THE BIG DEBATE…

Alan Blinder, former vice chairman of the Federal Reserve (1994-96) has no worries other than virus-related. Enjoy the boom!

Welcome to Joe Biden’s Boom Economy  The economy is recovering at a rapid clip, thanks in large part to a $5 trillion infusion from the feds.

(…) Add up the pieces and you get roughly $5 trillion in federal fiscal support, or about 23% of GDP. That enormous fiscal effort kept millions of families afloat, kept people in their homes, saved many businesses from failure, and prevented the horrible disease from bringing on Great Depression 2.0.

Because of the enormous influx of federal dollars, American households are sitting on a huge hoard of unspent money. Before the pandemic, American consumers were saving 7.5% of their disposable income—a typical figure. During 2020, the saving rate soared to 16.3%—a rate normally associated more with Singapore than the U.S. The difference translates into nearly $1.4 trillion in excess saving.

And don’t forget about monetary policy. The Federal Reserve fired all its weapons at the Covid recession, the most obvious of which was dropping interest rates to the floor. Amazingly, the interest rate cuts worked. After violent but brief downward hiccups, Americans went back to buying motor vehicles and houses despite the pandemic. Spending in those two categories actually rose 6.3% and 14.3%, respectively, over the four quarters of 2020. Never bet against the American consumer.

Yes, I am painting a rosy picture—of a recession that is gone and the beginnings of a boom. Could something go wrong? Sure. Here are four worries.

First, the battle between the variants and the vaccines could take a turn for the worse, with the virus winning. I’m no expert in epidemiology, but the experts seem to think the vaccines are likely to prevail. The main question seems to be how much help the virus gets from vaccine resistance and irresponsible behavior.

Second, enormous budget deficits spell a soaring national debt. Some observers wonder how high the debt can go before the world’s investors start demanding higher interest rates on U.S. Treasurys. It’s a fair question. But so far, so good.

Third, a few economists worry that fiscal stimulus combined with extraordinarily easy money will lead to inflation—and then to a clampdown by the Fed. Count this as possible, but not likely.

Finally, some conservative economists—and many Republican members of Congress—have made their usual claim: that tax increases will flatten the economy, or worse. Those predictions have proved wrong in the past. Bet against them.

Taken as a whole, the worry list doesn’t seem all that worrisome. Enjoy the Biden boom. (WSJ)

Greg Ip worries about wages:

The Job Market Is Tighter Than You Think Solid wage growth and unfilled openings point to much less slack than after previous recession

(…) sign of a tightening labor market: employers having trouble staffing up. In October 2009, businesses contacted for the Fed’s beige book, an anecdotal survey of economic conditions, overwhelmingly described the labor market as weak and wage pressures as subdued. By contrast, this month’s beige book reported shortages of drivers; entry-level, low-wage and skilled workers; child-care and information-technology staff; specialty trades; and nurses. “A homebuilder related that a landscaper had hired 20 laborers in early February and none showed up for work,” the latest beige book said. “One restaurant had begun offering $1,000 if workers stayed for at least 90 days.”

(…) job vacancy rates are above pre-pandemic levels in most sectors, even leisure and hospitality. (…)

The 2008-2009 financial crisis wiped out wealth and dried up credit. That sapped demand for goods and services as consumers stopped spending, and for workers as employers stopped hiring. By contrast, the pandemic clobbered both demand for workers as businesses closed, and the supply as workers withdrew to look after their children or their health.

As businesses reopen and stimulus checks juice sales, the demand for workers is now recovering, but the supply of workers, not so much. Adjusted for population growth, the labor force—people working or looking for work—is roughly five million smaller than before the pandemic.

