ASML, Europe’s Most Valuable Tech Firm, Is at the Heart of the US-China Chip War

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September 29, 2023

Accounting for the Widening Mortality Gap Between American Adults With and Without a BAAnne Case and Angus DeatonBrookings Papers On Economic Activity

As of 2021, US adults with a college degree have a life expectancy at age 25 on par with Japan, but US adults without a BA have a life expectancy that’s 8.5 years lower, significantly below rich country norms.

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

A Status Check on Bank Lending and Bank Balance SheetsManuel AbecasisGoldman Sachs

.@GoldmanSachs estimates that tighter financial conditions and lending standards will generate “a roughly 0.2pp drag on GDP growth next year, down from around 1.0pp in 2023 and 1.2pp in 2022.”

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

Not Such A Cruel SummerDavid Michael Tinsle, Anna Zhou, Taylor Bowley, and Liz Everett KrisbergBank of America

Bank of America transaction data suggests that consumer spending is broadly stable; faster wage growth for lower-income households helps offset pressure from higher credit card balances.

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

Feeding the World Once Brought the US Untold Influence—No MoreIsis Almeida, Gerson Freitas, and Michael HirtzerBloomberg

The USDA estimates the country will run an agricultural trade deficit of $19B this fiscal year, driven by changes in American eating habits and increased global agricultural productivity.

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

Europe Should Worry But Not Panic Over ChinaMartin SandbuFinancial Times

A surge in imports caused the EU’s trade deficit with China to roughly triple from 2018 to 2022 to almost €400B, but the deficit has declined by about 25% this year.

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

September 28, 2023

Hidden Exposure: Measuring U.S. Supply Chain RelianceRichard Baldwin, Rebecca Freeman, and Angelos TheodorakopoulosBrookings Papers on Economic Activity

After accounting for Chinese inputs into industrial imports from other countries, US exposure to China in 2018 was 4x the headline level. @BaldwinRE @freeman_reb @Angel__Theo

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

Why Are Long Rates Going Up?Torsten SløkApollo

Torsten Sløk @apolloglobal notes that the Treasury market is suffering from poor supply/demand dynamics. He writes that “the employment report next week will be very important and will likely set the tone for markets in Q4.”

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

What Should the 2023 Washington Consensus Be?Larry SummersPeterson Institute for International Economics

.@LHSummers issues a warning that America’s fiscal trajectory is leaving it little slack for meeting contingencies, “military or non-military.”

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

Americans Saved $1.1 Trillion Less Than Previously Thought From 2017-2022Rich Miller and Reade PickertBloomberg

Revised @BEA_News numbers show Americans saved $1.1T less over the last six years than previous estimates.

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

On Getting Older Euro Intelligence Staff Euro Intelligence

The 5 largest American firms were all founded within the last 50 years, vs. only one firm in the German Dax 30. Euro Intelligence staff argues that this is driven by government policies.

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

After Years of Sharp Decline, Will China’s Birth Rate Rebound?He YafuCaixin

China’s birth rate has halved since 2016. The majority of the decline took place prior to the pandemic.

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

September 27, 2023

US Capital is Depreciating FasterTimothy TaylorConversable Economist

US net investment has declined from its 1950-80 average of 10% of GDP to 5%. @TimothyTTaylor argues that the cause is increased investment in information technology that depreciates more quickly than plant and equipment.

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

Related: Capital Allocation

Trading Stages in the Company Life CycleMichael Mauboussin and Dan CallahanMorgan Stanley

The spread between return on invested capital and the weighted average cost of capital is highest early in a firm’s life cycle and then declines until late in a firm’s life cycle. @mjmauboussin

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

The Consequences of Remote and Hybrid Instruction During the PandemicDan Goldhaber, Thomas Kane, Andrew McEachin, et al.American Economic Review

In a study of nearly 10,000 US schools, @CEDR_US, @emily_r_morton, and @ajmceachin find that remote instruction during the pandemic was a primary driver of widening math achievement gaps in high-poverty districts. @HarvardCEPR

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

Why Are China’s Households in the Doldrums?Jeff DawsonFederal Reserve Bank of New York

A Keynesian paradox of thrift may be taking hold in China as the household savings rate rises in response to fears about the direction of the Chinese economy. @NewYorkFed

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

Is Chinese Youth Unemployment As Bad As It Looks?Nancy QianProject Syndicate

Nancy Qian argues China’s youth “will be wealthier than any other generation in China’s history,” but the mismatch between young people’s expectations and reality risks political unrest.

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

How China Can Avoid the Japan TrapMartin WolfFinancial Times

Martin Wolf argues that while the risk of a true financial crisis in China is low, China will not be able to generate growth through an export boom or consistent current account surpluses. The choice is rebalancing or slow growth.

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

September 26, 2023

What Was I Made For: Large Language Models in the Real WorldMichael CembalestJ.P. Morgan

Michael Cembalest @jpmorgan argues that AI’s impact on equity prices “should be much more durable than other recent investment themes, but the productivity shock that its most vocal adherents expect seems exaggerated.”

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

Setser On US Current Account DeficitBrad Setser@Brad_Setser

Over the past four quarters, inflows from official investors covered half of the US’s current account deficit. @Brad_Setser

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

Corporate America Promised to Hire a Lot More People of Color.It Actually DidJeff Green, David Ingold, Raeedah Wahid, Cedric Sam and Daniela Sirtori-CortinaBloomberg

A Bloomberg analysis found that, for 88 S&P 100 companies, 94% of job growth in 2021 went to non-white workers.

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

Inflation Expectations, the Phillips Curve, and Stock PricesKevin Lansing and Federico NuceraFederal Reserve Bank of San Francisco

Looking at postwar data, researchers at @sffed find that there was a regime shift around 1999 towards well-anchored inflation expectations that were not sensitive to incoming CPI data.

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

Commercial Real Estate’s Next Big Headache: Spiraling Insurance CostsKonrad PutzierWall Street Journal

Since 2017, commercial real estate insurance costs have grown at 7.6% per year. Developers report that new projects are sometimes seeing no insurance bids.

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

Why Trump Lost GeorgiaPatrick RuffiniThe Intersection

.@PatrickRuffini finds the 5.3pp shift in Georgia towards the Democratic presidential candidate from 2016 to 2020 was driven by vote switching from third party or Trump to Biden by 3.1pp, and demographic change worth 2.2pp.

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

Pentagon Plan to Buy Thousands of Drones Faces Looming SnagsDoug CameronWall Street Journal

The U.S. Department of Defense wants to buy thousands of drones in the next 18 months and as many as 2,000 larger uncrewed jets, but is running into supply constraints of both material and skilled labor.

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

September 25, 2023

Are We Destined For A Zero-Sum Future?John Burn-MurdochFinancial Times

Americans and Britons have shifted from believing “wealth can grow so there’s enough for everyone” to “people can only get rich at the expense of others.” Democrats who voted for Trump in 2016 scored very high on zero-sum beliefs. @jburnmurdoch

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

Zero-Sum Thinking and the Roots of U.S. Political DividesSahil Chinoy, Nathan Nunn, Sandra Sequeira and Stefanie StantchevaNational Bureau of Economic Research

Zero-sum thinking in terms of political and policy views is strongly associated with lower levels of intergenerational upward mobility. @S_Stantcheva @DrNathanNunn

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

Are Manufacturing Jobs Still Good Jobs? An Exploration of the Manufacturing Wage PremiumKimberly Bayard, Tomaz Cajner, Vivi Gregorich, and Maria TitoFederal Reserve Board

A @federalreserve analysis from last year finds the manufacturing wage premium has disappeared for most manufacturing jobs as of April 2018. The decline in unionization is responsible for “more than 70% of the drop in the manufacturing wage premium.”

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

Maxing OutJoseph WangFed Guy Blog

.@FedGuy12 writes that the Treasury market is likely to be volatile going forward. He speculates that rates are likely to go higher, as major recent buyers of Treasuries all seem to have exhausted their capacity to take on more Treasuries.

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

How The US Is Crushing Europe’s Domestic ExchangesPhilip AugarFinancial Times

US equities account for nearly 70% of the MSCI World index, and the 10 largest US equities are larger than the combined market capitalization of Japan, the UK, France, Canada, and Germany. European-based firms are looking at listing on US exchanges.

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

September 22, 2023

The Limits of Taxing the RichBrian RiedlManhattan Institute

Stabilizing US federal debt at 100% of GDP will require increased tax revenue and non-interest spending cuts of 5% of GDP going forward. @Brian_Riedl suggests that increasing tax rates on the rich could yield at most 2% of GDP and likely less.

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

Another Yield High as US 10-Year Jumps Above Key 4.5% Level in Post-Fed Bond RoutGarfield Reynolds and Ruth CarsonBloomberg

The 10-year Treasury yield went above 4.5% for the first time since 2007. The 30-year yield is at the highest level since 2011.

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

The Fed's Bullishness Is Pushing Up RatesMatt KleinThe Overshoot

.@M_C_Klein notes that the spot 5-year yield on TIPS is at levels not seen since before the financial crisis. He suggests that if term premia revert to historical levels, there would be negative implications for all asset prices.

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

US Households Are Big Buyers of TreasuriesTorsten SløkApollo

Torsten Sløk @apolloglobal notes that since the start of the hiking cycle, American households have bought $1.5 trillion in Treasuries.

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

The Fed Sees a Softer, Higher LandingJoseph PolitanoApricitas Economics

Real rates imply a long-run natural rate of between 4 and 4.5%, higher than the Fed’s projection. @JosephPolitano

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

Rebound in Immigration Comes to Economy’s AidAmara Omeokwe and Michelle HackmanWall Street Journal

32mm foreign-born workers made up 18% of the American labor force last year, the highest level since the series was initially published in 1996.

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

Parts of America are Becoming UninsurableEconomist StaffThe Economist

In Florida, the state-backed insurer of last resort is now the largest home insurer. California’s state-backed insurer almost doubled its policy count between 2018 and 2021.

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

September 21, 2023

Nearly Half of All Young Adults Live With Mom and Dad — and They Like ItPaulina Cachero and Claire BallentineBloomberg

45% of Americans (23mm) aged 18-29 are living with their families, the highest rate since the 1940s.

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

Democrats Have Been Winning Big In Special ElectionsNathaniel RakichABC News

Democrats have been outperforming in special elections in 2023; their margins have been 11pp higher than the district’s partisan margins in the last two presidential elections. @baseballot

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

Trends in U.S. Business Dynamism and the Innovation LandscapeUfuk Akcigit, Sina Ates and Craig ChikisEconomic Innovation Group

A new paper documents weaker technological diffusion in the economy and relates that to higher concentration of patents and a rise in patent litigation, factors that benefit incumbents and harm new entrants. @ProfUfukAkcigit @UChi_Economics

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

September 20, 2023

American Labor’s Real Problem: It Isn’t Productive EnoughGreg IpWall Street Journal

As the UAW strike gets underway, @greg_ip notes that American manufacturing productivity is lagging peer economies. Since 2009, manufacturing output per hour has grown at only 0.2% per year in the US.

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

Generation Next: Experimentation with AIGary Charness, Brian Jabarian and John ListNational Bureau of Economic Research

Large Language Models (LLM) will likely accelerate knowledge creation by making science research and data more transparent and rigorous. @Econ_4_Everyone @brian_jabarian

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

Is a Trump-Biden Rematch Inevitable?Nate SilverSilver Bulletin

.@NateSilver538 argues that the prediction markets are underpricing both Trump and Biden’s odds of being their party’s nominee.

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

Public Trust in Government: 1958-2023Pew StaffPew Research Center

In 2023, only 16% of Americans said they trust the government always/most of the time. Republican-leaning voters are lower trust at 8% relative to 25% of Democratic-leaning voters.

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

September 19, 2023

Business Formation BoomAnna Zhou and Taylor BowleyBank of America

New business applications by firms that are likely to hire workers remain elevated relative to pre-pandemic; in July 2023, they were 40% higher than the mean 2019 level. @BankofAmerica

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

America's Missing Empty HomesJoseph PolitanoApricitas Economics

Residential vacancy rates are at multi-decade lows. Raising unoccupied inventory rates back to pre-pandemic levels would require building 2.7mm units (vs. current pacing of 1.4 million units for 2023).@JosephPolitano

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

The Geography of Working From Home Begins to Shift AgainJustin FoxBloomberg

.@foxjust notes that two-thirds of America’s top 20 “work from home” neighborhoods in 2022 are within commuting distance to major cities’ central business districts.

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

China’s “Demographic Dividend” Appears to be a MythEconomist StaffThe Economist

Between 1982 to 2015 China’s working-age population grew from 600mm to 1bn; however, LFP dropped from 85% to 70% during the same period. This suggests that a “demographic dividend” didn’t drive Chinese growth.

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

The Root of China’s Growing Youth Unemployment CrisisBenn Steil and Elisabeth HardingCouncil on Foreign Relations

.@BennSteil argues the disconnect between the number of Chinese college graduates and service jobs will “fuel discontent among an age cohort on which China will depend for its future national vitality.”

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

September 18, 2023

BIS Quarterly ReviewClaudio Borio, Stijn Claessens, Benoît Mojon, Hyun Song Shin and Nikola TarashevBank for International Settlements

In their quarterly report, @BIS_org notes investors now expect policy rates to stay higher for longer. @HyunSongShin

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

Liquidity EventJoseph WangFed Guy Blog

.@FedGuy12 writes that Treasury liquidity is low as dealer balance sheets have not scaled up with Treasury issuance. The average daily volume of Treasuries has increased very slowly over the past decade despite a flood of issuance.

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

Bond Mountaineers Easily Scale the Maturity WallJonathan LevinBloomberg

High yield spreads are falling as firms are able to find financing at a mean of 378bps above Treasuries, 200bps lower than the 2022 high. @JonathanJLevin

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

Centaurs and Cyborgs on the Jagged FrontierEthan Mollick One Useful Thing

Boston Consulting Group consultants using AI finished 12.2% more tasks on average, completed tasks 25.1% more quickly, and produced 40% higher quality results than a control group without AI. @emollick

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

Giorgia Meloni Calls For EU Help To Deal With Surge In Migrant ArrivalsAmy Kazmin and Giuliana RicozziFinancial Times

At least 12,000 African migrants have arrived on the Italian island of Lampedusa (population of 6,000). So far 128,600 migrants have reached Italy in 2023.

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

One in 10 Japanese Now Aged Over 80, Population Report ShowsIsabel ReynoldsBloomberg

Persons aged over 80 now account for 10% of Japan’s population; almost 30% of the population is over 65.

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

September 15, 2023

Is Underlying Inflation Finally Decelerating, Or Revealing Itself?Matt KleinThe Overshoot

Underlying wage growth is rising 2pp faster than before the pandemic which is inconsistent with the Fed’s target. @M_C_Klein

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

UAW Strikes at Plants Owned by GM, Ford, StellantisNora Eckert and Ryan FeltonWall Street Journal

The United Auto Workers strike against the Big Three is underway. The firms had offered 17.5-20% wage increases over four years, less than the UAW’s mid-30% demand.

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

Union Voters Could Be Decisive in 2024Michael BaharaeenThe Liberal Patriot

As the UAW strike gets underway @mbaharaeen notes that union households will play a significant role in the 2024 election. In 2020 union households made up 21% of the electorate in MI, 18% in PA, and 14% in WI.

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

How to Avoid a Green-Metals CrunchEconomist StaffThe Economist

Meeting decarbonization goals will require significant investments in mining and refining. Industry leaders estimate a copper supply gap of 2m-4m tonnes, 6-12% of demand by 2030.

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

Repeat After Me: Building Any New Homes Reduces Housing Costs For AllJohn Burn-MurdochFinancial Times

Recent studies in the US, Sweden, and Finland demonstrate that new unsubsidized housing construction enhances overall affordability by freeing up housing for people with lower incomes. @jburnmurdoch

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

September 14, 2023

The Q4 Pothole: Student Loans, Shutdown, and StrikesRonnie Walker and Alec PhillipsGoldman Sachs

.@GoldmanSachs argues that the US economy is facing three headwinds in Q4: a resumption of student loan payments, a UAW strike, and a potential government shutdown, slowing quarterly annualized growth from 3.1% in Q3 to 1.3% in Q4.

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

Breaking Down the Sources of US Economic ResilienceKaren Karniol-Tambour and Shane MurphyBridgewater

Bridgewater writes that fiscal deficits have thus far helped keep the economy from slowing, but as net Treasury issuance ramps up, deficits are likely to result in “higher interest rates and lower asset prices.”

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

Median Income Is Down Again. Are There Any Silver Linings in the Data?Jeremy HorpedahlEconomist Writing Every Day

Median family incomes have declined every year since 2019; however, @jmhorp notes that median black household income is now the highest it’s ever been.

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

Huawei’s Breakthrough Still Shows China’s Limits in Tech RaceJacky WongWall Street Journal

Huawei’s new G5 phone demonstrates that the Chinese semiconductor industry can deliver advanced chips even without access to US, Dutch, and Japanese technologies blocked by sanctions, potentially enabling Huawei to regain lost market share.

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

China AI & Semiconductors Rise: US Sanctions Have FailedDylan Patel, Afzal Ahmad, and Myron XieSemi Analysis

Citing Huawei’s new flagship chip, @dylan522p argues that US export controls on China’s semiconductor sector are failing and suggests several steps the US could take that “could stop the Chinese semiconductor industry in its tracks.”

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

September 13, 2023

Furman On CPIJason Furman@jasonfurman

Core CPI grew at an annual rate 3.4% in August relative to <2% in the prior two months. @jasonfurman argues if September and October are in line with August the Fed should hike in December.

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

DM Debt - How to Move MountainsGeorge Cole and Sara GrutGoldman Sachs

A @GoldmanSachs analysis argues that high interest rates are likely to continue given current high inflation and wider deficits, and notes that “the US and UK are the most obvious candidates for a duration risk premium repricing.”

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

U.S. Incomes Fall for Third Straight YearGwynn Guilford and Paul OverbergWall Street Journal

US median household income fell in real terms by 2.1% in 2022 for the third straight year, as inflation outpaced wage gains. Since its pre-pandemic peak, real household income has fallen by almost 5%.

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

EU To Launch Anti-Subsidy Probe into Chinese Electric VehiclesAlice Hancock, Henry Foy, Hudson Lockett and Peter CampbellFinancial Times

The EU is launching an anti-subsidy investigation into Chinese electric vehicles; the investigation will likely result in significant tariffs on Chinese manufacturers.

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

Danish Weight Loss Drugs vs. Chinese Cars: Two Models of Export BoomsMatt KleinThe Overshoot

Contrasting Demark’s Novo Nordisk and China’s car exporters, @M_C_Klein distinguishes “positive-sum” trade which is driven by something new and valuable from “negative-sum” trade which is driven by overcapacity.

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

China Must Slow Down Investment If It Wants To Rebalance its Debt-Laden EconomyMichael PettisSouth China Morning Post

China is facing a choice between low GDP growth or encouraging more domestic consumption. @michaelxpettis calculates that transferring 1.5% of GDP to the household sector annually might enable a 4-5% growth rate.

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

Apple to Sell Made-in-India iPhones on Launch Day for First TimeSankalp PhartiyalBloomberg

For the first time, Apple is selling a new generation iPhone manufactured in India on launch day. Apple is trying to move at least 25% of its iPhone production out of China by next year.

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

September 12, 2023

Monthly Budget Review: August 2023Nathaniel Frentz and Justin LatusCongressional Budget Office

According to @USCBO, the federal budget deficit grew by $600B for the first 11 months of fiscal 2023 vs. fiscal 2022. Revenues were down 10% and outlays were up 3%.

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

Outlagging the RestJoseph WangFed Guy Blog

The prevalence of long-dated mortgages, and a reliance on capital markets financing, has made the US relatively immune to rate increases. @FedGuy12 writes that the dollar is likely to strengthen as foreign central banks cut rates before the Fed.

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

Corporate Profits in the Aftermath of COVID-19Berardino PalazzoFederal Reserve Board

New @federalreserve research demonstrates elevated corporate profit margins during the pandemic period were a function of government spending and lower interest expenses.

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

China Set to Overtake Japan as World’s Biggest Car ExporterEdward White, Song Jung-a, Leo Lewis and Andy LinFinancial Times

China is set to become the world’s largest car exporter, shipping 2.8mm vehicles through July. An industry analyst suggests that Chinese EV and legacy ICE manufacturers have excess capacity that may be as large as 25mm units/year.

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

An Update on the Stock-Bond CorrelationGreg ObenshainVerdad

Stock-bond correlation is positive when core inflation averages above 4%. @GregObenshain notes that, in high inflation environments, inflation shocks tend to suggest a policy response that sends stock and bond prices in the same direction.

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

Trump’s Electoral College Edge Seems to Be FadingNate CohnNew York Times

Trump’s edge in the electoral college is fading as polling shows Trump’s improved margins with non-white voters may have minimal impact in battleground states. @Nate_Cohn

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

Climate Change Is Causing an Insurance Crisis in LouisianaLeslie KaufmanBloomberg

In Louisiana the mean home insurance premium rose 6.7% in 2021 and 18.5% in 2022 as insurers reprice their risk.

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

Pandemic Population Boom in Rural Hotspots Sparks ResentmentNazmul Ahasan and Gregory KorteBloomberg

US non-metro population grew faster than urban population for the first time in three decades in 2021. Home prices in the 10 fastest-growing rural counties are up 40% in the past three years.

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

The ‘Eye-Watering’ Cost of Ending the Peace DividendJohn Paul RathboneFinancial Times

Western countries are facing tradeoffs to finance increased defense spending as the post-Cold War “peace dividend” fades in the face of Chinese and Russian revanchism, with 20 of 31 NATO members still below the 2% of GDP target.

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

September 11, 2023

Is the Fiscal Picture Getting Better or Worse? Yes.Paul KrugmanKrugman Wonks Out

.@paulkrugman acknowledges that “we’re going to keep running deficits bigger than even fiscal doves like myself would like.” He advocates raising taxes on the rich and middle class.

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

A Few Stocks Drive the Stock Market: Dot.com Vs. Today Vs. the Last 100 YearsJesper RangvidRangvid's Blog

Seven stocks made up 70% of S&P 500 value creation in 2023, but Jesper Rangvid argues that this isn’t without historical precedent. In the Dot.com period, Cisco, Dell, Intel, Lucent, and Microsoft had an even more extreme run-up.

The hype around the “Magnificent 7” stocks [Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla] that have driven the stock market this year is reminiscent of the dot.com era, which ended with a spectacular crash. However, there are two reasons why today’s developments seem less worrying: The rise of hyped stocks was more extreme in the Dot.com era, as was the rise of the rest of the market. While today’s situation is exceptional, with seven stocks accounting for nearly 30% of the total value of the S&P 500, the rule in the past has been that only a few stocks generated most of the value creation of the stock market in the US and internationally.

Long-Term Shareholder Returns: Evidence From 64,000 Global StocksHendrik Bessembinder, Te-Feng Chen, Goeun Choi and K.C. John WeiFinancial Analysts Journal

Hendrik Bessembinder finds that the best-performing 1,526 global firms (2.4% of total) accounted for all of the $75.7T in net global stock market wealth creation between 1990 and 2020.

We calculate net global stock market wealth creation of $US 75.7 trillion btw 1990 and 2020. Wealth creation is highly concentrated. Five firms (0.008% of the total) with the largest wealth creation during the January 1990 to December 2020 period (Apple, Microsoft, Amazon, Alphabet, and Tencent) accounted for 10.3% of global net wealth creation. The best-performing 159 firms (0.25% of total) accounted for half of global net wealth creation. The best-performing 1,526 firms (2.39% of the total) can account for all net global wealth creation. Skewness in compound returns is even stronger outside the U.S. The present sample includes 46,723 non-U.S. stocks. Of these, 42.6% generated buy-and-hold returns measured in U.S. dollars that exceed one-month U.S. Treasury bill returns over matched horizons. By comparison, 44.8% of the 17,776 U.S. stocks in the present sample outperformed Treasury bills.

How Weight Loss Drugs Stopped a Danish RecessionJoseph PolitanoApricitas Economics

US demand for Ozempic stopped a Danish recession. Excluding the pharmaceutical sector, Danish Q2 2023 GDP would have been down 0.9% vs. up 1.1% year-over-year. @josephpolitano

Demand for Ozempic (a diabetes drug often sought for weight loss—though not FDA-approved for that purpose) and Wegovy (the new drug explicitly approved for treating obesity), is so strong that it functionally prevented a recession in Denmark—headline GDP is up roughly 1.1% over the last year, but excluding the pharmaceutical industry it’s down -0.9%, meaning drugmakers alone have added roughly 2% to Danish economic growth. Booming exports and high dollar earnings are allowing Danmarks Nationalbank—the Danish Central Bank—to keep rates lower than they otherwise would in order to maintain their currency peg to the Euro. Novo Nordisk, the Danish pharmaceutical giant has rapidly become the most valuable publicly traded company in Europe. Sales have risen 30% in the first half of this year, profits are up 40%, and the company is having to ration supply as production struggles to keep up with growth in orders.

Related: More Bang for Your Buck

The Pandemic Has Broken a Closely Followed Survey of SentimentEconomist StaffThe Economist

Since the pandemic, the University of Michigan’s consumer sentiment survey has been much lower than expected based on strong economic indicators. Gloomy sentiment has not yet impacted consumer spending.

We built a statistical model to predict the monthly consumer-sentiment index between 1980 and 2016 using a broad battery of economic data. A combination of 13 variables, including inflation, unemployment and petrol prices explained 86% of the variation in the index in this period, a very good fit. Before the pandemic, the relationships between these indicators and consumer sentiment were relatively stable. Although Americans report being worried about their finances, they are behaving as flush as ever—and in economic forecasting, actions speak louder than words. When used to project future spending rather than consumer sentiment, the same battery of economic variables has fully maintained its forecasting power since 2020. In contrast, since covid began, the correlation between sentiment and both current and future spending has vanished.

Supply-Side Expansion Has Driven the Decline in InflationMike KonczalRoosevelt Institute

Disinflation has been driven by expanded supply, not decreased demand. @mtkonczal finds of 123 core PCE items 73% of goods and 66% of services see “prices falling with quantities increasing,” consistent with expanded supply.

Note that this is a deceleration of the rate of increase. So if an item had 5% price growth and 1% quantity growth at the end of 2022, and then it had a 3% price growth and 2% quantity growth ending July 2023, it would show up as (-2,+1), or on the bottom right quadrant. It would be categorized as supply-increasing in this exercise, as the rate of price increases fell while the rate of quantity increases picked up. At the moment, the inflation story is exactly what a “soft landing” would have predicted. A combination of resolving supply shocks and a subtle decrease in demand has driven inflation down dramatically, with no cost to the level of employment.

Lithium Discovery in US Volcano Could be Biggest Deposit Ever FoundAnthony KingChemistry World

A lithium deposit in a volcanic crater on the Nevada–Oregon border is likely the world’s largest. Mining could begin by 2026. @ChemistryWorld

An estimated 20 to 40 million tonnes of lithium metal lie within a volcanic crater formed around 16 million years ago. This is notably larger than the lithium deposits found beneath a Bolivian salt flat, previously considered the largest deposit in the world. Thomas Benson, a geologist at Lithium Americas Corporation expects to begin mining in 2026. It will remove clay with water and then separate out the small lithium-bearing grains from larger minerals by centrifuging. The clay will then be leached in vats of sulfuric acid to extract lithium.

Vietnam and US Upgrade Relations in Move to Counter ChinaMercedes Ruehl, James Politi, Henry Foy and Stefania PalmaFinancial Times

Vietnam has upgraded its relationship with the United States to the level previously reserved for China, Russia, India, and as of last year, South Korea. Vietnam had long avoided the move for fear of upsetting Beijing.

Vietnam has upgraded its relationship with the US to the highest level. The US signed a “comprehensive strategic partnership” with the south-east Asian country on Sunday after President Joe Biden arrived in Hanoi from New Delhi, where he had attended the G20 summit. The symbolic but significant change, which follows years of lobbying by Washington, raises the US by two levels to the top status in Vietnam’s bilateral ties hierarchy. The status is one previously reserved only for China, Russia, India and, as of last year, South Korea. Vietnam had long avoided the move for fear of upsetting Beijing. As well as having security implications, such as potential defence co-operation, the new US status also carries economic importance, especially in crucial industries such as semiconductors.

Meloni Tells China That Italy Plans to Exit Belt and RoadAntonio Vanuzzo and Alberto NardelliBloomberg

Italy has privately told China it plans to withdraw from Xi’s signature Belt and Road Initiative.

During a meeting on Saturday on the sidelines of the Group of 20 summit in India, Giorgia Meloni told Chinese Premier Li Qiang that Italy plans to withdraw from Chinese President Xi Jinping’s signature Belt and Road Initiative while still looking to maintain friendly relations with Beijing, according to a person familiar with the matter, who asked not to be named. Italy officially signed up for the pact in 2019.

September 8, 2023

Analyzing State Resilience to Weather and Climate DisastersCelso Brunetti, Benjamin Dennis, Gurubala Kotta and Adam SmithFederal Reserve Board

Damages from US weather events that cost >$1B have risen from $20B annually during the 1980s to $95B a year between 2010-2019, and $153B in 2021. Property insurers, who bear 48% of these costs, are beginning to reduce coverage. @FedResearch

Nationally, the real cost of [weather and climate] disasters has risen from $20B per year in the 1980s to nearly $95B per year during the period 2010–19. In 2021, damages increased to about $153B. Costs were absorbed by four entities: property insurers (48%), uninsured or underinsured homeowners, businesses, and agricultural entities (37%), the federal government (11%), and state and local governments (4%). If property insurers were to exit certain markets or decrease coverage in states with greater exposure to physical risks due to decreased profitability, a larger share of damages would not be fully insured. Two major insurers recently announced that they will no longer accept new applications for business and personal property insurance coverage in California, citing increasing wildfire risk as a key factor in that decision. In addition, several major hurricanes during 2020-22 forced numerous insurance companies into bankruptcy in Louisiana and Florida.

