Peak Uncertainty - EconVue June 2022
Slow Growth, a Hot Economy, or a Recession?
In spite of our reputation as the technology capital of the world, last month the US witnessed its greatest fall in productivity since 1949. This might be a symptom that the US is lagging in the type of innovation that leads to economic growth. According to Peter Coy at the New York Times, based upon data shared by the Hamilton Center on Industrial Strategy, the US has a definitive lead in only one tech sector: information services.
China has more or less matched the United States in terms of the two nations’ shares of world output in seven high-tech sectors: pharmaceuticals; medicinal, chemical and botanical products; electrical equipment; machinery and equipment (from engines to office gear); motor vehicle equipment; other transport equipment (mostly aerospace); computer, electronic and optical products; and information technology and information services.
Inflation, another drag on the economy, is being blamed on a wide cast of characters, from Vladimir Putin to Jerome Powell. Its persistance has been surprising to many economists in a world where demand is in a long-term structural decline due to slowing demographics. Yet we have found a way to push up prices after the effects of Covid have faded.
On her mea culpa tour Treasury Secretary Janet Yellen admits she was caught by surprise by inflation. Economic models failed us she says, or as Larry Summers claims, measurement of key data such as the CPI is inadequate to capture our current reality.
These and other negative factors, from lack of innovation to excess fiscal stimulus could be contributing to slower growth, but will they lead to recession? The Sahm Rule is a useful tool to predict recessions, based on changes in employment figures. “It is currently -0.1 percentage point, which is well below the 0.5 percentage-point trigger of being in a recession” writes economist Claudia Sahm in her newsletter We Are Not in a Recession Nor is One Inevitable.
Sahm believes that the biggest risk could be a policy error. She concludes what we can all see with our own eyes, we are not in a recession.
Consumers are spending. Businesses are hiring. The unemployment rate is low. That doesn’t mean everything is good. Inflation is high. But that’s not a recession.
The Fed is committed to bringing inflation down. But to do so, they need us to swap one hardship for another. Less consumption for less inflation. But that’s not the only way. More supply—whether it’s more workers to hire or more stuff to buy—would reduce inflation too. That’s the better way but more uncertain and beyond the Fed.
The best would be if inflation came down and it was not due to the Fed. The worst would be if it were all due to the Fed. And in between is some mix of the two. Regardless inflation’s coming down. Recession or not. Preferably not.
So the path forward is not clear. We live in a world where previous assumptions have been replaced with uncertainty and rapid shifts in geopolitics. However, despite all these co-morbidities, I think that a prolonged period of unpredictability is what could eventually give the economy a heart attack.
Uncertainty about the future incurs a high cost for both people and businesses. Last month here in Chicago, the CME MSRI Prize of Innovative Quantitative Applications was awarded to Nancy Stokey, a distinguished professor of economics at the University of Chicago. In 2009 she wrote “The Economics of Inaction.” Here is a very brief summary of one of her theories:
In economic situations where action entails a fixed cost, inaction is the norm. Action is taken infrequently, and adjustments are large when they occur. Interest in economic models that exhibit ”lumpy” behavior of this kind has exploded in recent years, spurred by growing evidence that it is typical in many important economic decisions, including price setting, investment, hiring, durable goods purchases, and portfolio management.
We are indeed living in “lumpy” times which make it harder for both investors and companies to ignore sunk costs. It is also difficult to assess risk accurately enough to incur new expenditures. Volatility in equity prices, as measured by VIX is about twice as high as it was pre-Covid. All over the US employers are hitting the pause button. From Coinbase to Olive AI, a unicorn health IT company in Ohio, hiring freezes have begun for high-skilled jobs. Low-skilled jobs remain unfilled, with many citing health concerns as the reason for their withdrawal from the workforce.
Wall Street awaits CPI data which are to be released this morning. Median rents in the US, now more than $2000 a month, were not directly impacted by higher food and energy costs, supply chain disruptions, or interest rates. My guess is that landlords are making up for lost revenues during COVID, taking advantage of the fact that mortgage rates are increasing…due to Fed rate hikes. There is a lot of seepage in monetary policy.
Almost any business owner would agree that it is preferable to have higher taxes and expenses that are fixed rather than unpredictable inputs. The measures of inflation that can be affected by monetary policy are already trending downwards. Housing sales are slowing, and supply shocks are righting themselves, as Target’s inventory drawdown reveals. Corporate America is doing its job but is cautious.
One example: oil companies. Although their profits have rebounded since the dip in 2020 when the major energy firms lost tens of billions of dollars, they are not planning to increase investments. Why? In the face of higher prices and ESG investors who shun carbon fuel, they are also being targeted by politicians. Unsure of where this might lead, they are spending their money paying down debt and rewarding shareholders who stayed with them during the lean years. There is too much risk, and not enough policy support to entice them to make long-term investments.
So the central question is, will we see slower growth, or will we bump our heads on a nasty recession? This points to the biggest risk of all—policy mistakes which would not confine themselves to the US economy. An overcorrection by the Fed could have worldwide humanitarian ramifications, particularly in emerging markets. Forward guidance does not solve this.
Robert Solow was quoted in the New York Times in 1979 saying “To try effectively to wipe out hard core inflation by squeezing the economy is possible but disproportionately costly. It is burning down the house to roast the pig.”
We will see how markets react to what is expected to be a large increase in the CPI today. It could be that inflation is successfully tamped down by the real economy sooner than expected, that Janet Yellen was right in the end, and that the peak economic uncertainty that we are experiencing now is as fleeting as peak oil was years ago.