Only a small share of those labor market dropouts want a job. Covid-19 is keeping most of the others out of the job market. A Census Bureau survey in late March found that 2.6 million people weren’t working because they were sick or caring for someone who was, and 4.2 million were afraid of catching or spreading the virus. (The two groups might overlap.) Indeed, fear might be the single most important difference between this recession and its predecessors. Millions are also caring for children, but it wasn’t clear how many were because of Covid-19 closures. (…)

All in all, while unemployment is indeed elevated, the job market isn’t as “loose” as the 8.4 million shortfall suggests. This partly undercuts the rationale for the aggressive fiscal and monetary stimulus injected into the economy: to fuel spending that soaks up all of those out-of-work people. Many simply aren’t available to be hired. (…)

But what if workers are slow to return? As stimulus-stoked demand for labor meets stubbornly reduced supply, the result should be even faster wage gains for those who do work, and one more reason to worry about inflation.

The NYT adds its support:

Welcome to the YOLO Economy Burned out and flush with savings, some workers are quitting stable jobs in search of postpandemic adventure.

(…) If “languishing” is 2021’s dominant emotion, YOLOing may be the year’s defining work force trend. A recent Microsoft survey found that more than 40 percent of workers globally were considering leaving their jobs this year. Blind, an anonymous social network that is popular with tech workers, recently found that 49 percent of its users planned to get a new job this year.

“We’ve all had a year to evaluate if the life we’re living is the one we want to be living,” said Christina Wallace, a senior lecturer at Harvard Business School. “Especially for younger people who have been told to work hard, pay off your loans and someday you’ll get to enjoy your life, a lot of them are questioning that equation. What if they want to be happy right now?” (…)

Disillusioned workers with money to spare have always gone soul-searching. And it’s possible that some of these YOLOers will end up back in stable jobs if they spend through their savings, or their new ventures fizzle. But a daredevil spirit seems to be infecting even the kinds of risk-averse overachievers who typically cling to the career ladder.

In part, that’s because more people than ever can afford to take a risk these days. Stimulus checks, enhanced unemployment benefits and a stock market boom have given many workers bigger safety nets. Many sectors now face severe labor shortages, meaning that workers in those fields can easily find new jobs if they need them. (…)

And Axios feeds the concerns:

Eateries from Miami to Martha’s Vineyard to Los Angeles are facing the same problem ahead of summer: not enough workers, Axios’ Erica Pandey reports. Millions of restaurants are hiring all at once, and — after a deadly pandemic — the jobs of waiters, cooks, and hosts seem more dangerous than they ever have before. The pandemic wiped out 2.5 million restaurant jobs and forced more than 100,000 eateries to shutter. And now the ones that made it through 2020 can’t find staffers.

We are in a world where synchronized disruptions meet synchronized stimulation

Supply delays hit unprecedented levels, and look set to get worse

(…) As government stimulus seeks to fuel a hyper recovery and the world economy accelerates over the rest of this year, the pressures on supply chains are increasing and disruptions are likely to grow as we head into summer. With stimulus dollars flowing, the pressures will increase as consumers come out of lockdowns with pent-up demand as well as a lot of liquidity — the household savings rate is now 18% compared to the normal 7%. (…)

The impact can be measured in trade and shipping costs. Containerized shipping to the West Coast was 30% higher in February 2021, over 2020, and shipping rates from Asia to the East Coast, including surcharges, are up as much as five times over last year. (…)

IHS Markit estimates that this [chip] shortage, at least for the auto industry, will persist into next year. (…) IHS Markit estimates that over one million fewer light vehicles will have been produced in the first quarter of 2021 because of semiconductor shortages, and the developing second quarter picture sees an increase to 702,000 units up from 600,000 units a week ago. Supplies of semi-conductors are likely to stabilise only in the fourth quarter, with additional supply, which could compensate for volume lost in the first half of the year, being delayed until early 2022.

BTW: From Goldman Sachs:

While semiconductors account for only 0.3% of US output, they are an important production input to 12% of GDP. For example, the touch screens, GPS, and smart technology in today’s new cars all require computer chips, and the shortage appears set to reduce auto production by 2-6% this year.