Public Finance Resilience in the Transition Towards Carbon Neutrality: Modelling Policy Instruments in a Global Net-Zero EmissionsJean Fouré, Rob Dellink, Elisa Lanzi and Filippo PavanelloOrganisation for Economic Co-operation and Development

OECD analysis projects that achieving net zero carbon emissions by 2050 will reduce global GDP by 5.6% relative to the current baseline.

While the global economy keeps growing over time, the NZE Ambition [net zero emissions] scenario results in a slowdown of GDP growth, both between 2019 and 2030 and between 2030 and 2050. The average global GDP growth rate goes from 2.3% per annum in the Baseline between 2019 and 2030 to 2.0% and decreases from 2.1% between 2030 and 2050 in the Baseline scenario to 1.9% in the NZE Ambition scenario. This leads to a reduction of global GDP compared to Baseline by 2.6% in 2030 and 5.6% in 2050.

The Fall in Home Prices May Already Be OverNicole FriedmanWall Street Journal

Home prices rose in July after declining for five consecutive months. High interest rates have kept inventories very low across all markets.

High interest rates have prompted homeowners to stay put rather than buy new homes and take on more expensive mortgages, resulting in an unusually low inventory of homes for sale. Sales of previously owned homes are now down about 36% from January 2022. But prices are generally holding firm outside of a few trouble spots.

How to Interpret Polling Showing Biden’s Loss of Nonwhite SupportNate CohnNew York Times

.@Nate_Cohn argues that current polling suggests a significant decline in black turnout in 2024 relative to 2020.

Looking back over the last few decades, there’s a clear relationship between the racial turnout gap — the difference between white and Black turnout — and the proportion of Black registered voters who back Democrats in pre-election polls since 1980. Or put differently: When Black voters don’t support Democrats, they tend not to vote. It’s possible that the Black voters who back Mr. Trump in the polls today will ultimately show up for him next November. But for now, when I see Mr. Biden’s share among Black voters slip into the 60s and 70s in the polls, I mostly see yet another decline in the Black share of the electorate, at least “if the election were held today.” If there’s any good news for Mr. Biden here, it’s that the election is still 14 months away.

India’s Military Studying Options for Any China-Taiwan WarSudhi Ranjan SenBloomberg

India’s military has started high-level planning for how India would manage a Taiwan contingency; ranging from serving as a logistics hub to opening a new theater of war along the India-China border.

Defense Chief General Anil Chauhan — India’s top military commander — commissioned a study to examine the wider impact of any war over the island that also involves the US and its allies, and what action India could take in response. One option the Indian military will study involves serving as a logistics hub to provide repair and maintenance facilities for allied warships and aircraft, as well as food, fuel and medical equipment for armies resisting China. A more extreme scenario would assess the potential for India to get directly involved along their northern border, opening a new theater of war for China. While no deadline has been set to complete the study, the Indian military is under orders to finish it as soon as possible, one of the officials said.

September 7, 2023

U.S. Job Churn Has Normalized. Wage Growth and Underlying Inflation Have Not. (Yet?)Matt KleinThe Overshoot

Job churn has normalized, however, it’s unclear whether recent growth in average hourly worker pay is consistent with the Fed’s 2% target. @M_C_Klein

It is unclear whether the normalization of churn that has already occurred will be sufficient to bring wage growth—and therefore consumer spending power—back in line with what would be consistent with the Fed’s inflation target. My preferred high-frequency measure of underlying wage growth has been the three-month average of the monthly change in average hourly pay for nonsupervisory workers outside of the retail, leisure, and hospitality industries. After hovering around 5% since last summer, it has come down sharply in the past three months to just 4% in June-August. That is encouraging news and seems to fit with the recent moves in the quit rate and the job openings rate.

Autoworkers Have Good Reason to Demand a Big RaiseJustin FoxBloomberg

The average hourly wage for auto workers has dropped 30% since 2003 and has converged with non-auto production workers. The UAW is attempting to arrest the trend, but the Big Three’s profits would be erased if they meet the UAW’s demands. @foxjust

During the past 20 years, the inflation-adjusted average hourly wage of non-management US workers, also known as production and nonsupervisory employees, has risen 13%. That’s not exactly a rip-roaring pace — 0.6% a year. Then again, real hourly wages for production and nonsupervisory employees fell in the 1970s and 1980s and rose at only a 0.3% annual pace in the 1990s. The average hourly wage for autoworkers on the production line has dropped 30% since 2003. GM, Ford and Stellantis are all profitable, with a combined net income of $42B for the 12 months ended in June and the amount coming from their US operations probably adding up to somewhat less than $30B. Bloomberg reported last month that Ford and GM’s internal estimates of the costs of the UAW’s demands peg them at $80B per company over the next four years, which would wipe out all those profits and then some.

What Is the Probability of a Recession? The Message from Yield SpreadsChristopher NeelyFederal Reserve Bank of St. Louis

The nominal yield curve spread predicts a 65% probability of a recession within a year, “unprecedentedly” high for a false recession signal. Real spreads imply a 40% probability, the highest in the history of the series. @stlouisfed

The nominal yield spread is currently negative—quite low by historical standards—and predicts a 65% probability of recession in 12 months. This recession probability would be unprecedentedly high for a false positive. The “real” interest rate spread implies a still elevated, but lower probability of recession in 12 months, of about 40%. This 40% probability is the highest in the history of the series, exceeding that even in any actual recession. Even if a model were literally correct instead of an approximation, these models predict 40%, 50%, and 60% probabilities of recessions, which means there is a fair likelihood of a soft landing.

Consistent Signs of Erosion in Black and Hispanic Support for BidenNate CohnNew York Times

Racial polarization in voting has been declining since 2012 in the US. @Nate_Cohn finds Biden underperforming relative to 2020 in current polling with non-white voters; 5% of 2020 non-white Biden voters now say they support Trump.

Mr. Biden’s weakness among nonwhite voters is broad, spanning virtually every demographic category and racial group, including a 72-11 lead among Black voters and a 47-35 lead among Hispanic registrants. The sample of Asian voters is not large enough to report, though nonwhite voters who aren’t Black or Hispanic — whether Asian, Native American, multiracial or something else — back Mr. Biden by just 40-39. In all three cases, Mr. Biden’s tallies are well beneath his standing in the last election. The survey finds evidence that a modest but important 5% of nonwhite Biden voters now support Mr. Trump, including 8% of Hispanic voters who say they backed Mr. Biden in 2020.

Pentagon Plans Vast AI Fleet to Counter China ThreatNancy Youssef and Michael GordonWall Street Journal

The US military intends to field thousands of “cheap” drones and autonomous systems within the next two years to counter threats from China and other adversaries.

The Pentagon intends to field a vast network of AI-powered technology, drones and autonomous systems within the next two years to counter threats from China and other adversaries. Kathleen Hicks, the deputy secretary of defense, provided new details in a speech Wednesday about the department’s plans to spend hundreds of millions of dollars to produce an array of thousands of air-, land- and sea-based artificial-intelligence systems that are intended to be “small, smart, cheap.”

September 6, 2023

Does Monetary Policy Have Long-Run Effects?Òscar Jordà, Sanjay Singh and Alan TaylorFederal Reserve Bank of San Francisco

Researchers at @sffed find that an unexpected 1% rise in short-term interest rates reduces real GDP by 5% after 12 years, but no evidence that loose monetary policy increases potential output. @sanjayrajsingh

Unexpected changes in monetary policy can slow the pace of economic activity much more persistently than is commonly believed. In response to a 1% increase in interest rates, output would be about 5% lower after 12 years than it would otherwise be. To provide some context for these numbers, consider some data for the United States. In response to a similar 1% increase in interest rates, after 12 years TFP would be about 3% lower and capital would be about 4% lower. When we separate our interest rate experiments into those that resulted in rate hikes versus those that resulted in lower interest rates, we see that there is no free lunch. The blue line shows that lower interest rates have mostly temporary effects that vanish after a few years, as traditional theories predict.

A Huge Threat to the U.S. Budget Has Receded. And No One Is Sure WhyMargot Sanger-Katz, Alicia Parlapiano and Josh KatzNew York Times

The growth in Medicare spending per beneficiary leveled off nearly a decade ago. If spending had grown at the prior rate, spending since 2011 would have been at least $3.9 trillion higher.

Spending per Medicare beneficiary has nearly leveled off over more than a decade. The trend can be a little hard to see because, as baby boomers have aged, the number of people using Medicare has grown. The reason for the per-person slowdown is a bit of a mystery. Some of the reductions are easy to explain. The Affordable Care Act in 2010 reduced Medicare’s payments to hospitals and to health insurers that offered private Medicare Advantage plans. Congress also cut Medicare payments as part of a budget deal in 2011. But most of the savings can’t be attributed to any obvious policy shift. Economists at the Congressional Budget Office described the huge reductions in its Medicare forecasts between 2010 and 2020. Most of those reductions came from a category the budget office calls “technical adjustments,” which it uses to describe changes to public health and the practice of medicine itself.

Soft Landing SummerJan HatziusGoldman Sachs

Jan Hatzius @GoldmanSachs lowered his 12-month recession probability to 15% which is equal to the postwar mean. He also expects the Federal funds rate to be closer to 1991-2007 level of just over 4% relative to the post-crisis level of just under 1%.

The continued positive inflation and labor market news has led us to cut our estimated 12-month US recession probability further to 15%, down 5pp from our prior estimate and equal to the unconditional average recession probability of 15% calculated from the fact that a recession has occurred roughly once every seven years since WW2. Our estimate is far below the Bloomberg consensus, which remains stuck at 60%. Our expectation is that the 1991-2007 period, when the nominal funds rate fluctuated between 1% and 6½%, will prove to be a better template than the post-2008 period when the Fed found it difficult to get much above 2%.

31% of All US Government Debt Outstanding Matures within 12 MonthsTorsten SløkApollo

Torsten Sløk @apolloglobal notes that 31% of US government debt outstanding will mature over the next 12 months, putting upward pressure on US rates.

One source of upward pressure on US rates is the $7.6 trillion in US government bonds that will mature over the coming 12 months.

Real-Estate Doom Loop Threatens America’s BanksShane Shifflett and Konrad PutzierWall Street Journal

US banks have total exposure to commercial real estate of $3.6T or 20% of deposits. They are facing the risk of a “doom loop” where loan losses trigger lending reductions and further price declines, this creates particular risk for regional banks.

Indirect lending—along with foreclosed properties, trading portfolios and other assets linked to commercial properties—brings banks’ total exposure to commercial real estate to $3.6 trillion, according to a Wall Street Journal analysis. That’s equivalent to about 20% of their deposits. Holdings of CMBS and loans to mortgage REITs and other nonbank lenders accounted for about 18% of the nearly $3.6 trillion in commercial real-estate exposure in 2022, or nearly $623 billion. The first quarter of 2023 marked the first decline in banks’ commercial real-estate holdings since 2013. At that point, banks’ overall securities holdings had lost nearly $400 billion in value, largely due to higher interest rates. Banks don’t have to mark down the value of loans in most cases, so the real losses are likely greater. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses.

Central Business Districts: City StrugglersTaylor Bowley and David Michael TinsleyBank of America

Changes in spending in cities’ central business districts are now largely being driven by changes in population, not differences in work from home according to a @BankofAmerica analysis.

Central business districts (CBDs) in the northern and western US continue to see consumer spending below pre-pandemic levels. However, there is a glimmer in New York City and Seattle that the situation is not continuing to deteriorate. Cities in the south are seeing strong growth in their city centers. The difference in performance is largely driven by migration patterns as working from home doesn't necessarily vary across cities. For example, southern cities with increased population growth also seem to be capturing more of the increasing spend in their city centers. Cities with population gains %YoY as of 2Q 2023 (Tampa, Phoenix, Orlando, Nashville, Jacksonville, Columbus, Charlotte and Austin) are seeing spending relative to pre-pandemic up around 20%. On the other hand, cities with net population losses over this period (New York, Boston, San Francisco and Atlanta) have spending down around 20%.

September 5, 2023

U.S. Deficit Explodes Even As Economy GrowsJeff SteinWashington Post

According to a @BudgetHawks analysis the US budget deficit will double in 2023 despite economic growth. @jasonfurman notes such deficits typically are associated with a “major crisis” like World War II or the 2008 financial meltdown.

According to the Committee for a Responsible Federal Budget the federal deficit is projected to roughly double this year, as bigger interest payments and lower tax receipts widen the nation’s spending imbalance despite robust overall economic growth. After the government’s record spending in 2020 and 2021 to combat the impact of covid-19, the deficit dropped by the greatest amount ever in 2022, falling from close to $3 trillion to roughly $1 trillion. But rather than continue to fall to its pre-pandemic levels, the deficit then shot upward. Budget experts now project that it will probably rise to about $2 trillion for the fiscal year that ends Sept. 30. Jason Furman said the current jump in the deficit is only surpassed by “major crises,” such as World War II, the 2008 financial meltdown or the coronavirus pandemic.

The Outlook for Long-Term Economic Growth Charles Jones Federal Reserve Bank of Kansas City

Stanford professor @chadjonesecon argues an improved allocation of talent globally and AI’s emergence as a general purpose technology might help the US maintain the long term 2% GDP/capital growth trend, offsetting stagnating TFP.

Growth theory reveals that in the long run, growth in living standards is determined by growth in the worldwide number of people searching for ideas. A growth accounting exercise for the US since the 1950s suggests that many other factors have temporarily contributed to growth, including rising educational attainment and a rising investment rate in ideas. But these forces are inherently temporary, implying that growth rates could slow in the future. In contrast, other forces could potentially sustain or even increase growth rates. The emergence of countries such as China and India provides large numbers of people who could search for ideas. Improvements in the allocation of talent — for example, the rise of women inventors — and increased automation through artificial intelligence are other potential tailwinds.

China Slowdown Means It May Never Overtake US Economy, Forecast ShowsJasmine NgBloomberg

Bloomberg Economics now forecasts China’s GDP won’t surpass the US until the mid 2040s, and then by “a small margin” before “falling back behind.” Prior to the pandemic Bloomberg forecasted China would permanently overtake the US by the early 2030’s.

Bloomberg Economics now sees growth in China’s economy — the world’s second largest — slowing to 3.5% in 2030 and to near 1% by 2050. That’s lower than prior projections of 4.3% and 1.6%, respectively. It will take until the mid-2040s for China’s GDP to exceed that of the US — and even then, it will happen by “only a small margin” before “falling back behind.” Before the pandemic, Bloomberg expected China to take and hold pole position as early as the start of next decade. Bloomberg estimates potential US growth at 1.7% in 2022-2023, with long-term forecasts showing a gradual drifting down to 1.5% by 2050.

The US Consumer: Still Strong in 2024Joseph BriggsGoldman Sachs

Despite the labor market cooling Goldman Sachs forecasts real income growth of 3% in 2024, “comfortably above the roughly 2½% real growth pace observed in the 20 years prior to the pandemic.”

We expect real income will grow by 3% in 2024 on a Q4/Q4 basis. In terms of components, expected labor income gains account for over half this increase, we expect interest income increases will raise real income growth by over 1pp, and the pullback in Medicaid coverage [Sunset of pandemic era continuous enrollment provision] is set to subtract almost ½pp. This pace of real income growth is below the 4% pace in 2023, but comfortably above the roughly 2½% real growth pace observed in the 20 years prior to the pandemic. In terms of the timing of these real income gains, we forecast a flatter profile than in 2023, as start-of-year adjustments from COLAs and changes in the effective tax rate will likely be less of a driver of income growth in 2024.

More Bang for Your BuckBrian ChingonoVerdad

Capital inflows into North American markets have contributed to a 3.9x Price/Book value relative to market averages of 1.9x in Europe and 1.4x in Japan according to @verdadcap_quant. He believes this offers opportunities in both Europe and Japan.

We’ve found reasons to think more highly of Europe and Japan. Notably, we find that value stocks in Europe and Japan are more profitable, with Europe being particularly impressive. Among firms that trade at a discount to book value, Europe has a Gross Profit/Assets ratio of 18.5%, which is 1.5x the profitability of North American value firms. The differences are even more stark in terms of EBITDA/Assets, with Europe’s value firms delivering a 6.4% return on assets, almost 3x higher than North America’s profitability among value firms. We believe that the combination of historically wide valuation spreads in Europe and higher levels of profitability among Europe’s value stocks bolster the case for upward mean reversion going forward. Historically, mean reversion in multiples has supported significant outperformance of value relative to growth.

Dollar DeleveragingJoseph WangFed Guy Blog

Off-shore non-bank dollar credit is contracting at a rate not seen since the financial crisis as higher US interest rates increase funding costs for foreign borrowers. This may slow global growth. @FedGuy12

While bank lending plateaued in the U.S., off-shore dollar bank lending has actually contracted outright at a rate not seen since the 2008 financial crisis. Data as of 2023Q1 indicates a year over year decline of $325b in loans with the bulk of the decline concentrated in lending to emerging markets. This is likely due to both supply and demand factors, where borrowers pull back due to higher rates and banks reduce lending due to lower profitability. A similar trend is observed on-shore, where bank lending has been growing at a very sluggish rate. Note that foreign banks may not have access to dollar liquidity backstops like FHLB lending and the discount window, so they may be more cautious than U.S. banks. The reduction in dollar credit is likely contributing to the global manufacturing slump and will remain a significant headwind to global growth.

Will China’s Economic Slump Be Contagious?Benjamin Hart and Brad SetserNew York Magazine

.@Brad_Setser notes the Yuan is at an ~ 15-year low relative to the $ and worries that China may pursue a global beggar-thy-neighbour policy by devaluing the Yuan.

The big way I think China could negatively impact the U.S. economy is that if China decides to export its way out, the U.S. is still the biggest market for consumer goods and the biggest market for imported goods globally. If China really wanted to export its way out, let its currency go, there would be a big further depreciation in the Yuan. And the Yuan’s already a 15-year low, more or less. If the Yuan goes back to the levels where it was when China joined the WTO, without an enormous ratcheting up of trade restrictions, there would be pressure on certain parts of the U.S. economy that I think would be meaningful. There’s no doubt that China has the biggest manufacturing base in the world. And those parts of the U.S. economy that compete with it may face difficulty if China can’t find a way to recover other than exports.

Young Japanese Find It Pays—Double—to Work AbroadMegumi FujikawaWall Street Journal

The typical Asian-American household in the US earns just over $100,000, 3x a typical Japanese family’s earnings.

Even after a planned rise in October, the minimum wage in Tokyo will be the equivalent of just $7.65, compared with $15 in New York City. Median household income in Japan in 2021, the most recent year for which data are available, was equivalent to about $29,000 at the current exchange rate, compared with $70,784 in the U.S. that year, according to government statistics in the two countries. The typical Asian-American household brought in just over $100,000—more than triple what the typical Japanese family made.

Japan Raises Military Spending To Counter China With More Missiles and ShipsKana InagakiFinancial Times

Japan is increasing it’s defense spending 13% y/y as part of a military buildup that will double defense spending to 2% of GDP up from a self-imposed postwar cap of 1%.

The 2024-25 budget represents a 13% rise compared with this fiscal year’s intended spending. It is part of a five-year, ¥43tn plan by Tokyo to strengthen its defence capabilities and bring military spending to roughly 2% of current gross domestic product, compared with the self-imposed cap of about 1% of GDP that Japan has maintained since the 1960s. Japan intends to build destroyers equipped with a US-built Aegis missile defence. The planned shopping list also includes the acquisition of counterstrike weapons, including Tomahawk cruise missiles. The largest portion of the requested spending will be designated to strengthening the “sustainability and resilience” of the Self-Defense Forces. The aim is to address shortages of basic items that officials fear will hamper the SDF’s ability to cope with a prolonged conflict.

September 1, 2023

Furman On Jobs ReportJason Furman@jasonfurman

.@jasonfurman believes today’s job report is consistent with “continued moderation in inflation” and doesn’t believe the Fed needs to hike another 25bps in September.

Overall both household and payroll employment are 1.5mm higher than CBO's pre-pandemic projections. It doesn't feel that long ago that people were talking about missing workers (talking about it for longer than was justified by the data I might add). Pretty much the only thing that went in the direction of tighter was average weekly hours ticked up but this series is noisy because of rounding and measurement issues. As a result, aggregate hours grew strongly as well. Average hourly earnings growth was the slowest in over a year and a half. This is noisy, subject to revision, but even adjusting for that perhaps the biggest sign of cooling in this report.

The NY Fed Trading Desk's Time to Shine?Matt KleinThe Overshoot

.@M_C_Klein argues that the Fed might need to follow the BOJ in controlling yield curves to manage the scale of debt issuances.

[Short-term interest rates] are not “market-determined” in any normal sense, but chosen at the discretion of the ~18 members of the FOMC. Longer-term interest rates are not explicitly set by the Fed, but Fed officials try to make those rates go up or down when they think it is necessary to achieve their policy objectives, sometimes by buying or selling bonds outright. If the point of maintaining “market functioning” is to prevent spikes in yields that could hurt borrowers in the real economy while facilitating transactions of bonds for cash, central banks are already better-positioned to do those trades directly than anyone else. What would be the point of involving intermediaries, except to pay them for a service that could be provided in-house? This is effectively what the BOJ has been doing for years, laying out target ranges for yields at points on the curve, adjusting those ranges as needed, sometimes buying oodles of Japanese Government Bonds (JGBs), and often doing nothing.

Recent Developments in Hedge Funds’ Treasury Futures and Repo Positions: Is the Basis Trade “Back"?Daniel Barth, R. Jay Kahn and Robert MannFederal Reserve Board

Similar to 2019/early 2020, hedge funds are again arbing away differences between Treasury futures and cash prices in large size; unwinding of the “cash-futures trade” likely contributed to the March 2020 Treasury market instability.

Hedge fund short futures positions in the 2-year, 5-year, and 10-year contracts rose by $411 billion between October 4th, 2022 and May 9th, 2023. Consistent with these empirical trends, spreads on the trade suggest it has been profitable at several points in recent months, without considering the value of options embedded in the trade (and whose value has likely increased as measures of Treasury market uncertainty have risen). The cash-futures basis trade is an arbitrage trade that involves a short Treasury futures position, a long Treasury cash position, and borrowing in the repo market to finance the trade and provide leverage. This trade presents a financial stability vulnerability because the trade is generally highly leveraged and is exposed to both changes in futures margins and changes in repo spreads. Hedge funds unwinding the cash-futures basis trade likely contributed to the March 2020 Treasury market instability.

Americans’ Ideal Family Size Is Larger Than the Birthrate SuggestsJosh ZumbrunWall Street Journal

According to surveys, Americans want larger families than they actually have. Ideal family size has changed very little since the mid-70s.

Most Americans still overwhelmingly stick to an ideal of two to three children. In fact, the share of people saying they want three or more children has risen as the actual number of children being born has dropped. By the mid-1990s, about one-third of Americans said the ideal family had three or more children. But since then, the share of respondents citing an ideal of three or more children has gradually climbed. Despite dipping briefly after the pandemic, that group rebounded again in 2022 to 44%, according to the General Social Survey, the more than 50-year-old survey of Americans’ social views conducted by the University of Chicago. Meanwhile, the share of people who say the ideal family consists of two children slipped to 51.7% in 2022 from 62% in 1998. On average, the ideal family is 2.5 children, which is up slightly from the 1990s but relatively little changed over the course of 50 years.

Rates Are Up. We’re Just Starting to Feel the HeatGreg Ip, Joe Pinsker, Will Parker, Walden Siew, et al.Wall Street Journal

American firms have $600 billion in debt maturing this year. Between 2025 and 2028 over $1 trillion of corporate debt matures each year.

U.S. companies have $600 billion in corporate debt set to mature this year, a total that will grow to more than $1 trillion a year from 2025 until 2028. That stark data from Goldman Sachs points to a financial cliff that is coming for American corporations, which executives are trying to navigate by extending the dates their debts come due, refinancing borrowings or managing cash reserves. What’s at stake? The debt loads, coupled with the rising costs of new financing for companies, may cut into corporate profits, investor returns, spending on new ideas, hiring—and could lead to less-healthy balance sheets. Some analysts say there could be a swath of corporate credit-rating downgrades ahead.

August 31, 2023

The US Capital Glut and Other MythsAlan Auerbach and Larry KotlikoffEconomics Matters

Alan Auerbach @Kotlikoff argue that the global savings glut was a “myth.” The market return on capital, which would show a decline if there were a capital glut, increased in the 2000s and 2010s.

There has been no major increase in the US capital-output ratio, nor has there been a major decline in the US marginal product of capital – the economy’s real return to capital. The US capital-output ratio remains close to its postwar average and capital’s real return has remained roughly constant -- around 6%. During the 2000s the marginal product of U.S. capital (MPK) was a healthy 5.84%. In the 2010s it was even higher at 6.42%. The market return to capital would show a decline if there were a capital glut and investors expected lower rates of return, It shows no such decline. The market return to capital’s real return averaged 5.52% between 1950 and 1989. Btw 1990 and 2019 it averaged 6.95. Hence, the broadest market-based real return data shows a rise, not a fall in returns in the recent decades during which capital has allegedly been in vast oversupply. The real return to US wealth between 2010 and 2019 averaged 8.25% – the highest average return of any postwar decade.

Prime-Age Women Are Going Above and Beyond In the Labor Market RecoveryLauren Bauer and Sarah Yu WangBrookings Institution

The labor force participation rate for prime-age women (ages 25-54) is at an all-time high 77.8%, driven by mothers whose youngest child is under 5 years old. @laurenlbauer

Since February 2023, the labor force participation rate for prime-age women––those between the ages of 25 and 54––has exceeded its all-time high. As of the most recent jobs report, prime-age women had a labor force participation rate of 77.8%. We find that those who have contributed most to the rebound in overall labor force participation in April and May of 2023, three years after the nadir of pandemic-era participation, are in fact prime-age women. Moreover, among prime-age women and indeed among all groups, women whose youngest child is under the age of five are powering the pack’s upward trajectory.

World’s Lowest Birthrate Sinks Further Despite Cash Payouts to ParentsDasl Yoon and Timothy MartinWall Street Journal

Despite spending at least $210 billion since 2006 to encourage marriage and children, South Korea’s fertility rate fell from 0.81 in 2021 to 0.78 last year, falling further to 0.70 in the April-to-June quarter.

South Korea’s fertility rate slumped to 0.78 last year, from 0.81 in 2021. The slide has worsened in recent months, falling to 0.70 in the April-to-June quarter. Since 2013, the country of 52 million has reported the lowest fertility rate among wealthy members of the OECD—where the average fertility rate stands at 1.58. No other OECD member has a fertility rate below 1. South Korea’s population began declining in 2020, with the number of deaths overtaking total births. Its military conscripts are expected to shrink by nearly half over the next two decades. The military has started to deploy more unmanned combat aircraft and increase the number of women serving. The country’s total student enrollment has shrunk for 18 years straight.

For $200, a Person Can Fuel the Decline of Our Major PartiesThomas EdsallNew York Times

Ideologically driven donors of $200 or less are driving political polarization in the US, as small donors hold far more extreme views than those of the mean voter. @Edsall

A 2022 paper, “Small Campaign Donors,” documents the striking increase in low-dollar ($200 or less) campaign contributions in recent years. The total number of individual donors grew from 5.2mm in 2006 to 195mm in 2020. The appeal of extreme candidates can be seen in the OpenSecrets listing of the top members of the House and Senate ranked by the percentage of contributions they have received from small donors in the 2021-22 election cycle: Bernie Sanders raised $38.3mm, of which 70%, came from small donors; Marjorie Taylor Greene raised $12.5mm, of which 68% came from small donors; and Alexandria Ocasio-Cortez raised $12.3mm, of which 68%, came from small donors. House Republicans who backed Trump and voted to reject the Electoral College count on Jan. 6 received an average of $140,000 in small contributions, while House Republicans who opposed Trump and voted to accept Biden’s victory received far less in small donations, an average of $40,000.

August 30, 2023

Global Supply Chains: The Looming “Great Reallocation”Laura Alfaro and Davin ChorFederal Reserve Bank of Kansas City

A “Great Reallocation” of US supply chain activity is underway with Vietnam and Mexico being the largest beneficiaries. @lalfaro

Rather than signaling a trend towards deglobalization, the available data hints at a looming “great reallocation” of US supply chain activity. This shift is marked by a decline in direct US sourcing from China, with a corresponding rise in import share from low-wage locations, chiefly Vietnam, and regional trade areas, particularly Mexico. Recent policy efforts may ultimately not succeed in their objective to reduce US dependence on supply chains tied to China. Despite a decrease in US direct reliance on China, there has been an increase in China’s import share in “friendly” nations, including the EU, Mexico, and Vietnam. Chinese firms are stepping up FDI and production facilities in Vietnam and Mexico in critical sectors, albeit from a low base. This suggests that plants in which China is the ultimate owner may continue to play a significant role in US value chains.

Germany Is Losing Its Mojo. Finding It Again Won’t Be EasyBojan Pancevski, Paul Hannon and William BostonWall Street Journal

The German economic model is under increasing stress due to higher energy costs, China’s import substitution strategy, and competition from American and Chinese electric car makers.

Germany will be the world’s only major economy to contract in 2023, with even sanctioned Russia experiencing growth, according to the International Monetary Fund. China was for years a major driver of Germany’s export boom. A rapidly industrializing China bought up all the capital goods that Germany could make. But China’s investment-heavy growth model has been approaching its limits for years. Growth and demand for imports have faltered. Energy prices in Europe have declined from last year’s peak as EU countries scrambled to replace Russian gas, but German industry still faces higher costs than competitors in the U.S. and Asia.

7 or 493 stocks: What Matters for the S&P 500?Jesper RangvidRangvid's Blog

Jesper Rangvid notes that, so far this year, seven stocks generated 70% of the S&P 500 return; they now constitute 27.5% of the S&P 500.

In this analysis, I look at the performance of stocks referred to by some as the “Magnificent Seven” (Mag7). These are: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. The combined market value of all 500 stocks in the S&P 500 has increased by $5 trillion or 15.3% in 2023, as mentioned. Leaving Mag7 out of the equation, the value of the remaining 493 shares has risen from $26 trillion to $27 trillion today, a return of only 4.5%. Consequently, Mag7 stocks have provided a 10.8% increase in the S&P 500. This means that only 7 out of 500 stocks generated 10.8%/15.3% = 71% of the return of the S&P 500 in 2023. The remaining 493 stocks delivered the remaining 29%. One can only speculate whether these shares are bubbles. The spectacular performance of Nvidia, for example, is reminiscent of the performance of hyped stocks during the dot.com bubble at the turn of the millennium.

