Econ Weekly (Trial Week of June 21, 2021)

Inside this Issue:

  • Dr. Loose: Powell Stays Still with Job Market Ill
  • Stocks Still Stung: Market Slides as Fed Rate Outlook Shifts
  • Rates of Gibraltar: Longer-Term Treasury Yields Drop Again
  • Inflation Patience: Fed Sticks to its Transitory Story  
  • Shop Shifting: Americans Buying More Services, Fewer Goods
  • And Maybe Fewer Houses: High Prices Throw Sand on Demand
  • An Apple a Day: Another Corporate Hulk Wants Market Share in Health Care
  • From Pipeline to Platform: The Mayo Clinic Chief’s Vision for Health Care
  • Oh Deere: The Latest on Innovation in Agriculture
  • And This Week’s Featured Place: Pine Bluff, Arkansas, A Shrinking Population Situation  

Quote of the Week

“This is an extraordinarily unusual time, and we really don’t have a template or, you know, any experience of a situation like this. And so I think we have to be humble about our ability to understand the data. It’s not a time to try to reach hard conclusions about the labor market, about inflation, about the path of policy. We need to see more data and we need to be a little bit patient.”

-Fed chairman Jerome Powell

Market QuickLook

The Latest

Strong but not strong enough. That continues to be the Federal Reserve’s assessment of the U.S. economy, which is now bigger than it was pre-Covid, yet with 8m fewer jobs. Accordingly, the Fed held steady on its loose-money policies, though officials did spook markets a bit with visions of rate hikes in 2023. It spooked the stock market anyway, not the more consequential debt market—yields on the 10-year U.S. Treasury bond didn’t budge.

Just prior to the Fed meeting, Census data showed a downward trend in retail sales—they fell more than 1% from April to May. But keep in mind, they were up 28% from May of last year. And importantly, the figures don’t reflect the rebound in non-retail spending, i.e., services like travel. They do reflect a 6% month-to-month drop in retail spending on building materials (think Home Depot and Lowes) and a nearly 4% drop in auto sales. Americans spent less on furniture, electronics and appliances as well. But they spent more at clothing stores, department stores, grocery stores, restaurants and gas stations.

Amid signs of a cooling housing market, lumber prices are now dropping from extreme highs, as are some other commodities and raw materials. Not oil though—prices rose again last week, reaching levels not seen since late 2018. But perspective, please: Today’s $70 oil is a far cry from the $100 oil that prevailed during much of the early 2010s (without any systemic inflation). And don’t forget the $130 oil that likely played a role in popping the housing bubble in 2008 (with gas topping $4 per gallon, it meant less money for the mortgage).

So if oil isn’t a worrisome inflationary omen, what is? Higher rental car prices and airline tickets as travel markets reopen? Pricier used cars as supply chain bottlenecks fester? Tight labor markets are perhaps disconcerting, but less so when remembering the huge pool of workers still on the sidelines. Seems more and more like the current inflation is indeed transitory as the Fed insists. Adam Hale Shapiro of the San Francisco Fed highlights another overlooked driver of current price pressures, this one also poised to soon ease. Health care services, he notes, had an unusually large influence on personal consumption expenditures during the Covid crisis, due to temporary increases in Medicare payments. They’ll likely end by early 2022, turning what’s now an inflationary boost into an inflationary drag.

All of that said, the inflation menace still looms, poised to intensify with still more fiscal kerosene on the agenda. There’s a new Senate compromise proposal on infrastructure, which would add about $600b in new spending. But some prefer pursuit of a more ambitious bill. President Biden continues to champion a separate $2 trillion program as well, this one aimed at workers in the often-overlooked care economy. Done right, supporters argue, such spending will make the economy more productive, neutralizing any inflationary threats.

Floating in the background, meanwhile, are macro megatrends shaping the global economy, including several deflationary forces mentioned by Powell—an aging population, for one, and globalization. Inflationistas, conversely, point to rising costs associated with the green economy transition, along with a shrinking global pool of cheap labor (China’s workforce is getting old). Globalization might be reversing. Supply chain bottlenecks could be longer lasting than many think. And tight labor markets could fail to loosen, especially in sectors where overseas outsourcing isn’t an option—like homebuilding, truck driving, food service and warehouse work.

