Easy Economics
Economics made Easy
Recent News
Brief summaries and analysis of recent economic news and developments.
From Physician to Technician: The Future of the Healthcare Industry
An exploration into the relationship between Artificial Intelligence and existing occupations in the Healthcare Industry
In recent years, discussion around applications of Artificial Intelligence has skyrocketed. We took this opportunity to review what AI is, whether or not it is likely to be deemed a "technology shock" for the likely future economic consequences of its current widespread adoption, and how AI is being used in the clinical side of the Healthcare industry.
We find, unsurprisingly, that AI's implementation is widespread and quickly accelerating as advancements are made in different learning models. In Healthcare specifically, implementation and automation of certain tasks seems to be mostly concentrated in the early stages of the patient treatment cycle (like patient testing, diagnosis, and treatment planning). We recommend healthcare professionals continue to monitor FDA approval of clinical AI enabled devices and strategically take on more responsibility to mitigate the risk of automation.
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Article:
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"From Physician to Technician: The Future of the Healthcare Industry"
By: Nicholas Dolasinski, Nicholas McElenney, Ari Mehta, and Brody Asheim
March 26, 2024
Changes in US Policy and their effects on Bond Markets
(2020-2023)
Over the past 3 years, policymakers have had their hands full in mitigating the economic effects of a global pandemic. In this article, I review the many pivots that US Fiscal and Monetary Policy have made since 2020 and how bond markets have responded. In doing so I also discuss the core channels through which the government can guide lending markets.
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Article:
"How US Policy has Impacted Lending Markets (2020-2023)"
By: Nicholas Dolasinski
Dec 13, 2023
What's Driving University Tuition Inflation?
With the resumption of student loan payments and interest accrual this month, I thought it appropritate to take take a step back and piece together the mystery that is tuition inflation. For years, the cost of attaining a degree has far outpaced the inflation of other goods and services in the United States. The reasons for this growth may surprise you.
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Article:
"The Drivers of Tuition Inflation"
By: Nicholas Dolasinski
Sep 5, 2023
Analyzing the Student Loan Moratoriam and its Conclusion
In this article, I explore what student loan borrowers have been using their "extra" cash for during the pause on Federal Student debt Payments beginning in March of 2020. I find that most borrowers did not take this opertunity to pay down student loan balances. Instead borrowers used the liquidity to save (2020-2021), offset inflation (2021-2023), and take on other forms of debt. As a result, the coming resumption of student loan payments will impose a strong headwind on over 40 million households.
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Article:
"An Economic Analysis of the Student Loan Moritorium and its Conclusion"
By: Nicholas Dolasinski
Sep 3, 2023
Job Market Still Hot in January
February 3, 2023
By: Nicholas Dolasinski
Boy, would I have paid to see the look on Jerome
Powell’s face when he saw the payroll figure which released
this morning. As I’m sure you know by now, the United States
added 517,000 jobs in January of 2023. For context, December
of 2022 added 223,000 jobs. Experts had expected this
month’s payroll to slow to around 187,000 jobs added. So
what happened, why did the figure come in nearly 3 times
the expected figure when all we have heard about for the
past two months is the big bad looming recession?
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Upon reading the official Employment Situation Summary published by the US Bureau of Labor Statistics, there is one phrase that stands out: “...was little changed..”. This quote was used to describe nearly every element of the employment situation from the unemployment rate (at 3.4%) to the labor force participation rate (at 62.4%). With that said, there were some standout areas.
The “Leisure and Hospitality” category added 128,000 jobs this month, much higher than the category’s 2022 average of 89,000 per month. This makes a bit of sense as spending on travel and leisure is inherently cyclical. Typically, summer is the prime season with holiday travel following. On top of this, we have seen significant travel restrictions easing in the past month with China’s reopening. With that said, one may ask, why is this sector growing so aggressively in January, after the typical travel season and with a potential global recession on the horizon? Well, the answer may lie in the fact that travel and leisure are still far below their pre-pandemic levels. In February 2020, travel and leisure jobs were 495,000 positions higher than the print today (around 2.9%). So with Covid fading away and a fruitful travel season behind us, these companies may be looking to build back their labor force in preparation for this summer.
Another sector that added a surprising number of jobs was the professional and business services sector, which increased to 82,000. This is higher than their 2022 average of 63,000 per month. Half of these (41,000) jobs were attributed to professional, scientific, and technical services.
