Econ Weekly (Oct. 4, 2021)

Featured Place: Oklahoma City, OK

Inside this Issue:

• Yellen Yells Help: Congress, the Treasury Chief Pleads, Must Act on Debt Ceiling

• Bounce of the Bonds: Treasury Yields Rising Again   

• Gaming Higher: ActivisionBlizzard and the Rise of Video Games

• Low Blow: Evans of the Fed Still Sees Risk of Not Enough Inflation

• Bottleneck Nation: Top Reasons for the Semicon Shortage

• Keys to the Seas: Nations Vie for Ocean Supremacy

• The Antitrust Fuss: Where Did it Begin?

• Rodent Returns: Are you Smarter than a Hamster?

• And This Week’s Featured Place: Oklahoma City, Gobs of Jobs

Quote of the Week

“This is a transformative moment where Ford will lead America’s transition to electric vehicles and usher in a new era of clean, carbon-neutral manufacturing.”

-Ford chairman Bill Ford, announcing an $11b investment in new electric vehicle and battery production

Market QuickLook

The Latest

The final quarter of 2021 has arrived, with growth strong but uncertainties high. Will Congress avert a sovereign debt catastrophe? Will it pass two new spending bills? How will the Fed’s bond-buy tapering affect credit markets? As fiscal stimulus fades, will demand weaken? Just how entrenched are supply-side bottlenecks that are driving up prices?

Prices, sure enough, were again up rather sharply in August, as the Commerce Department’s latest inflation reading shows. Its PCE Index increased 0.4% from a month earlier, and 4.3% from a year earlier. Some of that was rising energy and food prices, but even excluding these items, the reading showed a y/y jump of 3.6%, well above the Fed’s traditional goal of 2%.

The Fed, to be clear, is now more amendable to tolerate a temporarily high bout of inflation, recalling the excessively low inflation of the pre-pandemic period. Some, like Chicago Fed president Charles Evans, think insufficient inflation is still a risk, notwithstanding the current supply-chain driven inflation—that’s a transitory phenomenon, the Fed believes. Supply chain problems should fade as companies adjust. But alas, they’re sticking around much longer than the Fed initially expected.

Evans shared his thoughts at an event hosted by the National Association for Business Economics (NABE), whose attendees also heard from Treasury Secretary Janet Yellen and Fed governor Lael Brainard. Yellen, for her part, made the pitch for Biden’s economic agenda, which—subject to intense negotiations currently underway on Capitol Hill—includes heavy investments in physical infrastructure, new approaches to taxation and efforts to alleviate childcare, eldercare and health care barriers to workforce participation. Yellen separately warned Congress that absent action on the debt ceiling, the Treasury will run out of money on Oct. 18.

Congress did pass a bill, signed into law by President Biden, that averts a government shutdown. But only until early December. In the meantime, interest rates on Treasuries have ticked up of late, mirroring a trend seen in February and March. Nobody knows exactly why—one reason could be the Fed’s plan to stop buying so many Treasuries each month, implying weaker demand. And remember the cardinal rule about bond prices: As prices go down (which happens when there’s less demand), interest rates go up. Also with the onset of autumn, oil prices have increased and stocks—notably tech stocks—have lagged.

The biggest news from Corporate America last week? That’s surely Ford’s decision to put a massive $11.4b behind its electric vehicle strategy. The company will build electric versions of its F-Series pickups—these are top selling vehicles in America—at a newly constructed mega-plant outside of Memphis, Tennessee, employing nearly 6,000 people. It will also build two battery plants in Glendale, Kentucky, south of Louisville, creating another 5,000 jobs. It’s been an odd year for America’s automakers, thrilled by strong demand and high profit margins but immensely frustrated by an inability to produce enough vehicles due to a severe semiconductor shortage. Ford’s investment, though, looks beyond the short-term supply crunch and further advances the industry’s dramatic shift away from climate-unfriendly gas-powered vehicles, eyeing an end to an era launched by Henry Ford himself. No less importantly, the selection of Tennessee and Kentucky reinforces another great trend of modern-day America: A southward shift in auto manufacturing from its origins in Detroit and the wider Midwest.

The Route 1 Corridor running through New Jersey remains central to the lucrative pharmaceutical industry, where Merck—based near Newark—announced promising trial results for an anti-Covid medicine. On the opposite side of the country, Google’s financial sector ambitions took a step backward as the company abandoned plans to offer bank accounts. Walmart’s health sector ambitions, by contrast, moved a step forward with a new announcement on electronic health records. The nation’s largest company also closed a deal to sell $2b worth of “green” bonds to achieve its goal of 100% renewable energy by 2035 and zero emissions by 2040. Separately, New York’s Blackstone—the world’s largest owner of real estate—turned a big profit by selling a Las Vegas hotel it bought seven years ago.