Corporate America has its opinions. JPMorgan thinks more inflation is coming. And it’s positioning itself to benefit. Others like the giant drug distributor McKesson don’t seem too concerned—McKesson says supply chains are running more or less normal. Kroger, the supermarket chain, interestingly wants inflation to rise a bit, citing its many fixed costs (which decline in real terms when you’re paying them in devalued dollars).

Corporate America was in fact quite talkative last week, speaking publicly at the many investor conferences scheduled just before the close of Q2. General Motors will spend even more money on electric and autonomous vehicles. Walmart, a champion in distribution efficiency, sees potential to make further improvements. Oracle, in its latest earnings call, spoke about its journey to become a cloud-based software seller. More broadly, a Business Roundtable survey of CEOs reveals unambiguous bullishness on revenue growth, job creation and capital investment. It’s been a long time since the U.S. economy had an abundance of all that.

Kudos to good journalism, always essential in recognizing important economic trends. A Wall Street Journal report revealed Apple’s surprisingly ambitious efforts in the health care space. A ProPublica investigation revealed leaked tax information that screams unfairness. As an aside, Commentator Scott Galloway suggests years of cutting IRS budgets is the true manifestation of “defunding the police.”

Before moving on, we’d be remiss in not mentioning America’s opioid crisis. Deaths by drug overdose spiked during the pandemic, adding to the 841,000 fatalities from 1999 through 2019. It’s a humanitarian tragedy first and foremost. But it also has economic consequences, perhaps contributing to the longterm decline in labor participation. (Read more about this in Econ Weekly’s Feb. 1 and March 22 issues).

We’ll hear from a few big companies this week, including FedEx and Nike. We’ll get some more data on consumer spending.  And we’ll finish the week with just a few days left of Q2. The second half of 2021 awaits.

The Fed Policy Meeting

Eight times a year, the Federal Reserve’s policy making committee (the FOMC) meets to discuss monetary policy. Is there too much money in the economy, threatening price stability? Is there not enough, threatening access to credit and job creation? In their latest meeting last week, the Fed again refrained from any action, holding firm to its extraordinary loose-money policy adopted when the pandemic first hit last spring. Not only didn’t it raise its interest rate target. It didn’t even talk about raising rates—discussing that now would be “highly premature” said Fed chair Jerome Powell. One thing the Fed did begin discussing though, is the prospect of rolling back its monthly purchases of debt (at least $80b a month worth of Treasury securities, plus $40b a month worth of mortgage‑backed securities issued by government-sponsored agencies like Fannie Mae and Freddie Mac). To be clear, the Fed will continue with these purchases—no announcements last week on stopping or reducing them. But the topic is now on the Fed’s radar, with Powell assuring the market that any tapering of these purchases will be communicated in a way that’s “orderly, methodical and transparent” —don’t worry about any sudden surprises. One thing that did give the market a surprise last week: The FOMC’s collective expectation (based on the median forecasts of the meeting’s 18 participants) that the Fed’s conditions for raising rates (off their near-zero base) will be met sooner than previously expected; they now see a need to raise their target for the federal funds rate in 2023. But Powell downplayed the significance of this: “These projections do not represent a committee decision or plan, and no one knows with any certainty where the economy will be a couple of years from now.” On a technical note, the Fed did adjust some dials on its policy dashboard to ensure that the federal funds rate remains in its current targeted range between 0.0% and 0.4%. More specifically, it raised its two key “administered rates,” namely the interest it pays on excess reserves (the IOER rate) and on reverse repo agreements (the RRP rate). As reminder, the Fed’s toolbox for guiding the Federal Funds rate changed after the 2008-09 crisis. Below is a summary of how the Fed views current economic conditions:

Signs of Health and Progress

Momentary and Ongoing Concerns

·     The housing market is extremely strong (as Morgan Stanley’s Ellen Zentner noted at a virtual NABE event last week, Americans have roughly four times as much equity in their homes than in stocks). Supply, meanwhile, remains extremely tight. As the homebuilder Lennar said in its earnings call last week, “Demand has continued to strengthen, while the supply of new and existing homes has remained constrained. New home construction cannot ramp quickly enough to fill the void of the production deficit that has persisted over the past decade.”

