If AI can perform economically valuable cognitive tasks at very little marginal cost, it could similarly open up new horizons for spending and economic activity. In some cases, we will see a “Model T effect”: consumers buying a lot more when the price of a previously unaffordable item is slashed, causing entire new industries to spring up. Lower prices in one sector also often lead to higher spending in unrelated discretionary sectors because people effectively have more to spend elsewhere. A similar phenomenon (though not productivity-driven) happens over shorter time horizons when energy prices fall and consumers shift wallet share toward more discretionary categories of spending. Over longer periods, this dynamic generally leads to rising activity and employment in sectors facing increased demand. When supply in those sectors is inherently limited—such as in real estate—it can also produce inflation, as cost savings in one area are used to bid up the price of truly scarce resources in another. We’ll likely see a mix of the two dynamics as AI lowers production costs: customers will buy more at the new lower price but will also spend some of their savings in other categories.

Related: Will A.I. Transform the Economy, and if So, How? and Integrating the Goldman AI Report Into Our Views and The Outlook for Long-Term Economic Growth

Empirical studies of commodity cost pass-through typically find that pass-through is incomplete: even at long horizons, a 10% increase in costs causes retail prices to rise less than 10%. Using microdata from gasoline and food products, Incomplete pass-through in percentages often disguises complete pass-through in levels: a $1/unit increase in commodity costs leads to $1/unit higher retail prices. Pass-through appears incomplete in percentages due to an additive margin between marginal costs and prices. An implication of complete pass-through in levels is that rising commodity costs lead to higher inflation rates for low-margin products in a category, though absolute price changes are similar across products. This generates cyclical inflation inequality. I find that food-at-home inflation for the lowest income quintile is 10% more sensitive to upstream commodity costs. From 2020–2023, unequal commodity cost pass-through is responsible for two-thirds of the gap in food-at-home inflation rates experienced by low- and high-income households.

Related: Powerful CPI and Fiscal Influences on Inflation in OECD Countries, 2020-2022 and Digesting Inflation

People have been moving to the South over a long period, with the pace accelerating during the pandemic. In recent internal data, covering 2023 Q3, we see a continued strong inflow into southern Metropolitan Statistical Areas (MSAs), such as Austin, San Antonio, Jacksonville, and Tampa. And, on top of the migration story the South has a higher birth rate than other census regions, too. But GDP growth across the South has not been even. Between 2017 and 2022, seven southern states had a larger increase than the average US rise of 11%. Of these, Florida showed the biggest jump in GDP, by 20%, followed by Texas and Tennessee, growing by 15%. However, over the same period, nine others and D.C. expanded more slowly, with Oklahoma and Louisiana showing negative growth.

Related: A $100 Billion Wealth Migration Tilts US Economy’s Center of Gravity South and On the Move: Which Cities Have The Biggest Housing Shortage? and What’s the Matter With Miami?

American crude oil production reached a fresh all-time high of 13.2mn barrels a day in September, according to figures released last week, more than any other country and accounting for about one in eight barrels of global output. The added volumes have outpaced official forecasts and called into question claims of a US oil industry constricted by Wall Street or environmental regulations. They are causing difficulties for the OPEC+ oil cartel, which last week agreed to deepen cuts to its members’ own volumes in a bid to prop up faltering prices. The US accounts for 80% of the expansion in global oil supply this year, according to the International Energy Agency. Its production is set to grow by 850,000 b/d, the US Energy Information Administration estimates, well below the pace reached earlier in the shale revolution but much faster than analysts had anticipated. 

Related: An Unruly OPEC is Causing Problems for Russia and Saudi Arabia and US Shale: The Marginal Supplier Matures and The Changing Nexus Between Commodity Prices and the Dollar: Causes and Implications

The number of college graduates is expected to reach 11.79 million next year, the Ministry of Education said on Tuesday, up by 210,000 from this year. Beijing has been under pressure to create enough jobs amid an uneven post-Covid recovery, which has been dragged down by the protracted slump in the property market and a weak private sector. China’s college graduates exceeded 10 million for the first time in 2022.