Stay tuned for the September jobs report this Friday. Markets and policy makers will be watching that with a close eye. Then comes the start of Q3 earnings season the following week, led by the nation’s biggest banks.

Highlights from last week’s annual meeting of the National Association for Business Economics (NABE):

• Treasury Secretary Janet Yellen spoke to Congress last week, all but begging and pleading legislators to raise or suspend the debt limit. She also made the same point at the NABE event just outside of Washington, held in person this year. The main purpose of her NABE address, however, was to advocate for President Biden’s Build Back Better agenda now working its way (however tortuously) through Congress. The economy is recovering, she assured, but still faces major risks, including longterm structural shortcomings that need to be addressed now, while interest rates are extremely low. One of these is rising income and wealth inequality, driven by factors like declines in worker bargaining power, inadequate childcare options, a low minimum wage and most recently lack of broadband access. From 1948 to 1973, she said, median family income kept up with labor productivity. Since then, it hasn’t, leading to much greater concentration of wealth, alongside lingering disparities in living standards among different racial and ethnic groups. U.S. government spending on research and education, meanwhile, has been falling as a percentage of GDP, allowing other countries to advance in key industries—China, she notes, has more than twice as many electric vehicles as the U.S. Speaking of low-emission vehicles, climate change is one problem that must be dealt with now. Another is the prevalence of ultra-wealthy Americans evading federal taxes, leaving Washington unable to invest in infrastructure that businesses need to survive and thrive. The Build Back Better plan looks to address these shortcomings by allocating money to both hard infrastructure (i.e., upgraded energy, broadband and transport networks) and people infrastructure (housing, education, health care, childcare and eldercare). The agenda also includes tax reform that seeks to reverse a long trend of capital benefitting at the expense of labor. Such measures, in the aggregate, will help boost the economy’s productivity, Yellen insists, by improving, for example, female labor participation rates (which were declining even before the pandemic). But will all this new fiscal stimulus overheat the economy, at a time when inflation is already running high? No, she argues, in part because it won’t add to national debt—the measures will be funded through growth and revenue increases. Evoking the Progressive movement before World War 1 and during the Great Depression, Yellen urged support from Congress: “There’s no better time than today to act boldly.”

• Chicago Fed president Charles Evans spoke as well, spending much of his talk on the Fed’s new policy framework allowing for a period of overshooting inflation. The big question is whether the public’s inflation expectations will change, unleashing a destabilizing upward spiral in prices. Evans doesn’t see any meaningful evidence of that yet. On the contrary, he’s more concerned about the opposite problem: “I’m more uneasy about us not generating enough inflation in ’23 and ’24, than the possibility we will be living with too much.” The consensus of economist forecasts clearly sees lowish inflation beyond 2022, reflecting a belief that today’s rising prices stem from a temporary supply side problem that will eventually correct itself. “It doesn’t feel like a monetary-induced inflation,” Evans said. He harkens back to the days of repeatedly undershooting inflation targets pre-Covid, a tendency he thinks remains relevant. He separately said the unemployment rate would likely dip below 4% “before too long.”

• Fed Board Governor Lael Brainard, a potential candidate to succeed Jerome Powell as board chair, addressed topics ranging from the debt ceiling (“The American people have had enough drama over the last two years.”) to labor markets (one-third of missing jobs post-pandemic are from the leisure and hospitality segment) to cryptocurrencies (stablecoins present a meaningful run risk, akin to a bank run or a money-market-fund run). She’s hopeful that labor participation rates will increase as the Covid threat eases—it’s “too early to call a structural shift” on participation. In addition, she called attention to climate-related financial risks, something many companies have highlighted as well.

• Labor market: Regarding the work-from-home phenomenon, the University of Chicago’s Steven J. Davis studied resulting productivity gains, concluding that about three quarters of the estimated total are coming from avoiding commutes.

• Health Care: One major takeaway from a panel discussion on health care? There’s been a big increase in telemedicine during the pandemic. Economists hope it will inject some productivity and cost efficiency into a notoriously bloated industry. In a separate discussion, Dr. Jeffrey Gold of the Nebraska Medical Center expressed optimism about health care technology, highlighting areas like diagnostics, therapeutics and vaccines which—during the Covid crisis—were “dramatically catapulted into the future.” In still another panel—this one about small business—economist Susan Woodward used Intuit QuickBooks payroll data to show that health care was one industry barely affected during the 2008-09 housing crisis. Early during the pandemic though, much of the sector saw big job losses, led by hits to offices providing the most “in-your-face” services, like dental and eye care.

