Econ Weekly (Trial Week of May 31, 2021)

Inside this Issue:

  • Memorial Movement: Americans On the Road Again
  • Transition Mission: Ford Presents its Plan to Melt the ICE
  • Acquisition Mission: Amazon Buys a Movie Studio
  • Competition Mission: D.C. A.G. Says Amazon Hurts Consumers
  • Emissions Mission: Oil Firm Shareholders Stage Revolution to Cut Pollution
  • Tuition Mission: Colleges and the Shrinking Demographic Challenge
  • Keen for Green: Why the Boom in Eco-Friendly Assets?
  • Lender Vendors: A Look at Some Leading Non-Bank Mortgage Merchants
  • Wide World of Ports: America’s Busiest International Trade Gateways
  • From Steel to Storage: A Warehouse Boom in Pennsylvania; Good News or Bad?
  • Who’s Working Where? Employment Trends by State
  • And This Week’s Featured Place: Miami, Florida, Money Likes Sunny

Quote of the Week

“I’m fairly confident that crypto is going to play a big role in payments, to be determined exactly how big and in what kind of sequence and staging over time. But we are big time leaning into the crypto space because of the fact that we think it really could make a big difference.  And what our strategy is, is to get as involved as we can, to learn as much as we can talking to various blockchain players, as well as talking to and getting involved with as many crypto wallets as we can around the world.”

-Visa CEO Alfred Kelly, speaking at a JP Morgan investor event

Market QuickLook

The Latest

Memorial Day weekend. The traditional start of summer. And for most Americans, a holiday much easier to enjoy this year than last.

True, fewer Americans are working this year, for reasons still debated. But employment opportunities are much improved. Household incomes are up. So are household savings. And most importantly, victory over Covid is complete, or at least it feels that way to most Americans, especially the roughly 135m now fully vaccinated. Restaurants, airports, hotels, beaches and national parks are busy once again.

So is Corporate America, eager to take advantage of a demand surge all too rare during the 2010s. That’s lifted profit margins for many, both during the pandemic and its aftermath. Still, the future beyond 2021 elicits unease. How long will current supply chain frustrations persist? What about the tightness in labor supply? Is persistent 1970s-style inflation really a threat? Are taxes headed up? Does rampant government borrowing put the dollar’s value at risk? Is there a bigger risk in Washington not spending enough money, leaving the economy’s potential choked by decaying infrastructure and legions of workers unable to realize their potential due to paralyzing health care, childcare and elder care costs?

President Biden certainly favors big spending, as his latest budget proposal makes clear. He won’t get all of what he wants from a closely divided Congress though; the immediate question is how much if any he’ll get for infrastructure, and the legislative means by which he’d get it—through bipartisan compromise or (like the last relief bill) via more unilateral parliamentary tactics.

While the bargaining ensues on Capitol Hill, Wall Street is closely watching key monthly statistics as they’re published. The most important one last week shed more light on inflation trends during April. Just like a few weeks earlier, when the Labor Department’s consumer price index (CPI) showed a pop in prices, so too did the latest Commerce Department index tracking Personal Consumption Expenditures (PCE). The PCE index, a favored price gauge at the Fed, rose 0.6% from a month earlier and 3.6% from a year earlier. The monthly figure was a bit higher excluding food and energy. Here again was price data showing Americans are indeed paying more for their goods and services—car prices were a leading driver of April’s increase, the PCE data show. But more compared to what? Compared to the extremely depressed prices a year ago, when the onset of Covid had everyone expecting an apocalypse? Compared to times when supply chains and labor markets are behaving normally? The Fed and the Treasury, for their part, expect to see—before long—something akin to more normal supply chains and labor markets. So no imminent Fed moves yet. No tightening. No tapering. But internal murmurs of starting the process soon? Yes.

Yes to electrification. That’s Ford’s resounding response to the Great Green Shift now underway. Like rival GM and other automakers, it’s putting billions into batteries and EVs. The green shift is a bigger challenge for oil companies like ExxonMobil, subject of a forceful shareholder revolt. Chevron shareholders too, want the company to do more to cut emissions. The rebels are not alone. A Dutch court ordered Shell to significantly cut emissions. It’s feeling more and more like the age of hydrocarbons is coming to an end. But don’t forget: Even the most aggressive forecasts for renewables usage feature an important role for oil and gas for at least another decade. And there could be a shortage absent more investment.

