InvestMacro

By Amitrajeet A. Batabyal, Rochester Institute of Technology 

Supply chain disruptions during COVID-19 brought to light how interdependent nations are when it comes to manufacturing. The inability of the U.S. to produce such needed goods as test kits and personal protective equipment during the pandemic revealed our vulnerabilities as a nation.
China’s rise as a global production superpower has further underscored the weaknesses of American manufacturing.

In addition to fixing supply chain disruptions, bringing manufacturing back to the U.S. will benefit national security. Advanced computer chips, for example, are disproportionately made by a single firm, the Taiwan Semiconductor Manufacturing Co. These microchips are critical to smartphones, medical devices and self-driving cars, as well as military technology. TSMC, from a U.S. national security perspective, is located too close to China. Taiwan’s proximity to China makes it vulnerable because the Chinese government threatens to use force to unify Taiwan with the mainland.

My research and that of others examines how the lack of manufacturing competitiveness in the U.S. leaves the U.S. vulnerable to shortages of critical goods during times of geopolitical disruption and global competition. The strategies the U.S. employs in bringing back manufacturing, along with innovative practices, will be key to ensure national security.

Strengthening national security

President Joe Biden has signed two bills that propose to rebuild American manufacturing. The CHIPS and Science Act of 2022 will provide US$52.7 billion for American semiconductor research, development, manufacturing and workforce development.

The Inflation Reduction Act of 2022 will invest $369 billion to promote a clean energy economy, in part by offering generous incentives for U.S.-made electric cars.

Training workers for new advanced manufacturing is another key factor in strengthening a sector that has become increasingly reliant on technology. In fact, while the number of jobs in American manufacturing fell by 25% after 2000, manufacturing output did not decline. Still, American manufacturing is facing a massive shortage of labor, especially among those workers with skills needed to power a new generation of manufacturing.

This need to train a new group of skilled workers explains why federal funds in the CHIPS Act are set aside for workforce development. Complementing federal legislation are programs such as America’s Cutting Edge, a national initiative that provides free online and in-person training designed to meet the growing need in the U.S. machining and machine tool industry for skilled operators, engineers and designers.

The power of innovation

It is impractical to bring all manufacturing back to the U.S. Offshoring is often less expensive. But research shows that certain types of in-country manufacturing can not only help secure national security but also spark innovation.

When research and development are conducted close to where the goods are physically made, this proximity can increase the likelihood of collaboration between these two activities. Collaboration can lead to greater efficiencies.

Product development can benefit as well. New research demonstrates that U.S. firms that located their manufacturing and R&D physically close to each other generated more patents than firms that did not.

Even so, the contribution of U.S. manufacturing firms to innovation declined greatly between 1977 and 2016. That’s because the benefits of locating manufacturing and R&D close to each other depends on the nature of the manufacturing itself, researchers have found.

For instance, the design of new drugs often requires manufacturing facilities to be located nearby. In that respect, co-locating manufacturing and research and development makes sense. This can be true for semiconductors as well. World-class chip manufacturers in Taiwan, such as TSMC, are located alongside a growing chip design industry, which permits designers to prototype and test new ideas quickly.

The U.S. and other countries are betting on the same potential benefits from co-location. For instance, to minimize the dependence on TSMC and, more generally, on foreign sources for chips, the European Union is spending 43 billion euros, while Japan is encouraging chip manufacturing at home with a $6.8 billion investment.

People are the bottom line

In a 2011 op-ed, I argued that while federal legislation to promote U.S. manufacturing could succeed in bringing more manufacturing back to the U.S., there was no guarantee that large numbers of jobs would be created – a key point made by those seeking to promote manufacturing.

Governments are generally poor at picking winning technologies and industries. Governmental mistakes in picking supposedly winning industries or sectors have, generally, led to a great deal of waste of taxpayer dollars.

In fact, market forces and informed company decisions should, I believe, play a larger role picking winners than federal investment. Where that investment comes from, what it supports and how much money is needed are critical questions.

If firms choose to relocate their companies to benefit from the synergy of R&D, then they must be able to attract the best human resource talent available. This is where U.S. investment can help build a more skilled workforce.

