the U.S., according to International Monetary Fund data. That has left the average EU country poorer per head than every U.S. state except Idaho and Mississippi. Private consumption has declined by about 1% in the 20-nation eurozone since the end of 2019 after adjusting for inflation. In the U.S., where households enjoy a strong labor market and rising incomes, it has increased by nearly 9%. The European Union now accounts for about 18% of all global consumption spending, compared with 28% for America. Fifteen years ago, the EU and the U.S. each represented about a quarter of that total. Related: From Strength To Strength and The Economics Of Inequality In High-Wage Economies
As inflation comes down, American workers have seen real wage gains since May.
Americans’ growing paychecks surpassed inflation for the first time in two years, providing some financial relief to workers, while complicating the Federal Reserve’s efforts to tame price increases. Inflation-adjusted average hourly wages rose 1.2% in June from a year earlier, according to the Labor Department. That marked the second straight month of seasonally adjusted gains after two years when workers’ historically elevated raises were erased by price increases. Related: US Job and Wage Growth Beat Expectations, Making the Fed’s Job Harder and Low Earners in the US Enjoy Fastest Wage Growth
Money market funds are once again the marginal buyer of Treasuries. The replenishment of the Treasury General Account allows further quantitative tightening. @FedGuy12
The return of money funds as major investors in bills provides a mechanism where banking system reserves can be replenished and removes a significant obstacle to QT. While the recent bout of bill issuance was largely used to replenish the Treasury General Account (TGA), future bill issuance will be used to finance ongoing government spending. This means that money will flow out of the RRP, into the TGA, and then be spent into the banking system through fiscal spending. Bank reserves can remain abundant for an extended period of time, and net deposit outflows will be smaller than expected. QT can continue for the expected two more years given that bank reserves are likely to remain abundant. Related: Probing LCLoR and How Was the U.S. Current Account Deficit Financed In 2022?
.@pewresearch reports people who voted for Trump in 2020 turned out for the 2022 midterms at a 71% rate in 2022, vs. 67% for 2020 Biden voters.
A new Pew Research Center analysis of verified voters and nonvoters in 2022, 2020, 2018, and 2016 finds that partisan differences in turnout – rather than vote switching between parties – account for most of the Republican gains in voting for the House last year. Overall, 68% of those who voted in the 2020 presidential election turned out to vote in the 2022 midterms. Former President Donald Trump’s voters turned out at a higher rate in 2022 (71%) than did President Joe Biden’s voters (67%). Relatively small shares of voters defected from their partisan affiliation or 2020 presidential vote. Among those who voted for both president in 2020 and for a House representative in 2022, just 6% crossed party lines between elections or voted for third-party candidates in either election. Related: What Happened In 2022 and Millennials Are Not an Exception. They’ve Moved to the Right
Energy exports were $420 billion in 2022 (13.5% of American exports). It is the fifth year in a row the US has been a net energy exporter. @GregorMacdonald
The value of US energy exports is now a significant component of total US exports. US exports last year hit $3,108 billion, making energy’s $420 billion 13.5% of the total. The growth contribution from energy is even more impressive. US exports jumped $541 billion last year from 2021’s level of $2,567 billion, which means the energy export advance of $143 billion easily comprised more than 25% of total export growth. Related: Portfolio Nuclear and Energy and the Presidents
As of 2020, @NewYorkFed finds life and property and casualty insurance firms were well capitalized for the climate risk they are bearing.
Insurance companies can be exposed to climate-related physical risk through their operations and to transition risk through their $12T of financial asset holdings. We assess the climate risk [CRISK] exposure of property and casualty [P&C] and life insurance companies in the U.S. In terms of transition risk for life insurers, we observe a notable increase in their transition climate beta during the 2019-20 fossil fuel price collapse. The aggregate transition CRISK for life insurers in the U.S. also significantly rose by more than $ 150B, equivalent to around 28% of their market cap. Excluding concurrent undercapitalization, the marginal CRISK attributed solely to climate stress increased by more than $ 85B during the same period. In terms of physical risk for P&C insurers, we find that the top ten P&C insurers mostly had negative CRISK values [excess reserves], indicating no sign of potential systemic under-capitalization under physical climate stress. As of the end of 2020, their aggregate marginal CRISK stood at $15B, equivalent to approximately 7% of their market cap. Related: Farmers Insurance Limits Sales in Florida, California Amid Storm, Wildfire Risks, Climate Shocks Are Making Parts of America Uninsurable. It Just Got Worse and Florida Ocean Temperatures At ‘Downright Shocking’ Levels
The cost of servicing American government debt jumped by 25% in the first nine months of this fiscal year as the Treasury rolled into higher rate debt.
The cost of servicing US government debt jumped by 25% in the first nine months of the fiscal year, reaching $652 billion and contributing to a major widening in the budget deficit. For the nine months through June, the federal deficit hit $1.39 trillion, up some 170% from the same period the year before, according to Treasury Department data released on Thursday. As lower-yielding securities mature, the Treasury faces steady increases in the rates it pays on outstanding debt. The weighted average interest for total outstanding debt by the end of June was 2.76%, the highest level since February 2012, according to the Treasury. That’s up from 1.80% a year before, the department’s data show. Related: Net Interest Payments On External US Debt and Interest Costs Will Grow the Fastest Over the Next 30 Years
.@M_C_Klein notes that robust nominal wage growth is not consistent with inflation returning to target.
The main reason to worry is that nominal wages have consistently been rising about 5%-6% a year since last summer. The drop in the share of workers quitting their jobs for better opportunities elsewhere and the declining wage premium for workers switching jobs do not seem to be having an impact (yet). Regardless of what I want to happen, the experience of the past three years makes me reluctant to conclude that something fundamental has changed after only a few months of somewhat encouraging data. Broad price inflation cannot remain disconnected from nominal income growth by very much over any meaningful time horizon. At this point, the hope is that the current bout of disinflation buys time for wage growth to (somehow) slow down on its own without the need for any active measures to hurt the economy. The alternative does not seem to be priced in. Related: Furman On CPI Report
Michael Howell @crossbordercap argues that a 2% point fall in trend inflation is equivalent to a 60% jump in global liquidity which is bullish for risk assets.
This inflationary crisis was caused by excessive fiscal spending and it needs to be corrected by reducing fiscal spending. Demographic forces now act in the other direction [vs. the 1970s] and they are pushing up the pace of mandatory spending, even as growing geopolitical pressures demand ever more military spending. The inevitable conclusion is that Central Banks will ultimately have to purchase more and more government debt, or in other words create monetary inflation. Monetary inflation may not be the same thing as high street inflation, but over the long term, it runs close. Our two key criteria are: (1) rising Global Liquidity and (2) falling underlying inflation. Our analysis shows that a 2% point fall in trend inflation is equivalent to a 60% jump in Global Liquidity. Related: The Return Of Quantitative Easing
Torsten Sløk notes that low-interest mortgages constrain housing inventory: 23% of mortgages outstanding have an interest rate of less than 3% and 38% are at 3-4%. @apolloglobal
23% percent of all mortgages outstanding have an interest rate below 3%, 38% are between 3% and 4%, and only 9% of all mortgages outstanding were originated with an interest rate above 6%. The bottom line is that homeowners across America do not have any incentive to move and get a new mortgage with mortgage rates currently at 7.25%. This is a key reason why the supply in the housing market continues to be so low. Related: Inflation Adjusted House Prices 3.8% Below Peak and The Great Pandemic Mortgage Refinance Boom
Mexico became the top US trading partner earlier this year with 15.4% share of all the goods exported and imported, vs. Canada’s 15.2% and China’s 12%. @DallasFed
Mexico became the top U.S. trading partner at the beginning of 2023, with total bilateral trade between the two countries totaling $263 billion during the first four months of this year. Mexico’s gains mirror its rise in manufacturing, a key component of goods moving between it and the U.S. During the first four months of 2023, total trade of manufactured goods between Mexico and the U.S. reached $234.2 billion. Overall, Mexican imports to the U.S. totaled $157 billion; U.S. exports to Mexico reached $107 billion. Mexico–U.S. trade during the first four months of 2023 represented 15.4 percent of all the goods exported and imported by the U.S.; the Canada–U.S. share followed at 15.2 percent and then the China–U.S. share at 12.0 percent. Related: Pettis on “Friend-Shoring” and Global Trade Is Shifting, Not Reversing
The US is racing to find new suppliers of minerals needed for weapons. Concentrated production, complex refining, and low volumes complicate new supply chains.
The production of war minerals is extremely concentrated. For each of our 13 war materials, the top three exporters account for more than 60% of global supply. China is the biggest producer, by far, for eight of these minerals; Congo, a troubled mining country, tops the ranking for another two; Brazil, a more reliable trading partner, produces nine-tenths of the world’s niobium, though most of it is sent to China. Many minerals are impossible to replace in the near term, especially for cutting-edge military uses. When substitution is possible, performance usually suffers. The combination of concentrated production, complex refining, and critical uses means trading happens under the radar. All this makes building new supply chains much more difficult. Related: The U.S. China Rare Earths Battle and China’s Curb On Metal Exports Reverberates Across Chip Sector
.@TheEconomist argues that policymakers are overestimating the importance of manufacturing. In recent years, there has been no significant relationship between economic growth and manufacturing’s share of the economy in OECD countries.
Ronnie Walker of @GoldmanSachs estimates that only 25% of $365B in pledged new semiconductor and battery investments has been spent.
Continued strength in manufacturing structures investment—which has grown at an average annualized rate of 43% over the last three quarters on the back of investment in battery and semiconductor facilities—should at least partly offset these headwinds to structures investment. The White House reports that companies have pledged $365bn of new battery and semiconductor investments over the last two years. So far, only $90bn of investment has been tallied in the relevant construction spending category for battery and semiconductor facilities since the start of 2021, suggesting that the level of spending could remain elevated for quite some time (the current monthly annualized rate stands at $112bn vs. ~$10bn two years ago, or 0.40% of annual GDP vs. 0.05% of GDP). Related: Making Manufacturing Great Again and Unpacking the Boom in U.S. Construction of Manufacturing Facilities
Higher child care costs do not explain the labor force participation sluggishness. @stlouisfed @oksana_leukhina
During the first half of 2022, the LFP rate of partnered women with children increased by 1.06 percentage points. Our results suggest that had it not been for rising child care worker wages, we would have likely seen an even stronger LFP rate of partnered women with children today. One reason why this group dramatically increased their market work, despite the rising child care prices, may be related to the rise in the prevalence of telecommuting jobs for which this particular group has a high preference. Related: How Child Care Impacts Parents’ Labor Force Participation
Farmers Insurance is pulling out of Florida ending home, auto, and umbrella insurance policies. Farmers is also limiting sales in California.
Farmers Insurance is limiting sales of homeowners policies in Florida and California, becoming the latest big insurer to pull back from the hurricane- and wildfire-prone states. In Florida, Farmers is ending sales of home, auto, and umbrella insurance policies under its own brand, representing about 30% of the policies it sells in the state, the company said. It will continue offering insurance through other brands, including those for high-risk drivers, according to the statement. The ending of Farmers-branded sales in Florida affects around 89,000 policies, a person familiar with the matter said. Related: Climate Shocks Are Making Parts of America Uninsurable. It Just Got Worse and Florida Ocean Temperatures At ‘Downright Shocking’ Levels
A team at Purdue University has created a white paint that reflects the sun’s rays. The paint can make surfaces as much as 8° cooler than ambient air temperatures during the day and up to 19° cooler at night.
The paint’s properties are almost superheroic. It can make surfaces as much as eight degrees Fahrenheit cooler than ambient air temperatures at midday, and up to 19° cooler at night, reducing temperatures inside buildings and decreasing air-conditioning needs by as much as 40%. It is cool to the touch, even under a blazing sun, Dr. Ruan said. Unlike air-conditioners, the paint doesn’t need any energy to work, and it doesn’t warm the outside air. Jeremy Munday, a professor of electrical and computer engineering at the University of California, Davis, calculated that if materials such as Purdue’s ultra-white paint were to coat between 1% and 2% of the Earth’s surface, slightly more than half the size of the Sahara, the planet would no longer absorb more heat than it was emitting, and global temperatures would stop rising.
New York state’s foray into industrial policy was a white elephant; $1 billion investment in a Tesla facility earned 0.54 cents on the dollar. External auditors have written down nearly all of New York’s investment.
New York state paid to build a quarter-mile-long facility with 1.2 million square feet of industrial space, which it now owns and leases to Tesla for $1 a year. It bought $240 million worth of solar-panel manufacturing equipment. Musk had said that by 2020 the Buffalo plant each week would churn out enough solar-panel shingles to cover 1,000 roofs. A state comptroller’s audit found just 54 cents of economic benefit for every subsidy dollar spent on the factory, which rose on the site of an old steel mill. External auditors have written down nearly all of New York’s investment. Related: Making Manufacturing Great Again and Why Laws Meant To Create Jobs Can Be So Destructive For Our Cities
.@Brad_Setser argues that net interest payments will top their pre-crisis level of 1.5% of GDP.
The US is the world's big net debtor -- with net external debt of around 50% of its GDP. The US is now getting 4% on average on its loans, while only paying 3% on its borrowing (mostly bonds) the implied net interest rate on US external debt works out to be 2.4% -- well below any current US interest rate. And as a result, net interest payments as a share of US GDP are only up 15 bps of US GDP or so (not much really). These predictable dynamics slow the adjustment in the U.S. balance of payments to higher interest rates, but they don't eliminate it. Net interest payments have a lot further to rise. They certainly will top their pre-GFC peak as a share of US GDP (1.5% or so). Related: Interest Costs Will Grow The Fastest Over The Next 30 Years and American Gothic
As of February 2023, the labor force participation rate of women with young children has rebounded, despite the cost of childcare rising by 14% vs. pre-pandemic. @stlouisfed @oksana_leukhina
As of February 2023, the number of child care workers in the U.S. was about 6% below its pre-pandemic level while the cost of child care was up by 14%. The shortage of child care workers and rising child care prices have been deemed partly responsible for the lackluster rebound of labor force participation rates. Consistent with this hypothesis, a larger share of nonworking parents of young children and those working only part time currently report child care needs as the main reason for their low work hours. This fraction increased from about 15% prior to the pandemic to 18% in February 2023. Interestingly, women with a partner and young children—the group we expected to be most sensitive to child care prices—showed the strongest rebound with their LFP index having surpassed its pre-pandemic level. As a result, we do not see clear evidence for weaker labor supply rebounds among households with small children by early 2023.
Families with young children continue to migrate out of America’s large urban areas. The under-five population in large urban counties shrank 1.8% last year, vs. a 0.7% decline nationwide.