Related: The Root of China’s Growing Youth Unemployment Crisis and Can China Fix Youth Unemployment Woes With Military Recruitment Drive? and China’s Age Of Malaise

Italy has officially informed Beijing of its decision to withdraw from President Xi Jinping’s flagship Belt and Road Initiative, ending months of speculation over a relationship that had irritated Rome’s western allies. The formal decision comes three months after Prime Minister Giorgia Meloni — who in the past had called Rome’s participation in the BRI a “mistake” — publicly confirmed that her rightwing government was considering a pullout while affirming her determination to maintain “mutually beneficial” relations with Beijing.  A senior Italian official, who asked not to be identified, confirmed on Wednesday that Rome had formally notified Beijing of its intent to withdraw from the deal, which would have been otherwise renewed automatically for another five years in early 2024. Meloni’s office declined to comment.

Related: Meloni Tells China That Italy Plans to Exit Belt and Road and Danish Weight Loss Drugs vs. Chinese Cars: Two Models of Export Booms and EU to Press China On Industrial Overcapacity at Beijing Summi

The official poverty measure has hardly changed for more than 50 years, even as social benefit payments to the average household in the bottom 20% of income earners have risen from $9,700 to $45,000 in inflation-adjusted dollars, because most of these payments simply aren’t counted as income to the recipients. When all benefits are counted, the percentage of Americans living in poverty falls to only 2.5%. Bruce Meyer of the University of Chicago and James Sullivan of the University of Notre Dame arrived at a similar figure by comparing the actual goods and services consumed by poor households in 1980 with the actual level of consumption of households that were being counted as poor in 2017. They found that only 2.8% of households in 2017 were consuming at or below the actual poverty consumption level.

Related: Evaluating the Success of the War on Poverty since 1963 Using an Absolute Full-Income Poverty Measure and Work Requirements and the Lost Lessons of 1996 and The Economics of Inequality in High-Wage Economies

We find that the impact of inflation on consumer sentiment fades out with a decay rate of about 50% per year, with a 10% inflation shock reducing sentiment by 35 index points in the current year, 16 index points the following year, and 8 index points the year after. The estimates imply that current sentiment is being dragged down by 16 index points by the inflation we have experienced over the last 3 years, down 40 percent from the peak negative impact of 27 index points in June 2022. If inflation next year slows to 2.5%, the negative impact on consumer sentiment from inflation would decline by another 50% relative to the current value.

Related: Asymmetric Amplification and the Consumer Sentiment Gap and The Economy Is Great. Why Are Americans in Such a Rotten Mood? and The Pandemic Has Broken a Closely Followed Survey of Sentiment

Several economists had warned that the American Rescue Plan, the large spending bill passed early in the Biden administration, would be inflationary, warnings that appeared to be vindicated by the inflation surge of 2021-22. In retrospect, these economists may have been right for the wrong reasons, since inflation eventually surged, not only in America but almost everywhere. This suggests that inflation may have had less to do with overspending than it did with pandemic-related disruptions.

Related: What We’ve Learned About Inflation and Fiscal Influences on Inflation in OECD Countries, 2020-2022 and Fiscal Arithmetic and the Global Inflation Outlook

With the latest PISA results, America has proven once again that it has one of the smartest populations and, perhaps, the best education systems. American Asians and Whites topped the charts; American Hispanics beat all other Hispanics; American Blacks did well. Some people think the most important scale is mathematics, while others think it's reading, and a select few think it's science. They all indicate g, so there's no a priori rationale for favoring any particular scale. Regardless, look at how America did in mathematics! America's reading performance is perhaps its most laudable this year. American Asians came in first in this test, and American Whites came in third.

Related: Math Scores Dropped Globally, but the U.S. Still Trails Other Countries and Krugman’s Misleading Scandinavian Comparison

Two different official time series from the Ministry of Commerce (MOFCOM) and the State Administration of Foreign Exchange (SAFE) [show the same dynamic]. There are multiple differences between the two series, but the main one is that SAFE measures FDI on a net basis, i.e., FDI inflows minus FDI outflows, while MOFCOM only measures gross FDI inflows. Both agencies include greenfield investment and mergers and acquisitions (M&A) by foreign firms in their FDI data while SAFE also includes several other items. While these additional items were large a few years ago, as explained below, they are now likely quite small. Most of the $113 billion difference between the two numbers in the first three quarters of 2023 must result from the net sale of direct investment assets by foreign investors.