We estimate the economy-wide effects of the shortage by modeling the production functions of the 169 US industries that embed semiconductors into their products. We assume a 20% supply shortfall that lasts three quarters, based on East Asian export data and on company commentary. Some computer chips have no available substitute, and if output of every product that uses chips were to decline proportionately, the drag on 2021 GDP would be around 1%. But in practice the drag will likely be smaller, because chips will be allocated to the highest-value uses and because some firms will find ways to reconfigure production (modify designs in order to swap in available chips, produce nearly-finished products and store them until chips becomes available, or simply produce other products). As a result, we think a downside risk of ½pp is more realistic if firms find themselves unable to adapt.

Back to Markit:

[Then there is the] widespread shortage of plastic materials that are used to make such things as furniture, mattresses, and car seats. Alternative supplies that might be brought in from Asia are stuck in the same Pacific maritime traffic jam. No flexible foam means further shutdowns in auto plants. With fewer car seats, fewer cars to go to dealers. (…)

The interconnected pressure on supply chains is increasing as the economic recovery gains pace. Manufacturing of all kinds will be hampered by shortages in the months ahead. Port congestion will disrupt the complex flows of auto components. Trucking, which picks up the containers at ports, is stretched to the limit in the United States. (…)

The global supply chains have been a great engine of economic growth, indeed essential to the performance of the world economy. But they are now strained in a way that has never happened before.

• Ford Prolongs Shutdowns at Several U.S. Plants Due to Chip Shortage The auto giant is planning more downtime at five North American factories due to a global semiconductor shortage, further disrupting output of a popular SUV and the F-150 pickup.

(…) The Dearborn, Mich., auto maker said Wednesday that factories in Chicago, suburban Detroit and Kansas City, Mo., will be idled for an additional two weeks, extending the closures through May 14. An SUV plant in Ontario will also take an extra week of downtime in early May.

The latest shutdowns further curb production of the Explorer full-size SUV and Transit vans. Output of the F-150 also will remain limited. Work resumed Monday at Ford’s truck plant near its headquarters in suburban Detroit after a two-week pause, but production was halted at its second pickup plant, in Kansas City last week, and that site will remain down through May 10. (…)

Ford also said Wednesday a heavy-duty truck plant near Cleveland will continue to produce only select models through mid-May. It also announced additional downtime and altered schedules at several factories in Europe. (…)

Ford estimated in February that the disruption from the chip shortage could hurt operating profit by $1 billion to $2.5 billion this year. The company is expected to update investors when it reports first-quarter earnings next week. (…)

BTW: “The average new-car price in March was 9.3% higher than a year ago, while used cars have gotten 14% more expensive, according to data from Edmunds.” (WSJ)

So, we do have goods inflation, possibly transitory:

But the NY Fed is not worried, qualifying Blinder’s “$1.4 trillion in excess saving” as “not excessive”!

“Excess Savings” Are Not Excessive

(…) there is no doubt that households saved more in the past year than they would have in a world without the pandemic. But is there anything “excessive” about the savings that they have thus accumulated? Are these moneys significantly different from the other $130 trillion in net worth that U.S. households already own, in a way that might lead them to be spent faster than other components of wealth? There are at least three reasons to think that the answer to this question is no.

Excess savings are the accounting counterpart of “extra” government debt. According to the principles of national income accounting, the flow of private saving (by households and businesses) must be channeled to one of three uses. It can finance investment, be lent abroad, or lent to the government. In 2020, the U.S. government spent roughly $2 trillion to fight the COVID-19 recession, most of it financed with debt. The $1.6 trillion in “excess savings” is the accounting counterpart of this increase in government borrowing.

As is often the case with accounting identities, this observation has limited economic implications. It does not reveal why households accumulated the “excess savings,” nor whether they will spend them once the economy fully re-opens. Nonetheless, it helps us to consider them under a different light—not as “extra” resources ready to be spent, but as the flip side of the extraordinary fiscal effort to fight the COVID-19 pandemic.

