My new podcast, China's chip struggles, where Americans are moving, strategies for growing exports, urban design, the IRA's effects, and Larry Summers' predictions
Thanks a ton for highlighting my piece on the chips sanctions Noah! I have been super pleased with the response to that article, and am looking at writing a lot more on the topic in the future!
Has anyone done any theorizing about why the interest rate hikes haven't produced higher unemployment? They're clearly having an effect on the economy - ask any of my friends looking to buy a house or a car right now - but I wonder why unemployment hasn't risen with them. Perhaps there's still latent heat in the economy and unemployment is just being a lagging indicator, or maybe something strange going on with definitions given the general decline in working age population? Noah, do you have any hypotheses?
In general, interest rates are just a blunt mechanism, and they don't necessarily work like many economic models assume. First off, employment and investment decisions aren't that sensitive to interest rates. Having customers is generally more important than borrowing costs (especially if firms have a lot of cash, or can raise prices to compensate for higher rates).
The other thing is that higher interest rates also mean higher interest income, partially offsetting the contractionary effects. For example, federal government interest payments are $380 B higher than they were two years ago.
i think a big part of it is due to the lagging nature of unemployment rate. if we look at St. Louis fed's employment chart (https://fred.stlouisfed.org/series/UNRATE), unemployment rate almost always take off RIGHT AFTER the beginning of a recession period. and the defined starting date of a recession is also somewhat a lagging indicator and backward looking itself (eg some feel like we are already in one yet no official announcement has been declared). it's also possible that unemployment / firing accelerates only after a recession is officially stamp because employers adjust to a more conservative even pessimistic mentality only after a recession is commonly accepted.
Excess savings from COVID relief packages and other still being spent by consumers on services and not durables is lasting longer than planned. The timing of demand and supply "shocks" are different in this cycle relative to the past and is resulting in a smoother transition so far.
Unemployment will continue to be low:
Prime age workforce declining
Opiates
COVID deaths and long COVID
Caregiving of children and elderly
Low immigration
Are there other factors?
I read a book by Charles Goodhart a couple years ago that demographics will lead to higher inflation. It's excellent.
Could be base effects. Maybe raising interest rates from such a low base is not as bad as raising them from a higher number. The move was unprecedented, but we also started at a historic low. Even after this move, the rates are still pretty low. This is just a guess, I am not an economist, and I did not stay in a holiday inn express last night.
How much of this could be just a question of the counterfactual? That is, we are seeing 3.6% unemployment, which is incredibly low by the standards of recent decades, but could it be that economic conditions are such that we *would* have gotten down to 2% or 1.5% without all the rate increases?
One hypothesis for some of the bigger, debt-financed consumer purchases (viz., housing, cars): rising base prices in response to low interest rates[1] had *already* reached a very low-demand equilibrium before--and especially during, when the prices of both cars and houses skyrocketed--the pandemic. To the extent that decreases in demand resulted in increased unemployment in these sectors and/or labor market dislocations, it was a bullet that came "pre-bitten," so to speak, and there wasn't a lot of juice left for the Fed to squeeze by just substituting marginally higher rates for marginally lower or static base prices, because demand was already at its limit beforehand.
This is only a hypothesis and a very small part of the puzzle, though. Presumably commercial and industrial loan terms matter a lot more to the velocity of money and general macroeconomy than just these smaller consumer-demand sectors even if the hypothesis has validity.
[1] And in the case of cars, pandemic-related supply shortages since the supply is much more liquid than housing ex ante.
Great collection of information/insights. Thank you.
Re: Interest rates. The biggest transmission to the economy may be the eventual effect on the stock market. A steep decline could also be a decisive factor in the 2024 election, unfortunately in favor of the Republican nominee. I think this is an under appreciated risk. As is the rollback of all the Covid era programs.
And I think people don't appreciate how linked our economy has become to the stock market from a behavioral point of view
I recommend Biden start praising the Fed for reducing inflation and expressing confidence it does not really feel that the Fed will not cause a recession. Do not take credit for anything the reduction in unemployment unless you want to take the blame for the increase if there IS a recession.
Nice Podcast. One observation... the dramatic impact of technology driven productivity is not really included in the conversation. Not surprising...economists generally miss the non-linear impact of technology. The story of the last 50 years is often framed in political terms, but most of the big changes have been driven by technology/innovation driven shifts.
