Econ Weekly (Oct. 25, 2021)
Featured Place: Charlotte, NC
Issue 41: October 25, 2021
Inside this Issue:
The Great Price Panic of 2021: Just How Worrisome Is It?
October Pickup: Labor Prospects Brighter as Covid’s Toll Gets Lighter
The Latest Learnings from Earnings: Pricing Power Powers Profits
P&G’s P&L: Household Goods Maker Proves the Pricing Power Point
Stars and Cars: Auto Firms Drive South for Success
Crypto’s Climb: Bitcoin, etc. Now Bigger than Most Global Currencies
Love It or Shove It: Americans Quitting their Jobs in Record Numbers
Disco and Disquiet: The American Economy in 1979
The Agglomeration Sensation: How Talent Tends to Cluster
And This Week’s Featured Place: Charlotte, NC, Big Bank Brawn
Quote of the Week
“Demand remains strong across all of our segments, and I continue to believe that we’re just starting a cycle of sustained growth, which we are well-positioned to capture. The digitization of everything—accelerated by the four superpowers of AI, pervasive connectivity, cloud-to-edge infrastructure and ubiquitous compute—are driving the sustained need for more semiconductors. And the market is expected to double to $1 trillion by 2030.”
– Intel CEO Pat Gelsinger
Badly broken supply chains. Severe labor shortages. Sharply rising prices. The prospect of higher interest rates and higher taxes… A swarm of ghouls and goblins are haunting the U.S. economy. But good news: They’re not the only ones attending this Halloween party.
Also present are tailwinds strong enough to drive robust profitability throughout Corporate America. As companies report their Q3 financial results, one overarching theme is everywhere: Yes, the supply side of the economy is malfunctioning, but the demand side of the economy remains vigorous, which translates to exceptional pricing power—and in turn, exceptional profits for many. In the meantime, household balance sheets remain strong. So do critical industries like housing and finance. Employment is growing. Consumers are spending. Businesses are investing. Americans are launching new companies in record numbers. Covid is receding. And overall conditions are vastly better than they were in the aftermath of the 2008-09 recession.
The stock market likes what it sees. The S&P 500 index reached another all-time high last week after stumbling a bit earlier this fall. Uncle Sam’s 10-year Treasury bonds, meanwhile, saw prices drop and rates rise, often a sign that investors are encouraged by economic growth prospects.
Then again, a “price down/yield up” trend for bonds might instead reflect more fear than cheer. Inflation, after all, doesn’t bode well for fixed income assets, i.e., those that deliver steady nominal payments over time. That dollar Uncle Sam owes you in ten years won’t be worth nearly that if inflation runs wild.
But is it really running wild? That’s the debate at the center of the economic universe right now. The Labor Department’s latest reading (for September) clearly shows a trajectory of rising prices that—if sustained—spells trouble. The Fed, while admitting the trend is persisting for longer than expected, still holds firm to its “transitory” thesis. In a speech last week, Fed governor Randal Quarles, plainly stated: “I agree with my FOMC colleagues and most private forecasters that inflation likely will decline considerably next year from its currently very elevated rate.” Measures of the public’s longer-term inflation expectations, he continued, don’t show meaningful signs of worry. “Demand, augmented by unprecedented fiscal stimulus,” Quarles said, “has been outstripping a temporarily disrupted supply, leading to high inflation. But the fundamental productive capacity of our economy as it existed just before Covid… remains largely as it was. And the factors that are disrupting it appear to be transitory.” No need, in other words, for the Fed to artificially constrain demand. Doing so right now would be “premature.”
The Fed, remember, has a mandate to maximize employment. And employment is still down by 5m jobs from February 2020. One possibility is that current price rises merely reflect a one-off reset of what things will cost in a world with permanently scarred labor markets, not as much globalization and a switch to supply chains that emphasize resiliency over efficiency. Another possibility is true inflation, in which prices spiral ever higher and higher. If that’s indeed what we’re seeing now, blame Washington’s massive injection of money into the economy. No, not through quantitative easing, or any other monetary policy for that matter. Blame the trillions in fiscal stimulus.