For banks, it was time for their ritual Washington whipping. The CEOs of JP Morgan, Wells Fargo, Goldman Sachs, Citigroup, Bank of America and Morgan Stanley were all hauled before Senate and House committees, pressed on issues ranging from overdraft fees to small business lending to their involvement in politics. In Tech Land, on the other coast, Amazon announced a deal to buy MGM Studios, giving it more entertainment firepower to lure consumers into its many-tentacled retail universe. But gone are the days where what happens in Washington east matters little to Washington west. Washington, DC—the city, not the federal government (yet)—thinks Washington state’s largest company is breaking the law.

Nashville’s HCA, the country’s biggest hospital chain, will work with Google to apply the magic of artificial intelligence to health care. It comes, as a Bloomberg headline explains, while “Investors bet billions that health care’s long overdue digital shift is finally here.” But another headline last week, this one from the Wall Street Journal, casts a shadow of doubt: “Tech, banking and retail giants face numerous obstacles in their efforts to fix—and profit from—an industry that attracts $4 trillion annually.”

A few other happenings of note last week: More retailers and tech firms spoke of strong demand conditions. Crypto asset prices dropped again. Ethereum, a crypto platform that other developers can use to create applications, says it’s progressing toward a cleaner and faster method of verifying transactions. Treasury Secretary Yellen continued to promote Biden administration priorities, including changes to corporate taxation. U.S. tensions with China and Russia seem to only get worse. And in financial markets, stocks rose. Treasury yields fell. Oil was up.