Remote Work, Three Years LaterJan Hatzius and OthersGoldman Sachs

.@GoldmanSachs finds that 20-25% of US workers are working from home at least part of the week, well above the pre-pandemic average of 2.6%. This exerts upward pressure on office vacancy rates, partially offset by a decline in new office construction.

Work from home has reduced office utilization rates but has not yet led to substantial declines in office occupancy rates because most firms are locked in long-duration leases. Going forward, 17% of all office leases are scheduled to expire by the end of 2024, 47% between 2024-2029, and the rest after 2030. Our baseline estimates suggest that remote work will likely exert 0.8pp of upward pressure on the office vacancy rate by 2024, an additional 2.3pp over 2025-2029, and another 1.8pp in 2030 and beyond, though this is likely to be partially offset by a decline in new construction. The share of employees working remotely remains remarkably elevated in industries like information that require less face-to-face interaction, while it is much lower in contact-heavy sectors like retail and hospitality.

America Is Using Up Its Groundwater Like There’s No TomorrowMira Rojanasakul, Christopher Flavelle, Blacki Migliozzi and Eli MurrayNew York Times

Depletion of groundwater reserves is causing significant reductions in crop yields and puts at risk one-third of America’s total volume of drinking water that comes from groundwater.

A wealth of underground water helped create America, its vast cities and bountiful farmland. Now, Americans are squandering that inheritance. The Times analyzed water levels reported at tens of thousands of sites, revealing a crisis that threatens American prosperity - 84,544 monitoring wells examined for trends since 1920. Nearly half the sites have declined significantly over the past 40 years as more water has been pumped out than nature can replenish. In the past decade, four of every 10 sites hit all-time lows. And last year was the worst yet.

Gulf Coast Temperatures Surge to Highest Levels Ever ObservedIan LivingstonWashington Post

The Gulf of Mexico is 3 degrees warmer than the mean with temperatures of nearly 88° becoming common at depths of 165 feet. A University of Miami hurricane scientist described the ocean heat as “other-worldly.”

The sea surface temperatures of the gulf have cooked, warming more than 3 degrees above the norm for the date. The water has also heated up far beneath the surface. In fact, temperatures of nearly 88° are common to depths of 165 feet below the surface, according to data from Kim Wood, a professor of meteorology at Mississippi State University. University of Miami hurricane scientist Andy Hazelton called the ocean heat “other-worldly.” While the Gulf of Mexico as a whole has cooled slightly compared with earlier this month, when it shattered records, it remains near all-time highs.

An Analog-AI Chip for Energy-Efficient Speech Recognition and TranscriptionAmbrogio, S., Narayanan, P., Okazaki, A. et al.Nature

IBM researchers demonstrate a new technology that is 14 times as energy efficient as conventional chips at speech recognition, with potential for other AI applications.

Models of artificial intelligence (AI) that have billions of parameters can achieve high accuracy across a range of tasks but they exacerbate the poor energy efficiency of conventional general-purpose processors, such as graphics processing units or central processing units. Analog in-memory computing (analog-AI) can provide better energy efficiency by performing matrix–vector multiplications in parallel on ‘memory tiles’. However, analog-AI has yet to demonstrate software-equivalent (SWeq) accuracy on models that require many such tiles and efficient communication of neural-network activations between the tiles. We demonstrate fully end-to-end SWeq accuracy for a small keyword-spotting network and near-SWeq accuracy on the much larger MLPerf8 recurrent neural-network transducer (RNNT.)

August 29, 2023

Resilience Redux in the US Treasury MarketDarrell DuffieFederal Reserve Bank of Kansas City

Since 2007, the ratio of Treasuries outstanding to primary dealer assets has increased by a factor of four. @DuffieDarrell argues that this will drive increasing illiquidity in the Treasury market.

The total amount of Treasuries outstanding will continue to grow rapidly relative to the intermediation capacity of the market because of large and persistent US fiscal deficits and the limited flexibility of dealer balance sheets, unless there are significant improvements in market structure. Broad central clearing and all-to-all trade have the potential to add importantly to market capacity and resilience. Additional improvements in intermediation capacity can likely be achieved with real-time post-trade transaction reporting and improvements in the form of capital regulation, especially the Supplementary Leverage Ratio. Backstopping the liquidity of this market with transparent official-sector purchase programs will further buttress market resilience.

Has the Fed Tightened Enough? Guideposts to ConsiderBob Prince and Aaron GooneBridgewater Associates

Noting high nominal wage growth, Bridgewater argues that inflation is likely leveling out at its current rate which implies downside risk to asset prices.

Today, about 2.5% wage growth would be consistent with 2% inflation, as recent-trend productivity growth has been low and other sources of income (from assets and government-deficit-financed transfers) are more neutral. With wage growth currently running at around 4.5%, we’re far away from this level. We’re more likely to see inflation level out at its current rate rather than continue to decline like it has over the past year. This would push the Fed to continue tightening and, with a short pause and return toward easing being priced in, could come through the form of either rate rises or holding rates at high levels. This makes assets especially vulnerable to another round of tighter policy.

Adrift at SeaJoseph WangFed Guy Blog

Citing a rise in 5 and 10-year TIPS yields, @FedGuy12 notes some investors are pricing in a world with a higher r*.

One market based measure of longer dated real yields has steadily risen and appears to indicate such a possibility. Market pricing indicates that some investors have a clearer vision of the future. Market pricing of future inflation expectations and longer dated real rates have been creeping up, potentially pricing in some probability of both a higher inflation target and a higher r*. Together this implies that the higher nominal rates we see today are here to stay and may even trend higher as the future unfolds. The Fed is a conservative institution and would be hesitant to make any big changes to its approach to policy. If the future looks different from the past, the Fed will be among the last to know.

Little Impact of YCC Exit on US RatesTorsten SløkApollo

Torsten Slok @apolloglobal argues that reduced Japanese demand for Treasuries is a minor factor in rising long-term interest rates.

One way to better understand the impact of BoJ YCC exit on Japanese demand for US Treasuries is to look at how much of the recent increase in US long-term interest rates has happened during Tokyo trading hours. Since the BoJ YCC exit surprise in late July, the move higher in 10s has occurred almost entirely during New York trading hours. This suggests that US rates are not driven higher by Japanese investors during Tokyo trading hours. Hence, BoJ YCC exit doesn’t seem to be the reason long rates have increased over the past month. Instead, likely drivers of US rates over the past month are the US sovereign downgrade, fewer dollars for China to recycle in a falling exports environment, Fed QT, the significant budget deficit, the large stock of T-bills, and the Treasury’s intention to increase coupon auction sizes.

Monetary Policy and InnovationYueran Ma and Kaspar ZimmermannFederal Reserve Bank of Kansas City

Historically monetary tightening has had an impact on risk capital: 100bps of tightening is associated with a 1-3pp decline in R&D spending and a 25% decline in VC investment over the following 1-3 year period.

We normalize the shock to tightening by 100bps. Investment in intellectual property products (IPP) in the national accounts (NIPA) declines by about 1%. The magnitude is comparable to the decline in traditional investment in physical assets. R&D spending in Compustat data for public firms declines by about 3%. VC investment is more volatile, and declines by as much as 25% at a horizon of 1 to 3 years after the monetary policy shock. Patenting in important technologies declines by up to 9% 2 to 4 years after the shock. An aggregate innovation index constructed using estimates of the economic value of patents also declines by up to 9%. Based on estimates of the output and total factor productivity (TFP) sensitivity to the aggregate innovation index, a 9% decline in the index can contribute to 1% lower real output and 0.5% lower TFP 5 years later.

Falling College Wage Premiums by Race and EthnicityLeila Bengali, Marcus Sander, Robert G. Valletta and Cindy ZhaoFederal Reserve Bank of San Francisco

The decline in the college wage premium has been driven by faster wage growth for high school workers rather than slower wage growth for college graduates. @sffed

The college wage premium is especially large for Asian workers, with college graduates earning more than twice what high school graduates earn. This reflects about a 120% premium, compared with about a 70–80% premium for the other three racial/ethnic groups. The college wage gap is also somewhat larger for Black workers than for Hispanic and White workers, although the premiums for those groups have largely converged in recent years. All four groups saw gains through at least the early part of the recovery from the 2007–09 recession. While the premium continued to rise for Asian workers, the premium flattened for White workers in the latter half of the recovery and fell for Hispanic and Black workers. Moreover, since the 2020 pandemic recession, the college wage premium edged down slightly for all groups except Hispanic workers.

Demography Is Destiny in AfricaAshley AhnForeign Policy

According to current UN projections half of global population growth btw 2022 and 2050 will take place in sub-Saharan Africa. Current UN estimates project sub-Saharan Africa to have 33% of the global population by 2100 relative to 14% in 2019. @ashleyahn88

Half of the global population growth from 2022 to 2050 will occur in sub-Saharan Africa. The region’s population is currently growing three times faster than the rest of the world, and by the end of the century, it will be home to a third of all people in the world, compared to only 14% in 2019. This means that the burden of rapid population growth will fall on some of the poorest countries in the world, with nearly half of the region having a gross national income per capita below $1,135, and in places that are among the most vulnerable to climate change.

August 28, 2023

Fiscal Dominance and the Return of Zero-Interest Bank Reserve RequirementsCharles CalomirisFederal Reserve Bank of St. Louis

.@cwcalomiris argues high American public debt levels and chronic deficits may lead toward an era of “fiscal dominance,” in which the government forces banks to hold non-interest-bearing debt.

The essence of fiscal dominance is the need for the government to fund its deficits on the margin with non-interest-bearing debts. Inflation taxation has two components: expected and unexpected inflation taxation. Both are limited in their ability to fund real government expenditures. The expected component of inflation taxation (per period) is the product of the nominal interest rate and the inflation tax base, which consists of all non-interest bearing government debt. Unexpected inflation taxation occurs when the nominal value of outstanding government debt falls unexpectedly (thereby taxing government debtholders), and this component is also limited by the ability of government to surprise markets by creating unanticipated inflation. It is quite possible that a fiscal dominance episode in the US would result in not only the end of the policy of paying interest on reserves, but also a return to requiring banks to hold a large fraction of their deposit liabilities as zero-interest reserves.

Living with High Public DebtSerkan Arslanalp and Barry EichengreenFederal Reserve Bank of Kansas City

.@B_Eichengreen argues that high public debt levels are here to stay and that methods to suppress interest rates are “less feasible than in the past.” This means chronic fiscal deficits will need to be reduced even in countries that issue safe assets.

Large, persistent primary budget surpluses are not in the political cards. It is difficult to imagine more favorable interest-rate-growth-rate differentials (favorable interest-rate-growth-rate differentials reducing debt ratios in an accounting sense). Real interest rates have trended downward to very low levels. It is hard to foresee them falling still lower. Faster global growth is pleasant to imagine but difficult to engineer. Inflation is not a sustainable route to reducing high public debts. Statutory ceilings on interest rates and related measures of financial repression are less feasible than in the past. Investors opposed to the widespread application of repressive policies are a more powerful lobby. Financial liberalization, internal and external, is an economic fact of life. The genie is out of the bottle. All of which is to say that, for better or worse, high public debts are here to stay.

Hitch Your Wagon to R-StarPaul KrugmanKrugman Wonks Out

.@PaulKrugman notes that after a long period of general agreement that r* was very low, there is now active disagreement about the level of r*, with some, including the Richmond Fed, believing that r* has increased substantially.

Many of us thought we had a pretty good understanding of the forces behind low r* before Covid struck. Investment demand is largely driven by expectations about future economic growth, and prospects for U.S. growth seemed low in part because of demography — growth in the working-age population has stalled — and in part because, despite all the hype about technology, productivity has grown slowly since the mid-2000s. The demographic story hasn’t changed. There are a couple of other forces that might have increased r*. Budget deficits have gotten bigger, which could be providing a fiscal boost. The Biden administration’s industrial policies seem to be catalyzing a boom in manufacturing investment. But manufacturing investment isn’t that big a part of overall investment spending, so it’s not clear how much this matters for interest rates. One possible reason to think that r* may have risen is the surprising resilience of the economy in the face of Fed rate hikes.

Heating Waters Force Change in Industries That Depend on the OceanEric NiilerWall Street Journal

Half the world’s oceans are experiencing a marine heatwave. As the Gulf of Maine warms, the lobster catch has fallen by 26% since 2016 and is now “162 miles northward and nearly 70 feet deeper.”

This summer, nearly half the world’s oceans are experiencing a marine heatwave, defined as warmer than 90% of previous temperature observations on the same date. There are other possible explanations in addition to climate change and the El Niño/La Niña cycle. New pollution rules have cut airborne sulfur aerosol particles released by commercial ships over parts of the ocean, clearing the air and allowing more sunlight to reach the ocean surface. That in turn might be heating the water along some shipping routes, although the amount is in dispute. In January 2022, an underwater volcano near Tonga blasted 50 million tons of water vapor into the stratosphere. Some researchers believe that vapor might be acting as a planet-warming greenhouse gas and nudging up ocean temperatures. Both theories are still under investigation, and their overall impact is up for debate.

Auto Union Boss Wants 46% Raise, 32-Hour Work Week in ‘War’ Against Detroit CarmakersKeith Naughton, Gabrielle Coppola and David WelchBloomberg

The UAW is making demands of the Big Three that would cost an additional $80 billion over the course of the contract. Bloomberg notes total hourly pay and benefits expenses would rise from about $64 now to $150.

Shawn Fain, president of the United Auto Workers union since March, has declared “war” on the Detroit Three automakers, with contract demands that even he calls “audacious,” including proposals for a 46% raise, a return to traditional pensions and a 32-hour work week. The automakers counter that meeting those demands would threaten their existence, driving up labor costs by $80 billion and increasing total pay and benefit expenses to more than $150 an hour, from about $64 now, Bloomberg has reported. Higher labor costs contributed to Chrysler, Ford and GM’s lack of price competitiveness against foreign brands in the 1990s and 2000s.

Apple's iPhone Supply Chain Splinters Under US-China TensionsBloomberg StaffBloomberg

According to a Bloomberg analysis, Apple’s suppliers are following Apple out of China with Vietnam and India being the biggest winners. 7% of iPhones were manufactured in India last year.

Data compiled by Bloomberg on more than 370 suppliers and their factory locations reveals which of Apple’s manufacturing partners are building new capacity and where. The result is the clearest picture yet of all the ways the Cupertino, California-based company’s network of producers increasingly crisscrosses the developing world. Vietnam and India are the biggest winners, with smaller production hot spots appearing elsewhere in Asia. Producers from the US and Japan have reduced their footprint in China, even as Chinese firms join the supplier list at a rapid clip. China still houses the majority of Apple’s device-making factories, and will remain an integral part of the company’s supply chain. But the shift to a more diffuse production network is undeniable and accelerating.

Communist Party Priorities Complicate Plans to Revive China’s EconomyLingling Wei and Stella Yifan XieWall Street Journal

Xi Jinping is opposed to domestic consumption growth, according to well-sourced reporters @Lingling_Wei and @yifanxie. This implies that persistent imbalances with the West are a goal of the central government.

Xi Jinping has deep-rooted philosophical objections to Western-style consumption-driven growth, people familiar with decision-making in Beijing say. Xi sees such growth as wasteful and at odds with his goal of making China a world-leading industrial and technological powerhouse. Chinese officials also emphasized avoiding a current-account deficit, which would signal greater dependence on the outside world at a time of simmering tensions between Beijing and the West. Chinese officials told their counterparts at multinational institutions that the many hardships Xi survived during the Cultural Revolution—when he lived in a cave and dug ditches—helped shape his view that austerity breeds prosperity, the people said. “The message from the Chinese is that Western-style social support would only encourage laziness,” one person familiar with the meetings said.

August 25, 2023

Did the U.S. Really Grow Out of Its World War II Debt?Julien Acalin and Laurence BallNational Bureau of Economic Research

Improvement in the US debt-GDP ratio from 1946-1974 was driven primarily by primary government surpluses and distortions of real interest rates from surprise inflation and from pegged nominal rates, not overall economic growth. @AcalinJulien

We decompose the movements of debt/GDP into the effects of primary surpluses and deficits; distortions of real interest rates from surprise inflation and from pegged nominal rates; and the difference between the undistorted real interest rate and the growth rate of output (r⋆ − g). For the period up to 1974, we find that the fall in the debt-GDP ratio is explained mostly by primary surpluse and interest-rate distortions. Absent those factors, with the path of the ratio determined entirely by r⋆ − g, the ratio of 106% in 1946 would have fallen only to 74% in 1974 rather than the actual trough of 23%. As of the end of fiscal year 2022, the actual debt/GDP ratio stands at 102%, close to its peak of 106% in 1946. Over the last 76 years, however, g > r⋆ has contributed only modestly to debt reduction. History should not make us optimistic that the U.S. will grow out of its debt.

The Nimby Tax On Britain and AmericaJohn Burn-MurdochFinancial Times

.@jburnmurdoch notes that American and British infrastructure costs are far higher than other advanced economies. He cites research that attributes this to “Nimbyism” such as environmental reviews.

New motorway bridges in the UK cost more than three times as much per lane mile than in France, Denmark, or Norway, and additional lanes on existing British roads are twice as expensive as in Germany. In both cases, only the US faces even higher costs.

Rising Insurance Costs Start to Hit Home SalesJean EagleshamWall Street Journal

The average home insurance cost for Floridians has tripled in the past five years. Homebuilders in California and Florida are reporting insurance costs are “somewhat slowing sales.”

Almost a third of house builders in Florida said buyers’ concerns about home insurance were “somewhat slowing sales.” The proportion in Southern California was very similar, at 29%, the survey by John Burns Research & Consulting found. That is much higher than the national figure of 9% of builders reporting sales affected by insurance concerns. The risks of disasters haven’t been fully priced into property markets, partly because of flaws in the way federal flood insurance was priced, researchers say. If flood risks were taken into account, U.S. residential properties would be worth at least $121 billion less, according to a study earlier this year by nonprofit the First Street Foundation, the Federal Reserve and others. In Florida alone, properties in flood zones are overvalued by more than $50 billion.

China Imports Record Amount of Chipmaking EquipmentAndy Lin and Qianer LiuFinancial Times

Chinese imports of chipmaking equipment in June and July were up 70% vs. 2022, potentially in anticipation of additional export controls by Japan and the Netherlands.

China’s imports of semiconductor equipment have surged to record highs ahead of the implementation of export curbs by US allies. Chinese customs data shows the country’s chip production tool imports in June and July totalled nearly $5bn, up 70% from $2.9bn in the same period last year. Most of the imports came from the Netherlands and Japan, two countries that have imposed export restrictions on chipmaking equipment as they work with the US to slow China’s technological advancement.

August 24, 2023

Who Benefits from Higher Yields?Torsten SløkApollo

Torsten Sløk @apolloglobal notes higher interest payments aren’t flowing back into the American economy as foreigners and the Fed own 50% of Treasuries.

When interest rates increase, holders of fixed income get a higher cash flow. The problem is that the Fed and foreigners own 50% of Treasuries outstanding, and foreigners own 28% of [investment grade and high-yield corporate] credit outstanding, so a lot of the additional cash flow created by higher US yields is not boosting US GDP growth. The bottom line is that higher interest rates are a net negative for the US economy.

Big Firms Have Different IncentivesMatt Clancy and Arnaud DyèvreWhat's New Under the Sun

.@mattsclancy @ArnaudDyevre argue large firms have different incentive structures for innovation than small firms, causing large firms to emphasize high-volume process innovation vs. patent applications and new product development.

In the figure above, the gap in patent applications and earnings between inventors who go to incumbents and entrants are indistinguishable before the job change, and then begin to diverge after they start working in different types of firms. Two equally productive inventors, one working for a young/small firm and another working for an incumbent/large firm, will be told to work on problems that are different. The inventor in the large firm might be asked to work on innovations that are less likely to threaten the firm’s existing product lines, and therefore less likely to lead to patents (let alone high-impact patents). Akcigit and Goldschlag (2023) suggest that’s because large firms are paying their inventors better but asking them to work on projects less likely to lead to new patents and products.

Is Big Business Really Getting Too Big?Economist StaffThe Economist

.@TheEconomist notes that American firms collect 41% of “excess profits” globally as measured by firms’ return on invested capital above a hurdle rate of 10%.

Out of some 900 sectors in America the number where the four biggest firms have a market share above two-thirds grew from 65 in 1997 to 97 by 2017. The Economist has come up with a crude estimate of “excess” profits for the world’s 3,000 largest listed companies by market value (excluding financial firms). Using reported figures from Bloomberg we calculate a firm’s return on invested capital above a hurdle rate of 10% (excluding goodwill and treating research and development, R&D, as an asset with a ten-year lifespan). This is the rate of return one might expect in a competitive market. In the past year excess profits reached $4trn, or nearly 4% of global GDP. American firms collect 41% of the total, with European ones taking 21%. The energy, technology and, in America, health-care industries stand out as excess-profit pools relative to their size.

Russians Have Emigrated in Huge Numbers Since the War in UkraineEconomist StaffThe Economist

Since Russia invaded Ukraine in February 2022 approximately 1% of the Russian labor force has emigrated, exacerbating an acute labor shortage. @TheEconomist

Re: Russia, an analysis and policy network, has examined various estimates and available data from countries that have accepted large numbers of Russian émigrés. They found that between 817,000 and 922,000 people have left Russia since February 2022. Re: Russia reckons that the wartime emigrants account for roughly 1% of Russia’s workforce, exacerbating an acute labour shortage. The Gaidar Institute, a think-tank in Moscow, said that 35% of manufacturing businesses did not have enough workers in April, the highest figure since 1996. Shortages of specialists are especially severe: according to one Kremlin official, at least 100,000 IT professionals left the country in 2022.

Huawei Building Secret Network for Chips, Trade Group WarnsIan King and Debby WuBloomberg

Huawei has received $30B in state funding to build secret semiconductor fabrication facilities across China in an effort to evade US semiconductor sanctions. @markets

Huawei moved into chip production last year and acquired at least two existing plants and is building at least three others. The Semiconductor Industry Association estimates there are at least 23 fabrication facilities in the works in the country with planned investments of more than $100 billion by 2030. By 2029 or 2030, China is on track to have more than half the industry’s global capacity in older-generation semiconductors. “China is roughly spending as much in subsidies as the rest of the world combined,” said Chris Miller, author of “Chip War.”

August 23, 2023

AI Isn’t Good EnoughPaul Kedrosky and Eric NorlinIrregular Ideas

As the American workforce shrinks relative to the economy @pkedrosky @defrag argue the number of workers is a limiting constraint on economic growth. He notes that the current generation of AI isn’t mature enough yet to offset this headwind.

If the labor force had continued to grow more or less in line with history and GDP, we’d have almost 5M more workers out there. But we don’t. The gap is shrinking—it was closer to 7M a year ago—but it is still a very large number, and, given retirements, skill mismatches, and aging, it seems unlikely we will close that gap quickly, if ever. Absent a wave of immigration, which creates its own problems, politically and otherwise, and doesn’t necessarily fill the observed skill gaps, something needs to change. Historically, when this has happened—labor became more expensive than capital—economies have responded with automation, so we should expect that again today. We think, contrary to hyperbole, we are already at the tail end of the current wave of AI. We need to look past the limits of current AI technology if we are to break free from the past few decades of tech—enabled automation, where there is high worker displacement without commensurate productivity gains impact—where minimal human flourishing is created.

Rising Rates Slowing Growth Through Higher Debt Servicing CostsTorsten SløkApollo

Torsten Sløk @apolloglobal argues that higher debt servicing costs will make it difficult to keep interest rates elevated.

The annual debt servicing cost of the US government is close to $1 trillion, and the net interest expense as a share of total government revenues is near all-time high levels. Higher rates are not only slowing down consumers and corporates through higher borrowing costs. Higher rates are also a drag on growth through higher debt servicing costs for the government. In other words, higher debt servicing costs are impacting not only consumers and corporates but also the government. The bottom line is that when government debt levels are high, it is more difficult for interest rates to stay elevated for a long time because the negative impact on the economy of higher rates is also working through higher debt servicing costs for the government.

Do Deposit Buffers Still Matter?David Michael TinsleyBank of America

.@BankofAmerica notes deposits as a % of personal disposable income remains 9.8pp above 2019 levels. Over 50% of these deposits are held by middle- and lower-income households who may use them to support overall consumer spending.

The ratio of deposits to disposable income is currently relatively high, at least compared to over the past 30 years. Our estimated ratio of deposits to disposable income in 2023 Q2 would be around 9.8pp above the average in 2019 and around 11.5pp higher than the average over 2010-19. Using Bank of America internal data, we can estimate where the overall rise in deposits relative to 2019 is currently (as of 2023 Q2) held across the income distribution. On this basis, just under a quarter of the rise in total deposits is held by those households on incomes of less than $50,000, with another 30% of households on incomes between $50,000 and $100,000. Therefore, a reasonably large proportion of the remaining deposit buffers appears to be held by middle- and lower-income households, which implies they can still make a meaningful contribution to overall consumer spending.

Indian Spacecraft Makes Historic Landing At Moon’s South PoleBenjamin ParkinFinancial Times

India became the first nation to land a probe near the Moon’s South Pole, which contains water ice that could be a resource for future missions.

India has landed an uncrewed probe near the Moon’s unexplored South Pole, a milestone in the country’s efforts to become an international power in space exploration. The high-profile mission came days after a Russian attempt to land at the South Pole, Moscow’s first lunar mission since 1976, ended in failure. The uncrewed Luna-25 spacecraft spun out of control and crashed into the surface on Sunday. Moscow and New Delhi had been racing to become the first to explore the Moon’s South Pole. Scientists have said the region is of particular interest because it could contain water, which would make it crucial to any ambitions to inhabit the Moon.

Chinese Tech Could Break Barrier to Making Crucial Defence and Aerospace MaterialZhang TongSouth China Morning Post

A Chinese firm can now manufacture carbon fibre an important defense material. China has largely been blocked from large-scale production of carbon fiber by American and Japanese export controls. @SCMPNews

China has developed technology for the mass production of ultra-strong carbon fibre, which could help break international monopolies to supply materials for the aerospace and defence industries. Changsheng Technology worked with Shenzhen University to produce high-performance carbon fibre on a production line that can make 1,700 tonnes of the material per year. Carbon fibre is indispensable for the aerospace, defence, transport, new energy and marine engineering industries. China had been largely blocked from carbon fibre production because of US and Japanese bans on exports of manufacturing equipment to the country.

August 22, 2023

America’s Corporate Giants Are Getting Harder To ToppleEconomist StaffThe Economist

The Fortune 500 is less dynamic than many think: only 52 of the firms that make up the Fortune 500 were born after 1990. However, this likely reflects the dynamism of the component firms.

We found that only 52 of the [Fortune] 500 were born after 1990, our yardstick for the internet era. That includes Alphabet, Amazon and Meta, but misses Apple and Microsoft. Merely seven of the 500 were created after Apple unveiled the first iPhone in 2007, while 280 predate America’s entry into the second world war. In 1990 just 66 firms in the Fortune 500 were 30 years old or younger and since then the average age has crept up from 75 to 90. One explanation is that the digital revolution has not been all that revolutionary in some parts of the economy. Another is that inertia has slowed the pace of competitive upheaval in many industries, buying time for incumbents to adapt to digital technologies. A third explanation is that [incumbents’] scale creates a momentum of its own around innovation.

Long Term Expectations and Aggregate FluctuationsPedro Bordalo, Nicola Gennaioli, Rafael La Porta, Matthew O'Brien and Andrei ShleiferNational Bureau of Economic Research

Expected earnings for S&P 500 firms “fully explain observed stock market fluctuations from 1980-2022,” and help explain macroeconomic boom-bust cycles @NBERpubs

The present value of short and long term expected earnings for S&P 500 firms, computed using a constant required return, fully explains observed stock market fluctuations btw 1980-2022. When long term earning growth (LTG) is high relative to historical standards, analyst forecasts of short and long term profits are systematically disappointed in the future, inconsistent with rationality. High LTG also correlates with higher survey expectations of stock returns, in contrast with standard theories, in which investors expect low returns in good times. High LTG thus proxies for excess optimism: it points to investors being too bullish about future profits and stock return. This evidence offers additional support to the hypothesis that boom-bust dynamics in non-rational expectations about the long-term act as an important driver of the volatility of key asset prices. A one standard deviation increase in LTG fuels an investment boom. Crucially, the investment boom sharply reverts 2 years later, and that reversal is fully explained by the predictable disappointment of the initially high LTG.

Treasury Yields Hit Highest Since 2007 On Elevated Rate FearsMichael Mackenzie and Liz Capo McCormickBloomberg

Yields on 10-year Treasuries rose to 4.35%, a level last seen in 2007. 10-year TIPS yielded over 2% for the first time since 2009.

The yield on 10-year inflation-protected Treasuries on Monday pushed over 2% for the first time since 2009, extending its ascent from year-to-date lows near 1%. Not long after, the yield on 10-year Treasuries without that protection surpassed October’s peak, climbing nearly 10 basis points to as much as 4.35%, a level last seen in late 2007, before slightly paring the gain.

American Air Pilots Approve Record Contract With Higher PayMary Schlangenstein and Ryan BeeneBloomberg

American Airlines pilots approved a new contract boosting compensation by 46% over four years. The deal will cost the airline $9.6 billion.

American Airlines pilots approved a new contract that would provide 46% in cumulative pay raises and retirement contributions over its four-year term, along with a bonus, improved scheduling, sick leave, and insurance benefits. The pact will add about $9.6 billion in incremental costs for the airline over its duration, the Allied Pilots Association said in a statement Monday. That makes it the most expensive labor contract ever for a US carrier, topping the $7.2 billion value of an accord Delta Air Lines Inc. pilots secured in March.

Saudi Forces Accused of Killing Hundreds of Ethiopian MigrantsAndrew EnglandFinancial Times

Saudi security forces have reportedly killed hundreds of Ethiopian migrants seeking to enter the KSA. The migrants are largely motivated by higher earning potential in the kingdom.