The conventional wisdom about inflation needs a course correction. Here’s why:The Bureau of Labor Statistics reports that the wages and total compensation of Americans working full-time at least kept pace with inflation from January through March. Based on what people tell government surveyors, median weekly earnings after inflation stabilized in the first quarter of 2022 after falling steadily through 2021.
This work is based on my recent trip to Seoul to participate as a speaker in a forum held by the Republic of Korea (ROK) Ministry of Foreign Affairs, commemorating 60th year following the ROK establishment of relations with 15 Latin American and Caribbean states, an opportunity for the recently inaugurated ROK government to focus on the future of ROK engagement in Latin America.
As health systems report their earnings for the first quarter of 2022, the red ink is flowing in torrents. This is mostly due to financial losses on investment portfolios. More concerning, however, are hospitals’ substantial operating losses.
Remarks made at the International Finance Forum Spring meeting 2022. Edited post-delivery to reflect China’s announcement of its first ESG disclosure guidance, officially published April 16 and to take effect June 1, 2022
May 5, 2022 / Bloomberg
U.S. productivity dropped in the first quarter by the most since 1947 as the economy shrank, while labor costs surged and illustrated an extremely tight job market.
June 2022 NBER Working Paper
Marijn A. Bolhuis, Judd N. L. Cramer & Lawrence H. Summers
While Covid deaths overwhelmingly afflict senior citizens, absolute numbers of non-Covid excess deaths are similar for each of the 18-44, 45-64, and over-65 age groups, with essentially no aggregate excess deaths of children. Mortality from all causes during the pandemic was elevated 26 percent for working-age adults (18-64), as compared to 18 percent for the elderly. Other data on drug addictions, non-fatal shootings, weight gain, and cancer screenings point to a historic, yet largely unacknowledged, health emergency.
August 2021 / University of Manchester
The discovery of massive deposits of precious metals in America during the early modern period caused an exogenous monetary injection to Europe’s money supply. I use this episode to identify the causal effects of money. Using a panel of six European countries, I find that monetary expansions had a material impact on real economic activity.
June 5, 2022 Wall Street Journal
Steve Hanke and John Greenwood
The word ‘money’ doesn’t even appear in President Biden’s plan to whip inflation.
May 28, 2022 Financial Times
Central banks’ rate rises, geopolitical risk and slowing growth trigger investors’ stampede for safety, and fun managers dump emerging market debt.
May 20th, 2022 / Financial Post
Reports of the death of globalization are greatly exaggerated.
May 28, 2022 / Financial Times
Central banks’ rate rises, geopolitical risk and slowing growth trigger investors’ stampede for safety
May 6, 2022 / Youtube
Hass McCook, Academia.edu
To understand what drives Bitcoin’s energy use and emissions however, one must understand four key concepts: how Bitcoin works and incentivizes its miners, the nature of competition in the mining industry, the nature of mining hardware and innovation, and importantly, international energy and electricity markets and the differences between them. This paper will provide a thorough explanation of these concepts, as well as provide commentary on Bitcoin’s current state, and what the Bitcoin Mining Industry may potentially look like towards the end of the decade.
May 2022 / NBER Working Paper Series
Rebecca Janßen, Reinhold Kesler Michael E. Kummer and Joel Waldfog
Using data on 4.1 million apps at the Google Play Store from 2016 to 2019, we document that GDPR induced the exit of about a third of available apps; and in the quarters following implementation, entry of new apps fell by half. We estimate a structural model of demand and entry in the app market. Comparing long-run equilibria with and without GDPR, we find that GDPR reduces consumer surplus and aggregate app usage by about a third. Whatever the privacy benefits of GDPR, they come at substantial costs in foregone innovation.
May 27, 2022 / Council on Foreign Relations
The Biden administration’s freshly announced China strategy offers a welcome change in tone but few new policies.
May 3, 2022 / BBC
Billions of dollars of Chinese money are boosting some European economies - but some of the deals being struck have a catch. Critics say they are "debt traps", where China gets to choose what happens if loans aren't repaid.
April 19, 2022 / Twitter
Provinces/municipalities down >30% between 2019 and 2021–Hubei down nearly 40%.
April 19, 2022 / The Sydney Morning Harold
The 19th century belonged to Britain. The US thrashed all comers in the 20th. And, for a couple of decades there, it looked like the 21st was China’s for the taking.
May 18 • 37 minutes
Episode 29 with Kevin Rudd
How Can We Avoid War Between the US and China?
My guest is the Honorable Kevin Michael Rudd, the 26th prime minister of Australia. A fluent Mandarin speaker, he is in the unique position of having interacted with the leaders of both the US and China at their level, and in their language. He has a new and very timely book, The Avoidable War: The Dangers of a Catastrophic Conflict between the US and Xi Jinping's China which he has dedicated to his grandchildren. I urge you to read it, for yours.
May 7 • 57 minutes
Episode 28 - Marsha Vande Berg
Does the Indo-Pacific Really Exist?
My guest for the 28th episode of the Hale Report is Dr. Marsha Vande Berg. Marsha is an original EconVue expert, one of the first people I asked to join our network. She has a truly global macro outlook on the world, and the people who run it. She now heads her own consultancy, MJGlobal Insights. Her directorships have included Rand Corporation, the Asia Foundation, the Japan Society, and Tata Capital.
April 2 • 60 minutes
Episode 27 with Michael Green & Eleanor Shiori Hughes
Japan's new role in the Indo-Pacific
My guest today Dr Green served as the Senior Vice President for Asia, Japan, and the Henry Kissinger Chair at CSIS, the Center for Strategic and International Studies in Washington DC. Joining me with Dr Green is Eleanor Shiori Hughes, one of his graduate students at the Georgetown School of Foreign Service and an EconVue contributor.
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With all best wishes,