Companies

  • Ford: Less aggressive than General Motors in its shift to electric vehicles? Ford did its best to dispel that notion last week, presenting investors with a plan to “say goodbye to gas.” The goal is to end up both larger and more profitable. And for that to happen, it wants to go beyond merely building and selling vehicles. This of course will remain the core of Ford’s business, as it progressively rolls out electric versions of its current products, starting with the Mustang Mach-E already on sale. Next up is Ford’s golden goose: The highly profitable F-150 pickup truck, for years the best-selling vehicle in North America. The Ford Explorer and other familiar models will follow, such that by 2030, 40% of all the vehicles it produces will be fully electric, powered by batteries rather than internal combustion engines. To get there, Ford pledges to invest $30b by 2025, which includes money spent on battery development. But again, the company wants to do more than just build and sell cars. One big initiative is the launch of Ford Pro, a business unit providing various services to commercial and government customers—it’s already a leader in commercial truck and van sales. Another is a move to capture recurring revenue streams from services it offers through wireless software updates that drivers can downland from their cars. This could include anything from a third-party music app (for which Ford can earn a fee) to emergency roadside assistance and parking information. Amazon’s voice assistant Alexa is another example of what you’ll increasingly find available in a Ford vehicle. A connected car, of course, also implies a rich source of valuable data on customer behavior. What else is in Ford’s grand plan? It has a new suite of technology, or tech stack, called Blue Oval Intelligence. Ford Credit, which provides loans to dealers and car buyers, will make better use of data. Executives have already taken difficult steps to stem overseas losses, including big cuts to its manufacturing assets in South America. Partners will play an important role—they include Google, China’s Baidu, Volkswagen, the Korean battery maker SK, the artificial intelligence firm Argo and the EV startup Rivian (which is looking to go public). New products could emerge as it masters battery technology—one it briefly mentioned was a portable home power generator. It didn’t talk much about autonomous vehicles at last week’s event but for sure, that’s a big longterm focus too. Fortunately, Ford is undertaking its multibillion-dollar ICE-to-EV shift at a time of financial strength. Indeed, 2020 was a solidly profitable year (adjusted for special accounting items), and 2021 is looking strong too, notwithstanding severe production disruptions tied to semicon shortages. So yeah, it will sell fewer cars than it hopes this year, but at higher prices thanks to robust demand. By management’s own admission, margins in the years leading up to the pandemic were not so great. And the labor- and capital-intense auto business is by nature a low-margin affair. The billion-dollar test going forward is whether Ford can lower battery costs to the point where EVs can match the profit margins of ICE vehicles, which they don’t today. It might not need to achieve full parity, if all those other revenue streams come to fruition (i.e., from Ford Pro and those subscription-based software downloads). But battery technology is critical, and Ford’s rivals—General Motors, Tesla, foreign producers—are making big investments too.
  • Rocket: According to the New York Fed, home mortgage debt accounts for 69% of all the debt (amounting to some $14 trillion) held by American households. The next largest category of debt is student debt, responsible for about 11%. That’s followed by auto loans (10%) and credit card loans (6%). Who’s lending them the money? Banks, naturally, but also other financial institutions not classified or regulated as banks. In the mortgage space, Detroit-based Rocket, also known as Quicken, is the nation’s largest lender, ahead of even giants like Bank of America, JP Morgan and Wells Fargo. It’s known for making the complex journey of buying a home more convenient, which it does through technology. Buying a home, in fact, has been one of the last categories of transactions to move online due to its complexity, including the many different categories of professionals involved: real estate agents, title companies, local mortgage brokers, etc. Rocket’s loan volumes grew enormously during the pandemic; it closed on more than $100b of loan originations just last quarter. That was the sixth consecutive quarter in which it doubled its year-ago home loan volumes. At a JP Morgan investor event last week, CEO Jay Farner spoke of moving toward the goal of making underwriting decisions right at the point of sale, enabled by data science. It’s involved in auto loans too, and likewise growing fast in that category. Much of Rocket’s lending is done online directly with consumers. It works with partners who handle the loan origination as well, in which case Rocket earns lower margins per transaction but also incurs lower costs. The consumer direct lending, to be sure, requires heavy advertising to ensure brand awareness. Indeed, Rocket even advertised in this year’s Super Bowl.
  • United Wholesale Mortgage (UWM), also based in Michigan, is the second largest mortgage lender in the U.S. behind Rocket. It’s also a non-bank. But unlike Rocket, it doesn’t lend directly to consumers, instead working only with third party mortgage brokers—this is the “wholesale” model to which its name refers (brokers originate about a fifth of all U.S. mortgage loans). Its name is thus less familiar to the public, as it stays behind the scenes funding loans that partners originate. No Super Bowl ads for UWM. Earlier this year, it became a public company via the biggest-ever SPAC deal, referring to the special-purpose-acquisition companies now in vogue. UVM generally sells loans after funding them, to buyers involved in loan packaging, most importantly the government-sponsored companies Fannie Mae and Freddie Mac. They were established decades ago to buy loans, so that more Americans can own homes. They don’t originate or fund any loans itself, instead earnings fees for creating packages of loans that can be bought and sold by investors.
  • Loan Depot, still another non-bank mortgage lender, is barely a decade old. But it’s made big strides in a market that’s notoriously fragmented—and perhaps ripe for consolidation. Rocket itself commands a market share of just 10% in the mortgage lending space. California-based Loan Depot is now at about 3%. And keep in mind: The residential mortgage market in the U.S. is massive, with approximately $11 trillion of mortgages outstanding as of December 31, 2020. Last year saw $3.7 trillion in new mortgages, according to the Mortgage Bankers Association. The market, moreover, has changed a lot since the financial crisis of 2008, before which a company called Countrywide had a market share exceeding 20%. At the moment, housing supply, relative to demand, is tighter than ever (the same is true incidentally, for new and used autos). In addition, fewer people refinanced their homes in Q1, which is another way of saying they’re not trading in their old loans for new ones with lower rates. The reason is that rates started to rise, quite sharply during the quarter. They’ve since settled around a still historically low 3%. Firms like Loan Depot, to be clear, love it when people refinance because they earn fees for the transaction.
  • Upstart isn’t involved in mortgage lending, at least not yet. But the nearly ten-year old Bay Area fintech firm makes heavy use of artificial intelligence to make mostly unsecured personal loans typically ranging from between $1,000 to $50,000. An average Upstart loan runs for three to seven years, with annual rates ranging from about 7% to as high as 36%. But it’s not really a traditional bank that earns revenues from interest rate spreads. Instead, partner banks (one in particular called Cross River) originate the loans and pay Upstart a finder’s fee for each borrower that begins the process through its website. About a fifth of the loans wind up on the partner bank’s balance sheet. Upstart sells most of the rest to institutional investors. Partner banks also pay Upstart to use its lending algorithms on their own websites, under their own brands. Consumers, it says, benefit from higher approval rates, lower rates and a more digital experience. It criticizes the FICO score, devised in 1989 and still used today as a decision tool for most banks. Upstart is now getting into auto lending, a competitive market. And it has eyes on one day doing credit card loans, student loans and yes, even home mortgage loans. Will it stay independent? Or will an established bank buy it? The big players are always eager to acquire promising young rivals.
  • AutoZone Fun Fact: The Memphis-based auto-parts retailer said last week it spent $1m last quarter incentivizing employees to get their Covid shots.  

