Peak Uncertainty - EconVue June 2022
posted by Lyric Hughes Hale on June 10, 2022 - 12:00am
In spite of our reputation as the technology capital of the world, last month the US witnessed its greatest fall in productivity since 1949. This might be a symptom that the US is lagging in the type of innovation that leads to economic growth. According to Peter Coy at the New York Times, based upon data shared by the Hamilton Center on Industrial Strategy, the US has a definitive lead in only one tech sector: information services.
China has more or less matched the United States in terms of the two nations’ shares of world output in seven high-tech sectors: pharmaceuticals; medicinal, chemical and botanical products; electrical equipment; machinery and equipment (from engines to office gear); motor vehicle equipment; other transport equipment (mostly aerospace); computer, electronic and optical products; and information technology and information services.
Inflation, another drag on the economy, is being blamed on a wide cast of characters, from Vladimir Putin to Jerome Powell. Its persistance has been surprising to many economists in a world where demand is in a long-term structural decline due to slowing demographics. Yet we have found a way to push up prices after the effects of Covid have faded.
On her mea culpa tour Treasury Secretary Janet Yellen admits she was caught by surprise by inflation. Economic models failed us she says, or as Larry Summers claims, measurement of key data such as the CPI is inadequate to capture our current reality.
These and other negative factors, from lack of innovation to excess fiscal stimulus could be contributing to slower growth, but will they lead to recession? The Sahm Rule is a useful tool to predict recessions, based on changes in employment figures. “It is currently -0.1 percentage point, which is well below the 0.5 percentage-point trigger of being in a recession” writes economist Claudia Sahm in her newsletter We Are Not in a Recession Nor is One Inevitable.
Sahm believes that the biggest risk could be a policy error. She concludes what we can all see with our own eyes, we are not in a recession.
Consumers are spending. Businesses are hiring. The unemployment rate is low. That doesn’t mean everything is good. Inflation is high. But that’s not a recession.
The Fed is committed to bringing inflation down. But to do so, they need us to swap one hardship for another. Less consumption for less inflation. But that’s not the only way. More supply—whether it’s more workers to hire or more stuff to buy—would reduce inflation too. That’s the better way but more uncertain and beyond the Fed.
The best would be if inflation came down and it was not due to the Fed. The worst would be if it were all due to the Fed. And in between is some mix of the two. Regardless inflation’s coming down. Recession or not. Preferably not.
So the path forward is not clear. We live in a world where previous assumptions have been replaced with uncertainty and rapid shifts in geopolitics. However, despite all these co-morbidities, I think that a prolonged period of unpredictability is what could eventually give the economy a heart attack.
Uncertainty about the future incurs a high cost for both people and businesses. Last month here in Chicago, the CME MSRI Prize of Innovative Quantitative Applications was awarded to Nancy Stokey, a distinguished professor of economics at the University of Chicago. In 2009 she wrote “The Economics of Inaction.” Here is a very brief summary of one of her theories:
In economic situations where action entails a fixed cost, inaction is the norm. Action is taken infrequently, and adjustments are large when they occur. Interest in economic models that exhibit ”lumpy” behavior of this kind has exploded in recent years, spurred by growing evidence that it is typical in many important economic decisions, including price setting, investment, hiring, durable goods purchases, and portfolio management.
We are indeed living in “lumpy” times which make it harder for both investors and companies to ignore sunk costs. It is also difficult to assess risk accurately enough to incur new expenditures. Volatility in equity prices, as measured by VIX is about twice as high as it was pre-Covid. All over the US employers are hitting the pause button. From Coinbase to Olive AI, a unicorn health IT company in Ohio, hiring freezes have begun for high-skilled jobs. Low-skilled jobs remain unfilled, with many citing health concerns as the reason for their withdrawal from the workforce.
Wall Street awaits CPI data which are to be released this morning. Median rents in the US, now more than $2000 a month, were not directly impacted by higher food and energy costs, supply chain disruptions, or interest rates. My guess is that landlords are making up for lost revenues during COVID, taking advantage of the fact that mortgage rates are increasing…due to Fed rate hikes. There is a lot of seepage in monetary policy.
