Econ Weekly (Oct. 11, 2021)

Featured Place: Pittsburgh, PA

Inside this Issue:

• No Joy on Jobs: Another Month of Employment Disappointment

• But Caution! Schools Skewing September Stats

• Congress Kicks the Can: A Short-Term Truce in Debt Cap Quarrel

• Pains Bond: Treasury Yields on the Rise as Inflation Story Looks Less Transitory

• Secure No More? Is U.S. Treasury Debt Still Considered a Totally Safe Asset?

• With All These Riches, Why Dig Ditches? Does Rising Wealth Explain Loss of Labor?

• Fed Heat: Damned if it Loosens, Damned if it Tightens

• Tunnel Tech: The Potential of Elon Musk’s Boring Company

• Crypto Concerns: The Systemic Risks of Tether; Can they be Weathered?

• Fuel’s Gold: The Challenging Economics of Gas Stations

• And this Week’s Featured City: Pittsburgh, Pennsylvania, From Rust to Bust to Boom

Quote of the Week

“Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending. Frankly, at this time, it’s more like the Wild West or the old world of “buyer beware” that existed before the securities laws were enacted. This asset class is rife with fraud, scams and abuse in certain applications. We can do better.”

-U.S. Securities and Exchange Commission chairman Gary Gensler, testifying before the House Committee on Financial Services last week.

Market QuickLook

The Latest

Another discouraging jobs report. In September, the U.S. economy created just 194,000 net new jobs, a number many expected to be much larger. Schools, after all, were mostly reopened, allowing more parents to go back to work. Bonus unemployment benefits expired. And vaccination rates rose, if slowly. Unfortunately, Covid’s Delta variant intervened, as did severe supply chain difficulties that discouraged companies from hiring—why hire more salespeople if there’s not enough stuff to sell?

There is a more generous interpretation of the September jobs report. It would have been meaningfully better had state and local education jobs not fallen by 161,000. But as the Bureau of Labor Statistics (BLS) warned, month-to-month trends in education can be misleading due to abnormal school hiring patterns throughout the pandemic. The large leisure and hospitality sector, conversely, began adding jobs again after stalling in August. That’s welcome news. Other sectors created new jobs too, including business services, retail, manufacturing, information technology and transportation and warehousing. The unemployment rate fell to 4.8%. What’s more, the BLS said August was actually better than its original figures suggested—366,000 new jobs were created that month, not the 235,000 number it published at the time. July figures too, were revised upward to almost 1.1m.

Nevertheless, there’s no disputing that the job market remains problematic, with too many Americans not working yet too many jobs currently unfilled. The number of Americans working today is 5m fewer than it was pre-pandemic, never mind that GDP is back to where it was. Labor force participation rates remain worryingly low (though for reasons perhaps not all bad—see the Markets section below). Wages, though up, aren’t keeping pace with inflation, which is starting to feel more than just transitory. The bond market apparently thinks so, with demand for longer-term Treasuries weakening again last week. That’s despite short-term relief from Congress on that maddening debt ceiling drama—they’ll revisit the issue in early December.

But what does the Fed think? Will the unflattering September jobs report affect its taper timing? As discussed in the Markets section below, Jerome Powell and his colleagues find themselves in an extremely challenging position, determined to help nurse the labor market back to health (this requires a loose monetary approach) but pressured to counteract an inflationary surge that’s persisting for longer than expected (this requires a tight monetary approach). Complicating matters is the supply-side nature of the current inflation—it seems not the result of excessive money expansion. As such, the situation should improve when supply chain and labor market bottlenecks ease. But when will that happen? Can the Fed afford to wait before tightening? And what if it does tighten, beyond mere tapering bond purchases? If it goes one step further and raises interest rates to cool demand, how would that impact the heavily indebted corporate and government sectors?

