By Elijah Asdourian, Alexander Conner, Lorae Stojanovic, David Wessel
What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday.
Using data from the Current Population Survey, Gopi Shah Goda of Stanford and Evan Soltas of MIT find that the COVID-19 pandemic has had persistent effects on both the size of the labor force and workers’ earnings. They estimate that half a million people were missing from the labor force in June 2022 as a result of contracting COVID-19 at some point during the pandemic. COVID-19 infection also increases the likelihood that a worker will retire, become disabled, or leave the workforce to care for a family member. On average, workers who are absent for at least a week of work after contracting COVID-19 forgo $9,000 in wages because they are more likely to leave the labor force. The authors find that the loss in labor supply is comparable to an additional year of U.S. population aging, and that the value of lost wages is about half of the value of lost wages from diabetes or cancer in a given year.
Are equity and bond markets pricing in climate risk? Based on prior research demonstrating that unusually hot days can hurt local economies by lowering labor productivity (in industries such as mining and construction) and increasing energy expenditures (for air conditioning), Viral Acharya of New York University and co-authors simulate municipalities’ and companies’ exposure to heat-related losses by the end of the 21st century and compare them to bond and equity returns from 2006 to 2020. Municipal bond returns were 15 basis points higher in areas where heat stress is projected to destroy 1% of GDP compared to areas without heat stress risk. The authors find similar effects in bonds and stock of corporations, with a one standard deviation increase in heat stress being associated with a 40 basis point increase in yields on sub-investment grade corporate bonds and a 45 basis point increase in returns on S&P 500 companies. These effects began around 2013, at a time when the authors speculate investors became aware of the systemic nature of climate change risks.
Between 2004 and 2022, net income for publicly traded non-financial corporations rose 5.4% per year. A third of that came from falling interest and tax expenses, finds Michael Smolyansky of the Federal Reserve Board. The decline of interest rates and effective corporate tax rates, especially after the 2017 tax cuts, reduced tax and interest expenses as a share of earnings from roughly 45% before the Great Recession to 26% today. Had these expenses remained at a constant share of earnings, the author calculates that the earnings of these companies would have grown at only 3.6% per year. Over this period, firms also enjoyed faster earnings growth than sales growth because inputs were cheaper and labor productivity rose faster than real wages. With rising interest rates threatening leveraged balance sheets, new taxes in the Inflation Reduction Act, and no reason to expect an increase in earnings, Smolyansky argues that profit growth and stock returns for these firms will be in the 3.0%-3.5% range in the long term.
Chart courtesy of the Census Bureau
“It will not surprise you if I say that of course we [the European Central Bank] do not target any kind of exchange rate for the euro. But of course we monitor very carefully and just like all of you, we have noted the depreciation of the euro relative to a basket of currencies but more importantly, relative to the dollar. Just to give you an order of magnitude: it’s since the start of the year 12% relative to the dollar, and 4% in nominal effective terms relative to other currencies in general,” says Christine Lagarde, President of the European Central Bank.
“Of course we notice. We know that it does have an impact on inflation with a lagging time. It has direct and indirect effects as well, and we are very attentive to those, but we do not target an exchange rate. We have not done so and we will not do so.”
The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.recession pandemic covid-19 bonds corporate bonds sp 500 monetary policy federal reserve currencies euro recession gdp interest rates european
September Payrolls Preview: “Bulls Need A 100k Print For The Market To Alter Its Fed Expectations”
September Payrolls Preview: "Bulls Need A 100k Print For The Market To Alter Its Fed Expectations"
Prior to Friday’s NFP (and CPI next Wednesday),…
Prior to Friday's NFP (and CPI next Wednesday), the market has been oscillating between the “hawkish Fed” and “Fed pivot” narrative. While the JOLTS Job Openings and the ISM Manufacturing employment index showed more evidence of a slowing labor market...
... yesterday’s stronger than expected ADP/ISM Services once again proved the economy still remains strong and therefore weakens the hope of a near-term pivot from the Fed. In a nutshell, according to JPM's trading deks, with consensus expected tomorrow’s NFP to print +255k, Equity bulls would need a print ~100k to see the market alter its Fed expectations.