As pointed out by the economist Gary Pisano, many policymakers in the U.S. have long believed that manufacturing is an attractive sector for people with less education and training. Therefore, as a nation, we have not devoted many resources to train people with specialized skills in manufacturing.

This approach stands in stark contrast to the approach followed in Germany. There, practical work is valued by employers and employees and hence apprenticeship programs are routinely used to train workers who are well qualified to work in the manufacturing sector. While the U.S. approach is changing with recently announced investment by the White House through the CHIPS and the Inflation Reduction acts, more is needed.

Geopolitics is a significant consideration in the manufacture of computer chips.
Michael Dziedzic for Unsplash, CC BY-ND

It is my belief that if the U.S. is to remain an economic powerhouse, then corporations should not separate their workforce, sending cost-saving manufacturing offshore while retaining the innovators. Corporations like Apple have sent nearly all of their production offshore, retaining only the most skilled parts of the supply chain involving activities like R&D.

Instead, the U.S. needs to financially support firms wishing to bring manufacturing back by making it easier for such firms to find qualified manufacturing workers at home – and close to innovators when practical. This effort will bolster the U.S.‘s ability to be self-sufficient, innovative and secure in times of geopolitical conflicts.

About the Authors:

Amitrajeet A. Batabyal, Distinguished Professor, Arthur J. Gosnell Professor of Economics, & Interim Head, Department of Sustainability, Rochester Institute of Technology

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By JustMarkets

The US indices traded yesterday without a single trend. At yesterday’s stock market close, Dow Jones (US30) decreased by 1.14%, and S&P 500 (US500) lost 0.20%. The NASDAQ Technology Index (US100) gained 0.14% on Tuesday.

The Empire State Manufacturing Index, which measures activity in New York State, fell to 32.9 in January, the worst reading since the pandemic.

Goldman Sachs (GS) financial performance fell short of expectations. The company’s price fell more than 6% on the report. The report showed weakness in consumer banking and a 48% drop in investment banking revenue. On the other hand, Morgan Stanley’s (MS) stock was up more than 6% on the report. Record revenues in the asset management business offset weakness in investment banking.

Investors are waiting for Netflix’s quarterly results to be released Thursday. Analysts at UBS said they expect the streaming giant’s subscriber count to rise in the fourth quarter amid “strong content and seasonality.” Netflix is expected to add about 4.5 million subscribers in the fourth quarter, up from 2.4 million in the previous quarter.

Tesla (TSLA) shares jumped by 6% after Deutsche Bank issued its recommendation to buy the company on expectations that recent price declines are likely to support sales growth.

According to Harvard University professor Kenneth Rogoff, sustained inflation above the 2% target will force Federal Reserve policymakers to keep interest rates higher for longer. Eventually, inflation will fall, but interest rates will not fall to the level they were before.

The Ukrainian government has hired BlackRock Inc. to help set up the country’s reconstruction fund.

According to a survey released at the annual World Economic Forum in Davos, two-thirds of private and public sector economists surveyed expect a global recession this year. Meanwhile, German Chancellor Olaf Scholz said Europe’s largest economy would avoid a recession this year thanks to efforts to limit the impact of the region’s energy crisis on the economy. Bob Prince, chief investment officer at Bridgewater Associates, said the economic cycle has returned and that more people will have to lose their jobs before inflation is brought under control. According to the chief economist of the European Bank for Reconstruction and Development, it will take years for sanctions against Russia to force Vladimir Putin to back down because oil and gas revenues outweigh sanctions losses many times over. Hopes that US and European sanctions will change the balance of power in the near future are an unrealistic scenario.

Equity markets in Europe mostly rose yesterday. German DAX (DE30) gained 0.35%, French CAC 40 (FR40) jumped by 0.48%, Spanish IBEX 35 (ES35) added +0.15%, and British FTSE 100 (UK100) closed yesterday down by 0.12%.

Germany’s inflation rate fell sharply from 10% to 8.6% year-on-year. The inflation rate slowed in December 2022, mainly due to lower energy prices. But despite the decline in inflation rates across Europe, according to Philip Lane, chief economist at the ECB, the central bank should continue to aggressively raise rates to levels that will begin to limit growth.