·     On inflation, Powell admitted that supply chain bottlenecks have been larger than expected, depressing economic activity and forcing up prices. But no change to the Fed’s belief that these bottlenecks are just transitory, meaning temporary. It’s easier to create demand coming out of a pandemic (through fiscal stimulus for example) than it is to bring back supply. But the U.S. has a flexible economy that will bring supply and demand back into balance before long. Powell pointed to trends in the lumber market (see Markets section below). He also mentioned an aging population, low productivity and globalization as forces that continue to put downward pressure on inflation

·     Household spending is rising sharply, supported by widespread Covid vaccinations and unprecedented fiscal support; household incomes and saving rates are very healthy

·     Certain industries that were hard hit during the pandemic, like travel, are bouncing back but remain weak

·     Business investment is strong, which bodes well for future productivity (which is ultimately what makes people wealthier and enables growth without inflation)

·     The biggest reason for the Fed’s reluctance to tighten: The fact that so many Americans remain unemployed or out of the workforce. Powell does see strong labor markets gains on the horizon but currently, “we’re very far from maximum employment.” As a reminder, the Fed is charged by law with keeping prices stable and maximizing employment

·     According to surveys, Americans no longer have such low expectations about longer-run inflation; their expectations have risen. But that’s a good thing Powell insists; they were unwelcomingly below the Fed’s 2% target during the height of the pandemic. Inflation expectations are “at a good place right now.”

·     Low labor participation rates reflect a labor market that’s more distressed than the official unemployment rate suggests. The Fed, separately, is keen on seeing gains among lower-wage workers and minority groups. Caregiving needs, ongoing fears of the virus and elevated unemployment insurance are probably still depressing the labor supply but should wane by fall. The Fed’s thinking, importantly, is heavily influenced by the experience of the 2010s, in which unemployment kept falling without any impact on inflation

·     Real GDP is on track to post its fastest rate of increase in decades this year (7%, according to the median of forecasts for FOMC meeting participants, as disclosed in their latest Summary of Economic Projections (SEP); this is higher than the 6.5% GDP growth they forecasted at their last meeting in March)

·     Also affecting the labor supply right now: People retiring earlier than normal; it remains to be seen if these people wind up reentering the workforce. Another thing perhaps affecting workforce size, though it didn’t come up during Powell’s press conference, is the opioid crisis. According to Bloomberg, a new government report shows 91,000 opioid-related deaths in the U.S. last year (on top of the 600,000 killed by Covid)

·     For 2022, Fed officials see 3.3% growth, then 2.4% in 2023 and 1.8% annually over the long run. Note that some private economists, including those at Bank of America, expect much higher growth in 2022; as Powell says, forecasting the economy is tough even in normal times but particularly tough coming out of a pandemic

·     Powell emphasized the high level of economic uncertainty that still exists: “Forecasters have a lot to be humble about. It’s a highly uncertain business, and we’re very much attuned to the risks and watching the data carefully.” He added that the pace of vaccinations has slowed, and new strains of the virus remain a risk. The Fed, meanwhile, is no doubt keeping an eye on frothy asset markets and high levels of corporate and government debt

·     The SEP also sees unemployment falling to 4.5% this year, then 3.8% next year. Consumer inflation should be 3.4% this year before dropping to 2.1% next year (the Fed’s long-run target is a 2% average over time). A little unexpectedly and uncomfortably for some in the financial market, the SEP revealed a jump in the Fed’s targeted interest rate in 2023; that’s something members didn’t predict when they last met in March

·     Overnight money markets, involving trillions of dollars each day, are essential to the smooth operation of the economy, ensuring that financial institutions and ultimately their customers have access to cash when they need it. It was a run on these markets, incidentally, that triggered the 2008 crisis. Well, questions about their soundness remain. Powell said the Fed is working on measures to address the matter. In a related matter, banks and money market funds, currently awash in liquidity, are parking a lot of their cash at the Fed rather than in the private sector overnight market

