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Economy

The Three Biggest Mysteries About the U.S. Economy Right Now – The Atlantic

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The U.S. economy can’t be this weird forever. That’s what I keep telling myself, anyway. Eventually, I think, financial news will be boring again. Eventually, I pray, the U.S. economy won’t resemble some ever-morphing Rorschach blot. But after a year of shortages, a Great Resignation, and rising inflation, I’m still waiting for normalcy.

Here are three questions that get to the heart of what makes this moment so strange. Answering them, or at least attempting to answer them, could help indicate where things go in the second half of the year.

1. If gas prices are plummeting, why is inflation rising?

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In the past two weeks, we’ve seen all sorts of evidence of “disinflation”—a decline in the rate of inflation. Retailers including Target, Gap, and Bed Bath & Beyond say they’re swimming in merchandise that they’ll have to discount. Oil prices have plunged, and gasoline prices are now coming down fast. The cost of shipping goods from China is falling. Microchip inventory is rising, which should bring down the cost of electronics. The prices of commodities such as natural gas, wheat, lumber, and other raw materials are plummeting.

Falling prices sounds like we’ve reached peak inflation. But on Wednesday, the Bureau of Labor Statistics reported that annualized inflation had surged to 9.1 percent. That’s the largest increase since November 1981. This seems utterly confounding. Inflation is a measure of the growth in prices. If prices are going down, how can inflation be going up?

The optimistic possibility is that the great disinflation has only just begun, and it wasn’t captured by the most recent report. The government’s latest data cover the month of June. But all those suddenly falling prices—on goods, energy, chips, and materials—are stories from the very end of June and early July. Plausibly, inflation was surging for much of early June and then peaked just as the calendar flipped. That means we should expect next month’s report to be much better.

But as the writer Noah Smith argues, something stranger and more disturbing may be happening. Perhaps inflation keeps contradicting optimistic headlines because the Federal Reserve has lost its magic touch.

That’s conceivably what happened in the 1970s. The oil shock came and went, but inflation kept raging as the Federal Reserve’s interest-rate hikes and forecasts did little to stabilize prices. Ultimately Fed Chair Paul Volcker jacked up interest rates to 19.1 percent in the early 1980s to demonstrate how serious he was about crushing inflation. (By contrast, today’s federal-funds rate is still below 2 percent.)

For the last year, the dynamic between the Fed and the economy has been a bit like a classic scenario of a parent driving a car while noise inflation steadily rises from the backseat. “Knock it off, please,” the parent says. But the noise rises. “I said: Knock it off!” the parent repeats. And the kids just get louder. This is what it’s like for the Fed to lose credibility; small interest-rate hikes are met with accelerating price growth. The only way to beat this sort of inflation is for the person in the driver seat to do something dramatic to prove that the status quo is intolerable. If the Fed raises interest rates by a full percentage point in its next meeting, that will be a lot stronger than requesting a moment’s silence from the back seat. That’ll be more like doing a sharp U-turn, and speeding in the opposite direction until the kids promise not to speak louder than a whisper for another 35 years.

I really, really hope that our Great Disinflation moment is right around the corner. I don’t want the Fed taking a hard left and yanking up interest rates to crush the economy. But we can’t rule it out yet.

2. If jobs are growing, why is the economy shrinking? And if prices are rising, why are wages falling?

If the only economic statistic you followed was the monthly jobs report, you’d assume that the U.S. is booming. Two years ago in June, the unemployment rate was 11 percent—the highest since World War II. Today, it’s 3.6 percent—just 0.1 points away from being tied for the lowest unemployment rate since World War II. That’s a remarkable turnaround.

But if the only economic statistic you followed was GDP—and the Atlanta Fed’s unofficial GDPNow forecast—you might assume that the U.S. is in a recession. The economy contracted last quarter, and the Atlanta Fed now estimates that with the pullback in manufacturing, construction, and exports, GDP is still contracting by about 1 percentage point, annualized. Two consecutive quarters of negative growth is typically (but not always) a sign of a recession.