Since the beginning of the pandemic, the cumulative decline of under-five populations in large urban counties is now more than 6% —nearly twice the rate of decline nationally. Large urban areas are losing families with young children substantially faster than they are losing population overall. While the under-five population in such counties fell 6.1% between April 2020 and July 2022, the overall population declined by just 0.9%. In some of the country’s very largest counties, including New York, Cook County, IL, and Los Angeles, the population of young children is more than 10% smaller than in April 2020. Out-migration of young families from large and small urban counties has been more severe in the Mid-Atlantic and West Coast, while the under-five population actually grew in urban counties in the Southeast last year.
.@JasonFurman notes headline CPI inflation fell to an annual rate of 3% year-over-year. He cautions that “Fed should still do more.”
The headline is CPI inflation fell to 3.0%. But mostly this is the huge June 2022 # dropping out & what is almost certainly a transitory 17% fall in energy prices over the last yr. But underneath the #s show moderation, with the lowest core reading of the inflationary period. Overall what is happening is that service price growth is gradually slowing--as was predictable and predicted given the lags in the shelter measure. And goods price growth which was unusually (and likely transitorily) high in recent months turned back down again. The collapsing of "supercore," which excludes food, energy, shelter, and used cars (the narrowest category BLS publishes) is even more dramatic. Overall, core PCE inflation is still running well above Fed's target. Economy is very strong. Interest rates are not that high & most of the relevant increases happened a while ago. The banking sector stabilized. Fiscal policy may be mildly expansionary. Fed should still do more.
Torsten Sløk @apolloglobal argues that the impact of monetary policy will peak in Q3 of next year.
The Fed has raised the Fed funds rate to 5%, and the lagged effects of Fed hikes will continue to drag down growth over the coming 12 months. See chart above, which shows a simulation with the impact of a 5% increase in the Fed funds rate on the level of GDP done on a variant of the Fed’s FR/BUS model of the US economy. In other words, the transmission mechanism of monetary policy takes time, and the drag on growth from lagged Fed hikes over the coming year will be significant. That is why a recession is a more likely outcome than a soft landing, no matter what happens to inflation.
James Montier of GMO argues that elevated debt levels in the US over the past 20 years have created a cascading “slow burn Minsky moments.”
The late, great Rudi Dornbusch once opined, “The crisis takes a much longer time in coming than you think, and then it happens much faster than you would have thought.”. This idea got me thinking about what I am calling “slow burn Minsky moments.” Recall that Minsky’s financial instability hypothesis holds that stability begets instability. In essence, I am referring to situations characterized by economically unsustainable processes or systemic vulnerabilities that build up during “good times” but carry within them either the seeds of their own destruction or create fragilities that exacerbate any external shock far beyond what may have been commonly expected. Richard Vague suggests that a ratio of private sector debt to GDP in excess of 150% is an important threshold. As Exhibit 1 shows, the U.S. has spent most of the last 20 years at or above this level! No wonder we have experienced a litany of financial crises over this period.
Manhattan has 20% fewer store employees than before the pandemic and NYC overall is down 11%. Subsectors facing the stiffest online competition are hardest-hit: clothing employment is down 34%, and department stores down 20%.
As of February, retail employment in New York City sagged 38,000 jobs (11%) from its pre-pandemic level of 340,000 with no gain since, according to the Center for an Urban Future. The sector has declined since peaking at 360,000 jobs in 2015. Manhattan has been hardest hit, with a 20% decline. The other boroughs had single-digit declines. Subsectors facing the stiffest online competition have been hardest hit, with clothing employment down 34%, department stores off 20%, and general merchandise declining about 13%. The sector’s struggles are a key reason for the city’s high Black unemployment rate of 12.2%, compared to just over 1% for white workers. Workers of color account for 7 of 10 retail employees in the city.
Peder Beck-Friis and Richard Clarida @PIMCO argue that fiscal policy has been a key driver of the current temporary inflationary episode, consistent with @JohnHCochrane fiscal theory of the price level.
In advanced economies, there’s a significant positive relationship between core inflation and sovereign debt growth since the start of the pandemic. The fiscal expansions delivered this decade will likely lead to price levels adjusting permanently higher. But this is not the same thing as permanently higher inflation: Our base case is that as temporary pandemic-related deficits gradually normalize, inflation is likely to diminish – and today’s restrictive monetary policies aim to accelerate this process. And unlike in the 1970s, monetary policy credibility appears intact, with medium-term inflation expectations still anchored around central bank targets. Related: The Second Great Experiment Update, Inflation and Debt Across Countries and Waining Inflation, Supply and Demand
.@JohnHCochrane argues that current conditions of trillion-dollar deficits with 3.6% unemployment are not consistent with a persistent decline in inflation.
There was a big expansion in M2 before the US inflation. Monetarists took a victory lap. M2 has since fallen a lot. There is not much correlation between monetary expansion and inflation across countries, however. The slope of the regression also clearly depends on one or two points. Money or debt, which is it? When governments print money to finance deficits (or interest-bearing reserves), fiscal theory and monetary theory agree, there is inflation. Printing money (helicopters) is perhaps particularly powerful, as debt carries a reputation and tradition of repayment, which money may not carry. A core issue separating monetary and fiscal theory is whether a big monetary expansion without deficits or other fiscal news would have any effects. Would a $5 trillion QE (buy bonds, issue money) with no deficit have had the same inflationary impact? Monetarists, yes; fiscalists, no. Related: The Second Great Experiment Update,Waining Inflation, Supply and Demand and Fiscal Arithmetic and the Global Inflation Outlook
.@DrDaronAcemoglu @davidautor show that declining manufacturing productivity growth since the 1970s can be explained by “bottlenecks” where slowdowns in TFP growth of a sector’s suppliers undermine that sector’s productivity.
The foundational idea of our approach is that innovation in any one industry relies on complementary innovations in—and subsequent productivity gains from—its input and idea suppliers. Our framework yields a simple estimating equation that links growth in sectoral TFP to both the average TFP and the dispersion (variance) of TFP among that sector’s inputs. We estimate this equation using 462 manufacturing industries between 1977 and 2007, and also for the entire US economy between 1987 and 2007 by combining our manufacturing data with 42 non-manufacturing industries. Our estimates indicate that greater dispersion of TFP growth among an industry’s suppliers exerts a powerful negative influence on its own growth opportunities. At face value, our evidence implies that the bulk of the productivity slowdown in the United States (and several other industrialized economies) can be explained by the sizable increase in the cross-industry variance of TFP growth and innovation. Related: The Productivity Slowdown in Advanced Economies: Common Shocks or Common Trends? and The Economics of Inequality in High-Wage Economies
Evidence from CA shows that between 2002-2016 Asian immigration is associated with a decline in white student enrollment in public schools. @leah_boustan
We find substantial white flight from Asian students entering high-socioeconomic status suburban districts: on average, the arrival of one Asian student in a suburban school district leads to the departure of 1.5 white students, a rate of white flight that is somewhat lower but not too dissimilar from flight from Black/Hispanic We find substantial white flight from Asian students entering high-socioeconomic status suburban districts: on average, the arrival of one Asian student in a suburban school district leads to the departure of 1.5 white students, a rate of white flight that is somewhat lower but not too dissimilar from flight from Black/Hispanic populations documented in different settings. Academic performance also rises with Asian entry to high-SES suburban districts. After ruling out correlated patterns of Black/Hispanic entry and direct racial animus, and confirming that housing market dynamics cannot account for the observed departure rate, we suggest that white flight from high-SES districts may be due to parental concerns about academic competition, particularly in a state like CA where entry to public colleges and universities is determined in part by relative high school performance. This pattern is consistent with qualitative sociological evidence about white-Asian encounters in suburban settings. Related: Can Democrats Survive the Looming Crisis in New York City’s Outer Boroughs? and Where New York’s Asian Neighborhoods Shifted to the Right
According to @NATO 11 of 31 member nations will hit the 2% spending target this year, up from 3 in 2014. Germany will only spend 1.57%.
In the figures and tables that follow, NATO also uses economic and demographic information available from the Directorate-General for Economic and Financial Affairs of the European Commission (DG ECFIN), and the Organisation for Economic Co-operation and Development (OECD). In view of differences between both these sources and national GDP forecasts, and also the definition of NATO defence expenditure and national definitions, the figures shown in this report may diverge considerably from those which are quoted by media, published by national authorities, or given in national budgets. Equipment expenditure includes expenditure on major equipment as well as on research and development devoted to major equipment. Personnel expenditure includes pensions paid to retirees. Related: The Cost of the Global Arms Race and The Age-Old Question: How Do Governments Pay For Wars?
37% of the Navy’s attack submarines (18 of 49) are out of commission and awaiting repairs, up from 28% in 2017.
Delays at naval shipyards mean that nearly 40% of US attack submarines are out of commission for repairs, about double the rate the Navy would like, according to new data released by the service. As of this year, 18 of the US Navy’s 49 attack submarines — 37% — were out of commission, according to previously undisclosed Navy data published by the Congressional Research Service. That leaves the US at a critical disadvantage against China’s numerically superior fleet. That’s up from 28% overall in 2017 and 33% in 2022, and below the industry best practice of 20%. Related: Weapons Makers Can’t Hire Enough Workers as Ukraine War Drives Demand and US Can’t Keep Up with China’s Warship Building, Navy Secretary Says
Towns 300 miles south of the Arctic Ocean are seeing temperatures of 100 degrees which could accelerate wildfires. A record 22.7 million acres of Canada have burned so far this year, up from a previous record of 17.5 million acres in 1995.
In the desolate and oil-rich region of the Northwest Territories, nestled in the wooded Taiga Plains about 300 miles from the Arctic Ocean, the small town of Norman Wells hit 100 degrees on Saturday. It was “easily the farthest north in Canada with a reading of 37C (99F) or higher in the Canadian climate record,” tweeted climatologist Brian Brettschneider, before the mercury ultimately ticked up to 100. The scorching temperatures over western Canada exacerbated the country’s unprecedented wildfire crisis. A record 22.7 million acres (9.2 million hectares) have burned so far, according to the Canadian Interagency Forest Fire Centre, blowing past the previous high mark of 17.5 million acres (7.1 million hectares) in 1995. There are months of the wildfire season to go. Related: Climate Shocks Are Making Parts of America Uninsurable. It Just Got Worse and Global Temperatures Have Broken Records Three Times In A Week
Coastal waters in Florida are currently between 92 and 96 degrees vs. typical averages in the upper 80s. About 40% of the world’s oceans are facing a marine heat wave according to @NOAA.
Much of Florida is seeing its warmest year on record, with temperatures running 3 to 5 degrees above normal. While some locations have been setting records since the beginning of the year, the hottest weather has come with an intense heat dome cooking the Sunshine State in recent weeks. That heat dome has made coastal waters extremely warm, including “downright shocking” temperatures of 92 to 96 degrees in the Florida Keys, meteorologist and journalist Bob Henson said Sunday in a tweet. “That’s boiling for them! More typically it would be in the upper 80s,” tweeted Jeff Berardelli, chief meteorologist and climate specialist at WFLA-TV in Tampa. The hot waters around Florida are connected to record-breaking ocean heat worldwide. About 40 percent of the world’s oceans are facing a marine heat wave, NOAA reported. That is the highest percentage on record, and it could reach 50 percent by September. Related: Climate Shocks Are Making Parts of America Uninsurable. It Just Got Worse and Global Temperatures Have Broken Records Three Times In A Week
.@FedGuy12 argues slowing employment growth is consistent with an American economy that is at full employment and running out of workers. This works against Fed aims, as higher wages are needed to attract marginal workers into the labor force.
The pandemic was a significant negative labor supply shock because it led to a wave of early retirements. This sudden labor shortage led to a spike in wages, which appeared to draw in people who were otherwise not looking for a job. The prime-age labor force participation rate has risen to multi-year highs and is not too far from all-time highs last seen in the 1990s. This suggests that there is very little slack in the labor market and additional workers will be increasingly difficult and expensive to find. While that shock has been digested, workers continue to retire and place increasing demand on a stagnant worker pool. In this scenario, moderating employment growth reflects labor scarcity and would be accompanied by reacceleration of wages similar to that seen in the most recent non-farm payroll report. Related: “The Great Retirement Boom”: The Pandemic-Era Surge in Retirements and Implications for Future Labor Force Participation and Unions’ Inflation Warning?
.@foxjust reports that young American men who play video games played for an average of almost four hours a day in 2022.
Statistics released last month by the US Bureau of Labor Statistics from the annual American Time Use Survey show that the time young men spent “playing games” — the survey doesn’t differentiate between electronic and non-electronic games, but most researchers assume it’s chiefly the former — rose by nearly three-quarters of an hour from 2019 to 2022, more than it had increased over the previous 16 years. It does appear that, since the pandemic, most of the additional gaming time has come from work and sports/exercise/recreation. American men 65 and older spent an average of just more than five hours a day watching TV in 2022, up from just more than four in 2003. Related: Is Technology Changing The Value Of Leisure? and Are We Ready For The Approaching Loneliness Epidemic?
Mexican exports to the United States exceeded Chinese exports for the first time in two decades reports @Johnauthers
This is how the imports to the US from Mexico and China have moved over the last three decades. For both countries, trade agreements made a huge difference, with Mexico suffering grievously from lost share after China entered the World Trade Organization in 2001. Now, it appears to be benefiting from the retreat from China. These numbers are shown as 12-month moving averages to avoid the distortions that come with the Chinese lunar new year holiday. The last three months, on an un-smoothed basis, actually show Mexican imports exceeding those from China for the first time in 20 years. Related: Global Trade Is Shifting, Not Reversing and Globalization Isn’t Dead. But It’s Changing
Despite predictions of a ‘train wreck’ of copper supply shortfalls, prices have dropped around 10% since January. EVs and green mandates will boost long-term demand, but short-term financial market interest has been muted. #Copper @TheEconomist
Financial investors are snubbing copper. As interest rates rise, they prefer to hold cash-generating assets rather than commodities, which yield nothing. For much of this year,, “non-commercial” net positioning on copper-futures markets has been in the red, implying that more investors are betting prices will fall than recover. Yet today’s prices remain $2,500 a tonne above production costs at the marginal mine. This implies that the recent correction has taken froth out of the market, rather than pushed prices too low, suggesting they could stay subdued for a while. Supply may struggle to keep up. The average age of the world’s ten biggest mines is 64, which is forcing miners to dig deep for ores of ever lower quality, making each new tonne of refined copper costlier to produce. New mines are scarce. Assuming all certain and probable projects go ahead, McKinsey, a consultancy, forecasts that supply will hit 30m tonnes by 2031, 7m tonnes short of estimated demand. Related: Copper Mine Flashes Warning of ‘Huge Crisis’ for World Supply and Glencore Says This Time Is Different for Coming Copper Shortage
.@verdadcap Minje Kwun and Lila Alloula argue that there is little evidence to support the claim that the private equity industry as a whole engineers operational improvements.
