October 7, 2022

August PCE Inflation Data Shows Prices Are Stubbornly High

The data underlined the challenging path the Fed faces as it tries to guide the U.S. economy toward slower inflation. Both the economy and price pressures have retained momentum, even as central bankers raise interest rates to try to cool demand. As a result, the Fed has become steadily more aggressive in its efforts to constrain spending and temper inflation, and it is likely to keep raising rates and keep them elevated for a while.

“Inflation is very high in the United States and abroad, and the risk of additional inflationary shocks cannot be ruled out,” Lael Brainard, the Fed’s vice chair, said in a speech on Friday. She later added that policymakers were “committed to avoiding pulling back prematurely.”

The Fed has lifted interest rates five times this year, including three unusually large three-quarter-point increases, and Ms. Brainard reiterated that it would need to restrict the economy for some time to make sure inflation was back under control. But she also emphasized that future rate increases would depend on incoming data, suggesting that the Fed will keep an eye on the economy as it slows down and calibrate its moves accordingly.

Economists remain hopeful that healing supply chains, a slowing housing market, cooling consumer demand and a moderating labor market will combine to pull inflation lower in the months ahead. Spending on goods fell in August for the second month in a row, which should ease pressure on factories and shipping routes, and overall spending may slow further as consumers draw down the extra savings they built up earlier in the pandemic.

But Russia’s war in Ukraine poses a constant risk to the global supply of food and oil, and some industries, including automobiles, remain severely disrupted. Rents and other service costs have been rising sharply, and labor shortages spanning many industries have pushed wages up, which could feed through to higher prices.

Article source: https://www.nytimes.com/2022/09/30/business/economy/inflation-fed.html

U.S. Economy Weaker Than Thought in Year’s First Half, by One Measure

Taken together, the two measures suggest economic growth was at best anemic in the first half of the year. At worst, the economy had been shrinking for two consecutive quarters, a common, though unofficial, definition of a recession. An average of the two measures, which some economists consider more reliable than either individual figure, shows that output shrank slightly in the first half of the year.

The conflicting signals sent by the two measures of output in recent quarters had been something of an economic mystery because, in theory, the two indicators should be identical. G.D.P. measures the value of all the goods and services produced and sold in the country; the lesser-known gross domestic income measures all the money earned by individuals, businesses and other organizations. Because one person’s spending is someone else’s income, the two figures should add up to the same amount.

In practice, the two measures rarely align perfectly because they are derived from different data sources. Recently, however, they diverged sharply, which government statisticians attributed in part to the big shifts in economic activity caused by the pandemic, as well as difficulty accounting for the huge aid programs enacted to combat it. Before the latest revisions, government data showed gross domestic income as $773 billion larger than gross domestic product in the second quarter of this year, a gap of nearly 4 percent.

The updated data released Thursday helped narrow the gap to 1.3 percent. Gross domestic income was revised downward both last year and this year, mostly because workers’ earnings grew less than previously believed. Gross domestic product was revised upward in 2020 and 2021, mostly because of stronger consumer spending, especially on services, as well as increased exports.

Those upward revisions to G.D.P. years mean that the recovery, taken as a whole, looks stronger than earlier figures suggested. They indicate that G.D.P. returned to its prepandemic growth path at the end of last year, a remarkably rapid recovery from the deep pandemic recession.

Article source: https://www.nytimes.com/2022/09/29/business/economy/economy-gross-domestic-product.html

Britain’s Gamble on Tax Cuts has Economists Warning of Past Mistakes

Ms. Truss has been cheered on by conservative champions of supply-side economics in the United States, including many of the chief backers of Mr. Trump’s tax cuts. Stephen Moore, who served as an outside economic adviser to the former president, praised Ms. Truss for her willingness “to challenge the reigning orthodoxy by sharply cutting taxes to boost growth,” calling the package “a gutsy and sound policy decision.”

“By far the most important change is the reduction in the top income tax rate from 45 percent to 40 percent,” Mr. Moore wrote. “This will bring jobs, capital and businesses back to the U.K.”

A host of critics, though, have lined up to denounce the tax package, warning it will provoke economic war with the Bank of England and risk a damaging combination of economic contraction and soaring prices, which could in turn hurt the global recovery.