The British FTSE 100 index is close to an all-time high. Yesterday’s labor market data showed that the UK unemployment rate remained at 3.7%, but average earnings rose to 6.4% from 6.1% the previous month, the highest rate of growth. Wage growth is a major concern for the Bank of England, as there is a risk of a wage-price spiral that will eventually lead to higher inflationary expectations. UK inflation data will be released today, where consumer prices are expected to fall for the first time in 12 months.

Reuters predicts that gold prices will return to their all-time highs above the psychologically critical $2,000 level this year unless, of course, there is a major change in the US inflation picture. The highest gold price ever in US dollars is $2077.88. This peak was reached on August 7, 2020.

Oil prices continue to rise amid hopes for a rebound in Chinese demand, even despite weak economic data. The Organization of the Petroleum Exporting Countries (OPEC) reported in its monthly report that oil demand in China will increase by 510,000 BPD this year. The rise in oil was also supported by a weaker US dollar, which fell against most major currencies on Tuesday. A weaker dollar makes oil less expensive for other currency holders.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) added 1.23% on Tuesday, China’s FTSE China A50 (CHA50) decreased by 0.47%, Hong Kong’s Hang Seng (HK50) ended the day down by 0.78%, India’s NIFTY 50 (IND50) added 0.89%, and Australia’s S&P/ASX 200 (AU200) ended the day up by 0.03%.

The Bank of Japan left all policy settings unchanged at its meeting. This includes the discount rate (maintained at -0.1%) and the 10-year bond yield target of about 0%. Policymakers also mentioned that they would continue to buy bonds with a degree of flexibility. This underscores the central bank’s intention to continue to control the yield curve as planned. This disappointed investors who had hoped for the first steps of monetary policy normalization.

S&P 500 (F) (US500) 3,990.97 −8.12  (−0.20%)

Dow Jones (US30) 33,910.85  −391.76 (−1.14%)

DAX (DE40) 15,187.07 +53.03 (+0.35%)

FTSE 100 (UK100) 7,851.03 −9.04 (−0.12%)

USD Index 102.40 +0.20 (+0.19%)

• – Japan BoJ Interest Rate Decision at 05:00 (GMT+2);
• – Japan BoJ Monetary Policy Statement at 05:00 (GMT+2);
• – Japan BoJ Outlook Report at 05:00 (GMT+2);
• – Japan Industrial Production (m/m) at 06:30 (GMT+2);
• – Japan BoJ Press Conference (Tentative);
• – UK Consumer Price Index (m/m) at 09:00 (GMT+2);
• – World Economic Forum Annual Meetings at 10:00 (GMT+2);
• – Eurozone Consumer Price Index (m/m) at 12:00 (GMT+2);
• – US Retail Sales (m/m) at 15:30 (GMT+2);
• – US Producer Price Index (m/m) at 15:30 (GMT+2);
• – US Industrial Production (m/m) at 16:15 (GMT+2);
• – US FOMC Member Harker Speaks at 21:00 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By Steven Pressman, The New School 

Republicans and Democrats are again preparing to play a game of chicken over the U.S. debt ceiling – with the nation’s financial stability at stake.

The Treasury Department on Jan. 13, 2023, said it expects the U.S. to hit the current debt limit of US$31.38 trillion on Jan. 19. After that, the government will take “extraordinary measures” – which could extend the deadline until May or June – to avoid default.

But it’s not clear whether Republicans in the House will agree to lifting the debt ceiling without strings attached – strings that President Joe Biden and Senate Democrats have vowed to reject. Right-wing Republicans demanded that, in exchange for voting for Kevin McCarthy as speaker of the House, he would seek steep government spending cuts as a condition of raising the borrowing limit.

Economist Steve Pressman explains what the debt ceiling is and why we have it – and why it’s time to abolish it.

1. What is the debt ceiling?

Like the rest of us, governments must borrow when they spend more money than they receive. They do so by issuing bonds, which are IOUs that promise to repay the money in the future and make regular interest payments. Government debt is the total sum of all this borrowed money.

The debt ceiling, which Congress established a century ago, is the maximum amount the government can borrow. It’s a limit on the national debt.

2. What’s the national debt?

On Jan. 10, 2023, U.S. government debt was $30.92 trillion, about 22% more than the value of all goods and services that will be produced in the U.S. economy this year.