For EBITDA margins, we notice that PE firms tend to target companies outperforming their industries: EBITDA margin is on average 0.5% above industry standard in the three years before the deal. In the year the transaction is completed, the metric drop sharply. We hypothesize that major LBO transactions are distracting to management and lead to suboptimal outcomes from a sales and margin perspective during the deal year. Once the deal has been completed, growth and margins recover, but do not on average return to pre-deal levels. EBITDA margin averages out to exactly the industry standard, 50bps lower than pre-acquisition. While PE firms are typically praised for their efficiency and cost-control, the graph on EBITDA margins shows a negligible difference in actual profitability. The supposed efficiency and cost-cutting isn’t showing up in the numbers. Instead, PE firms appear to be buying slightly higher-performing companies that then experience some mean reversion post-acquisition. Related: Private Equity Fundamentals
The new mean global air temperature record is more than half a degree warmer than the hottest temperature recorded in 1980.
On July 3rd the average global air temperature reached a new record. On July 4th the average global air temperature reached a new record. And on July 6th the average global air temperature reached a new record. The biggest influence on the Earth’s temperature, aside from global warming, is the El Niño-Southern Oscillation (ENSO). This is the first El Niño in seven years. Previous highs have often occurred towards the end of a strong El Niño, when the warming pattern has heated the Earth. The recent switch to El Niño, therefore, is unlikely to be the cause of the latest record-breaking temperatures. Its effect should be in full swing next summer, when more records could be set. That would be the first time new records have been attained in two consecutive years. Related: Earth Keeps Breaking Temperature Records Due to Global Warming and Climate Shocks Are Making Parts of America Uninsurable. It Just Got Worse
The suicide rate for 5-14-year-old Chinese quadrupled between 2010-2021 @NikkeiAsia
During the 11-year period, the suicide rate among children aged 5 to 14 increased from about 0.2 to about 0.8 per 100,000 people, according to the study published June 23 in China CDC Weekly, the official journal of the Chinese Center for Disease Control and Prevention. The study also found that the suicide rate for 15- to 24-year-olds fell by 6.8% per year from 2010 to 2017, but then surged at an annual rate of 19.6% to 2021, the latest available data. Related: Youth Risk Behavior Survey and China Urges Jobless Graduates To ‘Roll Up Their Sleeves’ and Try Manual Work
While China’s overall unemployment rate is stable at 5.2% in May, but youth unemployment at nearly 21% is above now even higher than Italy. China’s civil service exam had twice as many applicants as in 2019.
.@BudgetHawks highlights that in the latest @USCBO forecast Federal interest expenses will exceed defense spending by 2027 and nondefense discretionary by 2029.
According to the Congressional Budget Office’s (CBO) long-term baseline, federal spending as a percentage of GDP will grow to 29.1% over the next three decades. Driving a large part of that growth is spending on interest payments to service the national debt. Net interest payments hit a nominal dollar record of $475B Fiscal Year (FY) 2022 and will nearly triple by FY 2033 to $1.4T, growing to $2.7T in 2043 and $5.4T 2053. As a share of the economy, net interest will rise from 1.9% of GDP in FY 2022 to hit a record 3.2% by 2030 and more than double to 6.7% by 2053. By 2051, spending on interest will be the single largest line item in the federal budget, surpassing Social Security, Medicare, Medicaid, and all other mandatory and discretionary spending programs. Related: The 2023 Long-Term Budget Outlook and American Gothic
American crude oil production will hit a record in 2023, driven by production improvements that have lowered the cost of drilling and fracking by 36% since 2014, according to @jpmorgan estimates.
Production improvements since 2014 have pushed down the cost of drilling and fracking in the U.S. shale patch by 36%, according to J.P. Morgan, even as recovered oil volumes have increased. A major producer, EOG Resources, said it bored a well over 5 miles deep and nearly 3 miles long in South Texas early this year—a record length for the company. The increased efficiency means EOG can earn as much from oil priced at $42 a barrel today as it would have from oil trading at $86 nine years ago. People familiar with Saudi oil policy have said the government’s budget requires an estimated $81 a barrel. Brent crude is trading around $76 a barrel, down 13% from the start of the year. Related: Portfolio Nuclear and Energy and the Presidents
.@jburnmurdoch notes that immigrants in France significantly underperform native-born citizens; unemployment rates for recent immigrants are significantly higher than in the US.
In 2021, US unemployment was 5.5% for those born in the country, and 5.6% for those born overseas. Black and white employment rates are now neck and neck. In France, unemployment is 7% among those born in the country, but 12% for immigrants, rising past 17% among those who arrived in the last ten years. Comparisons with Britain, whose demographics and colonial history perhaps make for a fairer benchmark, are similarly damning. Related: From Strengh To Strengh and France Has Poor Income Mobility Compared To US, Study Shows
.@KarstenMueIIer and @EmilVerner find that credit growth to non-tradable industries like real estate is predictive of a boom-bust output pattern and financial fragility, while credit to the tradable sector is associated with productivity growth.
Credit expansions lead to disproportionate credit growth toward non-tradable sector firms and households. This pattern is in line with theories in which these sectors are more sensitive to relaxations in financing conditions and to feedbacks through collateral values and domestic demand. The sectoral allocation of credit, in turn, has considerable predictive power for the future path of GDP and the likelihood of systemic banking crises. Credit growth to non-tradable industries predicts a boom-bust pattern in output and elevated financial fragility. Credit to the tradable sector, on the other hand, is less prone to large booms and is associated with higher future productivity growth. Our evidence suggests that previous work, which could not differentiate between different types of corporate credit, has missed an important margin of heterogeneity. Figure 7 plots the average yearly change in sectoral credit-to- GDP for five years before and after a systemic banking crisis, relative to non-crisis times. The sample includes 59 crises. Non-tradable sector credit expands more than twice as rapidly relative to GDP as tradable sector credit, surpassing the growth of household debt in the three years immediately before crises.
.@JoanMonrasEcon argues that immigrants cluster in cities with higher wages to support remittances to family members in their native countries, and are deterred less by higher living costs than US-born workers.
A large share of immigrants keeps ties with their origin countries. Many send money, known as remittances, to family members in those countries, while others plan to eventually return to their birthplace. In either case, this means that a substantial part of immigrants’ spending, now or in the future, takes place in their origin country rather than in the city where they currently work. Hence, for immigrants, the local prices in the city where they work only matter for the fraction of their total budget spent there. This means, that, relative to native-born workers, immigrants are equally attracted to high wages in select cities but less deterred by high local prices—particularly housing. This simple mechanism can explain why immigrants concentrate so much in a small number of select cities, and why these cities tend to have the highest costs of living.
Net emigration from China in 2022 was 300,000 up from a low of 125,000 in 2012 during China’s post-crisis period of growth.
Net emigration from China, which had fallen as low as 125,000 in 2012 according to U.N. data, had rebounded to nearly 300,000 by 2018. The latest U.N. forecast puts net emigration in 2022 at over 300,000 again, after a net drain of about 200,000 in 2021. Strikingly, the U.N. data actually lines up surprisingly well with data from private sources looking at a more specific demographic—the wealthy. Data collated by South Africa-based New World Wealth and Henley & Partners, a London-based investment migration consulting firm, show a similar pattern. Net outflows of high net-worth individuals (with more than $1 million in assets) from China were steady at around 9,000 a year for most of the early 2010s. But in the late 2010s, that number started rocketing up: In 2017, net emigration by the wealthy was over 11,000 individuals, and by 2019 it was more than 15,000. Henley estimate 13,500 wealthy individuals will, on net, leave China this year, following a 10,800 person net drain in 2022. Related: Singapore Asks Banks to Keep Quiet on Wealth Inflows During China Boom and U.S. Bound Migrants Surge at Darien Jungle Crossing in Panama
Gregory Clark @PNASNews finds that social status in England was strongly correlated across generations between 1600 and 2022, consistent with a theory of genetic transmission of characteristics influencing status.
Using a large genealogical database of 422,374 people with rarer surnames in England the paper examines patterns of inheritance of social status in England. These correlations reveal four things. First status persists strongly across even very distant relatives, across all measures of status. Second the decline in status correlations with each step outward in the lineage is a constant 0.79, for different measures of status, and epochs from 1600 to 2022. Third of the correlations conform closely to those predicted by Ronald Fisher in 1918, for familial correlations in the presence of strong assortment in mating. In particular, the correlation in mating in the genetics underlying social outcomes [must] be 0.57 to generate the persistence rate of 0.79. Since these are observational data, there is no proof that additive genetic transmission causes social status. [Only] that whatever social processes are producing the observed outcomes have a form of transmission which mimics that of additive genetic effects, in the presence of the important social institution of strong assortative mating. [Fourth,] the constancy of status persistence across the interval 1600 to 2022 does suggest social interventions have surprisingly modest effects.”
Foreign direct investment in the US fell by 27% in 2022 to $285 billion, but the United States remains the largest destination of foreign direct investment.
The U.S. was the top destination for businesses looking to expand internationally last year but the inflow of capital fell as companies around the world cut foreign investment amid rising uncertainty and borrowing costs. Foreign investment in the U.S. fell to $285 billion in 2022 from $388 billion in 2021, mainly due to a sharp fall in foreign purchases of American companies, according to United Nations data. While still behind the U.S., China registered its highest-ever inflow at $189 billion, an increase of 5%. Much of that increase came from European businesses. Related: Financial Fragmentation
The number VC funded startup deals in Q2 2023 was down a third vs. Q2 2022, with total deal value down nearly half. @markets
In the US, investors financed 3,011 startup funding deals last quarter, about a third fewer than a year ago. And they spent less cash: $39.8 billion, down by nearly half from the same period last year. Take out the more than $6.5 billion investors spent on payments company Stripe, and the total looks even worse, said PitchBook analyst Kyle Stanford. The biggest drop came in angel or seed deals. In that category, there were half as many funding deals as there were a year earlier. Those early funding rounds — when young companies are either nurtured or starved — are generally considered to be critical to the health of the venture ecosystem.
.@JosephPolitano notes a surge in US capital investment in chip-making equipment: in Q1 2023, special industry machinery investment (mostly semiconductor equipment) was 50% higher in real terms than the 2019 peak.
The boom in domestic US chipmaking construction has been coupled with rising demand for semiconductor equipment that can’t be met domestically. The pace of US semiconductor equipment imports over the last few months has been near an all-time high, with Japan, the EU, and Singapore being the major sources. This is part of the reason why the market for semiconductor equipment hasn’t contracted alongside the market for chips themselves. Supercharged domestic investment is perhaps the US’s greatest asset in the current trade war—buying up scarce chipmaking equipment gives America leverage to encourage compliance among its would-be customers and trade partners. Related: Making Manufacturing Great Again and TSMC To Send Hundreds More Workers To Speed U.S. Plant Construction
Ruy Teixeira notes that Democrats’ margin with Latino voters dropped by 18pp in ‘20 vs. ‘16, with Latino men giving President Trump 44% of their 2020 two-party vote.
Catalist data confirm a nationwide shift among Latinos in 2020. The Democrats’ overall margin among this group dropped by 18 points relative to 2016. Cubans had the largest shift of 26 points, but Puerto Ricans moved by 18 points to Trump, Dominicans by 16 points and Mexicans by 12 points. An overall weak spot for Democrats was among Latino men who gave Trump a shocking 44 percent of their two-party vote in 2020. And in a recent Washington Post-ABC poll, Hispanics preferred the way Trump handled the economy when he was in office to Biden’s performance so far by 55 to 36 percent. What Happened In 2022 and Republicans Really Are the Party of the Working Class
.@Edsall notes that former President Trump’s core constituency of whites without college degrees fell by 2.1M from 2016-22. During that same period, the number of white college graduates increased by 13.2M.
One of the most significant developments in the run-up to the 2024 presidential election has emerged largely under the radar. From 2016 to 2022, the number of white people without college degrees — the core of Donald Trump’s support — has fallen by 2.1 million. Over the same period, the number of white people who have graduated from college — an increasingly Democratic constituency — has grown by 13.3 million. These trends do not bode well for the prospects of Republican candidates, especially Trump. President Biden won white people with college degrees in 2020, 51 to 48 percent, but Trump won by a landslide, 67 to 32 percent, among white people without degrees, according to network exit polls. Related: The Road To A Political Realignment In American Politics and What Happened In 2022
Torsten Sløk @apolloglobal notes the Fed has been increasing its estimate of the long-run Federal Funds rate. However, their estimate is only back at its 2019 level.
The Fed has started to increase its estimate of the long-run Fed funds rate. The implication is that the Fed is beginning to see the costs of capital as permanently higher. A permanent increase in the risk-free rate has important implications for investors. Related: What Have We Learned About the Neutral Rate
The @BIS_org annual report notes that real wages have declined in 2022-23 by more than in past deflationary episodes, but tight labor markets could threaten the disinflation process.
While nominal wage growth has not been exceptionally strong so far, this should not provide too much comfort. Wage adjustments are still influenced by the lingering effects of the norms prevalent in the low-inflation regime, but this could change quickly. The inflation surge has severely eroded the purchasing power of households (Graph 14.A), even more than in past disinflation episodes (Graph 14.B). Some catch-up is on the cards, particularly given the strength of labour markets. While labour’s bargaining power declined significantly over the years of low inflation, recent strikes and calls for unionisation suggest that the environment is evolving. What’s more, the pass-through from prices to wages has been somewhat higher when labour markets have been tight. Related: Inflation’s Return Changes the World
.@martinwolf_ disagrees with @BIS_org that persistently low rates could have been avoided citing the Bank of Japan’s and ECB’s failed inflationary experiments in the 1990s and 2010s.
Where I disagree with the BIS is over whether “low for long” could have been avoided. The Bank of Japan tried in the early 1990s and the European Central Bank in 2011. Both failed. Will what we are now experiencing prove an enduring shift in the monetary environment or just a temporary one? We just do not know. It depends on how far high inflation has been just the product of supply shocks. It depends, too, on whether societies, long unused to inflation, decide that bringing it back down is too painful, as happened in so many countries in the 1970s. It depends, as well, on how far the fragmentation of the world economy has permanently lowered elasticities of supply. It depends not least on whether the era of ultra-low real interest rates is over. If it is not, this could indeed be a blip. If it is, then significant stresses lie ahead, as higher real interest rates make current levels of indebtedness hard to sustain. Related: Annual Economic Report and The Future of Interest Rates Is a Riddle
.@M_C_Klein is skeptical that “immaculate disinflation” can be achieved, noting that the Fed’s preferred inflation measure is consistently 2-3 percentage points higher than pre-pandemic.