Tweet of the Week

“TURNING POINT: Big Oil has suffered a huge defeat today on its climate change strategy, with Exxon, Chevron and Shell (by far the 3 largest western oil majors) enduring either big shareholder rebellions or losing important legal fights.”

-Bloomberg reporter Javier Blas, Tweeting on Wednesday, May 26

Sectors

  • Shipping: Ryan Petersen, the CEO of Flexport gave some stats that capture the current supply tightness in the ocean freighter business. Speaking on the Odd Lots podcast, he said 30% of ships right now are not meeting their schedules. Nearly 40% of containers are getting “rolled,” or overbooked, compared to about 8% pre-pandemic. Roughly 20% of shippers are now paying premiums for guaranteed delivery times, up from below 10%. Flexport itself, incidentally, had 43 containers on the Evergiven ship that was stuck in the Suez Canal in March. Why is supply so tight? For one, demand is up with so many people buying manufactured goods during the pandemic. And companies are over-ordering to boost their chances of actually getting their shipments in time. Ocean liners themselves cut capacity expecting just the opposite—weak demand—when the pandemic first hit. An added complication is the sharp drop in U.S. exports, coinciding with a surge in imports, leading to more empty containers leaving the U.S. In addition, there’s a shortage of truck cabs to haul containers upon arrival. Imports are slow to unload at ports, in part due to Covid-related worker shortages. And airfreight, while a substitute option, has its own capacity limitations with so many commercial planes grounded. Petersen criticizes the shipping industry for its old IT systems and bureaucratic nature. The “dirty little secret,” he says, is that even the top brands often have no idea where their products are at any given time due to outdated IT.
  • Crypto-mining: A subsequent Odd Lots episode features Brian Venturo, the CTO of a specialized cloud computing company called CoreWeave. It caters to people that need temporary bursts of high-power computing (i.e., gamers), which requires unique semiconductor chips that are currently in short supply. CoreWeave needs to keep a surplus of computing capacity on hand for when customers need it on short notice, not unlike a shopping mall needs a big parking lot for holiday shopping. Unlike parking spaces that sit empty during quieter times though, CoreWeave makes use of its surplus high-powered chips to mine cryptocurrencies. This is the process of verifying crypto transactions, which can earn miners a fee denominated in whatever cryptocurrency their mining. Bitcoin uses this verification method. So does Ethereum, though it’s working to adopt an alternative method that doesn’t involve idle computers expending huge amounts of electricity. Miners however, Venturo says, will lose opportunities to earn money if the shift happens. And they “aren’t going down without a fight.” Back on the chip shortage, Venturo asserts that global foundry capacity is simply too small to deal with present and future demand, even if crypto mining does decline. There’s still rapidly growing demand among cloud data storage firms, gamers, auto makers and so on.
  • Education: Carleton College economics professor Nathan Grawe joined the New Books Network podcast to discuss his book: “The Agile College: How Institutions Successfully Navigate Demographic Changes.” Those demographic changes refer to America’s shrinking population of young people, especially in the northeast quadrant of the country, i.e., the Northeast and Midwest. In Vermont, for example, the number of high school graduates is down by a quarter. Naturally, this poses challenges for colleges and universities as enrollments decline. Grawe also points to more people questioning whether college is really “worth it,” given all the debt it often entails. Grawe himself has no doubt that the return on investment is strongly positive, but student debt does become a major problem for people who don’t finish their degree, or who major in subjects with limited job prospects. The demographic challenge won’t change until at least the late 2030s, given today’s low birth rates. Immigration could change the trajectory, but the trend now—as it was even before the Trump administration—is fewer International students also have more options as colleges in other countries improve academically, boost recruiting efforts and grow more welcoming. One encouraging trend is a rise in college enrollment among Hispanic Americans, a group whose demographics skew younger. Nevertheless, for regions like New England and the midwestern manufacturing belt, college closures are all but inevitable. Schools will likely get more aggressive with financial aid as well, in their pursuit of more students. Carleton College where Grawe teaches is a non-profit private school. And because of its strong reputation and educational credentials, its student recruitment challenges will be less severe. Same for elite schools like those considered Ivy League. For smaller public colleges and universities, including those offering two-year degrees, the threats are greater. And worryingly, many are vital to the health of local communities, providing many jobs. The best performing schools during the pandemic, as it turns out, were for-profit universities, many of them online—University of Phoenix is one that comes to mind. But their Covid-era success follows a turbulent period of shakeout tied to changes in regulations and public criticism about their business models. One possible avenue of growth for colleges of all stripes, according to Grawe: Serving adult learners including retirees and mid-career professionals seeking to retrain.
  • Retail: Quick stat: According to the St. Louis Fed, e-commerce sales accounted for 14% of all U.S. retail sales during the first quarter of 2021.