• Sara Johnson of IHS Markit remarked that global and U.S. growth trends are surprisingly coordinated. She sees both growing by close to 6% this year. That factors in an expectation of easing Covid stress at the tail end of the year, as positive trends in recent weeks suggest. Next year will bring waning fiscal support, Fed tapering, gradual interest rate increases, declines from peak housing prices, possible impacts from labor scarring and ongoing supply strains but also gradual improvement in labor markets, increased vaccine distribution, strong household balance sheets, pent-up demand for services like travel, a still-accommodative monetary policy, business inventory restocking and moderating inflation. She also notes the favorable environment for corporate capital spending, underpinned by cheap and easy credit. What about the big spending bills that Congress might pass? They’d add demand, Johnson says, but the spending would be spread out over a long period—the infrastructure bill for its part would see just $50b a year or so over ten years.

• Digital Currencies: Carmelle Cadet, CEO of EMTech, sees potential for a central bank digital currency to help with financial inclusion, enabling services to people without bank accounts. Policy implementation would be more effective too, as when trying to reach more people when distributing stimulus checks.

• Housing: Jerry Konter, CEO of Konter Quality Homes in Savannah, Georgia, says his input costs are up roughly 20% this year. But much of his revenue comes from fixed contract pre-sales. That creates an unusual situation where it actually benefits the company when people cancel their contracts—Konter can then turn around and sell the home at a higher price. He mentions the “missing middle,” referring to people who can’t afford to buy a house but don’t quite qualify for government support. That’s after a decade in which entry-level housing was undersupplied. Demand overall however remains strong, albeit cooling a bit. And it should stay solid for a long time with the large millennial generation now forming households. Konter shared some thoughts on the U.S. housing shortage, pinning some blame on the Dodd-Frank law that’s constrained construction financing. What’s more, embracing technology has “never been a strong suit of the housing industry.” The sector needs more immigrants to address a labor shortage. And building codes have added costs, thus reducing the supply of new homes and forcing people to live in older and less climate-friendly homes. “That’s not the way to net zero.” He criticized the way in which codes are adopted, alleging influence by manufacturers lobbying to tighten standards to sell new products. As for supply chain headaches, they’re indeed many. He mentions storm-impact windows that normally take about ten weeks to get. They now take about 20. On the other hand, plywood is now readily available where earlier this year it wasn’t. It’s hard to predict, he says with a sigh, what will be affected at any given moment.

• Other hot topics of discussion at the NABE event: The labor market and its post-pandemic future was the subject of multiple sessions. Others dealt with the critical energy, transport and health care sectors. Panelists discussed government finance topics ranging from federal debt to state and local fiscal health. Climate change and China never strayed too far from the conversations. Same for the challenges of income inequality and ensuring diversity and inclusion.

Companies

• ActivisionBlizzard: What’s the most overlooked industry in the global economy? How about gaming? According to the market intelligence firm IDC, as reported by MarketWatch, worldwide revenues from video games reached nearly $180b last year, bigger than the global film and North American sports industries combined (and bigger than the GDP of Hungary). Central to the sector are tech giants like Microsoft, maker of the Xbox console. For Apple, gaming generates roughly 70% of its total App Store revenue. Gaming is important to Google, Facebook and Amazon too. But the Big Tech Big Five are hardly dominant. No less important are companies like Santa Monica-based ActivisionBlizzard, which earned a gargantuan 42% operating margin on $2.3b in revenue—just in the second quarter alone! Much of this revenue comes from subscriptions and game sales, but in-game advertising is a growing source as well. The company employs nearly 10,000 people, developing, publishing and distributing video games. It also runs e-sports leagues and tournaments, some of which draw more viewers than the Super Bowl. Some 400m people worldwide play its games, with three big franchises accounting for most of the firm’s profits. One is Call of Duty, whose mobile version alone should produce more than $1b in consumer spending this year. Another is World of Warcraft. And the third is Candy Crush, the highest grossing game franchise on U.S. app stores. Currently, ActivisionBlizzard is in the news for unfortunate reasons, paying $18m last week to settle a federal lawsuit alleging workplace harassment against female employees. Management pledged to address the issue going forward. It also, importantly, faces frequent criticism for the violent content of its games. In the meantime, the gaming industry faces the prospect of slowing somewhat after a pandemic-plagued year in which people spent more time in their homes. Will they stop playing as many video games as they start traveling and eating out again? From 2017 to 2020, ActivisionBlizzard estimates, the gaming industry’s revenues grew 17% a year on average. The company is dependent on console, app store and social media platform companies like Sony, Apple, Google, Microsoft and Facebook. It’s also dependent on retailers like Walmart, Amazon, BestBuy and Target. Perhaps not surprisingly, some on Wall Street have recommended that one of the tech giants—Apple perhaps—should buy ActivisionBlizzard. The latter separately downplays concern about China’s crackdown on game playing, noting the country produces just 5% of its business. Gaming, incidentally, hasn’t migrated to cloud computing as much as other software, simply because of network latency demands—response times need to be near instantaneous for games to work properly. 5G mobile communications will help in that regard. Looking farther beyond, video games have become virtual worlds that some see as templates to even more encompassing virtual reality—what Facebook calls the Metaverse.

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