Econ Weekly (Aug. 9, 2021)
Featured Place: Los Angeles, California
Photo courtesy of the Port of Los Angeles
Inside this Issue:
Joba the Hut: Smiles Not Sobs with ~1m New Jobs
The Delta Danger: Will Covid’s Mutations Cause Complications?
Time to Taper? It is Finally Time for the Fed to Unwind?
The Time of Paper: Merry Memories of Maine
Airlines: Biz Travel Trouble
General Motors: Profit Gains Despite Semicon Pains
The Dollar Shortage: Causing Depression Since 2007
Stable Stakes: Are Crypto-World Stablecoins a Systemic Threat?
Missing Males: A Labor Market Mystery
A Trunk for Your Junk: A Look at the High-Margin Self-Storage Business
And This Week’s Featured Place: Los Angeles, California, Hollywood Dreams and Home Price Extremes
Quote of the Week
“What does non-transitory inflation actually look like? When does inflation become self-fulfilling? The short answer it is: It needs to be visible and sustainable in wages.”
-BMO Capital Market’s Ian Lyngen
Good news: The U.S. economy created 943,000 new jobs in July, an important sign of progress in the recovery from Covid. In most respects, the recovery has already happened. GDP is back to where it was and demand for many goods and services are stronger than ever. Not the labor market though. Even with its nearly 1m new jobs last month, 8.7m Americans remain unemployed, up from just 5.7m in February 2020. The unemployment rate, too, is not yet back to its pre-crisis lows (5.4% now, 3.5% then).
But the July job gains are indeed encouraging, representing “substantial further progress” toward conditions the Fed deems necessary before tapering monthly Treasury and MBS purchases (see Government section below). That’s the first step toward post-crisis monetary policy normalization, and it looks like an announcement on that will come before year end (maybe even at the Fed’s Jackson Hole summit later this month).
Note also that revised figures for May and June show more job gains than previously estimated—614,000 in May and 938,000 in June. So that’s nearly 2.5m new jobs created in the past three months, a sign of substantial further progress indeed. Americans, it seems, are getting back to work. But what President Biden calls a pandemic of the unvaccinated continues to threaten a return to economic normality, with many companies now abandoning plans to reopen offices this fall. Events are canceling too, like the New York Auto Show. Schools, however, are opening their doors across the country this month and next. Sure enough, 28% of last month’s job gains came from the education sector. Only leisure and hospitality—responsible for 40% of July’s job gains—made a greater contribution. Much of that was hiring by restaurants and bars.
There’s still the mystery of why labor participation rates—especially among males—remain depressed, continuing a decades-long trend (see the Markets section below for possible explanations). Average hourly earnings are up y/y, and by almost 10% in leisure and hospitality. Even in the context of elevated inflation, that’s good, even more so for anyone not buying or renting a car.
As the labor market heals, the housing market is cooling. It’s still red hot to be sure, with demand greatly exceeding supply in most markets. But according to Bloomberg, citing a survey by John Burns Real Estate Consulting, just 62% of homebuilders raised prices in July, down from 95% in April. No, it’s not a 2008-like bubble—that was a case of widespread reckless lending. But the zeal for home buying does appear to have peaked.
The auto market by contrast, also with demand greatly exceeding supply, sees “nothing fundamentally different about demand… in the near-term.” That’s what General Motors said last week. Carmakers are encouraged by easing commodity prices too. But Covid’s assault on factories in East Asia adds to the supply chain challenges already intense because of semicon shortages. Separately, Expedia, the online travel giant once owned by Microsoft, warned that the “road may still be bumpy for a while as we watch all the variants play out, and various government responses to them.”
In the youthful crypto economy, a sharp drop in asset values from springtime highs isn’t deterring a rush of new money, talent and attention. It’s now a focus for regulators in Washington, particularly those charged with protecting investors. The stablecoin market, resembling a crypto version of bank deposits or money market funds, is attracting particular attention. Before federal deposit insurance, destabilizing bank runs were common. As recently as the 2008-09 financial crisis, the economy was destabilized by a run on money market funds. Should regulators worry about a run on stablecoins?
Separately in the crypto space, Ethereum—a platform for building blockchain-based businesses and applications—is moving toward a new system of transaction verification that doesn’t use so much dirty energy. Back in the physical world, a top Biden administration priority is building an economy that doesn’t use so much dirty energy. The latest iteration of the infrastructure bill, still weaving its way through Congress, features some clean energy programs. Same with the larger care-economy bill Democrats are pushing.
Expect even more drama on Capitol Hill as Fed chief Powell’s term comes up for renewal. Will President Biden reappoint him? Or will he turn to someone else—Fed governor Lael Brainard is a much-mentioned alternative. Oh, and in case you forgot: The debt ceiling is now back in place. Legislators need to act before the Treasury runs out of cash sometime this fall. If not, the U.S. will default on its bonds, the equivalent of a nuclear bomb dropped on the global financial market.
The market for U.S. Treasuries remains robust for now, with the yield on 10-year notes plummeting to 1.19% mid-week before snapping back to 1.31% following the healthy jobs report—good economic news usually sends money flowing away from low-yield Treasuries. Sure enough, stocks gained last week, albeit modestly as Covid fears thwarted further gains. The oil market, seemingly more concerned about the resurgent Covid threat, dropped sharply.
As for Corporate America, the sentiment remains bullish, underpinned by excellent Q2 results and ongoing demand strength and pricing power that’s outweighing higher input costs, supply chain disruptions and labor shortages. That’s generally true in the giant health care sector too, where non-Covid patient levels are rising, and operating rooms are experiencing backlogs—that according to the staffing agency AMN Healthcare Services. It also sees healthcare organizations struggling with extended unfilled job vacancies, clinician fatigue and extended leaves of absences among nurses.
Another major health care company, CVS, joined Berkshire Hathaway as the largest U.S. firms to report earnings last week. It spoke of a “rapidly changing U.S. healthcare environment” characterized by new medicines, new technologies, new business practices and new forms of primary care, including virtual care. As always with U.S. health care though, the challenge is controlling costs, which for decades have been spiraling out of control.
Here’s just one more earnings call highlight, from the real estate firm Cushman & Wakefield. It sees “some very encouraging green shoots emerging in the office sector.” Office real estate, remember, was one of the big losers during the pandemic as workers toiled from home. But recent Covid variant setbacks notwithstanding, it seems they’re returning. “At the beginning of the year,” the company estimates, “roughly 17% of U.S. office employees were back at the office. At the end of the second quarter, it was closer to a third.”
In this week’s issue, we look at the rise of Los Angeles, a city that barely existed at the time of the Civil War. Today, it’s America’s second largest metro after New York. How did it happen? Can other cities learn from its success? Can its success be sustained amid a housing crisis? Next week, as always, we’ll profile a different American place—Hint: It’s home to one of the country’s largest pharmaceutical companies. Also next week: Ongoing earnings coverage, with Disney and Berkshire Hathaway among the heavy hitters stepping to the plate. (And be sure to sign up for our free newsletter about the North American railroad industry at: