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Place of the Week: Great Falls, Montana
Econ Weekly Free Edition (Jan. 17, 2022)
photo source: Visit Great Falls
Issue 51: January 17, 2022
Inside this Issue:
Prices Go Higher: Can the Fed Quell the Fire?
Earnings Season Underway: Banks and Airlines Had Lots to Say
The House of Morgan: Still Earning a Fortune
Atlanta Claus: It’s Back: The Delta Air Profit Share
Retail Fear: But Spending Up Big from Last Year
The Meaning of the Metaverse: Plans for Virtual Lands
Lunar than Later: The Space Economy’s Moon Boon
Devotion to the Ocean: The U.S. Navy’s Role in Global Commerce
On Covid’s Eve: Fears of a Freeze Just Before the Disease
And this Week’s Featured Place: Great Falls, Montana, Recent Gloom but Nearby Boom
Quote of the Week
“A great failure of contemporary American capitalism is that it is not serving everyone. The educated minority—the one-third of the adult population with a four-year college degree—has prospered, but the majority has lost out, not just relatively but absolutely. The facts are increasingly clear and hard to ignore. Less-educated Americans’ prospects are getting worse: they are losing materially, they are enduring more pain and social isolation, and their lives are getting shorter.”
-Anne Case and Angus Deaton, from their Project-Syndicate article entitled “America’s Killer Capitalism”
When the pandemic froze much of the U.S. economy in early 2020, few would have foreseen exceedingly strong consumer demand, exceedingly strong household balance sheets and exceedingly strong corporate profits—give policymakers some credit for that. But there’s one nasty side effect: Exceedingly high inflation.
Bottlenecked supply chains. Labor shortages. Stimulus-fueled demand growth. For all three reasons, consumer prices are now 7% higher than they were a year ago, an increase not seen since the days of Carter and Reagan. As the December CPI report shows, gas prices are up 50%, beef and veal up 19%, used cars up 37%, furniture up 14%, clothing up 6%... and so on. Inflation is less severe on the service side of the economy, which includes housing, health care and education. That said, housing costs are starting to show some upward momentum, with rents—and ownership equivalent of rents—now up about 4% y/y. Rents, furthermore, seem poised for steeper gains in the months to come. (Home purchase prices are up sharply but that’s considered investment, not consumption).
Inflation is the elephant in the room as Corporate America begins reporting Q4 results. Three of the nation’s largest banks presented last week, describing their own encounters with rising costs, most importantly for workers—bankers don’t come cheap even in normal times. Nevertheless, the story is a mostly positive one. Lending volumes are up. And non-lending activities remain lucrative—think managing client investments, helping companies raise debt and equity, advising on mergers, payment services and trading securities.
The airline industry is a rare realm of the economy where costs have declined during the pandemic, but for an unwelcome reason: A catastrophic collapse of demand that forced colossal downsizing. Thanks to strong domestic leisure demand, Delta for one is back in the black at the operating level, distributing profit sharing checks. But rising jet fuel costs are an industry challenge. Business and overseas travel remain depressed. And the Omicron wave stressed labor availability during the winter holidays, causing mass cancellations.
Omicron is disrupting labor markets across the economy, likely taking a toll on national output during December and January. It’s also taking a toll on the functioning of America’s health care system, with staffing and bed scarcity adding to the many things in short supply, from semiconductors for cars to garage doors for homes.
Garage doors? Yes, garage doors. KB Homes, a California homebuilder, said getting them was “one of our biggest challenges” last quarter. Don’t feel bad for homebuilders though. KB has “not seen a slowdown in demand across our geographic footprint in the past couple of months, and we foresee a strong spring selling season ahead.” It added: “Market conditions remain very healthy as favorable demographics, low mortgage interest rates and an extremely limited supply of homes—particularly for first-time buyers—continue to drive demand.”
We’ll know more about tech sector demand later this month, when companies like Microsoft and Apple report. Tech stocks, though, begin the year out of favor. Apple by the way, claims supply chain woes cost it $6b in just last year’s third quarter, according to the Financial Times. Mergers are still hot, with video game maker Take-Two buying the mobile gaming firm Zynga. That’s a $13b deal, underscoring the often-overlooked immensity of the gaming sector.
The immensity of climate-related costs hit home for many companies last year. The U.S. National Oceanic and Atmospheric Administration said 2021 featured 20 distinct natural disasters costing more than $1b each. December temperatures across the country, it added, were almost seven degrees above the historical average, making it the warmest December in 127 years of record keeping. The six warmest years on record have all occurred since 2012, triggering wildfires, extreme heat, drought conditions and tornados. Adding to the uneasiness: Heightened tensions on the geopolitical landscape, with Russia’s demands on Ukraine now front and center, and China’s demands on Taiwan always lurking in the background.
Lurking in the minds of Federal Reserve officials are plans to reverse course and abruptly tighten policy in response to inflation that—alas—wasn’t as transitory as expected. The FOMC will meet later this month, followed by a meeting in March, when bond buying (quantitative easing) will end. Successive hikes in short-term interest rates are expected thereafter. And perhaps by year’s end, the Fed will be ready to contract its balance sheet, reducing its bond holdings (quantitative tightening). In the meantime, Fed chair Jay Powell testified before Congress as part of his renomination process. He told Senators that labor markets are recovering “incredibly rapidly,” while leaving no doubt about the Fed’s intent to quell inflation. Lael Brainard, picked to be the Fed’s Vice Chair, conveyed a similar message. Assuming confirmation, they’ll be joined on the Fed’s Board by three new nominees, one of them—Sarah Bloom Raskin—designated for the key Vice Chairman role of supervision. The others—Lisa Cook and Philip Jefferson—are both African-American economists, adding racial diversity to the Board.
