Place of the Week: Provo, Utah
Econ Weekly (Nov. 1, 2021)
photo courtesy of Brigham Young University
Issue 42: November 1, 2021
Inside this Issue:
Descent to 2%: GDP Growth Slowed Sharply in Q3
The Latest Price Reading Before the Latest Fed Meeting: PCE Index Still Hot
Curves Rattling Nerves: Are Bond Yields Signaling Recession?
As Covid Wanes, Optimism Gains: Surveys Signal Consumer Cheer
Putting on a New Face: Facebook Rebrands as Big Tech Soars
Gains on Planes: How One Firm (an Airline) is Benefiting from Falling Prices
Where’s the Bank? Why are There so Few New Ones?
Fur the Love of Money: Early Wins from Selling Skins
Guns and Beaches: The Twin Pillars of Hawaii’s Economy
Not Supersonic, Hypersonic: The Pentagon Develops a New Class of Weapons
And This Week’s Featured Place: Provo, Utah; Faith, Finance and Fertility
Quote of the Week
“Cryptocurrencies: Everything you don’t understand about money, combined with everything you don’t understand about computers.”
-Comedian John Oliver
Market QuickLookThe Latest
After growing nearly 7% in the second quarter, the U.S. economy slowed sharply in Q3. That’s the takeaway from the Commerce Department’s initial estimate of real GDP growth, which rose a mere 2% (on an annualized basis) from July through September.
Why the slowdown? Blame Covid’s comeback, for one. As the Delta variant spread, demand for services like travel and elective surgeries reversed course and declined. Supply chain woes, furthermore, led to unfulfilled demand for durable goods, automobiles most importantly—the auto sector’s problems explain a significant part of the slower growth. A widening trade deficit—more imports and fewer exports—also subtracted from GDP. At the same time, the end of Washington’s paycheck protection loan program (PPP) meant a lower Q3 GDP contribution from the federal government. Federal unemployment benefits expired during the quarter as well. On the other hand, state and local government (SLG) spending had a positive impact as education jobs returned. Investment in software provided another boost. And to be clear, household spending on services (including transportation, health care and hospitality) trended upward overall despite Delta’s mid-quarter impact. Trends in business inventories were likewise positive. For the record, the total amount of goods and services produced by the American economy now stands at $23.2 trillion.
Last week’s GDP report separately noted a 16% drop in household savings from Q2 to Q3, which also represents a 60% drop from its Q1 peak, when government transfers accounted for 27% of total household income (the figure was 20% in Q3). The declining savings rate might signal weaker demand for goods and services in the coming quarters. It also helps explain the loudening talk of “stagflation,” referring to sluggish growth paired with sharply rising prices. Then again, the significant easing of the Covid pandemic, if it holds, will be a powerful positive counterweight. So would an easing of current supply chain bottlenecks, though General Motors for one expects its semicon headaches to persist through 2022 (and perhaps even into 2023). The severity should ease, however. And even now, GM, like many of America’s corporations, is earning extremely strong profits. In any case, models like the Atlanta Fed’s GDPNow expect a return to bullish growth of 6.6% for the current October-to-December quarter. And note that the GDPNow forecast underestimated growth for Q3—it expected GDP to rise a mere 0.2%. Survey data, too, hint at economic strengthening this quarter. Here’s this from the Conference Board: “Consumer confidence improved in October, reversing a three-month downward trend as concerns about the spread of the Delta variant eased… The proportion of consumers planning to purchase homes, automobiles and major appliances all increased in October—a sign that consumer spending will continue to support economic growth through the final months of 2021.”
There is of course, the matter of inflation. The Commerce Department had something to say about that last week as well, releasing data showing prices jumped another 0.3% from August to September, for a 4.4% annual gain (the Fed’s long-range annual inflation target is 2%). How will the Fed react at its policy meeting this week? It’s already signaled an imminent start to unwinding its stimulative bond buying program. Might it increase interest rates sooner than expected?