Markets

  • Green Assets: Green assets are on a tear, writes The Economist, referring of course to assets deemed environmentally sustainable. Prices of battery materials, namely lithium and cobalt, have soared. Same for copper, a key ingredient in making wind turbines and other clean energy infrastructure. In Europe, which has an emissions trading regime, carbon prices are way up. Also up are stocks of renewal power companies, electric vehicle (EV) makers, hydrogen fuel cell producers and so on. Once a niche area of investment, green investing has gone mainstream for several reasons, according to the report. One is that clean-energy firms are now more viable businesses thanks to a dramatic drop in the price of solar power, for one, down 80% in the past decade. The cost of lithium-ion batteries, which power EVs, is falling by about 20% a year. In addition, the U.S., China and the E.U. have all set “net-zero” carbon emissions targets, convincing investors that green regulations are coming. Also lifting green asset prices: Excitement among retail investors (think millennials with stimulus checks on Robinhood) for clean tech stocks including Tesla. The popularity of SPACs too, has involved lots of sustainability-themed takeovers. The Economist recounts how wind and solar firms began to expand in the 2000s, aided by generous government subsidies. “Over time the technologies improved, and the subsidies shrank.” Consolidation occurred as well, and survivors now generate stable revenues. Investors hope new winners emerge from today’s crop of young startups, many testing new technologies. Is there risk of a green asset bubble? Inflation, for one, would erode the value of future projected earnings, which investors are counting on for startups not generating earnings today. Higher interest rates, furthermore, would hurt the many renewable power firms that rely on debt financing.

Government

  • Antitrust Policy: The momentum is unmistakable. A movement is building to counter the power and influence of Big Tech, much like prior generations of public officials reined in big banks, railroads, oil companies, telecom monopolies and software goliaths. We saw it with federal lawsuits against Google and Facebook in December. We saw the sentiment against Apple in its legal struggle with Epic Games. And last week, the attorney general for the District of Columbia fired a legal shot at Amazon, suing it for allegedly gouging consumers and stifling innovation. It specifically attacked the company’s “most favored nation” policy with third-party sellers, which forbids them from offering their products at lower prices (or on better terms) anywhere else. If you sell on Amazon, in other words, don’t even think about charging a lower price on even your own website. The suit claims Amazon levies fees of as high as 40% of a product’s price. And because of the favored nation rule, that 40% markup gets incorporated into prices everywhere. Amazon, it adds, is the world’s largest online retailer, controlling 50% to 70% of all online market sales. More than 2m independent third-party sellers, meanwhile, sell their products on Amazon Marketplace. Will other governments join the antirust assault launched by D.C.? Separately, Amazon’s deal to purchase MGM Studios could encounter some antitrust resistance as well. While the company certainty won’t dominate the entertainment media business, the acquisition will tighten Amazon’s grip on the large basket of products and services that Americans consume.
  • Monetary Policy: Robert Kaplan is clearly on the hawkish side of the tapering debate. The Dallas Fed president, in a town hall meeting earlier this month, sounded equivocal on the practice of buying $40b worth of mortgage securities a month while the housing market is extremely hot. He is, however, concerned about scarring in the labor market, based on pandemic-era declines in high school graduation rates and lower enrollment in skills training programs. He also points to many older workers retiring earlier, and many females with children leaving the workforce. This concern normally favors a more dovish approach to tapering.
  • Public Education: How much does America spend on public schools? The answer in fiscal year 2019 was $752b, covering 48m children. This was up about 5% from the year prior. The figures come from the Annual Survey of School System Finances conducted by the U.S. Census Bureau. Almost a third of the money spent goes to teachers. The biggest sources of revenue are state and local governments, followed by the federal government.