Companies

  • JPMorgan: What does the chief of America’s largest bank think about inflation? At a Morgan Stanley investor event, JPMorgan’s Jamie Dimon explained his decision to hold $500b in cash on its balance sheet, rather than buy perfectly safe Treasury securities and at least earn some interest. The reason? Because the bank sees a “very good chance inflation will be more than transitory,” which would lead the Fed to raise interest rates, which in turn would mean higher-yield investment opportunities for that cash. Put another way, the bank is sacrificing some interest income now, to earn more money if and when interest rates rise in the future. To be clear, Dimon also has a rosy view of the economy, noting the “unbelievably good shape” of American consumers. Spending on JPMorgan credit cards, he points out, is currently stronger now than in 2019. Investment banking, meanwhile, is having one of its best quarters ever, though trading revenues are unsurprisingly declining from earlier highs. Dimon also spoke about competing with fintech startups and challengers like Walmart and Google. He said loan demand is increasing a bit. He again criticized bank regulations he sees as unfair and counterproductive to economic growth. He discussed the popular “Buy Now, Pay Later” trend. And he cautioned the Federal Reserve in its considerations of a digital dollar—political lending and privacy are two concerns.
  • Apple: Speaking of privacy, Apple is making that a centerpiece of its marketing, positioning itself as a more righteous actor than—most conspicuously—Facebook. Apple in fact just made it tougher for Facebook and other online advertisers to collect data on people using iPhone and iPads. But Apple championing privacy? That sits awkwardly alongside its close business relationship with China’s government. As a New York Times Daily episode made clear last week, Apple and China have a symbiotic relationship, having helped each other grow and prosper in the 2000s. Many of the company’s products are still made in Chinese factories, with a combination of low costs and reliability that would be hard to beat anywhere else. But privacy isn’t exactly a top priority for the Chinese government. As the Daily episode discussed, the two parties have had uneasy discussions about where Apple should store its user data—Beijing wants it stored in China to ensure ready access. The productive but sometimes-tense relationship captures a broader trend in Corporate America’s relations with China, which is a big market (for companies like Boeing), a big source of reliable and low-cost manufacturing capacity (for companies like Apple) and a big source of low-cost goods (for American consumers and retailers like Walmart).
  • Apple: When Corporate America contemplates the $4 trillion a year America spends on health care, the typical reaction is something like: “If only we could get a tiny slice of this pie…” Sure enough, America’s three largest companies all have grand health sector ambitions: Walmart, Amazon and… Apple? Yes, Apple. Last week, the Wall Street Journal reported that the company—never mind its auto sector ambitions—has been heavily investing in health care. It wants to go way beyond merely health-monitoring Apple Watch apps. It was even experimenting with its own primary care clinics, staffed by its own employee doctors. The grand idea is to create a subscription based personalized health care product, using data generated by Apple devices plus actual hands-on physician care, both physical and virtual. “If Apple could prove that its combination of device sensors, software and services could improve people’s health and lower costs, the company could franchise the model to health systems and even other countries,” the Journal wrote, citing internal documents. But is Apple making good progress? Not really, according to the report. Its health apps aren’t proving too popular, and some employees have questioned how it’s using the data it collects. The company, for its part, says the effort is only just getting started.
  • Walmart: CFO Brett Biggs fielded questions at an Evercore ISI investor event last week. America’s largest company, he made clear, is also a growth company, with its online sales potential, its third-party marketplace potential, its Walmart Plus membership potential and its advertising and data monetization potential. “Whether people want data, or they want eyeballs for advertising, we’re pretty tough to beat on both of those.” In the past, most of Walmart’s capital expenditures were directed toward building new stores. Now, they’re mostly directed toward those growth areas, with new stores accounting for less than 15% of total capex. Today’s single biggest capex focus is distribution and supply chain, a critical area for growing not just ecommerce but home delivery from stores. Walmart eventually eyes a day when customers don’t even think about shopping—their needs will be fulfilled through automated replenishment. To be clear, it still wants people to come to its stores. And they’re in fact still doing so in big numbers, even though value retailers tend to do less well during times of strong GDP growth. Higher gas prices, furthermore, tend to reduce the number of shopping trips people take. But again, store traffic is rebounding nicely from the pandemic despite pricier gas. A final thought about Walmart’s importance to the U.S. economy: Its gains in distribution efficiency during recent decades likely had a meaningful impact on improving national productivity, in an era of generally low productivity growth.
  • McKesson: It’s the largest U.S. company most Americans have never heard of. Believe it or not, Dallas-based McKesson ranks number seven on the Fortune 500 list, with its nearly $250b in annual revenues—that makes it larger than giants like Google, ExxonMobil, JPMorgan and AT&T. At an investor event hosted by Goldman Sachs, CFO Britt Vitalone spoke about McKesson’s central role in distributing Covid vaccines to Americans—it’s delivered more than 170m doses to date. Now it stands to benefit from distributing Biogen’s newly approved Alzheimer’s drug, a likely blockbuster. Overall sales volumes took a hit last year as the pandemic reduced demand for flu and cough medicines. But that demand is starting to return, and overall volumes should be back to normal in the second half of this year. McKesson, interestingly, is one company that’s not experiencing major supply chain issues. Vitalone says the company is operating in “normal fashion” despite dependence on India and China. Looking ahead, McKesson is of course watching to see what more Amazon might do in the pharmacy and pharmaceutical space.
  • H&R Block, based in Kansas City, spoke in its latest earnings call about the complexity of this year’s tax filing season. It included a delayed start from the IRS, two additional rounds of stimulus payments, mid-season changes to tax laws, new policies regarding unemployment and recovery rebate credits, and a one-month delay in the filing deadline to May 17. Complexity of course, encourages more Americans to use professional help when filing their taxes, thus benefitting H&R Block and its rivals, which include Intuit (with its TurboTax product) and Jackson Hewitt.