The Fed’s preferred inflation measure is services excluding energy services and housing. That inflation rate has consistently been 2-3 percentage points faster than it was before the pandemic, with remarkably little volatility. The combined picture is not terrible, in the grand scheme of things, but it is also consistent with the claim that the last bit of excess inflation will not be squeezed out without some significant disruption to the real economy. I still hope that a truly immaculate disinflation can be achieved, but I am increasingly skeptical that it is the likeliest outcome.
China is retaliating against Western export controls by restricting exports of rare earth metals that are essential to chipmaking. @FT
Trade officials were assessing the fallout from the latest escalation in the US-China technology battle after Beijing said it would impose curbs on exports of metals used in chipmaking. Gallium and germanium are among dozens of minerals classified by the US government as critical to economic and national security. The US state department did not respond to a request for comment. Related: The U.S.-China Rare Earths Battle
.@NikkeiAsia reports that the United States is restarting rare earth mining in an effort to counter China’s 70% production share.
Despite their name, most rare earths are relatively abundant -- although they are not always easy to extract. China is now the world's largest producer of rare earths by far, thanks to its decades long effort to develop the industry. Last year it accounted for an estimated 70% of output, according to the United States Geological Survey. China also has the world's largest reserves, totaling 44 million tonnes of rare-earth-oxide (REO) equivalent -- about double those of Vietnam, Brazil,, or Russia. Related: China’s Curb On Metal Exports Reverberates Across Chip Sector
Recent labor reforms in India that increased the length of working shifts from 8 to 12 hours are facing a backlash. @FT
Two of India’s most business-friendly southern states, Karnataka and Tamil Nadu, recently amended laws to allow an increase the length of working shifts from eight to 12 hours in a reform urged by investors, including Apple and its contract manufacturer Foxconn. No sooner than India appears to be heading down the same path of more business-friendly working hours, a backlash is forming. After an outcry from trade unions and opposition parties, Tamil Nadu’s chief minister MK Stalin announced on the May 1 Labour day public holiday in India that he was putting the state’s legislation on hold. In Karnataka, the opposition Indian National Congress last month trounced Modi’s Bharatiya Janata party in a state election. In its manifesto it said it would repeal the factories law amendment there too. Related: Apple India iPhone Output Soars to $7 Billion in China Shift and China Finally Has a Rival as the World’s Factory Floor
Toyota announced a breakthrough in solid-state EV batteries that would allow a range of almost 750 miles. Toyota plans to mass-produce the batteries by 2027 or 2028. @FT
Toyota claimed it had made a “technological breakthrough” to resolve durability issues and “a solution for materials” that would allow an EV powered by a solid-state battery to have a range of 1,200km [746 miles] and charging time of 10 minutes or less. By reducing the number of processes required to make battery materials, the cost of solid-state batteries could be lowered to similar or cheaper levels than liquid-based lithium-ion batteries, he added.
The world’s global mean temperature reached a record 63°F on July 4th, topping a previous record of 62°F set in 2016.
The average worldwide temperature reached 17C (63F) on Monday, just above the previous record of 16.9C in August 2016, according to data from the National Centers for Environmental Prediction. The threshold only lasted a day. On Tuesday, the average temperature hit 17.2C. Related: Antarctic Sea Ice Has Shrunk By An Area Nine Times The Size Of Britain
TSMC is sending at least 500 workers to Arizona from Taiwan to speed up construction of its new chip facility. The American labor force doesn’t have many workers with experience constructing semiconductor manufacturing facilities.
TSMC and its suppliers are in talks with the U.S. government to assist with the application process for non-immigrant visas in a bid to dispatch more than 500 experienced workers as early as July to expedite the construction of cleanroom facilities and the installation of pipelines and other equipment, three chip supply chain executives said. One of the main aims is to "improve work efficiency and help make up for lost time" in the construction processes, they said. The U.S.-bound workers will include contract technicians and workers with hands-on experience in cleanroom setup, pipeline installation, mechanical and electrical systems for chip plants, and other specialized areas. "There are not enough U.S. workers who have good first-hand experience specifically on building semiconductor manufacturing facilities, and many are not familiar with the requirements for chipmaking plants," one executive told Nikkei. "That has caused delays in multiple installation works." Related: TSMC to Triple U.S. Chip Investment to $40bn to Serve Apple, Others
The dollar’s dominant international role has remained steady over the past two decades, as measured by share of official currency reserves, FX transaction volume, foreign currency debt, cross-border deposits, and cross-border loans. @federalreserve
A review of the use of the dollar globally over the last two decades suggests a dominant and relatively stable role. To illustrate this stability, we construct an aggregate index of international currency usage. This index is computed as the weighted average of five measures of currency usage for which time series data are available: Official currency reserves, FX transaction volume, foreign currency debt instruments outstanding, cross-border deposits, and cross-border loans. The dollar index level has remained stable at a value of about 70 since 2010, well ahead of all other currencies. The euro has the next-highest value at about 23, and its value has remained fairly stable as well. While international usage of the Chinese renminbi has increased over the past 20 years, it has only reached an index level of about 3, remaining even behind the Japanese yen and British pound, which are at about 7 and 6, respectively.
With just under 24% of US GDP Florida, Texas, Georgia, the Carolinas, and Tennessee now have a greater share of the American economy than the Northeast with just over 22%.
Six fast-growing states in the South — Florida, Texas, Georgia, the Carolinas and Tennessee — are contributing more to the national GDP than the Northeast, with its Washington-New York-Boston corridor, in government figures going back to the 1990s. The Southeast accounted for more than two-thirds of all job growth across the US since early 2020, almost doubling its pre-pandemic share. And it was home to 10 of the 15 fastest-growing American large cities. Related: Small Towns Chase America’s $3 Trillion Climate Gold Rush and Black Americans Are Leaving Cities in the North and West
Chinese auto exports are surging. KPMG estimates Chinese automakers could grab 15% of new car sales in Europe in the next two years. @FT
Chery, currently China’s biggest exporter of cars, plans to sell up to 15,000 vehicles next year in the UK alone, a level that would see it overtake Jeep, Jaguar and Suzuki from a standing start. According to KPMG, Chinese groups could snatch a 15 percent market share of new car sales in Europe — larger than France’s Renault — within the next two years. Already, Chinese companies are establishing a presence. Chery expects to open 50 showrooms in the UK alone next year, doubling by 2025. Last October, when BYD announced it had entered a partnership with Sixt. By 2028, Germany’s largest car rental company has agreed to buy 100,000 BYD vehicles for its European operations, focusing initially on the Atto 3, a compact sport utility vehicle. Related: China’s Auto Export Wave Echoes Japan's in the ’70s and Can Volkswagen Win Back China?
Antarctic sea ice is at its lowest recorded level for June, and is currently 2.3m square km below the 1981-2010 mean. @TheEconomist
Antarctica currently has exceptionally little ice—the lowest ever seen in June. On June 12th the continent’s sea ice covered just 10.7m square km. That is 1.15m square km below the previous minimum record for that date, from 2019, and 2.3m square km below the average for 1981-2010. The first difference represents an area a little larger than Colombia; the second an area the size of Mongolia—with three Britains tacked on. It is not yet clear why there has recently been such a precipitous drop in Antarctica’s sea ice, nor why it rose somewhat before that.
.@pewresearch in 2023 has found that 50% of Americans oppose the use of race in higher education admission decisions, while 33% approve and 16% are unsure.
A larger share of Americans disapprove than approve of higher education institutions taking race and ethnicity into account when admitting students, according to several recent Center surveys. In a survey conducted in spring 2023, half of U.S. adults said they disapprove of selective colleges and universities taking race and ethnicity into account in admissions decisions in order to increase racial and ethnic diversity. A third of adults approved of this, while 16% were not sure. Other Center surveys have also found more opposition than support for the consideration of race and ethnicity in college admissions decisions. In the December 2022 survey, for example, 82% of U.S. adults said colleges should not consider race or ethnicity when deciding which students to accept, while only 17% said colleges should take this into account.
While global housing prices are 3% off their recent peak they are ~ 60% higher than January 2006.
Global house prices have certainly come off the boil. They are 3% below their recent peak, or 8-10% lower once adjusted for inflation. This is in line with the average correction since the late 19th century. Yet this slump should have been different because it followed a boom when prices rose at their fastest rate of all time. The upshot is that real house prices remain miles above the level of 2019. Three factors explain the rich world’s surprising housing resilience: migration, household finances, and people’s preferences.
.@USCBO projects a deficit of 5.8% of GDP in 2023 which will decline to 5% by 2027 and then accelerate to 10% of GDP by 2053 when federal debt will be 181% of GDP.
In CBO’s projections, the deficit equals 5.8% of gross domestic product (GDP) in 2023, declines to 5.0% by 2027, and then grows in every year, reaching 10% of GDP in 2053. Over the past century, that level has been exceeded only during World War II and the coronavirus pandemic. The increase in the total deficit results from faster growth in spending than in revenues. The primary deficit, which excludes interest costs, equals 3.3% of GDP in both 2023 and 2053, but the total deficit is boosted by rising interest costs. By the end of 2023, federal debt held by the public equals 98% of GDP. Debt then rises in relation to GDP: It surpasses its historical high in 2029, when it reaches 107% of GDP, and climbs to 181%% of GDP by 2053. Related: The Return of Quantitative Easing
Torsten Sløk writes that the failure of SVB and First Republic led to tightening financial conditions, and the full impact of those tighter conditions has not been felt. He forecasts a 60% chance of a hard landing. @apolloglobal
While we may have turned the corner on inflation, it continues to prove much “stickier” than most market watchers expected. As of this writing, inflation was around 5% annually, still way above the Fed’s 2% target. In our view, that means higher rates for longer, and an elevated cost of capital through the remainder of 2023 and well into 2024. The increase in borrowing costs since SVB failed corresponds to a 200-basis-point Fed hike for regional banks and a 50-basis-point increase for large banks. Weighing these estimates together using the shares of loans and leases accounted for by small and large banks, respectively, gives an economy-wide Fed tightening equivalent of a bit more than 100 basis points for the entire banking sector.
Bridgewater argues the United States is in a bearish disequilibrium which is associated with a -2.4% return on equities in the subsequent 12 months.
We believe that there are three major equilibriums and two major policy levers that interact to drive markets and economies: 1) Spending in line with output, which is in line with capacity. 2) Incomes in line with debts. 3) Normal risk premiums across assets If these conditions don’t exist, intolerable circumstances will ensue that will drive changes toward these equilibriums being reached. For example, if an economy’s usage of capacity (e.g., labor and capital) remains low for an extended period of time, that will lead to social and political problems as well as business losses, which will produce further changes until these equilibriums are reached. The two levers are monetary policy and fiscal policy.
.@hannahrubinton @stlouisfed found only limited support for the hypothesis that the recent labor market tightness was driven by the shortfall in immigration.
The U.S. was missing an average of about 1.39 million foreign workers in 2021 relative to the expected level based on the pre-pandemic trend. The number of foreign workers has recovered in 2023. The percentage point change in vacancy rates between 2019 and 2021 versus the number of missing workers as a share of employment for industries and states. In neither case is there a statistically significant relationship between the change in vacancy rates and the number of missing workers. (Though the line of best fit is upward sloping for the industries case, it is not statistically significant, meaning that, on average, the industries with more missing workers did not see larger increases in the vacancy rate.) Related: Immigration Playing a Key Role in the Labor Market and The Role of Immigration in U.S. Labor Market Tightness
.@Brad_Setser finds China has been parking foreign assets off the PBoC’s balance sheet. He estimates China has close to $6 trillion in foreign assets.
All told, institutions that report to China’s central government probably have closer to $6 trillion in foreign assets than the $3.12 trillion SAFE reported in December 2022. The scale of these hidden reserves — foreign current currency assets that aren’t formally counted as “reserves” — also highlights an important fact that is often forgotten amid all the talk of China’s domestic debt problems. The main way China has hid its reserves has been its big state banking system. Globally China is still a massive creditor, and the weight of China’s massive accumulation of foreign exchange is still felt around the globe.
The shape of space-time is in constant flux due to gravitational waves. The most likely cause is supermassive black holes, but some scientists argue that these waves represent the first empirical observations of cosmic strings. @QuantaMagazine
Astronomers have found an extra-low hum rumbling through the universe. The discovery, announced today, shows that extra-large ripples in space-time are constantly squashing and changing the shape of space. These gravitational waves are cousins to the echoes from black hole collisions first picked up by the Laser Interferometer Gravitational-Wave Observatory (LIGO) experiment in 2015. But whereas LIGO’s waves might vibrate a few hundred times a second, it might take years or decades for a single one of these gravitational waves to pass by at the speed of light. The finding has opened a wholly new window on the universe, one that promises to reveal previously hidden phenomena such as the cosmic whirling of black holes that have the mass of billions of suns, or possibly even more exotic (and still hypothetical) celestial specters.
.@crossbordercap argues that quantitative easing will soon return as central banks in advanced economies will be needed to help fund deteriorating fiscal positions that will be driven by defense spending, demographics, and entitlements.
Quantitative easing is coming back. The US government will need to sell an average of $2T of Treasuries each year over the next decade. And according to latest Congressional Budget Office forecasts the Fed will be required to chip in. The CBO estimates that Fed holdings of US Treasuries will have to rise to $7.5T by 2033 from current levels of nearly $5T. No QT here, but worse, these CBO spending projections are likely too low — especially for defence outlays. More realistic numbers point to required Fed Treasury holdings of at least $10T. That translates pro rata into a doubling of its current $8.5T balance sheet size and will mean several years of double-digit growth in Fed liquidity. Related: Government Debt and Debt Servicing Costs Risingand American Gothic
.@ernietedeschi @WhiteHouseCea argues that on the basis of “harmonized inflation” that uses the same consumer basket in all countries, the US now has the lowest 12-month inflation in the G7 advanced economies, both overall and by core.
Put simply, “harmonizing” means using the same consumer basket in all countries. The result is close to a truly apples-to-apples inflation concept that allows for international comparisons. Harmonized inflation generally rose and peaked earlier in the pandemic than the rest of the G7, measured on a 12-month basis. Though inflation remains elevated across all countries in this analysis, the U.S. now has the lowest 12-month harmonized inflation in the G7, both for overall and core inflation. That said, inflation going forward remains considerably uncertain across all G7 nations, including the U.S.