But don’t rule out the Fed’s transitory argument just yet. Deflationary forces—including new technologies, aging demographics, tepid bank lending, China’s slowing economy, policy tightening and the eventual fruits of efforts to fix supply chains—will have their say too. Some inflation bears also say the level of dollars in the global economy remains low, depressed by a big drop in dollar lending by… (TO CONTINUE READING, VISIT www.econweekly.biz)
Charlotte, NC: There’s an old joke in the airline industry: When you die and go to heaven, you’ll have to make a stop in Atlanta. That’s Atlanta, the busiest airport in the world. But you might make the same joke about Charlotte, America’s sixth busiest airport despite being its 22nd largest metro. Just four hours by road northeast of Atlanta, North Carolina’s largest city enjoys much of the same geographic advantage for air transport, situated along the path between many of the busiest traffic flows, including almost everything into and out of Florida. Amid the demand devastation of 2020, Charlotte—without much international exposure—saw the smallest y/y decline in traffic of any major U.S. airline hub. That enabled it to achieve its number six ranking nationwide. But even pre-crisis, in 2019, it was the country’s 11th busiest airport, punching far above its weight. It also happens to be among the world’s most profitable airline hubs, in its case dominated by American Airlines (which employs more than 10,000 people in the region). Charlotte’s geography, moreover, doesn’t just work well for airlines. It works well for trucking too, with a strong highway network allowing easy access to more than half of America’s population—indeed, that’s how many people live within a 650-mile radius. This includes Washington, New York and much of Florida. It also includes Detroit and the many auto factories across the Southeast. Sure enough, Charlotte now has an auto-cluster of its own, which includes a Daimler factory producing trucks. The area’s distribution benefits also make it a hot spot for retailers, including Amazon and several major supermarket chains. Charlotte is home to Lowe’s, the giant home improvement retailer, along with non-retailers like Duke Energy and the hospital network Atrium. It’s a big sports town too, with NASCAR, the Hornets and the Panthers. UNC Charlotte enrolls 30,000 students. In addition, the city is in a relatively low-cost area of the eastern seaboard, and one with sunny weather. No wonder why the Charlotte metro population spiked 17% during the 2010s. According to the Charlotte Regional Business Alliance, the area’s job count is down by just 3.1% from its pre-pandemic level, compared to a 4.4% decline nationally. Since Q2 2020, the Alliance notes, foreign-owned firms have announced more than $600m in new capital investments, led by the Korean owner of Bobcat construction equipment. But there’s something else—something that distinguishes Charlotte from even its bigger neighbor Atlanta. The city, surprisingly, is one of America’s top banking centers, behind only New York City and San Francisco in total deposits. Like so many U.S. cities, Charlotte owes its early development to the arrival of railroads, in its case just before the Civil War. The financial sector later grew as the city needed capital to finance its emergence as a hub for cotton and textile manufacturing, much of it migrating from New England where labor costs were higher. This gave rise to the North Carolina National Bank (NCNB), created through a merger in the 1950s. As the Charlotte Museum of History explains, NCNB benefitted from a 1985 state law—the Southeastern Regional Banking Compact—which allowed North Carolina banks to own branches in other states but disallowed northern banks from entering North Carolina. As the Museum explains: “This act of protectionism allowed NCNB to continue expansion with little fear of acquisition by an outside bank.” And so, NCNB, which changed its name to NationsBank, grew and grew, with one merger after another. In 1998, it bought San Francisco-based… (TO CONTINUE READING, VISIT www.econweekly.biz)
The Economy in 1979: Here’s a fun activity for economics nerds: Go back and read old Federal Reserve meeting transcripts. One picked at random, from early 1979, reveals a U.S. economy then grappling with annual consumer price inflation of 10% and annual producer price inflation of 14%, the latter swelled by a 45% jump in crude oil prices (the economy then was much more exposed to an oil shock than it is today). The unemployment rate was 5.7% (a bit higher than today). The average mortgage rate was 10.4% (a lot higher than today). Fed officials were clearly preoccupied with inflation, noting “a broad acceleration of price increases from the already rapid rate late last year.” They also worried about the risk of recession: “The recent increase in the price of oil, the acceleration of the overall rise in prices and the sluggish growth of the monetary aggregates over the latest five months were cited among the factors that increased the probability of recession.” Different Fed districts reported various other troubles, including a California farm labor strike, a shortage of engineers and “computer software people” in the San Francisco and Boston districts, and a “bleak” manufacturing outlook in the Philadelphia and Richmond districts. Detroit’s automakers, meanwhile, saw buyers flock to compact foreign… (TO CONTINUE READING, VISIT www.econweekly.biz)
The World’s Stock Markets
SIFMA, which advocates for the U.S. securities industry, published the following chart depicting the size of America’s stock market relative to those elsewhere:
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