Tweet of the Week

Sectors

  • Agriculture: Jahmy Hindman, chief technology officer at John Deere, isn’t happy about the state of rural broadband in America. Speaking on The Verge’s Decoder podcast, he says the best rural connectivity solution might lie with a satellite-based service like Starlink—that’s the offering by Elon Musk’s SpaceX. Why is Deere so concerned about rural broadband? Because its tractors are becoming data hubs for farmers, in line with a new movement called precision agriculture. The idea is to improve crop yields by using artificial intelligence to analyze data. The AI becomes a “master gardener” optimizing management of each unique plant. In the past ten years, Hindman says, farmers have gone from planting at three miles per hour to more like ten. Larger combines have helped. In the future, though, the improvement will be making combines more intelligent. It will be a while before driver cabs on farm vehicles become autonomous. It’s harder than building AVs for the road, he says, because it involves more than just getting from point A to point B—there are many other tasks a tractor must handle, requiring different AI algorithms. Demand for Deere’s tractors is strong right now, both new and used. But the semicon shortage is a production headache, especially with older-technology chips. Hindman separately refuted charges by “right-to-repair” advocates who want the legal right to fix their own equipment rather than visit an authorized dealer every time. He argues that Deere’s complex, software-intensive equipment needs to be handled by professionals to ensure safety and compliance with emissions standards. The company, incidentally, now employs more software engineers than mechanical engineers.
  • Agriculture: It’s a good time to be an American farmer. Last year, payments from Washington increased to unusually high levels. This year, demand and prices are on the rise as restaurants and hotels reopen. But in one respect, farmers—especially those in the west—are having a difficult 2021. As The Atlantic’s Alan Taylor writes “After two of the driest years in decades, many of California’s reservoirs are expected to reach record-setting lows this summer, four years after exiting the state’s most recent drought emergency… Governor Gavin Newsom has declared a drought emergency for most of the state, while farmers are working to cope with the lack of irrigation water, and fire crews are preparing for a potentially disastrous fire season.”
  • Housing: Something strange happened on Sept. 4, 2020. The Centers for Disease Control and Prevention in Atlanta (the CDC) imposed a nationwide temporary federal moratorium on residential evictions for nonpayment of rent. Its stated purpose was to prevent homelessness and overcrowded housing conditions, which could increase the spread of Covid-19. Normally, state and local governments—not the federal government—have jurisdiction over landlord-tenant laws, even in matters of public health. But as things currently stand, the moratorium will end on June 30. It was originally supposed to expire in December but was extended multiple times. The moratorium, according to the GAO, prohibits evictions only for nonpayment of rent and related fees, not other causes, and it does not prohibit landlords from charging fees or penalties, nor does it forgive unpaid rent amounts. Even so, the act imposed severe financial difficulties on owners of rental properties, from large real estate firms to individuals. Its expiration, meanwhile, could be a big financial blow to some low-income renters who only managed to stay in their homes in the past year thanks to the moratorium. Might the expiration have an impact on labor participation, pushing more Americans back into the job market?