.@greg_ip argues that despite recent declines in inflation, private wage and salary growth has failed to keep up with rising consumer prices.
Many of the benefits of that tight labor market have been negated by inflation. It soared from 2% just before the pandemic to a peak of 9.1% last year as gasoline prices leapt in the wake of Russia’s invasion of Ukraine. It has since retreated to 4% as gasoline prices dropped, but underlying inflation persists around 4% to 5%. Inflation is the main reason voters disapprove of Biden’s handling of the economy by a two-to-one ratio, according to a May poll by the Associated Press and NORC Center for Public Affairs Research. If inflation doesn’t fade of its own accord, the Federal Reserve might have to raise interest rates further and push the economy into recession, which won’t help Biden’s approval ratings. Related: Jason Furman On Employment Cost Index and Real Wage Growth at the Individual Level In 2022
International financial transactions among the US, China and Euro Area are smaller relative to their combined output then at any point other than the trough of the financial crisis. @M_C_Klein
Americans, Chinese, and Europeans have curtailed their lending and investing abroad—while also selling commensurately fewer financial claims to foreigners. In 2021, the gross value of cross-border financial transactions involving the U.S., China, and the euro area was worth about $7.9 trillion. In 2022, that figure was just $2.8 trillion. U.S. data for the first three months of this year suggest that cross-border transactions volumes have continued to shrink. International financial transactions involving the world’s three largest economies are smaller relative to their combined output than at any point other than the trough of the financial crisis.
Goldman Sachs forecasts there will be $7T of energy infrastructure investment in China through 2040 with a growing share related to energy storage.
Goldman Sachs forecasts that energy storage, opened up by China’s energy policies, will be part of a more than $7tn infrastructure investment opportunity through to 2040. Goldman forecasts that China requires about 520 gigawatts of energy storage by 2030, with as much as 410GW coming from batteries. That reflects a 70-fold increase from battery storage levels in 2021. The number of Chinese enterprises registered as energy storage companies has more than doubled in the past three years to nearly 109,000, according to data from Chinese companies information provider Aiqicha.
Biden’s Treasury Department notes that the US is experiencing a much larger surge in real manufacturing construction than other advanced economies.
Today, the computer/electronic segment is the dominant component of U.S. manufacturing construction. Importantly, the boom in this segment has not been offset by reduced spending on other manufacturing construction segments, which are largely consistent with long-term levels. In fact, construction for chemical, transportation, and food/beverage manufacturing is also up from 2022, albeit much less than the computer/electronic sector. The same surge in manufacturing construction is not apparent in other advanced economies. No harmonized data series provides an exact comparison to the United States, but comparable data indicators help unveil the relevant trends. Other advanced economies have not experienced similar increases, according to roughly analogous data sets measuring some concept of real construction for manufacturing purposes. Related: Making Manufacturing Great Again
China’s government is mobilizing their tech sector in an effort to keep pace and eclipse the US in the artificial intelligence race. American investment in AI in 2023 was $26.6 billion in mid-June relative to China’s $4 billion.
AI investments in the US dwarf that of China, totaling $26.6 billion in the year to mid-June versus China’s $4 billion, according to previously unreported data collated by consultancy Preqin. Yet that gap is already gradually narrowing, at least in terms of deal flow. The number of Chinese venture deals in AI comprised more than two-thirds of the US total of about 447 in the year to mid-June, versus about 50% over the previous two years. China-based AI venture deals also outpaced consumer tech in 2022 and early 2023, according to Preqin. Related: The Race of the AI Labs Heats Up
.@calculatedrisk notes affordability is low, which has been associated with low returns going forward. However, in this cycle many owners have low interest mortgages, restricting available inventory.
Here is a graph showing affordability, and the 5-year real return (red) on the house purchase (annualized). The 5-year real return is the future return on the Case-Shiller index, adjusted for inflation. When affordability was poor in the early ‘80s, it was actually a good time to buy (and that was before refinancing!). Another good time to buy was in the mid-to-late ‘90s. And another good time was around 2011 or 2012 and also the next several years. The worst time to buy (using a 5 year real return) was in the runup to and during the housing bubble. Since the real return is based on 5 years, we don’t know the return after April 2018. Unaffordability and the low level of inventory are pushing prices in opposite directions!
.@YuTingChiang4 and @JesseLaBelle11 find that overall households in the top quintile of net worth, who tend to be older, have taken the biggest hit from inflation due to their Treasury holdings.
For households in the top wealth quintile, Treasuries become a more important element of their balance sheets, topping at 6% for the oldest and wealthiest group (the fifth quintile). However, for the second to fourth wealth quintiles, holdings of Treasuries as a share of net worth tend to fluctuate with age: increasing from the 20s age group to middle age, but then decreasing gradually. This transition likely reflects the change in household asset holdings over the life cycle. We can interpret the numbers in the second figure as showing how much households’ wealth in each group is exposed to the implicit inflation tax through their Treasury holdings. Overall, the older, wealthiest households and the groups that are both middle-aged and middle wealth seem to be the most exposed.
.@henryfarrell and Cosma Shalizi argue that free markets and institutional hierarchies were revolutions in human information-processing, and AI can be seen along the same lines.
Artificial intelligence is a familiar-looking monster, say Henry Farrell and Cosma Shalizi [that] began at least two centuries ago with the industrial revolution, when human society was transformed by vast inhuman forces. Markets and bureaucracies seem familiar, but they are actually enormous, impersonal distributed systems of information-processing [with minds of their own]. Economist Friedrich Hayek argued, any complex economy has to somehow make use of a terrifyingly large body of disorganised and informal “tacit knowledge” … [that] no individual brain or government can possibly comprehend. These vast machineries are simply incapable of caring if they crush the powerless or devour the virtuous. The modern world has been built by and within monsters, which crush individuals without remorse or hesitation. We eke out freedom by setting one against another, deploying bureaucracy to limit market excesses, democracy to hold bureaucrats accountable, and markets and bureaucracies to limit democracy’s monstrous tendencies.
.@gizemkosar @davide_melc and @DavidWiczer present evidence that lower wealth households used pandemic period transfers to pay down debt.
We define marginal propensity to consume (MPC) as the share of the stimulus payment a household spent, marginal propensity to save (MPS) as the share a household saved, and marginal propensity to repay debt (MPRD) as the share used to pay down their debt. With these measures we document three main facts. First, households used one third of their transfers to pay down debt. This is higher than the average marginal propensity to consume (MPC), which usually takes center stage. Second, households with low net liquid wealth-to-income ratios are more likely to pay down debt and more likely to adjust their net wealth positions. Third, and relatedly, households with lower net liquid wealth-to-income ratios have lower MPCs. We show these two latter facts in the chart below. Note that we define net liquid wealth as the sum of liquid assets minus non-housing debt. For income, we use annual household income.
Core capital goods orders increased 0.7% in May as American firms continue to invest in manufacturing.
Orders placed with US factories for business equipment rose in May for a second month, indicating companies continue to make longer-term investments despite high borrowing costs and economic uncertainty. The value of core capital goods orders, a proxy for investment in equipment that excludes aircraft and military hardware, increased 0.7% last month after a downwardly revised 0.6% gain in April, Commerce Department figures showed Tuesday. The data aren’t adjusted for inflation.
Natural gas now makes up 41% of American power generation, more than solar, wind, hydro and coal combined, but accounts for 47% of outages. @markets
Given its reputation for low-cost, clean and stable generation, gas dethroned coal in 2016 as the US’s No. 1 source of electricity. This year, it will make up a record 41% of power production, more than solar, wind, hydro and coal combined. Although natural gas is often promoted as a “bridge fuel” to span the transition from coal power to renewable energy, the country’s vast network of gas plants, pipelines and the regulations that govern them were largely built without the realities of extreme weather in mind. Facilities aren’t uniformly winterized, and some rely on a single gas pipeline for supply. Between plant malfunctions and fuel shortages, natural gas accounted for about 47% of outages.
The Chinese military is drawing more heavily on recent high school and college graduates, in an effort to raise military capability and offset persistent youth unemployment. Recruiters are particularly targeting science and engineering talent. @SCMPNews
More than 90% of this year’s recruitment to the Chinese military could be drawn from fresh graduates and high school students, in a bid to meet the People’s Liberation Army’s modernisation targets and ease the country’s record youth unemployment. Analysts said that a drive to encourage educated young people to join the PLA was likely to have a twin purpose, with Beijing determined to achieve a world-class military by 2050 and more than 11 million graduates expected to swell the job market this year. The army is still finding it difficult to attract the country’s most outstanding young people, according to Zhou Chenming, a researcher with the Beijing-based Yuan Wang military science and technology think tank “Compared with top public universities like Peking and Tsinghua, military academies are less attractive to outstanding high school students in first-tier cities like Beijing and Shanghai.”
Torsten Sløk @apolloglobal notes that 25% of American government debt outstanding has been added since the start of 2020. Federal debt servicing costs have almost doubled in that period because of higher interest rates.
Twenty-five percent of all US government debt outstanding has been added since the beginning of 2020. And with higher debt levels and higher interest rates, debt servicing costs have increased from $1 billion per day in 2020 to almost $2 billion per day in 2023, see charts below.
.@M_C_Klein argues that hedge funds have replaced the Federal Reserve as the marginal buyer of Treasuries as interest rates have risen.
Net purchases of marketable securities by “households and nonprofits” have soared, more than offsetting sales and redemptions by money market funds, the Federal Reserve, and banks. In practice, much of this buying likely reflected purchases by hedge funds. The U.S. Treasury borrowed about as much in 2022Q2-2023Q1 ($1.02 trillion) as it did in 2018 ($1.13 trillion) and 2019 ($1.06 trillion). The sources of financing have changed dramatically as bond prices plunged. Compared to 2019 or the first years of the pandemic, the newest crop of buyers most closely resembles those who stepped up in 2018, when rising interest rates encouraged relative value hedge funds and securities dealers to fill in for the Federal Reserve as it ran down its bond portfolio.
Real estate broker @JLL estimates that office buildings in New York have lost at least $76B in value from their most recent sales prices, and estimates that 90% of office buildings are distressed, either in terms of debt or occupancy.
Broker JLL estimates that office buildings in New York have lost $76B in value from their most recent sales prices. Seventy-three were now worth less than their loan balances. An exception is a new group of the most modern and luxurious offices, such as SL Green’s One Vanderbilt, which are fetching record rents. More common are buildings like 1330 Avenue of the Americas, recently sold by Blackstone and RXR for $320M, a 1/3 less than the price it commanded in 2006. One broker estimated that only the top 10% of office buildings in New York were not distressed — either in terms of the level of debt or occupancy. “I think we are on the front edge of forced sales,” this person said. The financial damage may be masked because so few buildings have been sold in the past year, with deal volumes for commercial real estate down by more than half year on year in the first quarter.
.@FSoyres @FedResearch estimates that excess savings have come down much faster in the United States than in other advanced economies.
Household savings rates spiked across several countries following the onset of the COVID-19 pandemic. We construct a measure of excess savings for the United States, advanced foreign economies, and emerging market economies, and compare the COVID-19 recession to past recessionary episodes. While accumulated excess savings during COVID-19 were unprecedented in size, they have been unwound in the United States, declined in the advanced foreign economies, and slowed in the emerging market economies. Relative to COVID-19, past episodes are characterized by smaller increases in excess savings and greater persistence in the stock of excess savings. Absent any further shocks to disposable income or savings behavior, our analysis suggests that the accumulated average AFE excess savings should be unwound by the end of the year. Related: The Rise and Fall of Pandemic Excess Savings and America's "Excess" Household Savings Are Going Away
.@lee_ohanian @AEIEcon finds that China’s pattern of growth in per capita GDP matches that of Japan, South Korea and Taiwan at earlier stages of their development. He forecasts that China’s per capita GDP will asymptote at 41% of the US level ~2050.
Figure 3.1 shows real GDP for China, Japan, South Korea, and Taiwan, in which each economy begins at approximately the same per capita income level. The most striking aspect of these data is that the time path of China’s per capita GDP is remarkably similar to those of the three other East Asian miracle economies. After 25 years of becoming middle-income economies, China, Japan, and Taiwan achieved nearly the same per capita real GDP level. The one exception is Korea, which was somewhat ahead of the other three at that point in time. These data show that there is nothing unusual about China’s real GDP growth rate relative to the experiences of these other economies. We use the model and the fitted TFP catch-up process to predict that China’s relative per capita GDP level will asymptote to about 41% of the U.S. level around 2050, reflecting a substantial slowdown in China’s observed TFP catch-up in recent years. Related: How Soon and At What Height Will China’s Economy Peak?
The United States is now likely on its fifth year of net energy independence @GregorMacdonald
The US is now working on its fifth year of (net) energy independence. The trend began late in the Bush administration, got going more strongly during the Obama administration, and has stayed on trend through the Trump and now Biden administrations. None of these four administrations undertook any policies at all that crimped, suppressed, or held back US domestic production of oil and gas, which are now once again at all time highs. The big game changer came under Obama, when wind and solar ignited. Today, the 15% share of wind and solar on the grid means the US can export even more coal, and more natural gas, through LNG. That too—the LNG export approval wave—also started under Obama in 2014, and it has gone from strength to strength.
.@mfariacastro @stlouisfed finds that, despite a decline in excess retirements that was driven by the market decline in 2022, there are still 2.4mm excess retirements relative to the pre-pandemic trend.
The actual share of retirements roughly tracked the predicted share from January 2000 through February 2020, when the actual share was 18.1%. In the first three months of the pandemic, however, actual share quickly increased to 18.6% versus a predicted share of 18.2%, implying just over one million excess retirees in May 2020. The gap between actual and predicted shares of retirements continued to grow throughout the COVID-19 pandemic and peaked in December 2022, implying an estimated 2.95 million excess retirees in that month. Starting in 2023, the model line begins to flatten out. As of April 2023, we estimate that there were approximately 2.4 million excess retirees in the U.S. Excess retirements are still well above our predicted trend, which may be contributing to a continued tightness in the labor market and low unemployment rate since the recovery from the pandemic recession. Related: Pandemic Labor Force Participation and Net Worth Fluctuations and Retirements, Net Worth, and the Fall and Rise of Labor Force Participation
India and the US announced a series of agreements that would significantly deepen the relationship between the Indian and American defense industrial bases, including co-production of GE jet engines in India.