The task at hand, let’s be clear, is not an easy one. The economy is sending all sorts of mixed signals, including several unwelcome ones last week. As mentioned, consumer prices jumped. So did producer prices. Oil prices jumped too. And retail sales (which are not adjusted for inflation) dropped 2% from November to December, with nonstore retailers like Amazon seeing a 9% decline. But careful: December’s retail stores were still up a mammoth 17% from last year. Spending would have been greater, furthermore, were it not for inventory shortages. Omicron surely hurt sales at service businesses like restaurants during the latter half of December. And some spending was likely advanced from December to November as holiday shoppers bought early to avoid shipping delays. The larger point is that consumers still have ample capacity and willingness to spend, something already noted in Q4 earnings reports as they start to roll in. Harvard’s Jason Furman, in a Peterson Institute address last week, said retail sales continue to be “gangbusters.”
The question now is how long the omicron disruption will last, and how long supply chains will remain snarled. A new worry is Omicron’s impact on China and its factories and ports. For the record, China exported $3.4 trillion worth of goods and services to the rest of the world last year. Note: Next week’s issue of Econ Weekly will discuss the current strengths and weaknesses of the Chinese economy, presenting two alternate viewpoints.
As for this week’s issue, read below for more on the current state of the banking and airline sectors. The Looking Back section describes what the U.S. economy looked like in late 2019, on the eve of the Covid crisis—spoiler alert: there were already fears of a recession, enough so to convince the Fed to lower interest rates. The Metaverse and the Space Economy are highlights of this week’s Looking Ahead section. And our profiled place of the week is Great Falls, Montana, a slow-growing town in a fast-growing state.
Earnings season goes full blast this week, with more reports pouring in from the banking and airline sectors. Keep an eye on transport and logistics companies like Union Pacific (a railroad), JB Hunt (trucking) and Prologis (warehousing) for updates and insight on the supply chain. Some big names like United Health Care and Netflix will present as well.
Delta: When something goes wrong in the world—almost anything—airlines are the first to suffer. Wars, storms, germs… there’s no profiteering off bad times in this industry. Delta, for one, had a good thing going in the 2010s, establishing itself as one of the world’s most profitable and well-liked airlines. Its fortress in Atlanta—arguably the best airline hub on the planet—is one reason. Its flexible, mostly non-union workforce is another. But not even the best of the bunch could withstand the greatest crisis in industry history, which… (TO CONTINUE READING, VISIT www.econweekly.biz)
Banking: Three of America’s four largest banks—JPMorgan Chase, Wells Fargo and Citigroup—delivered Q4 earnings presentations last week, painting a generally positive picture. Revenues remain strong for activities other than lending, from helping firms sell bonds and stock to managing assets for clients. As for lending, demand for bank loans still isn’t great, with businesses enjoying ample access to bond markets and households amassing high levels of saving. But lending trends are improving, and default rates are still low. Credit card lending, specifically, took a revenue hit… (TO CONTINUE READING, VISIT www.econweekly.biz)
National Defense: A new book called “The Blue Age” by Gregg Easterbrook emphasizes the U.S. Navy’s role in protecting global commerce. It describes an endless history of conflict on the seas—that is until the U.S. established supremacy in recent decades. About a quarter of all global economic activity, Easterbrook estimates, involves ocean commerce. Central to that is container shipping, without which products like iPhones would likely not exist. That’s because ultra-cheap transoceanic container shipping enables supply chains to operate across multiple countries, creating enormous efficiencies (some have compared ever-declining transport costs to Moore’s Law for microchips). Undersea internet cables and energy pipelines are essential to the global economy too. Ocean commerce, meanwhile, was the primary means by which China became a global power. And today, most of the world’s wealthiest population clusters are in coastal areas. Maritime shipping giants like Maersk and Evergreen, Easterbrook argues, have more significance to the global economy than even Goldman Sachs. To repeat, it’s all made possible by the U.S. Navy, with its unsurpassed… (TO CONTINUE READING, VISIT www.econweekly.biz)
Great Falls, Montana: Just look at a map. Montana is a big, big state. Only Alaska, California and Texas have more land. But not too many people live in Montana—about as many (1.1m) as live in Rhode Island. That said, only one state (Idaho) grew its population faster last year. Indeed, people are moving to Montana. But only to certain parts of the state. They’re coming in droves to Bozeman, home to a large university, stunning scenery and soaring home prices. They’re coming to Missoula, another scenic university town. They’re coming to Billings, with its large energy sector. They’re coming (with lots of money) to Kalispell, gateway to Glacier National Park. They’re coming to Helena, the state capital. But people are not—at least not yet—coming to places farther east and north of the Rockies, including Great Falls, still the state’s third largest population center after Billings and Missoula. The Great Falls metro area, alas, had fewer… (TO CONTINUE READING, VISIT www.econweekly.biz)
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