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    USA    | Jul 08 2025

    Fed Operating Procedure – Don’t Let the Perfect Be the Enemy of the Good

    The Federal Reserve currently is involved in one of its periodic navel-gazing exercises to try to improve its monetary-policy procedures. Most likely this introspection will involve issues such as identifying the level of the “neutral” federal funds interest rate, the lags between a change in the federal funds rate and the cumulative effect on the inflation rate and the unemployment rate, how to move the federal funds rate in periods of heightened uncertainty and how to more effectively communicate with the public on monetary-policy issues. But, it is doubtful that the Fed will contemplate abandoning the federal funds rate as its primary policy tool. In what follows, I am going to propose that a lot of the Fed’s monetary-policy conundrums could be solved by targeting a monetary quantity, rather than an interest rate. The monetary quantity I would propose the Fed target and hit is the sum of the monetary base (which is the sum of cash reserves of depository institutions plus currency in circulation) plus the loans and securities held by depository institutions (commercial banks, savings and loans and credit unions). I have called this monetary quantity thin-air credit because it is credit that is created, figuratively, out of thin-air. In what follows, I will present a theoretical argument for proposing thin-air credit as the Fed’s operating tool as well as empirical evidence for supporting thin-air credit. I will argue that targeting and hitting a steady rate of growth in thin-air credit in periods of exogenous shocks to the economy, such as pandemics, tariffs, etc., will prevent the Fed from making policy moves that will exacerbate the effects of these exogenous shocks on the economy. The proposal that the Fed target a monetary quantity rather than an interest rate was popularized by Professor Milton Friedman. The only difference between my proposal and Friedman’s is that the monetary quantity I prefer is thin-air credit rather than some money supply definition.

    What does it mean that the sum of the monetary base and the loans and securities of depository institutions are created “out of thin air”? When the Fed purchases securities in the open market, from where do the funds come that the sellers of these securities to the Fed receive? They come from bookkeeping entries on the Fed’s balance sheet. On the asset side of the Fed’s balance sheet, “securities held” increase by the amount of securities purchased by the Fed in the open market. On the liabilities side of the Fed’s balance sheet, “deposits of depository institutions” increase by the same amount. These deposits of depository institutions are also referred to as reserves held by depository institutions at the Fed. These reserves were created by nothing other than Fed balance-sheet entries. On the balance sheet of the depository-institution system, the asset item “reserves held at the Fed” increase by the amount of the securities purchased by the Fed and the liabilities item “deposits” increase by the same amount. Again, nothing but bookkeeping entries. The sellers of the securities to the Fed now have deposits that they can use to purchase goods, services and/or assets. Moreover, the depository-institution system has additional funds that can be used to make additional loans and/or purchase additional securities. The recipients of these additional loans issued by depository institutions are able to purchase goods, services and/or assets. Because depository institutions desire to hold only a proportion of their assets as reserves, the depository-institution system is able to increase its holdings of loans and securities by some multiple in excess of the reserves created by the Fed. This enables the recipients of funds from increased depository institutions loans and securities to purchase goods, services and/or assets without any other entity needing to reduce its current purchases of goods, services and/or assets. It is as though the Federal Reserve and the depository-institution system are legal counterfeiters. They can create additional credit, not with a literal printing press, but by bookkeeping entries. The Fed and the depository-institution system are able to create credit, figuratively, out of thin air.

    Now, let’s rewind the tape. Instead of the Fed purchasing securities in the open market, assume that the purchaser of securities was some entity other than the Fed or the depository institution system. From where did this entity get the funds to purchase the securities? This entity might reduce its current spending on goods, services and/or assets by the amount of its purchase of these securities. This is often referred to as an increase in saving. In this case, the seller of securities can purchase goods, services and/or assets. But the buyer of these securities is reducing its purchases of goods, services and/or other assets. In this case, the purchaser of securities is transferring purchasing power to the seller of securities. Under these circumstances no net increase in the purchases of goods, services and/or assets occurs. In contrast, the sale of securities to the Fed set in motion a series of bookkeeping entries that did result in a net increase in the purchases of goods, services and/or assets. To a borrower, it makes no difference whether the lender is the Fed or a depository institution. But to the borrowers’ effect on the aggregate economy, it makes all the difference in the world whether or not the lender was the Fed and/or the depository institution system.