The Economist is calling it the “shortage economy,” caused by $10 trillion of global stimulus that “unleashed a furious but lopsided rebound in which consumers are spending more on goods than normal, stretching global supply chains that have been starved of investment.” It also, interestingly, pins the blame on two other factors: The zeal to decarbonize and the persistence of protectionism. Oil prices, incidentally, jumped again last week, joining a surge in natural gas and coal prices. It does raise an important question: Can the economy manage its pursuit of a carbon-free future without painful disruptions along the way?

The pursuit, make no mistake, is intense. General Motors, hosting an event for investors last week, showed again how the auto sector is 100% all-in on electric vehicles. Yet it will be many years before EVs account for a majority of all vehicles on the road—it’s a negligible percentage today. Demand for fossil fuels will persist, therefore, and could outstrip supply amid environmental pressures restraining further investment. Of course, one never knows. Maybe some new technology will come to the rescue.

There is some encouraging news in the battle against Covid, with case counts, hospitalizations and deaths now falling from their mid-September peak. On the global stage, efforts to create a worldwide minimum tax rate—the idea is to stop countries from creating tax havens—advanced with support from a reluctant Ireland. The initiative does still need approval from national legislatures, however; Will the U.S. Congress even approve? Congress last week heard testimony from SEC chairman Gary Gensler, who’s currently conducting a review of the country’s capital markets, worth some $110 trillion. The five specific markets in focus: The Treasury market, the non-Treasury fixed income market, the equity market, the market for security-based swaps and last but not least, the youthful crypto market. On the latter, he stated “I am technology-neutral. I think that this technology has been and can continue to be a catalyst for change. But technologies don’t last long if they stay outside of the regulatory framework. I believe that the SEC, working with the CFTC and others, can stand up more robust oversight and investor protection around the field of crypto finance.”

What else is happening on the eve of Q3 earnings season? Tesla says it’s moving its headquarters to Austin while committing to grow in northern California as well. Apple, meanwhile, is expanding in Los Angeles. Facebook’s controversial business practices are again under scrutiny. Washington and Beijing are talking trade again. And about those upcoming earnings reports, expect healthy profits, but also a lot of what the food giant ConAgra described last week: “If we had the capacity to meet all of the demand, our numbers would likely have been even more impressive.”

Places:

