The Middle East and the Economy (from the New York Times): Fed warns of more risks from Mideast conflict-President Biden used a rare address from the Oval Office last night to urge Americans to support war efforts in Israel and Ukraine, as Israeli troops amassed ahead of a possible ground invasion of the Gaza Strip and exchanged fire with Hezbollah forces near the border with Lebanon.
Worries are growing about how much the turmoil could cost the global economy. Biden is expected to ask Congress to approve $14 billion in military aid for Israel and $60 billion for Ukraine — no easy task with the House still without a leader — as part of a jumbo $100 billion aid package.
The risk of wider conflict is again roiling the markets. A U.S. Navy warship shot down missiles and drones launched by Iran-backed Houthi militants in Yemen, and American military bases in Syria and Iraq have come under drone attack, too.
Brent crude, the global oil benchmark, hit a three-week high this morning over fears that a military escalation could disrupt already tight supplies. Asian and European stocks and U.S. futures were in the red, adding to yesterday’s losses.
The Fed is watching the region closely. In a speech largely focused on inflation, interest rates and economic growth, Jay Powell, the central bank’s chair, warned yesterday that “geopolitical tensions are highly elevated and pose important risks to global economic activity.”
The Middle East is becoming a wild card for the global economy. Rising oil prices could push up inflation, hindering central banks’ efforts to bring down prices. Higher energy costs could also force businesses and consumers to cut back on spending. That would probably sap growth but might also slow the economy enough to negate the need for an additional interest-rate increase.
The Fed, Powell said, would “monitor these developments for their economic implications, which remain highly uncertain.”
Powell had a more immediate concern: that the economy might be running too hot — consumers are spending and hiring remains brisk — despite a rapid rise in interest rates to a range of 5.25 to 5.5 percent. Policymakers remain divided over whether to raise rates at least one more time.
Powell reiterated that he’s in the wait-and-see camp. There was a steep sell-off in bonds yesterday after his speech, with the yield on the 30-year Treasury coming within a tick of the 16-year high of 5 percent.
U.S. Economic Growth Accelerated in the Third Quarter (from the New York Times): Gross domestic product expanded at a 4.9 percent annual rate over the summer, powered by prodigious consumer spending. But the pace is not expected to be sustained.
Gross domestic product expanded at a 4.9 percent annual rate over the summer, powered by prodigious consumer spending. But the pace is not expected to be sustained.
The United States economy surged in the third quarter as a strong job market and falling inflation gave consumers the confidence to spend freely on goods and services.
Gross domestic product, the primary measure of economic output, grew at a 4.9 percent annualized rate from July through September, the Commerce Department reported Thursday. The pace exceeded forecasts and was the strongest showing since late 2021, defying predictions of a slowdown prompted by the Federal Reserve’s interest rate increases.
The acceleration was made possible in part by slowing inflation, which lifted purchasing power even as wage growth weakened, and a job market that has shown renewed vigor over the past three months.
Although the growth rate is an initial estimate that may be revised as more data comes in, it’s a far cry from the recession that many had forecast at this time last year, before economists realized that Americans had piled up enough savings to power spending as the Fed moved to make borrowing more expensive.
Interest Rates and the Economy (from the New York Times): Jerome H. Powell, the chair of the Federal Reserve, reiterated the central bank’s commitment to moving forward “carefully” with further rate moves in a speech on Thursday. But he also said that the central bank might need to raise interest rates more if economic data continued to come in hot.
Mr. Powell tried to paint a balanced picture of the challenge facing the Fed in remarks before the Economic Club of New York. He emphasized that the Fed is trying to weigh two goals against one another: It wants to wrestle inflation fully under control, but it also wants to avoid doing too much and unnecessarily hurting the economy.
Yet this is a complicated moment for the central bank as the economy behaves in surprising ways. Officials have rapidly raised interest rates to a range of 5.25 to 5.5 percent over the past 19 months. Policymakers are now debating whether they need to raise rates one more time in 2023.
The higher borrowing costs are supposed to weigh down economic activity — slowing home buying, business expansions and demand of all sorts — in order to cool inflation. But so far, growth has been unexpectedly resilient. Consumers are spending. Companies are hiring. And while wage gains are moderating, overall growth has been robust enough to make some economists question whether the economy is slowing sufficiently to drive inflation back to the Fed’s 2 percent goal.