Saudi border forces have killed hundreds of Ethiopian migrants attempting to cross into the kingdom from Yemen over the past 18 months, according to a human rights group. New York-based Human Rights Watch alleges in a 73-page report that the security forces “fired explosive weapons” at migrants and in some cases asked them which of their limbs they would prefer to be shot. The kingdom is home to hundreds of thousands of Ethiopian workers.

August 21, 2023

Interest Rates Hit 16-Year RecordCRFB StaffCommittee for a Responsible Federal Budget

Treasury yields are 75bps above the CBO’s baseline projection. If rates remain at this level interest costs will exceed defense spending in 2024.

The ten-year Treasury Note interest rate closed at 4.30% on Thursday, the highest since 2007. Meanwhile, the three-month Treasury Bill rate closed at 5.56% and the 30-year Treasury Bond at 4.41%. All three are at or near their highest level in 16 years. CBO's most recent baseline projections are based on a ten-year rate of 3.9% and a three-month rate of 4.6% this quarter. Based on this, we estimate that interest rates across the yield curve average about 75bps above baseline projections. If rates remain 75bps above CBO’s projections, it could add $2.3T (6% of GDP) to the debt over the next ten years and $350B (0.9% of debt-to-GDP) to the deficit in 2033. Under that scenario, interest costs would exceed combined spending on Medicaid, SSI, and SNAP as well as spending on defense by next year. By 2026, the cost of interest would reach a record high 3.3% of the economy.

Why the Era of Historically Low Interest Rates Could Be OverNick TimiraosWall Street Journal

The Fed is still projecting a neutral rate of .5% though some of their models show a rising r* in line with arguments that increased capital investment and chronic deficits will lead to a higher r*.

Every quarter, Fed officials project where rates will settle over the longer run, which is in effect their estimate of neutral. The median estimate declined from 4.25% in 2012 to 2.5% in 2019. After subtracting inflation of 2%, that yielded a real neutral rate (sometimes called “r*” or “r-star”) of 0.5%. In June, the median was still 0.5%. That also happens to track a widely followed model co-developed by New York Fed President John Williams that also puts neutral at 0.5%. A model devised by the Richmond Fed, which before the pandemic closely tracked Williams’s model, put the real neutral rate at 2% in the first quarter. Larry Summers has recently suggested neutral has gone up because of higher deficits and the investment to transition to a lower-carbon economy.

Steepening StanceJoseph WangFed Guy Blog

Noting the Fed’s view that r* hasn’t gone up relative to pre-pandemic @FedGuy12 anticipates rate cuts and further QT, “The financial system needs an upwards-sloping curve to work well.”

By any measure real rates have steadily risen as both actual and expected inflation have trended lower and nominal rates have trended higher. Without any change, policy would be unnecessarily tightening. Rates cuts and QT would together have a steepening impact on the curve and help address some concerns in the banking sector, whose margins have been squeezed by curve inversion. The Japanese experience with a persistently flat or inverted curve was poor growth and potential financial stability concerns as some investors reached for risk. This in part motivated the BOJ’s 2016 foray into YCC, which steepened the curve by raising 10 year JGB yields above the deposit rate. The financial system needs an upward-sloping curve to work well, so the Fed may be nudging it in that direction.

The Fed Should Carefully Aim for a Higher Inflation TargetJason FurmanWall Street Journal

.@jasonfurman argues that once the Fed has stabilized inflation below 3% for six months it should change the target rate from 2% to 3% “to give the Fed more scope to cut interest rates and thereby stimulate the economy.”

In the short run, the Fed should be aiming to stabilize inflation below 3% for at least six months. If it can achieve this goal, then it should shift to a higher target range for inflation when it updates its overall strategy around 2025. We have spent nearly half of the past 20 years with interest rates at the zero lower bound. Considerations led policy makers to conclude that 2% was the right number in the 1990s would lead them to consider something higher, like 3%, today to give the Fed more scope to cut interest rates and thereby stimulate the economy.

Jerome Powell, Mind Controller?Paul KrugmanKrugman Wonks Out

Noting that inflation has fallen without a rise in unemployment @paulkrugman argues the disinflation has been driven by improved supply as opposed to reduced demand.

The National Federation of Independent Business survey shows a sharp rise in 2021-22, then a steep fall that has brought us most of the way back to prepandemic inflation. This really doesn’t sound like an economy in which businesses are forgoing price hikes because of weak demand. It sounds like an economy in which inflation is coming down because of improved supply, not reduced demand. Does this mean that the Fed was wrong to raise rates? Not necessarily. If it hadn’t raised rates, the economy might be running really, really hot. The Atlanta Fed’s GDPNow tracker currently shows the economy growing at 5.8 (!!!), which isn’t really plausible but does suggest a lot of heat; so the Fed may not have caused disinflation, but rate hikes may have been necessary to permit disinflation caused by other forces.

Meta’s Next AI Attack on OpenAI: Free Code-Generating SoftwareKevin McLaughlin, Amir Efrati and Stephanie PalazzoloThe Information

Meta Platforms is preparing to launch open-sourced software to help developers automatically generate programming code, a move that could accelerate AI adoption and challenge proprietary software from OpenAI, Google, and startups. @theinformation

[Meta’s] Code Llama will make it easier for companies to develop AI assistants that automatically suggest code to developers as they type, and it could siphon customers from paid coding assistants such as Microsoft’s GitHub Copilot, which is powered by OpenAI. Generating automated code suggestions has been among the most popular uses of LLMs, as code is based on language. LLMs also power conversational text services like ChatGPT. GitHub a year ago began charging developers $10 per month for Copilot, and a slew of other coding assistant companies have raised venture funding in recent months. Companies might gravitate to using an open-source coding model to develop their own coding assistant in order to safeguard their source code, said one person who has worked on Code Llama.

Run It Cold: Why Xi Jinping Is Letting China’s Economy FlailRebecca Choong Wilkins and Colum MurphyBloomberg

As the dollar strengthens relative to the yuan China’s GDP is declining as a percent of US GDP. In real terms China’s GDP is still growing as a percent of US.

American nominal growth is clocking a 6.5% pace this year against 4.8% for China, according to Bloomberg Economics, which still sees the world's second-biggest economy expanding faster in real terms. The strengthening US dollar against the yuan has also contributed to China’s rival pulling away, for now, in the global race when GDP is measured in dollars.

China’s 40-Year Boom Is Over. What Comes Next?Lingling Wei and Stella Yifan XieWall Street Journal

China’s leadership is suspicious of growing household consumption as a % of GDP at the expense of building industrial capacity and “girding for potential conflict with the West.”

Xi and some of his lieutenants remain suspicious of U.S.-style consumption, which they see as wasteful at a time when China’s focus should be on bolstering its industrial capabilities and girding for potential conflict with the West, people with knowledge of Beijing’s decision-making say. The leadership also worries that empowering individuals to make more decisions over how they spend their money could undermine state authority, without generating the kind of growth Beijing desires.

China’s Fertility Rate Dropped Sharply, Study ShowsLiyan QiWall Street Journal

.@fuxianyi expects fewer than eight million newborns in China this year, based on indicators including marriage and newborn-medical-checkup data, less than half the number in 2016 when China scrapped its one-child policy.

China’s total fertility rate—a snapshot of the average number of babies a woman would have over her lifetime—fell to 1.09 last year, from 1.30 in 2020, according to a study by a unit of the National Health Commission cited this week by National Business Daily, a media outlet managed by the municipal government of Chengdu, the capital of Sichuan province. At 1.09, China’s rate would be below the 1.26 of Japan. Yi Fuxian, a scientist at the University of Wisconsin who has studied China’s demographics expects fewer than eight million newborns in China this year, based on indicators including marriage and newborn-medical-checkup data. That would be less than half the number in 2016, when China scrapped its one-child policy and recorded around 18 million births. By last year, the figure had fallen below 10 million.

August 18, 2023

Is The “Natural” Rate of Interest Back to Pre-Financial Crisis Levels?Tom LawlerCalculated Risk

Tom Lawler argues in support of recent work by Lubik and Matthes at the Federal Reserve that shows that r* has risen over the last year. He thinks that interest rates will be persistently higher.

There is in fact evidence that the natural rate of interest, or r-star, has in fact risen over the last year, and by some measures, it would appear as if r-star may be at levels not that far from those seen just prior to the financial crisis of 2008. If that were the case, then a “soft-landing scenario where inflation fell back to 2% would be one where the Federal Fund Rate fell back to the 3 ½-4% level, rather than the 2 ½-2 ¾ % level implied by the HLW model or the FOMC’s “dot plots.” In addition, if r-star has risen significantly, then recent Federal Reserve policy has not been as “restrictive” as many have suggested. If that were the case, then one would have expected the economy to have performed better than the “consensus” forecast, which in fact has been the case. Related: The Evolution of Short-Run r* After the Pandemic and What Have We Learned About the Neutral Rate? and The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet)

Have Rising Mortgage Rates Frozen the Housing Market?Joseph PolitanoApricitas Economics

.@JosephPolitano argues that the uptick in mortgage rates from 2.7% in 2021 to 7% two years later won’t “lock in” homeowners as fully as many expect, given that 42% of Americans own their homes outright.

What if higher mortgage rates have turned the low-rate mortgages of 2021 into golden handcuffs, locking owners into their existing homes? 42% of American homeowners own their homes with no mortgage. Most existing homeowners with mortgages have large equity cushions by virtue of purchasing before the massive pandemic-era home price appreciation. Excluding people who owned their homes free and clear, the median level of housing debt is only 52% of the value of the home, and those homeowners with large equity cushions should also be less affected by lock-in. Related: The "New Normal" Mortgage Rate Range and The Great Pandemic Mortgage Refinance Boom

The Debt Supercycle Comes to ChinaKen RogoffProject Syndicate

.@krogoff argues the best lens for viewing the Chinese economy is a simple story of deleveraging after a debt “supercycle” that drove the property sector to 23% of GDP.

China’s current problems can be traced back to its massive post-2008 investment stimulus, a significant portion of which fueled the real-estate construction boom. After years of building housing and offices at breakneck speed, the bloated property sector – which accounts for 23% of the country’s GDP (26% counting imports) – is now yielding diminishing returns. This comes as little surprise, as China’s housing stock and infrastructure rival that of many advanced economies while its per capita income remains comparatively low. The debt supercycle may have lasted longer than initially expected, perhaps because of the pandemic. But it was a critical piece of the story, and now, as China’s economy falters, it is the best explanation for what might come next. Related: Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and China Begins Nationwide Push to Reveal Hidden Government Debt and Housing, Household Debt, and the Business Cycle: An Application to China and Korea

Chinese Developer Evergrande Files for US Bankruptcy ProtectionThomas Hale and Sujeet IndapFinancial Times

Evergrande, a Chinese property developer with $19B in overseas liabilities, has filed for bankruptcy protection in the US.

Property developer China Evergrande has filed for bankruptcy protection in the US, as the company pursues a prolonged restructuring agreement with international creditors that hold billions of dollars in bonds. Evergrande defaulted on its dollar-denominated debts in late 2021, sparking a sector-wide liquidity crisis that has weighed on China’s economic growth and put increasing pressure on policymakers in Beijing. The company has about $19bn in overseas liabilities, according to Bloomberg data. Related: Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and China Begins Nationwide Push to Reveal Hidden Government Debt and Housing, Household Debt, and the Business Cycle: An Application to China and Korea

How Serious is China's Economic Slowdown?Nicholas LardyHow Serious is China's Economic Slowdown?

Nicholas Lardy @PIIE argues that concerns about the Chinese economy are overstated, given that core consumer prices in July rose by 0.8% once volatile food and energy prices are stripped out.

A careful reading of the present situation does not support the view that China's growth is now gripped by a severe cyclical downward spiral that will persist for several years. Falling retail prices could lead households to postpone consumption on the expectation that goods would become cheaper tomorrow. That would reduce consumption and economic growth. But the widely noted 0.3% decline in consumer prices in July 2023 compared with a year ago was mostly due to elevated food prices in the same period of 2022. Stripping out volatile prices of food and energy, core consumer prices in July rose by 0.8%, up from the 0.4% increase in June. It may be premature to raise the specter of deflation based on one month of data. Related: The Neoclassical Growth of China and China Stops Reporting Youth Unemployment as Economic Pressures Mount and China Cannot Allow Jobless Young To ‘Lie Flat’

Top Google AI Experts Pick Japan To Set Up On Their OwnMadhumita Murgia Financial Times

All 8 of the Google researchers who co-wrote a 2017 paper that set off the AI boom have left the firm for startups.

A former Google researcher who co-authored a paper that kick-started the generative AI revolution has joined forces with an ex-colleague to found a Tokyo-based artificial intelligence start-up. Jones, Sakana’s chief technology officer, was one of eight Google researchers who collaborated on building a software known as the transformer, which underpinned the rise of generative AI, including chatbots such as ChatGPT and Bard, and image generators such as Stability AI, Midjourney and Dall-E. The Transformers research paper was first published in June 2017. Since then all of its co-authors have left Google, primarily to found their own start-ups. Jones was the last of the eight to exit Google. Related: The Economics of Inequality in High-Wage Economies and The Size of Firms and the Nature of Innovation and The National Economic Council Gets It Wrong on the Roles of Big and Small Firms in U.S. Innovation

August 17, 2023

Excess No More? Dwindling Pandemic SavingsHamza Abdelrahman and Luiz OliveiraFederal Reserve Bank of San Francisco

Analysts at @sffed argue that as of June households have spent 90% of $2.1T in excess savings accumulated during the pandemic. They estimate that excess savings will be fully depleted by the end of Q3 2023.

Overall, despite differing methodologies and assumptions, the existing body of work on household savings following the pandemic recession firmly points to the rapid accumulation and drawdown of excess savings in the United States. The red area in Figure 1 shows our updated estimate for cumulative drawdowns, which reached more than $1.9 trillion as of June 2023. This implies that there is less than $190 billion of excess savings remaining in the aggregate economy. Should the recent pace of drawdowns persist—for example, at average rates from the past 3, 6, or 12 months—aggregate excess savings would likely be depleted in the third quarter of 2023. Related: The Rise and Fall of Pandemic Excess Savings and Accumulated Savings During the Pandemic: An International Comparison with Historical Perspective and The Trickling Up of Excess Savings

The Economics of Public Investment Crowding in Private InvestmentHeather BousheyCouncil of Economic Advisors

.@hboushey46 of President Biden’s CEA argues public spending is “crowding in” private investment by “de-risking” ventures through tax credits and direct government support.

When goods have strong positive externalities—such as decreasing our carbon emissions, improving supply chain resilience, or promoting national security—the market can underprovide, as private actors do not experience all of the social benefits of their production. In these instances, government action, such as by lowering the cost of production for the firm, can correct the failure of the market to provide sufficient supply and improve overall welfare. These funding streams, combined, are designed to de-risk new technologies, support the development of necessary infrastructure, and more, making new technologies and domestic manufacturing cost-competitive. Related: Making Manufacturing Great Again and Factory Boom Sweeps US With Construction at Record $190 Billion and Republican Districts Dominate US Clean Technology Investment Boom

How a Small Group of Firms Changed the Math for Insuring Against Natural DisastersEmily FlitterNew York Times

In January reinsurance prices in the United States rose as much as 40% year-over-year as the industry repriced risk.

Prices for reinsurance rose as much as 40% on Jan. 1 from a year earlier, according to a report by Gallagher Re, a brokerage firm that puts together reinsurance coverage deals. The price increases jolted insurers, who then made changes to where and for what they offered coverage. When State Farm announced in May that it would stop accepting new applications for certain policies in California, it cited “a challenging reinsurance market.” Allstate also cited reinsurance costs when it paused some of its activities in California. Last month, reinsurers specializing in agriculture insurance announced that they were pulling out of Iowa, where, three years ago, a severe windstorm caused nearly $4 billion in damage. Related: Why California and Florida Have Become Almost Uninsurable and Home Insurers Are Charging More and Insuring Less and Climate Shocks Are Making Parts of America Uninsurable. It Just Got Worse and Farmers Insurance Limits Sales in Florida, California Amid Storm, Wildfire Risks

Global Yields Reach 15-Year Highs as Rate-Hike Worries BuildGarfield Reynolds and Michael MackenzieBloomberg

Yields on 30-year T-bills rose to 4.42% and the 10-year rose to 4.3%. The higher yields are attracting investors: according to @BankofAmerica, $127B has moved into funds that invest in Treasuries.

In early US trading Thursday the 30-year Treasury yield rose as much as seven bps to 4.42%, slightly exceeding last year’s high. It was below 4% as recently as July 31. The US 10-year yield approached 4.31%, within a few basis points of its 2022 peak. The higher yields in the US continue to draw in buyers. Investors pumped $127 billion this year into funds that invest in Treasuries, on pace for a record year, Bank of America said last week. Related: In Search of Safe Havens: The Trust Deficit and Risk-free Investments! and The Fed and the Secular Decline in Interest Rates and What Have We Learned About the Neutral Rate?

Summers Sees 10-Year Yields Averaging 4.75% in Coming DecadeChris AnsteyBloomberg

.@LHSummers forecasts 10-year T-bills yielding an average of 4.75% over the next decade relative to an average of 2.9% over the last 20 years.

Inflation is likely to trend at a faster pace than in the past, perhaps 2.5%. A real return, which could be 1.5% to 2% over time when thinking of the government’s increasing borrowing needs — driven by the need for more defense spending, the likelihood of some Trump administration tax cuts getting extended, and higher average interest costs on outstanding debt. A term premium, which is the compensation investors get for buying a longer-term security rather than rolling over investments in short-term ones. Typically this has averaged about 0.75 to 1 percentage point. Adding up the three components, then it’s likely investors over the next decade will be “looking at 4.75 on the 10-year — and it obviously could end up being higher than that.” Related: What Have We Learned About the Neutral Rate? and The 2023 Long-Term Budget Outlook and US Fiscal Alarm Bells Are Drowning Out a Deeper Problem

China Population: 100 Million More Senior Citizens Expected In Next Decade As Ageing Crisis Enters ‘Crucial Juncture’Mia NulimaimaitiSouth China Morning Post

By 2050 at least 38% of China’s population will be older than 60.

China’s aging society problem will accelerate over the next decade, with the number of citizens aged over 60 expanding by an average of 10 million per year, according to a leading demographer, adding further strain to the state pension fund, elderly care facilities, and medical services. The acceleration will push the number of senior citizens to 520 million by 2050, or 37.8% of the population, according to Renmin University of China vice-president Du Peng. China had 209.78 million people aged over 65 last year, accounting for 14.9% of the population, up from 200 million in 2021, according to official data. Last year, 29.1% of Japan’s population were aged over 65, with 17% in the United States and South Korea and 7% in India, according to World Bank data. Related: China Is Facing a Moment of Truth About Its Low Retirement Age and China Is Dying Out and China’s Population Likely Fell in 2022 as Births Hit New Low

August 16, 2023

Global Views: Runway in SightJan HatziusGoldman Sachs

Jan Hatzius argues the labor market is softening via reduced job openings which should slow wage growth. @GoldmanSachs wage tracker has slowed to 4.5-5% from almost 6% in 2022.

Despite continued low unemployment, our jobs-workers gap is trending down on the back of reduced job openings. And while average hourly earnings grew a faster-than-expected 0.4% in July, other wage indicators such as the Q2 ECI and the Atlanta Fed wage growth tracker measure came in on the softer side; all told, our GS wage tracker has slowed from a peak of nearly 6% in 2022 to the 4½-5% range now. Related: The Unresolved Tension Between Prices and Incomes and Furman On Jobs Report and Soft Landing Optimism Is Everywhere. That’s Happened Before

In Search of Safe Havens: The Trust Deficit and Risk-free Investments!Aswath DamodaranMusing on Markets

.@AswathDamodaran argues that central banks are rate takers, not rate makers. Rates, in his view, are ultimately set by inflation and real growth. He notes, “The fundamentals will win.”

There is no better way to show the emptiness of "the Fed did it" argument than to plot out the US treasury bond rate each year against a crude version of the fundamental risk-free rate, computed by adding the actual inflation in a year to the real GDP growth rate that year. No one (including central banks) cannot fight fundamentals: Central banks and governments that think that they have the power to raise or lower interest rates by edict, and the investors who invest on that basis, are being delusional. While they can nudge rates at the margin, they cannot fight fundamentals (inflation and real growth), and when they do, the fundamentals will win. Related: The Fed and the Secular Decline in Interest Rates and What Have We Learned About the Neutral Rate? and The Evolution of Short-Run r* After the Pandemic

UAW Warns Contract Talks With Big Three Carmakers Are Moving ‘Too Slow’David WelchBloomberg

The United Auto Workers are coming closer to a strike in September. Their demands would cost carmakers $80 billion over the four years of the deal.

The leader of the United Auto Workers union on Tuesday asked members to grant him the ability to call a strike, arguing contract talks with the three major Detroit carmakers are moving too slowly. Earlier this year, the UAW gave each carmaker a list of demands that included pay raises of more than 40%, inflation protection, better treatment of temporary workers, and improved perks for retirees. The UAW also wants all workers paid the same wage, regardless of the job they do or whether they work on electric vehicles. If the union got everything it demanded it would cost carmakers $80 billion over the four years of the deal, Bloomberg has reported. Related: The ‘Summer of Strikes’ Isn’t Living Up to the Hype and Unions’ Inflation Warning? and Everyone Wants to Work at UPS After Teamsters Deal

The "New Normal" Mortgage Rate RangeBill McBrideCalculated Risk

.@calculatedrisk notes that a rise in the neutral rate vs. the pre-pandemic period would imply that 30-year fixed mortgage rates “will be in current range for some time.”

Goldman Sachs economists argued the neutral rate will likely be higher than the Fed currently expects. "We expect the funds rate to eventually stabilize at 3-3.25%." If the neutral rate is in that range then the 30-year fixed mortgage rate will be in the low to mid 6% range. With a 3.25% Fed Funds rate, a 4.45% 10-year yield, we’d expect 30-year mortgage rates around 6.45%. Recent buyers, with 7%+ mortgage rates, might be able to refinance, but most buyers will be locked into their current rate. The bottom line is it appears 30-year mortgage rates will be in current range for some time (barring a crisis). Related: Could 6% to 7% 30-Year Mortgage Rates be the "New Normal"? and What Have We Learned About the Neutral Rate? and Rate Cuts

The U.S. Is Turning Away From Its Biggest Scientific Partner at a Precarious TimeKaren Hao and Sha HuaWall Street Journal

40% of America’s high-quality scientific papers involve international collaborations, and China is the #1 partner in producing scientific research, though security concerns threaten the relationship going forward.

More than 40% of America’s scientific production—measured by the number of high-quality papers that U.S.-based scientists produce—involves cooperation with researchers abroad, according to Clarivate, a London-based data firm that tracks global scientific research. China and the U.S. are each other’s No. 1 partner in producing scientific research, with collaborative research between the two consistently among the most-cited papers across fields, according to an analysis of Clarivate’s data by Caroline Wagner, a professor of public policy at Ohio State University. The U.S. depends more heavily on China than China does on the U.S. in some strategic areas, according to an analysis by Clarivate of studies in respected journals shared exclusively with The Wall Street Journal. Related: Creating and Connecting US and China Science: Chinese Diaspora and Returnee Researchers and Xie Xiaoliang Is Latest Chinese Scientist to Give Up US Citizenship and Award-Winning Chinese Mathematician Sun Xin Returns from US to Work at Peking University

China Is Now Growing Slower Than the U.S.Matt KleinThe Overshoot

The American economy is now growing faster than China’s. @M_C_Klein notes agency debt might come under pressure as China moves to support the yuan.

In July the PBOC and other banks collectively sold more foreign currency and FX forwards than in any month since January 2017. Is this meaningful? It depends on perspective. One potentially interesting question is how this might affect spreads on mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. After all, Chinese entities have been big buyers of agency MBS even when they were reducing (maybe) their holdings of U.S. Treasury notes and bonds. If they have now switched to selling reserve assets, or are simply buying less than before, that could have potential ramifications for convexity premiums and interest rate volatility. Related: Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and The Neoclassical Growth of China and The Rise & Fall of Foreign Direct Investment in China

A Year Into Biden’s Climate Agenda, the Price Tag Remains MysteriousLeslie KaufmanBloomberg

Researchers at Wharton project the true cost of the Inflation Reduction Act will be over $1T, with the uptake of uncapped tax credits higher than initial CBO projections.

Most of the [IRA’s] spending comes in the form of tax credits that are uncapped, and those unlimited credits are designed to be rolled out over a 10-year span. In September 2022 CBO estimated the clean energy and climate portions of the bill would cost about $391 billion between 2022 and 2031. A team of researchers at the University of Pennsylvania’s Wharton School, working with Goldman Sachs, updated their own earlier estimate of $385 billion with a staggering new figure in excess of $1 trillion. The report’s authors cited “newer implementation” details and more optimistic assumptions about how much private capital will pour into the economy, particularly electric vehicles, in response to the promise of leveraging tax credits. Related: Making Manufacturing Great Again and Republican Districts Dominate US Clean Technology Investment Boom and Unpacking the Boom in U.S. Construction of Manufacturing Facilities

August 15, 2023

On the Move: Which Cities Have The Biggest Housing Shortage?Anna ZhouBank of America

.@BankofAmerica reports that in Q2 ‘23 San Antonio, Dallas, and Orlando have the most constrained housing supplies as buoyant labor markets continue to attract people.

Our analysis suggests that in 2Q, San Antonio, Dallas, and Orlando have the most constrained housing supply as buoyant labor markets continue to attract people. St. Louis, Detroit, and Miami seem to have the highest housing stock relative to their population. The good news is that cities with lower housing supply are already seeing higher construction trends but if the current population dynamics are maintained there will continue to be a strong housing need in the growing parts of the country. Looking more broadly at population flow, Bank of America internal data suggests that in 2Q, 13 out of the 27 Metropolitan Statistical Areas (MSAs) we track continue to see positive year-over-year growth in population with Jacksonville and Columbus leading the gain. Charlotte, Nashville, and Las Vegas saw accelerating pace of increase in residents than in 1Q. Related: A $100 Billion Wealth Migration Tilts US Economy’s Center of Gravity South and What’s the Matter With Miami? and Young Families Have Not Returned to Large Cities Post-Pandemic

More Americans Are Ending Up Homeless—at a Record RateJon Kamp and Shannon NajmabadiWall Street Journal

A @WSJ analysis finds that the number of homeless people in America jumped 11% vs. 2022. According to homeless advocates, this was driven by rising housing costs and the winding down of pandemic-era relief policies.

The [homeless] data so far this year are up roughly 11% from 2022, a sharp jump that would represent by far the biggest recorded increase since the government started tracking comparable numbers in 2007. The next highest increase was a 2.7% jump in 2019, excluding an artificially high increase last year caused by pandemic counting interruptions. The Journal reviewed available data from more than 300 entities that count homeless people in areas ranging from cities to entire states, accounting for eight of every nine homeless people counted last year. The Journal’s tally thus far includes more than 577,000 homeless people. The biggest driver remains high housing costs, which are now taking a heavier toll following the wind down of pandemic-era relief spending and policies such as eviction moratoriums, according to advocates for the homeless.

How Far Is Labor Force Participation from Its Trend?Andreas Hornstein, Marianna Kudlyak, Brigid Meisenbacher, and David RamachandranFederal Reserve Bank of San Francisco

Labor force participation is down 1pp since the start of the pandemic. A @sffed analysis finds that two-thirds of the decline was driven by changes in population, largely aging, and forecasts a further 1pp decline between 2022 and 2032.

The labor force participation (LFP) rate remains persistently low at 62.6% as of July 2023, almost a percentage point below its pre-pandemic level in February 2020. We project that the trend in the aggregate LFP rate will decline an additional 1pp btw 2022 and 2032. The projected decline comes entirely from changes in the population composition. Population aging looms large in this projection: we project the aggregate trend will decline as more of the population enters age groups with low participation rates. This is expected to more than offset the positive effect on LFP from the projected growth for people with higher educational attainment, as LFP tends to increase with education. Related: Labor Market Indicators Are Historically Strong After Adjusting for Population Aging and Wage Inequality and the Rise in Labor Force Exit: The Case of US Prime-Age Men and Where Are the Missing Gen Z Workers? and “The Great Retirement Boom”: The Pandemic-Era Surge in Retirements and Implications for Future Labor Force Participation

The Unresolved Tension Between Prices and IncomesMatt KleinThe Overshoot

.@M_C_Klein argues that current per-worker income growth of ~5% a year is inconsistent with ~2% inflation.

It remains extremely difficult for me to reconcile persistent per-worker income growth of ~5% a year with any credible forecast of ~2% inflation. Just as investors and policymakers were right to look through the “transitory” inflation of 2021-2022, they should also strip out the “transitory” disinflation of 2022-2023 to get a handle on where such pressures will settle in the years ahead. Since inflation is just the difference between changes in nominal spending and real production, that means focusing on wage trends: the largest and most reliable source of financing for consumer spending…This explains Fed officials’ continued focus on “softening” the job market via higher interest rates. That presents a risk that interest rates may not come down as quickly as implied by market prices, which in turn could affect other asset valuations. Related: The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet) and What Have We Learned About the Neutral Rate? and Rate Cuts

China Stops Reporting Youth Unemployment as Economic Pressures MountThomas HaleFinancial Times

After reporting record 21.3% youth unemployment in June, China did not report the July figure in a wider data release on Tuesday and will stop publishing data on youth unemployment.

China has said it will stop publishing data on youth unemployment, weeks after the gauge hit a record level, in a sign of mounting pressure on policymakers as new data pointed to weakness in the recovery of the world’s second-largest economy. Youth unemployment, which China began reporting in 2018, hit 21.3% in June, but the figure was not included in a wider data release for July on Tuesday. Related: Why Has Youth Unemployment Risen So Much in China? and Can China Fix Youth Unemployment Woes With Military Recruitment Drive? and Chinese Professor Says Youth Jobless Rate Might Have Hit 46.5%

August 14, 2023

Rate CutsDavid MericleGoldman Sachs

.@GoldmanSachs baseline forecast includes a rate cut in Q2 2024 with a terminal fed funds rate of 3-3.25% but notes a rising likelihood the Fed holds rates steady.

Why might the FOMC not cut? The simplest reason is that inflation might not come down quite enough. Another possible reason is that even if it does, if GDP growth is above potential, the unemployment rate is pushing below its 50-year low, and financial conditions have eased further on enthusiasm about a soft landing, then stimulating an already-strong economy by cutting might seem like an unnecessary risk, especially with the memory of the recent inflation surge still fresh. In that scenario, the FOMC could say that the short-run neutral rate is higher than common estimates of the medium-run neutral rate, and as a result the monetary policy stance is actually not so restrictive and the need to cut is not so immediate. Related: What Have We Learned About the Neutral Rate? and The Evolution of Short-Run r* After The Pandemic and The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet)

Higher Cost of Capital ContinuesTorsten SløkApollo

Torsten Sløk @apolloglobal notes an uptick in bankruptcy filings since the start of the hiking cycle, consistent with his view that a default cycle is underway.

The Fed started raising rates in March 2022, and the effects are clear. Higher costs of capital have pushed more and more companies into bankruptcy. This is the idea behind raising rates: to slow the economy down with the ultimate goal of getting inflation back to 2%. Every day there are companies that cannot get new loans or refinance, and this trend higher in bankruptcies will continue as long as interest rates stay high. Related: A Default Cycle Has Started and Most Global Economies Remain in Disequilibrium, Requiring Policy Action and Furman On Jobs Report

Credit NormalizationJoseph WangFed Guy Blog

.@FedGuy12 argues that the “slight deterioration” in credit quality is a story of mean reversion, not the start of a default cycle.

Excluding Treasuries, there are over $30t of debt securities outstanding. Credit spreads have widened since the lows of 2021, but remain within historical ranges. The slight deterioration seen recently in credit quality across a range of metrics most likely indicates normalization rather than the beginning of financial distress. Looking at bankruptcy filings, filings notably increased in 2023 but only from historically low levels. Given elevated inflation, nominal GDP growth remains high that thus supportive of further revenue growth to support interest expense payments. Interest expense burdens may also further ease next year as the Fed potentially cuts rates next year in line with declining inflation. The overall picture thus suggests a continued benign credit environment. Related: A Default Cycle Has Started and How Is the Corporate Bond Market Functioning as Interest Rates Increase? and Settling Into 4% Inflation?

Two Towns, Two Factories: How a $500 Billion Boom Exposes American FailuresShawn DonnanBloomberg

A Bloomberg analysis shows the recent boom in American manufacturing investment is largely bypassing areas that bore the brunt of the “China Shock.” @sdonnan

The new industrial boom has mostly bypassed the areas hit hardest by the China Shock. Just 16 of the 100 most affected commuter zones have been the sites of any newly announced projects over the past two years. These areas are projected to receive just 11.4% of the value of those projects, or $57.4 billion. And, of that sum, a lone IBM announcement accounted for $20 billion. White House spokesman Michael Kikukawae says those zones represent only 4% of the US population, so the analysis understates their impact. Related: The Geography of Work and Trading Places: Mobility Responses of Native and Foreign-Born Adults to the China Trade Shock and The Economics of Inequality in High-Wage Economies

Republican Districts Dominate US Clean Technology Investment BoomAmanda Chu, Oliver Roeder, and Myles McCormickFinancial Times

.@FT finds that over 80% of large-scale clean energy and semiconductor manufacturing investment pledged since last year’s Inflation Reduction and Chips Acts is destined for Republican congressional districts.

More than 80% of investment in large-scale clean energy and semiconductor manufacturing pledged since last year’s passage of the Inflation Reduction Act and the Chips and Science Act is destined for Republican congressional districts, a Financial Times analysis found. Republicans’ success in attracting investment is partly due to their districts often having large swaths of available land and cheap labour, but states such as Georgia and Ohio have also rolled out their own hefty tax breaks and subsidies to attract developers, including through roadshows in Europe and Asia. Related: Small Towns Chase America’s $3 Trillion Climate Gold Rush and ‘Transformational Change’: Biden’s Industrial Policy Begins to Bear Fruit and Why Laws Meant to Create Jobs Can Be So Destructive for Our Cities

Managing an Energy Shock: Fiscal and Monetary PolicyAdrien Auclert, Hugo Monnery, Matthew Rognlie and Ludwig StraubNational Bureau of Economic Research

Using a model of energy price shocks, @ludwigstraub @a_auclert find that an increase in energy prices for energy-importing economies lowers aggregate demand and depresses real incomes.

When MPCs [marginal propensities to consume] are realistically large and the elasticity of substitution between energy and domestic goods is realistically low, there is a direct link between high energy prices and aggregate demand: increases in energy prices depress real incomes and cause a recession, even if the central bank does not tighten monetary policy. When nominal and real wage rigidities are both present, imported energy inflation can spill over to wage inflation through a wage-price spiral; this, however, does not mitigate the decline in real wages.. Fiscal policy, especially energy price subsidies, can isolate individual energy importers from the shock, but it raises world energy demand and prices, imposing large negative externalities on other economies. Related: The Many Channels Of Firms’ Adjustments To Energy Shocks: Evidence From France and Europe: Well-Positioned To Get Through Next Winter Without Major Gas Shortages and How Europe is Decoupling from Russian Energy

Europe's Imbalances in Pandemic and WarMatt KleinThe Overshoot

.@M_C_Klein notes that Europe’s large current account surpluses are largely due to chronic German underinvestment in housing, public goods, and productive capacity.

Trade surplus that had emerged in the wake of the euro crisis has returned with a vengeance, although the distribution of the surplus has shifted somewhat. At the European aggregate level, Germany’s investment slump and stagnant consumption were offset by building booms in Spain, Greece, and central and eastern Europe. Since the beginning of 1999, there has been more investment in fixed capital (buildings, equipment, R&D, etc) net of depreciation in Spain than in Germany, even though Spain has only half of Germany’s population and has had almost no net investment since 2010. There was just as much net investment in Italy from 1999 through 2011 as in Germany—and Italy was far from booming in the 2000s, as well as far smaller. Related: The New Geopolitics of Global Finance and Germany's Industrial Slowdown and Pettis On Pozsar

China Expands Farmland In Bid To Cut Foreign Food RelianceSun YuFinancial Times

China has reclaimed at least 170,000 hectares of land since 2021 as part of a campaign to gain self-sufficiency in food supplies. Currently, ¾ of Chinese soybean supply comes from the US and Brazil.

Xi Jinping said authorities must take “hard measures that grow teeth” to maintain 120mn hectares of cultivated land across the country — the level widely seen by Beijing as necessary to secure self-sufficiency. Authorities have reclaimed more than 170,000 hectares since 2021 as Beijing tries to reduce its reliance on imported food amid fears confrontation between China and the US could disrupt global supply chains. "China is preparing for the worst-case scenario in which it couldn’t buy any food from abroad”, said Yu Xiaohua, an agricultural economics professor at the University of Göttingen. “The authority is counting on the reclamation drive to improve the country’s grain self-sufficiency.” Related: Could Economic Indicators Signal China’s Intent To Go To War? and China Ups Food Security Drive, Plans To Grow 90 Percent Of Its Grain By 2032, Warning For US And Thai Farmers

US Nuclear Submarine Weak Spot In Bubble Trail: Chinese ScientistsStephen ChenSouth China Morning Post

A well-regarded Chinese research center claims to have developed a new method of tracking American submarines. @SCMPNews

Researchers from the Chinese Academy of Sciences’ Fujian Institute of Research on the Structure of Matter, found an ultra-sensitive magnetic detector could pick up traces of the most advanced submarine from long distances away. The result “provides a new solution for the detection and tracking of submarines”, according to the paper published on August 1 by the Chinese Journal of Ship Research. The journal is run by the China Ship Scientific Research Centre, which has a long and respected history of cutting-edge developments in ship and ocean engineering. The researchers calculated that the extremely low frequency (ELF) signal produced by a submarine’s bubbles could be stronger than the sensitivities of advanced magnetic anomaly detectors by three to six orders of magnitude. Related: Aukus Allies Unveil Plan to Supply Australia With Nuclear-Powered Submarines and Nearly 40% of US Attack Submarines Are Out of Commission for Repairs and UK and Australia Urge Washington to Ease Secrecy Rules in Security Pact

August 11, 2023

Is Britain Really As Poor As Mississippi?John Burn-MurdochFinancial Times

A @jburnmurdoch analysis shows that excluding, London, per capita GDP of the rest of the UK would be lower than Mississippi, the poorest American state.

Removing London’s output and headcount would shave 14% off British living standards, precisely enough to slip behind the last of the US states. Britain in the aggregate may not be as poor as Mississippi, but absent its outlier capital it would be. By comparison, amputating Amsterdam from the Netherlands would shave off 5%, and removing Germany’s most productive city (Munich) would only shave off 1%. Most strikingly, for all of San Francisco’s opulent output, if the whole of the bay area from the Golden Gate to Cupertino seceded tomorrow, US GDP per capita would only dip by 4%. Related: From Strength To Strength and The Economics of Inequality in High-Wage Economies and Europe Has Fallen Behind America and the Gap Is Growing

Germany's Industrial SlowdownJoseph PolitanoApricitas Economics

.@JosephPolitano notes that Germany has achieved 0.5% cumulative GDP growth since late 2018, and industrial investment remains below 2018 levels.

Germany’s economy has eked out extremely low growth over the last 5 years—recent revisions to GDP data mean its output is once again barely above pre-pandemic levels, but that still means the country has seen less than 0.5% cumulative GDP growth since late-2018. German industrial investments have not recovered to pre-pandemic levels at a time when countries like the US are pouring record amounts of resources into factory construction and equipment purchases. Real German fixed investment in equipment remains below 2018 levels nearly 5 years later, despite a strong recovery in late 2022 and early 2023. Related: Germany Is Running Out of Workers, Putting Growth in Jeopardy and China’s Auto Export Wave Echoes Japan's in the ’70s and Germany's Niche Companies Are a Model for Life After Globalization

Financial Flows to the United States in 2022: Was There Fragmentation?Colin WeissFederal Reserve Board

In 2022, purchases of US securities by Middle East oil exporters, China, India, and Mexico were significantly higher than their 2013-2021 averages, despite talk of “financial fragmentation.” @dismaleconomist

In 2022, foreign investors purchased nearly $670 billion of long-term U.S. securities and short-term Treasury bills. Not only were the purchases by China, India, and the Middle East oil exporters in 2022 large compared to those by other countries, they were also sizable when measured against these countries' average purchases over the previous nine years. Net purchases in 2022 were well above average annual net purchases from 2013-2021 in every case. As before, under increased financial fragmentation, one would not expect these countries to be making larger purchases of U.S. assets compared to purchases in previous years. Related: How Was the U.S. Current Account Deficit Financed In 2022? and The New Geopolitics of Global Finance and Saudi Arabia's PIF and the New Petrodollar Recycling

China Population: 2023 Births Could Plunge By A Quarter From Record Low Set Last Year, Academic WarnsLuna SunSouth China Morning Post

Chinese fertility has fallen by 40% over the past 5 years with a prominent researcher forecasting fewer than 8mm births in 2023, down from 9.56mm in 2022.

Last year’s 9.56mm births in China represented the lowest total in modern history. “The expected number of births in 2023 is estimated to be around 7 million to 8 million,” Qiao Jie, dean of the Health Science Centre at Peking University, said on Tuesday. Last year, wedding registrations declined to 6.83 million, marking the ninth consecutive annual decline and reaching the lowest level since the late 1970s. Related: A Revolution Is Coming for China’s Families and China and India Have Fewer People Than the UN Thinks and An Economic Hail Mary for China

What Happens in Antarctica, Doesn’t Stay in AntarcticaLara WilliamsBloomberg

Declining sea ice has contributed to warming in the Arctic four times faster than the rest of the planet. Record low Antarctic sea ice may contribute to a similar dynamic.

In terms of sea ice extent, this year has been particularly unusual. July’s sea-ice levels were three times further from the average than what had ever been seen previously. At the moment, Antarctica’s ice reflects a large amount of solar radiation back into space, helping keep the world cool. Only 0.2-0.4% of the continent is exposed above the ice at the moment, but that proportion is likely to increase with further warming. That reduces the albedo – or reflectivity – of the surface and increases the heat absorbed by the planet. It’s an effect we’re already seeing in the Arctic, which is now warming four times faster than the rest of the planet. Related: The Rapid Loss Of Antarctic Sea Ice Brings Grim Scenarios Into View and Antarctic Sea Ice Has Shrunk By An Area Nine Times The Size Of Britain and Antarctic Sea Ice Levels Dive In 'Five-Sigma Event', As Experts Flag Worsening Consequences For Planet

August 10, 2023

The Evolution of Short-Run r* After the PandemicKatie Baker, Logan Casey, Marco Del Negro, Aidan Gleich and Ramya NallamotuFederal Reserve Bank of New York

Despite the Fed funds rate rising by 500bps in just over a year, the tightening may have been offset by an increase in the natural rate helping to limit the impact of tightening. @NYFedResearch

From the model’s perspective, short-run r* has increased notably over the past year, to some extent outpacing the large increase in the policy rate. The chart decomposes the change in real r* (black line) and its forecast (red line) between June 2022 and March 2023. Note that these are changes in the real variable. The chart shows that “financial’’ shocks (yellow) are the key driver of this change. These shocks capture the fact that financial conditions, as measured for instance by corporate spreads, have remained very resilient in spite of the increase in the policy rate (and of the recent banking turmoil). Related: What Have We Learned About the Neutral Rate? and Measuring the Natural Rate of Interest After COVID-19 and The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet)

The Long-Term Housing and Population ShiftBill McBrideCalculated Risk

.@calculatedrisk argues that the shift of the American population’s center of gravity to the southwest is likely to slow if not reverse due to climate change and water supply issues.

Although most projections are for the southwestward trend for the median center of US population to continue, without additional sources of water, changes in housing policy, and progress on climate change the southwestward trend will slow - or maybe even reverse. Climate change might make some areas further north more desirable. Perhaps the Carolinas (away from the coast), TN, and KY will see more growth. And maybe even areas further north that have more affordable housing will experience new growth. Climate change might make those areas - from MO to WV on up to the Great Lakes - more attractive over the next 50 years. For the southwestward trend to continue, there will have to be an increase in water supply, progress on global warming, and changes to housing policies (to make housing more affordable). Related: What’s the Matter With Miami? and Climate Change and the Geography of the U.S. Economy and A $100 Billion Wealth Migration Tilts US Economy’s Center of Gravity South

Furman On CPI PrintJason Furman@jasonfurman

.@jasonfurman argues today’s CPI print which leaves core 12-month CPI at 4.7% leaves the Fed room to skip a rate hike in September, though more might be needed.

2-month CPI rose from 3.0% in June to 3.2% in July. Overall real average hourly earnings (both private and production and non-supervisory which excludes managers) continue to rise. But they are 4% and 3% below their immediate pre-pandemic trend respectively. Overall, assuming August is relatively moderate as well there is no reason for the Fed to raise rates at their September meeting. I outlined my views on this earlier. If some of the good news proves transitory, however, they'll need to go back & do more. Related: Settling Into 4% Inflation? and What We’ve Learned About Inflation and The Second Great Experiment Update

White House Unveils Ban On US Investment In Chinese Tech SectorsDemetri SevastopuloFinancial Times

The Biden administration is limiting American investment in China’s quantum computing, advanced chips, and artificial intelligence sectors.

The Biden administration will ban some US investment into China’s quantum computing, advanced chips, and artificial intelligence sectors, as it boosts efforts to stop the Chinese military from accessing American technology and capital. The new executive order unveiled by President Joe Biden on Wednesday will come into force next year and will also require companies to notify the government of other investments in the three Chinese sectors. The action will largely affect private equity and venture capital firms as well as US investors in joint ventures with Chinese groups. Related: US Adds 36 Chinese Companies to Trade Blacklist and China Fears Japan’s Chipmaking Curbs Go Further Than US Restrictions and The Rise & Fall of Foreign Direct Investment in China

How China Became A Car-Exporting JuggernautEconomist StaffThe Economist

Chinese car exports are surging; China is now exporting more than 10,000 cars a day.

In 2021 China exported nearly 1.6m cars. By 2022 it hit 2.7m. International sales are set to rev up further in 2023. Customs data show that the country shipped nearly 2m cars in the first six months of the year, or more than 10,000 a day. For all its manufacturing might, China never mastered internal-combustion engines, which have hundreds of moving parts and are tricky to assemble. The arrival of battery-powered vehicles, which are mechanically simpler and easier to build, helped China catch up. State investment in the EV technology, an estimated $100bn between 2009 and 2019, put the country in pole position. Today battery-powered vehicles account for a fifth of car sales in China and a third of exports. In Japan and Germany only 4% and 20% of exports, respectively, are electric. Related: China’s Auto Export Wave Echoes Japan's in the ’70s and Can Volkswagen Win Back China? and The Chinese Carmakers Planning to Shake Up The European Market

August 9, 2023

The Rise & Fall of Foreign Direct Investment in ChinaJens Nordvig, Alex Etra and Lynge RasmussenMoney: Inside and Out

Over the last year, FDI flows into China have turned negative, as foreign multinationals have repatriated Chinese earnings they had previously reinvested. @jnordvig @EtraAlex @martin_lynge

Net FDI into China has been negative for four consecutive quarters (from Q3 2022 to Q2 2023). The bottom line is that foreign investors have shifted in recent quarters from reinvesting their earnings on their Chinese operations to repatriating those earnings. Whether this simply reflects cash management and carry considerations or is a harbinger of a slowdown in future foreign direct investment in China is too soon to say. If the recent trend to repatriate earnings is a signal about future investment intentions, it could have implications for future Chinese production and export capacity and economic growth. Either way, the repatriation of foreign investors’ profits from their Chinese operations is negative for the CNY. Related: The Mysterious $300 Billion Flow Out of China and NYC Becomes One Billionaire Family’s Haven From China Property Crash and Singapore Asks Banks to Keep Quiet on Wealth Inflows During China Boom

Why Fitch’s Downgrade MattersGreg IpWall Street Journal

.@greg_ip notes that the US will spend 10% of federal revenue on interest by 2025, compared with just 1% for the average triple-A-rated country and 4.8% for double-A rated.

The variable that best captures the change in circumstances is the real Treasury yield—what investors expect to earn on a 10-year note after inflation. It was around zero in August 2011, soon to go negative. Today, it is 1.7%, near the highest since 2009. One takeaway is that the global saving glut—the wall of money in search of safe assets that kept yields down a decade ago—is no more. independent economist Phil Suttle estimates private investors will be asked to absorb government debt worth 7.7% of developed economies’ GDP this year and 9.2% next, more than double the 4.3% of 2011. Private borrowers thus face competition from governments for capital, which in the long run hurts investment and growth. We got a taste of that last week when yields jumped on news of larger-than-expected quarterly Treasury auctions. Related: Raising Anchor and American Gothic and Is a U.S. Debt Crisis Looming? Is it Even Possible?

Income Ladder Is Difficult to Climb for US Metro AreasJustin FoxBloomberg

.@foxjust notes that the poorest regions of the US in 1949 largely remain poorest, even though their real median household income has doubled.

Only three of the 15 most affluent metro areas in 1949 (San Francisco, New York and Washington) are still in the top 15, two (Buffalo and Cleveland) have fallen into the bottom 15 and four (Toledo, Dayton, Akron and Youngstown) have median incomes low enough to make the bottom 15 but not enough inhabitants to qualify. So there seems to be a lot more persistence at the bottom than the top. There’s also regional persistence, with Southern metros in the majority on the least affluent list in 1949 and now. On a regional level, things weren’t always so static — from 1929 until the 1970s, there was a lot of convergence in the BEA's estimates of state and regional per-capita personal income (that is, average income, as opposed to the median incomes). But they stopped coming together after that, and the Southeast and Southwest were the country’s poorest regions in 2022 just as they were in 1929. Related: The Economics of Inequality in High-Wage Economies and Young Families Have Not Returned to Large Cities Post-Pandemic and Sunbelt Cities Nashville and Austin Are Nation’s Hottest Job Markets

Why Joe Biden Is The Heir To TrumpGideon RachmanFinancial Times

.@gideonrachman argues Trump started a “lasting revolution” in America’s China, trade, and industrial policies, all of which Biden is building out in a more systematic way.

For many, Trump’s legacy will be his assault on the American democratic system. But, in important respects, Trump brought about a lasting revolution in US foreign and domestic policy. Trump repudiated the previous 40-yr pro-globalization consensus, argued that US policy towards China has failed, and that the Communist party will never be a “responsible stakeholder” in the int’l system. He made “great-power competition” with China the centerpiece of his approach to the world, pulled America out of the TPP, made a deliberate effort to hobble the WTO, imposed a raft of tariffs on China, and renegotiated NAFTA. The Biden administration has retained most of these Trump-era policies. Biden made no attempt to rejoin the TPP and continues to block the WTO's appellate court. Trump’s victory in 2016 also forced Democrats to take the plight and anger of US workers more seriously. “Bidenomics” are driven by a Trump-like desire to reindustrialize America and rebuild the middle class. Related: Bidenomics and Its Contradictions and Aukus Allies Unveil Plan to Supply Australia With Nuclear-Powered Submarines and US and India Launch Ambitious Tech and Defence Initiatives

Everyone Wants to Work at UPS After Teamsters DealAzul Cibils BlaquierBloomberg

Under the UPS-Teamsters deal full-time drivers will make $170,000 in annual pay and benefits by the end of the five year contract. UPS lowered its profit forecast due to the higher labor costs.

UPS lowered its full-year profit forecast, in part due to rising costs after the tentative labor agreement. UPS said the guidance change was “primarily to reflect the volume impact from labor negotiations and the costs associated with the tentative agreement.” UPS shared some details of the new labor contract on its earnings call. Full-time drivers will make around $170,000 in annual pay and benefits by the end of the five year contract. Part-time union employees will earn at least $25.75 per hour and receive full health care and pension benefits. Related: Settling Into 4% Inflation? and The ‘Summer of Strikes’ Isn’t Living Up to the Hype and The Unexpected Compression: Competition at Work in the Low Wage Labor Market

How China Cornered The Market For Clean TechEdward WhiteFinancial Times

China has massive economies of scale that have helped it corner the market on “clean tech.” China has 90% of rare earth production, 80% of all stages of solar panel construction, and 60% of wind turbines and electric-car battery production.

In some of the materials used in batteries and more niche products, China’s market share is close to 100%. Goldman data suggests that China can build an EV factory in about a 1/3 of the time it takes in other countries while a battery factory in the US will cost nearly 80% more than in China. Bernstein says the cost of some manufacturing in the US can be three times more than in China. This highlights how China’s rivals must grapple with not only limited access to resources and upfront technology costs, but also labour shortages, wage inflation and higher environmental standards. Related: Can the World Make an Electric Car Battery Without China? and Why China Could Dominate the Next Big Advance in Batteries and China’s Curb On Metal Exports Reverberates Across Chip Sector

Europe: Well-Positioned To Get Through Next Winter Without Major Gas ShortagesGisela RuaFederal Reserve Board

Even if Europe has a colder winter than 2022-2023 the continent is in a good position to get through this winter without major gas shortages according to a @federalreserve analysis.

We consider three scenarios for the one-year period spanning 2023:H2 and 2024:H1. The first scenario ("Baseline") assumes that Europe maintains gas imports from Russia and all other sources at the same average level as in 2022:H2 and that gas consumption in each month is the same as its 2015–2021 average level.4 The second scenario ("Harsh Winter") is the same as the baseline, except that it assumes that next winter will be historically cold and, as a result, gas consumption in each month reaches its maximum 2015–2021 level. The third scenario ("Adverse Scenario") is the same as the baseline, except that it assumes that Europe's imports from non-Russian sources fall back to their 2015–2021 average in each month, while natural gas imports from Russia are the same as in the baseline. Related: How Europe is Decoupling from Russian Energy and Germany Opens Floating Gas Terminal at North Sea Port and War in Ukraine Drives New Surge of U.S. Oil Exports to Europe

How America Is Failing To Break Up With ChinaEconomist StaffThe Economist

While there is evidence American firms are “decoupling” from mainland China, many of the alternatives are still Chinese-owned firms with production shifting to countries that have deep links with the PRC.

Look at the countries that benefit from reduced direct Chinese trade with America. Caroline Freund of the University of California, San Diego found that countries which had the strongest trade relationships with China in a given industry have been the greatest beneficiaries of the redirection of trade, suggesting that deep Chinese supply chains still matter enormously to America. This is even truer in categories that include the advanced-manufacturing products where American officials are keenest to limit China’s presence. When it comes to these goods, China’s share of American imports declined by 14pp between 2017 and 2022, whereas those from Taiwan and Vietnam—countries that import heavily from China—gained the greatest market share. In short, Chinese activity is still vital to the production of even the most sensitive products. Related: Setser On Rumors Of Decoupling and US-China Trade is Close to a Record, Defying Talk of Decoupling and Global Firms Are Eyeing Asian Alternatives to Chinese Manufacturing

Doubts About LK-99 Superconductor Claim Sink Korean StocksSangmi Cha and Youkyung LeeBloomberg

The University of Maryland’s Condensed Matter Theory Center reported that in their opinion “LK-99 is NOT a superconductor.” @condensed_the

A US-based research center rebutted claims of a sensational breakthrough in the technology, heaping pressure on scientists to validate those findings as soon as possible. The University of Maryland’s Condensed Matter Theory Center challenged claims made by the Seoul-based Quantum Energy Research Centre that it synthesized a material capable of conducting electricity with zero-resistance at room temperature and ambient pressure, known as LK-99. Related: Korean Team Claims To Have Created The First Room-Temperature, Ambient-Pressure Superconductor and Origin Of Correlated Isolated Flat Bands In Copper-Substituted Lead Phosphate Apatite

SpaceX Launches 15 Starlink Satellites, Lands Rocket At SeaMike WallSpace.com

.@SpaceX has launched just shy of 5,000 Starlink internet satellites since 2019, and more than 4,500 are currently working.

SpaceX launched 15 more of its Starlink internet satellites Monday night and landed the returning rocket on a ship at sea. A Falcon 9 rocket topped with the Starlink spacecraft lifted off from California's Vandenberg Space Force Base. The Falcon 9's first stage came back to Earth as planned, landing on the SpaceX drone ship Of Course I Still Love You about 9.5 minutes after launch. This was the second Starlink launch for SpaceX in as many days. A Falcon 9 lofted 22 of the satellites from Cape Canaveral Space Force Station in Florida on Sunday night. SpaceX has now launched 4,918 Starlink spacecraft to date, and more than 4,500 of them are currently functional. Related: Despite An Explosion, Elon Musk Is Closer to His New Space Age and SpaceX Rocket Explodes Before Reaching Orbit

August 8, 2023

Where Is Shelter Inflation Headed?Augustus Kmetz, Schuyler Louie and John MondragonFederal Reserve Bank of San Francisco

A model from the @sffed forecasts “year-over-year shelter inflation will continue to slow through late 2024 and may even turn negative by mid-2024.”

The dashed line presents our baseline forecast of year-over-year shelter inflation over the next 18 months based on the average of cumulative shelter inflation forecasts at the CBSA level. Blue shading shows the area in which 95% of the model’s out-of-sample forecast errors fall, indicating the range of confidence regarding the accuracy of our model estimates. The solid line plots actual year-over-year shelter inflation. Our baseline forecast suggests that year-over-year shelter inflation will continue to slow through late 2024 and may even turn negative by mid-2024. This would represent a sharp turnaround in shelter inflation, with important implications for the behavior of overall inflation. The deflationary component of this forecast would be the most severe contraction in shelter inflation since the Global Financial Crisis of 2007-09. Related: Rangvid On Housing Inflation and New Tenant Repeat Rent Index

Tax Data Reveals Large Flight of High Earners from Major Cities During the PandemicConnor O’BrienEconomic Innovation Group

Since the start of the pandemic major urban counties’ federal tax base has declined by at least $68B, with large declines in San Francisco and New York City. @cojobrien

The country’s large urban areas were hit hard by the pandemic and subsequent economic recovery on a number of fronts. Between 2020 and 2021, IRS data shows that net migration subtracted more than $68 billion (Adjusted Gross Income, or AGI) from large urban counties’ aggregate taxable income. Meanwhile migration added to taxable income in all other types of counties, even smaller urban peers. The scale of decline in large urban areas was equivalent to nearly two percent of total taxable incomes in such counties. In contrast, newcomers to rural counties have added more than 1.5% to taxable income in each of 2020 and 2021. Manhattan alone lost more than $16 billion in federally-taxable income (spread across more than 37,000 returns) through net migration, equivalent to more than 13% of remaining residents’ combined taxable incomes. Net migration out of San Francisco left that city’s federal income tax base more than $8 billion—or 20% —smaller between 2020 and 2021 alone. Related: Young Families Have Not Returned to Large Cities Post-Pandemic and Sunbelt Cities Nashville and Austin Are Nation’s Hottest Job Markets and Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy

Dealer of Second to Last ResortJoseph WangFed Guy Blog

Treasury’s new buyback program will allow the Treasury to “add and remove duration into the market,” an ability previously only held by the Fed. @FedGuy12

Treasury plans to issue a bit more debt at each auction with the understanding a portion of the proceeds would be used to purchase old debt. In effect, the composition of Treasuries outstanding would be tilted towards the more liquid new issues. The program could one day be deployed to influence monetary conditions. For example, Treasury could effectively ease financial conditions by issuing short dated debt to purchase longer dated debt. There is no indication of this today, but treasuries and the central banks do not always have the same goal, and conflicts between the two are common in history.

How Real is America’s Chipmaking Renaissance?Economist StaffThe Economist

If all planned investment in domestic chipmaking comes online, by 2025 the US will produce enough cutting-edge chips to meet only 1/3 of domestic demand.