Excess savings are mostly held by…savers. One reason why many economists do not associate the exceptional increase in government debt over the past year with an imminent explosion in aggregate demand—even though they might worry about it for a host of other reasons—is the idea that government debt is money that citizens owe to themselves. As such, it would not represent “net wealth” that is ready to be spent. In economics jargon, this idea is known as Ricardian Equivalence. According to this proposition, public transfers financed with government debt do not affect consumption because households save them to pay for the increase in taxes that will eventually be necessary to repay that debt. If Ricardian Equivalence held, the marginal propensity to consume out of debt-financed transfers would be zero, and the resulting savings would never be spent.

Ricardian Equivalence is the kind of theoretical benchmark that economists love, but it clearly does not hold in practice. In fact, many U.S. families did spend a significant share of the checks and other income support that they received during the pandemic. According to available estimates, this share is around one-third on average. The rest was used to pay down debt (also about one-third) or otherwise saved. It is hard to know exactly who holds these savings, but it seems reasonable to assume that they are individuals and families with a bit of a buffer in their budgets—and whose consumption decisions are therefore less sensitive to their immediate economic circumstances.

This is presumably what allowed them to save part of the support they received. According to economic theory, these savers are more likely to be Ricardian, and hence to continue holding on to these savings. Of course, their economic circumstances might change in the future and they might find themselves in need to spend those accumulated resources, but the end of the pandemic in itself is unlikely to turn them from savers to immediate spenders. If anything, fewer households should face financial hardship as aggregate conditions improve.

Excess savings are unlikely to unleash pent-up demand for services. One caveat to the previous reasoning is that some of the “excess savings” might be due to a dearth of spending opportunities in the sectors of the economy most affected by the virus, such as travel and entertainment. If this is true, some of that lost spending could materialize once those sectors fully re-open.

How large is this “pent-up” demand for services likely to be? On the one hand, there is little doubt that many consumers will enjoy a few extra restaurant meals and perhaps splurge on a nicer vacation after such a long period without them. On the other hand, there is a limit to how many extra restaurant meals and vacations people will be able to enjoy. To have a sense of how much of this pent-up demand might be activated by the “excess savings” accumulated during the pandemic, recall that available estimates of the propensity to consume out of the CARES Act transfers is about one-third. This means that the average household spent about 33 cents out of each dollar received in direct payments. As it turns out, this estimate is in line with those based on previous transfers of this kind, such as the Economic Stimulus Payments of 2008. Therefore, the pandemic does not seem to have substantially limited households’ ability to spend the support that they received.

The bottom line from these three sets of considerations is that, although large by historical standards, the savings accumulated by U.S. households during the pandemic do not appear to be “excessive” when set against the extraordinary need of many American families and the unprecedented government intervention to support them. It is certainly possible that some of these savings will pay for extra travel and entertainment once the COVID-19 nightmare is behind us, but our conclusion is that the resulting boost to expenditures will be limited. This conclusion does not rule out a strong economic recovery from the virus shock. It only implies that spending out of excess savings won’t be one of its major drivers.

Music to Jerome Powell’s ears!

But, away from economic theory and computer models, the main question is what will happen to the lines on this chart when most Americans are vaccinated and the reopening of the service economy absorbs a large part of the currently unemployeds? No model can factor in the humongous swing in these two series in the last year:

In the real world, bank accounts have swelled and credit card balances have cratered, to extents not even close to the 2008 crisis. To assume that the 2008 spent ratio of 33% will also apply to the present situation takes no account of the fact that Americans’ balance sheets needed repair in 2008 (savings rate of 3.3% vs 8.2% in February 2020, February 2021: 13.6%). In fact, still very much in the pandemic, Americans have already spent 33% of their enormous stimmies.