No economy this crummy has been so amazing for finding work; but also, no economy this good for finding work has ever been this crummy. The gap between GDP and employment is the highest on record—a smashing violation of Okun’s law, the rule that employment and growth tend to move up or down in lockstep.

I’m sorry if this mystery already seems impossibly convoluted, but there’s more. Rising inflation typically occurs alongside rising wage growth. But that’s not happening right now. Weekly earnings growth has been falling; adjusted for inflation, average weekly earnings have turned sharply negative.

In sum, jobs are up, but growth is down; and inflation is soaring, but wage growth is falling. Huh?

One explanation is that rising material costs—such as energy, lumber, and metals—have dramatically held back growth, even as jobs are plentiful. That might also explain why average hourly earnings are decelerating, while inflation is accelerating: Materials costs have gobbled up the rest.

A second possibility is that companies are responding chaotically to rapid changes in demand, which is creating a “bullwhip effect.” Bloomberg’s Joe Weisenthal described it this way:

Goods become scarce. Companies fear that they will be unable to have goods to sell. They start to over-order key components, just to be sure they can keep operating. This makes goods more scarce. Eventually the cycle turns. Everyone has ordered too much. Orders get slashed. Gluts emerge. Prices fall. You know the drill.

Many companies might be at a moment in the bullwhip cycle where inventory has piled up. So they’ve slashed their orders, without yet laying people off. If enough firms did this at the same time, you’d see output declining in an economy with low unemployment. And that’s exactly what we’ve got.

A third possibility is that productivity has declined in the past few months, perhaps because of some combination of COVID, work-from-home ennui, and the aftershocks of the Great Resignation. Here’s one scenario: Let’s say you own a restaurant. Every month during the Great Resignation, one-seventh of your workers quit. Now you’ve got almost all-new kitchen staff and waitstaff, and you can’t train them fast enough. The new chefs keep messing up your nightly specials. The new waiters keep dropping plates. Every week, somebody seems to get COVID. Yes, your restaurant is fully staffed. But are you working at full capacity? Not a chance!

The chief executive of Delta recently described his airline like a real-world version of this hypothetical restaurant. “Since the start of 2021, we’ve hired 18,000 employees,” he said. “A chief issue we’re working through is not hiring but a training and experience bubble, coupling this with the lingering effects of COVID.” If many companies are stuck in this chaos bubble, it would make sense that employment is strong but output is a bit of a mess. A lot of new workers just don’t really know what they’re doing right now, and companies don’t have the capacity to train them.

Finally, the economic data might just be wrong, or temporarily janky. I’m not a Shadowstats guy. I don’t think the BLS is lying, and I trust that government analysts are doing the best they can. But monthly statistics are subject to sharp revisions. Maybe we are in a moment of transition, where the data are simply not going to make sense for a bit.

3. If consumers are miserable, why is leisure spending on fire?

Americans seem to be having a grand old time. Leisure travel is so strong that airports can barely keep up. The movie-theater box office has already set several holiday-weekend records. Despite lingering COVID fears, hotel occupancy this summer is matching its 20-year average, and restaurants are packed.

But if you ask Americans how they’re feeling about the economy, you’d better bring a pack of tissues. Consumer sentiment has plunged to its lowest rate on record.

I’ve previously suggested that Americans have an everything is terrible, but I’m fine mentality about the economy. Asked about the state of the country, we’re lugubrious. “Things have never been worse,” we tell pollsters over and over. Asked about our own lives or finances, our mood lightens significantly.

But maybe I should give the American public a bit more credit. With plunging stock values and medium-term Treasuries, the market seems to be betting on a recession or something like it. Perhaps Americans are internalizing that message. Perhaps they intuitively sense that a recession is near, so they’re getting in their last thrills before the economy tips over.