Summers is, in my opinion, the worst applied economist of his generation. It’s not enough to be smart. Very serious smart people can inflict financial and work-career damage on millions of Americans. You can sweep just so many things under the carpet. If you sweep Summers’ policy performance under the carpet, you won’t be able to walk out of the room:
You can't be serious? Both these articles are classic "team transitory" takes from 2021 that criticized Summers view that inflation would continue to rise. They were wrong, he was right. That's precisely why he's been getting a lot of attention since.
John McEnroe? (That’s two. How about three snarks for Muster Mark!) Summers was half right, which is easy if you ignore loss of jobs. 100 economists wrote an open letter to Obama (advocating Yellen) when he announced his intent to put Summers forward for Fed Chair. If it’s label-licking time, surely for group of 100 economists there’s a good name to stick on those folks. I’m drawing a blank.
Remember when random Coeur d'Alene Idaho became the hottest housing market in the whole country, and right there in the WSJ article they had to admit a big reason was mask-free schools?
Or when explicitly anti-Mandate Ron DeSantis won an enormous gubernatorial victory "despite" a huge, recent influx of Floridians from bluer states?
But I am sure all this movement from lockdown/mandate states to free states during a time period that includes 2020-2022 was all for generic pre-Covid reasons like cheaper land.
(Although, there is plenty of very cheap land in Buffalo.)
Nothing random about Coeur d'Alene. CDA is one of the most beautiful places in the country. I live in the area and I believe the housing market was already hot pre-Covid.
I was in North Idaho a lot during the pandemic. It was like the pandemic never happened there. If you wore a mask (even indoors) you would get disapproving looks from people. I enjoyed spending time out there without the Covid restrictions, as I already had antibodies circa March 2020. Still, it felt to me like they took it to an extreme of rejecting every kind of intervention.
Is Idaho a free state? Depends on your criteria. Income taxes are higher than in deep blue Washington, right next door.
As much as I enjoy spending time in Idaho, it's no utopia. The casual anti-semitism and anti-black racism is more than I've seen anywhere else I've lived (Washington, New York, Georgia).
I believe CDA, in addition to great natural beauty is also right on one of the major East-West highways going across Idaho. It's far from "random" as Idaho towns go.
I don't think those things are really related at all. You could find mask free schools without needing to move to Idaho, and FL has been trending red for years before Covid. People moving from blue states doesn't mean they're democrats (e.g. trump got twice as many votes in LA county then the state of West Virginia)
Idaho was the hottest statewide housing market pre-pandemic already. On this particular site, Boise is the only local housing market within Idaho that is tracked, and it was second hottest in 2019, behind Ogden, UT, and right above Spokane, WA (which might include Coeur D’Alene?)
I think we need both second street density, which seems like a great idea, and big thoroughfare density. The second streets preserve the appeal of local neighborhood commercial strips. In addition, the big streets already have lots of traffic and not much charm, so there's no harm in building density there as well.
To use San Francisco examples, build higher one block off of Clement Street so that Burma Superstar doesn't get replaced by a parking structure, but also build higher on Geary and California, which in this case happen to be one block away from Clement anyway.
Re #6: Summers is clearly wrong, but it's not the specific amount of people he thinks we need to lay off, it's his entire analysis of the problem.
We had a global pandemic, a war in Ukraine, and energy prices shooting up. All of these things which so clearly affected prices and economists are sitting there going no, don't believe your eyes, it's workers making too much money that's the problem. Even while real wages are lower than pre-pandemic.
The Fed, among others, were still treating the pandemic as a deflationary event long after the evidence was showing otherwise. That is what Summers got right and others missed.
Like a good lefty, you are totally ignoring the fact that the left was all aboard "team transitory" for many months, claiming inflation would subside on its own. Summers did a far better job of predicting the course of inflation.
Now the left is just throwing out this inconvenient fact and acting like they expected inflation all along, but it's caused by something else. Quite disingenuous.
Japanese zoning (http://urbankchoze.blogspot.com/2014/04/japanese-zoning.html) is of course a lot more sensible than American Euclidean zoning, but I can't help thinking that it was only possible in Japan because it is an ethnically homogenous country.
That perhaps white American suburbanites support onerous minimum lot sizes, parking minimums etc because they hope to price the n***ers out of their neighborhoods.
A quick comment on cities. Staying right now for some extended time in NE Spain (Girona). And in that city and others that we visited - the walkability is so much higher. Part of it is that these have older cores with narrow streets, alleys, multiple 2nd and 3rd back streets. Part of it is density and compactness. Mostly just saying how different it is than most American cities that are so centered around autos (especially in the West, but a lot of the rest of the country as well).
Density really can work well when done right (whether intentionally or historically or just lucky)
“Dutch export control rules will forbid ASML from maintaining, repairing and providing spare parts for controlled equipment without government approval, people familiar with the matter said.” -- Bloomberg
This is significant, more for China than ASML. Clients are dependent on ASML to repair/maintain the high-end machines. While an important revenue stream for ASML, the damaged is limited and eclipsed by a huge backlog and ever-increasing demand for its high-end machines. Because of ASML’s product quality and excellent support/repair, 90% of ASML machines are still working. In fact, there is a resale market for ASML machines.
Would be interesting to know how much of this population movement is short-distance/ within m-state rural to urban county movement versus moving from one metro to another. Especially considering the midwest and southern triangles, which,based on intuition, seem to be more driven by people moving from rural/exurb to cities.
Thanks a ton for highlighting my piece on the chips sanctions Noah! I have been super pleased with the response to that article, and am looking at writing a lot more on the topic in the future!
Love these Noah
Has anyone done any theorizing about why the interest rate hikes haven't produced higher unemployment? They're clearly having an effect on the economy - ask any of my friends looking to buy a house or a car right now - but I wonder why unemployment hasn't risen with them. Perhaps there's still latent heat in the economy and unemployment is just being a lagging indicator, or maybe something strange going on with definitions given the general decline in working age population? Noah, do you have any hypotheses?
In general, interest rates are just a blunt mechanism, and they don't necessarily work like many economic models assume. First off, employment and investment decisions aren't that sensitive to interest rates. Having customers is generally more important than borrowing costs (especially if firms have a lot of cash, or can raise prices to compensate for higher rates).
https://www.federalreserve.gov/pubs/feds/2014/201402/201402pap.pdf
The other thing is that higher interest rates also mean higher interest income, partially offsetting the contractionary effects. For example, federal government interest payments are $380 B higher than they were two years ago.
https://fred.stlouisfed.org/series/A091RC1Q027SBEA
i think a big part of it is due to the lagging nature of unemployment rate. if we look at St. Louis fed's employment chart (https://fred.stlouisfed.org/series/UNRATE), unemployment rate almost always take off RIGHT AFTER the beginning of a recession period. and the defined starting date of a recession is also somewhat a lagging indicator and backward looking itself (eg some feel like we are already in one yet no official announcement has been declared). it's also possible that unemployment / firing accelerates only after a recession is officially stamp because employers adjust to a more conservative even pessimistic mentality only after a recession is commonly accepted.
Excess savings from COVID relief packages and other still being spent by consumers on services and not durables is lasting longer than planned. The timing of demand and supply "shocks" are different in this cycle relative to the past and is resulting in a smoother transition so far.
Unemployment will continue to be low:
Prime age workforce declining
Opiates
COVID deaths and long COVID
Caregiving of children and elderly
Low immigration
Are there other factors?
I read a book by Charles Goodhart a couple years ago that demographics will lead to higher inflation. It's excellent.
Could be base effects. Maybe raising interest rates from such a low base is not as bad as raising them from a higher number. The move was unprecedented, but we also started at a historic low. Even after this move, the rates are still pretty low. This is just a guess, I am not an economist, and I did not stay in a holiday inn express last night.
How much of this could be just a question of the counterfactual? That is, we are seeing 3.6% unemployment, which is incredibly low by the standards of recent decades, but could it be that economic conditions are such that we *would* have gotten down to 2% or 1.5% without all the rate increases?
One hypothesis for some of the bigger, debt-financed consumer purchases (viz., housing, cars): rising base prices in response to low interest rates[1] had *already* reached a very low-demand equilibrium before--and especially during, when the prices of both cars and houses skyrocketed--the pandemic. To the extent that decreases in demand resulted in increased unemployment in these sectors and/or labor market dislocations, it was a bullet that came "pre-bitten," so to speak, and there wasn't a lot of juice left for the Fed to squeeze by just substituting marginally higher rates for marginally lower or static base prices, because demand was already at its limit beforehand.
This is only a hypothesis and a very small part of the puzzle, though. Presumably commercial and industrial loan terms matter a lot more to the velocity of money and general macroeconomy than just these smaller consumer-demand sectors even if the hypothesis has validity.
[1] And in the case of cars, pandemic-related supply shortages since the supply is much more liquid than housing ex ante.
I'd love your take on this.
https://wapo.st/3DaPTBF
https://open.substack.com/pub/exponentialview/p/q2-3-months-in-ai-in-6-charts?r=dvwlc&utm_medium=ios&utm_campaign=post
Great collection of information/insights. Thank you.
Re: Interest rates. The biggest transmission to the economy may be the eventual effect on the stock market. A steep decline could also be a decisive factor in the 2024 election, unfortunately in favor of the Republican nominee. I think this is an under appreciated risk. As is the rollback of all the Covid era programs.
And I think people don't appreciate how linked our economy has become to the stock market from a behavioral point of view
Below is my analysis (with a Disney World motif)
https://robertsdavidn.substack.com/p/warning-there-be-squalls-ahead-the
I recommend Biden start praising the Fed for reducing inflation and expressing confidence it does not really feel that the Fed will not cause a recession. Do not take credit for anything the reduction in unemployment unless you want to take the blame for the increase if there IS a recession.
Nice Podcast. One observation... the dramatic impact of technology driven productivity is not really included in the conversation. Not surprising...economists generally miss the non-linear impact of technology. The story of the last 50 years is often framed in political terms, but most of the big changes have been driven by technology/innovation driven shifts.
Summers is, in my opinion, the worst applied economist of his generation. It’s not enough to be smart. Very serious smart people can inflict financial and work-career damage on millions of Americans. You can sweep just so many things under the carpet. If you sweep Summers’ policy performance under the carpet, you won’t be able to walk out of the room:
https://ritholtz.com/2021/06/why-does-anyone-care-what-lawrence-summers-thinks/
https://www.nytimes.com/2021/06/25/business/economy/larry-summers-washington.html
You can't be serious? Both these articles are classic "team transitory" takes from 2021 that criticized Summers view that inflation would continue to rise. They were wrong, he was right. That's precisely why he's been getting a lot of attention since.
John McEnroe? (That’s two. How about three snarks for Muster Mark!) Summers was half right, which is easy if you ignore loss of jobs. 100 economists wrote an open letter to Obama (advocating Yellen) when he announced his intent to put Summers forward for Fed Chair. If it’s label-licking time, surely for group of 100 economists there’s a good name to stick on those folks. I’m drawing a blank.
Remember when random Coeur d'Alene Idaho became the hottest housing market in the whole country, and right there in the WSJ article they had to admit a big reason was mask-free schools?
https://www.wsj.com/articles/why-is-coeur-dalene-americas-hottest-housing-market-11619644273
Or when explicitly anti-Mandate Ron DeSantis won an enormous gubernatorial victory "despite" a huge, recent influx of Floridians from bluer states?
But I am sure all this movement from lockdown/mandate states to free states during a time period that includes 2020-2022 was all for generic pre-Covid reasons like cheaper land.
(Although, there is plenty of very cheap land in Buffalo.)
Nothing random about Coeur d'Alene. CDA is one of the most beautiful places in the country. I live in the area and I believe the housing market was already hot pre-Covid.
I was in North Idaho a lot during the pandemic. It was like the pandemic never happened there. If you wore a mask (even indoors) you would get disapproving looks from people. I enjoyed spending time out there without the Covid restrictions, as I already had antibodies circa March 2020. Still, it felt to me like they took it to an extreme of rejecting every kind of intervention.
Is Idaho a free state? Depends on your criteria. Income taxes are higher than in deep blue Washington, right next door.
As much as I enjoy spending time in Idaho, it's no utopia. The casual anti-semitism and anti-black racism is more than I've seen anywhere else I've lived (Washington, New York, Georgia).
I believe CDA, in addition to great natural beauty is also right on one of the major East-West highways going across Idaho. It's far from "random" as Idaho towns go.
I don't think those things are really related at all. You could find mask free schools without needing to move to Idaho, and FL has been trending red for years before Covid. People moving from blue states doesn't mean they're democrats (e.g. trump got twice as many votes in LA county then the state of West Virginia)
Idaho was the hottest statewide housing market pre-pandemic already. On this particular site, Boise is the only local housing market within Idaho that is tracked, and it was second hottest in 2019, behind Ogden, UT, and right above Spokane, WA (which might include Coeur D’Alene?)
https://constructioncoverage.com/research/hottest-real-estate-markets-us
Yes, Spokane and CDA are considered to be part of the same Combined Statistical Area.
https://en.wikipedia.org/wiki/Spokane%E2%80%93Coeur_d%27Alene_combined_statistical_area
The drive from Spokane to CDA is about 30 minutes.
I continue to be amazed at how well the Fed's smooth landing appears to be going (and no, I don't believe in jinxes). I hope it continues!
I think we need both second street density, which seems like a great idea, and big thoroughfare density. The second streets preserve the appeal of local neighborhood commercial strips. In addition, the big streets already have lots of traffic and not much charm, so there's no harm in building density there as well.
To use San Francisco examples, build higher one block off of Clement Street so that Burma Superstar doesn't get replaced by a parking structure, but also build higher on Geary and California, which in this case happen to be one block away from Clement anyway.
Re #6: Summers is clearly wrong, but it's not the specific amount of people he thinks we need to lay off, it's his entire analysis of the problem.
We had a global pandemic, a war in Ukraine, and energy prices shooting up. All of these things which so clearly affected prices and economists are sitting there going no, don't believe your eyes, it's workers making too much money that's the problem. Even while real wages are lower than pre-pandemic.
https://fred.stlouisfed.org/series/COMPRNFB
https://fred.stlouisfed.org/series/LES1252881600Q
The Fed, among others, were still treating the pandemic as a deflationary event long after the evidence was showing otherwise. That is what Summers got right and others missed.
Like a good lefty, you are totally ignoring the fact that the left was all aboard "team transitory" for many months, claiming inflation would subside on its own. Summers did a far better job of predicting the course of inflation.
Now the left is just throwing out this inconvenient fact and acting like they expected inflation all along, but it's caused by something else. Quite disingenuous.
I don’t speak for “the left”, just myself. If you are interested in my view on something, you’ll have to ask.
Right, you don't speak for them. You just regurgitate uncritically.
Japanese zoning (http://urbankchoze.blogspot.com/2014/04/japanese-zoning.html) is of course a lot more sensible than American Euclidean zoning, but I can't help thinking that it was only possible in Japan because it is an ethnically homogenous country.
How so? I fail to see the relationship there
That perhaps white American suburbanites support onerous minimum lot sizes, parking minimums etc because they hope to price the n***ers out of their neighborhoods.
A quick comment on cities. Staying right now for some extended time in NE Spain (Girona). And in that city and others that we visited - the walkability is so much higher. Part of it is that these have older cores with narrow streets, alleys, multiple 2nd and 3rd back streets. Part of it is density and compactness. Mostly just saying how different it is than most American cities that are so centered around autos (especially in the West, but a lot of the rest of the country as well).
Density really can work well when done right (whether intentionally or historically or just lucky)
“Dutch export control rules will forbid ASML from maintaining, repairing and providing spare parts for controlled equipment without government approval, people familiar with the matter said.” -- Bloomberg
This is significant, more for China than ASML. Clients are dependent on ASML to repair/maintain the high-end machines. While an important revenue stream for ASML, the damaged is limited and eclipsed by a huge backlog and ever-increasing demand for its high-end machines. Because of ASML’s product quality and excellent support/repair, 90% of ASML machines are still working. In fact, there is a resale market for ASML machines.
Would be interesting to know how much of this population movement is short-distance/ within m-state rural to urban county movement versus moving from one metro to another. Especially considering the midwest and southern triangles, which,based on intuition, seem to be more driven by people moving from rural/exurb to cities.