Around one-quarter of this money the government actually owes itself. The Social Security Administration has accumulated a surplus and invests the extra money, currently $2.8 trillion, in government bonds. And the Federal Reserve holds $5.5 trillion in U.S. Treasurys.

The rest is public debt. As of October 2022, foreign countries, companies and individuals owned $7.2 trillion of U.S. government debt. Japan and China are the largest holders, with around $1 trillion each. The rest is owed to U.S. citizens and businesses, as well as state and local governments.

3. Why is there a borrowing limit?

Before 1917, Congress would authorize the government to borrow a fixed sum of money for a specified term. When loans were repaid, the government could not borrow again without asking Congress for approval.

The Second Liberty Bond Act of 1917, which created the debt ceiling, changed this. It allowed a continual rollover of debt without congressional approval.

Congress enacted this measure to let then-President Woodrow Wilson spend the money he deemed necessary to fight World War I without waiting for often-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so it limited borrowing to $11.5 billion and required legislation for any increase.

The debt ceiling has been increased dozens of times since then and suspended on several occasions. The last change occurred in December 2021, when it was raised to $31.38 trillion.

4. What happens when the US hits the ceiling?

Currently, the U.S. Treasury has under $400 billion cash on hand, and the U.S. government expects to borrow around $100 billion each month this year.

When the U.S. nears its debt limit, the Treasury secretary – currently Janet Yellen – can use “extraordinary measures” to conserve cash, which she indicated would begin on Jan. 19. One such measure is temporarily not funding retirement programs for government employees. The expectation will be that once the ceiling is raised, the government would make up the difference. But this will buy only a small amount of time.

If the debt ceiling isn’t raised before the Treasury Department exhausts its options, decisions will have to be made about who gets paid with daily tax revenues. Further borrowing will not be possible. Government employees or contractors may not be paid in full. Loans to small businesses or college students may stop.

When the government can’t pay all its bills, it is technically in default. Policymakers, economists and Wall Street are concerned about a calamitous financial and economic crisis. Many fear that a government default would have dire economic consequences – soaring interest rates, financial markets in panic and maybe an economic depression.

Under normal circumstances, once markets start panicking, Congress and the president usually act. This is what happened in 2013 when Republicans sought to use the debt ceiling to defund the Affordable Care Act.

But we no longer live in normal political times. The major political parties are more polarized than ever, and the concessions McCarthy gave right-wing Republicans may make it impossible to get a deal on the debt ceiling.

5. Is there a better way?

One possible solution is a legal loophole allowing the U.S. Treasury to mint platinum coins of any denomination. If the U.S. Treasury were to mint a $1 trillion coin and deposit it into its bank account at the Federal Reserve, the money could be used to pay for government programs or repay government bondholders. This could even be justified by appealing to Section 4 of the 14th Amendment to the U.S. Constitution: “The validity of the public debt of the United States … shall not be questioned.”

Few countries even have a debt ceiling. Other governments operate effectively without it. America could too. A debt ceiling is dysfunctional and periodically puts the U.S. economy in jeopardy because of political grandstanding.

The best solution would be to scrap the debt ceiling altogether. Congress already approved the spending and the tax laws that require more debt. Why should it also have to approve the additional borrowing?

It should be remembered that the original debt ceiling was put in place because Congress couldn’t meet quickly and approve needed spending to fight a war. In 1917 cross-country travel was by rail, requiring days to get to Washington. This made some sense then. Today, when Congress can vote online from home, this is no longer the case.

This is an updated version of an article first published on July 18, 2019.

About the Author:

Steven Pressman, Part-Time Professor of Economics, The New School

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By JustMarkets

The US stock market did not trade yesterday due to the holiday. But futures on indices traded in the European and partly in the US session. By the close of the futures market on Monday, the indices were down a bit, so the stock market’s opening on Tuesday will be accompanied by a price gap.

Traders should not forget that it is the earnings season in the United States. Such companies as Morgan Stanley (MS), Goldman Sachs (GS), Interactive Brokers (IBKR), and United Airlines Holdings (UAL) are reporting today.

