The Dangerous Economist: February 2023

Tuesday, February 28, 2023

Apartment Rents Fall as Crush of New Supply Hits Market

By Will Parker of The WSJ. Excerpts:

"Apartment rents fell in every major metropolitan area in the U.S. over the past six months through January, a trend that is poised to continue as the biggest delivery of new apartments in nearly four decades is slated for this year.
Renters with new leases in January paid a median rent that was 3.5% lower than they would have paid last August, according to estimates from listing website Apartment List. It was the first time in five years that rent fell every month over a six-month period, according to the same estimates."
"The softening rental market follows an unprecedented run for the apartment and home-rental industry put into motion by the pandemic. Pent-up demand for housing exploded in the months after the introduction of Covid-19 vaccines in late 2020 and a surge in people searching for apartments lifted rents 25% over two years.
Now, recent declines are a sign that many tenants have maxed out on how much of their income they can devote to rent, while the specter of layoffs has created new concerns for some. Other would-be renters, living with family or friends, remain sidelined by prices that are still far too high for their budgets.
While some seasonal stalling in rents is normal, the market faces a significant headwind in the biggest delivery of new supply since 1986, according to projections from CoStar Group. Nearly half a million new apartments are coming on line this year as developers seek to cash in on the high rents that tenants have been paying."
"In the months since August, new-lease rents have fallen most sharply in some of the nation’s biggest metro areas. Seattle rents have tumbled 8%, while rents in Boston and Las Vegas have fallen 6%"

"Apartment vacancies have risen since last fall, several reports show, due to weaker demand from potential renters. Fewer people are flocking to Zoomtowns—communities that experienced a surge in population from an influx of remote workers—such as Boise, Idaho, or Phoenix compared with earlier in the pandemic"

This is exactly what we would expect: A short-run rise in prices causes higher profits which leads producers to increase output in the long run. That shift in supply to the right lowers prices.

Sunday, February 26, 2023

Workers’ Pay Globally Hasn’t Kept Up With Inflation

Decline in purchasing power could reverse this year if prices rise more slowly

By Tom Fairless of The WSJ. Excerpts:

"Wage growth across advanced economies is plateauing or declining from high levels."

"Workers’ purchasing power—their average inflation-adjusted wage—was lower last year than in 2019"

"In the U.S., nominal wage growth—meaning unadjusted for inflation—has slowed sharply since the middle of last year, according to a variety of measures. Average hourly earnings for private-sector nonfarm workers rose 4.4% in the 12 months through January, down from 5.6% last March and less than the 6.4% rise in consumer prices in the year through January.

In Europe, average wage growth across six countries declined to 4.9% in December from 5.2% in November, according to a report by Ireland’s central bank and the recruitment company Indeed, which tracks advertised wages across millions of online job ads. Inflation in the eurozone ended the year at 9.2%.
In Canada, central bank chief Tiff Macklem highlighted easing wage growth to explain the bank’s recent decision to pause interest-rate increases after raising its key rate to 4.5%, the highest level in 15 years.
“Wage growth is currently running between 4% and 5% and appears to have plateaued within that range… The risk of a wage-price spiral has diminished,” Mr. Macklem said.
Economists have noted that pay growth tends to lag, not lead, inflation as workers and employers adjust pay expectations to the prices they have experienced. Thus, the recent decline in pay growth might reflect, with a lag, the fact inflation peaked around summer and fall of last year in major economies like the U.S. and eurozone and has since declined, as energy prices fell sharply and global supply-chain pressures eased.
Why, though, did wages never catch up with inflation in the first place? One reason is that wages tend to be sticky, changing relatively slowly and sluggishly—over months and years—while prices can change more rapidly. Firms might be wary of raising wages aggressively since cutting them later would be bad for morale.
Now, slowing economic growth and the threat of layoffs might be tempering workers’ demands, said Andrea Garnero, an economist with the Organization for Economic Cooperation and Development."

"Some workers who left the labor force during the pandemic are being tempted back as pandemic savings dwindle and are eroded by inflation. Almost 83% of Americans ages 25-54 are working or actively looking for work, roughly back to the prepandemic rate, according to the U.S. Labor Department."
"In the U.S., net international migration added more than a million people to the population in the year through mid-2022, the Census Bureau said. Migrant workers could have helped fuel January’s robust 517,000 increase in nonfarm payrolls while keeping wage inflation moderate"
"History suggests that workers often fail to claw back losses from high inflation. In the U.S., periods of high inflation were, in general, periods of lower real-wage growth, according to research by the Federal Reserve Bank of St. Louis."