Spending has been elevated to a virtue in America, even a patriotic duty (remember George W. after 9-11 (“Take your families and enjoy life, the way we want it to be enjoyed.”). In a 2013 book (“Beyond Our Means: Why America Spends While the World Saves”), Princeton University Professor Sheldon Garon explained why Americans aren’t thrifty and the rest of the world is:

Beyond Our Means tells for the first time how other nations aggressively encouraged their citizens to save by means of special savings institutions and savings campaigns. The U.S. government, meanwhile, promoted mass consumption and reliance on credit (…).

In reality, Europeans save at high rates despite generous welfare programs and aging populations. Americans save little, despite weaker social safety nets and a younger population. Tracing the development of such behaviors across three continents from the nineteenth century to today, this book highlights the role of institutions and moral suasion in shaping habits of saving and spending. It shows how the encouragement of thrift was not a relic of indigenous traditions but a modern movement to confront rising consumption. Around the world, messages to save and spend wisely confronted citizens everywhere—in schools, magazines, and novels. At the same time, in America, businesses and government normalized practices of living beyond one’s means.

Back to the real world, as of April 17, total spending on Chase’s 30 million credit cards were 23% above their January 2019 level in spite of restrictions on travel and entertainment, a subset of Discretionary.

Through April 17, Chase’s data suggest that “control retail sales”, which feed directly into GDP, are up 2.1% MoM in April. Added to the first quarter data, control retail sales are running at a whopping 60% annualized rate so far this year!

Meanwhile, in Canada, Bloomberg tells us that

A surprisingly hawkish BOC goosed the loonie. Governor Tiff Macklem’s policy board not only pared asset purchases to C$3 billion ($2.4 billion) from C$4 billion as expected, it also signaled earlier rate hikes, citing a stronger-than-expected rebound. Tightening could now come as early as next year, compared with earlier guidance pointing to no action before 2023. Canada’s currency reversed course and jumped almost 1%.

The Globe & Mail explains:

With new projections, Bank of Canada signals it’s willing to be flexible on inflation target in pursuit of full recovery

The Bank of Canada had plenty of interesting – and, mostly, encouraging – things to say in its eagerly awaited interest-rate decision and quarterly Monetary Policy Report on Wednesday. It sharply increased its near-term economic growth estimates. It reduced its government bond-buying (aka quantitative easing) program by 25 per cent, citing the improved state of the recovery.

It now believes the economy will return to full capacity in the second half of 2022, rather than in 2023 as it had previously forecast. It talked optimistically about less scarring from the pandemic than previously feared, and about accelerated business investments in technology.

(…) the bank is effectively acknowledging that its current policy intentions – with its key interest rate on hold at a record-low 0.25 per cent at least until the economy returns to full capacity, expected in the second half of 2022 – are going to result not in reaching the inflation target, but in overshooting it. (…)

Mr. Macklem indicated Wednesday that that bank is looking for a “complete” economic recovery – and not just some arithmetic return to full output – before it begins returning rates to normal. That will include evidence that there has been a widespread recovery in the jobs lost to the pandemic, including low-income segments that were particularly hard hit by the crisis. (…)

There is clearly a synchrony of the minds between the BOC and the FOMC. Yet, the former is already tapering even without a “complete” and evident economic recovery…

Canada’s CPI Shows Pressure

(…) The Bank of Canada has adopted a framework that explicitly focuses attention on processed views of inflation derived from the raw inflation statistic. It looks at the CPI-trim, the CPI-median and the CPI-common. You can find definitions of those gauges here and a discussion of what they are here. The names are descriptive as ‘the trim’ trims-off the excessive monthly moves, ‘the median’ looks at the middle of the distribution’s price increase and ‘the common’ seeks to identify common trends and to jettison item specific price moves. The measures are intended to focus on the true trend for inflation and to reduce or eliminate pure variability or idiosyncratic moves in individual prices using differing methodologies. So Canada is trying to step away from drinking the Kool Aid of any individual monthly inflation headline. Of course, looking at the core inflation rate does the same thing in a crude way. The Bank of Canada’s previous preferred gauge for accomplishing this objective, the CPI-X, eliminated eight of the most cantankerous CPI elements (plus indirect taxes). (…)

This month BOC’s CPI rises by 2.2% year-on-year (the calculations in the table uses Haver Analytics’ seasonal adjustments). The trim CPI is up by 2.2% year-on-year. The median CPI is up by 2.1% year-on-year. The CPI-common is up by 1.5% year-on-year. Price increases are in the BOC’s 1% to 3% range and near the range mid-point of 2% that the Bank seeks to hit.