Equity markets in Europe were mostly up yesterday. German DAX (DE30) gained 0.31%, French CAC 40 (FR40) added 0.28%, Spanish IBEX 35 (ES35) fell by 0.12%, and British FTSE 100 (UK100) closed on Monday with a 0.20% gain.

Short-term interest rate differentials are a good indicator of the future trajectory of relative monetary policy cycles. Using central bank policy projections, economists expect the two-year EUR/USD swap differential to reverse this year. Right now, swaps are trading at about 125 basis points in favor of the dollar, and by the end of this year, that differential could change to 40 basis points in favor of the euro. If this materializes, the EUR/USD currency pair will reach the 1.20 level before the end of the year.

In Europe, a surprisingly warm winter led to a drop in natural gas prices. Europe may come out of the heating season with more than 50% of its storage capacity filled. This could limit the jump in natural gas prices in the second half of 2023 to around €140-160/MWh. This is still high but well below the €250-300/MWh level seen last summer.

Goldman Sachs raised its aluminum price forecast due to rising demand in China and Europe. According to analysts, the metal is likely to cost an average of $3125 per tonne this year. However, it is pointed out that the upward price impulse will gradually increase in the spring.

Oil prices fell on Monday, consolidating after a strong rise last week ahead of the publication of demand forecasts from OPEC and IEA. These monthly reports strongly influence oil market trends in global oil demand. They may be essentially this month, given the importance the market attaches to a potential recovery in oil demand in China.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) decreased by 1.14% on Monday, China’s FTSE China A50 (CHA50) added 1.50%, Hong Kong’s Hang Seng (HK50) was up by 0.04% on the day, India’s NIFTY 50 (IND50) fell by 0.34%, and Australia’s S&P/ASX 200 (AU200) was positive by 0.82%.

China’s GDP growth slowed in the latest quarter to +2.9% year-over-year, down from +3.9% in the previous quarter. But industrial production rose by 1.3% last month, while the unemployment rate fell to 5.5% from 5.7%. Analysts say rising domestic demand in China could be an important counterbalance to slowing growth in the US and Europe. Investors are once again buying up Chinese blue chips, from large consumer goods to financial companies. China’s stock market rally underscores expectations of an economic recovery at a time when most developed countries are in a recession. Foreign capital inflows into China reached about 44 billion yuan last week, the highest since May 2021.

There is a growing possibility that the Bank of Japan may announce a significant policy change this week as bond yields reach the upper limit again. According to economists, there are two options at the moment. The first (main scenario) is the abolition of the yield curve control policy. This might lead to a sell-off in Japanese equities, which would strengthen the yen. The second scenario is that Japan’s central bank can extend the range to 75 basis points on either side of its 0% target for 10-year government bonds. This would save time until the end of the quarter when Kuroda resigns. Either way, the closer we get to spring, the more likely the Bank of Japan will change course.

S&P 500 (F) (US500) 3,999.09 0 (0%)

Dow Jones (US30)34,302.61 0 (0%)

DAX (DE40) 15,134.04 +47.52 (+0.31%)

FTSE 100 (UK100) 7,860.07 +16.00 (+0.20%)

USD Index 102.39 +0.19 (+0.18%)

• – China GDP (q/q) at 04:00 (GMT+2);
• – China Industrial Production (m/m) at 04:00 (GMT+2);
• – China Retail Sales (m/m) at 04:00 (GMT+2);
• – China Unemployment Rate (m/m) at 04:00 (GMT+2).
• – UK Average Earnings Index (m/m) at 09:00 (GMT+2);
• – UK Claimant Count Change (m/m) at 09:00 (GMT+2);
• – UK Unemployment Rate (m/m) at 09:00 (GMT+2);
• – German Consumer Price Index (m/m) at 09:00 (GMT+2);
• – World Economic Forum Annual Meetings at 10:00 (GMT+2);
• – German ZEW Economic Sentiment (m/m) at 12:00 (GMT+2);
• – Eurozone ZEW Economic Sentiment (m/m) at 12:00 (GMT+2);
• – Canada Consumer Price Index (m/m) at 15:30 (GMT+2);
• – US NY Empire State Manufacturing Index (m/m) at 15:30 (GMT+2);
• – US FOMC Member Williams Speaks at 22:00 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.