Saturday, February 25, 2023

Hundreds of Energy Department Officials Hold Stocks Related to Agency’s Work Despite Warnings

Ethics lawyers caution officials not to work on matters affecting the companies but don’t tell them to sell

By Rebecca Ballhaus, Brody Mullins, Chad Day and Coulter Jones of The WSJ. Excerpts:

"U.S. ethics officials in recent years have warned one-third of the Energy Department’s senior officials that they or their families owned stocks related to the agency’s work, reminding them not to violate federal conflict-of-interest rules.
Most held on to the stocks, a Wall Street Journal analysis of officials’ financial disclosures from 2017 through 2021 shows.
The more than 300 agency officials who received such warnings include nearly six dozen who held stocks of major energy companies such as Exxon Mobil Corp.
More than 130 officials in the Energy Department collectively reported about 2,700 trades of shares, bonds and options in companies that ethics officers labeled as related to their agency’s work"
"The letter doesn’t direct the official to sell the stock. It just advises him or her not to work on matters that would “have a direct and predictable effect” on the company, and to “remain alert for any potential conflicts.” In the meantime, the official is allowed to continue owning the stock and is certified as complying with federal conflict-of-interest rules.
U.S. law prohibits federal officials from working “personally and substantially” on any matters in which they, their spouses or their dependent children have a significant financial stake."
"more than 2,600 government officials reported investments that stood to rise or fall with the decisions made by their agencies.
Like the rest of the federal ethics system, the Energy Department’s ethics policy has gaps. It doesn’t take into account whether officials have knowledge of or could come across information affecting companies they invest in."
"The U.S., while prohibiting federal officials from working on any matter in which they have a significant stake, leaves it to individual agencies to decide whether they need additional rules to ensure that officials don’t use their influence for personal gain.
Some do."
"The Energy Department has no such rule."

But government officials (or legislators) acting on their self interest is not new. Charles Beard wrote about this in his book An Economic Interpretation of the Constitution of the United States. He argued that self-interest was a big force in how the framers wrote the constitution.

In the 1950s, Forrest McDonald We the People : The Economic Origins of the Constitution, in attempt to refute Beard. But more recently, economic historian Robert A. McGuire wrote a book called To Form a More Perfect Union: A New Economic Interpretation of the United States Constitution. He used modern statistical analysis to show that the Beard thesis may be legitimate.

My students might recall something like this that I used to talk about on the first day of the semester. Congressmen in the early 1790s voted on the "Funding and Assumption Act" based on how much money they would receive if that bill passed. The bill paid back all of the debts from the Revolutionary War at full value (they were not getting paid back before the Constitution was passed because under the Articles of Confederation all states had to agree to a tax increase-this did not happen much so taxes were never raised to pay back the money the government borrowed to finance the war). But under the Constitution if both the House and the Senate passed a tax increase and the president signed it, it became law.

The debts were securities or bonds. Some congressman owned them. I found how much about half the congressmen owned in these bonds from McDonald's book. The ones who voted yes on the bill had an average of about $6,000 while the ones who voted no had about $700. So it is possible that money influenced the vote.

Here is a passage from John Spencer Bassett's book about the "Funding and Assumption Act" The Federalist System, 1789-1801:

"All the speculating class, in Congress and out of it, were zealously in favor of the scheme; and while it was till being debated they were trying to by all the means known to their class to buy up, even in the remote parts of the country, the old bonds at the depreciated values."