 

  • Advertising: A report by the ad agency GroupM (cited by the Wall Street Journal) says the top five global ad sellers last year were Google, Facebook, Amazon, Alibaba and ByteDance (owner of TikTok). They together collected $296b in ad revenue, accounting for 46% of total global ad spending. Ten years earlier, the top five were Google, Viacom/CBS, News Corp/Fox, Comcast and Disney. But their collective share of the market was only 17%. Conclusion: Ad spending today is more concentrated today, with the lion’s share going to U.S. and Chinese tech giants.

Markets

  • Lumber: With housing demand starting to cool, the extreme run-up in lumber prices is finished. Prices have declined sharply in recent weeks, though they remain at historically high levels. The peak, in retrospect, was around early- to mid-May. Will home prices start to drop in reaction? No major signs of that happening yet. Lennar, the big homebuilder, spoke about strong housing demand but limited supply in its Q2 earnings report last week. It said land, labor, and supply chain bottlenecks are all limiting factors in the drive to meet current demand.
  • Labor: Moving from lumber to labor… here’s one sign of an increasingly dynamic job market: More people feel emboldened to quit their jobs. The Labor Department’s latest Job Openings and Labor Turnover survey (the “JOLTS” report) showed nearly 4m Americans quit their jobs voluntarily in April. It was roughly half that figure a year earlier, at the start of the pandemic. What sectors typically have the highest quit rates? Hotels and restaurants are at the top of that list. Retail is next. Others with high rates include transportation and warehousing; professional and business services; and arts and entertainment. Note also that the South—and to a lesser extent the West and Midwest—typically have significantly higher labor turnover than the Northeast. Where in the economy do you see the lowest quit rate? In the government sector.
  • Semiconductors: Gartner, a research firm, said the worldwide semiconductor shortage will persist through 2021. But it’s expected to recover to normal levels by the second quarter of 2022.
  • Corporate Debt: The Financial Times highlights the hearty appetite for corporate bonds, reflecting investor desire to find better returns than what super-low interest rate government bonds can offer. That’s thinned the spread between Treasury and corporate yields to their narrowest in a decade. Given such a robust appetite for investors to lend, companies have borrowed heavily in the past year or so. As long as interest rates stay low, and the economy stays hot, paying back the loans shouldn’t be a problem. But what if…?

 

Government

  • Fiscal Policy: John Taylor of Stanford University is best known for his “Taylor Rule,” which says the Fed should use a mathematical formula—not its own discretion—to set monetary policy. His latest article, though, expresses an opinion about fiscal policy, specifically regarding the three big government spending packages enacted between March 2020 and March 2021. Writing in Project Syndicate, Taylor defends Milton Friedman’s thesis from the 1950s stating that one-off economic impact payments (better known as stimulus checks) lead to only small increases in consumption. With the three Covid stimulus packages, most Americans received checks ranging from $600 to $1,400 for individuals and from $1,200 to $2,800 for married taxpayers. The hope was that these checks would do what John Maynard Keynes said they would do: Increase spending and thereby boost the economy. Taylor looks at how the latest payments affected personal consumption expenditures, concluding that indeed, their impact was very low like Freidman would have predicted. People, it seemed, saved the money instead. As Taylor concludes his article “Temporary stimulus programs simply do not increase consumption or stimulate the overall economy.”
  • Fiscal Policy: The Peterson Institute took a closer look at those three rounds of stimulus payments. It found that Americans spent nearly three quarters of the money provided in the first checks, but only 22% of the second checks and 19% of the third checks. The rest of the money was either saved or used to repay debt. Keep in mind that checks sent directly to people weren’t the only form of income support during the Covid crisis. Supplementary unemployment checks were another important measure.
  • Antitrust Policy: Should Big Tech have Big Worries? There’s clearly a blowback building on Capitol Hill, never mind President Biden’s appointment of antitrust hawk Lina Khan to chair the FTC. Here’s a passage from a recent House Judiciary Committee report on competition in digital markets: “To put it simply, companies that once were scrappy, underdog startups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons. Although these firms have delivered clear benefits to society, the dominance of Amazon, Apple, Facebook and Google has come at a price. These firms typically run the marketplace while also competing in it—a position that enables them to write one set of rules for others, while they play by another, or to engage in a form of their own private quasi regulation that is unaccountable to anyone but themselves.” Ouch.