The Government employment figures may have skewed the print slightly as 35,000 of the 74,000 jobs the government added in January were from teachers returning to work after their strike.
The rest of the sector’s gains were on par with their 2022 averages. Average hourly earnings for all sectors increased by 10 cents (0.3%). In the past 12 months, these average hourly earnings have grown by 4.4%. So what does all of this mean going forward?
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Well, it’s not great news. Though jobs are still being added, and the labor market remains tight, we are beginning to see interest rates impact consumer spending. Inflation peaked in June 2022 at 9.06%. Since then it has fallen by nearly 3%. The tricky element of this cycle’s inflation was its root in supply constraints. The ultra-tight energy market over the past 8 months and trouble with manufacturing and shipping from COVID complications made goods far more expensive than they typically would have been. Now that these complications are mostly resolved, we are seeing inflation that can be attributed to the years of quantitative easing and economic stimulus during COVID. This core inflation should really read more around 5%. I would argue the combination of the FED Funds rate at 4.5%, heavy quantitative tightening schedule, and pessimistic market sentiment is more than enough to combat this core inflation over the next year.
It’s important to remember that, according to a study by Christina D. Romer
and David H. Romer in 2004, inflation is little changed by a monetary policy shock
until over 2 years after the shock. Refer to the graph to the right for a better picture
of the timeline impacts monetary policy shocks have on output, inflation, and production.
Unfortunately, the Federal Reserve must maintain the market’s confidence.
This large jobs print will dominate the news cycle for the next few weeks, convincing
people that the economy and inflation are out of control and the FED must do more
to hold it down. The Fed will likely continue to hike rates over the next couple of
meetings without seeing the error in this overreaction for a while.
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References:
Bureau of Labor Statistics; Employment Situation Summary; January 2023
Christina D. Romer and David H. Romer; "A New Measure of Monetary Shocks: Derivation and Implications". 2004
The Peak?
November 17, 2022
By: Nicholas Dolasinski
There has been a lot of discussion in the media about whether we have reached peak inflation in the United States. In this month’s article, we will analyze recent trends that support this conclusion, what implications this could have on the market, and some events that could reverse this trend toward lower inflation.
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The Consumer Price Index (CPI) report measures the monthly price increases or decreases of a basket of goods and services that the typical household purchases. In October of 2022, the CPI rose 0.4% putting the U.S. at a 7.7% increase year over year. For reference, the current peak in year over year inflation existed in June at 9.1%. Since June, the new and used car markets have declined at an increasing rate. In October, used car prices fell 2.4% (their largest decrease this year). The used and new car markets are likely to continue along this path as supply constraints loosen and demand continues to fall due to interest rates having skyrocketed. On a similar note, apparel prices have continued to decrease due to excess inventory and lower demand.
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A particularly important contributor to the CPI report and core inflation (inflation excluding food and energy prices) is the housing market. As you and I know, shelter eats up most of our paychecks. This is reflected in the CPI as housing expenditures hold the largest weight of all the categories, making up around 33% of the CPI (CNBC). Now, it is estimated that changes in the housing market lag the CPI report by around a year due to the stickiness and length of leasing and rent contracts. In October, the shelter index rose an astounding 0.8% putting the year of year increase at 6.9%. This deceiving number is not reflected in the actual housing market today. According to real estate broker Redfin, home listings were down 17.5% in the same month (CNBC). Similarly, prices on listings continue to plumit as demand crashes. I can’t imagine why demand is crashing, who wouldn’t want a 7% mortgage? Regardless, the lagging element of housing prices will act as an enormous headwind for inflation midway through next year, after a few more elevated months. To sumerize, we are likely to see apparel, car, and housing inflation fall heavily in the early part of 2023.
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The two elements of inflation that remain undecided are food and energy. Food rose 0.6%, the smallest increase since before April. This puts the year over year inflation for food at home at 12.4% and the food away from home index at 8.6%. While food inflation appears to be slowing, energy saw its first positive increase since June coming in at 1.8%. Food and energy have been drastically affected by the volatility of the global market. The war between Russia and Ukraine certainly isn’t helping matters. Russia is the second largest producer of natural gas and crude oil in the world. Ukraine supplies around 52% of global sunflower oil and 11.3% of global cereals (Brookings). Positive developments in this altercation would be great news for the global food and energy market. Unfortunately, the opposite appears to be the case we have seen with the Polish missile incident. Futher escalation to a global war would obviosly revert progress in inflation and make the possibility of a softish landing very unlikely. Assuming the current situation remains the same, in the coming months we will likely see food inflation continue to slow while energy prices grow with the European Unions plan to stop insuring maritime transportation of Russian oil on December 5th and a cold european winter acting as tailwinds.
