Econ Weekly (July 26, 2021)
Featured Place: Lexington, Kentucky
Inside this Issue:
More Learnings from Earnings: Higher Costs but Strong Demand
Still the Vim without the Stim? Economy Faces New Tests as Measures Wane
Just More Drama? Or this Time Trauma? Another Debt Ceiling Debate (Ugh)
Money Laundering: Big Demand for Whirlpool Washing Machines
Package Power: A New Book About Labor Relations at UPS
Dating the Dip: NBER Says 2020 Recession Lasted Two Months
Man-Made Brains: The Future of Artificial Intelligence
And This Week’s Featured Place: Lexington, Kentucky: Growth Sources Beyond Race Horses
Quote of the Week
“No way did I or anybody else in the last six months realize how difficult it was going to be to try and get people to come to work these days. It is an enormous challenge for us to go out and find people that want to be conductors on the railroad, just like it's hard to find people that want to be baristas or anything else. It's very, very difficult. Nor did we anticipate that a lot of the people were going to decide they didn’t want to work anymore. So our attrition was much higher in the first half of the year than what we had expected.”
-CSX Railroad CEO James Foote
Americans are still buying lots of stuff. That much is clear from the growing list of companies that have now reported their Q2 earnings. More importantly, this strength in demand is—for most companies, anyway—outweighing the negative impact of higher input prices and supply chain headaches. Indeed, Corporate America says profits are strong.
The economy, however, will soon be tested. How well can it stand on its own? For now, there’s no additional fiscal stimulus coming (beyond what hasn’t yet been spent from previous bills). Perhaps as early as this week, when it holds its next policy meeting, the Federal Reserve will outline initial steps toward unwinding the extraordinary stimulus it enacted last spring. If not this week, then maybe at an August event in Wyoming. Separately, a federal moratorium on home evictions expires at the end of this month, perhaps heralding an increase in foreclosures and homelessness. Also expiring at the end of this month: Congressional permission for additional federal borrowing.
Even without any additional borrowing after July, the Treasury will have enough cash to pay its bills for a while. Exactly how long is hard to say. Secretary Yellen notes that in October, the Treasury has a large payment due for a Defense Department-related retirement and health care investment. Of course, the money could run out even earlier. Expectations for now are that Congress will eventually—after some political brinkmanship—increase or suspend the debt limit, removing the frightening prospect of a federal loan default. No American in their right mind would want to see that.
In the meantime, Covid remains a threat as the Delta variant spreads and vaccination refusal persists. Also somewhat unsettling: An increase in Americans applying for unemployment benefits. It’s the labor market, remember, that’s the primary focus of the Federal Reserve right now, never mind high rates of inflation that—were this the pre-Covid era—might have called for immediate and panicked tightening. No need, the Fed still insists. The inflation is just transitory.
The labor market’s big moment will be September, when schools reopen, and unemployment bonus payments expire. Hopefully then, unemployment rates will drop to pre-Covid lows. As a reminder, GDP already has returned to its pre-pandemic level, but the job market has not. Unfortunately, September probably won’t mark an end to supply strains on the economy. Intel, for one, says the shortage of critical semiconductors could last into (gulp) 2023.
In the giant health care sector (now approaching a fifth of total U.S. GDP), HCA reported a “strong rebound” in demand for medical services deferred during the pandemic. During Q2, the hospital chain said, Covid patients accounted for just 3% of admissions, compared to 10% in Q1. Separately, Alcoa said it’s currently the most profitable time ever to be in the aluminum business. American Express sees a surge in credit card spending, especially on travel and entertainment. Netflix, less happily, faces some challenges with subscriber growth but boldly wants to offer video games. AT&T, as it undertakes a change in media strategy, sees positive growth trends in its core cellular and cable businesses.
Amazon founder Jeff Bezos followed Richard Branson high into the sky, kindling prospects of the further commercialization of space. Satellite communications are already a big part of the space economy. Might we one day mine asteroids for raw materials and operate factories in space as a way to cut carbon emissions? Will space tourism become an option for more than just billionaires?
Back on planet earth, the stock market, after swooning early in the week, returned to expansion after strong corporate earnings settled nerves. The market for oil and Treasury debt were mostly unchanged.
This week brings more earnings fun, led by Big Tech. Amazon, Apple, Google, Microsoft, Facebook and Tesla all report. Joining them will be Comcast, Lockheed Martin, GE, UPS, Pfizer, PayPal, McDonald's, Ford, Boeing, Qualcomm, ExxonMobil and so on. And don’t forget: Two separate trillion-dollar-plus spending proposals remain alive in Congress. There’s a lot to watch.
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