Related: China Suffers Plunging Foreign Direct Investment Amid Geopolitical Tensions and The Rise & Fall of Foreign Direct Investment in China and The Global Economy Enters an Era of Upheaval

EU leaders will stress their rising concerns about Chinese industrial overcapacity when they meet President Xi Jinping for a summit in Beijing on Thursday, amid signs China is pumping more funding into manufacturing. The EU is worried China is increasing its industrial capacity, particularly in renewable energy products, at a time when domestic demand is weak and other trading partners such as the US are limiting access to their markets. This leaves Europe as an important target for an overflow of China’s exports. “China’s trade deficit with us is growing. It’s just below $400bn at present. And as you can imagine, the doubling of the trade deficit within a matter of two years is a matter of great concern . . . particularly over its sustainability,” said a senior EU official ahead of the summit.

Related: What Will It Take for China’s GDP to Grow at 4–5 Percent Over the Next Decade? and EU To Launch Anti-Subsidy Probe into Chinese Electric Vehicles and Pettis On China's Export Strategy

The venture capital landscape is shifting. There is a  rising median time between venture rounds.  An increased number of startups terminated due to bankruptcy.  There has been a large jump in “down rounds” between 2022 and 2023, and post-money valuations have declined (i.e., the company’s value after a new capital injection), particularly for Series C rounds. For example, from 2022 to 2023, the incidence of down rounds rose from 8% to almost 20%, and when down rounds occurred, in 2023 they entailed post-money valuation declines of more than 50% All of this is consistent with tightening financial conditions and a hangover from easy conditions prevailing in 2020 and 2021.

Related: Private Equity Fundamentals and The Grind Ahead and Market Bipolarity: Exuberance versus Exhaustion

We break down the data by generation and make three observations. First, prior to the pandemic, the % YoY growth in the number of households with an escrow payment among both younger and older Millennials was consistently higher than that of Baby Boomers (Exhibit 4). This makes sense given that Millennials were entering prime home-buying age in 2019. Second, this gap widened rapidly in 2020 and 2021 as record low mortgage rates made home buying more affordable, which allowed an uptick in homeownership, especially among younger generations. Third, as we entered 2022, and home affordability started to plummet with the rapid increase in interest rates, the % YoY growth rate of escrow payments among Millennials converged to that of Gen X and Baby Boomers, with older Millennials (age 35-45) seeing the biggest pullback.

Related: Inflation Adjusted House Prices 3.0% Below Peak and Higher For Longer and The 2024 Housing Outlook and With Housing, Millennials Have Much to Complain About

In the first Program for International Student Assessment (PISA) results since the coronavirus pandemic, 15-year-olds in the United States scored below students in similar industrialized democracies like the United Kingdom, Australia, and Germany, and well behind students in the highest-performing countries such as Singapore, South Korea, and Estonia — continuing an underperformance in math that predated the pandemic. Globally, students lost the equivalent of three-quarters of a year of learning in math, which was the primary focus of the 2022 test. And only a few countries — Singapore, Japan, South Korea, Switzerland, and Australia — maintained high levels of math performance through the pandemic. Countries that kept schools closed longer generally saw bigger declines. Even with its declines in math, the United States lost less ground than some European countries that prioritized opening schools more quickly.

Related: Krugman’s Misleading Scandinavian Comparison and  ACT Scores Fell for Class of 2023, Sixth Consecutive Decline and NAEP Long-Term Trend Assessment Results: Reading and Mathematics

South Korea’s nominee for finance minister compared challenges posed by the country’s aging demographics to the iceberg that sank the Titanic, calling for immediate steps to cope with the situation. “It’s already too late,” Choi Sang-mok told reporters on Tuesday. “A ship like the Titanic has no choice but to crash by the time it discovers a reef.” It would take 30 years at the earliest to see the benefits of efforts to raise the world’s lowest fertility rate, so South Korea should be patient and thoroughly prepare for the implications of current demographic trends, he said. A shrinking workforce is a major cause of Korea’s declining potential growth rate. The number of babies expected per woman fell to 0.78 last year, according to data released by the statistics office.