Almost any business owner would agree that it is preferable to have higher taxes and expenses that are fixed rather than unpredictable inputs. The measures of inflation that can be affected by monetary policy are already trending downwards. Housing sales are slowing, and supply shocks are righting themselves, as Target’s inventory drawdown reveals. Corporate America is doing its job but is cautious.
One example: oil companies. Although their profits have rebounded since the dip in 2020 when the major energy firms lost tens of billions of dollars, they are not planning to increase investments. Why? In the face of higher prices and ESG investors who shun carbon fuel, they are also being targeted by politicians. Unsure of where this might lead, they are spending their money paying down debt and rewarding shareholders who stayed with them during the lean years. There is too much risk, and not enough policy support to entice them to make long-term investments.
So the central question is, will we see slower growth, or will we bump our heads on a nasty recession? This points to the biggest risk of all—policy mistakes which would not confine themselves to the US economy. An overcorrection by the Fed could have worldwide humanitarian ramifications, particularly in emerging markets. Forward guidance does not solve this.
Robert Solow was quoted in the New York Times in 1979 saying “To try effectively to wipe out hard core inflation by squeezing the economy is possible but disproportionately costly. It is burning down the house to roast the pig.”
We will see how markets react to what is expected to be a large increase in the CPI today. It could be that inflation is successfully tamped down by the real economy sooner than expected, that Janet Yellen was right in the end, and that the peak economic uncertainty that we are experiencing now is as fleeting as peak oil was years ago.
The Truth About Today’s Inflation
The conventional wisdom about inflation needs a course correction. Here’s why:The Bureau of Labor Statistics reports that the wages and total compensation of Americans working full-time at least kept pace with inflation from January through March. Based on what people tell government surveyors, median weekly earnings after inflation stabilized in the first quarter of 2022 after falling steadily through 2021.
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David W. Johnson
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Remarks at International Finance Forum 2022 Spring Meetings, April 27-28
Marsha Vande Berg
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U.S. Productivity Drops Most Since 1947, Driving Up Labor Costs
U.S. productivity dropped in the first quarter by the most since 1947 as the economy shrank, while labor costs surged and illustrated an extremely tight job market.
June 2022 NBER Working Paper
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While Covid deaths overwhelmingly afflict senior citizens, absolute numbers of non-Covid excess deaths are similar for each of the 18-44, 45-64, and over-65 age groups, with essentially no aggregate excess deaths of children. Mortality from all causes during the pandemic was elevated 26 percent for working-age adults (18-64), as compared to 18 percent for the elderly. Other data on drug addictions, non-fatal shootings, weight gain, and cancer screenings point to a historic, yet largely unacknowledged, health emergency.
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Steve Hanke and John Greenwood
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May 28, 2022 Financial Times
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Hass McCook, Academia.edu
To understand what drives Bitcoin’s energy use and emissions however, one must understand four key concepts: how Bitcoin works and incentivizes its miners, the nature of competition in the mining industry, the nature of mining hardware and innovation, and importantly, international energy and electricity markets and the differences between them. This paper will provide a thorough explanation of these concepts, as well as provide commentary on Bitcoin’s current state, and what the Bitcoin Mining Industry may potentially look like towards the end of the decade.
May 2022 / NBER Working Paper Series
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Rebecca Janßen, Reinhold Kesler Michael E. Kummer and Joel Waldfog
Using data on 4.1 million apps at the Google Play Store from 2016 to 2019, we document that GDPR induced the exit of about a third of available apps; and in the quarters following implementation, entry of new apps fell by half. We estimate a structural model of demand and entry in the app market. Comparing long-run equilibria with and without GDPR, we find that GDPR reduces consumer surplus and aggregate app usage by about a third. Whatever the privacy benefits of GDPR, they come at substantial costs in foregone innovation.
May 27, 2022 / Council on Foreign Relations
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May 3, 2022 / BBC
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April 19, 2022 / Twitter
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Provinces/municipalities down >30% between 2019 and 2021–Hubei down nearly 40%.
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