Despite oil, housing, and potentially food prices remaining elevated for a while, it is unlikely that we will see another 9.1% year over year inflation rate. This means the market’s focus will now be on how the Federal Reserve manuvers through the next few meetings.
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Many investors are calling for a Fed slowdown or even a pivot in the coming months. While this is likely on the horizon, markets are still in for a load of pain. This quarter has brought with it the first earnings revisions and series of layoffs, primarily in the technolgy sector. This just the beginning. As the consumer continues to feel the pressure of inflation and high interest rates, their COVID savings will disappear and demand will fall. This destruction of demand is primarily how inflation is coming down currently and will be the driving force in returning inflation to the Fed’s goal of 2.5%. Companies will feel this lack of demand and will have no choice but to produce less and reduce their workforce. Expect higher unemployment and lower company earnings as we enter the final stage of inflation correction next year.
While it is likely that we have seen peak inflation in the United States, there remains a lot of pain to be felt from this slowing economy.
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Referances:
Iacurci, Greg; "Here's why it may take a while for housing inflation to cool off". CNBC. Link
Bureau of Labor Statistics; "Consumer Price Index - October 2022". Link
Strubenhoff, Heinz; "The War in Ukraine Triggered a Global Food Shortage". Brookings. Link
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My tea has just gone cold, a travesty that has somehow been overshadowed by the United States CPI print today. In the print, we saw all items rise 0.4%, much higher than August’s 0.1% increase and overshooting the 0.3% expectation. All this despite energy prices falling 2.1%, particularly driven by gas prices falling 4.9%.
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The deflation of energy prices is the first element I would like to discuss. Earlier this month we heard Opec’s announcement to cut production by 2 million barrels per day (around 2.22% of the daily global oil production). On top of this, the European Union is set to stop insuring Russian maritime oil on December 5th, 2022 which will severely cut the purchase of Russian oil and subsequently tighten the global supply. The energy market is extremely tight right now and will soon become a lot tighter. Demand has recently fallen on the heels of more Chinese Covid lockdowns however these will not last forever. A combination of higher demand and much tighter supply in the common months will surely reverse this recent reduction in the price of oil. Unfortunately, the Fed has little to no control over energy inflationary pressures as they are primarily supply-related.
Moving on to all items minus food and energy which rose 0.6%, the same as August. Despite this high number, commodities inflation didn’t increase at all. In a similar trend, used cars declined by 1.1%, apparel by 0.3%, and medical care commodities by 0.1%. These three indicators are a clear sign that the consumer is beginning to feel some pain as their disposable budget is being squeezed.
Possibly the most concerning area in this print was the services minus energy services. The services industry is historically the stickiest element of inflation and the most difficult for the Fed to impact. Shelter increased by 0.7% which is a testament to the 5 million person housing shortage that currently exists in the US. It’s worth noting that rent, which increased by 0.8% in September, is an extreme lagging indicator. These numbers do not indicate the true housing inflationary picture for the month of September. In fact, many other indicators paint a much slower housing market such as increased listings and price reductions on sites like Zillow. Due to this fact, housing inflation is likely to remain elevated for a while contributing to the growing belief that due to supply constraints, macro issues, and the lagging nature of CPI data, inflation readings are likely to remain higher for longer.
The likelihood of seeing high inflation for longer is driving the fear this print has instilled in the market. This tells us that the Fed is nowhere near slowing down, which could be a mistake. The majority of these inflationary pressures that are persisting are driven by supply constraints from macroeconomic issues, unrelated to demand. Unfortunately, the Fed’s tools primarily target the demand by reducing the liquidity in bond markets and influencing consumer sentiment. Regardless, the Fed has the obligation to do what it can to deliver price stability no matter the cost. In this environment, this means destroying demand until unemployment rises significantly, capital markets plummet, inflation data comes down, and a constricting business cycle (recession) is induced. It’s important to remember that raising rates so aggressively is felt internationally as the US Dollar continues to rise in a period where many countries have above-average debt from the pandemic. The Fed must maneuver extremely carefully here and consider the impact every rate hike has on dangerously fragile international markets and an already wounded American economy.
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References:
Bureau of Labor Statistics; "Consumer Price Index - September 2022".