Months from now, we may look back on the summer of 2022 and realize that this apparent weirdness was pretty self-explanatory, after all. We might look back and say:

America’s labor recovery was impressively swift because it coincided with an unsustainable boom in demand. Along with supply-chain challenges, this creation a classic surge in domestic inflation, with too much money chasing finite goods and services. The Federal Reserve responded by turning up interest rates to crush demand. And this predictably caused a downturn in spending and investment. In the handoff from boomflation to recession, gas prices fell before inflation, growth fell before employment, and sentiment plunged before spending. In the end, it all went in the same direction: down.

What I’m describing here is a recession. And I don’t like how plausible the story sounds. If this is the most likely alternative to the everything-is-weird economy, then I say: Keep the American economy weird.


Want to discuss more? Join me for Office Hours August 9 at 11 a.m. ET. I’ll continue to hold office hours on the second Tuesday of each month. Register here and reply to this email with your questions about progress or the abundance agenda. If you can’t attend you can watch a recording any time on The Atlantic’s YouTube channel.

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Economy

Canadian economy starts the year on a rebound with 0.6 per cent growth in January – CBC.ca

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The Canadian economy grew 0.6 per cent in January, the fastest growth rate in a year, while the economy likely expanded 0.4 per cent in February, Statistics Canada said Thursday.

The rate was higher than forecasted by economists, who were expecting GDP growth of 0.4 per cent in the month. December GDP was revised to a 0.1 per cent contraction from zero growth initially reported.

January’s rise, the fastest since the 0.7 per cent growth in January 2023, was helped by a rebound in educational services as public sector strikes ended in Quebec, Statistics Canada said.

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WATCH | The Canadian economy grew more than expected in January: 

Canada’s GDP increased 0.6% in January

41 minutes ago

Duration 2:20

The Canadian economy grew 0.6 per cent in January, the fastest growth rate in a year, while the economy likely expanded 0.4 per cent in February, Statistics Canada says.

“The more surprising news today was the advance estimate for February,” which suggested that underlying momentum in the economy accelerated further that month, wrote CIBC senior economist Andrew Grantham in a note.

Thursday’s data shows the Canadian economy started 2024 on a strong note after growth stalled in the second half of last year. GDP was flat or negative on a monthly basis in four of the last six months of 2023.

More time for BoC to assess

The strong rebound could allow the Bank of Canada more time to assess whether inflation is slowing sufficiently without risking a severe downturn, though the central bank has said it does not want to stay on hold longer than needed.

Because recent inflation figures have come in below the central bank’s expectations, “it appears that much of the growth we are seeing is coming from an easing of supply constraints rather than necessarily a pick-up in underlying demand,” wrote Grantham.

“As a result, we still see scope for a gradual reduction in interest rates starting in June.”

WATCH | Bank of Canada left interest rate unchanged earlier this month: 

Bank of Canada leaves interest rate unchanged, says it’s too soon to cut

22 days ago

Duration 1:56

The Bank of Canada held its key interest rate at 5 per cent on Wednesday, with governor Tiff Macklem saying it was too soon for cuts. CBC News speaks with an economist and a couple who might be forced to sell their home if interest rates don’t come down.

The central bank has maintained its key policy rate at a 22-year high of five per cent since July, but BoC governors in March agreed that conditions for rate cuts should materialize this year if the economy evolves in line with its projections.

The bank in January forecast a growth rate of 0.5 per cent in the first quarter, and Thursday’s data keeps the economy on a path of small growth in the first three months of 2024. The BoC will release new projections along with its rate announcement on April 10.

Growth in 18 out of 20 sectors

Growth in January was broad-based, with 18 of 20 sectors increasing in the month, StatsCan said. The agency said that real estate and the rental and leasing sectors grew for the third consecutive month, as activity at the offices of real estate agents and brokers drove the gain in January.

Overall, services-producing industries grew 0.7 per cent, while the goods-producing sector expanded 0.2 per cent.

In a preliminary estimate for February, StatsCan said GDP was likely up 0.4 per cent, helped by mining, quarrying, oil and gas extraction, manufacturing and the finance and insurance industries.