Ahead of the visit, US officials said India would commit to buying armed MQ-9B SeaGuardian drones, which are produced by US defence contractor General Atomics. The leaders will also announce that memory chipmaker Micron will open a $2.75bn semiconductor assembly and test facility in India, which will include $800mn in investment from the US company. Biden and Modi also signed an agreement that will result in General Electric co-producing fighter jet engines in India. The agreements, which also include efforts to boost co-operation in space, mark a big push by Washington to draw New Delhi into its orbit as part of a strategy to work with allies and partners to counter China. Related: Indian Stock Market Surges as Foreign Funds Buy Into National Growth Story
Goldman Sachs forecast the US’s relative share of global equity market cap to decline to 27% by 2050 from 42% last year. They expect China’s share to grow from 5% to 15% over that time period. They expect India’s share to increase from 2% to 8%.
Looking at this at a more granular level, we expect the relative share of the US in global equity market cap to decline from 42% in 2022 to 35% in 2030, 27% in 2050, and 22% in 2075. By contrast, we expect China’s share in global market cap to rise from 10% to 15% by 2050, but decline to around 13.5% by 2075. We see the biggest scope for global market cap share increase in India, where our projections imply that India’s global equity market cap share will rise from around 2.5-3% in 2022 to 8% in 2050, and 12% in 2075. Likewise, we project the rest of EMs' share to rise, from 13.5% in 2022 to 17% in 2030, to 24% in 2050, and to 30% in 2075.
.@NewYorkFed suggests we will return to a low inflation environment, noting that their estimate of the natural interest rate in the US, Canada and Euro Area in 2022 is close to their 2019 estimate.
Figure 5 compares the estimates for the United States, Canada, and the Euro Area, respectively, from the modified model estimated through 2022:Q4 with estimates from the model with parameter values fixed their 2019:Q4 values. In all three economies, the estimates of the natural rate of interest in 2022 are within a few tenths of a percentage point of the corresponding estimates in 2019. According to the model estimates, the main longer-term consequence from the pandemic period is a reduction in the natural rate of output, but the imprint on the natural rate of interest appears to be relatively modest. We do not find evidence that the era of historically low estimated natural rates of interest has come to an end. Related: What Have We Learned About the Neutral Rate?
The Great Migration is reversing as Black American are increasingly migrating from the Midwest and Northeast to the South. @WSJ
The latest U.S. Census Bureau estimates, released Thursday, indicate Black residents are continuing to leave many urban centers in the North and elsewhere, adding to decades of decline. These losses have hit many major cities with historically large Black populations, including Chicago, Detroit, Cleveland and Oakland, Calif. Much of the current shift is driven by younger, college-educated Black people who are relocating from northern and western places to the South, said William Frey, a demographer at the Brookings Institution. Nationwide, Black people haven’t suburbanized at the same level as the broader population, but the share of the Black population living in metropolitan-area suburbs reached 44% by 2020 from 33% two decades earlier. Over the same period, the percentage of the Black population living in central cities declined to 47% from 53%.
.@cojobrien argues that the sectors of the economy with a high share of STEM workers appear to have converged with the rest of the economy in terms of their startup rate.
Although the High Tech sector still remains more dynamic than the non-High Tech sector of the economy, the gap between the two has gradually faded. Beginning with firm entry rate, we see a long-running decline in both the High Tech sector and the broader economy. The national firm entry rate, hitting a series high of 13.5 percent in 1984, fell below 10% during the Great Recession and has yet to recover. The High Tech sector saw much higher startup rates during the 1980s, peaking at 17.9%, also in 1984. High Tech industries saw another huge surge in new startups in the 1990s, coinciding with the dot-com boom, but their startup rates have yet to recover. In 2018, the gap between the national and High Tech startup rates fell below one percentage point to an all-time low, down from 5 to 6percentage points in the 1990s. The rate of new firm creation in the High Tech sector, once far ahead of other sectors, now looks similar to that of the increasingly sclerotic national economy.
.@tylercowen thinks @ProfDavidDeming new paper implies that wages are driven by training not quality, suggesting the signaling theory of education is overstated.
You will note how this relates to the signaling vs. human capital debates over education. Signaling your quality may put you in a position to learn more over time, as your initial offer likely will be better if you come out of Harvard. But over the longer haul, the wages you earn are the result of what you have learned, not just your initial level of quality. So, most of the return to education is that you learn more over time, and thus most of the return is learning-related rather than initial quality-related. Overall, signaling models behave rather awkwardly in dynamic rather than purely static settings. Related: Why Do Wages Grow Faster For Educated Workers?
.@DietzVollrath notes that the European productivity slowdown could be in part explained by higher labor force participation which drew “relatively less skilled (or possibly less experienced?) workforce that lowered measured productivity growth.”
The entries in the table are the change in the growth rate of each element from 1979-1999 to 1999-2019. In Germany (DEU), for example, the annual growth rate of GDP per capita fell by -0.67 percentage points from the earlier period to the later period. That is the slowdown we're trying to understand. The remaining columns are the breakdown of that drop in the growth rate of GDP per capita into different parts. For example, in Germany the fall in the growth rate of productivity subtracted 1.32 percentage points from the growth rate of GDP per capita, and changes in education subtracted 0.43 percentage points. In contrast, changes in hours worked added 0.5 percentage points to the growth rate and increases in labor force participation added 1.38 percentage points. Those latter things helped offset all the other negatives, making the slowdown not as bad as it could have been. Related: Fully Grown - European Vacation! and The Slowdown in Europe via Human Capital
The Chinese Ministry of Finance is launching an effort to track gross government debt in China. In February the IMF estimated there was 66T yuan ($9.2T) of local government hidden debt at the end of 2022, up from 40T yuan in 2019. @markets
Ministry of Finance data showed governments across China had 37 trillion yuan ($5.1T) in on-book debt outstanding at the end of April, but there is no official total for how much hidden debt there is and who owes it. The International Monetary Fund estimated in February that nationwide there was 66T yuan [$9.2T] of local government financing vehicles (LGFV) hidden debt at the end of 2022, up from 40Tyuan in 2019, with that quick increase underscoring how local governments ramped up off-book borrowing and spending during the pandemic to support their local economies. Local officials will be pressed to come clean about their so-called hidden debt as national leaders attempt to get a fuller picture of liabilities across all levels of government, the people said, asking not to be named discussing private information. The campaign is being led by the Ministry of Finance, one of the people said.
India’s stock market has gained 14% in the past three months driven by institutional foreign investors. Indian equities account for 3.3% of global stock market total capitalization.
The $440bn increase in the value of Indian equities to more than $3.5tn means India has climbed well above both France and the UK to regain the status of the world’s fifth-largest stock market after the US, China, Japan, and Hong Kong. The Sensex index, which tracks India’s 30 biggest companies by market capitalisation and is weighted towards financial stocks, has been climbing steadily for the past three months and hit a record 63,588 points on Wednesday, spurred by buying from foreign pension and insurance funds. Indian shares have received $9.4bn of net inflows from foreign portfolio investment in the second quarter, according to Bloomberg data. The Kotak Institutional Equities analysts said “the bulk” of the net inflow this year had been passive, meaning fund managers were buying a whole index rather than choosing specific stocks. Related: India Equity: An Unsung Long-Term Performance Story and India Is Getting an Eye-Wateringly Big Transport Upgrade
Shanna Swan argues that falling sperm counts around the world are likely driven the proliferation of “endocrine disrupting” chemicals which are used in pesticides and plastic manufacturing.
For more than two decades she has devoted her life to studying the effects of “endocrine disrupting” chemicals (EDCs), which can interfere with the body’s natural hormones. These include pesticides, bisphenols, which harden plastic so it can be used in food storage containers and baby bottles, and phthalates, which soften plastic for use in packaging and products such as garden hoses. In recent years, traces of EDCs have been found in breast milk, placental tissue, urine, blood, and seminal fluid. The innocuous products in your kitchen cupboard, bathroom cabinet or garden shed may be lowering sperm counts. They could also affect the reproductive systems of your unborn children. The implications of EDCs for human health don’t stop there: they can disrupt thyroid function, trigger cancer and obesity.
.@swinshi @AEIecon finds faults with @oren_cass analysis and argues that it has become easier for a male earner to support a family than it was in 1985. @jmhorp @JonahDispatch
We find that it has become easier for a male earner to support a family than it was in 1985. We correct the dollar costs of the Oren Cass' Cost of Thriving Index (COTI) and find that instead of rising by 22 weeks of work, the cost of thriving (for male workers) rose by just over 10 weeks. This improved estimate overstates the increase in COTI, however. Cass’s way of measuring “costs” fails to account for quality improvement in the items he tracks—particularly better health care and nicer cars. Furthermore, COTI does not take into account taxes—a major flaw. It’s especially important in this case because the kind of family Cass is describing has seen a major reduction in its federal tax burden since 1985, going from a net taxpayer to receiving a subsidy, primarily due to the child tax credit (CTC). After including estimates of the federal tax burden or tax subsidy in both years, we find that the 2022 cost of thriving for a family with one male earner is lower than it was in 1985.
America’s 13-year-olds test scores declined significantly between 2019-2020 and last school year. The mean 13-year-old lost 4pp in reading and 9pp in math a loss of 2.7% over a decade in reading and 5% in math.
The National Center for Education Statistics (NCES) administered the NAEP long-term trend (LTT) reading and mathematics assessments to 13-year-old students from October to December of the 2022–23 school year. The average scores for 13-year-olds declined 4 points in reading and 9 points in mathematics compared to the previous assessment administered during the 2019–20 school year. Compared to a decade ago, the average scores declined 7 points in reading and 14 points in mathematics. The 2023 mathematics scores for age 13 students at all five selected percentile levels declined compared to 2020. The declines ranged from 6 to 8 points for middle- and higher-performing students to 12 to 14 points for lower-performing students, with larger declines for lower performers in comparison to their higher-performing peers. The percentage of students who reported missing 5 or more days doubled from 5 percent in 2020 to 10 percent in 2023.
.@DietzVollrath notes that a rise in labor force participation prevented what would have been a dramatic decline in European growth from 1999-2019, given Europe’s population aging and productivity slowdown.
The story of the slowdown in Europe is about productivity growth and aging, but with substantial offsets coming from LFP and hours. Changes in labor market activity, in general, prevented the slowdown in Europe from being even more devastating. The gross changes in the components of growth (productivity, labor force participation, etc..) were massive in Europe between 1979-1999 and 1999-2019. They turned out to offset each other in many cases so that the net change in the growth rate of GDP per capita was "only" on the order of minus 1 percentage point for most of Europe. Related: Fully Grown - European Vacation!
The price of water in Arizona is rising. Some cities are finding the price per acre-foot has doubled since 2021. @markets
In 2021 Queen Creek, [a high-end suburb of Phoenix] paid $30 million for 5,000 acre-feet of water [from] Harquahala, a basin west of Phoenix. It’s negotiating for another 8,000 acre-feet there, though the cost will likely be much higher this time around: Buckeye, [another Phoenix suburb,] approved paying $80 million for 6,000 acre feet from the same area in January. That’s more than double what Queen Creek paid in 2021. In 1993 the state created the Central Arizona Groundwater Management Replenishment District (CAGRD). Communities would pay to pump water and in return the agency would replenish what they took out with water from the Colorado or other rivers. Households in the district pay bills for water and separate assessments for groundwater replenishment. Those rates have already gone from $154 per acre-foot in 2002 to $768 per acre-foot in 2021.
In 2008, the EU economy was 10% larger than the US economy. Today, the US economy is 1/3 larger than the EU and the UK. The US is 50% larger than the EU net the UK. @gideonrachman
In 2008, the EU and the US economies were roughly the same size. But since the global financial crisis, their economic fortunes have dramatically diverged. As Jeremy Shapiro and Jana Puglierin of the European Council on Foreign Relations point out: “In 2008 the EU’s economy was somewhat larger than America’s: $16.2tn versus $14.7tn. By 2022, the US economy had grown to $25tn, whereas the EU and the UK together had only reached $19.8tn.”The dollar’s status as the world’s reserve currency gives the Americans the ability to finance their ambitions, without spooking the markets. As one European industrialist puts it: “They can just swipe the credit card.”
.@DietzVollrath argues that Europe’s slow growth, like the US’s slowing growth, is largely driven by a slowdown in human capital growth related to the aging of baby boomers.
Changes in the accumulation of physical capital were not important for Europe's growth slowdown. Changes in human capital growth were important for Europe's growth slowdown, but that effect varies by country. This also doesn't tell me whether it was demographics (as in the US) or some other factor in human capital, like changes in education or working hours. A significant source of the growth slowdown in Europe is due to a drop in productivity growth, pretty much universally. This drop is larger than in the US. If you look at the US, productivity growth rises up until about 2005, and then starts to abate. But if you look at the UK or France, as examples, their productivity growth just sort of tracks 2% up until about 2006, and then it drops down close to zero percent per year, and at times is negative. That's a far more dramatic drop in productivity growth than the US.
The yield on three-month Treasurys, the S&P 500 forward earnings and US investment grade debt have converged at 5.3%.
The yield on three-month US Treasury bills was 5.3%this week after the Federal Reserve held interest rates at between 5 and 5.25% but signaled that most of its officials expected a further two rate rises this year. That is the same level as the expected 12-month forward earnings yield across the S&P 500, which has risen by more than 15% since January. Although it is one of the best half-years for the index in two decades, it has left investors nervous about the potential for future returns.
There has been no disinflation since mid-2021 as idiosyncratic supply shocks have faded. The current inflation is being driven by strong nominal wage growth without productivity gains. @M_C_Klein
The underlying issue is that most consumers’ nominal incomes continue to rise faster than they did before, without any commensurate increases in output or offsetting changes in saving. Strip out the volatile wage changes for managerial workers and the lower-paid workers in industries hit hardest by the pandemic, and the result (red lines below) is that hourly pay has been rising at a 5% yearly rate almost every month for nearly a year.
Using evidence from call center workers @NataliaHEmanuel @emma_k_h find that remote work lowered workers’ productivity, but the majority of the gap between onsite and remote work was driven by negative worker selection into remote work. @NewYorkFed
We ask two questions: how does remote work affect productivity, and how productive are the workers who choose remote jobs? To quantify each factor, we use data from an American Fortune 500 firm that hired both remote and on-site workers prior to Covid-19. Around the office closures of Covid-19, the hourly calls of on-site workers going remote fell by 4% relative to that of already-remote workers, indicating that negative treatment effects accounted for one third of the productivity gap. After the offices were closed, workers who initially chose remote jobs were 8% less productive than those who initially chose on-site jobs, even though all workers were working at home. Thus, two thirds of the initial productivity gap was due to worker selection.
Torsten Sløk @apolloglobal notes a high correlation between Fed net QE and the S&P500. He suggests that Fed liquidity provided through the Bank Term Funding Programs has been a crucial driver of the stock market.
