Place of the Week: Midland, Texas

Econ Weekly Free Edition (Jan. 31, 2022)

Jan 30, 2022

Inside this Issue:

Time to Tighten: Fed Readies Rates to Take Wing this Spring
An Inventory Story: Q4 GDP Jumps as Firms Flock to Restock
Senior Moment: How the Aging of America is Reshaping its Economy
Tesla and the Toilet Paper Caper: A Muskian Metaphor for Supply Shortages
No Fall Yet for the Oil Curtain: Still a Party in the Permian for Halliburton
Taking A Pass on Class: Colleges Seeing Sharp Decline in Enrollment
Captains of Crypto: The Who’s Who of Crypto Trading Hubs
Moving Around: A History of Migration in the U.S. South
And this Week’s Featured Place: Midland, Texas, The Petro-Plex

Quote of the Week

“The last few weeks of December, we did see a slowdown in terms of some of our travel bookings as people got, and rightfully so, a little omicron nervous. But the first two weeks in January, our travel bookings are up 44% over 2019. So, what that tells me is people are ready to get out and get out and about again.”

- American Express CEO Steve Squeri

Market QuickLook

The Latest

The Fed’s big decision. A new report on GDP. The undulating stock market. Crypto’s crash. The latest corporate earnings. All that in a moment. But let’s start with an often-overlooked megatrend that’s reshaping the entire U.S. economy.

Soon, demographer Bradley Schurman points out, America will have more people over age 65 than under age 18, joining Japan, Italy and Germany as “super aged” societies. By 2050, the U.N. says, one out of every six people in the world will be over 65. In the U.S., the ratio will be one in five—as early as 2030. Already today, 16% of Americans are over 65, up from just 8% in 1950. This helps explain why health care now accounts for a fifth of national GDP, why the U.S. labor force is shrinking and why public pension and health care budgets are strained. A sinking birth rate and greater curbs on immigration will only accelerate this aging trend, influencing aggregate demand patterns for not just health care services but everything from housing to consumer goods to financial assets. There’s a reason why The Villages, a retirement community, was the fastest-growing place in America last decade. (see Econ Weekly, Oct 18th, 2021).

Alright, with that out of the way, let’s get to the biggest economic story of last week: The first Fed meeting of 2022. As expected, the FOMC refrained from any interest rate hikes just yet (it’s still not quite finished with buying bonds). But Jay Powell made clear that a hike “would soon be appropriate,” with “soon” all but assuredly meaning March, when the FOMC holds its next meeting. As a reminder, the Fed moves interest rates by announcing a target for the rate it wants to see in overnight lending markets, which it can mold to its liking by adjusting the interest it pays on bank reserves and (for institutions without Fed accounts) overnight repurchase transactions. The hope is that any rate moves will ripple far beyond the overnight market, all the way to markets like 30-year mortgages. Sure enough, even the Fed’s mere intention of hiking has sent mortgage rates up in recent weeks. The question is, will that slow the housing market, a key pillar of economic strength throughout the pandemic.

Powell did sound unmistakably committed to beating the high inflation now vexing the economy, prompting Bank of America for one to forecast as many as seven hikes this year. Some expect a half-point rather than a quarter-point hike in March, followed perhaps by quantitative tightening (in other words, shrinking the Fed’s $8b collection of federal debt). Others are more cautious, still expecting inflation to drop on its own as the pandemic subsides post-omicron, as spending shifts from goods to services, as household savings dwindle and as last year’s fiscal and monetary stimulus fades. An imminent drop in prices will depend, however, on supply chain bottlenecks easing and more people rejoining the labor force. As of this moment, ports are still clogged, semicons and other vital inputs remain scarce and employers are still short-staffed.

It’s anyone’s guess where commodity prices go. But oil for one rose again last week, nearing the $90 mark amid U.S. tensions with energy superpower Russia. On the other hand, falling asset prices, most importantly stocks and crypto, herald weaker spending power and falling consumer prices. His hawkish tones notwithstanding, Powell emphasized flexibility, insisting the Fed “will be led by the incoming data.”

Some new data, as it happens, suggest a significant slowdown in Q1 output due to omicron. An IHS Markit index of economic activity, for example, showed “near-stalled output” among both manufacturing and service firms in December. In their earnings calls last week, airlines like Southwest and JetBlue reported a drop in demand and a spike in employee sickouts as omicron spread. They expect a strong recovery by March, however, consistent with broader optimism that the omicron effect will fade rather quickly, and with it the long Covid nightmare. Predicting the pathogen’s path, however, has been a fool’s game.