Here are they guys who voted yes and their dollar value of their bond holdings:

AMES 35
BASSETT 0
BURKE 5252
BUTLER 0
CLYMER 14000
DALTON 12
DCARROLL 227
ELLSWORTH 5985
FITZSIMMONS 2668
GALE 4252
GERRY 50000
GROUT 0
IZARD 20865
JOHNSON 0
KING 10000
LANGDON 27921
MORRIS 11000
PARTRIDGE 2195
PATERSON 0
READ 341
SEDGWICK 1680
SHERMAN 7729
STRONG 10903
STURGES 189
SUMTER 0
WADSWORTH 1625
WHITE 1619
WLSMITH 11910

Now the no votes

BALDWIN 2500
COLES 0
FEW 640
GILMAN 1025
GRIFFIN 0
HARTLEY 0
LIVERMORE 0
MADISON 0
MATHEWS 0
MJSTONE 3814
MOORE 0
MUHLENBERG 0
SCOTT 127
WILLIAMSON 2600

Looks Like Some Pretty Good Capitalists Run The Congress (2009-lawmakers were making better rates of return than the market averge)

Did U.S. government officials make money buying and selling stocks based on their inside information about Covid policy? (2022)

Wednesday, February 22, 2023

‘Green’ Funds Cost Three Times More Than You Think

Buying an ESG fund is a lot like buying in an index fund. That means investors are paying a lot for the small part that is different.

By Jason Zweig of The WSJ. Excerpts:

"At the average ESG fund, the effective fees can be three times what’s reported, according to a new study. That’s because these funds—also often called green, sustainable or responsible—are nowhere near as pure as they purport to be."

"Although some ESG funds take conservative or even “biblically responsible” approaches that favor industrial and other old-fashioned sectors, most seek to avoid companies that emit excessive pollution, consume precious natural resources, squelch labor unions, downplay gender equality and so on.
The inevitable result: They tend to favor software and healthcare, while tilting away from oil and gas.
Sustainable U.S. stock funds have 22.1% of their assets in technology and 15.4% in healthcare, but only 2.6% in energy, according to Morningstar. Non-ESG funds, meanwhile, hold 18.7% in tech, 14.3% in healthcare and 5.7% in energy."
"green funds outperformed over the past five years, earning an average of 8.1% annually, while non-sustainable funds grew at 6.9%."
"Last year, however, tech went into the tank along with most of the market, while energy stocks were among the only winners. Green funds lost 19.7%, faring even worse than conventional funds, which fell 18.1%."
"Slightly more than half of studies on corporations showed that those adopting ESG principles improved their financial results. But only one in six studies on ESG funds found that these portfolios performed significantly better than average."
"The average green U.S. stock ETF charges 0.17% in annual fees, according to Morningstar—0.05 percentage points more than conventional funds."
"ESG funds have 68% of their assets invested in “the exact same” holdings as non-ESG funds."
"So, for every dollar you invest in a responsible fund, only about 30 cents goes into stocks you couldn’t have gotten in a fund that makes no show of trying to make the world a better place."
"Responsible portfolios aren’t less like the overall market than traditional funds. They are even more like it."
"non-ESG funds tend to own smaller stocks. But with green funds, on average, acting 98% like the mainstream stock market, you’re kidding yourself if you think they’re a distinctly different way to invest."

One of the Hottest Trends in the World of Investing Is a Sham (ESG, environmental, social and governance criteria) (2022)

An Inconvenient Truth About ESG Investing (2022)

ESG Investing Can Do Good or Do Well, but Don’t Expect Both (2022)

The hidden costs of corporate social responsibility (2021)

Why the Sustainable Investment Craze Is Flawed (2020)

C.E.O.s Are Qualified to Make Profits, Not Lead Society (2020)

ESG Investing in the Pandemic Shows Power of Luck (2020)

ESG Investing Shines in Market Turmoil, With Help From Big Tech: The strength of socially responsible funds suggests they have staying power; ‘ESG is not a fad’ (2020)

Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards (2020)

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges) (2019)

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy) (2017)

Can You Find Virtue by Investing in Vice? (2006)

What if companies pledge to adhere to social and environmental accountability guidelines? (2015)

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) (2007)

Data show that socially responsible investments can outperform the S&P 500 index (2017)

Is altruism a result of selfishness? (2017)

Do you have to be selfish to make more money? (2018)

Does collective self-deception mask selfish behavior? (2018)

Why Doing Good Makes It Easier to Be Bad (2019)

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders (2019)

Should you invest according to religious guidelines? (2017)

Companies Adapt to Activism by Athletes (2021)

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ (2017)

Monday, February 20, 2023

Diamonds, From Your Ring to Your iPhone (and will people start buying engagement rings with man made diamonds?)