Places

  • Pine Bluff, Arkansas: Of the nearly 400 metropolitan areas tracked by the U.S. Census, only one (outside of Puerto Rico) saw a double-digit decline during the 2010s. Pine Bluff, Arkansas, with 100,000 residents in 2010, had fewer than 88,000 by decade’s end. That’s a 12% drop. Even nearby Little Rock, hardly a fast-growing city, managed 6% growth in the 2010s. Why are so many people leaving Pine Bluff? In some ways, the city’s decline mirrors those typically associated with the Midwestern rust belt—a story of industrial jobs that left for somewhere else or evaporated altogether. But Pine Bluff’s problems are also representative of its own Mississippi Delta region, and of a rural area dependent on farming and forestry. In its early years, Pine Bluff earned its living from slaves and cotton—cotton was the oil of its time, and the U.S. South its Saudi Arabia. Just as importantly, its location along the Arkansas River made the city an important shipping port, as it still is today. The river flows right into the Mighty Mississippi, which means crops and other commodities can easily and cheaply reach the critical port of New Orleans. Railroads would displace some river commerce but no worries—Pine Bluff became a major railroad hub and remains an important Union Pacific market today. But jobs in manufacturing, agriculture and forestry disappeared over time, and the city began losing population as early as the 1980s. Pine Bluff also suffers from a serious crime problem, often labeled one of the dangerous places in the U.S. As the country reflects on its fraught history of racial relations, Pine Bluff is a case study in troubles afflicting the Black population. African Americans account for about half of the metro area’s population, and about three quarters of the city itself. It was in fact the hometown of O.W. Gurley, who founded what came to be known as Black Wall Street in Tulsa. Efforts are now underway to recreate a version of that in downtown Pine Bluff, the site of numerous revitalization projects. Allison Thompson, CEO of the Economic Development Alliance for Jefferson County, highlights the downtown’s new library, new art and performance space, a new aquatic center, additional housing and improved walkability. Just outside the city is a new casino that opened last fall and should create 1,000 new jobs. “We’re pivoting to the jobs of today, not chasing the jobs of yesterday,” said Thompson. Casinos, sure enough, are an increasingly popular way to generate jobs in areas of industrial decline (they’re very labor intensive), especially in those where Amazon hasn’t yet opened any fulfillment centers. Pine Bluff’s port, meanwhile, is benefitting from a stronger post-Covid economy. And its job market is anchored by not just education and medical jobs but also federal and state government facilities. The National Center for Toxicological Research is the largest federal lab outside of Washington, DC. No less important is a major federal arsenal. The state’s department of corrections, meanwhile, employs more than 1,400 people in the region. Tyson Foods is a major private-sector employer. So is Evergreen Packaging. And don’t forget the many retail jobs supported by Walmart, the most famous Arkansas-based company (its home is Bentonville, a roughly four-hour drive from Pine Bluff). Agriculture remains important—Arkansas happens to be the number one rice producer in the U.S. A perennial threat, however, is flooding from the Arkansas River, including a costly one just two years ago.
  • Nevada: Keep an eye on the Silver State’s new health care law, which establishes a public insurance entity to compete with private insurers. The hope is that competition with bring down costs. The fear is that costs for taxpayers will rise. The federal government nearly created a public option when passing the Affordable Health Care Act a decade ago. To date only one other state has tried (Colorado). Economists will be closely watching Nevada’s efforts, to see if they help improve what nearly everyone thinks is a broken U.S. health care system. But they’ll need to be patient; the Nevada public insurance option isn’t expected to be available until 2026.