That said, many have said that in the absence of a huge outlier (to the downside) what markets and the Fed will be focusing on will be the participation rate (look for a big bounce here to confirm the recent slump in job openings) and hourly earnings: anything below 5.0% Y/Y and a 0.1% or lower sequential number will be greeted by the market.
Want more? Here is Newsquawk with a more detailed preview of what to expect tomorrow:
- The headline rate of payrolls growth is expected to resume cooling in September, with the consensus looking for 255k payroll additions (vs 315k in August);
- The jobless rate is seen unchanged at 3.7%, and there will also be focus on the participation rate after a welcome rise in August.
- Wage growth is expected to continue, although the annual rate is expected to cool a touch.
- Traders will be framing the data in the context of Fed policy; there are building hopes that the central bank might relent on some of its hawkishness if its policy tightening gives rise to financial stability concerns as it moves policy further into restrictive territory – these concerns could be exacerbated by soft economic data, as seen this week after the release of the Manufacturing ISM and JOLTs data, which fueled bets that the Fed would not be as aggressive with rate hikes ahead.
PAYROLL GROWTH: Analysts expect 255k nonfarm payrolls to be added to the US economy in September (Goldman estimates nonfarm payrolls rose by 200k in September, 50k below consensus and a slowdown from the +315k pace in August.), with the pace of jobs growth seen easing from 315k in August;
This would represent a resumption of recent trends where payroll growth has begun to cool (3-month average 378k, 6-month average 381k, 12-month average 487k). Jobless claims data that coincides with the reference period for the establishment survey in August and September augurs well for the headline: initial jobless claims eased to 209k vs the 245k level heading into the August jobs data, while continuing claims declined to 1.347mln vs 1.412mln into the previous jobs report. Meanwhile, while the ADP’s employment data bodes well for the official payrolls data (ADP printed 208k in September, a little above the expected 200k, and improving from the previous 185k), there is a great deal of scepticism about the payroll processor’s modelling, particularly given that its new methodology did not capture the trend of the August data in its inaugural release. Business surveys were mixed; the Manufacturing ISM report gave a sobering look at the labor market, where the Employment sub-index fell into contraction territory at 48.7, 5.5 points lower than the level recorded in August; the Services ISM however, saw the Employment sub-index rise to 53.0 from a previous 50.2, suggesting employment in the services sector continues to expand, while employment in the manufacturing sector is declining.
UNEMPLOYMENT: The unemployment rate is likely to have remained unchanged at 3.7%; analysts will also be watching the participation rate, which encouragingly rose by 0.3ppts in August to 62.4%. Additionally, there will also be focus on the U6 measure of underemployment after that picked-up to 7.0% in August from 6.7% in July. In terms of signposts about how these data will impact monetary policy, JPMorgan’s analysts point to the so-called non-accelerating inflation rate of unemployment (NAIRU), a level which puts neither upward nor downward pressure on inflation. JPM explains that when unemployment is above NAIRU, inflation tends to go down, and vice versa. The CBO estimates NAIRU is currently around 4.4%, but the median estimate of FOMC participants is at 4%. JPM itself argues that the actual level might have moved higher after the pandemic: "the relation between unemployment and job openings is also consistent with a higher natural rate," it writes, "massive sectoral reallocation over the past three years is a likely culprit for this increase." The Fed’s most recent economic projections envisage the jobless rate rising to 4.4%, where it is expected to stay into next year.
WAGES: Average hourly earnings are seen rising 0.3% M/M, matching the rate seen in August, but with the annual measure expected to ease a little to 5.1% Y/Y from 5.2%. The Conference Board's gauge of consumer confidence in September revealed that consumers were more optimistic about the short-term prospects for the labor market, although they were mixed about their short-term financial prospects. On this front, Fed officials have been closely monitoring the JOLTs data series, which offers a proxy on the tightness of labor market conditions (the tighter the labor market, the more wage growth economists expect ahead). In that regard, the latest JOLTs data may be welcomed by Fed officials, given that it showed labor market tightness eased significantly in the month, which might suggest that wage growth is to cool further in the months ahead. (NOTE: the latest JOLTs report was for August, not September).