• Pittsburgh, Pennsylvania: A rust belt relic? Or a high-tech all-star? Today, Silicon Valley is the symbol of America’s information-age prowess. A century ago, it was Pittsburgh that symbolized the nation’s economic power, then expressed through industrial might. As late as 1910, the City of Steel was America’s sixth largest, behind only New York, Chicago, Philadelphia, Boston and St. Louis. Its steel proved essential to building the railroads, skyscrapers and military machinery that shaped much of the country’s history. Few cities were home to as many major corporations—Alcoa, Gulf Oil, H.J. Heinz, Mellon Bank, Westinghouse... and most famously, U.S. Steel. But then came the plunge. As Pittsburgh’s steel industry gradually withered, so did its economic fortunes. Between 1910 and 2000, the U.S. population increased threefold, notes Pittsburgh Quarterly, but Allegheny County (home to Pittsburgh) lost 9% of its residents. The decline, alas, continues today. During the 2010s, Pittsburgh’s population shrank another 2%, most among the country’s top 50 metros, save Puerto Rico’s capital San Juan. Its contraction has been more akin to smaller metros emblematic of post-industrial decline, like Syracuse, Toledo, Scranton and Youngstown. In the 2020 census, Pittsburgh’s 2.4m people ranked 27th nationwide among all U.S. metros, this after still ranking in the top 10 as late as 1970—and in the top 20 as late as 1990. The early 1980s marked the city’s low point. Unemployment reached 17% as the region lost 133,000 manufacturing jobs between 1979 and 1987, the Pittsburgh Post-Gazette reported. Between 2002 and 2005, according to the Department of Housing and Urban Development (HUD), the manufacturing sector shed an average of 5,800 jobs per year, with another 2,400 losses in the closely related transportation and utilities sector. Early in the new century, Pittsburgh lost its status as a major passenger airline hub. When the 2008 recession hit, the region lost another 28,000 jobs, nearly 10,000 of them in manufacturing. Japan’s Sony, to give just one example, closed its last remaining U.S. television manufacturing plant in Pittsburgh that year, laying off 560 employees. As mentioned, population continued to shrink throughout the 2010s, ranking number one among metros for the highest net migration outflow to other states. Tellingly, the largest number of residents left for Tampa, many of them retirees. HUD data shows that more than a quarter of migrants fleeing out of state were older than 65. But even with so many seniors leaving, a full fifth of Pittsburgh’s residents today are over 65, compared to 17% nationwide. Pittsburgh, in other words, is a metaphor for U.S. metros facing the triple challenge of deindustrialization, population loss and aging demographics. But guess what? That’s only half the story, and a misleading half. Pittsburgh—cue the cheerful music—is also a metaphor for U.S. metros achieving remarkable success in meeting many of these challenges. No, the steel mills aren’t coming back. And yes, population decline remains a concern. But in an age when luring technology companies is the economic development equivalent of scoring touchdowns, then Pittsburgh is Ben Roethlisberger in his prime (substitute the name Terry Bradshaw if you’d like). Google, Facebook, Uber and Zoom are a few of the companies with major offices in the area, enticed by Carnegie-Mellon University’s world-class computer science program. The school also benefits from government-funded research focused on artificial intelligence and robotics, making Pittsburgh a leader in both fields. The city is on the front lines of autonomous vehicle development, with two leading companies in the field—Aurora and Argo AI—choosing Pittsburgh as their corporate headquarters. Carnegie-Mellon is of course a big employer itself, as are the University of Pittsburgh and Duquesne University. Education and health care, which have replaced manufacturing as the largest providers of jobs throughout much of America, now employs 22% of all workers in the Pittsburgh metro, up from 17% from two decades ago. Health care, of course, includes everything from a hospital custodian to highly paid doctors and medical researchers, and Pittsburgh has an abundance of the latter. University of Pittsburgh Medical Center and Highmark healthcare are the area’s two largest employers, followed by the University of Pittsburgh. Next is PNC, the country’s fifth largest bank and a reason (along with BNY Mellon’s presence) why Pittsburgh is also a major financial center. And adding to the diversification, it’s a major center for the oil and gas industry too. The surrounding Marcellus Formation is the largest source of natural gas in the U.S. and the site of a drilling boom that began in 2007 as fracking technology transformed the industry. Europe’s Royal Dutch Shell will soon complete a $6b petrochemical plant on the banks of the Ohio River, turning low-cost ethane from shale gas into polyethylene, a kind of plastic used in everything from food packaging to auto parts. Interestingly, Shell says more than 70% of North American polyethylene customers are within a 700-mile radius of Pittsburgh, giving the new plant an advantage over more distant Gulf Coast operators. This geographical advantage, incidentally, also makes it a growing logistics hub for companies lie Amazon. Some 6,000 construction workers are involved in the Shell project, which will employ about 600 people when completed. What more to say about Pittsburgh’s renaissance? Its picturesque downtown, with sports venues and spectacular bridges, are a draw to millennials. Living costs are relatively low. Severe air pollution is no longer the problem it was during steel’s heyday. And the city has on multiple occasions played host to major international conferences, including the 2009 G20 Summit (right in the middle of the global financial crisis) and last month’s U.S.-EU Trade and Technology Council. Pittsburgh, in sum, is Exhibit A in America’s shift from an industrial economy centered on making physical stuff to one much more characterized by providing services to people, most importantly health care and education services. The transition hasn’t been easy, and challenges remain, most importantly demographic challenges. But Pittsburgh is nevertheless a case study in success, with a high-tech knowledge economy that all cities crave. Maybe it’s time to change the name of the Pittsburgh Steelers. The “Pittsburgh Artificial Intelligence Algorithms?” With a self-driving car logo on their helmets? You know what? Let’s keep them the Steelers.

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