The government published lots of new economic data last week, including an early BEA estimate of Q4 GDP. The headline figure was striking: A towering 6.9% annualized increase in real output from the previous quarter, when output grew just 2.3%. Q3, remember, was when supply chain and labor problems started getting really bad, aggravated by Covid’s Delta wave. A closer look at the Q4 data shows that of the four components of GDP—personal spending, business spending, government spending and exports—almost all the growth came from businesses. More specifically, it came from businesses restocking their inventories (as detailed in the latest Census Advance Indicators report). Inventories don’t say anything about final demand, however. The real driver of the economy (some 70% of it) is personal spending, which rose an annualized 3.3% (mostly driven by a recovery in service spending). Government spending was negative y/y. Export growth was offset by input growth. And back on the business side, housing investment was down but investment in intellectual property was sharply up. The latter reflects a welcome boost in research, development and technology spending, all of which augurs well for future productivity. Gains in productivity, remember, is the key to higher standards of living. It’s also the main lever by which the U.S. can overcome its shrinking workforce problem. For all of 2021, by the way, the U.S. economy grew a galloping 5.7%, bouncing back from a 3.4% decline in 2020. In 2019, GDP grew 2.3%.

A separate BEA report on personal income and spending gave updated figures for December. They include the closely watched PCE index of inflation, which rose 0.4% from November and stands 5.8% higher than this time last year. The Labor Department’s CPI inflation index, recall, showed a December increase of 7%. The BEA numbers separately showed a clear erosion of disposable income and spending after adjusting for inflation.

The cratering stock market this month won’t help matters, though prices did recover for a gain last week. Remember this time last year, when online hordes of retail investors stormed the ramparts with big bets on heavily-shorted meme stocks like GameStop and AMC? Remember the SPACs? Remember the tech stock rage? The stay-at-home bets. The economic reopening bets? This chapter of history appears to be closing.

No company typified the pandemic-era stock boom quite like Tesla. Its value is down by nearly a third since early November. But Tesla is not GameStop. The automaker reported strong Q4 profits last week, sharply increasing production despite semicon chip shortages. Chip shortages, said Elon Musk, are “still an issue,” so don’t expect to be driving a Cybertruck anytime soon. But do expect announcement on a new factory later this year. Do, says Tesla, expect big things from self-driving software and even humanoid robots it’s building to ease labor shortages. And always expect Elon to be Elon—here’s what he said last week about materials shortages: “I think there’s some degree of the toilet paper problem… it wasn’t really a tremendous, enhanced need for ass wiping. It just… people panicked.”

Demand for Apple products remains something close to insatiable. America’s most valuable company delivered another set of breathtaking revenues and profits, astounding in their magnitude. Watch closely as it moves into markets like health care, payments and maybe even autos. Microsoft, meanwhile, unveiled results that were no less superlative. More than Apple, Microsoft offers software critical to businesses, delivering cloud computing, cybersecurity, machine learning and so on (don’t forget tools like Word and Excel). But it’s for sure a consumer-facing company too, made clear by its $69b giga-offer to buy game maker ActivisionBlizzard. Get ready for more Big Tech earnings this week as Amazon, Google and Facebook report (we’ll stick with the old names).

Old soldiers like General Motors, hoping to beat Tesla at its own game, announced plans for another huge factory in Michigan, the latest in a spree of auto investment—along with semicon investment—in the heart of old industrial America. That’s breathing new life into areas like the Midwest and Appalachia.

Elsewhere across Corporate America, Nvidia appears ready to abandon its purchase for ARM. Facebook is abandoning its cryptocurrency plans. HCA Healthcare talked about its nursing shortage, compounded last quarter by even surgeons getting sick and canceling procedures. AT&T provided updates on its business simplification strategy featuring the rollout of 5G mobile telecom, the expansion of fiber broadband, growth of HBO Max and the fusion of WarnerMedia with Discovery. Boeing, a rare company without major supply constraints right now (its production levels are low), instead has problems building its Dreamliner jets. Semicon giant Intel spoke of its multibillion-dollar factory investments in Arizona and Ohio. Chevron is bracing for a post-hydrocarbon world but for now finds itself reaping great gains from a sharp runup in oil prices. Chevron’s fortune, though, is the economy’s kryptonite—every modern U.S. recession has followed a runup in oil prices. An omen?