POLICY IMPLICATIONS: Analysts will be framing the data in the context of the Fed’s mission to tackle surging consumer prices. BMO’s analysts argue that “as the market can now see the end of the rate hike cycle, market volatility around employment releases will increase,” adding that “the Fed has been very effective in communicating the fact that the strong underlying labor statistics have allowed it to be more aggressive in fighting inflation than they might have otherwise been; at some point this will turn, and as a result not only will the official BLS data be pivotal.” Accordingly, BMO argues that as the real economy enters the next stage of the cycle, the market will be on guard for any signs of undue stress in the labor market, given the ramifications it could have on the speed of Fed policy. Indeed, this week, soft ISM and JOLTs data both resulted in a re-pricing of Fed hike trajectory expectations (traders reason that soft data may compel the Fed to relent on some of its hawkishness, while any particularly strong economic data will embolden the Fed to continue to act aggressively with normalizing policy).
ARGUING FOR A WEAKER-THAN-EXPECTED REPORT
- Youth workers back to school. The loss of the youth summer workforce represents a headwind for September payrolls following strong summer employment gains for this segment. The household survey indicates that 1.3mn workers ages 16-24 were hired on net during the May-to-August payroll periods (nsa), the largest gain since 2016 outside of the 2020 reopening. As shown in Exhibit 1, September youth employment losses are strongly correlated with the summer pace of hiring in that segment, consistent with the vast majority of these workers returning to school in the fall. Additionally, this year’s particularly tight labor market suggests that many of these newly vacant positions remained unfilled during the September survey period. There is also find a negative correlation between youth summer hiring and the September nonfarm payroll surprise (relative to consensus, correlation of -0.47). These relationships would imply a roughly 35k nonfarm payroll miss and a roughly 110k drag on youth employment in tomorrow’s report (mom sa).
- Big Data. High-frequency data on the labor market were mixed-to-weaker inn September, with each of the three measures available this month consistent with at-or-below consensus job growth (see Exhibit 2).
- September first-print bias. As in August, payrolls have exhibited a tendency toward weak September first prints, which may reflect a recurring seasonal bias in the first vintages of the data. September job growth has missed consensus by at least 25k in 4 of the last 5 years and in 6 of the last 10 years. Relatedly, September payroll growth was subsequently revised higher by an average of 46k in the five years leading up to the pandemic, consistent with a negative bias in tomorrow’s report of roughly that magnitude.
- Employer surveys. The employment components of business surveys generally decreased in September. Goldman's Services employment survey tracker decreased by 1.0pt to 52.2 and its manufacturing survey employment tracker decreased by 1.7pt to 52.9.
- Job cuts. Announced layoffs reported by Challenger, Gray & Christmas increased 28.9% month-over-month in September, following a 9.3% increase in August (SA by GS).
ARGUING FOR A STRONGER-THAN-EXPECTED REPORT
- Jobless claims. Initial jobless claims decreased during the September payroll month, averaging 220k per week vs. 246k in September but up from 175k in August. Residual seasonality and other non-economic factors explain much of the variation in initial claims over the last few months, and the overarching message from the jobless claims data is that layoff rates remained very low in Q3. Continuing claims in regular state programs decreased 66k from survey week to survey week, although they may also be affected by residual seasonality.
- Job availability. JOLTS job openings surprised to the downside, declining by 1.1mn to 10.1 million workers in August. However, the level of job openings nonetheless remains elevated relative to history. The Conference Board labor differential—the difference between the percent of respondents saying jobs are plentiful and those saying jobs are hard to get—edged up by 2.0pp to 38.0%.
- Seasonal factors. In contrast to those of the spring and summer months, the September seasonal factors have not evolved dramatically in recent years. The September month-over-month hurdle for private payrolls was -618k in 2021 compared to -665k in 2019 and -695k in 2017 (which unlike 2019 was also a 5-week September payroll). On this basis, September 2021 was sequentially more difficult by 50-75k. However, this could reverse for September 2022 based on the trend in recent months toward favorable year-on-year evolution in the factors. On net, Goldman is not assuming a significant tailwind or headwind from the seasonal factors (compared to a seasonality tailwind of as much as 100-200k in the previous report).
- ADP. Private sector employment in the ADP report increased by 208k in September,n in line with expectations for 200k.
What Really Divides America
What Really Divides America
Authored by Joel Kotkin via UnHerd.com,
The Midterms aren’t a battle between good and evil…
The Midterms aren't a battle between good and evil...