Economists interpreted his remarks to mean that while the Fed is unlikely to raise interest rates at its upcoming meeting, which concludes on Nov. 1, it was leaving the door open to a potential rate increase after that. The Fed’s final meeting of the year concludes on Dec. 13.
The Federal Deficit: The Federal Deficit Is Growing. This Is Why. (from the New York Times): Tax receipts dipped unexpectedly last year. The Biden administration blames Republican tax cuts, but the truth is more complicated.
Tax receipts dipped unexpectedly last year. The Biden administration blames Republican tax cuts, but the truth is more complicated.
America’s federal budget deficit effectively doubled over the year to $2 trillion, a surprising jump given the strength of the economy.
The deficit is the gap between how much the government spends and how much it receives in taxes. It tends to balloon during tough economic times and narrow when growth resumes, though that relationship broke under President Donald J. Trump and now President Biden.
White House officials initially predicted that the deficit would hit about $1.7 trillion in the 2023 fiscal year, which ended last month. That is the official figure that Treasury released on Friday. But it actually hit $2 trillion, when an accounting mirage caused by Mr. Biden’s student-loan plan is factored out. That program was supposed to increase deficits, but the Supreme Court struck it down, meaning the deficit was lower in 2022 and higher in 2023 than the official figures.
The widening deficit is a surprise given that the economy grew faster than expected over the last year.
But the Trump tax cuts are not the only reason the deficit jumped unexpectedly last year. Federal spending isn’t to blame, either; it grew only slightly from the previous year, after excluding the blocked student loan program, Treasury officials said on Friday. The big driver of the increase was slumping tax revenue unrelated to the Trump cuts.
A preliminary analysis by the Congressional Budget Office suggests that federal tax receipts fell 9 percent from the 2022 fiscal year, even though the economy grew steadily, a historical anomaly that cannot be explained only by the Trump tax cuts.
Asked if those cuts were behind the surprise slump in tax collections last year, Mr. Kogan was less certain. “Who knows?” he said.
To understand why the deficit rose so much last year, it helps to separate the long-run pressures on the federal budget from the handful of unexpected effects that sneaked up on economists in and outside the administration last year.
The government does not collect nearly enough in taxes to fully cover the costs of federal programs. The gap is expected to grow as millions more Americans retire in the years to come, raising the costs of Medicare and Social Security.
The budget office projects that federal spending over the next decade will average about 24 percent of the country’s annual economic output. In the same period, it predicts, the government’s tax receipts will equal about 18 percent of the economy — a number that assumes many of Mr. Trump’s tax cuts will expire in 2025.
That amount has been reduced by multiple rounds of tax cuts. In the three years after Mr. Trump’s cuts passed, receipts fell by about a percentage point of gross domestic product compared with the three years before the cuts.
Mr. Biden and Democrats approved some tax increases in 2022. But in a surprise, individual and corporate tax receipts appear to have fallen in 2023 by at least two percentage points from the previous year. Administration forecasters knew the Trump tax cuts would still be in place when their estimates of tax revenues and deficit levels were included in Mr. Biden’s budget proposal early this year. Still, those forecasts were off by several hundred billion dollars.
Several one-off factors help explain that extra decline.
There was a surge in claims — and in potential fraud — for a pandemic-era tax credit meant to encourage companies to keep paying workers even if Covid-19 was hurting business. The Internal Revenue Service delayed tax-filing deadlines for millions of people affected by natural disasters, including almost everyone in California, effectively pushing some tax payments from last fiscal year into the current one. American consumers bought fewer imported goods, and customs duties fell 20 percent as a result.
Receipts also plunged for taxes on capital gains — proceeds from the sale of assets like stocks. Those receipts are historically volatile. They came in unexpectedly high in the 2022 fiscal year, helping to reduce the deficit by more than expected.
A pair of corporate tax increases that Mr. Biden signed into law in 2022, including a new minimum tax and a tax on stock repurchases, were not projected to raise enough revenue last year to offset those losses.
Total federal spending grew by about 2.5 percent from 2022, Treasury reported. But one spending category went up sharply. The government spent $659 billion last year to pay the net interest on the national debt, Treasury reported. That was nearly $200 billion more than the previous year. The increase is largely the product of the Federal Reserve’s aggressive raising of interest rates in a bid to tame inflation.