Sectors

Higher Education: According to the National Student Clearinghouse Research Center, undergraduate enrollment at U.S. colleges and universities has declined nearly 7% during the Private for-profit, four-year colleges are suffering the steepest drop in percentage terms (down 11% y/y). But public, four-year schools are down the most in terms of number of students. Private nonprofit, four-year enrollment is down 2%. Community college enrollment is down 3%. During the fall 2021 semester, roughly 17m students were enrolled at U.S. colleges… (TO CONTINUE READING, VISIT www.econweekly.biz)

Markets

Labor: What percentage of the American workforce is unionized? The answer is 10%, according to the Department of Labor. In 1983, the first year the DOL started tracking, the rate was 20%. It was even higher at the peak of the industrial age, when unionized firms like General Motors and US Steel sat atop the commanding heights… (TO CONTINUE READING, VISIT www.econweekly.biz)

Interest Rates: Viktor Shvets with Macquarie Securities is in the camp of economists who think that beyond the immediate future, deflationary forces are still stronger than inflationary Appearing on the Macro Voices podcast, he said consumer price inflation (CPI) should fall back to around 2% by year end, barring any new supply shocks, overzealous Fed tightening or serious geopolitical disruptions. The world’s heavy debt burdens, stagnant… (TO CONTINUE READING, VISIT www.econweekly.biz)

Places:

Midland, Texas: Quiz: What was the fastest-growing metro area in Texas during the 2010s? A) Houston, B) Austin or C) Dallas-Fort Worth. The answer is D) none of the above. In a state blanketed by scorching-hot economies, none saw its population grow faster than the Midland-Odessa metro in dusty West Texas. The reason is simple: oil and gas. According to the U.S. Energy Information Administration, the Texas Midland Basin (part of the giant Permian basin) generated 1.68m barrels of crude oil per day in 2020, or a fifth of all crude oil production in the U.S. It also produced about 6% of America’s dry natural gas. Midland and Odessa, separated by a short drive, are quintessential U.S. oil towns, originally founded as sleepy railway stops for cattle traders. But the area became a critical node in global energy markets ever since the first West Texas oil strikes in the 1920s. In fact, oil prices today are typically quoted using the WTI benchmark, which stands for West Texas Intermediate. It’s here in the dry isolated plains between Dallas-Fort Worth and El Paso that a young George Bush and his son began their journeys to the White House. It’s here where non-college educated workers routinely earn six-figure salaries. It’s here where nearly a third of all jobs are in natural resource mining or construction. It’s here in the 2010s, furthermore, where America’s shale oil fracking revolution took center stage, reinvigorating… (TO CONTINUE READING, VISIT www.econweekly.biz)

Looking Back

The South: University of Richmond professor Edward J. Ayers looks at the history of America’s South through the lens of human migration. His book—“Southern Journey: The Migrations of the American South, 1790-2020”—is based on maps he and his colleagues created from Census data to track movements of people within the South over time. One early theme is that Virginia and South Carolina, both powerful slave economies during the time of the American Revolution, became net exporters of slaves by the Civil War. As early as the 1840s, Ayers said, nothing profitable could be grown in Virginia. Slaves by then were more useful in… (TO CONTINUE READING, VISIT www.econweekly.biz)

Looking ahead

Crypto Exchanges: The Economist, just before crypto markets began to crash, profiled the “four main players” in the world of crypto exchanges, where people can buy, sell and… (TO CONTINUE READING, VISIT www.econweekly.biz)
Aging Demographics: To end where we began, consider this fact mentioned by Bradley Schurman (on the New Books Network podcast) about the seniorization of America’s population. The AARP, which lobbies on behalf of retirees, currently has 38m members, making it the largest membership organization in the world after the Catholic Church. Schurman’s new book, “The Super Age: Decoding Our Demographic Destiny,” notes how the global population soared from roughly 2b people in 1900 to 8b today. Giant strides in public health and reduced infant mortality help explain why. But most countries including the U.S. are now experiencing their slowest population growth ever, even as seniors live longer. Once a country with abundant labor, the U.S. is now a country with labor shortages, made worse by the pandemic. Throughout the first two decades of the 2000s, companies alleviated this shortage by outsourcing work to younger societies like China. But China’s population… (TO CONTINUE READING, VISIT www.econweekly.biz)

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