Reading the mainstream media, one would be forgiven for believing that the upcoming midterms are part of a Manichaean struggle for the soul of democracy, pitting righteous progressives against the authoritarian “ultra-MAGA” hordes. The truth is nothing of the sort. Even today, the vast majority of Americans are moderate and pragmatic, with fewer than 20% combined for those identifying as either “very conservative” or “very liberal”. The apocalyptic ideological struggle envisioned by the country’s elites has little to do with how most Americans actually live and think. For most people, it is not ideology but the powerful forces of class, race, and geography that determine their political allegiances — and how they will vote come November.
Of course, it is the business of both party elites — and their media allies — to make the country seem more divided than it is. To avoid talking about the lousy economy, Democrats have sought to make the election about abortion and the alleged “threat to democracy” posed by “extremist” Republicans. But recent polls suggest that voters are still more concerned with economic issues than abortion. The warnings about extremism, meanwhile, are tough to take seriously, given that Democrats spent some $53 million to boost far-Right candidates in Republican primaries.
Republicans are contributing to the problem in their own way, too. Rather than offering any substantive governing vision of their own, they assume that voters will be repelled by unpopular progressive policies such as defunding the police, encouraging nearly unlimited illegal immigration, and promoting sexual and gender “fluidity” to schoolchildren. They ignore, of course, the fact that their own embrace of fundamentalist morality on abortion is also widely rejected by the populace. And even Right-leaning voters may doubt the sanity of some of the GOP’s eccentric candidates this November.
In short, both major parties stoke polarisation, the primary beneficiaries of which are those parties’ own political machines. But most Americans broadly want the same things: safety, economic security, a post-pandemic return to normalcy, and an end to dependence on China. Their divisions are based not so much on ideology but on the real circumstances of their everyday life.
The most critical, yet least appreciated, of these circumstances is class. America has long been celebrated as the “land of opportunity”, yet for working and middle-class people in particular, opportunity is increasingly to come by. With inflation elevated and a recession seemingly on the horizon, pocketbook issues are likely to become even more important in the coming months. According to a NBC News poll, for instance, nearly two-thirds of Americans say their pay check is falling behind the cost of living, and the Republicans hold a 19-point advantage over the Democrats on the economy.
A downturn could also benefit the Left eventually. As the American Prospect points out, proletarianised members of the middle class are increasingly shopping at the dollar stores that formerly served working and welfare populations. Labour, a critical component of the Democratic coalition, could be on the verge of a generational surge, with unionisation spreading to fast food retailers, Amazon warehouses, and Starbucks.
To take advantage of a resurgent labour movement, however, Democrats will have to move away from what Democratic strategist James Carville scathingly calls “faculty lounge politics”: namely, their obsession with gender, race, and especially climate. For instance, by demanding “net zero” emissions on a tight deadline, without developing the natural gas and nuclear production needed to meet the country’s energy needs, progressives run the risk of inadvertently undermining the American economy. Ill-advised green policies will be particularly devastating for the once heavily Democratic workers involved in material production sectors like energy, agriculture, manufacturing, warehousing, and logistics.
To win in the coming election and beyond, Democrats need to focus instead on basic economic concerns such as higher wages, affordable housing, and improved education. They also need to address the roughly half of all small businesses reporting that inflation could force them into bankruptcy. Some progressives believe that climate change will doom the Republicans, but this is wishful thinking. According to Gallup, barely 3% of voters name environmental issues as their top concern.
Racial divides are also important — though not in the way that media hysterics about “white supremacy” would lead you to believe. Florida Governor Ron DeSantis’s decision to fly undocumented immigrants to Martha’s Vineyard was undoubtedly a political stunt, and one arguably in poor taste. But it succeeded in its main goal: highlighting the enormous divide between the border states affected by illegal immigration and the bastions of white progressivism who tend to favour it.
Under Biden, the Democrats have essentially embraced “open borders” — illegal crossings are at record levels, and few of the migrants who make it across the border are ever required to leave. This policy reflects a deep-seated belief among elite Democrats that a more diverse, less white population works to their political favour. Whether they are right to think so, however, is far from clear. Black people still overwhelmingly back the Democrats, but Asians (the fastest-growing minority) and Latinos (the largest) are more evenly divided, and have been drifting toward the Republicans in recent years.
