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Place of the Week: Cincinnati, Ohio
Econ Weekly (Jan. 10, 2022)
Inside this Issue:
Jobs, Jobs Everywhere: But No One Wants to Fill Them
Reverse Hikeology: As Inflation Frightens, Fed Now Tightens
But Higher Rates Bring Other Risks: The Cure for Inflation Could Cause Recession
Tech Stocks Rocked: A Sign of More Bearish Times Ahead?
Nuclear Subs: The Dollars and Cents of National Defense
The Adventure of Accenture: Good Times for Management Consultants
A Not-So-Golden Era: The U.S. Under the Gold Standard
And This Week’s Featured Place: Cincinnati, Ohio, From River Commerce to E-Commerce
Quote of the Week
“As you are aware, this is a dynamic market with a fair share of paradoxes. Demand across our end markets remains strong. At the same time, the availability and cost of key inputs remain challenging. In short, it’s the best of times and the most challenging of times.”
- Neil Ashe, CEO of lighting company Acuity Brands
The simplest way to describe the U.S. labor market right now: Strong demand for workers but subdued demand to work.
On the final day of 2019, before anyone heard the word Covid, there were 6.4m job openings across the American economy. Now there are 10.6m. So this much is clear: Businesses are hiring. Yet roughly 2.8m fewer Americans are employed now versus then, a nearly 2% decline. The number neither working nor looking for work is up by nearly 5m.
Why are so many adults not even looking for work? Why aren’t people filling all those open positions? The virus itself remains a critical reason. According to the household survey results from last week’s jobs report (for December), 1.1m people said they’re prevented from looking for a job due to the pandemic. That’s often related to health effects or caregiving needs. Rising asset prices (homes, stocks, crypto, etc.) is another factor, in this case enabling people to refrain from work, perhaps to retire early or rely solely on a spouse’s income.
Nevertheless, the economy added 6.3m new jobs in 2021, including 199,000 last month. This follows a gain of 249,000 in November and 648,000 in October. The December number will likely get an upward revision, as the October and November numbers did. The unemployment rate, meanwhile, which ignores the people not looking for work, sank to just 3.9%, within a whisker of where it was pre-crisis. The December jobs report, to be clear, reflected data collected before the Omicron variant arrived—its disruptions won’t be visible in data until the January numbers arrive next month.
Of the jobs that have vanished since the crisis began, many are in the leisure/hospitality and government sectors (local government specifically; federal employment is up). Job losses, not to mention workforce dropouts, are also concentrated among Americans without college degrees (see chart below). In December, more than a quarter of the 199,000 new jobs came from leisure/hospitality, most importantly in restaurants and bars. Other sectors adding jobs were professional services, manufacturing, construction and transportation/warehousing.
So that’s the job market—demand for labor very strong, supply of labor sharply down. What does it mean for monetary policy?
The Fed is clearly now spooked by rising prices, much more so than just a few months ago, when it was still insisting inflation was a transitory phenomenon. The more pressing concern, it concluded then, was getting the labor market healthy again, not just measured by the unemployment rate but also the labor force participation rate (which incidentally held at 62% last month). A shift to greater concern about prices was clear in newly-published minutes of the Fed’s December meeting, which included discussion not just of ending bond purchases, but also interest rates hikes and reducing the bond holdings it currently has (otherwise known as balance sheet normalization). Note that the Fed’s balance sheet never really normalized after the last crisis in 2008-09.
The more hawkish approach was enough to torpedo bond markets last week, sending the 10-year Treasury yield to 1.76%—it ended 2021 at 1.52%. As a reminder, the Fed has power over short-term Treasury rates, which influences longer-term rates, which in turn influences all lending markets globally. The big risk of hiking rates, of course, is that they’ll make mortgages, car loans, businesses loans and other borrowing more expensive, thus squeezing demand from the economy. Indeed, many past Fed hikes have led to recessions.
Other factors of course, will help shape the future path of the economy. Headwinds could include waning fiscal support and potentially softer asset price gains—stock prices took a battering last week, with tech companies bearing much of the brunt. Crypto prices plummeted too. Still, the bedrock of the U.S. economy—household balance sheets and corporate profits—remains very strong.