This Valentine’s Day could see gems grown in a lab take market share from natural ones

By Jinjoo Lee of The WSJ. Excerpts:

"Lab-grown diamonds have essentially the same chemical, optical and physical properties as mined diamonds, according to the Gemological Institute of America. Yet they can be bought at a fraction of the cost.

On Blue Nile, an online jewelry retailer owned by Signet Jewelers, a 1-carat colorless round lab diamond goes for $1,534, which is about 73% cheaper than the lowest-priced natural diamond with the same specifications on its website. That pricing gap has widened over time."

"Lab-diamond jewelry also has a strong pull for consumers who care about sustainability and ethical sourcing. In December, lab diamonds accounted for 15.7% of all engagement rings sold in the U.S., up from 7.9% a year earlier"

"Unlike the natural-diamond industry, where a cartel controlled the supply of stones for the better part of the past century, lab-grown diamond production is subject to cutthroat competition. It costs just about half a million dollars—sometimes even less—to buy reactors or chambers for chemical vapor deposition (CVD)"

"involves pumping carbon-containing gas (such as methane) into a sealed, superheated chamber housing a small piece of diamond. The process prompts carbon atoms to form a structure around the seed diamond."

"The cost of production is rapidly declining. Martin Roscheisen, CEO of San Francisco-based Diamond Foundry, says in an email that the cost of producing a lab diamond has declined by about 12% each quarter over the past five years at his company. "

"Lab diamonds haven’t affected the value of natural diamonds so far, but the industry hasn’t faced a real test because demand for all diamond jewelry surged between 2020 and 2022"

"Engagement rings tend to be a symbolic and emotional purchase, so there could still be lasting demand for a stone that took millions of years to form. Even so, a flood of supply probably means diamond jewelry will become more commoditized."

"Proceeds from lab-diamond rings could fund an even larger, if distant, ambition: making their way into semiconductors. WD Lab Grown Diamonds, Diamond Foundry and De Beers’s Element Six are all developing diamonds for industrial use"

Is it okay to propose to your sweetheart with a diamond that was made in some drab office park? (2017)

Saturday, February 18, 2023

Most of us are wrong about how the world has changed (especially those who are pessimistic about the future)

By Max Roser of Our World In Data. Excerpts:

"The majority of people – 52% – believe that the share of people in extreme poverty is rising. The opposite is true. In fact, the share of people living in extreme poverty across the world has been declining for two centuries and in the last 20 years this positive development has been faster than ever before (see our work on Poverty). For the recent era it doesn’t even matter what poverty line you choose, the share of people below any poverty line has fallen (see here)."
"We are not just wrong about global poverty. In the same survey people were asked: “In the last 20 years, has the child mortality rate in developing regions increased, decreased or stayed about the same?”
Here again the data is very clear. The child mortality rate in both the less- and least-developed countries has halved in the last 20 years.²
The survey once more shows that most people are not aware of this. On average only 39% know that the mortality of children is falling. And what greater achievement has humanity ever achieved than making it more and more likely that children survive the first, vulnerable years of their lives and sparing parents the sadness of losing their babies? This has to be one of humanity’s greatest achievements.
And just as with knowledge about extreme poverty, the share of uninformed people is much higher in the rich countries of the world."

Thursday, February 16, 2023

How does the Bureau of Labor Statistics account for shrinkflation in calculating the Consumer Price Index?

See Getting less for the same price? Explore how the CPI measures “shrinkflation” and its impact on inflation by Kari McNair of the BLS. Excerpts:

"You may have noticed recently that you’re going through a roll of paper towels at a faster clip or that there seem to be fewer tortilla chips in the bag. This isn’t your imagination! The concept is known as downsizing or shrinkflation. (We will use the term downsizing in this article.) As input costs increase and costs to create a product rise, companies can increase the list price of a good or they can offer a smaller amount of the product for the same price. So, a candy bar’s size might change from 1.6 ounces to 1.5 ounces, yet the price stays the same. In other words, the price per unit the consumer pays increases as the amount they purchase decreases, while the price they pay at the register remains the same."
"Given how easy it is to miss downsizing when you are shopping, you might be wondering if the CPI is able to reflect these types of price changes accurately. The CPI strives to capture the price change caused by downsizing through accurate data collection and effective price calculations. Our data collectors and economists identify changes to the goods and services used to calculate the CPI. Data collectors collect prices for the same unique set of goods and services over time. This includes identifying, verifying, and notifying each other of product size changes so the effective price change experienced by consumers can be accurately reflected in the CPI. When an item goes through downsizing or upsizing, the data collector reports the new data, updates the product description, and sends a message to economists in the national program office noting the product size change. Data collectors do not record information such as the number of chocolate chips in a cookie or the number of pepperonis on a pizza, however, they do record attributes such as weight and volume.