    The Fed’s so-called dual mandate is to promote low unemployment and low inflation. Real GDP growth is related to the unemployment rate. All else the same, if real economic growth is close to its potential, which is a function of available productive resources and the productivity of those resources, a low unemployment rate would likely result. In the past 70 years, the compound rate of growth in real GDP has been 3.03%. In the past 70 years, the compound rate of growth in the Congressional Budget Office’s estimate of real potential GDP has been 2.99%. So, let’s say that growth in real GDP of 3% would come close to generating an acceptably low unemployment rate. For reasons unknown to me, the conventional wisdom is that the consumer inflation rate ought to be around 2% annualized. In the past 70 years, the compound annualized rate of growth in both the GDP and Personal Consumption chain prices indices has been 3.2% on a rounded basis. What I am suggesting is that if the Fed could conduct policy such that the growth rate in nominal GDP were around 5% (3% real and 2% GDP price inflation), the Fed would come close to meeting its dual mandate of low unemployment and low inflation.

    If only there were some monetary quantity whose behavior would be relatively highly correlated with the behavior of nominal GDP. Oh wait, there is. It is the sum of the monetary base plus depository institutions’ holdings of loans and securities, i.e., thin-air credit. Plotted in Chart 1 are the year-over-year percent changes in annual averages of nominal thin-air credit (blue bars) and nominal GDP (red line) starting in 1955 and ending in 2019. That “r = 0.65” in the upper left-hand corner of the chart is the correlation coefficient between the two series. If the two series were perfectly correlated, the absolute value of the correlation coefficient would be 1.0. Because there is an implicit “+” sign in front of the 0.65 correlation coefficient, it means that when thin-air credit growth increases, nominal GDP growth also increases and vice versa. An absolute value of 0.65 for a correlation coefficient is not bad for government work. Why did I truncate the series to 2019 rather than 2024? Because the correlation coefficient is higher for the truncated period. How’s that for honesty? My deceased friend and former colleague, Robert “Bob” Laurent, remarked that I was the most honest economist he had ever encountered. NOT the BEST, but the most honest. The correlation coefficient drops to 0.45 when the years 2020 through 2024 are included. This is because of the record growth and near-record growth in nominal thin-air credit in 2020 and 2021 and the unusual contraction in nominal GDP in 2020. All of this was due to the once-in-a-century (I hope) pandemic and the Fed’s errant response to it.

    by:Paul L. Kasriel

    |in:Viewpoints

    China    | Jul 07 2025

    China’s Weak Economy Increases Chances of a U.S. Trade Agreement

    There's an interesting article in today's July 7 South China Morning Post that has far-reaching implications for China’s efforts to stimulate its economy and its imperative to strike a trade deal with the U.S.: "China urged to take bolder steps to tackle price wars, deflation and weak demand". The article reports that China's Central Financial and Economic Affairs Commission, the Communist Party's highest economic policymaking body, has identified "disorderly low-price competition" as a substantial negative, and argued for the need to end the cycle of mild deflation and weak demand.

    This officially acknowledges that China's domestic economy remains quite weak, well below where China's leaders’ desire. The article also implies and describes how Chinese leaders rely on central command efforts to manage and guide the economy, rather than market forces. Their policies created the excesses in real estate and China’s economic slump, and are now inhibiting the recovery.

    One important issue created by China's weak domestic demand is the admission by its leading policymakers that the trade war with the U.S. imposes a heavy negative weight on China. As the article states, the ongoing trade war with the U.S. "could further intensify China's "involutionary dynamics", an awkward term used to describe what its leaders perceive as intense and self-defeating domestic competition. While its leaders understand that the basics of market supply and demand work to affect economic outcomes, they rely on central control, directives and coercion to achieve desired economic and social objectives. This generates inefficiencies and undercuts the government’s credibility, as Chinese citizens understand the shortcomings of the policies. China is extraordinarily good at certain things—it is a true world leader in efficient manufacturing, with striking advances in high technology, including AI. But its Communist dictatorship that eschews free markets and U.S.-style capitalism undercuts China’s economic performance.