Spending on Learning

Spending per pupil on public elementary/secondary school systems, fiscal year 2019

  • Discrepancies partly explained by varying cost of labor (teachers command higher salaries in states with higher cost of living)
  • In addition, different areas of the country have different levels of tolerance for higher local taxes that fund schools (states with many retirees like Florida and Arizona tend to be less fond of education spending)

(Source: Census Bureau’s Annual Survey of School System Finances)

Places

  • Miami, Florida: They come for the They come for the beaches. Now, they’re coming to start and run companies too. Count Miami as one of 2020’s economic winners, luring an impressive list of high-powered financial and tech firms from New York and California. Blackstone, the esteemed private-equity group, moved its technology hub to Miami. Japan’s SoftBank, a giant in venture technology investments, has a new Latin America fund based in Miami. Goldman Sachs is moving some jobs there. Microsoft will open a new office. And so on. But will the influx continue? City mayor Francis Suarez calls it more than just a moment but a movement. Perhaps some did come just because Florida was a good place to be outdoors during a pandemic. The state, furthermore, had fewer health-related operating restrictions on businesses and schools. By last fall, the state’s economy was largely reopened. But the city—as well as the wider Dade County area—insist there are more enduring reasons for Miami’s appeal, ones which remain relevant even as the pandemic passes. Florida’s taxes, for one, are low (it’s one of just nine states without a personal income tax). The airport is among the nation’s 20 busiest, with unbeatable connections to Latin America and a broad menu of nonstop flights to Europe and the Middle East. American Airlines, in fact, is Miami Dade’s largest employer outside of the government, health and education centers. If you’re doing business in Latin America, you almost have to have a presence in Miami—this helps explain why some 1,300 multinational firms have offices there, according to Miami-Dade Beacon Council, a private-public partnership tasked with promoting economic development. According to the Council’s executive VP of business development James Kohnstamm, the county is attracting as many as 1,000 new residents a week, while last year ranking seventh nationwide for venture capital investment. The area is home to multiple “unicorn” startups valued over $1b, including REEF technology and Cyxtera. Even putting aside the aviation jobs, plus the jobs tied to Latin American trade and the growing finance and tech sectors, Miami’s economy is by any standards well-diversified. Tourism is of course vital, driving not just airline, hotel and restaurant employment but also a big cruise sector—Carnival, Royal Caribbean and Norwegian are all headquartered in Dade County. The area is home to several fast-food giants too, including Burger King and soon Subway. Ford chose Miami as its first testing site for autonomous vehicles. The container port is America’s eleventh busiest. South Florida is certainly no stranger to the housing boom now evident nationwide. The area comprising the Miami housing market, as defined by the Department of Housing and Urban Development (HUD), is remarkably diverse in all senses of the word. Leisure and hospitality accounted for just 12% of jobs in 2019, compared to 16% for education and health. The number was 15% for professional and business services. It was 12% for government. A HUD report, meanwhile, notes that Miami is the only market in the U.S. where more than half of the total population is foreign-born. Also important at a time when many companies and entrepreneurs are eager to diversify their talent pool, Miami’s Florida International University (FIU) ranks number one in the U.S. for Hispanic engineering graduates, with a high ranking for Black engineers as well. Officials and philanthropists are now directing more money to IT-related subjects at both FIU and the University of Miami. That said, the area arguably does punch below its weight in higher education, at least with respect to hosting the very upper tier of elite universities likely to attract the world’s top students and future entrepreneurs. This is perhaps a legacy of Miami’s original attraction as a place for retirees, a group for which education generally isn’t a top priority. Another thing Miami lacks is a large manufacturing sector. It’s considered among the most vulnerable U.S. cities to climate change. Many of its tourism jobs are low paid. With the protected Everglades to its west and the ocean to its east, Miami’s physical expansion is constrained—other cities in Florida are growing faster. As an example, the Miami metro grew its population 10% in the 2010s; Orlando grew 22%. Then again, Miami is a much larger metro, the county’s seventh largest in fact when including Broward and Palm Beach counties to the north. In a way, Miami’s economy is both blessed and cursed by its geography. Yes, it helps to be a warm-weather place with lots of great beaches. But even aside from its worrying exposure to rising sea levels and intense heat, Miami’s position in the far southeastern corner of the nation puts it far away from the U.S. west coast, far away from Europe and especially far from East Asia. A company doing business in Latin America? Sure, there’s no better place than Miami. But for Asia, a much larger market, other cities are more attractive. In any case, that doesn’t seem to be a problem for all the finance and tech firms now coming and launching. Is it happening on an Austin- or Nashville-like scale? Not quite. But for Miami, the trend is in the right direction. The tourism sector, meanwhile, is already seeing a vigorous recovery. And the momentum will accelerate when cruises restart, perhaps this summer pending controversies over whether to allow vaccinated passengers only. As Kohnstamm makes clear, the cruise sector is a major economic force, encompassing a whole ecosystem of suppliers, dockworkers, service providers, entertainers and so on. A final step in Miami’s post-Covid recovery will be a reopening of borders with countries in the Caribbean and South America.
  • Leigh Valley, Pennsylvania: The New York Times examines the explosive growth of new warehouses throughout Leigh Valley, an area once home to major steel manufacturers and other champions of the bygone industrial era. Like so many other such places, it’s had to transition to health care and education jobs. But with e-commerce expanding so rapidly, logistics firms have seized advantage of the Valley’s proximity to New York City—it’s only about 80 miles away. In fact, about 30% of all American consumers are within just a day’s truck drive. It helps that two major interstate highways pass through the area. But not everyone is happy. Some complain about all the additional truck traffic. Some don’t like seeing rural areas turned into unsightly warehouses. And some say the average warehouse/truck driver wage of $46,700 annually doesn’t come close to matching the $71,400 that manufacturing jobs pay (the steel mills are gone, but Leigh Valley is still home to large manufacturing plants that produce Crayola crayons and marshmallow Peeps candies). Critics also say the work is hard and prone to injuries. They wonder if such jobs will eventually be replaced by robots. But supporters say the new warehouses offer a rare chance for locals to make decent living with just a high school diploma.