Our economists continuously review goods and services in the CPI. They identify product downsizing through monthly reviews of CPI data and online research. For products data collectors identify with a size or weight change, economists will conduct further research on the manufacturers’ websites, online shopping websites, and other sources to verify if the product is experiencing product downsizing or upsizing. Once the economist has verified that the item is experiencing product size change, they will notate the item and search the CPI sample for the same item. To ensure downsizing is captured in a timely manner, the economist will notify the data collectors that a product is experiencing downsizing so that they can be on the lookout for a size change.

Data collection procedures vary for different products and services; therefore, the impact of product size change is handled differently based on the item. An effective price per standard size, usually a price per ounce, is calculated for items where size is reported. The effective price per ounce is the collected price divided by size. For example, if a half-gallon (64 oz) of Brand A vanilla ice cream is priced in January 2021 at $5.99, then the effective price per ounce is $5.99 divided by 64 oz or $0.093 per ounce. If, in February 2021, the same Brand A vanilla ice cream is reduced in size to 60 oz, but the price is still $5.99, the effective price per ounce would be $0.0998 per ounce. This results in a 6.7-percent increase in the price per ounce of the ice cream, and the CPI would include this price increase. Our economists even adjust for items that do not have a weight, like toilet paper. For example, when the number of sheets per toilet paper roll changes from 220 per roll to 200, the economist will adjust the data to show a 10-percent price-per-sheet increase.
CPI economists track identified downsizing and upsizing in the CPI sample each month."
"product size changes (upsizing and downsizing) increased the CPI all commodity and services index by 0.01 percent per year."
"the impact of product downsizing at the all commodity and services level is minimal, with an average annual effect of 0.01 percent per year, so while consumers may notice shrinkflation at the grocery store, it has a very small impact the overall inflation picture they face."

Tuesday, February 14, 2023

A Special Valentine's Message On Romantic Love

But first some links to related news stories:

The first one is Mwah! Kissing eases stress, study finds. The following quote gives you an idea of what it is all about: "Kissing, it turns out, unleashes chemicals that ease stress hormones in both sexes and encourage bonding in men, though not so much in women." I guess economists call this "interdependent utility functions." Meaning that what brings one person pleasure brings brings the other person pleasure, and vice-versa.

The other is Cocoa Prices Create Chocolate Dilemma. (that is from 2009) The article opens with "Soaring cocoa prices are creating a Valentine's Day dilemma for chocolate makers. They don't want to raise retail prices when recession-weary consumers are trying to limit their spending." The problem is crop diseases in Ivory Coast and Ghana. You might need to be a WSJ subscriber to read the whole article.

Here is a new article from yesterday's San Antonio Express-News (2-13-2011). Romance in bloom at workplace: Survey indicates 59% have taken the risk-filled leap. It seems like many people admit to having a romance at work and/or meeting their spouse at work. So what starts out as economic activity leads to some other needs being met.

Now the economic definition of romantic love.

Abstract: "Romantic love is characterized by a preoccupation with a deliberately restricted set of perceived characteristics in the love object which are viewed as means to some ideal ends. In the process of selecting the set of perceived characteristics and the process of determining the ideal ends, there is also a systematic failure to assess the accuracy of the perceived characteristics and the feasibility of achieving the ideal ends given the selected set of means and other pre-existing ends.

The study of romantic love can provide insight into the general process of introducing novelty into a system of interacting variables. Novelty, however, is functional only in an open system characterized by uncertainty where the variables have not all been functionally looped and system slacks are readily available to accommodate new things. In a closed system where all the objective functions and variables must be compatible to achieve stability and viability, adjustments in the value of some variables through romantic idealization may be dysfunctional if they represent merely residual responses to the creative combination of the variables in the open sub-system."