Chipmakers have announced more than $200bn-worth of investments in America. By 2025 American chip factories will be churning out 18% of the world’s leading-edge chips. TSMC is splurging $40bn on two fabs in Arizona. Samsung of South Korea is investing $17bn in Texas. Intel, America’s chipmaking champion, will spend $40bn on four fabs in Arizona and Ohio. If all the planned investments materialise, America will produce enough cutting-edge chips to meet barely a third of domestic demand for these. Apple will keep sourcing high-end processors for its iPhones from Taiwan. So, in all likelihood, will America’s nascent AI-industrial complex. Related: Can Intel Become The Chip Champion The US Needs? and TSMC Delays Start of First Arizona Chip Factory, Citing Worker Shortage and The Extreme Shortage of High IQ Workers

Presenting Your 2024 Senate Race RatingsChris StirewaltAmerican Enterprise Institute

.@ChrisStirewalt argues that MAGA base turnout may be key to 10 competitive 2024 Senate races: only 2 are currently held by Republicans and half are in states Trump won in 2020.

To deny Trump the nomination, even if unsuccessful, could alienate the 1/3 of Republican voters who are strong supporters of Trump. They might not show up for Senate races without Trump on the ballot. Even if the quarter of Republicans who vehemently opposed Trump vote against Trump, they will [likely] revert to the GOP down ballot. That’s what happened in 2020. A nominee other than Trump might have a better chance of winning the presidency but could imperil hopes of winning back the Senate. A lot of Republicans would be okay with that outcome: Trump gets his comeback shot, loses, but does so with enough clout in Congress to rein in the Democratic president. And if Trump pulls off an upset, he does so with a Republican Senate and probably the House. But, given the narrowness of the current GOP House majority, if Trump gets thrashed in the general election, it could deliver both chambers of Congress and the White House for Democrats. Related: For Some Key Voters, Trump Has Become Toxic and The Road to A Political Realignment in American Politics and What Happened In 2022

Missing Ice and Bleached Coral: The Sudden Warming of the OceansClive CooksonFinancial Times

Heatwaves are currently impacting 44% of the oceans up from a 10% mean. NOAA forecasts 50% of the oceans will be experiencing heatwave conditions during September and October.

Average sea surface temperatures across the globe have been rising by just over 0.1C/0.2F per decade since 1970 — about half as fast as the atmosphere. The overall increase in the past year is closer to 0.2C/0.4F, with much more intense marine heatwaves in some regions. On August 1, average global sea surface temperatures reached an all-time high just short of 21C/70F, Europe’s Copernicus Climate Change Service says. This record is particularly disconcerting because March is usually the hottest month for the world’s oceans. Related: What This Year’s ‘Astonishing’ Ocean Heat Means for the Planet and Warming Could Push the Atlantic Past a ‘Tipping Point’ This Century and The Rapid Loss Of Antarctic Sea Ice Brings Grim Scenarios Into View

Long-term Surface Impact of Hunga Tonga-Hunga Ha'apai-like Stratospheric Water Vapor InjectionMartin Jucker, Chris Lucas and Deepashree DuttaPreprint

New research suggests water vapor from a recent volcanic eruption is a major factor in the recent uptick in global temperature. The research suggests the impact will persist over a decade.

Volcanic eruptions typically cool the Earth's surface by releasing aerosols which reflect sunlight. However, a recent eruption released a significant amount of water vapor-a strong greenhouse gas-into the stratosphere with unknown consequences. This study examines the aftermath of the eruption and reveals that surface temperatures across large regions of the world increased by over 1.5°C for several years, although some areas experience cooling close to 1°C. Additionally, the research suggests a potential connection between the eruption and sea surface temperatures in the tropical Pacific, which warrants further investigation. Related: What This Year’s ‘Astonishing’ Ocean Heat Means for the Planet and Warming Could Push the Atlantic Past a ‘Tipping Point’ This Century and The Rapid Loss Of Antarctic Sea Ice Brings Grim Scenarios Into View

August 7, 2023

The Corporate Debt Maturity Wall: Implications for Capex and EmploymentRonnie Walker and Sienna MoriGoldman Sachs

.@GoldmanSachs notes the mean interest rate on corporate debt will rise from 4.2% this year to 4.5% in 2025, adding that “for each additional dollar of interest expense, firms lower their capital expenditures by 10¢ and labor costs by 20¢”

We estimate that the average interest rate on the current stock of corporate debt will rise from 4.20% in 2023 to 4.30% in 2024 and 4.50% in 2025, based on our assumptions about the future path of Fed policy and market interest rates. This would imply that private sector interest expense as a share of current private sector gross output will rise from 3.35% in 2023 to 3.40% in 2024 and 3.60% in 2025, an increase of 0.25pp from 2023 to 2025. The increase in interest expense that we estimate would therefore reduce capex growth by 0.10pp in 2024 and 0.25pp in 2025 and labor cost growth by 0.05pp in 2024 and 0.15pp in 2025. Related: Data Update 3 for 2023: Interest Rates and Bond Returns

Settling Into 4% Inflation?Matt KleinThe Overshoot

.@M_C_Klein argues income growth and credit expansion, along with quits coming down, are consistent with trend inflation of 4%, significantly above its pre-pandemic level.

Job churn is coming down, yet nominal wage growth has remained stubbornly stuck around 5% a year. Given the rough historical link between wages, output, and prices, the implication is that the trend growth rate of nominal gross domestic product (GDP) is now around 5-6% a year while trend inflation is around 4% a year. Related: What Have We Learned About the Neutral Rate? and The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet) and Measuring the Natural Rate of Interest After COVID-19

The Price of Risk: With Equity Risk Premiums, Caveat Emptor!Aswath DamodaranMusings on Markets

.@AswathDamodaran argues his implied equity risk premium for the S&P 500 of 4.44% is a better measure than alternatives for predicting future returns.

If you are using equity risk premiums or even earnings yield for market timing, recognize that having a high R-squared or correlation in past returns will not easily translate into market-timing profits, for two reasons. First, the past is not always prologue, and market and economic structures can shift, undercutting a key basis for using historical data to make predictions. Second, even if the correlations and regressions hold, you may still find it hard to profit from them, since you (and your clients, if you are a portfolio manager) may be bankrupt, before your predictions play out. Statistical noise (the standard errors on your regression predictions) can create havoc in your portfolios, even if it eventually gets averaged out. Related: The Benefit of Owning Stocks Over Bonds Keeps Shrinking and The Rasputin Effect: Global Resilience To Higher Rates and Most Global Economies Remain in Disequilibrium, Requiring Policy Action

Will Today’s Behemoths Rule Tomorrow?Chris SatterthwaiteVerdad

Chris Satterthwaite notes the overperformance of the top-5 market cap stocks is historically unusual and speculates that technological advances ranging from AI and superconductors will likely drive significant churn over the next decade.

The phenomenon of the largest stocks delivering the best returns is new, in our opinion. In fact, from 1994 to 2013, an annually rebalanced portfolio of the largest 5 stocks (“Big 5”) in the US had a comparable return to the entire S&P 500. But both portfolios significantly lagged a large-cap value portfolio (per Ken French). The last 10 years have seen a concentration of returns to the tech sector and to a few companies within that sector. This is both notable and unusual. With the advent of exciting new technologies like AI and superconductors, we think it’s plausible that the top 5 largest companies 10 years from now may look quite different from the top 5 today. In which case, a diversified portfolio would likely serve investors better than a highly concentrated size-defined portfolio. Related: Birth, Death, and Wealth Creation and Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOs and The Economics of Inequality in High-Wage Economies

Is a U.S. Debt Crisis Looming? Is it Even Possible?Paul KrugmanKrugman Wonks Out

.@paulkrugman argues that at the current interest rate of inflation-protected 10-year U.S. bonds of 1.83%, economic growth makes a runaway debt spiral unlikely.

You can get a debt spiral if r is significantly larger than g; in that case rising debt leads to faster accumulation of debt, and we’re off to the races. Even after the rate surge of the past few days, the interest rate on inflation-protected 10-year U.S. bonds was 1.83%, which is close to most estimates of the economy’s sustainable growth rate. If you take the low end of such estimates, we could possibly face a debt spiral, but it would be a very slow-motion spiral. Put it this way: If r is 1.8, while g is only 1.6, stabilizing the debt ratio with debt at 100% of G.D.P. would require a primary surplus of 2% of G.D.P.; increase debt to 150%, and that required surplus would increase only to 3%. Related: Summers and Blanchard Debate the Future of Interest Rates and Interest Costs Will Grow the Fastest Over the Next 30 Years and US Fiscal Alarm Bells Are Drowning Out a Deeper Problem

Rangvid On Housing InflationJohn CochraneThe Grumpy Economist

.@JohnHCochrane notes that excluding the cost of housing, US inflation is already back at target, consistent with the fiscal theory of the price level.

CPI and PCE core inflation (orange and gray) are how the US calculates inflation less food and energy, but including housing. We do an economically sophisticated measure that tries to measure the "cost of housing" by rents for those who rent, plus how much a homeowner pays by "renting" the house to him or herself. You can quickly come up with the plus and minus of that approach, especially for looking at month to month trends in inflation. Europe in the "HICP core" line doesn't even try and leaves owner occupied housing out altogether. Jesper's point: if you measure inflation Europe's way, US inflation is already back to 2%. The Fed can hang out a "mission accomplished" banner. (Or, in my view, an "it went away before we really had to do anything serious about it" banner.) And, since he writes to a European audience, Europe has a long way to go. Related: Striking Similarities (and Differences) Between Inflation Today and In the 1970s

Can Measurement Error Explain Slow Productivity Growth in Construction?Daniel Garcia and Raven MolloyFederal Reserve Board

A @FederalReserve working paper argues that the decline in construction productivity is largely a mismeasurement issue and the sector’s productivity was “essentially flat” between 1987 and 2019.

We find that mismeasurement error has biased construction-sector productivity growth downward by 3⁄4pp per year at the very most. This brings an estimate of average productivity growth from 1987 to 2019 up to positive territory, but just barely (from negative 0.5% to positive 0.2%), and still about 1pp below productivity growth of the next-lowest major industries and more than 11⁄2pp below the average for the nonfarm business sector. Consequently, we conclude that productivity growth may well have been quite low in the construction industry, even if it has not been as low as implied by the official statistics. While this estimated growth rate is higher than the growth rate of the published data, it does not change the qualitative result that productivity growth in this sector has been quite low. And our estimate of productivity growth in the construction sector remains much lower than in other industries. Related: The Strange and Awful Path of Productivity in the U.S. Construction Sector and Construction Industry Has Work, Needs More Workers

US Scientists Repeat Fusion Power BreakthroughTom Wilson and Alice HancockFinancial Times

American scientists at Lawrence Livermore National Laboratory have repeated their achievement of net energy gain in a fusion reaction.

US government scientists have achieved net energy gain in a fusion reaction for the second time. Researchers at the federal Lawrence Livermore National Laboratory in California, who achieved ignition for the first time last year, repeated the breakthrough in an experiment on July 30 that produced a higher energy output than in December, according to three people with knowledge of the preliminary results. The improved result at NIF, coming “only eight months” after the initial breakthrough, was a further sign that the pace of progress was increasing, said one of the people with knowledge of the results. Related: How US Scientists Moved One Step Closer to Dream of Fusion Power and When Will Fusion Be Ready for Prime Time? Watch These Three Numbers and Tech Billionaires Bet on Fusion as Holy Grail for Business

Mainland China Airs Documentary Signalling Military Preparation For Taiwan Attack And Willingness To SacrificeLiu ZhenSouth China Morning Post

.@SCMPNews reports Chinese state media is airing a high-profile documentary that highlights the PLA’s willingness to fight and die in pursuit of “reunification.”

Beijing is trying to send strong signals about its preparation for an attack on Taiwan, with People’s Liberation Army soldiers pledging to sacrifice themselves. The pledges are part of the eight-episode documentary series Zhu Meng, or “chasing dreams”, aired on state broadcaster CCTV from Tuesday to mark the PLA’s 96th anniversary and show the readiness of military personnel to fight “at any second”. In one instance, a pilot in one of the PLA’s most advanced stealth fighter jets vows to launch a suicide attack if necessary.

August 4, 2023

The Startup Surge Continues: Business Applications on Track for Second-Largest Annual Total on RecordDaniel NewmanEconomic Innovation Group

Based on first-half new business formation, 2023 will be just shy of 2021’s record number of new firms likely to hire employees. @InnovateEconomy

Early-stage business activity across the United States remains robust through the first half of 2023, as the pace of new business formation strengthened over last year. Individuals filed nearly 2.7 million applications to start a business between January and June of this year, a 5% increase over 2022 and a staggering 52% increase over the same period in 2019. One-third of those filings were for new businesses likely to hire employees—a key subset of applications from the Census Bureau’s Business Formation Statistics demonstrating a “high propensity” to hire staff, if and when the business becomes operational. The volume of likely employer applications also remained well above prepandemic levels, surpassing the total from the first six months of 2019 by 36%. Related: Startup Surge Stood Firm Against Economic Headwinds in 2022 and Like the Broader Economy, the High Tech Sector is Becoming Less Dynamic and The Economics of Inequality in High-Wage Economies

What’s the Matter With Miami?Paul KrugmanKrugman Wonks Out

Florida’s growth relative to the population decline in Miami is driven by affordable housing and the baby boomers retiring. @paulkrugman notes that between 2010-20 the US population grew 7.4% but the share over age 65 grew 38.6%.

What are all those new Floridians doing for a living? Well, a significant number are retired. Retirees have been moving to Florida for the warm winters for a long time. But there are a lot more potential retired migrants now than in the past: between 2010 and 2020 the overall U.S. population grew only 7.4%, but the population 65 and older grew 38.6%. And since retirees spend money on local services, the influx of seniors creates jobs for younger adults as well. Related: Miami Sees Its First Population Drop in Decades and A $100 Billion Wealth Migration Tilts US Economy’s Center of Gravity South and Florida Ocean Temperatures At ‘Downright Shocking’ Levels

Big Pharma's Big Tax DodgeBrad Setser and Tess TurnerBusiness Insider

.@Brad_Setser argues tax reform is needed as the American pharmaceutical sector has optimized its corporate structure to shift almost all of its domestic profits overseas paying an effective tax rate of 3%.

The six major US pharmaceutical firms that provide fairly detailed data reported making $215 billion worth of sales in the US for 2022. Given America's systematically higher prices, their sales abroad were logically more modest — totaling $170 billion. Despite this discrepancy, the companies reported earning very, very little in profits — in some cases, absolutely nothing — in the US. Of their $100 billion combined profit, the companies said $90 billion was made abroad, while a paltry $10 billion came from their US operations. That comes out to a profit margin of 5% in the US and a margin of over 50% abroad.

Furman On Jobs ReportJason Furman@jasonfurman

While wages are still accelerating, @jasonfurman notes cooling jobs/hours and thinks today’s job report is consistent with a soft landing.

The unemployment rate fell back to 3.5%. Has been in a 3.4% to 3.7% band for 17 straight months. The last time this happened was Nov 2007. Given the recovery in the (age-adjusted) participation rate this has brought the employment-population rate for prime age workers (25-54) above the pre-pandemic rate. The wage growth slowdown earlier this year has largely gone away. Earlier this year average hourly earnings were growing at a 3.5% annual rate, now they're up to a 5% annual rate--unchanged since early 2022. Note, these are noisy and can be revised a lot. Overall this report is mixed for the inflation outlook: Jobs/hours: Cooling Unemployment rate: Neutral Wages: Heating I tend to think the order I listed them above is roughly right for what signals matter so think this report is slightly favorable for inflation.

August 3, 2023

The Rasputin Effect: Global Resilience To Higher RatesMichael CembalestJ.P. Morgan

Michael Cembalest notes that, “There’s still plenty of liquidity in the system,” as central banks have removed only 1/3 of the $11 trillion in liquidity created during the pandemic period.

While a simple read of the yield curve points to recession, the health of the US corporate sector does not: the corporate sector financial balance is still in surplus, a condition which has never preceded a recession. Central banks have only removed around one third of the $11 trillion in global liquidity they created in 2020/2021. There’s still plenty of liquidity in the system and the cost of money is not prohibitive. Excess US household savings are projected to run out sometime in 2024, and while current economic indicators are robust, there’s weakness in Conference Board leading indicators. The overall pulse does not point to a significant contraction, just to modestly weaker US conditions in 6-9 months. Related: Most Global Economies Remain in Disequilibrium, Requiring Policy Action

There Is No "Stealth Fiscal Stimulus"Matt KleinThe Overshoot

The increase in the US federal deficit has been driven by higher net interest costs, lower remittances to the Treasury from the Federal Reserve, and lower capital gain income. @M_C_Klein

The U.S. federal budget deficit has widened by about 3-4pp of GDP since the start of 2022. The downturn in revenues is mostly attributable to the plunge in capital gains tax receipts after the windfall of 2021/2022, as well as the collapse in dividends paid by the Federal Reserve to the Treasury. Meanwhile, the increase in outlays is almost entirely attributable to the surge in interest payments on Treasury debt. Related: Net Interest Payments On External US Debt and The Budget and Economic Outlook: 2023 to 2033

Fitch Is RightJohn CochraneThe Grumpy Economist

.@JohnHCochrane argues that Fitch was right to downgrade the US as inflation is effectively a default. “If you only repaid 87.6% of your mortgage, you can be sure the bank would see you as a worse credit risk going forward.”

Inflation is the economic equivalent of a partial default. The debt was sold under a 2% inflation target, and people expected that or less inflation. The government borrowed and printed $5 Trillion with no plan to pay it back, devaluing the outstanding debt as a result. Cumulative inflation so far means debt is repaid in dollars that are worth 12.4% less than if inflation had been 2%. That's economically the same as a 12.4% haircut. If you only repaid 87.6% of your mortgage, you can be sure the bank would see you as a worse credit risk going forward. The probability that the US inflates again, that in the next crisis they do the same thing, is unquestionably larger. The world's appetite for boundless amounts of US debt is unquestionably smaller. Related: What We’ve Learned About Inflation

Birth, Death, and Wealth CreationMichael Mauboussin and Dan CallahanMorgan Stanley

As firms have stayed private longer wealth creation has shifted from public to private markets. @mjmauboussin

The median age at IPO was 7.9 years from 1976 to 2000 and rose to 9.5 years from 2001 to 2022. One implication of companies staying private longer is that wealth creation has shifted to private markets from the public markets. To illustrate the point, Amazon’s market capitalization was $749 million when it went public in 1997 and $1.3 trillion as of June 30, 2023 (in 2022 dollars). The company was three years old when it did its IPO. Essentially all of its wealth creation occurred when it was public. Hendrik Bessembinder, a professor of finance, has measured the wealth creation of more than 28,000 U.S.listed companies since 1926. A company creates wealth if it generates returns in excess of one-month Treasury bill rates. He found that from 1926 to 2022, just under 60% of them destroyed $9.1 trillion and the other 40% or so created $64.2 trillion. Just 2% of the sample created $50 trillion of the net total of $55.1 trillion, and the top 3 firms (Apple, Microsoft, and ExxonMobil) created almost $6 trillion. Related: Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOs and The Economics of Inequality in High-Wage Economies

The Ultra-Rich Are Flourishing and Sticking Around In CaliforniaEliyahu Kamisher and Biz CarsonBloomberg

Despite net migration from California between 2019 and 2021, California added more than 116,000 millionaire taxpayers. The top 1% of earners account for roughly 50% of personal income tax revenue.

California has more billionaires — 113 — than in any country except China. The ranks of mere millionaires have grown as well, far outpacing any loss of high-net-worth taxpayers during the pandemic. From the end of 2019 through 2021, California added more than 116,000 millionaire taxpayers, according to the state’s Department of Finance. The number of residents making more than $50 million surged 158% to 3,182. And that likely underestimates the riches. While the tax data reflects salaries along with income from stock and real estate sales, the ultra-wealthy often avoid income taxes by borrowing against their wealth instead of selling assets that would incur a tax burden. In total, more than 288,000 Californians, or 0.7% of residents, reported over $1 million in income in 2021. Related: The Population of California Declined, Again and Taxes, Revenues, and Net Migration In California and Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy

The Rapid Loss Of Antarctic Sea Ice Brings Grim Scenarios Into ViewEconomist StaffThe Economist

After remaining relatively stable and actually growing between 1976 to 2014, Antarctic sea ice is at a record low, six standard deviations below the 1991-2020 levels.

One of the leading short-term explanations is unusual patterns of wind and waves. Throughout June and July, gusts traveling from the Bellingshausen Sea towards the South Pole prevented ice from forming near the Antarctic Peninsula. Weather systems emanating from storms in the Indian Ocean—brought about by shifts in two regular atmospheric fluctuations, the El Niño Southern Oscillation and the Southern Annular Mode—may also have broken up sea ice as it began to form in East Antarctica. The ring of sea ice around Antarctica holds in place the continent’s coastal ice shelves, which in turn do the same for its glaciers and ice sheets. If those ice shelves were to collapse—as the Conger shelf in east Antarctica did in 2022—the gates would open for continental ice to flow rapidly into the oceans. The west Antarctic ice sheet alone contains enough water to increase global sea level by 11 feet. Related: Antarctic Sea Ice Levels Dive In 'Five-Sigma Event', As Experts Flag Worsening Consequences For Planet and Antarctic Sea Ice Has Shrunk By An Area Nine Times The Size Of Britain

What This Year’s ‘Astonishing’ Ocean Heat Means for the PlanetElena ShaoNew York Times

Last week a buoy off the coast of Florida recorded a reading of 101.1°F which might be a record for sea surface temperature.

The planet’s average sea surface temperature spiked to a record high in April and the ocean has remained exceptionally warm ever since. The North Atlantic has seen some of the most exceptional warmth, with recent temperatures consistently reaching more than 2°F higher than what is typical for this time of year. Last week, one reading from a buoy recorded a stunning 101.1°F, possibly a world record for sea surface temperatures. The eruption of an underwater volcano in the Pacific Ocean near Tonga last year, which spewed tens of millions of tons of water vapor into the stratosphere, may have also influenced this year’s ocean temperatures. Water vapor, like carbon dioxide, is a greenhouse gas that traps heat near Earth’s surface. Scientists expect warm ocean conditions to continue into the fall, with El Niño intensifying in the months ahead. Related: Florida Ocean Temperatures At ‘Downright Shocking’ Levels

August 2, 2023

What We’ve Learned About InflationJohn CochraneWall Street Journal

.@JohnHCochrane takes a victory lap, arguing that the fiscal theory of the price level is the most descriptive theory of inflation.

A one-time $5 trillion fiscal blowout causes a one-time rise in the level of prices, just enough to inflate away the value of the debt by $5 trillion. Then inflation stops, even if the Federal Reserve does nothing. The Fed is still important in fiscal theory. The Fed bought about $3 trillion of the new debt and converted it to interest-paying reserves. Giving people checks backed by reserves is arguably a more powerful inducement to spend than giving people Treasury bonds. Now, by raising interest rates, the Fed lowers current inflation but at the cost of more-persistent inflation. That smoothing is beneficial. These are core propositions of fiscal theory, stated ahead of time and at odds with conventional theories. Related: Waning Inflation, Supply and Demand and The Second Great Experiment Update

The Collapse of Broken-Windows Policing in New York City, Los Angeles, and Washington, DC, 2013–22Charles MurrayAmerican Enterprise Institute

.@charlesmurray argues that urban disorder has increased since 2013, when cities abandoned broken-windows policing.

I created a “broken-windows arrest rate” analogous to the violent and property crime rates by summing arrests in the eight categories, dividing them by the size of the city’s population, and expressing the result as the number of arrests per 100,000 population. To ensure that all these qualified as minor crimes, I included only arrests that were charged as misdemeanors, violations, or infractions, excluding arrests charged as felonies. The graph below shows the proportional change in those arrest rates using 2013 as the baseline. In New York and Los Angeles, the fall in arrests for broken-windows offenses was steep and steady from 2013 to 2020. Washington is different, with a sudden rise in broken-windows arrests in Washington in 2019. The anomaly was created entirely by a one-year spike in arrests for prostitution and solicitation, the result of a policy decision to clear the streets of prostitutes near hotels. If arrests for prostitution and solicitation are deleted from the Washington data, the trendline of broken-windows offenses shows the same unbroken decline as the trendlines for New York and Los Angeles. As of 2022, arrests for broken-windows offenses since 2013 had fallen by 74% in New York, 77% in Washington, and 81% in Los Angeles. There was no apparent “Floyd effect” in New York or Los Angeles. A case for a small effect can be made for Washington. Related: Pandemic Murder Wave Has Crested. Here’s the Postmortem

Deteriorating Household Finances Will Not Support Strong SpendingWendy Edelberg and Sofoklis GoulasBrookings Institution

.@WendyEdelberg notes the current 4.6% personal savings rate and argues that households must either cut spending or undermine financial health by borrowing to maintain current spending levels.

The rate at which households saved out of income saw large fluctuations during the COVID-19 pandemic. In 2019 the saving rate hovered around 9%. After the saving rate spiked to unprecedented levels in 2020 and 2021, it fell dramatically in 2022. In June 2022 households saved less than 3% of DPI, which was close to a historically low level. As of May 2023, the saving rate remains low at 4.6%. Some households may be on a precipice where real income and real wealth do not show marked improvement. To maintain relatively healthy balance sheets, such households can moderate the pace of consumer spending (particularly goods spending). Alternatively, households can maintain the current trends in spending, increasingly financing spending with borrowing, and financial health could deteriorate in a worrying way. Related: Accumulated Savings During the Pandemic: An International Comparison with Historical Perspective and The Rise and Fall of Pandemic Excess Savings

Frying Pans and Fiscal PolicyPaul KrugmanKrugman Wonks Out

.@paulkrugman notes the slow recovery from the Great Recession cost Americans $4.5 trillion and argues that the rapid recovery from the post-pandemic recession suggests Great Recession fiscal policy was too constrained.

You can draw comparable charts for many other economic variables, some of them just showing levels like the two figures above, others showing deviations from the pre-2008 trend. Their consistent shapes all tell the same story: The U.S. economy remained significantly depressed for many years — indeed, a decade or so, after the financial crisis — and this lost decade could have been avoided with the right policies. How do we know that it could have been avoided? Because of what happened the past few years, when the U.S. economy, boosted by major federal spending programs, came roaring back from the Covid slump, regaining all the lost ground in just over three years. If America had done as well after the financial crisis, we would have been back on trend by mid-2011. Related: Unintended Consequences Accurately Predicted The Slow Recovery

The ‘Summer of Strikes’ Isn’t Living Up to the HypeJustin FoxBloomberg

Between UPS reaching a tentative deal with the Teamsters and the Yellow Corp bankruptcy, August won’t be the “Summer of Stikes” but @foxjust notes recent labor activity is increasingly in the private, not the public sector.

The strikers in 2018 and 2019 were mostly teachers and other state and local government employees, while this year most are employees of private companies. A lot of current private-sector organizing is on a location-by-location basis with strikes that don’t show up in the BLS counts because they involve fewer than 1,000 workers, with the more inclusive Cornell-ILR Labor Action Tracker counting 224,000 workers involved in stoppages last year, nearly double the BLS tally of 120,600. The 340,000 workers who didn’t go on strike at UPS because the company gave into their wage demands should probably count as a significant union victory even if doesn’t show up in the strike statistics. And according to the US BLS other main measure of strike activity, days on strike divided by total working time, this year may still prove a standout, at least by post-1980 standards. Related: America Is Barreling Toward a Summer of Strikes and Unions Inflation Warning

BOJ Shock Has Wall Street Gaming Out the Global SpilloversMichael Mackenzie and Katherine GreifeldBloomberg

The end of the Bank of Japan’s yield control campaign will likely tighten financial conditions globally.

While the Bank of Japan has signaled it will let yields to trade toward 1% from roughly 0.5% now, its decision to step into the market on Monday suggests that won’t happen anytime soon. Still, with domestic investors holding around $2.5 trillion of US stocks, bonds and credit, the very idea that Japan will one day join the developed world in retreating from zero rates has Wall Street sizing up a volatile fallout that could add fuel to the higher-for-longer interest rate era. Related: Raising Anchor and What Have We Learned About the Neutral Rate? and The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet)

Tech Cold War: South Korea Pivots From China To USChristian DaviesFinancial Times

The United States is South Korea’s largest export market for the first time since 2004 as Korean firms quietly pivot away from China.

In June, Xing Haiming, China’s ambassador in Seoul, publicly warned South Korea against “decoupling” from the Chinese economy under the influence of the US. South Korea has already embarked on an unmistakable — albeit untrumpeted — pivot away from the Chinese economy. According to data released by the Bank of Korea in June, South Korea exported more goods to the US in 2022 than it did to China for the first time since 2004 when China’s nominal gross domestic product was still less than that of the UK.

August 1, 2023

Raising AnchorJoseph WangFed Guy Blog

.@FedGuy12 argues that “Treasury yields will continue to drift higher,” as higher Japanese yields will move the marginal Japanese buyer out of the Treasury market just as Treasury issuance is increasing.

The BOJ’s low interest policy remains an anchor of global bond yields, but that anchor will soon be set at a higher level. U.S. bonds will appear even more unattractive to Japanese investors, whose exit from the market would allow U.S. bond yields to drift higher. The eventual Fed rate cuts would reduce FX hedging costs and potentially bring back some Japanese investors, but until then it looks like one more marginal source of demand is evaporating even as Treasury supply is set to increase. This suggests that Treasury yields will continue to drift higher. Related: American Gothic and China Isn't Selling Treasuries

War, AI and Climate Change Shake Up $32 Trillion in Global TradeBloomberg StaffBloomberg

Bloomberg’s @TomOrlik writes that Mexico and Vietnam have been the biggest beneficiaries of the realignment of global supply chains, a process that he thinks “has barely begun.”

Bloomberg calculates that US imports of tariffed goods from China are down about $150 billion from where they’d otherwise be. Mexico is filling much of the gap. The share of manufacturing in India’s gross domestic product stands at 13%, well below Modi’s 25% goal. China outperforms India in making sophisticated technology—the so-called value-add that leads consumers to pay more for items such as electronics. Chinese manufacturers’ value-add is currently 49%, compared with 20% for India’s, the government says. Related: Mexico Seeks to Solidify Rank As Top U.S. Trade Partner, Push Further Past China and Take Away China, and a Stealth Bull Market Emerges

The Benefit of Owning Stocks Over Bonds Keeps ShrinkingSam GoldfarbWall Street Journal

The equity risk premium is at its lowest level since 2002.