Federal borrowing costs have climbed in recent weeks and stoked new concerns about interest payments — and larger deficits — in the years to come. In May, the budget office predicted interest costs alone would total $10.5 trillion over the next decade.
Long COVID - From the New York Times: A team of scientists is proposing a new explanation for some cases of long Covid, based on their findings that serotonin levels were lower in people with the complex condition.
In their study, published on Monday in the journal Cell, researchers at the University of Pennsylvania suggest that serotonin reduction is triggered by remnants of the virus lingering in the gut. Depleted serotonin could especially explain memory problems and some neurological and cognitive symptoms of long Covid, they say.
A colored transmission electron micrograph showing an intestinal endocrine cell, with granules containing serotonin in green.Credit...Steve Gschmeissner/Science
Why It Matters: New ways to diagnose and treat long Covid.
This is one of several new studies documenting distinct biological changes in the bodies of people with long Covid — offering important discoveries for a condition that takes many forms and often does not register on standard diagnostic tools like X-rays.
The research could point the way toward possible treatments, including medications that boost serotonin. And the authors said the biological pathway that their research outlines could unite many of the major theories of what causes long Covid: lingering remnants of the virus, inflammation, increased blood clotting and dysfunction of the autonomic nervous system.
From the Financial Times: China’s GDP grows 4.9% in third quarter, beating forecasts-China’s gross domestic product grew 4.9 per cent year on year in the third quarter, beating market expectations. The economy expanded 1.3 per cent on a quarterly basis, China’s National Bureau of Statistics said, regaining some momentum after growth of just 0.5 per cent in the April-June period.
Here’s What We Do and Don’t Know About the Effects of Remote Work from the New York Times: Three years into a mass workplace experiment, we are beginning to understand more about how work from home is reshaping workers’ lives and the economy.
When workplaces are remade by a tectonic shift — women flooding into the work force, the rise of computing — it typically takes some time for economists, psychologists, sociologists and other scholars to gather data on its effects.
So when employers moved suddenly to adopt remote work during the pandemic, with the share of employed Americans working exclusively from home rising to 54 percent in 2020 from 4 percent in 2019, researchers leaped to examine the effects of remote work on employees and the economy at large. Now the early results are emerging. They reveal a mixed economic picture, in which many workers and businesses have made real gains under remote work arrangements, and many have also had to bear costs.
Broadly, the portrait that emerges is this: Brick-and-mortar businesses suffered in urban downtowns, as many people stopped commuting. Still, some kinds of businesses, like grocery stores, have been able to gain a foothold in the suburbs. At the same time, rents rose in affordable markets as remote and hybrid workers left expensive urban housing.
Working mothers have generally benefited from the flexibility of being able to work remotely — more of them were able to stay in the work force. But remote work also seems to bring some steep penalties when it comes to career advancement for women.
Studies of productivity in work-from-home arrangements are all over the map. Some papers have linked remote work with productivity declines of between 8 and 19 percent, while others find drops of 4 percent for individual workers; still other research has found productivity gains of 13 percent or even 24 percent.
Urban Downtowns: When some 50 million Americans started working from home in the early days of the pandemic, brick-and-mortar retailers clustered in urban downtowns were hurting. The number of downtown clothing stores fell 8 percent from late 2019 to late 2021, according to a study using transaction data from 70 million Chase Bank customers. General goods stores in downtowns — including anything from department stores to florists to booksellers — fell 7 percent, and grocery stores declined 2 percent.
Some of those businesses followed remote workers to the suburbs. During that period, the number of suburban grocery stores increased roughly 3 percent, slightly outpacing the urban decline, particularly in suburbs where remote work levels were high.
In the coming years, the movement of retailers from downtowns to suburbs is likely to prove difficult for low-income workers who cannot afford to live in these areas, some of them affluent, where retailers may be hiring.
But some economists argue that many Americans stand to gain from the effects of remote work because rents in rural and suburban areas are likely to begin dropping. One recent study used data from postal address changes, rent changes on Zillow and the construction industry to project the potential rent effects of remote and hybrid work. The pandemic saw a temporary rent spike in previously affordable areas — think Dallas; Manchester, N.H.; and upstate New York — because many remote workers left the priciest housing markets once they gave up daily commutes. As construction catches up with that new demand, economists say, rents will fall back down.