The author was K. K. Fung of the Department of Economics, Memphis State University, Memphis. It was from a journal article in 1979. More info on it is at this link. The entire article, which is not too long, can be found at this link.

Then there was this related article: Love really is blind, U.S. study finds. Here is an exerpt:

"Love really is blind, at least when it comes to looking at others, U.S. researchers reported on Tuesday.

College students who reported they were in love were less likely to take careful notice of other attractive men or women, the team at the University of California Los Angeles and dating Web site eHarmony found.

"Feeling love for your romantic partner appears to make everybody else less attractive, and the emotion appears to work in very specific ways in enabling you to push thoughts of that tempting other out of your mind," said Gian Gonzaga of eHarmony, whose study is published in the journal Evolution and Human Behavior.

"It's almost like love puts blinders on people," added Martie Haselton, an associate professor of psychology and communication studies at UCLA."

More links:

How to Be a Better Valentine, Through Economics by economist Paul Oyer.

Here’s what science says is the secret ingredient to making your love spark

Can Giving Up Money And Material Things Lead To More Love?

What Do Men In China Need To Get A Bride?

Adam Smith, Marriage Counselor

A Special Valentine's Message On Romantic Love

Can You Put A Price Tag On Love?

Do Opposites Attract? Not Usually, Except Maybe When It Comes To Money

Return of the Love Headhunters

eHarmony To Provide Personal Counselors To Help You Find Mr. Or Ms. Right

Economist Paul Zak, aka Dr. Love (he studies the brain with "neuroeconomics")

This is your brain on love (brain scans and biology seem to confirm the economic definition given above)

Dollars and Sex: How Economics Influences Sex and Love (book by Marina Adshade).

Do Women Really Value Income over Looks in a Mate? by Marina Adshade

Sunday, February 12, 2023

Paychecks Eclipse Ideals For Many Gen Z Workers

By Callum Borchers of The WSJ. Excerpts:

"For many 20-something workers and new grads, a sense of mission is butting up against the need to make money. Though they came of age under Presidents Obama and Trump and formed worldviews during times of powerful social movements, some are shifting their priorities or making compromises they might have criticized before entering the workforce.
A sharper focus on money shows up in Deloitte Global’s annual survey of Gen Zers, which the firm defines as people born starting in 1995. (Some others, like the Pew Research Center, say the generation starts in 1997.) Climate change was the top concern, ahead of financial challenges, when Deloitte polled more than 8,000 Gen Zers early last year. This year, however, the cost of living vaulted ahead of the environment as the No. 1 worry in a survey of nearly 15,000 Gen Zers.
Meanwhile, 37% of Gen Zers in the latest poll said they have “rejected a job and/or assignment based on their personal ethics.” A year ago, nearly half said ethics determine the kind of work they’re willing to do, and for whom."
"People in every generation hold ideals that eventually collide with reality. The terrorist attacks of Sept. 11, 2001, disrupted the early careers of many in Gen X, the post-boomer generation born between 1965 and 1980. The financial crisis and recession of the late aughts sobered a lot of the millennials who followed Gen Xers into the workforce.
Now, the pandemic and its fallout are testing Gen Zers. They approach issues like gun control, foreign policy and racism as people who went through school post-Columbine, have little or no memory of 9/11 and were children when Trayvon Martin’s death helped catalyze the Black Lives Matter movement.
They’re entering adulthood as the planet hits the hottest temperatures in recorded history and could soon face some of the most restrictive abortion laws in a half-century.
They were raised in a time of questioning such widely accepted norms as pronouns, standing for the national anthem and the wholesomeness of Dr. Seuss.
They’ve told pollsters for years that all of this—maybe not Dr. Seuss specifically, but social and political issues generally—will be important when they enter the labor force, saying they want to work for companies that share their values.
In a recent poll of roughly 400 college seniors commissioned by ResumeBuilder.com, however, 54% said they’d be willing to work for a company they “morally disagree with” for a six-figure starting salary. (Such hefty offers are increasingly common in today’s labor market.)"

Friday, February 10, 2023

Can we get a soft landing or is the Goldilocks economy too good to be true? Two different views

This post is related to yesterday's post where I showed that the low inflation like we had the last six months is usually followed by another six months of low or moderate inflation. It also seems like a "soft landing" and a "Goldilocks economy" are the same thing or very close.