The extra reward for holding stocks instead of bonds has fallen to its lowest level in 20 years, threatening a recent hot streak for major indexes. One method for gauging the value of stocks is to compare their earnings yield—calculated by dividing a company’s expected earnings over the next year by its stock price—to the yield on government bonds, considered the closest thing to a risk-free return. The gap between the earnings yield of the S&P 500 and the yield on the 10-year U.S. government bond dropped to around 1.1pp last week, its narrowest since 2002. The spread to the yield on the 10-year Treasury inflation-protected security, seen by some analysts as the better benchmark because corporate earnings tend to adjust with inflation, has similarly fallen to its lowest level since 2003, at around 3.5pp. Related: Market Resilience or Investors in Denial: The Market at Mid-Year 2023 and Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOs

Miami Sees Its First Population Drop in DecadesKonrad Putzier and Deborah AcostaWall Street Journal

Miami-Dade County’s population shrank between 2019 -2022, the first decrease since the 1970s. The number of employed workers in May was just under 2019 levels.

Miami-Dade lost 79,535 people through net migration to other parts of Florida or other states between 2020 and 2022, according to an analysis of U.S. Census Bureau data by the Brookings Institution. Although foreign immigration offset some of the loss and helped the county’s population rise slightly last year, Miami-Dade County’s population still shrank between 2019 and 2022—its first population loss over a multiyear period since at least 1970, according to the Federal Reserve Bank of St. Louis. Home prices in Miami have soared 53% since June 2020, according to online listing site Zillow, the second most out of the top 50 metropolitan housing markets after Tampa. Related: Young Families Have Not Returned to Large Cities Post-Pandemic and Home Insurers Are Charging More and Insuring Less and A $100 Billion Wealth Migration Tilts US Economy’s Center of Gravity South

Origin Of Correlated Isolated Flat Bands In Copper-Substituted Lead Phosphate ApatiteSinead GriffinLawrence Berkeley National Lab

Research from Lawrence Berkeley National Lab @sineatrix suggests that the potential superconductivity breakthrough announced by South Korean researchers is plausible.

A recent report of room temperature superconductivity at ambient pressure in Cu-substituted apatite (‘LK99’) has invigorated interest in the understanding of what materials and mechanisms can allow for high-temperature superconductivity. Here I perform density functional theory calculations on Cu-substituted lead phosphate apatite, identifying correlated isolated flat bands at the Fermi level, a common signature of high transition temperatures in already established families of superconductors. I elucidate the origins of these isolated bands as arising from a structural distortion induced by the Cu ions and a chiral charge density wave from the Pb lone pairs. These results suggest that a minimal two-band model can encompass much of the low-energy physics in this system. Related: Korean Team Claims To Have Created The First Room-Temperature, Ambient-Pressure Superconductor

Climate Change Hasn’t Set the World on FireBjorn LomborgWall Street Journal

.@BjornLomborg argues that the narrative around forest fires has been distorted by the media. He notes that the percentage of the globe that burns each year has been declining since 2001.

For more than two decades, satellites have recorded fires across the planet’s surface. The data are unequivocal: Since the early 2000s, when 3% of the world’s land caught fire, the area burned annually has trended downward. In 2022, the last year for which there are complete data, the world hit a new record-low of 2.2% burned area. While the complete data aren’t in for 2023, global tracking up to July 29 by the Global Wildfire Information System shows that more land has burned in the Americas than usual. But much of the rest of the world has seen lower burning—Africa and especially Europe. Globally, the GWIS shows that burned area is slightly below the average between 2012 and 2022, a period that already saw some of the lowest rates of burned area. Related: Canada Sees Its Farthest-North 100-Degree Temperature As Wildfires Rage

July 31, 2023

Elon Musk’s Latest Mission: Rev Up the Electricity IndustryTim HigginsWall Street Journal

.@elonmusk predicts US electricity consumption will triple by 2045. PG&E forecast electrical demand will be up 70% over next 20 years, while McKinsey expects demand will double by 2050.

Elon Musk is predicting U.S. consumption of electricity will triple by around 2045. “I can’t emphasize enough: we need more electricity however much electricity you think you need, more than that is needed.” He anticipates an electricity shortage in two years that could stunt the energy-hungry development of artificial intelligence. For the past 20 years, U.S. electricity demand has grown at an average rate of 1% each year, according to a Deloitte study. PG&E expects electricity demand will rise 70% in the next 20 years, which, the California company notes, would be unprecedented. Similarly, McKinsey expects U.S. demand will double by 2050. Deloitte estimates the largest U.S. electric companies together will spend as much as $1.8 trillion by 2030. Related: Gridlock: How a Lack of Power Lines Will Delay the Age of Renewables and Summers and Blanchard Debate the Future of Interest Rates

Sticking the Soft LandingJoseph PolitanoApricitas Economics

.@JosephPolitano notes that real per-capita consumption briefly caught up with the pre-crisis trend, and argues the post-crisis period of persistent underinvestment, low employment, and sluggish growth is over.

Not only has real per-capita consumption recovered to pre-COVID levels, but it has actually broadly returned to its pre-COVID trend at the fastest pace of any modern recession—in stark contrast to the permanent scars on consumption left by the 2008 recession. In fact, growth in real consumption of durable goods has not only vastly exceeded the pre-pandemic trend but briefly caught up with the pre-Great Recession trend, and remains high even as it hasn’t grown in several years. The 2010s saw durable goods’ share of spending sink by roughly 3% in 3 years and barely recover afterward. Not until the pandemic did durable goods consumption spending climb back to its pre-recession share of household budgets. That meant more than a decade of, effectively, household underinvestment in some of the most-important big-ticket items that provide long-term welfare and enhance people’s economic productivity—and that is being partially undone today.

The Case for "Higher for Longer": Prices are Disinflating, But Not Wages (Yet)Matt KleinThe Overshoot

.@M_C_Klein notes strong nominal wage growth and increased demand for investment aren’t consistent with a deflationary process and notes the “neutral” rate of interest may have risen relative to pre-pandemic levels.

The overall picture is that occupations where pay rose the fastest in 2021-2022 have since seen pay growth normalize, while jobs in the rest of the economy are still experiencing persistently faster pay growth. There has been some deceleration relative to the peak at the beginning of 2022, but it has been very modest. One good reason to think that the “neutral” policy rate has gone up is that the post-2000 investment drought is finally ending thanks in no small part to the U.S. government’s subsidies. In this environment, short-term interest rates of 5.5%—which is what the U.S. endured in the second half of the 1990s without problems when inflation was slower—do not seem particularly high. If that is correct, then 4% yields on 10-year Treasury notes could be too low, which could also have implications for the appropriate discount rates for stocks. Related: What Have We Learned About the Neutral Rate?

Home Insurers Are Charging More and Insuring LessJean EagleshamWall Street Journal

Since 2022, 31 states have approved double-digit home insurance rate increases as insurers seek to properly price risk.

Arizona, Texas, North Carolina, Oregon, Illinois and Utah had the biggest total of approved increases, ranging from 20% to 30%. In states such as California, some insurers are halting sales of new policies. Companies are also pulling back from some areas vulnerable to disasters. The escalating cost of catastrophes is reflected in a steep increase in premiums for the reinsurance coverage that home-insurance companies buy to pass on some of their risk. Depending on the state regulator, those higher premiums can feed directly through to the price charged to homeowners. Data shows reinsurance premiums were up on average 33% for June 1 renewals, which includes many Florida carriers, and 50% for renewals at the start of this year. Related: Why California and Florida Have Become Almost Uninsurable and Climate Shocks Are Making Parts of America Uninsurable. It Just Got Worse and Farmers Insurance Limits Sales in Florida, California Amid Storm, Wildfire Risks

Will There Be Enough Cables For The Clean Energy Transition?Rachel MillardFinancial Times

Demand for high-voltage cables outside China is increasingly supply-constrained which will soon start to delay major renewable energy projects.

Sending electricity at very high voltage is more efficient, if more expensive, with losses potentially as low as 3% per 1,000km for direct current systems, which have less resistance. This is about 30-40% lower than for alternating current systems. “HVDC [high-voltage direct current] becomes economic at about the 60km mark” for subsea systems, says Ian Douglas, chief executive of cable company XLCC. Demand for high-voltage cables is booming, with the market climbing from a typical $3bn of new projects awarded per year between 2015-20 to $11bn in 2022. This year, the estimated value of new orders is likely to exceed $20bn before settling at $18bn-$20bn per year, according to Massimo Battaini, incoming chief executive of Prysmian. “We are fully booked until 2026/27,” he says. Related: Gridlock: How a Lack of Power Lines Will Delay the Age of Renewables

First New US Nuclear Reactor In Three Decades May Be Its LastMyles McCormickFinancial Times

The first new US nuclear facility in 30 years will start to deliver power this summer; however, cost overruns have led to diminished investor interest in future projects.

When Plant Vogtle unit 3 finally delivers commercial electricity to the Georgia power grid, it will be the first nuclear reactor the country has built from scratch in more than three decades. The 1,100-megawatt Vogtle unit 3 was initially supposed to enter service in 2016. Georgia Power, the utility driving the project, most recently said it would start commercial operations in July after the latest delay caused by a degraded seal in its main generator. The $14bn original cost of Vogtle units 3 and 4 has now ballooned to more than $30bn. The cost for Georgia Power, with a 45% share of the project, will be about $15bn. Related: Pricey Things

The Death of SummerNiall FergusonBloomberg

Citing the rise in the frequency of extreme heat globally, @nfergus argues investors should “short shores, long hills” as changes in temperature increasingly impact financial markets and politics.

Global warming no longer needs to be a theory; it’s a reality. Extreme heat is significantly more common in major cities these days (2019-23) than it was in the early 1950s. To be precise, there are 2.7 times as many days with mid-afternoon temperatures above 30 C in Athens; 3.7 times in Barcelona; 8.1 times in Paris; and an amazing 10.4 times in London. The mountains are seeing temperatures rise roughly as much as the beaches. The effects on snow cover in the Alps are all too familiar to European skiers. Short shores, long hills may not turn out to be the trade of the century. But short shores, long hills feels right. Related: Climate Change and the Geography of the U.S. Economy and Global Temperatures Have Broken Records Three Times In A Week

U.S. Hunts Chinese Malware That Could Disrupt American Military OperationsDavid Sanger and Julian BarnesNew York Times

Chinese hackers have hidden malicious computer code in US computer networks that control power grids and water supplies to military bases globally. The code is not designed for intelligence gathering but for offensive operations.

The investigations so far show the Chinese effort appears more widespread — in the United States and at American facilities abroad — than they had initially realized. But officials acknowledge that they do not know the full extent of the code’s presence in networks around the world, partly because it is so well hidden. There is a debate inside the administration over whether the goal of the operation is primarily aimed at disrupting the military, or at civilian life more broadly in the event of a conflict. Related: Volt Typhoon Targets US Critical Infrastructure with Living-Off-The-Land Techniques and CIA Chief Warns Against Underestimating Xi's Ambitions Toward Taiwan

US To Provide Taiwan With Weapons From Its Stockpiles For First TimeDemetri SevastopuloFinancial Times

Using the same “presidential drawdown authority” used to send arms to Ukraine, the Pentagon is directly providing weapons to Taiwan for the first time. Last year Congress approved a $1 billion of drawdown support to Taiwan.

The US will provide Taiwan with $345mn in weapons, marking the first time the Pentagon will send arms directly to the country. The White House on Friday announced its plan to provide weapons from US stockpiles in the first tranche of an annual $1bn “presidential drawdown authority” (PDA) Congress approved last year to support Taiwan. Successive US administrations have approved the sale of weapons to Taiwan. But this is the first time the arms have been directly provided under the PDA — the same authority that the Biden administration has been using to send weapons to Ukraine. Related: US To Link Up With Taiwan and Japan Drone Fleets To Share Real-Time Data and US Effort to Arm Taiwan Faces New Challenge With Ukraine Conflict

July 28, 2023

How Ivy League Schools Tilt Your Odds in the Lottery of LifeJosh ZumbrunWall Street Journal

.@JoshZumbrun, evaluating the differences between @OppInsights recent research on elite schools and Krueger’s earlier findings, shows that elite schools don’t have that much impact outside of lottery-like tail outcomes.

Dale and Krueger had classified everyone who earned more than $200,000 into the same category, making no distinction between an affluent doctor earning $250,000 and Jeff Bezos. Chetty and his authors use a slightly different approach. They classify everyone’s income into percentiles—80th, 81st, etc. Among top students, 19% who attend the top schools make it to the richest 1% of the income distribution, versus 12% who didn’t attend. Chetty’s co-author Deming compares those upper-tail outcomes to winning the lottery: Elite schools have lots of lottery tickets lying on the ground, whereas most other colleges only have a few. For most people, the lottery ticket will be worth nothing. For a few, it is a jackpot. Related: Diversifying Society’s Leaders? The Determinants and Causal Effects of Admission to Highly Selective Private Colleges

Doctor’s Office Care at Hospital PricesBobby Jindal and Charlie KatebiWall Street Journal

.@BobbyJindal argues that simple reforms in Medicare billing could save patients and taxpayers somewhere between $346B and $672B over the next 10 years.

Currently, Medicare pays hospital-owned facilities two to three times as much as independent physician offices for the same service, according to the Alliance for Site Neutral Payment Reform. This creates an enormous incentive for large hospital chains to acquire outpatient practices. A report by the Physician Advocacy Institute found that the share of hospital-owned physician practices more than doubled, from 14% to 31%, between 2012 and 2018. By 2020 more than half of physicians worked directly for a hospital or at a physician practice owned by a hospital, according to the American Medical Association. Removing these perverse incentives could save patients and taxpayers between $346 billion and $672 billion over the next decade.

Furman On PCE ReportJason Furman@jasonfurman

.@jasonfurman notes the Fed’s preferred inflation measure, Core-PCE, came in very low, running at 4.1% y/y. He says that this “Confirms the good June CPI news (but no real new info).”

Core PCE inflation came in very low (albeit a touch above expectations), the second lowest pace of the inflationary period. If you swap in new rents for all rents you see a more pronounced slowdown (although not nearly as dramatic as the same adjustment for the CPI). This is a 2.3% annual rate over the last 3 months. In sum, this tells the same story as the CPI: inflation is slowing, there is reason to believe there will be further slowing as shelter comes down but also some worries about some of the good news being transitory. But overall the June inflation data was good news. Related: A June Inflation Surprise and Is This Disinflation "Immaculate" or "Transitory"?

Could Economic Indicators Signal China’s Intent To Go To War?Economist StaffThe Economist

.@TheEconomist argues that increasing stockpiles of imported food and energy could signal China’s intent to invade Taiwan.

China imports nearly three-quarters of the oil it uses. The substance accounts for only 20% of the country’s energy use, but it would be crucial to any war effort. If China were to start increasing its reserves—it currently has enough to last three months at today’s consumption rate—that would be one of the best indicators that it is preparing for war. China imports more agricultural produce than any other country. Obsessed with food security, it already has enormous stockpiles. In 2021 an official said its wheat reserves could meet demand for 18 months. Over the past decade, China has greatly increased its purchases of wheat, corn, rice, and soybeans.

Soft Landing Optimism Is Everywhere. That’s Happened BeforeJeanna SmialekNew York Times

On Wednesday, Jerome Powell said Fed staff economists are no longer predicting a recession in 2023. @jeannasmialek notes such optimism has been wrong in the past: 1994-95 was the only true soft landing.

The historical record may not be particularly instructive in 2023, said Michael Feroli, the chief U.S. economist at J.P. Morgan. This has not been a typical business cycle, in which the economy grew headily, fell into recession, and then clawed its way back. Instead, growth was abruptly halted by coronavirus shutdowns and then rocketed back with the help of widespread government stimulus, leading to shortages, bottlenecks and unusually strong demand in unexpected parts of the economy. All of the weirdness contributed to inflation, and the slow return to normal is now helping it fade.

July 27, 2023

Why US Debt Will Continue To RiseMichael PettisFinancial Times

.@michaelxpettis argues that high US income inequality leads to structurally low US demand, as the wealthy are prone to save. As a result, the US is forced to choose between more debt and more unemployment.

The wealthy save a much larger part of their income than do workers or the middle class, and use a much smaller part for consumption, rising income inequality automatically reduces overall consumption and forces up savings by effectively transferring income from high consumers to high savers. If lower consumption is not balanced by higher investment, total demand must decline. To prevent this from happening, Washington typically does one of two things. First, the Federal Reserve can implement policies that encourage household borrowing to fund additional consumption. In that case, the reduction in the income share of ordinary Americans is balanced by an increase in their borrowing, so the same level of consumption can be maintained. Second, Washington can itself borrow and use the proceeds to replace the demand lost by the reduction in household consumption. Related: Pettis On CBO Numbers

Labor Market Indicators Are Historically Strong After Adjusting for Population AgingErnie TedeschiCouncil of Economic Advisors

After adjusting for population aging, the employment-to-population ratio is within .1% of its Feb 2020 level and labor force participation ratio is at its highest level since 2001. @ernietedeschi

The employment-to-population ratio (EPOP) has returned to its age (and gender)-adjusted prepandemic trend. The labor force participation rate (LFPR) age-adjusted in June 2023 was consistent with rates last seen in 2001. When looking over extended periods of time, labor market indicators should be age-adjusted to distinguish between secular demographic trends versus other cyclical economic effects. Second, after accounting for demographic shifts in labor supply and demand, the current U.S. labor market is unusually strong from a historical perspective, posting elevated and even record measures of participation and employment. Related: Unions’ Inflation Warning?

Housing, Household Debt, and the Business Cycle: An Application to China and KoreaAmir SufiNational Bureau of Economic Research

The rapid rise of China and South Korea’s household debt to GDP ratio has strong parallels to EU and North American real-estate boom-bust cycles in 2007. @profsufi

The Chinese and Korean booms are comparable with the booms that occurred in the United States and United Kingdom from 2001 to 2007. [Going forward] in both countries, consumer spending could be quite weak. This is an especially pronounced problem in Korea, where the debt service ratio has risen substantially and is now at an exceptionally high level. A rise in the debt service ratio during a household debt boom portends slower growth in the historical data, and Korea appears likely to follow that historical pattern. The allocation of production to real estate and construction activities over the past decade in China is historically unprecedented. It is difficult to imagine that the rate of activity in the real estate sector is sustainable, and it is difficult to see what sectors can take up the production slack if there is a continued decline in real estate activity. Related: Can China’s Long-Term Growth Rate Exceed 2–3 Percent?

A Looming Retraction Casts a Shadow Over a Field of PhysicsKenneth ChangNew York Times

Earlier work by Ranga Dias, the researcher who claimed a breakthrough on room-temperature superconductors, has been retracted due to willfully submitted false data.

A major physics journal is retracting a two-year-old scientific paper that described the transformations of a chemical compound as it was squeezed between two pieces of diamond. Such an esoteric finding — and retraction — would not typically garner much attention. But one of the leaders of this research is Ranga Dias, a professor at the University of Rochester in New York who made a much bigger scientific splash earlier this year, touting the discovery of a room-temperature superconductor. While Dr. Dias continues to defend the work, to some scientists, there is now clear evidence of misconduct. “There’s no plausible deniability left,” said N. Peter Armitage, a professor of physics and astronomy at Johns Hopkins University in Baltimore who is among the scientists who have seen the reports. “They submitted falsified data. There’s no ambiguity there at all.” Related: The Scientific Breakthrough That Could Make Batteries Last Longer and Room-Temperature Superconductor Discovery Meets with Resistance

Korean Team Claims To Have Created The First Room-Temperature, Ambient-Pressure SuperconductorBob YirkaPhys.org

In a preprint a team in South Korea claims to have created a room-temperature/ambient-pressure superconducting material.

In their papers, the team claims to have measured samples of LK-99 as electricity was applied and found its sensitivity fell to near zero. They also claim that in testing its magnetism, it exhibited the Meissner effect—another test of superconductivity. In such a test, a sample should levitate when placed on a magnet. The team has provided a video of the material partially levitating. They claim that the levitation was only partial because of impurities in their material.

July 26, 2023

A US Recession Is Still PossibleMichael StrainProject Syndicate

.@MichaelRStrain highlights the fact that monetary policy slows the economy by tightening overall financial conditions, and yet financial conditions have not tightened much in 2023. He predicts more rate increases and a recession.

According to my calculations, the real (inflation-adjusted) interest rate is around 1.5%, which is one percentage point higher than the Fed’s estimate of the neutral real policy rate (which neither stimulates nor reduces economic activity). Prior to previous recessions, the real rate has been higher. While current market pricing suggests that the Fed will increase the federal funds rate once more this cycle, I think that is optimistic. Between stubborn and high underlying inflation, financial conditions that aren’t tightening, and real interest rates that are lower than is typical before a significant economic slowdown, there are ample reasons for the Fed to raise rates more than economists and investors currently seem to expect. If that happens, the risk of recession will increase. Related: Furman On CPI Report and A Default Cycle Has Started

Warming Could Push the Atlantic Past a ‘Tipping Point’ This CenturyRaymond ZhongNew York Times

New research projects that the Atlantic Meridional Overturning Circulation current will weaken this century which could have a cooling effect on the Northern Hemisphere and reduce rainfall in the monsoon regions of Asia.

The last time there was a major slowdown in the mighty network of ocean currents that shapes the climate around the North Atlantic, it seems to have plunged Europe into a deep cold for over a millennium. That was roughly 12,800 years ago when not many people were around to experience it. But in recent decades, human-driven warming could be causing the currents to slow once more. New research published in Nature Communications [projects] the Atlantic Meridional Overturning Circulation, or AMOC could collapse around midcentury. Were the circulation to tip into a much weaker state, the effects on the climate would be far-reaching, though scientists are still examining their potential magnitude. Much of the Northern Hemisphere could cool. The coastlines of North America and Europe could see faster sea-level rise. Northern Europe could experience stormier winters, while the Sahel in Africa and the monsoon regions of Asia would most likely get less rain. Related: Antarctic Sea Ice Has Shrunk By An Area Nine Times The Size Of Britain and Florida Ocean Temperatures At ‘Downright Shocking’ Levels

How China Suddenly Became a Car Export PowerhouseJoseph PolitanoApricitas Economics

China is now the leader in car export volume, but the value of its net exports remains lower than Germany and Japan. @JosephPolitano

“No one noticed—but we noticed,” said Ford CEO James Farley on an earnings call last month, “something monumental happened in our industry, where China became the number one exporter of vehicles globally. It had always been the Germans or the Japanese.” Despite the record-setting rise in gross exports and China’s newfound motor vehicle trade surplus, net exports still remain below Japanese and German levels. The per-car value of Chinese vehicles still tends to be lower than their foreign competitors, and a lot of the rise in exports has been matched by a rise in imports. Related: China’s Auto Export Wave Echoes Japan's in the ’70s and The Chinese Carmakers Planning to Shake Up The European Market

The Many Channels Of Firms’ Adjustments To Energy Shocks: Evidence From FranceLionel Fontagné, Philippe Martin and Gianluca OreficeCenter for Economic and Policy Research

Between 1996-2019 French firms responded to energy shocks by initially reducing exports and employment but over time they increased their energy efficiency and the negative effects faded. @martinph01

The energy price shock also generates a fall in production and employment: a 10% increase in electricity price translates into a 1.6% fall in production and a 1.5% fall in employment. Energy efficiency increases at the firm level. Profits fall but modestly or only for the most gas-intensive firms. However, these negative impacts wane over time. Our interpretation is that during 1995–2019, firms adapted their technology and production processes to higher energy prices and a selection process eliminated those not able to adjust. All in all, these results suggest that firms are able to adjust and adapt strongly to energy shocks but that the competitiveness impact is significant.

G.M. and Other Automakers Will Build 30,000 Electric Vehicle ChargersJack EwingNew York Times

Seven major automakers are investing $1 billion in a joint venture that will almost double the number of EV chargers in the United States.

Seven major automakers announced a plan on Wednesday to nearly double the number of fast chargers in the United States in an effort to address one of the main reasons that people hesitate to buy electric cars. The carmakers — BMW Group, General Motors, Honda, Hyundai, Kia, Mercedes-Benz Group,, and Stellantis — will initially invest at least $1 billion in a joint venture that will build 30,000 chargers on major highways and other locations in the United States and Canada. The United States has about 32,000 fast chargers — those that can replenish a drained battery in 10 to 30 minutes. The chargers will have plugs designed to use the connections used by most carmakers other than Tesla, as well as the standard developed by Tesla that Ford, G.M.,, and other companies have said they intend to switch to in 2025.

July 25, 2023

End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock ReturnsMichael SmolyanskyFederal Reserve Board

Michael Smolyansky @federalreserve argues the decline in interest and corporate tax rates mechanically explains 40% of real growth in corporate profits between 1989-2019 suggesting lower returns going forward.

The reduction in interest and corporate tax rates was responsible for over 40% of the growth in real corporate profits from 1989 to 2019. Moreover, the decline in risk-free rates over this period explains the entirety of the expansion in price-to-earnings (P/E) multiples. These two factors therefore account for the majority of this period’s exceptional stock market performance. From 1989 to 2019, real corporate profits grew at the robust rate of 3.8% per year. This was almost double the pace seen from 1962 to 1989. The difference in profit growth between these two periods is entirely due to the decline in interest and corporate tax rates from 1989 to 2019. One way to see this is to compare the growth of earnings before subtracting interest and tax expenses (EBIT). In fact, real EBIT growth was slightly lower from 1989 to 2019 compared to 1962 to 1989: 2.2% versus 2.4% per year. The outlook for stock price growth is bleak. Related: The Curious Incident of the Elevated Profit Margins and Charlie Munger: US Banks Are ‘Full of’ Bad Commercial Property Loans

Is the Chinese Government Pushing Down the Yuan?Matt KleinThe Overshoot

.@M_C_Klein argues the Chinese government is managing the Yuan real exchange rate to boost exports and insulate domestic firms from foreign competition.

The Bank for International Settlements (BIS) measure of China’s inflation-adjusted trade-weighted exchange rate (based on differences in consumer prices) is down by roughly 14% since the recent peak last March, which is the largest decline out of 64 countries tracked by the BIS. This appears to be a policy choice. While China’s official foreign reserves are substantially lower now than at the peak in 2014, the consolidated position of the PBOC and the state-run banks looks a bit different. As I suggested two years ago, there are good reasons to think that the PBOC has deliberately outsourced reserve management to Chinese banks (which among other things helps explain the continued reductions in reserve requirements). After the PBOC mostly stopped buying foreign currency reserves, it switched to lending increasingly large sums to the domestic banking system. Related: Setser On China's Trade Surplus and China's Surplus Again Topped 10% Of GDP

Asset NeutralJoseph WangFed Guy Blog

Large banks are seeing a funding advantage as competition for deposits increases. @FedGuy12

A wide range of banks have reported a squeeze on net interest margins as deposit funding costs have surprised to the upside. In a typical rate hiking cycle, interest income on bank assets tend to rise more quickly than interest paid on deposits. This led to a steady expansion of net interest margins over the past quarters that is suddenly reversing. Banks now see customers both shifting out of non interest bearing deposits and demanding higher interest for interest bearing deposits. This was widely reported in recent earnings calls by all but the largest banks. Related: All Clear and Bank Funding during the Current Monetary Policy Tightening Cycle

A Default Cycle Has StartedTorsten SløkApollo

Torsten Sløk @apolloglobal notes an uptick in bond defaults and argues that we are at the start of a default cycle. He argues market sentiment will change when a “household name” defaults.

Markets are not taking the ongoing rise in default rates for HY and loans seriously. The reality is that more and more companies are defaulting because the cost of capital is higher, and Fed Chair Powell says that interest rates will stay at these levels “for a couple of years,” so tight monetary policy will continue to have a greater negative effect on the economy and capital markets. In fact, higher costs of capital is precisely how monetary policy works: By making it more difficult to get financing. Once there is a default by some household name in credit, we will likely see an overnight change in market sentiment from bullish to bearish. Related: Small Bank Thoughts John Cochrane and Credit Allocation and Macroeconomic Fluctuations

How Fentanyl Changed The Game For Mexico’s Drug CartelsChristine MurrayFinancial Times

Current annual US demand for fentanyl is the equivalent of one truckload, making interdiction very difficult. The equivalent US heroin demand would weigh 25X more.

In the last decade, fentanyl has become the leading cause of death for young adults in the US. Fentanyl now causes most of the more than 85,000 annual opioid overdose deaths in the US and Canada. All the fentanyl needed to supply the US for one year weighs the equivalent of 5 tonnes and would easily fit into one lorry, according to researchers at Rand Corporation. That compares with about 125 tonnes for heroin and even more for cocaine. Related: Only One Thing Will Solve the Fentanyl Crisis and Drug Overdose Deaths Topped 100,000 Again in 2022

Chip Industry Sees Labor Shortages Threatening US Expansion PlanIan KingBloomberg

The American semiconductor industry trade association reports the industry is facing a likely shortfall of 60% of the 115,000 new positions they will need through 2030. @markets

Chipmakers are on course to add about 115,000 jobs by 2030 [according to] Semiconductor Industry Association (SIA). Based on a study of current degree completion rates, though, about 58% of those projected positions could remain unfilled. Not enough Americans are studying science, engineering, math and technology-related subjects, according to the SIA. And people from other countries who are acquiring those skills are leaving, the group said. At US colleges and universities, more than 50% of master’s engineering graduates and 60% of those with a Ph.D. in engineering are citizens of other countries. About 80% of those master’s graduates and 25% of those who earn doctorates depart the US — either by choice or because immigration policy doesn’t allow them to stay. Related: The Extreme Shortage of High IQ Workers and TSMC To Send Hundreds More Workers To Speed U.S. Plant Construction

Antarctic Sea Ice Levels Dive In 'Five-Sigma Event', As Experts Flag Worsening Consequences For PlanetAlexandra AlvaroAustralian Broadcast Corporation

According to oceanographer Edward Doddridge the decline in Antarctic ice this winter is “a five-sigma event,” i.e. once every 7.5 million years.

