Econ Weekly (Aug. 16, 2021)
Featured Place: Indianapolis, Indiana
Photo courtesy of the Visit Indiana
Inside this Issue:
The Climate Conundrum: Balancing Economy and Ecology
The Metaverse: Facebook’s VR Visions
Price Check: Inflation Worries Wane… a Bit
Chicken Combo: Cargill Gains Poultry Power
Averting Another Hurting: Fixing the Treasury Market’s Broken Plumbing
Eli Lilly: Down on the Pharm
Correlation Sensation: There Really Is a Link Between Profits and Stock Prices
Missing Medics: America’s Worsening Shortage of Doctors and Nurses
Peking Peril: The Hazards of Buying Chinese Stocks
Track in the Day: A History of Railroads in the Northeast
And This Week’s Featured Place: Indianapolis, Indiana, The Midwest’s Hoosier Hub
Quote of the Week
“The richest 22 men in the world have more money than all the women in the whole of Africa.”
– Alberto Gallo, Algebris Global Credit Opportunities (speaking on the “Macro Hive Conversations” podcast)
Market QuickLook
The Latest
Al Gore called it the “inconvenient truth.” Others might call it the existential threat. Earth’s climate is changing in dangerous ways, leaving humanity in a bind. Few things are more useful to growing an economy—and improving people’s incomes—than burning fossil fuels for energy. But doing so, a new UN report again makes clear, is making the climate change problem worse. Can the world and its largest economy manage to simultaneously address two seemingly conflicting goals: Improving standards of living and quickly reducing greenhouse gas emissions? Failing at either would bring great misfortune.
The dilemma was on display in Washington last week as President Biden both 1) campaigned for legislation heavy on climate mitigation efforts and 2) called on OPEC to produce more oil to ease inflation for American households.
Helpfully, inflation is easing. The latest consumer price index (CPI) for July showed a 0.5% increase from June to July, still high to be sure, but also the slowest monthly increase since February. Energy, as Biden’s message to OPEC suggests, remains a big driver of price gains. Exclude energy and food though—both are tied to the volatile commodity market—and the easing trend was even more pronounced. Price pressures for vehicles are easing for example—the monthly rate of increase in used car prices fell sharply. House prices, remember, while soaring, are considered an investment (like stocks or bonds) and thus not part of the CPI. Housing-related costs that are included, meanwhile, remain relatively stable. Importantly, medical care including pharmaceuticals has been one major area of essentially nonexistent inflation over the past year (it’s been kind of the opposite in recent decades: low inflation except in medical care).
Prices aren’t easing as much for companies, as the producer price index shows. Along with higher energy costs, transportation and warehousing remains a pain point. It’s perhaps becoming more difficult for firms to pass these cost increases on to consumers. But speaking of consumers, they’re apparently growing more pessimistic about the economy, judging from a newly-released University of Michigan survey. New surveys of small businesses suggest unease as well.
A bipartisan infrastructure bill passed the Senate, allotting $1 trillion to projects ranging from road improvements to expanding broadband access. It still must pass the House, however, which could be a challenge. Many would-be House supporters say they’ll only vote yes if combined with a gargantuan $3.5t package addressing issues like affordable housing, clean energy, education, health care and childcare. Others though, say they’ll only accept the infrastructure and care economy bills together if the latter is pared back. As of now, the proposal as envisioned by the Senate includes paid family and medical leave, Medicare coverage for dental and vision benefits, lowering the Medicare eligibility age, extending child tax credits, Universal Pre-K for 3- and 4-year olds, childcare for working families and tuition-free community college. It also includes tax cuts for American households earning less than $400,000 per year but tax increases for those earning above (and on corporations as well).
As fiscal matters unfold on Capitol Hill, the Federal Reserve appears ready to end its monthly bond purchases—or at least announce that they’re ending—sometime this fall or maybe even at a Wyoming symposium later this month. That would be a step toward post-crisis monetary policy normalization and a prelude to eventually raising interest rates. The Fed, meanwhile, along with other financial regulators, have their work cut out addressing worrisome vulnerabilities in the mother of all financial markets: The Treasury market. And that’s separate from the debt ceiling constraint that risks financial armageddon if not removed soon.
If that weren’t enough to test the nerves of Treasury Secretary Janet Yellen, tensions with China threaten the world’s most important bilateral trading relationship. Both economies depend greatly upon each other, a fact to which companies like Apple, Boeing and Walmart would attest. But mutual economic dependence is no guarantee of rational political outcomes.
Should Yellen worry about the big increase in U.S. federal debt? That’s a matter of great debate among economists. What’s clear, though, is that sovereign debt fears are not playing as large a role in policymaking as they did in the aftermath of the last recession. From Washington to Berlin, there’s no longer the sense of urgency to impose fiscal austerity. During the last recession, keep in mind, the economy had a demand problem. Today, it has a supply problem.
It still, unfortunately, has a Covid problem too. Airbnb, while experiencing extremely strong demand this summer, noted a recent slowdown in bookings, perhaps attributable to Covid’s Delta surge. Disney’s great summer too, is clouded by uncertainty about future visits to its theme parks.
In other news, the U.S. Census published more data from its 2020 population count, a major determinant of political power across geography. In the crypto world, Coinbase said Ethereum is now more traded than Bitcoin. Stocks were up. Treasury yields were down.
Be sure to read this week’s profile of Indianapolis, the state capital of Indiana. Its thriving economy rests upon more than just state government though. Read on for more about the care economy and the future of business travel, plus the mystery of the bond market and a history of the railroads. And come back next week as the nation’s big retailers report Q2 earnings. Next week’s Featured Place, meanwhile, isn’t thriving like Indianapolis. Quite the contrary.
Depicting Rising Inequality in the U.S.
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