The first article is from yesterday's (Feb. 9) print edition of The WSJ. See The Fed Now Has a Good Chance at a Soft Economic Landing: Inflation is falling fast. If the monetary hawks aren’t careful, they could fly into a recession by Alan S. Blinder. Excerpts:

"six months of quiescent inflation data doesn’t prove that the inflationary dragon has been slain. True again. But six months is also too long a period to be dismissed as a mere blip in the data. The dragon is, at minimum, seriously wounded."
"a sizable part of the sharp decline in inflation came from falling energy prices. Between the first and second halves of 2022, the “core” version of CPI inflation—which excludes food and energy prices—dropped only 2.3 points (from 6.8% to 4.5%), and the core version of PCE inflation fell only 1.5 points (from 5.2% to 3.7%). But focus your attention, as the Fed does, on that last number. A rate of 3.7% is only about another 1.5-point decline in core PCE inflation away from the Fed’s 2% target."
"My point isn’t that inflation has definitely been vanquished, and the FOMC should declare victory. Rather, it’s that pausing rate hikes now is at least worth debating."
"Remember, the Fed’s job is to reduce inflation, not to drive the economy into the ground. Some observers insist that conquering inflation requires a recession. But that’s based on Phillips curve reasoning: High unemployment is supposedly needed to slow the growth of wages, which in turn will slow the growth of prices. Maybe. But what if that proves wrong here—as it has for most of the 21st century?
Consider these amazing facts. When the Fed started tightening in March 2022, the unemployment rate was 3.6%. Since then, about four million net new jobs have been created, and the unemployment rate today stands at 3.4%. Yet inflation has come way down, not up; wage increases are moderating, not accelerating; and less inflation from rents is in our future. We also know that the effect of tight money on inflation is long delayed. Maybe, just maybe, the Fed can finish off the dragon without killing the economy.
Six months ago, before all the good inflation news started pouring in, I thought the odds were strongly against achieving a soft landing. Now they look to be at least 50-50, maybe better. And if a soft landing is possible, shouldn’t the Fed try for it?"

There was another article in the Feb. 9 WSJ that takes a different position. See Goldilocks Economy Is a Fairy Tale Too Good to Be True by James Mackintosh of The WSJ. Excerpts:

"What investors really liked in the 1990s was a Goldilocks economy—not too hot, not too cold, just like the porridge she eats in the fairy tale. To the delight of investors, Goldilocks seems to be back, in spite of full employment that ought to push up wages fast."
" Last month’s payrolls figures showed strong job creation, even stripping out the end of some public-sector strikes. The unemployment rate was last lower in 1953. Inflation is down, with the Fed’s preferred measure running at an annualized three-month rate of 2.9% in December, from 6.7% in June. And wages are rising more slowly, with private-sector wage costs up an annualized 4.2% in the final quarter of last year, sharply below a 6.5% increase in the second quarter and not much above the 3%-4% compatible with the Fed’s inflation target."
"The bull case is that inflation was, after all, transitory. The Fed will realize that it doesn’t need to be hawkish and rates will come down without unemployment needing to rise much, if at all."
"Fed Chairman Jerome Powell . . . he has reiterated that the strong jobs market means rates will have to be higher for longer"
"But Mr. Powell still sees inflation danger in core services, where prices are particularly sensitive to higher wages. Strip out rent from services, and prices were up 4.9% on an annualized basis in December"
"overall demand in the economy is running ahead of supply. That means underlying prices will keep rising too fast, and the Fed won’t risk cutting rates—unless there is a recession."
"Part of the disagreement between bulls and bears is about how sensitive wages are to unemployment, a relationship known as the Phillips curve—named after the New Zealand economist who first charted it. After the financial crisis of the late 2000s, the Phillips curve flattened, so higher demand for workers did little to push up wages. But as Gerard Minack of Minack Advisors points out, the curve seems to have shifted, with wages rising by more for any given level of unemployment than they did between 2008 and the pandemic. With unemployment so low, wage pressure should be expected if there has truly been a change in the wage-joblessness relationship."
"Minneapolis Fed President Neel Kashkari told CNBC on Tuesday, it is hard to imagine that strong jobs growth is compatible with weaker wage growth."
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