The sea ice around Antarctica is in sharp decline, scientists observed an all-time low in the amount of sea ice around the icy continent, following all-time lows in 2016, 2017 and 2022. Usually, the ice has been able to recover in winter but this year is different. For the first time, the sea ice extent has been unable to substantially recover this winter, leaving scientists baffled. Physical oceanographer Edward Doddridge said vast regions of the Antarctic coastline were ice free for the first time in the observational record. "To say unprecedented isn't strong enough, for those of you who are interested in statistics, this is a five-sigma event. So it's five standard deviations beyond the mean. Which means that if nothing had changed, we'd expect to see a winter like this about once every 7.5 million years." Antarctic Sea Ice Has Shrunk By An Area Nine Times The Size Of Britain and Earth Keeps Breaking Temperature Records Due to Global Warming

July 24, 2023

A June Inflation SurpriseChris MarshMoney: Inside and Out

The June CPI print shows steady deflation after removing volatile items; however, the reading is still well above target. @GeneralTheorist

Adjusted durables remain volatile, of course, but over 3 months are now close to typical pre-pandemic lows. Services remain elevated, about 2ppts above pre-pandemic norms. Overall, the Fed can be encouraged by the disinflation of underlying core inflation—though the reading is still well above 2%. There may be two risks ahead. The first would be if durables goods begin to show even sharper deflation, perhaps portending more general price pressures. The second is if service inflation becomes entrenched at current levels—lower than a year ago, but well above a rate consistent with the Fed’s target.

Unemployment Rate At or Near Record Lows in Half of US StatesReade Pickert, and Alexandre TanziBloomberg

The unemployment rate is at or near a record low in half of American states.

The unemployment rates in 25 states are currently at or within 0.1 percentage point of a record low [according to] Bureau of Labor Statistics data. In a dozen states and DC, the number of people on payrolls remains below pre-pandemic levels. That includes New York and Hawaii. Idaho, Utah, Texas, and Florida were among the states with the biggest gains in employment since February 2020. Related: Labor Inelasticity and Unions’ Inflation Warning? and America Is Barreling Toward a Summer of Strikes

Americans in Their Prime Are Flooding Into the Job MarketJeffrey SparshottWall Street Journal

Americans aged 25-54 are employed or looking for jobs at rates not seen in two decades, helping counter the exodus of older baby boomers from the workforce.

American prime age 25-54 labor force participation is at a two decade high of 83.5% as an uptick in prime age female LFP has offset a decline in male prime age LFP since 2000. In the first months of the pandemic, nearly four million prime-age workers left the labor market, pushing participation in early 2020 to the lowest level since 1983—before women had become as much of a force in the workplace. Prime-age workers now exceed prepandemic levels by almost 2.2 million. The resurgence of midcareer workers is driven by women taking jobs. The labor-force participation rate for prime-age women was the highest on record, 77.8% in June. That is well up from 73.5% in April 2020. Related: The Labor Supply Rebound from the Pandemic and Where Are the Missing Gen Z Workers

Diversifying Society’s Leaders? The Determinants and Causal Effects of Admission to Highly Selective Private CollegesRaj Chetty, David Deming and John FriedmanNational Bureau of Economic Research

.@OppInsights finds that the “Ivy-Plus” (Ivy League, plus UChicago, Duke, MIT, Stanford) admit students from the highest income families scoring in the top 1% of SAT/ACT at far greater rates than those from lower-income families.

Children from families in the top 1% are more than twice as likely to attend an Ivy-Plus college (Ivy League, Stanford, MIT, Duke, and Chicago) as those from middle-class families with comparable SAT/ACT scores. Two-thirds of this gap is due to higher admissions rates for students with comparable test scores from high-income families; the remaining third is due to differences in rates of application and matriculation. The high-income admissions advantage at private colleges is driven by three factors: (1) preferences for children of alumni, (2) weight placed on non-academic credentials, which tend to be stronger for students applying from private high schools that have affluent student bodies, and (3) recruitment of athletes, who tend to come from higher-income families. Highly selective public colleges that follow more standardized processes to evaluate applications exhibit smaller disparities in admissions rates by parental income than private colleges that use more holistic evaluations. Related: Why Do Wages Grow Faster for Educated Workers? and Multidimensional Human Capital and the Wage Structure and The Economics of Inequality in High-Wage Economies

Chinese Money Flees the Western WorldStella Yifan Xie and Jason DouglasWall Street Journal

Chinese investment in the US has declined by just under 25% as focus shifts to manufacturing and natural resource investments in non-Western nations. @AEIecon @DerekScissors1

The biggest recipient of Chinese investment so far this year is nickel-rich Indonesia, according to a preliminary estimate of Chinese investments compiled by the American Enterprise Institute. Direct overseas investment from China to the rest of the world fell by 18% from a year earlier by one new measure released recently. The latest level marks a decline of 25% from a peak in 2016, as overseas mergers and acquisitions have plummeted and Beijing has tightened rules to curb capital flight. Related: Exodus of Wealthy Chinese Accelerates with End of Covid Zero and Singapore Asks Banks to Keep Quiet on Wealth Inflows During China Boom and The Mysterious $300 Billion Flow Out of China

China Cannot Allow Jobless Young To ‘Lie Flat’George MagnusFinancial Times

.@georgemagnus1 notes that the ratio of low-pay, low-skill informal sector jobs to high-skilled jobs in China is now 60:40, the opposite of 15 years ago.

A marked change in the occupational structure of jobs has meant that the proportion of low pay, low skill, informal sector jobs has been rising at the expense of higher paid, high skill jobs in manufacturing and construction. According to Stanford University professor Scott Rozelle, the ratio of informal to formal sector jobs 15 years ago was 40:60, but has now flipped. This is a particular problem for younger workers who are over-represented in low pay sectors and the gig economy. Related: China’s Youth Left Behind As Jobs Crisis Mounts and Why Has Youth Unemployment Risen So Much in China? and Can China Fix Youth Unemployment Woes With Military Recruitment Drive?

California Looks Into the Future — and Sees Fewer CaliforniansAlexandre Tanzi and Eliyahu KamisherBloomberg

California’s Department of Finance forecast the state’s population will be smaller in 2060 than it was in 2020.

More than a century of long-term population growth in California could be over, according to new projections that show the state will have about the same number of people in 2060 as it does now. The California Department of Finance predicts that there’ll be 39.5 million people in the state by 2060. Just three years ago, forecasters were expecting the number to be 45 million — and a decade ago, the population was seen surging to almost 53 million. If there’s a bright spot in the forecast, the state is at least expected to recoup its pandemic population decline in the coming years — returning to its 2020 population level in the 2030s, before peaking in 2044. Related: Taxes, Revenues, and Net Migration In California and The Population of California Declined, Again

Per Capita CO₂ EmissionsOur World In Data StaffOur World In Data

American per capita CO₂ emissions are back to the level prior to the United States’ entry into the First World War but remain almost 2X Chinese levels.

Energy Startup Says It Has Achieved Geothermal Tech BreakthroughMichelle MaBloomberg

Fervo Energy is building a commercial geothermal facility that will power 300,000 Utah homes; the firm has started permitting on another half dozen facilities.

In a landmark step for enhanced geothermal technology’s potential as a dependable carbon-free energy source, startup Fervo Energy has wrapped up a full-scale, 30-day well test at its Project Red site in northern Nevada, which was able to generate 3.5 megawatts of electricity. (One megawatt can power roughly 750 homes at once.) Project Red will connect to the grid later this year and power Google's data centers and infrastructure throughout Nevada. With the demo complete, Fervo is attempting to repeat its success at its southwest Utah site, which is currently under construction. With design improvements maximizing power output as expected, the Utah site is predicted to deliver about 400 megawatts by 2028, roughly enough electricity to power 300,000 homes at once. Related: This Geothermal Startup Showed Its Wells Can Be Used Like a Giant Underground Battery

Why California and Florida Have Become Almost UninsurablePeter CoyNew York Times

Globally mean reinsurance rates rose by 25% in 20222 and are up 33% so far in 2023 according to reinsurance broker Howden Tiger. @petercoy

Wildfires in California and hurricanes in Florida produced lots of claims. Housing prices and bills for construction and repairs have gone up, making claims larger. And insurance companies have had to pay more for reinsurance: Worldwide, average rates for reinsurance rose by a quarter last year and by another third this year, according to the London-based reinsurance broker Howden Tiger, an arm of Howden Group Holdings. Related: Climate Shocks Are Making Parts of America Uninsurable. It Just Got Worse and Farmers Insurance Limits Sales in Florida, California Amid Storm, Wildfire Risks and Your Homeowners’ Insurance Bill Is the Canary in the Climate Coal Mine

July 21, 2023

The Rise in American Pain: The Importance of the Great RecessionSneha Lamba and Robert MoffittNational Bureau of Economic Research

The increase in reported pain among Americans wasn’t a linear trend over decades but was almost entirely concentrated in the 2007-2010 period among the less educated. @ramoffitt4

We show that, rather than resulting from a smooth upward trend, the increase was almost entirely concentrated in the 2007-2010 period, the time of the Great Recession, a result not uncovered in prior work. The disproportionate increase in pain among the less educated is also shown to have occurred primarily at the time of the Recession, with either little or no trend before or after. The Recession jump occurred only at older ages and primarily only at the points during each cohort’s lifetime when they experienced the Recession. However, we too find the jump difficult to explain, for while there is necessarily a temporary decline in employment during a Recession, why there should be a permanent increase in pain as a result is unclear. Related: Drug Overdose Deaths Topped 100,000 Again in 2022 and America’s Work Ethic Is Under Assault

TSMC Delays Start of First Arizona Chip Factory, Citing Worker ShortageYang JieWall Street Journal

TSMC’s new Arizona fab is pushing back the start of production by a year, citing a shortage of skilled workers.

TSMC Chairman Mark Liu said construction in Arizona is hampered by a shortage of skilled workers and that the company might have to bring in experienced technicians temporarily from Taiwan. He said this would delay the start of mass production of 4-nanometer chips in the first factory until 2025. Previously TSMC described the 4-nanometer chip as the leading product of the first Arizona factory and said production would start in 2024. Overall, it expects to invest $40 billion in Arizona. “We are now entering a critical phase of handling and installing the most advanced and dedicated equipment. However, we are encountering certain challenges,” Liu said. Related: TSMC To Send Hundreds More Workers To Speed U.S. Plant Construction and The Semiconductor Trade War

The National Economic Council Gets It Wrong on the Roles of Big and Small Firms in U.S. InnovationRobert AtkinsonInformation Technology & Innovation Foundation

According to @RobAtkinsonITIF, the public discourse around startups downplays the importance of large firms in driving American innovation.

While small firms account for 49% of U.S. employment, they account for just 16% of business spending on R&D, while firms of more than 25,000 workers account for 36%. Likewise, small firms account for 18.8% of patents issued, while the largest firms account for 37.4% of patents. When ITIF surveyed almost 1,000 U.S. scientists and engineers involved in filing triadic patents (patents filed in the United States, Europe, and Japan), they found that approximately 75% of materials science and IT patents and 60% of life science patents were filed by firms with more than 500 employees. Countering the popular narrative that large firms are sluggish copiers and small firms the true innovators, firms with 500 or fewer workers in the sample accounted for only around 30% of patents, yet they employed 48.4% of workers. Related: Mega Firms and Recent Trends in the U.S. Innovation: Empirical Evidence from the U.S. Patent Data and The Economics of Inequality in High-Wage Economies

Sadly, Many Happiness Studies Are FlawedNidhi SubbaramanWall Street Journal

.@NidhiSubs cites research by @DunnHappyLab showing that most studies on happiness have lacked scientific rigor. Only 57 of 494 peer-reviewed papers evaluated met minimal standards for good research.

Dunn and Folk gathered 494 peer-reviewed papers, in which one of the five happiness strategies was evaluated against a control group. When they weeded out weakly designed work, only 57 studies were left. The vast majority of papers were too poorly designed to support their conclusions. The remaining subset of studies met at least one of two conditions for good science: They included sufficient numbers of study participants or the researchers committed to hypotheses or study plans before analyzing their data. These studies failed to confirm that three of the five activities made people happy. “The evidence melts away when you look at it,” Dunn said. A handful of scandals in psychology in the 2010s—including a bombshell paper that demonstrated the danger of p-hacking—sent shock waves through the field and forced researchers to re-examine the status quo. This reform isn’t limited to psychology. “Every field that has bothered to look at issues of rigor and reproducibility in their evidence has found challenges."

Chinese Professor Says Youth Jobless Rate Might Have Hit 46.5%Reuters StaffNikkei Asia

Peking University professor Zhang Dandan estimates that China’s youth unemployment rate could be as high as 46.5% if one includes 16mm young non-working non-students who are living with their parents.

If 16 million non-students "lying flat" at home or relying on their parents were included, the rate at that time could have been as high as 46.5%, Zhang Dandan wrote in an online article in respected financial magazine Caixin. The article by Zhang, associate professor of Economics at the university's National School of Development, was published on Monday but has since been removed. The official youth jobless rate, which only includes people actively seeking work, rose further to a record 21.3% in June after the world's second-biggest economy lost steam in the second quarter. Related: Why Has Youth Unemployment Risen So Much in China? and China’s Youth Left Behind As Jobs Crisis Mounts

July 20, 2023

Saudi Arabia's PIF and the New Petrodollar RecyclingAlex EtraMoney: Inside and Out

.@EtraAlex documents the shift in petrodollar recycling from FX reserves at central banks to sovereign wealth funds, most notably Saudi Arabia’s Public Investment Fund (PIF).

While clearly not all of the foreign asset allocation that was previously done by Saudi Central Bank is now being done by the Public Investment Fund (PIF), some significant portion of it does seem to be. Hence a look at PIF’s Annual Reports can provide some basic insights into some aspects of the new form of petro-dollar recycling. In particular, we focus on the more transparent and traditional assets PIF shows on balance sheet. Of the roughly $777bn in total assets at end 2022, $305bn are listed as current assets, and $472bn are listed as non-current assets. However, of the non-current assets, nearly half—$225bn—are held as investment securities. Related: The New Geopolitics of Global Finance

Mega Firms and Recent Trends in the U.S. Innovation: Empirical Evidence from the U.S. Patent DataSerguey Braguinsky, Joonkyu Choi, Yuheng Ding, Karam Jo and Seula KimNational Bureau of Economic Research

.@_seulakim documents the importance of the 50 largest US firms in generating novel patents that combine technical components in new ways.

The share of mega firms in novel patent applications had been declining for almost two decades but there has been a turnaround since the early-mid 2000s. By the mid-2010s, the share of mega-firms was the highest since 1980 when our sample starts. We show that mega firms are more likely to apply for novel patents even after controlling for various firm characteristics including size, industry, and the total number of patents. This finding also holds within firms––firms produce more novel patents than before as they become mega firms. This suggests that closing on market leadership is associated with more, not less new combinations. We also examine the opposite side of the spectrum, the not-yet-public VC-backed startups, and find that those also play a disproportionately large role in generating novel patents, especially “hit” novel patents, so that successful novel patents appear to be produced in a bi-modal pattern, both by super large mega firms and relatively small startups. Related: The Economics of Inequality in High-Wage Economies and Where Have All the "Creative Talents" Gone? Employment Dynamics of US Inventors

America Is Barreling Toward a Summer of StrikesJosh EidelsonBloomberg

While only 6% of American private sector workers are unionized, as many as 650,000 workers might soon be on strike according to a Bloomberg tracker. @markets

More than 650,000 American workers are threatening to go on strike this summer — or have already done so — in an avalanche of union activity not seen in the US in decades. The combined actors and writers strikes in Hollywood are already a once-in-a-generation event. Unions for UPS and Detroit’s Big Three automakers are poised to join them in coming weeks if contract negotiations fall through. One Bank of America Corp. analyst put the odds of a United Auto Workers strike at more than 90%. And while logistics experts and financial analysts expected the Teamsters to reach a deal with UPS, their confidence has dwindled as the July 31 deadline approaches. Even before the 100,000-plus actors joined in last week, both the number of strikes and workers on strike were up in the first half of this year. Related: Unions Inflation Warning

Rich Chinese Eye Australia Homes as 700,000 to Leave by 2025Selina XuBloomberg

Real estate firm Juwai IQI estimates 712,000 Chinese will migrate to the US, Canada, and Australia between 2023 and 2025.

A sustained exodus over the next few years will likely continue to drive Chinese property investments abroad. About 712,000 people from the country will migrate to the US, Canada, and Australia from 2023 to 2025, a report by real estate firm Juwai IQI’s estimated. Capital flight from the mainland could reach $150 billion this year, as more people park their money abroad for fear of additional measures at home. Related: Booming Chinese Family Offices Recruit Top Bankers in Singapore and China Notes, July ’23: On Technological Momentum

July 19, 2023

Market Resilience or Investors in Denial: The Market at Mid-Year 2023Aswath DamodaranMusings On Markets

The S&P 500 equity risk premium fell back to 5% at the start of July, roughly the mean value since 2008. @AswathDamodaran

The S&P has had a strong first half of 2023, increasing 15.91%, the NASDAQ has delivered almost twice that return, with its tech focus.After a year for the record books, in 2022, when the expected return on stocks (the cost of equity) increased from 5.75% to 9.82%, the largest one-year increase in that number in history, we have had not just a more subdued year in 2023, but one where the expected return has come back down to 8.81%. In the process, the implied equity risk premium, which peaked at 5.94% on January 1, 2023, is back down to 5% at the start of July 2023. Even after that drop, equity risk premiums are still at roughly the average value since 2008. If the essence of a bubble is that equity risk premiums become "too low", the numbers, at least for the moment, don't seem to be signaling a bubble. Related: Data Update 2 for 2023: A Rocky Year for Equities

The Economic Impact of the Student Loan RestartJoseph PolitanoApricitas Economics

.@JosephPolitano argues the resumption of student loan payments will only have a minor impact on consumers’ balance sheets.

46 million Americans owe some money to the Department of Education for their student loans. The vast majority of borrowers also have comparatively small balances remaining, with 3/4 of debtors having balances less than $40k and 1/2 having balances under $20k. The small contingent of borrowers with large balances holds a disproportionately large share of the outstanding debt—although they make up only 16% of total borrowers, those with balances in excess of $60,000 hold the majority of student loan debt. Related: Debt Moratoria: Evidence from Student Loan Forbearance

The Economists Who’d Rather Be Influencers Joshua Rauh and Gregory KearneyWall Street Journal

.@joshrauh & Gregory Kearney of @HooverInst argue academic research suffers from a feedback loop that encourages economists to produce left-leaning research to achieve widespread coverage in the mainstream media.

Social sciences researchers hoping to become public influencers have one clear path: through the mainstream media. Unfortunately, journalists aren’t unbiased arbiters. For more than a decade, the media has praised economists Saez, Zucman and Piketty. Their data purport to show the income share of the top 1% of [US] earners climbed to 21% in 2019 from 9% in 1970. In a recent paper that has received far less attention, Auten of the U.S. Treasury and Splinter of Congress’s Joint Committee on Taxation find the income share of the top 1% climbed to 13.7% in 2019 from 9.2% in 1970. and, incorporating increases in redistributive government policy, the income share of the top 1% only increased to 8.8% in 2019 from 6.8% in 1970. In 2017, [Harvard’s Raj Chetty] published findings that U.S. trends in the likelihood of children achieving a higher income status than their parents has grown progressively worse, a point that received intense media coverage. Research published by Scott Winship of the American Enterprise Institute shows the fall in mobility was a direct consequence, not of inequality, but of slowing economic growth that began in the 1970s. Journalists’ propensity to ignore research that refutes their beliefs encourages academics to pander to the liberal tilt of mainstream news organizations, leading to the general public’s misunderstanding of important policy issues.

China Notes, July ’23: On Technological MomentumDan WangThe Secure Transport Of Light

.@danwwang notes that China’s strength is its ability to manufacture complex goods. Wang is not worried about slowing growth and a demographic drag affecting China’s manufacturing dominance, but he does see China’s nonliberal environment as a threat.

The general political environment poses perhaps the greatest threat to technological momentum. In the last few months, I’ve chatted with a good number of Chinese undergrads in the US, who almost to a person tell me that their parents are urging them not to return to the mainland. China retains considerable strengths, one which doesn’t depend so much on slowing economic growth or demographic drags. The main one is its entrenched workforce that continues to advance manufacturing complexity. I think about the humming engine that is outlined by Kevin Kelly’s concept of the “technium” that describes an ecosystem of intertwined, co-dependent, and complex technologies with a mind of its own. But I grow less certain that a third-Xi term China will sustain an innovative drive. Related: 2022 Letter and U.S. Bound Migrants Surge at Darien Jungle Crossing in Panama

China's Missing Post-Pandemic ReboundMatt KleinThe Overshoot

Despite the end of Covid Zero, Chinese growth remains anemic. There is no evidence of “revenge spending” from Chinese consumers. @M_C_Klein

Chinese growth in 2023 has been anemic, especially relative to the starting point. So far this year, economic output was just 5.5% higher than in the first half of 2022, which in turn was up only 2.5% compared to the first half of 2021. Officially, China’s Gross Domestic Product (GDP) grew just 0.8% between 2023Q1 and Q2 compared to the 2017-2019 quarterly average of 1.6%. That would be bad enough, but there is also reason to think that output may actually have shrunk in the most recent quarter. Nominal spending in March-June 2023 was 16.6% higher than in March-June 2019, which corresponds to an average yearly growth rate of just 3.9%. Before the pandemic, Chinese consumer spending was rising about 7.4% a year. Related: Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and The Neoclassical Growth of China

External Rebalancing In Turbulent TimesIMF StaffInternational Monetary Fund

The American current account deficit is mainly financed via portfolio debt flows, a change from the pre-GFC period when the deficit was funded by reserve accumulation. @IMFNews data shows a declining role for China.

The US current account deficit, the largest deficit of all, is mainly financed via portfolio debt flows. Geographically, the financing of the US current account deficit has become increasingly mediated by financial centers in recent years. This contrasts with the pre-GFC period, when the US current account deficit was financed largely through reserve accumulation from surplus countries. Balance-of-payments data show a declining role for China. Related: Brad Sester On The Balance Of Payments and How Was the U.S. Current Account Deficit Financed In 2022?

July 18, 2023

Climate Change and the Geography of the U.S. EconomySylvain Leduc and Daniel WilsonFederal Reserve Bank of San Francisco

.@wilson_daniel_j @sffed argues that rising temperatures between now and 2050 will drive a shift in population and employment away from the Sunbelt and toward the North and Mountain West.

The link between extreme heat and population growth was strongly positive in the 1980s. That relationship weakened substantially over the subsequent two decades and vanished entirely over 2010-2020. The projections for the decades ahead show a continuation of this pivot. “Hot” climate counties have gotten considerably hotter - to a point where they are no longer as tolerable. The 90th percentile county over 1951-1980 averaged about 62 days per year of daily average temperatures above 80◦F. That number grew to 72 days from 1991-2020. The projected climate changes are predicted to cause a general shifting of population from the Southeast and parts of the Southwest to the North, the Mountain West, and most of the Pacific coastline. Related: Sunbelt Cities Nashville and Austin Are Nation’s Hottest Job Markets and Young Families Have Not Returned to Large Cities Post-Pandemic

Rethinking the Inflationary Effects of Deglobalization and the Green TransitionDavid Mericle and Ronnie WalkerGoldman Sachs

David Mericle and Ronnie Walker @GoldmanSachs make the case that artificial intelligence, like the deflationary impact of the 1990s tech boom, might help offset inflationary drivers such as deglobalization and the green transition.

Artificial intelligence could exert downward pressure on consumer prices if it provides the sort of large, sustained boost to productivity growth that we expect. In the late 1990s and early 2000s, a similar productivity boom led by the technology sector enabled the Fed to let the labor market become quite tight by historical standards without running into an inflation problem. A future productivity boom should have similar effects. Artificial intelligence is likely to boost productivity by lowering production costs and improving consumer goods and services in more qualitative ways. These effects should also lower measured consumer prices. Related: Summers and Blanchard Debate the Future of Interest Rates and What Have We Learned About the Neutral Rate?

Monopsony, Efficiency, and the Regularization of Undocumented ImmigrantsGeorge Borjas and Anthony EdoIZA Institute of Labor Economics

George Borjas finds that a 1981 French program giving legal status to undocumented workers who represented about 1% of all workers resulted in increased employment and wages for low-skill native and immigrant men and raised GDP 1%.

This paper documents the economic consequences of a large amnesty program implemented in France. In July 1981, the newly elected government of President François Mitterrand proposed to regularize all undocumented workers. The regularized workers were predominantly male, low-skill, and lived disproportionately in the Paris region. The regularized immigrants composed 2.0% of workers in Paris and nearly 1% of all workers in France. In short, by reducing monopsony power in the undocumented labor market, a regularization program improves labor market efficiency and can generate a substantial increase in output, a “regularization surplus.” Our empirical analysis of employment, wage, and output data in the French labor market confirms that the regularization program indeed had positive effects on the employment and wages of many groups, and particularly for male, low-skill workers. Moreover, there was a sizable jump in the growth rate of per-capita GDP in the affected region, suggesting an increase in total French GDP of around 1%. Related: Immigration to Drive All US Population Growth Within Two Decades and Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995

A Positive Covid MilestoneDavid LeonhardtNew York Times

Excess deaths in the United States have returned to pre-pandemic levels. According to the CDC, the weekly excess death level is less than 1%. @DLeonhardt

The total number of Americans dying each day — from any cause — is no longer historically abnormal. During Covid’s worst phases, the total number of Americans dying each day was more than 30% higher than normal, a shocking increase. For long stretches of the past three years, the excess was above 10%. But during the past few months, excess deaths have fallen almost to zero, according to three different measures. The Human Mortality Database estimates that slightly fewer Americans than normal have died since March, while The Economist magazine and the Center for Disease Control both put the excess-death number below 1% percent. Related: Our Model Suggests That Global Deaths Remain 5% Above Pre-Covid Forecasts

Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOsMichael CeblalestJ.P. Morgan

Michael Cembalest @jpmorgan notes the 2020/20221 IPO class has performed extremely poorly relative to the overall equity market. IPO returns since 2010 were highly skewed; if the top 5% were removed, returns were strongly negative vs the market.

Since 40%-60% of IPOs generate negative returns even in good times, their value proposition is whether a small subset of winners offsets all the losers. A highly skewed investment universe is characterized by average returns that are much higher than median. As shown below, IPOs are an example of that; in many years, average net returns were positive while median net returns were close to zero. But these positive average returns are highly skewed: look how quickly they decline when excluding the best 3%, 5%, and 7% of IPOs. Even when only excluding the top 3%, average net returns become negative, and average absolute returns fall by more than half. In other words, long-term IPO survival odds are low and skewed to a small number of mega-winners.

July 17, 2023

What Has Policy Tightening Accomplished So Far?Matt KleinThe Overshoot

.@M_C_Klein notes the credit contraction hasn’t slowed down the real economy as it’s been offset by strong nominal income growth.

At the end of 2021 and the beginning of 2022, nominal consumer spending was rising about 7% annualized. So far this year, nominal PCE is rising about 6% annualized. The change in spending has been negligible compared to the slowdown in inflation, which suggests that improvements in the match between real production and demand have been more important than any shift in monetary policy. None of this is to suggest that interest rates should have stayed at zero, but it does suggest that the bulk of the disinflation that we have experienced so far can be attributed to benign developments in businesses’ ability to produce the real goods and services that consumers want.

The Most Important New Disinflation IndicatorJoseph PolitanoApricitas Economics

.@JosephPolitano argues that newly-signed rents show rapidly declining rent inflation which suggests significant disinflation over the next three quarters.

The New Tenant Repeat Rent (NTRR) Index uses the same underlying microdata as the CPI to look at price changes for only the subset of units where new tenants have signed leases. That gives a much better picture of where the housing market is right now, and by proxy where official rent inflation is headed. Critically, the NTRR tends to lead the official CPI rent components by one year—and right now, it is saying we should expect significant disinflation over the next three quarters. Inflation is now mostly a housing phenomenon—rising rents are the single-largest contributor to the CPI by a wide margin, and outside of shelter headline inflation has completely flatlined over the last year. Related: New Tenant Repeat Rent Index

Europeans Are Becoming Poorer. ‘Yes, We’re All Worse Off.’Tom FairlessWall Street Journal

Since 2019, adjusted for PPP and inflation, wages are down 3% in Germany, 3.5% in Italy and Spain, and 6% in Greece. Over that same period, US wages were up 6%.

The eurozone economy grew about 6% over the past 15 years, measured in dollars, compared with 82% for the U.S., according to International Monetary Fund data. That has left the average EU country poorer per head than every U.S. state except Idaho and Mississippi. Private consumption has declined by about 1% in the 20-nation eurozone since the end of 2019 after adjusting for inflation. In the U.S., where households enjoy a strong labor market and rising incomes, it has increased by nearly 9%. The European Union now accounts for about 18% of all global consumption spending, compared with 28% for America. Fifteen years ago, the EU and the U.S. each represented about a quarter of that total. Related: From Strength To Strength and The Economics Of Inequality In High-Wage Economies

Pay Raises Are Finally Beating Inflation After Two Years of Falling BehindAmara Omeokwe and Megan TagamiWall Street Journal

As inflation comes down, American workers have seen real wage gains since May.

Americans’ growing paychecks surpassed inflation for the first time in two years, providing some financial relief to workers, while complicating the Federal Reserve’s efforts to tame price increases. Inflation-adjusted average hourly wages rose 1.2% in June from a year earlier, according to the Labor Department. That marked the second straight month of seasonally adjusted gains after two years when workers’ historically elevated raises were erased by price increases. Related: US Job and Wage Growth Beat Expectations, Making the Fed’s Job Harder and Low Earners in the US Enjoy Fastest Wage Growth

A Beautiful ReplenishmentJoseph WangFed Guy Blog

Money market funds are once again the marginal buyer of Treasuries. The replenishment of the Treasury General Account allows further quantitative tightening. @FedGuy12

The return of money funds as major investors in bills provides a mechanism where banking system reserves can be replenished and removes a significant obstacle to QT. While the recent bout of bill issuance was largely used to replenish the Treasury General Account (TGA), future bill issuance will be used to finance ongoing government spending. This means that money will flow out of the RRP, into the TGA, and then be spent into the banking system through fiscal spending. Bank reserves can remain abundant for an extended period of time, and net deposit outflows will be smaller than expected. QT can continue for the expected two more years given that bank reserves are likely to remain abundant. Related: Probing LCLoR and How Was the U.S. Current Account Deficit Financed In 2022?