And there could be an unexpected bonus: A study in Britain showed that burglaries declined nearly 30 percent in areas with high rates of working from home, which the researchers attributed to the increase of “eyes on the street” in those neighborhoods.
Working Women: For decades, a working mother’s schedule has felt like an equation that won’t balance. Many women are expected to still be at their desks at 5 p.m., and simultaneously at school pickup. They’re supposed to be in an office, and also available at home when their children are coughing and turned away from day care. (Ample data shows that this bind tends to constrict mothers more than fathers.)
Remote work slightly eases that conundrum, according to research using prepandemic data from economists at the University of Virginia and the University of Southern California. In fields like computer science, marketing and communications, which welcomed remote work from 2009 to 2019, working mothers’ employment rates increased. There was an almost one-to-one correlation: When remote work rose 2 percent, there was a 2 percent rise in mothers’ employment. Even so, the employment rates for working mothers lagged those of women without children, though remote work diminished that gap.
Claudia Goldin, who this week was awarded a Nobel Prize in economics, has shown that women tend to seek jobs with more flexibility so they can take care of household responsibilities. That has contributed to the gender pay gap.
While some working women, particularly mothers, may gain from being remote, women tend to see greater penalties when they do so. In a study of engineers at a Fortune 500 company, remote work had a negative effect on the amount of feedback junior employees got on their work — with the penalties more pronounced for women.
Men appeared more comfortable asking clarifying questions even if they weren’t physically near colleagues.
Women may also face more undeserved questions about their productivity, wherever they work. In a series of studies with more than 2,000 participants, researchers in Wisconsin and Canada found that both men and women were more likely to suspect women than men of shirking work. Some of these employees worked from home, and some did not.
When study participants saw through video footage that a female employee wasn’t at her desk, this was attributed to something nonwork-related 47 percent of the time; for men, it was attributed to nonwork activities just 34 percent of the time.
Remote Productivity: Whether work-from-anywhere setups hurt productivity or help it has been a burning question for executives.
Early evidence came in a 2013 paper from Mr. Bloom and others about a call center in China that allowed some employees to be mostly remote for nine months; it found that productivity rose 13 percent. Just under 10 percent of this boost was attributed to people taking fewer breaks, and 4 percent to them doing more calls per minute because their working environments were quieter.
But during the pandemic, when millions of workers suddenly shifted to being remote, the effects were more complex. The arrangements hadn’t been figured out in advance. The move to remote work wasn’t voluntary. So the results were more scattered.
A study of an Asian information technology company’s remote employees during the pandemic showed a decline in productivity of 8 to 19 percent. Another, looking at an American call center, found that when workers went remote, they made 12 percent fewer calls. On the other hand, a study of the productivity of economic researchers in the United States during the pandemic found a roughly 24 percent increase in their output.
These disparate findings leave some questions unanswered. “How on earth can you get a more than 30 point spread between them?” Mr. Bloom asked. “It all comes down to how workers are managed. If you set up fully remote with good management and incentives, and people are meeting in person, it can work. What doesn’t seem to work is sending people home with no face time at all.”
Emma Goldberg is a business reporter covering workplace culture and the ways work is evolving in a time of social and technological change. More about Emma Goldberg
New Normal or No Normal? How Economists Got It Wrong for 3 Years (from the New York Times): Economists first underestimated inflation, then underestimated consumers and the labor market. The key question is why.
Economists spent 2021 expecting inflation to prove “transitory.” They spent much of 2022 underestimating its staying power. And they spent early 2023 predicting that the Federal Reserve’s rate increases, meant to cure the inflation, would plunge the economy into a recession.
None of those forecasts have panned out.
Rapid inflation has now been a fact of life for 30 consecutive months. The Fed has lifted rates above 5.25 percent to hit the brakes on price increases, but the economy has remained surprisingly strong in the face of those moves. Americans are working in greater numbers than predicted, and recent retail sales data showed that consumers are still spending at a faster clip than just about anyone expected. For now, there is no economic downturn in sight.
The question is why experts so severely misjudged the pandemic and postpandemic economy — and what it means for policy and the outlook going forward.
Economists generally expect growth to slow late this year and into early next, nudging unemployment higher and gradually weighing inflation down. But several said the economy had been so hard to predict since the pandemic that they had low confidence about future projections.