Related: World’s Lowest Birthrate Sinks Further Despite Cash Payouts to Parents and South Korea Again Smashes Own Record for World’s Lowest Fertility Rate in 2022 and How a Vast Demographic Shift Will Reshape the World

Raimondo said American companies will need to adapt to US national security priorities, including export controls that her department has placed on semiconductor exports.“I know there are CEOs of chip companies in this audience who were a little cranky with me when I did that because you’re losing revenue,” she said. “Such is life. Protecting our national security matters more than short-term revenue.” Raimondo called out Nvidia Corp., which designed chips specifically for the Chinese market after the US imposed its initial round of curbs in October 2022. If you redesign a chip around a particular cut line that enables them to do AI, I’m going to control it the very next day,” Raimondo said. “I have a $200 million budget. That’s like the cost of a few fighter jets. Come on,” she said. “If we’re serious, let’s go fund this operation like it needs to be funded.”

Related: China AI & Semiconductors Rise: US Sanctions Have Failed and US Restricts Nvidia Made-for-China Chips in New Export Rules and Chinese Scientists Create Chip That Can Perform AI Task 3,000 Times Faster Than Nvidia’s A100: Study

While China accounts for 18% of global GDP and only 13% of global consumption, it currently accounts for an extraordinary 31% of global manufacturing. If China maintained annual GDP growth rates of 4–5% while also maintaining the role of manufacturing in its economy, its share of global GDP would rise by less than 3pp in a decade, to 21%, even as its share of global manufacturing would rise by more than 5pp, to 36%. What’s more, if—as a result of the massive shift in investment from the property sector to the manufacturing sector—the GDP share of China’s manufacturing sector rose above its current 28% to, say, 30%, China’s share of global manufacturing would rise to 39%. To accommodate this and prevent a global overproduction crisis, the rest of the world would have to allow its manufacturing share of GDP to drop between 0.5 and 1.0pp.

Related: The Global Constraints To Chinese Growth and EU To Launch Anti-Subsidy Probe into Chinese Electric Vehicles and Managing Economic and Financial Entanglements With China

The October CPI in the United States might be the most important in confirming the unlikely immaculate disinflation that central bankers will have dreamt of since the pandemic—certainly, the “market” took the number as a strong signal that the hiking cycle may have come to an end. The October inflation print was consequential for three reasons: First, core was once more supported by negative prints in re-opening related items (used cars and trucks, -0.8% MoM; airfares, -0.9% MoM and hotels, -2.9% MoM) though somewhat offset by a positive print in medical services (+0.3%MoM for the second month running). Second, commodities ex. used cars and trucks was essentially flat—and has averaged -0.04% MoM over the past 5 months. Third, super core services (ex. housing, medical care, hotels, and airfares) slowed meaningfully to +0.39% MoM from +0.52% MoM in Sept, +0.57% MoM in Aug. and 0.71% MoM in July. This is the lowest monthly print since May and only the fourth time this is printed below 0.4% MoM since Dec. 2021. This is the most important signal from the October reading.

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

Large fiscal deficits combined with future rate cuts will likely lead to significant demand for equities. The wealth distribution of the U.S. is heavily concentrated, suggesting that newly printed Treasuries ultimately end up in the hands of a small group of people. At the same time, the attractiveness of Treasuries is decreasing with the expectation of rate cuts. The market has priced in 125bps of cuts in 2024 after hearing Governor Waller suggest cutting rates due to moderating inflation. This may encourage wealthy investors to rebalancing their rapidly growing portfolio out of bonds and into other assets like equities. The intersection of a structural decline in equity supply with a structural increase in demand suggests the potential for significant upward price pressure.

Related: 2024 US Equity Outlook: “All You Had To Do Was Stay” and R versus G and the National Debt

At a high level, while there has been some decline in core profitability, most of the decrease in quality has come from an influx of unprofitable companies, which, after three years, enter the core cohort and contribute to deteriorating quality. In fact, the companies that have gone public since 2013, net of de-listings, currently account for 57% of our small-cap US universe of 2,750 stocks. Given the steep decline in quality since 2013 among new entrants, this significant influx has contributed to a broad deterioration of quality. To make matters worse, the exits from the small-cap universe have tended to be of higher quality than the core cohort. The new entrants to the US small-cap universe, on a market cap-weighted basis, have been heavily concentrated in biotech, financials, and health care. The SPAC boom of 2021 comprised a large portion of the financial entrants, but the biotech and health care overweights are notable.