The impact of previous tax cuts, including those signed into law by Mr. Trump in 2017, provides fodder for those critiques.

Much as Ms. Truss has proposed to do, Mr. Trump reduced tax rates for income earners across the spectrum, including those in the highest bracket. He also cut a variety of business tax rates — a contrast with the British plan, which cancels a planned increase in corporate taxes. Mr. Trump said his full package of cuts would jump-start economic activity by encouraging businesses to invest, hire and raise wages.

Yet initial evidence, which includes studies from I.M.F. economists, suggests Mr. Trump’s cuts did not deliver the steep gains in investment and productivity that conservatives had promised. If such gains came to pass in Britain, they could help counter inflation there.

Instead, the cuts increased consumer spending, an outcome that helped temporarily expand growth in the United States, the I.M.F. found, but which could be dangerous in a high-inflation environment.

Article source: https://www.nytimes.com/2022/09/29/us/politics/tax-cuts-uk.html

Why the British Pound Continues to Sink

Over the centuries, British leaders have often gone to extraordinary lengths to protect the pound’s value, viewing its strength as a sign of the country’s economic power and influence. King Henry I issued a decree in 1125 ordering that those who produced substandard currency “lose their right hand and be castrated.”

In the 1960s, the Labour government under Harold Wilson so resisted devaluing the pound — then set at a fixed rate of $2.80, high enough to be holding back the British economy — that he ordered cabinet papers discussing the idea to be burned. In 1967, the government finally cut its value by 14 percent to $2.40.

Other economic crises thrashed the pound. In the 1970s, when oil prices skyrocketed and Britain’s inflation rate topped 25 percent, the government was compelled to ask the International Monetary Fund for a $3.9 billion loan. In the mid-1980s, when high U.S. interest rates and a Reagan administration spending spree jacked up the dollar’s value, the pound fell to a then record low.

The pound’s dominance has been waning since the end of World War II. Today, the global economy is experiencing a particularly tumultuous time as it recovers from the aftermath of the coronavirus pandemic, supply chain breakdowns, Russia’s invasion of Ukraine, an energy shortage and soaring inflation.

As Richard Portes, an economics professor at London Business School, said, currency exchanges have enormous swings over time. The euro was worth 82 cents in its early days, he recalled, and people referred to it as a “toilet paper” currency. But by 2008, its value had doubled to $1.60.

What might cause the pound to revive is not clear.

The Truss government’s economic program has forcefully accelerated the pound’s slide — the latest in a series of what many economists consider egregious economic missteps that peaked with Brexit.

Much depends on the Truss government.

“The plunge in the pound is the result of policy choices, not some historical inevitability” said Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. “Whether this is a new, grim era or just an unfortunate interlude depends on whether they reverse course or are kicked out at the next election.”

Article source: https://www.nytimes.com/2022/09/28/business/economy/uk-pound-history.html

Protests in Prague Signal a Troubled Winter Ahead in Europe

“They may think they have no other place to express their displeasure,” he said.

The far right is having a resurgence across Europe. This week, the Brothers of Italy party won the largest share of votes in Italian elections. And in Sweden, a group founded by neo-Nazis and skinheads looks set to become the largest party in the next government.

In Germany, the far-right Alternative for Germany, known by its German acronym AfD, has risen to about 15 percent in public polls and is planning protests in Berlin next month.

“People are not even using heating yet — that is still to come,” said Mr. Quent. “And, nevertheless, the AfD already had a visible upswing. This is, indeed, the scenario I have feared.”

In the Prague protest, many who joined bristled at the idea of being called fringe or far right.

“It’s not only energy prices rising — grocery prices, too. I am raising my granddaughter, and I am worried,” said Miroslav Kusmirek, who came from a town 30 miles outside the capital to protest on a rainy afternoon. “I see companies now struggling and I worry; if the company that employs me collapses, so will I.”

As he spoke, a speaker onstage from Germany’s AfD, Christine Anderson, was shouting to loud cheers, “You no longer live in a democracy!”

For energy experts, the populist surge adds yet another knot in the tangle of problems Europe is grappling with. On top of Russia’s cutting gas, France’s nuclear plants have been at half capacity because of maintenance issues, and a severe drought has hampered Germany’s ability to import coal over the summer.