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Yellen Sounds Alarm on China ‘Global Domination’ Industrial Push – Bloomberg

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US Treasury Secretary Janet Yellen slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

“There is no country in the world that subsidizes its preferred, or priority, industries as heavily as China does,” Yellen said in an interview with MSNBC Wednesday — highlighting “massive” aid to electric-car, battery and solar producers. “China’s desire is to really have global domination of these industries.”

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Opinion: The future economy will suffer if Canada axes the carbon tax – The Globe and Mail

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Open this photo in gallery:

Poilievre holds a press conference regarding his “Axe the Tax” message from the roof a parking garage in St. John’s on Oct.27, 2023.Paul Daly/The Canadian Press

Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.

The carbon tax is the single most effective climate policy that Canada has. But the tax is also an important industrial strategy, one that bets correctly on the growing need for greener energy globally and the fact that upstart Canadian companies must rise to meet these needs.

That is why it is such a shame our leaders are sacrificing it for political gains.

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The fact that carbon taxes address a key market failure in the energy industry – polluters are not incentivized to consider the broader societal costs of their pollution – is so well understood by economists that an undergraduate could explain its merits. Experts agree on the effectiveness of the policy for reducing emissions almost as much as they agree on climate change itself.

It is not just that pollution is bad for us. That a patchwork of policies supporting clean industries is proliferating across the United States, China and the European Union means that Canada needs its own hospitable ecosystem for clean-energy companies to set up shop and eventually compete abroad. The earlier we nurture such industries, the more benefits our energy and adjacent sectors can reap down the line.

But with high fixed costs of entry and non-negligible technological hurdles, domestic clean energy is still at a significant disadvantage relative to fossil fuels.

A nuclear energy company considering a reactor project in Canada, for example, must contend with the fact that the upfront investments are enormous, and they may not pay off for years, while incumbent oil and gas firms benefit from low fixed costs, faster economies of scale and established technology.

The carbon tax cannot address these problems on its own, but it does help level the playing field by encouraging demand and capital to flow toward where we need it most. Comparable policies like green subsidies are also useful, but second-best; they weaken the government’s balance sheet and in certain cases can even make emissions worse.

Unfortunately, these arguments hold little sway for Pierre Poilievre’s Conservatives, who called for a vote of no-confidence on the dubious basis that the carbon tax is driving the cost-of-living crisis. Nor is it of much consequence to provincial leaders, who have fought the federal government hard on implementing the tax.

Not only is this attack a misleading characterization of the tax’s impact, it is also a deeply political gambit. Most expected the vote to fail. Yet by centering the next election on the carbon tax debate, Mr. Poilievre is hedging against the possibility of a new Liberal candidate, one who lacks the Trudeau baggage but still holds the line on the tax.

With the reality of inflation, a housing crisis and a general atmosphere of Trudeau-exhaustion, Mr. Poilievre has plenty of ammunition for an election campaign that does not leave our climate and our clean industries at risk. The temptation to do what is popular is ever-present in politics. Leadership is knowing when not to.

Nor are the Liberals innocent on this front. The Trudeau government deserves credit for pushing the tax through in the first place, and for structuring it as revenue-neutral. But the government’s attempt to woo Atlantic voters with the heating oil exemption has eroded its credibility and opened a vulnerable flank for Conservative attacks.

Thus, Canadian businesses are faced with the possibility of a Conservative government which has promised to eliminate the tax altogether. This kind of uncertainty is a treacherous environment for nascent companies and existing companies on the precipice of investing billions of dollars in clean tech and processes, under the expectation that demand for their fossil fuel counterparts are being kept at bay.

The tax alone is not enough; the government and opposition need to show the private sector that it can be consistent about this new policy regime long enough for these green investments to pay off. Otherwise, innovation in these much-needed technologies will remain stagnant in Canada, and markets for clean energy will be dominated by our more forward-thinking competitors.

A carbon tax is not a panacea for our climate woes, but it is central to any attempt to protect a rapidly warming planet and to develop the right businesses for that future. We can only hope that the next generation of Canadian leaders will have a little more vision.

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