Abroad

  • Global Capital Flows: Brent Neiman of the University of Chicago discussed a study he and his colleagues did on cross-border financing by multinational companies. Many such companies based outside of the U.S., he explains, raise money by issuing bonds from tax havens like the Cayman Islands or Luxembourg. Examples include Brazil’s Petrobras, China’s Alibaba and Russia’s Gazprom. It’s not just a tax move. It also helps avoid foreign ownership regulations back home. Unfortunately, Neiman explains, official U.S. statistics on foreign investment can be misleading about the true overseas exposure of U.S. investors—they appear to show huge exposure to the Cayman Islands, for example. One important trend the data doesn’t capture, he says, is that U.S. investor exposure to China is actually rising when counting companies issuing assets from tax havens.
  • China: Quick stat from Stratfor analyst Michael Monderer: China, he said on a company podcast, accounts for 13% of global trade (the U.S. figure is less than 12%.) But China’s currency, the yuan or RMB, is used in less than 2% of cross-border transactions. When it comes to international commerce, the U.S. dollar still reigns supreme.

Looking back

  • Dodd-Frank: After the housing and financial crash of 2008/09, Congress passed—and President Obama signed—the Wall Street Reform and Consumer Protection Act of 2010, better known as Dodd-Frank. What did it do? A few years after its passage, Keith Goodwin of the Richmond Fed provided a summary. For one, it imposed tougher requirements on banks and other systemically important financial firms, in areas like capital, leverage, risk management and mergers and acquisitions. Their businesses and balance sheets would also be subject to periodic Federal Reserve stress testing, to evaluate their resilience in the face of various hypothetical shocks (there are currently 19 banks subject to the stress tests). Dodd-Frank also requires more transparent trading and clearing of derivatives. There’s the “Volcker Rule” that prohibits insured depository institutions, like commercial banks, from dealing in derivatives for their own account. Banks and other lenders, if they securitize an asset, need to retain some of the credit risk (in other words, have some “skin in the game”). The act established the Financial Stability Oversight Council (FSOC), whose membership includes the heads of all the financial regulatory agencies, to monitor the financial system for signs of trouble. Regulators were given “Orderly Liquidation Authority,” a way to safely seize and unwind systemically important nonbank financial firms on the verge of collapse. The Federal Reserve could no longer extend emergency loans to individual firms. Large financial institutions, meanwhile, must prepare “living wills” that inform regulators how they would deal with their own collapse in the absence of extraordinary government support. Dodd-Frank created a Bureau of Consumer Financial Protection with power to regulate basic financial transactions like deposit taking and check cashing and to set and enforce rules against “abusive” acts or practices. Lenders were mandated to verify a mortgage borrower’s ability to repay a loan. It also banned some practices common before the housing crisis, like “yield-spread premiums” that incentivized mortgage originators to steer prospective borrowers into more expensive loans. Looking back in history, past efforts to ensure the safety of America’s financial system centered on protecting against traditional bank runs, in which the public suddenly races to withdraw their deposits. That wasn’t the problem in the 2008 crisis. In that case, the run took place in the short-term money market, also known as the repo market.

Looking ahead

  • Health Care: What’s the future of America’s $4 trillion dollar health sector? Gianrico Farrugia took a stab at the question, posed to him an event hosted by the Detroit Economic Club. Farrugia, who runs the prestigious Mayo Clinic in Minnesota, expects more care to happen in people’s homes rather than in hospitals, with virtual care playing a bigger role as well. In addition, there’s a shift underway to mimic other sectors in making health care a platform business rather than a pipeline business. The Harvard Business Review describes the difference thus: “Pipeline businesses create value by controlling a linear series of activities—the classic value-chain model. Inputs at one end of the chain (say, materials from suppliers) undergo a series of steps that transform them into an output that’s worth more: the finished product. Apple’s handset business is essentially a pipeline. But combine it with the App Store, the marketplace that connects app developers and iPhone owners, and you’ve got a platform.” Can health care do something similar? One interesting health care platform company now getting attention is San Francisco-based Doximity, which the Motley Fool calls the LinkedIn for health professionals. It’s now in the process of doing an IPO.

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