Article source: https://www.nytimes.com/2022/09/28/world/europe/prague-protests-economy.html

To Calm Markets, Bank of England Will Buy Bonds on ‘Whatever Scale Is Necessary’

The British government’s sweeping fiscal plan, presented without an independent fiscal and economic assessment, has sent investors fleeing from British assets. The pound fell to a record low against the U.S. dollar on Monday, and traders suspected that the central bank would be forced to raise rates quickly, which pushed up short- and long-term borrowing costs.

The speed of the rise in bond yields had disrupted Britain’s mortgage market, with some lenders pulling offers on new mortgages because they had become too difficult to price.

“A decision by the government to scrap some of the tax cuts, or to cut spending sharply, would help to alleviate the stress in” currency and bond markets, Samuel Tombs, an economist at Pantheon Macroeconomics, wrote in a research note. “But its actions to date have eroded confidence among global investors, which cannot be easily restored. Accordingly, a painful recession driven by surging borrowing costs lies ahead.”

The market turmoil and the central bank’s intervention reveal the extent to which the government’s plans are at odds with the bank’s monetary policy goals. The government is trying to quickly generate economic demand, while the bank is trying to cool it to lower inflation.

On Tuesday, Huw Pill, the chief economist of the Bank of England, said the government’s fiscal plans would be met with a “significant” response by officials at the Bank of England, who are scheduled to meet again in early November.

Just last Thursday, the central bank said it would initiate its plan to sell bonds back to the market as it tried to end the long era of easy money in its fight against inflation. It had insisted there would be a “high bar” for the bank to deviate from the plan, which would over the next year reduce its holdings of bonds by £80 billion through sales and redemptions, to £758 billion. On Wednesday, the bank said it was postponing the start of sales until the end of October.

Article source: https://www.nytimes.com/2022/09/28/business/economy/bank-of-england-bonds.html

Three Charts That Illustrate America’s Political and Economic Malaise

Galloway doesn’t dispute any of that, but he chalks up the wage-productivity gap to a few fuzzier factors.

No. 1, he says, was that “we just decided that the consumer was king.”

In his estimation, the shift from an economy driven by manufacturing to one powered by consumers has had the pernicious effect of reorienting America’s business sector around catering to disgruntled, entitled customers.

He recalled how, as a child, his family would take its busted television to the repair shop and foot the bill to fix it. That’s no longer possible or even practical in most cases, as globalization and automation have driven the price of electronics so low that it usually makes more sense to just replace your flat-screen when it goes on the fritz.

Now, he said, “you expect a nice man in a brown suit to come take it and give you a new one, and a handwritten apology note from a customer service.”

To demonstrate the growing power of consumers, Galloway charts the number of goods carried each year by shipping containers, which increased from 102 million metric tons in 1980 to 1.83 billion metric tons as of 2017.

Factor No. 2 is what Galloway calls “the gross idolatry of ‘innovators,’” which has exacerbated economic inequality by heaping huge rewards on tech entrepreneurs, while harming working people.

Time magazine — which is owned by Mark Benioff, the founder of the customer service software company Salesforce — regularly features Silicon Valley titans on the cover of its annual “Person of the Year” issue, for instance.

Article source: https://www.nytimes.com/2022/09/27/us/politics/scott-galloway-economy.html

The Long Road to Driverless Trucks

Restricting these trucks to the highway also plays to their strengths. “The biggest problems for long-haul truckers are fatigue, distraction and boredom,” Mr. Rodrigues explained on a recent afternoon as one of his company’s trucks cruised down a highway in Northern California. “Robots don’t have a problem with any of that.”

It’s a sound strategy, but even this will require years of additional development.

Part of the challenge is technical. Though self-driving trucks can handle most of what happens on a highway — merging into traffic from an on-ramp, changing lanes, slowing for cars stopped on the shoulder — companies are still working to ensure they can respond to less common situations, like a sudden three-car pileup.

As he continued down the highway, Mr. Rodrigues said his company has yet to perfect what he calls evasive maneuvers. “If there is an accident in the road right in front of the vehicle,” he explained, “it has to stop itself quickly.” For this and other reasons, most companies do not plan on removing safety drivers from their trucks until at least 2024. In many states, they will need explicit approval from regulators to do so.