Here, too, class is a key factor. Many middle and upper-class minorities are on board with the Democrats’ anti-racist agenda. But many working-class Hispanics and Asians have more basic concerns. After all, notes former Democratic Strategist Ruy Teixiera, these are the people most affected by inflation, rising crime, poor schools, and threats to their livelihoods posed by draconian green policies.
Culture too plays a role. Immigrants, according to one recent survey, are twice as conservative in their social views than the general public and much more so than second generation populations of their own ethnicity. Like most Americans, they largely reject the identity politics central to the current Democratic belief system. Immigrants and other minorities also tend to be both more religious than whites; new sex education standards have provoked opposition from the Latino, Asian, African American and Muslim communities.
The final dividing line is geography, always a critical factor in American politics. For decades, the country seemed to become dominated by the great metropolitan areas of the coasts, with their tech and finance-led economies. But even before the pandemic, the coastal centres were losing their demographic and economic momentum and seeing their political influence fade. In 1960, for example, New York boasted more electoral votes than Texas and Florida combined. Today, both have more electoral votes than the Empire State. Last year, New York, California, and Illinois lost more people to outmigration than any other states. The greatest gains were in Florida, Texas, Arizona, and North Carolina. These states are high-growth, fertile, and lean toward the GOP.Likewise, regional trends suggest that elections will be decided in lower density areas; suburbs alone are home to at least 40% of all House seats. Some of these voters may be refugees from blue areas who still favour the Democrats. But lower-density areas, which also tend to have the highest fertility rates, tend to be dominated by family concerns like inflation, public education and safety, issues that for now favour Republicans.
Put the battle between Good and Evil to one side. It is these three factors — class, race, geography — that will shape the outcome of the midterms, whatever the media says. The endless kabuki theatre pitting Trump and his minions against Democrats may delight and enrage America’s elites — but for the American people, it is still material concerns that matter.
Global Trade Forecast ‘Darkens’ On Central Bank Tightening, Inflation, Ukraine War
Global Trade Forecast ‘Darkens’ On Central Bank Tightening, Inflation, Ukraine War
The World Trade Organization published a new report that…
The World Trade Organization published a new report that outlines a sharp slowdown in world trade is expected for next year under the weight of skyrocketing energy prices, soaring interest rates, and war-related disruptions, with increasing risks of a global recession.
WTO economists expect world trade to "lose momentum in the second half of 2022 and remain subdued in 2023 as multiple shocks weigh on the global economy." These economists expect global merchandise trade volumes will increase only by 3.5% in 2022, slightly better than forecasts in April of 3%. They warned that 2023 would be a doozy, forecasting only a 1% increase in trade volumes, down from the previous estimate of 3.4%.
Forecasts for world GDP will grow by 2.8% in 2022. The economists lowered their 2023 estimate to 2.3% from earlier expectations of 3.3% and warned, "major central banks are already raising interest rates in a bid to tame inflation but overshooting on tightening could trigger recessions in some countries, which would weigh on imports." This means central banks could exacerbate the downturn by tightening too much next year.
The WTO's downgrades to global trade align with new IMF and OECD projections. This is a drastic change and a considerable deceleration from last year's 9.7% growth in international trade. Consumers, fueled by stimmy checks and ultra-low rates by central banks during Covid, are dialing back on spending as the hangover phase is underway.
"We're looking at a situation in which a global slowdown is going to squeeze households even more, squeeze businesses and we may be edging into a recession.
"It's looking quite grim -- a little more grim than we had thought," WTO Director-General Ngozi Okonjo-Iweala said in an interview with Bloomberg Television.
The pandemic boom trade has ended as the global economy faces a multipronged crisis. We noted the reversal in the "shortage of everything" bullwhip effect has led to container lines on major shipping routes canceling sailings as US importers do not need to increase purchases of foreign goods because of rising domestic inventory as consumers are on strike due to negative real wage growth, low savings, and maxed out credit cards amid worst inflation in decades.
Last month, FedEx Corp.'s CEO Raj Subramaniam delivered a chilling message while speaking with CNBC's Mad Money with Jim Crammer: The global economy is "going into a worldwide recession."
More evidence of the world stumbling into trouble is JP Morgan's Global PMIs now sub 50, which means contraction.
WTO's latest report is a reminder that 2023 economic outlooks for the world are quickly darkening as excess tightening by central banks could spark an even more significant downturn.
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