Comparing inflation in the table to 12-month inflation of a year ago, we find the year-on-year change higher in just three-of-six categories and those are the categories with the greatest volatility. Considering just Canadian prices, the headline shows acceleration but the CPI-X and the core measure both show less inflation than a year ago and these are the measures designed to eliminate volatility.

From the Calculated Risk blog:

Homebuilder Comments in Mid-April: Crazy Price Increases, Offers Way Over Ask, Costs Increasing Quickly

Some twitter comments from Rick Palacios Jr., Director of Research at John Burns Real Estate Consulting quoting builders across the USA:

• “Still have 10x buyers to available homes to buy. Went to ‘highest/ best’ offer system March 1st & offers over asking price are shocking. Most offers are 10+% over ask, that’s after raised base prices $10K to $20K+ with each release.”
• “Super high demand. Volume controlled with release process, otherwise would be unbearable. Some price increases are $100K between releases.”
• “Limiting sales in 100% of communities. Can’t sell ahead as costs are rising too quickly. We may stop selling and become a spec builder until costs stabilize.”
• “Increasing prices 2% to 3% a month to keep up with costs.”
• “Only selling homes under construction, no dirt sales due to the variability of construction costs. Waiting lists at pretty much every community and restricting investors.”
• “Continue restricting sales but priority lists are increasing and buyers seem accustomed to the rising prices and are still anxious to move forward. Price increases each week/each release.”
• “Doing price increases twice a month.”
• “Opening 4 new neighborhoods and seeing tremendous pre-sale interest (checks, etc… prior to us releasing prices).”
• “Capping sales at 4 per month for each community, which is frustrating customers. Finished lots are golden.”
• “Anyone walking in is a buyer. There are no looky-loos. Raising prices at an obscene level.”
• “Raising prices materially each sales phase release. It’s crazy, but so are our costs. Many of the homes are being bought by investors.”
• “We have monthly price increases per community. All have escalators in multiple offers we are getting, ranging from $20k to $200k over list price. Offer reviews are pushing pricing beyond our list price by 10% or more.”
• “Can’t price them high enough…they’re selling anyway…for now, at least.”
• “When homes are released, they go almost immediately. Sales as strong as I can remember. Pushing price on every release with no resistance.”
• “Traffic down slightly from March but still well over our normal volume. Restricting sales as demand is still really strong. Stopped taking VIPs because list of interested buyers is longer than the number of lots we have.”
• “Sales are restricted to 85% of neighborhoods. Drawings for lots and highest/best offers are some of methods used to select buyers. Continue raising prices, no differences among segments.”
• “We will likely turn off sales early again this month.”

Get the point?

COVID-19

Should this move to the top of the post?

The surge in Covid-19 cases has the potential to damage overall global growth, while threatening to widen the gap between rich and poor nations. India reported a world record one-day jump in cases at 314,835 yesterday amid reports the country’s health system is close to collapse. The World Health Organization also warned on increasing infections in Argentina, Turkey and Brazil. A new law allowing the federal government in Germany to impose curfews and lockdowns was passed in the lower house of parliament there. (Bloomberg)

Still pretty calm in the USA:

Data: CSSE Johns Hopkins University; Map: Andrew Witherspoon/Axios

Dodgers offer “fully vaccinated” sections

Fans 16 and older who show proof that two weeks have passed since a final vaccination dose can purchase tickets ($124 to $154) to sit in two “fully vaccinated sections” at the Dodgers-Padres game on Saturday, the L.A. Times reports (subscription).