The Fed, in its December meeting minutes, expressed bullishness about late-year 2021 GDP growth, following a Q3 slowdown from the Delta variant. The Omicron variant, however, poses a new challenge in early 2022. As a result, the Fed’s economists downgraded their GDP forecasts, incorporating the “emerging surge in Coivd-19 caseloads and hospitalizations.” They also cited supply bottlenecks that are expected to resolve more gradually than previously assumed. A new assumption, meanwhile, is that monetary policy will be less accommodative in coming years.
Regarding supply shortages, they’re the reason why General Motors, for the first time in nearly a century, failed to rank number one in U.S. car sales last year. The distinction went to Japan’s Toyota, which had fewer difficulties finding semiconductors. GM long ago lost its status as the most valuable U.S. company. Today that’s Apple, which last week became the first-ever to top $3 trillion in value. Apple faces challenges though, from its politically fraught dependence on China to what seems a risky jump into GM’s world, i.e., the auto sector.
In the airline sector, hapless carriers faced yet another reign of adversity, this time Omicron-related labor disruptions causing mass flight cancellations. One low-cost carrier, however, Las Vegas-based Allegiant, gave battered Boeing a boost with some new B737-MAX orders. Boeing sold some more freighter jets as well.
Speaking of Las Vegas, the annual Consumer Electronics Show, dubbed “the most influential tech event in the world,” gave companies the chance to showcase new products. Mobility was a major focus, with electric vehicle makers prominent among the participants. Gaming and virtual reality always get a lot of attention at the show too, this time with emphasis on the emerging Metaverse.
Finally, a fun fact about the stock market, courtesy of Barron’s: Just seven tech stocks—Apple, Microsoft, Nvidia, Alphabet, Tesla, Meta and Amazon—are currently worth about $12 trillion. That’s almost a third of the value for the entire S&P 500, which is supposed to be representative of all of Corporate America, and even of the U.S. economy. S&P 500 funds, indeed, are often treated as safe haven assets among household investors allocating money for retirement to their 401Ks. The recent slide in tech stocks, if sustained, might prove rather painful.
Things will get interesting this week. Q4 earnings season gets underway, headlined by Delta Air Lines on Thursday, followed by a handful of big banks on Friday. New York’s mighty JPMorgan Chase will be among them.
Alternative Assets: The Wall Street Journal last month reported that Ares Management, an investment firm, raised $8b for a fund that will make direct loans to small and midsize U.S. companies. This highlights a boom in the so-called private credit market, distinct from the traditional ways in which companies obtain credit: through bank loans or the bond market. Blackstone and Apollo are perhaps the best-known providers of “alternative assets” like private credit, alongside private equity, in which they buy ownership stakes in companies. Real estate and infrastructure are other popular alternative assets, likewise increasingly popular with clients such as pension funds and university endowments. After all, earning good returns on bonds isn’t easy with interest rates so low. So why not give a portion of their money to firms like Blackstone, to invest in other types of assets? Riskier? For sure. But with more risk comes more potential reward.
Labor: Harvard professor Edward Glaeser, presenting to the Princeton Bendheim Center for Finance, gave a sobering statistic about the U.S. labor market: In 1967, the jobless rate of prime age American males was just 5%. For much of this past decade, it’s been 15%. More than 30% of all prime age men not working, he adds, are living with their parents. The trends… (TO CONTINUE READING, VISIT www.econweekly.biz)
Nuclear Submarines: In its fiscal year 2020, the U.S. federal government spent $6.6 trillion. Of that figure, $714b, or 11%, went to national defense. That’s an extraordinary amount of money pumped into the U.S. economy, and a big category of spending that’s incidentally absent in Europe (which can thus allocate more of its government spending to social welfare). Defense spending of course… (TO CONTINUE READING, VISIT www.econweekly.biz)
Cincinnati, Ohio: For some cities, past is prologue. As early as the 1830s, Cincinnati was in the right place at the right time. The young city, built along the Ohio River, was perfectly situated for the newly-emerging age of river commerce—so much so that it became the first city in the Midwest to crack the top ten ranking of America’s most populous cities. Many less-welcoming developments have occurred in the nearly two centuries since, from the rise of mightier midwestern cities like Chicago (after the Civil War) to the region’s deindustrialization (after World War II). But Cincinnati, the “Queen City,” suddenly finds itself once again in the right place at the right time… (TO CONTINUE READING, VISIT www.econweekly.biz)