“The forecasts have been embarrassingly wrong, in the entire forecasting community,” said Torsten Slok at the asset manager Apollo Global Management. “We are still trying to figure out how this new economy works.”
Economists were too optimistic on inflation.
Two big issues have made it difficult to forecast since 2020. The first was the coronavirus pandemic. The world had not experienced such a sweeping disease since the Spanish flu in 1918, and it was hard to anticipate how it would roil commerce and consumer behavior.
The second complication came from fiscal policy. The Trump and Biden administrations poured $4.6 trillion of recovery money and stimulus into the economy in response to the pandemic. President Biden then pushed Congress to approve several laws that provided funding to encourage infrastructure investment and clean energy development.
Inflation F.A.Q.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Between coronavirus lockdowns and the government’s enormous response, standard economic relationships stopped serving as good guides to the future.
Take inflation. Economic models suggested that it would not take off in a lasting way as long as unemployment was high. It made sense: If a bunch of consumers were out of work or earning tepid pay gains, they would pull back if companies charged more.
Economic models did not take in to account that people were saving money during the pandemic that enabled them to buy goods even when unemployed.Credit...Jim Wilson/The New York Times
As inflation showed staying power, officials at the Fed started to raise interest rates to cool demand — and economists began to predict that the moves would plunge the economy into recession.
Central bankers were lifting rates at a speed not seen since the 1980s, making it sharply more expensive to take out a mortgage or car loan. The Fed had never changed rates so abruptly without spurring a downturn, many forecasters pointed out.
“I think it’s been very seductive to make forecasts that are based on these types of observations,” said Jan Hatzius, Goldman Sachs’s chief economist, who has been predicting a gentler cool-down. “I think that understates how much this cycle has been different.”
Not only has the recession failed to materialize so far, but growth has been surprisingly fast. Consumers have continued shelling out money for everything from Taylor Swift tickets to dog day care. Economists have regularly predicted that America’s shoppers are near a breaking point, only to be proved wrong.
Part of the issue is a lack of good real-time data on consumer savings, said Karen Dynan, an economist at Harvard.
“It’s been months now that we’ve been telling ourselves that people at the bottom of the income distribution have spent down their savings piles,” she said. “But we don’t really know.”
At the same time, fiscal stimulus has had more staying power than expected: State and local governments continue to divvy out money they were allocated months or years ago.
And consumers are getting more and better jobs, so incomes are fueling demand.
Economists are now asking whether inflation can slow sufficiently without a pullback in growth. A landing so painless would be historically abnormal, but inflation has already cooled to 3.7 percent in September, down from a peak of about 9 percent.
Normal may still be far away.
Still, that is too quick for comfort: Inflation was about 2 percent before the pandemic. Given inflation’s stubbornness and the economy’s staying power, interest rates may need to stay elevated to bring it fully under control. On Wall Street, that even has a tagline: “Higher for longer.”
Some economists even think that the low-rate, low-inflation world that prevailed from about 2009 to 2020 may never return. Donald Kohn, a former vice chair of the Fed, said big government deficits and the transition to green energy could keep growth and rates higher by propping up demand for borrowed cash.
“My guess is that things aren’t going to go back,” Mr. Kohn said. “But my goodness, this is a distribution of outcomes.”
Neil Dutta, an economist at Renaissance Macro, pointed out that America had a baby boom in the 1980s and early 1990s. Those people are now getting married, buying houses and having children. Their consumption could prop up growth and borrowing costs.
“To me, it’s like the old normal — what was abnormal was that period,” Mr. Dutta said.
Fed officials, for their part, are still predicting a return to an economy that looks like 2019. They expect rates to return to 2.5 percent over the longer term. They think that inflation will fade and growth will cool next year.
The question is, what happens if they are wrong? The economy could slow more sharply than expected as the accumulated rate moves finally bite. Or inflation could get stuck, forcing the Fed to contemplate heftier interest rates than anyone has gambled on. Not a single person in a Bloomberg survey of nearly 60 economists expects interest rates to be higher at the end of 2024 than at the end of this year.
Mr. Slok said it was a moment for modesty.
“I think we have not figured it out,” he said.
Jeanna Smialek covers the Federal Reserve and the economy for The Times from Washington.