Abroad

  • FDI: What U.S. industry receives the most foreign direct investment? The answer, according to the Global Business Alliance, is the financial sector, with $763b worth during the years 2014 through 2019. This includes banks and insurance firms. The pharmaceutical industry ranks high with $511b worth of FDI over the same period. The oil and gas sector received $306b. Other big categories include autos, food, electronics, machinery, transportation, mining, utilities and real estate. Foreign companies, the Alliance said, employed 7.4m Americans last year.
  • At right: Chart showing top 25 U.S. Foreign Trade Freight Gateways by Value of Shipments (source: Bureau of Transportation Statistics) 

Looking Back

  • Tulsa’s “Black Wall Street”: This week marks the 100th anniversary of the Tulsa race riots, in which a thriving Black neighborhood in Oklahoma was destroyed by mob violence. Historian Hannibal Johnson is an expert on the tragedy, including the economic forces that shaped the affected area both before and after. The story begins with O.W. Gurley, the son of Alabama slaves, who grew up and prospered in Arkansas. In 1906, he went to neighboring Tulsa, Oklahoma, which was booming at the time thanks to oil. It was there that Gurley established the Greenwood District, attracting Black entrepreneurs and professionals from the South most importantly. Some even wanted to establish the area as America’s first all-Black state. But the massacre destroyed more than 200 Greenwood businesses, along with 1,200 homes. One reason for the anger directed toward Greenwood was mere envy at the area’s relative wealth. Another was the fact that railroads and other corporations wanted the land. Remarkably, Greenwood would rebuild, despite the refusal of insurance companies to accept claims, invoking clauses absolving them of liability in the case of civil unrest. By the 1940s, Greenwood had more people and more wealth than even before the massacre. Ironically, as Johnson explains, the end of legal segregation contributed to the area’s eventual decline, as consumers were now free to shop and use services from outside the community. In many cases, due to economies of scale enjoyed by national corporations, products and services were cheaper elsewhere, including neighborhoods of Tulsa that Blacks previously couldn’t visit. Another blow came in the 1970s, when Interstate 244 was built right through Greenwood—highway projects would destroy Black neighborhoods throughout the country during this era. Efforts, Johnson says, are now underway to “rekindle the entrepreneurial flame that was once here.” But he recognizes that Greenwood won’t ever look quite like it did in its heyday, owing in part to more career opportunities for Black entrepreneurs and professionals in large cities.
  • Agriculture: Today, without access to the internet, it’s very hard to make a living. For much of American history starting in the mid-1800s, it was near-impossible to make a living if you didn’t have access to a railroad. Consider this statistic from the Franklin Institute Museum in Philadelphia: By the second half of the 19th century, more than 80% of farms in the U.S. corn belt were located within five miles of a railway.
  • The Federal Reserve, on its website, looks back at some of the politics surrounding its creation in 1913. It wasn’t just a matter of Congress passing a law. There were big questions to answer, like which cities would get the privilege of hosting the system’s twelve Reserve Banks. To deal with this matter, the law established a Reserve Bank Organization Committee (RBOC) that included the Treasury and Agriculture secretaries (keep in mind how important the agriculture sector was at the time). The RBOC held hearings on 18 candidate cities (37 in total applied), evaluating the amount of capital held by banks in the
    area, among other criteria. Some choices were obvious, like New York. The other 11 ultimately selected were Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco. Naturally, rejected cities were disappointed, none more so than New Orleans and Baltimore, both much larger and more economically influential in 1913 than they are in 2021. Critics asked why the committee selected St. Louis and Kansas City, both in the state of Missouri. Others asked why Atlanta and Richmond were both selected. Today, of course, the selections don’t reflect current economic realities. Los Angeles, the second largest metro market in the country, doesn’t have a Fed Reserve bank, but Richmond (the 45th largest) does. Mega-cities like Houston or Miami would probably have one too if the system were designed today. Why not update the list of cities? It’s a non-starter politically.

Looking ahead

  • Energy: The International Energy Agency (IEA) surprised many in calling for an end to new investments in fossil fuel projects. The organization, created by industrialized nations during the 1970s oil crisis, is clearly committed to weaning the world off oil, gas and coal. In its roadmap to achieving net zero carbon emissions by 2050, the IEA also calls for an end to sales of vehicles with internal combustion engines by 2035. By 2040, in its vision, the global electricity sector will have already reached net-zero emissions, with help from major adoption of wind and solar energy, plus efficiency improvements and new technology. “By 2050, the energy world looks completely different.” It foresees global demand that’s 8% lower than today but serving an economy more than twice as big, and a population expected to grow by 2b. Fossil fuels, responsible for almost four-fifths of total energy supply today, will account for just over one-fifth by 2050. Can the world achieve this? Can it do so without sacrificing wealth? Will the transition result in geopolitical power shifts? The changes are necessary. But the questions are many.

The Latest on Labor

  • While many fewer people were employed during the pandemic than before it, average wages were up sharply
  • One reason is that many big companies including giant employers like Walmart and Amazon raised wages
  • But more importantly, averages were inflated by the disappearance of many low-paying jobs. Indeed, the lowest-paying industry category tracked by the Labor Department, leisure and hospitality, saw the largest job losses. As these jobs return this spring and summer, this will bring the national average wage back down. So when you start seeing declines, don’t be alarmed. It’s just a sign that lower-wage workers are coming back
  • Separate from the December 2020 wage data last week, the Labor Department published April 2021 unemployment rates by state (not shown below). Hawaii still had the highest rate at close to 9%, reflecting its heavy reliance on tourism. (Big cities like New York and Los Angeles were significantly higher still). Utah, South Dakota, New Hampshire, Nebraska and Vermont, by contrast, also had unemployment rates below 3%.

(source: Bureau of Labor Statistics)

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