Since SVB collapsed, the Fed has been adding liquidity, and the S&P500 is up more than 10%. The high correlation between Fed net QE and the S&P500 seen in the chart below suggests that Fed liquidity is a crucial driver of the stock market. With the Fed turning more hawkish and continuing QT, the downside risks to equities are growing.
Canada’s population is now 40mm people, nearly 25% of them born abroad as Canada’s population growth rate hits 2.7% the highest among advanced economies. @markets
Nearly one in four people in Canada are now immigrants, the largest proportion among the Group of Seven nations. At the current pace of growth, the smallest G-7 country by population would double its residents in about 26 years, and surpass Italy, France, the UK and Germany by 2050.
Water levels in the Ogallala Aquifer which provides water for 30% of the US’s irrigation systems has fallen consistently for the past five years. @TexasTribune
On the heels of Texas’ worst drought in a decade, a report from the High Plains Underground Water Conservation District shows water levels in the Ogallala Aquifer, also known as the High Plains Aquifer, have dropped consistently in the region over the last five years. With only a finite amount of water to be shared throughout the U.S. High Plains region — Texas, Colorado, New Mexico, Kansas, Nebraska, Oklahoma, Wyoming and South Dakota — the Ogallala running dry could have devastating consequences nationwide. The aquifer provides water for about 30% of the nation’s irrigation systems, boosting up the farms and ranches that supply a quarter of the nation’s agricultural production. And for 82% of the people who live within the aquifer’s boundaries, it supplies their drinking water too.
In the first five months of 2023, US venture capital funds invested nearly $17B in more than 200 deals. This was more than the sector raised in all of 2019. @PitchBook
US venture capitalists have agreed more than 200 defence and aerospace deals in the first five months of this year worth nearly $17bn — more than the sector raised during the entire of 2019, according to data from PitchBook. US venture investment in defence start-ups surged from under $16bn in 2019 to $33bn in 2022, PitchBook data shows. Investors piled a record $14.5bn into such start-ups in the first quarter of this year.
Michael Cembalest @jpmorgan notes “the AI hype machine is in full swing right now.” Thirty-two stocks in the $CHAT Generative AI ETF have returned 77% this year with a mean P/E of 31x.
Investors are paying a sizable premium for AI exposure. One example: the 32 stocks in the $CHAT Generative AI ETF have returned 77% this year. The 22 $CHAT ETF stocks that have positive earnings projected for the next 12 months trade at an average P/E of 31x. The other 10 $CHAT ETF stocks have infinite P/Es, either due to negative earnings or trivially positive earnings that create nonsense P/E ratios over 100x. The large language model revolution is going to have to live up to the high end of expectations to justify this. I have seen estimates that AI will eventually add ~10% to the fair value of the S&P 500 due to some combination of augmented employee productivity and staff reductions, but I’m not sure how one would measure that.
A new study of national charter schools by Margaret Raymond and Meghan Mazzola shows that, in a sample matched for student quality, charter school students experience the equivalent of 25 days more learning relative to non-charter school students.
In this report, we look at students in charter schools compared to the experience they would have had in the traditional public schools (TPS) they would otherwise have attended. Using both student and school level data, our resulting data set included 81% of tested public school students in the United States, making it one of the largest data sets of student-level observations created to date. We used this information to create a matched student data set with over 6,500,000 student-level observations from over 1,853,000 charter students and a matched comparison group. We present our findings about learning outcomes measured in days of learning. The measure uses a benchmark of learning: the average student in TPS will obtain a year’s learning in a year’s time. If astudent makes more (or less) progress [during a 180 day school year,] we present that as additional (or fewer) days of learning.
.@alanbeattie argues geopolitical fracturing won’t be inflationary as the deflationary pressure associated with “hyperglobalisation” was overstated.
The “hyperglobalisation” period when world trade and global value networks grew most rapidly ran from the late 1990s until shortly before the global financial crisis began in 2008. By that point the fall in inflation in the rich world had largely already happened. Given that goods are much more highly traded than services, you’d have expected rising inflation differentials between the two. In fact, the gap remained constant until after the financial crisis, when services inflation actually fell while goods inflation rose. As a rough sense check of the impact of cheaper imports, those goods subject to low-cost Chinese competition like clothing, shoes and electronics make up quite small parts of the consumer price basket. In the eurozone, apparel and footwear are about 5% of the total, compared with 15% for housing and utilities and 10% for restaurants and hotels.
.@andrewbatson notes China’s growing dependence on external demand as measure by manufacturing value-added output. China accounts for 31% of global of manufacturing value-added.
In recent years, about 40-45% of China’s manufacturing output has come from exports, while 55-60% has come from domestic demand. This pattern was established in 2009 by China’s massive property-and-infrastructure stimulus in response to the 2008 global financial crisis. Since then, the level of investment activity in the economy has stayed very elevated. So, we can say that China’s manufacturing sector is indeed mainly oriented to domestic demand, but it’sdefinitely true that the contribution from exports is quite large. A 55-45 split in an economy of China’s size is a pretty significant reliance on external demand. And that reliance has increased more recently. The current edition of the OECD TiVA database ends in 2018; extending the estimates to 2022 shows that the export contribution has probably picked up quite a bit due to the pandemic export boom.
Fertility is declining globally. In all of the world’s 15 largest economies, fertility is under the replacement rate. @TheEconomist
In 2010, there were 98 nations and territories with fertility rates below 2.1 (known as the replacement rate) according to the United Nations. In 2021, that number had risen to 124, or more than half the countries for which data were available. The world’s 15 largest economies all have fertility rates below the replacement rate. Educated women have for decades tended to have fewer children. But fertility among the less educated is now falling. On a global level the link between national incomes and fertility rates has also weakened. India’s fertility rate, for example, fell below 2.1 in 2020, despite a gross domestic product of less than $3,000 per person.
New research from @nhendren82 @bsprungkeyser finds that $1 spent auditing taxpayers above the 90% income thresholds yields $12 in revenue, including a “deterrence effect” which produces “at least three times more revenue than the initial audit.”
An additional $1 spent auditing taxpayers above the 90th income percentile yields more than $12 in revenue, while audits of below-median income taxpayers yield $5. We begin by estimating the average initial return to all audits of US taxpayers filing in 2010-2014. On average, $1 in audit spending initially raises $2.17 in revenue. Audits of high-income taxpayers are more costly, but the additional revenue raised more than offsets the costs. Audits of the 99-99.9th percentile have a 3.2:1 initial return; audits of the top 0.1% return 6.3:1. Next, we use randomly selected audits to examine the impact of an initial audit on future revenue. This specific deterrence effect produces at least three times more revenue than the initial audit. Deterrence effects are relatively consistent across the income distribution. This results in the 12:1 return above the 90th percentile.
The Danish government scrapped a public holiday to help offset increased defense spending despite 70% of Danes opposing the change. Globally defense spending rose 4% in 2022. @FT
Next April, for the first time in more than three centuries, Danes will have to work on the holiday of Great Prayer after the government scrapped the religious day off partly to pay for extra defence spending. The decision, approved in March, was deeply unpopular: in one poll, 70 percent of Danes opposed it. The Stockholm International Peace Research Institute calculates that global defence spending rose by 4 percent to reach a record $2.24tn last year. This year, it is set to continue rising, even as higher rates increase governments’ borrowing costs. During the long decades of the cold war, the west financed its defence spending through higher taxation.
The S&P 500 performance is the most concentrated it has been since the 1970s with 5 of 7 tech stocks representing almost 25% of the total market capitalization. At $2.9T, Apple is worth more than the UK’s top 100 listed companies combined. @FT
Seven of the biggest constituents — Apple, Microsoft, Google owner Alphabet, Amazon, Nvidia, Tesla and Meta — have ripped higher, gaining between 40 percent and 180 percent this year. The remaining 493 companies are, in aggregate, flat. Big tech companies dominate the index to an unprecedented degree. Just five of those seven stocks representnearly a quarter of the market capitalisation of the entire index. At $2.9tn, Apple alone is worth more than the UK’s top 100 listed companies put together.
West Coast dockworkers reached a tentative deal with port employers yesterday. Labor activity had disrupted West Coast port operations in recent weeks. @WSJ
West Coast dockworkers reached a tentative labor deal with port employers Wednesday following more than a year of contentious negotiations that have disrupted trade flows from California to Washington state. The International Longshore and Warehouse Union, which represents more than 22,000 dockworkers, and the Pacific Maritime Association, representing employers at 29 ports, said the agreement would run for six years.
India has 1,600 global capability centers which provide back office services, 40% of the number globally, helping to drive India’s service exports to $323B in the FY ending in March. @markets
India has roughly 1,600 global capability centers (GCC), more than 40% of the number worldwide, according to Nasscom, a trade body for the country’s technology industry. The offices generated about $46 billion in combined revenue in the fiscal year ended March, more than the output of Nepal. Services exports rose to a record for December, leading economists to speculate why. The trend continued. They climbed to about $323 billion in the fiscal year ended March, up 27% from the year before. Analysts reached the same conclusion: It was the GCCs.
China’s youth unemployment hit a new record in May, rising to 20.8% from 20.4% in April for workers aged 16-24. The overall jobless rate was unchanged at 5.2% @markets
China’s youth jobless rate edged up to a fresh record in May as the economy’s recovery slowed, adding to challenges for policymakers as new graduates join the workforce. The unemployment rate among those aged between 16 and 24 reached 20.8%, up from 20.4% in April, according to data published by the National Bureau of Statistics on Thursday. That’s four times the overall surveyed jobless rate, which was unchanged at 5.2%.
.@M_C_Klein argues that investment catalyzed by the CHIPS Act and Inflation Reduction Act will spill over globally, which will boost “global manufacturing demand, ease the supply constraints of the past few years, and support the green transition.”
There is no appetite in the U.S. for boosting investment at the expense of current consumption by redirecting spending, workers, and capital. Nor is there much scope for American producers to export even less than they already do. This means that any realistic scenario in which U.S. investment rises substantially would mostly involve some combination of higher production out of existing labor and capital as well as higher levels of imports. In theory, good investments should boost the capital stock and eventually make it easier to further increase both investment and consumption, but that process takes time. Until then, there will be a mismatch between America’s needs and its productive capabilities that can only be bridged by drawing upon foreign production. Foreigners stand to benefit from this even if some of the specific subsidies encouraging U.S. investment have local-content restrictions.
S&P Global Markets Intelligence calculates 2/3 of planned EV jobs will be located in the American South, but @TheEconomist argues that the impact on Southern politics may be minimal.
The industrial policies crafted by Mr. Biden’s administration—notably, incentives and rules to boost the production of semiconductors, renewable energy and electric-vehicles — have catalysed a surge in investment, much of it in the South. S&P Global Market Intelligence calculates that about two-thirds of planned EV jobs will reside there. Might the South’s manufacturing boom have political consequences? The investment surge resulting in part from Mr. Biden’s policies so far looks like the opposite of pork-barrel politics: most of the money has gone to places that do not favour him. According to a database of EV investments announced in the 300 days since the passage of the Inflation Reduction Act more than 80% has gone to Republican-controlled districts. As factories become more automated and less labour-intensive, their political weight may well diminish. Robots do not vote.
.@foxjust highlights 15 cities that have 5-year job growth at a much faster pace than the rest of their states. He notes that, other than Phoenix and Philadelphia, all are in states that voted GOP in 2020 but all but two have Democratic mayors.
This list has a little of everything. It includes Indianapolis, of course, along with perennial powerhouses Dallas-Fort Worth and Phoenix, boomtowns Austin and Nashville and much-discussed up-and-comers Boise, Fayetteville-Springdale-Rogers, Oklahoma City and Raleigh. But there are also some under-the-radar growth stories (Charleston, Huntsville) moderate Midwestern successes (Cincinnati, Columbus, Des Moines) and one true surprise: Philadelphia? Really?! There is not, however, a single city from Florida. What unites the standouts? All but two, Phoenix and Philadelphia, are in states that voted Republican in the 2020 presidential election, while in all but two, Huntsville and Oklahoma City, the mayors of the largest cities are either Democrats or nonpartisan officials who sound a lot like Democrats.
Between 2010 and 2018 firms that invested in AI shifted employment towards more junior employees with high educational attainment and technical expertise. @TaniaBabina @AnastassiaFedyk @AlexXiHe
In terms of labor composition, we observe a general upskilling trend associated with larger AI investments. Firms that invest more in AI tend to increase their shares of workers with bachelors, masters, and doctoral degrees (correspondingly decreasing the share of workers without college education). For example, a one-standard-deviation increase in the firm’s share of AI workers translates into a 3.7% increase in the share of workers whose maximal educational attainment is an associates or bachelors degree, a 2.9% increase in the share of workers whose maximal educational attainment is a masters degree, and a 0.6% increase in doctoral degrees. These increases in educated workers correspond to a 7.2% decline in the share of workers without college education.
.@McKinsey forecasts that generative AI could accelerate US productivity growth to 3.6% CAGR between 2022-2040.
The deployment of generative AI and other technologies could help accelerate productivity growth, partially compensating for declining employment growth and enabling overall economic growth. Based on our estimates, the automation of individual work activities enabled by these technologies could provide the global economy with an annual productivity boost of 0.2 to 3.3 percent from 2023 to 2040 depending on the rate of automation adoption—with generative AI contributing to 0.1 to 0.6 percentage points of that growth— but only if individuals affected by the technology were to shift to other work activities that at least match their 2022 productivity levels. In some cases, workers will stay in the same occupations, but their mix of activities will shift; in others, workers will need to shift occupations.
IBM researchers have used a quantum processor and a process of error elimination to make a major step forward in quantum computing. The work may help in accelerating drug discovery and modeling fusion reactions. @NYT
The IBM researchers used a quantum processor with 127 qubits to simulate the behavior of 127 atom-scale bar magnets — tiny enough to be governed by the spooky rules of quantum mechanics — in a magnetic field. That is a simple system known as the Ising model, which is often used to study magnetism. This problem is too complex for a precise answer to be calculated even on the largest, fastest supercomputers. On the quantum computer, the calculation took less than a thousandth of a second to complete. Each quantum calculation was unreliable — fluctuations of quantum noise inevitably intrude and induce errors — but each calculation was quick, so it could be performed repeatedly. Altogether, the computer performed the calculation 600,000 times, converging on an answer for the overall magnetization produced by the 127 bar magnets.
.@jasonfurman argues that, with core inflation running at a 5% annualized rate, the Fed shouldn’t pause. Even though today’s report does offer evidence inflation is falling, he has “no confidence it is falling to 3% let alone 2%.”