December 2016: The V-shaped recovery never came. Instead, the first half of the 2010s saw only sluggish growth as the economy dug itself out of the 2008-09 housing and financial crisis. Various theories exist about why the revival wasn’t stronger, one being excessively tight fiscal policy. In addition, the country was running into challenging demographic realities, namely an aging population that depressed labor force participation rates. The early 2010s were particularly rough for working-age Americans without college degrees, which is to say, about two-thirds of all American adults. Critically, the years following the Great Recession saw a sharp spike in oil prices, not quite to levels seen in mid-2008 but extremely high nonetheless. For three straight years—2011, 2012 and 2013—oil prices averaged more than $100 per barrel. Then came a big change. Oil prices crashed in late 2014, which roughly coincided with a rosier outlook for the U.S. economy. In 2015, real GDP grew a solid 2.7%. That slipped to 1.7% in 2016. But by late 2016, as the Fed’s policy makers met for their last meeting of the year, unemployment was down to just 4.6%, the lowest level since 2007—in other words, the lowest level since before the financial crisis. Between the low point of the recession and late 2016, the U.S. economy added 15m new jobs. Several factors contributed to the slower growth in 2016, including the impact of the earlier oil collapse on energy sector investment. A strong dollar hurt exporters. Low commodity prices hurt farmers. But the mood was hardly glum with consumer sentiment strong, the financial sector once again healthy, the housing market stabilized, tourism booming and fears of a eurozone breakup eased. Even better, the economy continued to show no significant signs of inflation, though the Fed did raise rates a bit in a move toward normalizing them from zero. Fed chair Janet Yellen, at a press conference to announce the rate hike, expressed more concern about inflation being too low. She also warned about the demographic challenge, which heightened the importance of achieving higher productivity. And she highlighted the “disturbing” increase in income inequality, noting that “a significant share of our population hasn’t been enjoying significant real wage gains, if any.” She added: “These are not new phenomenon, but the recession was very severe and probably exacerbated developments that had long been affecting many American workers and households.” A month earlier, the U.S. presidential election produced a stunning outcome, elevating the New York real estate developer and media personality Donald Trump to the Oval Office. A key to his victory: wining 64% of non-college educated whites, which accounted for 44% of the entire electorate. A few months earlier, the U.K. stunned the world by voting to secede from the European Union. The most important economic relationship in the world, however, was that between the U.S. and China, which at that point remained robust. It’s around 2016 when Fed reports start featuring trends like heightened demand for transportation and warehouse labor amid rapidly growing e-commerce. Solar and wind farms were becoming more common. So was cloud computing, led by Amazon Web Services. Again making clear that labor shortages are nothing new, the December 2016 Fed Beige Book included an anecdote about one employer complaining “eight out of ten potential hourly hires either cannot pass a drug test or cannot pass a simple math test.” The report featured concerns about housing affordability, as “house prices and rents continued to rise, particularly in regions [with] robust growth in the technology sector.” As you can see, the contradictions are many. In the aftermath of the Great Recession, large coastal and Sun Belt mega-metros were growing explosively, while conditions deteriorated in other parts of America. Consider the difference between New York City and York, Pennsylvania. The former’s GDP grew 22% between 2007 and 2019. The latter’s GDP? Just 4%. San Francisco’s economy, by the way, led the charge with 61% growth. Do these diverging paths of economic fortune help explain the rise of Trump? The correlation of economic data with voting patterns is striking. As the Brookings Institution showed, the 2,584 counties Trump won in 2016 generated just 36% of the nation’s aggregate economy. Hillary Clinton, by contrast, won just 472 counties, but these generated almost two-thirds of national output. A subsequent analysis of the 2020 election showed an even starker gap—Trump’s winning counties last year contributed just 29% to national GDP.
Future Inflation: Former Treasury Secretary Larry Summers, who warned that too much fiscal stimulus would cause inflation, explained in a Bloomberg podcast how he came to that assessment. Policymakers, he said, delivered a stimulus package worth 15% of GDP to plug a gap that was only about 3%. “We were overstimulating the economy.” There are still many economists… (TO CONTINUE READING, VISIT www.econweekly.biz)
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