Speculation about the Fed’s intentions caused unusual stirrings in the bond market last week. Yields for U.S. Treasuries with near-term maturities rose while those with longer-term maturities did the opposite. In fact, for the first time this year, yields on 20-year Treasuries were higher than those on 30-year Treasuries, never mind that—all else being equal—longer-term securities carry more risk. When the curve of yields across time inverts like that, it can signal a recession ahead (it’s done exactly that multiple times in the past). The bond market might be thinking that the Fed will move quickly and aggressively to hike shorter-term rates, which could slow the economy and drive down long-term rates. But that also means investors are less concerned about inflation—if that were a big concern, longer-term bond yields would logically rise to compensate for the eroding value of Uncle Sam’s future repayments.
As you can see, it’s an economy with many mixed signals. And we didn’t even mention stock markets, which hit another record high last week. A separate focus of investor attention? Capitol Hill, where Democrats are close to passing what’s become a $1.75b package of social spending, tax changes and climate policies. Negotiations on details continue, but now more likely than not, the new bill, together with a bipartisan $550b infrastructure package, will become law. It would mean further government stimulus, though allocated over a much longer timeframe than earlier pandemic relief.
It was another busy week of Q3 earnings reports, including those from the Big Tech Big Five of Silicon Valley and Seattle. Amazon’s torrid expansion slowed a bit, but Apple, Microsoft, Google and Facebook all produced another round of scorching revenue growth and towering profits (see chart below). Facebook, like Google with its Alphabet moniker, adopted a new corporate name to reflect its ambition to create a new “Meta” verse of social interaction and commerce. Big Tech does face increasing competition among each other, as The Economist often highlights. But a bigger threat is Washington’s growing bipartisan appetite for curbing the sector’s vast power and influence. Are we headed for a Standard Oil/AT&T moment?
Tesla got a big boost as Hertz, fresh out of bankruptcy, placed a massive EV order. It’s getting Uber involved as well, auguring a world of Tesla rentals and ride-hailing. The crypto casino has a new meme coin minting millionaires—it’s called Shiba Inu (or as Warren Buffet might call it, “rat poison.” A Wall Street Journal report on 3D-printed homes raises hope that maybe, just maybe, the housing sector will get a badly needed burst of productivity to help alleviate a tragic national home shortage. Rains helped alleviate California’s severe drought conditions. As President Biden attends a climate summit in Scotland, the Washington Post reports that already in 2021, the U.S. has seen 18 weather disasters costing at least $1b. UPS, America’s most unionized company, earned record profits despite rising costs. Centene, a St. Louis health insurer, said Covid cases dropped sharply in October after peaking in late August. Apollo, the Wall Street titan, said commercial real estate is recovering, while growing in popularity as an investment choice for pension and endowment funds. Believe it or not, there’s at least one industry taking advantage of falling costs: The low-cost airline Allegiant said it’s buying second-hand planes and spare engines at “significantly discounted” prices. That’s not good news for America’s largest exporter though—Boeing reported a $132m Q3 net loss.
Labor shortages remain a major theme of corporate earnings calls, with Vox naming immigrant-reliant sectors like construction; transportation and warehousing; accommodation and hospitality; and personal service businesses (i.e., salons, dry cleaners and repair shops) as the worst afflicted. Vox says in a normal year, the U.S. welcomes roughly 1m immigrants, some three-quarters of which end up participating in the labor force. But the number of new arrivals in 2020? Just 263,000. Massachusetts, meanwhile, says 25% of its licensed childcare programs closed in the decade before the pandemic—look no further for an example of market failure. As for the medical profession, the hospital chain Universal Health said nurses earning $80,000 a year suddenly had the opportunity to earn $10,000 a week (that’s more than $500k per year) working in Covid-hit areas of the country.
We’ll close with encouraging words from the head of logistics firm C.H. Robinson: “I certainly don’t believe that having 70 ships anchored in Los Angeles is by any stretch the new normal.” But, he adds, “I also don’t see us reverting to a market resembling 2019 anytime soon.”
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