But deploying these trucks is also a logistical challenge — one that will require significant changes across the trucking industry.

In shuttling goods between Dallas and Atlanta, Kodiak’s truck did not drive into either city. It drove to spots just off the highway where it could unload its cargo and refuel before making the return trip. Then traditional trucks picked up the cargo and drove “the last mile” or final leg of the delivery.

In order to deploy autonomous trucks on a large scale, companies must first build a network of these “transfer hubs.” With an eye toward this future, Kodiak recently inked a partnership with Pilot, a company that operates traditional truck stops across the country. Today, these are places where truck drivers can shower and rest and grab a bite to eat. The hope is that they can also serve as transfer hubs for driverless trucks.

“The industry can’t afford to build this kind of infrastructure from scratch,” said Kodiak’s chief executive, Don Burnette. “We have to find ways of working with the existing infrastructure.”

Article source: https://www.nytimes.com/2022/09/28/business/driverless-trucks-highways.html

Inflation Has Hit Tenants Hard. What About Their Landlords?

Geography also matters. Even among the largest landlords, those with a presence in Sun Belt cities such as Miami, Tampa, Nashville and Phoenix saw far faster rent growth than high-cost coastal markets like San Francisco, where rents fell substantially during the pandemic lockdowns as white-collar workers fled for remote locations.

Mid-America Apartment Communities, a publicly traded owner of 101,000 units concentrated in Georgia, Texas, Florida and North Carolina, has benefited from all these trends. Its new tenants make $91,319 on average and are in their mid-30s. In the first half of the year, its new and renewed leases increased 17.1 percent over their previous rates, driving the largest increase in its dividend per share in decades.

“We feel very good about the opportunity for pricing going forward and still believe now is the time to push rate versus volume,” said Tom Grimes, the company’s chief operating officer, explaining to investors on a quarterly earnings call that he’d rather raise prices than worry about turnover, which remains low. “Demand is good, and our priority is for growing rents.”

It’s harder to track the finances of privately owned real estate portfolios, which can range from a few hundred to a few thousand units — midsize landlords, in relative terms. But interviews suggest that even if they remain profitable, rising expenses have weighed more heavily on their bottom lines.

Take Swapnil Agarwal, whose Houston-based Nitya Capital has grown swiftly to encompass 20,000 units. He says insurance premiums, payroll costs and maintenance have combined to push his expenses to $7,000 per unit this year from $5,500 in recent years.

“It’s ironic, because our net operating margins have not gone up — actually, they’ve gone down,” Mr. Agarwal said. The picture may improve as he renews leases at market rates. “Yes, the rent growth is there,” he said, “but it has to sustain there for a while because of the costs going up.”

Many midsize landlords are also in the business of acquiring, renovating and building apartments. Rising interest rates have made that much more difficult.

Article source: https://www.nytimes.com/2022/09/27/business/economy/landlords-rent-inflation.html

Strong Dollar Is Good for the US but Bad for the World

“You can see these very pronounced negative effects of a stronger dollar,” said Maurice Obstfeld, an economics professor at the University of California, Berkeley, and an author of the study.

Then there is a pile-on effect. Even in countries where inflation is not as high, central banks feel pressure to raise interest rates to bolster their currencies and prevent import prices from skyrocketing. Last week, Argentina, the Philippines, Brazil, Indonesia, South Africa, the United Arab Emirates, Sweden, Switzerland, Saudi Arabia, Britain and Norway raised interest rates.

Despite the pain a strong dollar is causing, most economists say that the global outcome would be worse if the Fed failed to halt inflation in the United States.

At the same time, the sweep of rising interest rates around the globe is causing concerns that central bankers might move too far, too fast. The World Bank warned this month that simultaneous interest rate increases are pushing the world toward a recession and developing nations toward a string of financial crises that would inflict “lasting harm.”

Clearly, the Fed’s mandate is to look after the American economy, but some economists and foreign policymakers argue it should pay more attention to the fallout its decisions have on the rest of the world.

In 1998, Alan Greenspan, a five-term Fed chair, argued that “it is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.”

Article source: https://www.nytimes.com/2022/09/26/business/economy/us-dollar-global-impact.html