Core inflation (which excludes food and energy) rose at about a 5% annual rate for a sixth straight month. But other measures of underlying inflation were much lower reflecting the outsized importance of shelter and used cars (again) this month. Some relief should be coming. Look at the BLS's most narrow measure, sometimes called "supercore," which also excludes shelter (which is lagging) and used cars (which are volatile and posted a big increase in May). At an annual rate: 1 month: 1.1% 3 months: 2.3% 6 months: 3.3% 12 months: 4.2%. What does all of this mean? The most standard measure of core inflation is running at a 5% rate. That almost certainly overstates current underlying inflation. But by how much? How much will it fall? I expect some but have no confidence it is falling to 3% let alone 2%. The Fed has strongly telegraphed a pause/skip & nothing about this will change that. But is mildly unfortunate. Over the last 3 months core CPI is 5.0% annual rate. The employment mandate is fine with 283K jobs per month. Both much hotter than expected. Ought to raise now.
Unemployment rates have risen at least 0.5% above the prior 12 month low in DC and 18 states. Based on the “Sahm Rule,” which has been remarkably accurate at the national level, this would suggest these states have entered a recession.
Across the country, well over a dozen states are flashing warning signals, triggering the so-called Sahm rule, which links the start of a recession to when the three-month moving average of the unemployment rate rises at least half a percentage point above its low over the past 12 months. The Sahm rule traditionally applies to national unemployment — not state-level data, which can be distorted by small sample sizes — but the trend across the country suggests labour market conditions have softened. Still, the weakness is not yet broad-based and would need to intensify for the worst prognoses to be realised.
According to a model by Torsten Slok @apolloglobal, it takes a year and half for tighter credit to have its maximum impact on GDP, suggesting changes in banks behavior in the aftermath of SVB won’t peak until the second half of next year.
We built a small vector autoregressive model with GDP growth, loan growth, and bank lending standards, and giving a one standard deviation shock to bank lending standards using a standard Cholesky decomposition shows that it takes six quarters before tighter credit conditions have a maximum negative impact on GDP, see chart below. In other words, the negative impact of the SVB collapse on tighter lending standards will continue to accumulate until the second half of 2024 because it takes time for banks to repair their balance sheets.
.@NielsGormsen shows that the average firm reduces its discount rate by only .3% in response to a 1% decline in perceived cost of capital. The implication is a lower level of capital spending relative to what the decline in cost of capital would imply.
We document that changes in the perceived cost of capital only modestly affect discount rates, in contrast to the stylized view. Using within-firm variation, we show that, on average, a 1 percentage point increase in the perceived cost of capital leads to a 0.3 percentage point increase in the discount rate. We show that discount rate wedges are associated with investment fluctuations at the firm level. A 1 percentage point increase in the wedge lowers the investment rate by 0.9 points. Many firms rarely change discount rates, so the relation becomes stronger over longer horizons. However, even at the 10-year horizon, 40 percent of firms maintain unchanged discount rates and, even if they change, adjust less than one-to-one with the perceived cost of capital. These results suggest that discount rates have “a life of their own,” beyond the perceived cost of capital. The average US firm in our sample has increased its discount rate wedge by 2.5 percentage points between 2002 and 2021.
During COVID, births fell dramatically, especially in states where case counts were high and unemployment spikes were relatively large. Births rebounded sharply in 2021 but are still below 2019 levels. @kearney_melissa @phil_wellesley
Before the pandemic, births had been steadily declining for many years. There were almost 600,000 fewer annual births in 2019 relative to 2007—a 13% reduction. The size of the COVID-related baby bust, and subsequent rebound were meaningful in that context, but they also represent short-term deviations from an ongoing trend of considerably greater importance. Birth counts in 2022 are still below what they were in 2019.
China is building its own parallel fiber optic network as the West increasingly locks Chinese firms out of the cable network that carries internet traffic.
There are more than 500 active and planned submarine cables, transporting 99% of intercontinental data, arriving at around 1,400 coastal landing stations around the world. The US has succeeded in preventing Beijing from becoming a major player in the global submarine cable market. Chinese supplier HMN Tech has provided or is set to provide the equipment to only 10% of all existing and planned global cables, where the supplier is known, FT analysis of data supplied by the consultancy TeleGeography shows. Meanwhile, French cable maker ASN has supplied 41 per cent and American company SubCom has supplied 21%. Neither ASN nor SubCom responded to requests for comment.
.@paulkrugman argues the cost associated with getting inflation from 3% to 2% outweighs the benefits citing the public’s declining interest in inflation among consumers, noting declining searches for “inflation.”
So people are thinking about inflation a lot less, and their interest will probably recede even further toward normal as grocery prices decrease. The question is, how low does the inflation target have to be for the public to lose interest? I now worry that 4 percent may be a bit too high. But 3 percent almost surely isn’t. In which case, should we be willing to pay a high price to get inflation down from 3 to 2? This isn’t a hypothetical question about a remote possibility. It may very well be exactly the question policymakers face a few months from now.
.@M_C_Klein notes the increase in nominal pretax business income is just 17% of the increase in consumer spending, suggesting that “excess” profits were not a primary driver of inflation post-pandemic.
Put another way, the increase in nominal pretax business income since 2019Q4 is equivalent to just 17% of the increase in consumer spending excluding imputed rent since the eve of the pandemic. For perspective, the total amount of nominal pretax business income generated in the U.S. in any given quarter has historically been worth about 21% of PCE ex-imputed rents, which means that the growth in profits has been a little low relative to what one might have naively expected.
According to research by the Lawrence Berkeley National Laboratory 2,000GW of solar, wind and storage projects are in the planning stage, and 20% are likely to be built based on historical completion rates, vs. 1,300 GW installed capacity in 2022.
In the US, grid connection requests grew by 40 per cent in 2022, a study led by Lawrence Berkeley National Laboratory found. The researchers discovered that nearly 2,000GW of solar, wind and storage projects were in queues to connect to transmission grids — the long-distance, high-voltage electricity network — far more than the installed capacity of the entire US power plant fleet. Many of these projects will never be built. Developers often submit speculative applications, says lead author Joseph Rand. His research looking at connection requests submitted between 2000 and 2017 found that typically only a fifth of projects were built.
Detailed analysis by @Tfpiasecki shows that American manufacturing firms have not fully substituted foreign for domestic production, but rather supplement their domestic efforts with foreign production.
The first row of Table 1 presents the number of US firms that manufacture in-house in 2007 across these four categories. Of the 243,700 US manufacturing firms, only 1,700 have majority-owned foreign establishments (columns 2 to 4). Among these multinationals, 1,200 firms own US and foreign manufacturing plants, versus 350 firms with just domestic plants, and only 150 firms with exclusively foreign in-house manufacturing. Firms with both domestic and foreign manufacturing plants are thus the most prevalent type of US multinational manufacturing enterprise. Panel A of Table 1 presents total sales for these firms. Panel B shows that transnational manufacturers - those that perform in-house physical transformation activities in the United States and abroad - employ more workers than all other firm types, with just over half of these workers employed at their US plants. Firms that manufacture exclusively in foreign plants employ less than one million workers worldwide and account for just 2.5 percent of all US manufacturing firms ' global employment.
According to the OECD, the US lost 896 scientific authors in 2021, while China picked up 3,108. In 2015, the US gained 2,920 scientists while China lost 366. @SCMPNews
A joint study last year by Princeton, Harvard and the Massachusetts Institute of Technology found more than 1,400 US-based ethnic Chinese scientists changed their academic affiliation from American to Chinese institutions in 2021 – a 22 per cent increase on the previous year. According to data published in April by the Organisation for Economic Cooperation and Development, the US lost 896 scientific authors in 2021, while China picked up 3,108. The findings are in stark contrast to 2015, when traffic was reversed, with a gain of 2,920 scientists for the US and a loss of 336 to China.
There were 6.8M marriages in China in 2022, the lowest level since 1985, driven by a decline in the population aged between 20-34, and a gender imbalance of 10M more men than women in that cohort.
About 6.8 million couples registered marriages in China last year, down 11% from 2021 and the lowest number since 1985, when available government data begins. The data shows the number of unions peaked in 2013 and has since rapidly declined. In 2021, the number of people aged 20-34 fell below 300 million for the first time since the mid-1980s, and there were more than 10 million more men than women in that age cohort, according to data from the United Nations. That gender imbalance could make it even harder to get married, especially as same-sex marriage isn’t legal in China. The average age of a first marriage in 2020 was almost 29, up almost four years from 2010, local media Yicai reported over the weekend, citing national census data.
Fueled by Long Credit Binge, China’s Economy Faces Drag from Debt Purge
Total credit to the nonfinancial sector was $49.9 trillion last September, more than triple the level 10 years ago, according to the Bank for International Settlements, a consortium of global central banks. The figure has begun to drop in dollar terms from $51.4 trillion at the end of 2021, though in local currency, the debt continued to climb. The issue isn’t the central government, whose debts are relatively low as a percentage of gross domestic product, but households, the private sector and local governments. Total debt as a share of GDP hit 295% in China last September, surpassing 257% in the U.S. and an average of 258% in the eurozone, BIS data show.
According to @pitchbook, the annual internal rate of return for venture capital firms was -7% in Q3 2022, the lowest return since 2009. @wsj
The yearly internal rate of return for venture firms was negative 7% in the third quarter of 2022, the lowest value since 2009, according to PitchBook Data. The venture market, meanwhile, has been declining. Startups in the U.S. raised $37 billion in the first quarter of this year, down 55% from the first three months of last year. The longer the venture market stays depressed, the closer many startups get to the moment of truth.
In 2018 Chinese born researchers contributed to 27% of American research papers, Chinese born researchers who had returned to China from the US contributed to 38% of Chinese research papers. @NBERpubs
The close connection between US and China in scientific research and education in the 2000s produced a large group of China-born researchers who work in the US (“diaspora”) and a larger group of China-born researchers who gained US-research experience and returned to do their research in China (“returnee”). We estimate that diaspora researchers contributed to 27% of US addressed papers, and that returnee researchers contributed to 38% of China addressed papers. In terms of quality or impact, papers with diaspora or returnee authors averaged more citations and had higher proportions of publication in high CiteScore journals than other US-addressed or China-addressed papers. The link between the countries’ research began to fray from 2018 through the early 2020s, with potential deleterious effects on each country’s future research output and on global science to which US and China are the two biggest contributors.
.@greg_ip notes that markets are more efficient than governments in allocating scarce resources, but “Bidenomics sees market failure all around” and thus has “no limiting principle on government intervention.”
First, the quality of economic growth matters more than the quantity. Second, laissez-faire is out, industrial policy is in. Third, trade policy should give priority to American workers, not consumers. Basic economics tells us that capital and labor are finite, so they need to be allocated in a way that maximizes productivity and growth. Experience has shown, painfully, that governments are much worse at this than markets. Market failures exist, of course, such as pollution or military vulnerability, but they are exceptions. Bidenomics accepts the value of markets but sees market failure all around, in everything from regional, racial and gender inequities to the lack of rural high-speed internet and affordable child care. When market failure is so broadly defined, there is effectively no limiting principle on government intervention.
Homicides in major American cities are down 12% year-over-year. @wsj
Killings are down 12% overall in nine of the 10 most populous cities compared with the same time frame last year, according to local government data. Homicides are down in six of those cities, including 27% in Los Angeles, 22% in Houston, and 16% in Philadelphia. In Texas, the cities of Dallas, San Antonio and Austin reported slight upticks. San Diego didn’t provide data. The 2023 data available from the cities had different end dates, ranging from April to this week.
JP Morgan estimates that the US will need to borrow at least $1.1T in short-dated Treasury bills by the end of 2023. The deluge is expected to stress markets and raise yields.
Following the resolution of [the debt ceiling] dispute — which had previously prevented the US from increasing its borrowing — the Treasury department will seek to rebuild its cash balance, which last week hit its lowest level since 2017. JPMorgan has estimated that Washington will need to borrow $1.1tn in short-dated Treasury bills by the end of 2023, with $850bn in net bill issuance over the next four months. A principal concern voiced by analysts was that the sheer volume of new issuance would push up yields on government debt, sucking cash out of bank deposits.
US GDP has contracted in four out of the last five quarters, but labor markets remain robust. @foxjust argues “This can’t go on forever. At some point either the job market will crack or other economic measures will begin to catch up with it.”
During the past two quarters rising GDP has been more than offset by falling GDI. As the measures stand now (there are many revisions to come), the US economy appears to have contracted in four of the last five quarters. Meanwhile, payroll employment has grown and grown. Last spring, three of the five indicators were dropping but employment and industrial production were quite strong. Late last year, industrial production fell sharply, but other indicators were mixed. Payroll employment has continued to rise throughout, joined in recent months by the other “most reliable” indicator, real personal income. The jobful recession-that-isn’t-quite-a-recession continues. This can’t go on forever. At some point either the job market will crack or other economic measures such as GDP and GDI will begin to catch up with it.
A labor shortage in the mining sector is expected to slow firms’ abilities to expand production in the face of higher demand. Citi Group forecasts lithium prices will be up 40% by the end of the year and copper up 50% by 2025.
Citi expects labor shortages, permitting challenges and other issues will propel lithium prices higher by as much as 40% by year’s end. It forecasts copper will jump 50% by 2025, noting that it is less vulnerable than some other metals to recent innovations for electric-vehicle batteries. The overall industry’s seasonally adjusted head count shrank by nearly 39% since 1990 as power generators turned away from coal, according to the Bureau of Labor Statistics. Colleges and universities have struggled to rebuild the depleted talent pipeline. “The problem is that talent isn’t lying around waiting to be paid more—there just isn’t enough of it,” said Andrea Brickey, an associate professor of mining engineering and management at the South Dakota School of Mines & Technology.
Port operations on America’s west coast are being disrupted by labor activity. @freightwaves reports that full time dock workers have mean earnings that are 9% higher than dentists and just $5,600 less than airline pilots.
Full-time registered longshore workers earned an average of $197,514 in 2022, not including benefits, according to the Pacific Maritime Association. Full time is defined as working 2,000 hours or more per year, or 38.4 hours per week. Clerks working full time earned an average of $220,042 and foremen and walking bosses averaged $306,291. The PMA also paid $100,534 per International Longshore and Warehouse Union registrant in benefits costs. Benefits include full insurance coverage, a 401(k) and a pension with a maximum yearly retirement benefit of $95,460.
Investor excitement in AI is a key factor in the recent stock market recovery. @The Economist reports that 73% of the S&P 500 rally since November 2022 has been driven by 14 firms with significant AI exposure.