Related: The Death of Small Cap Equities? and Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOs and Birth, Death, and Wealth Creation

One question from the Michigan survey asks whether people think now is a good time to buy big household items. When the pandemic hit, Democrats and Republicans alike moved sharply towards “not a good time to buy”. But just months later, when Joe Biden won the presidential election — while Covid-19 still raged — Democrats suddenly declared conditions ripe for purchases of new fridge-freezers. Republicans did not.   It seems US consumer sentiment is becoming the latest victim of expressive responding, where people give incorrect answers to questions to signal wider tribal political or social affiliations. My advice: if you want to know what Americans really think of economic conditions, look at their spending patterns. Unlike cautious Europeans, US consumers are back on the pre-pandemic trendline and buying more stuff than ever.

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

This October, for the first time in more than 3 years, Americans were once again required to make payments on their $1.5T of outstanding Federal student debt. Starting in August, payments to the US Department of Education, most of which represent student loans, surged back to about their pre-pandemic rate of more than $75B annualized, up from the extreme lows of less than $13B annualized seen just months prior. Perhaps most importantly for the broader economy, America’s youngest households have made a substantial cutback in their consumption as student loan payments resume. Since the start of September, real retail spending by those 25-34 years old has fallen by 1.5% at the same time it has risen by between 2.5%-4.2% for all other age groups. However, this recent effect was concentrated among the young with the broader population of all former college attendees regardless of age not seeing a commensurate decrease in spending. 

Related: Debt Moratoria: Evidence from Student Loan Forbearance and The Economic Impact of the Student Loan Restart and Credit Card Delinquencies Continue to Rise—Who Is Missing Payments?

Saudi Arabia and Russia are leading the way, with cuts of 1m barrels a day and 300,000 b/d respectively; the rest of OPEC+ is together contributing another 3.7m b/d in cuts. Recent oil-price drops reflect both expectations of slowing global demand, influenced by concerns over China’s economy, and the fact that geopolitical risk has fallen: few now expect the war in Gaza to turn into a broader regional conflict. At the same time, other producers, including America, Brazil, and Guyana, have increased output, making up for OPEC+ cuts.

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

Mexico has been singled out by investors as one of the countries best placed to economically benefit from geopolitical changes. Referring to Mexico, JPMorgan’s chief executive Jamie Dimon told Bloomberg TV this month: “If you had to pick a country this might be the number one opportunity.” Mexico this year became the US’s largest trading partner, ahead of Canada, as it began to win a bigger share of the ground lost by China.  Sceptics point out that foreign direct investment, which rose to a record $32.9 billion in the first nine months of this year, mostly reflects reinvestment of profits rather than new projects.

Related: Mexico Seeks to Solidify Rank As Top U.S. Trade Partner, Push Further Past China and Pettis on “Friend-Shoring” and  War, AI and Climate Change Shake Up $32 Trillion in Global Trade

And the heart of the problem here is that global aging and population decline are mainly driven by a withering away of the family— the basic unit of human life up to this point. And therein lies the problem. As an arithmetic matter, the greying of societies is driven much more by smaller families than longer lives. But longer lives also mean that middle aged and even elderly children will increasingly be responsible for ancient living parents. Consider the outlook for China. Demographic simulations by Ashton Verdery and myself suggest the dilemmas that may face middle aged people in China in less than a generation: By 2040 it is likely that Sixtysomething couples in China will have at least one living parent to look after; many will have two or three to think about. But those prospective elders are elders with descendants. With the rise in (voluntary) childlessness around the world, growing numbers of elders will have no relatives—or no close relatives—to count on.

Related: A Revolution Is Coming for China’s Families and Millennials Aren’t Having Kids. Here Are The Reasons Why and Why Americans Are Having Fewer Babies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Related: There Is No "Stealth Fiscal Stimulus"

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Related: Milei’s Challenge

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Related: A Brief History of Dollar Hatred

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Related: Neutralizing QT and Probing LCLoR

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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