    In 2021-2022, I argued that China's strong growth was unraveling, and its economy would weaken sufficiently to challenge its role as global leader of economic growth and trade (China Is About to Fall Into the Middle-Income Trap, October 26, 2022). In 2023, after China's real estate excesses had crumbled and major land developers had filed for bankruptcy, I argued that the Chinese economy would be in the doldrums for many years, similar to Japan's following its asset-price bubble in the late 1980s and the U.S. following its debt-financed housing bubble of the early-2000s (China’s Bill Comes Due, September 19, 2023). All of that is now unfolding, as western companies and nations reduce their supply chain exposures to China.

    At least two implications seem clear. First, while China is a tough global negotiator, it clearly would benefit from a favorable trade agreement with the U.S. that would lower tariffs and trade barriers on their imported goods. Doing so would be a plus for China, the U.S. and global trade. Second, similar to Japan's and the U.S.'s historic experiences, China will have to stimulate its domestic economy through increases in deficit spending to lift consumption and businesses. As China stimulates, it will provide interesting investment opportunities in its stock market.

    Mild deflation and domestic demand. China is experiencing mild deflation: its GDP deflator has been falling since the third quarter of 2023 and the year-over-year percentage change in its CPI has fallen for four consecutive months (Chart 1). This is a direct reflection of insufficient domestic demand relative to productive capacity. The Chinese leaders’ public allegation that the deflation is due to destructive price competition is misguided by ideology and misleading.

    It’s hard to provide a clear numeric analysis because the China’s National Bureau of Statistics (NBS) provides statistical data that are not reliable, and occasionally stops providing the data public, or changes its definition, if the trend of the data is inconsistent with the objectives of the Communist Party. Its official data on GDP growth are far too strong to be realistic with its components and economic logic.

    Three trends are clear: 1) China’s mild deflation is a direct result of insufficient domestic demand, 2) the weak demand stems from the earlier excesses in real estate that have unraveled and severely harmed household balance sheets and forced consumers to save rather than spend, and 3) residential real estate remains in the doldrums, with low expectations, despite government efforts to stimulate it.

    Prior to and into the Covid pandemic, at the direction of China’s leading economic policymakers, different layers of China’s government pumped up real estate investment through a variety of equity and debt schemes in an ongoing effort to achieve unrealistically high GDP targets. This worked to stimulate robust economic growth and boost local government finances and create an upward spiral in activity, real estate development and prices and household net worth. But the strategy relied on expectations that home values would keep rising. In this regard, the role of home price expectations in China’s real estate boom were strikingly similar to those in the U.S. during its debt-finance housing bubble in the early 2000s, and Japan’s asset price bubble of the late-1980s. Chinese citizens came around to realize the excesses beginning in 2021, and once home price expectations started to erode, they collapsed.

    The government scheme unraveled, and left a huge negative gap in China’s household net worth, the largest portion of which was in real estate (estimates ran as high as 75%, more than triple the U.S.’s current 22%). Mirroring Japan in the 1990s and the U.S. following the collapse of its housing bubble, China’s households raised their rate of saving and cut spending to replenish their balance sheets. Many Chinese businesses similarly suffered, including those in land development activities and others that had relied on loans collateralized by real estate. This followed the same pattern as Japan in the 1990s and the U.S. through and following the Great Financial Crisis.

    Unlike Japan, which denied it had a problem through much of the 1990s and allowed zombie banks (those that were effectively insolvent) to continue making loans to keep inefficient companies afloat, China quickly acknowledged its problem, but underestimated its severity, and addressed its economic malaise too tentatively. In addition, it tried to directly manage household behavior to try to lift the morbid housing market. For example, some local governments forced select government employees to buy homes while constraining any declines in home prices. Such non-market strategies have had only limited success, harmed credibility and have inhibited rather than facilitated the necessary adjustments that would stabilize real estate and lead to recovery.

    One tell-tale indication that the economic recovery is tentative is the ongoing negative expectations of home values. Current data show that residential real estate prices continue to fall (Chart 2) and no leading cities are experiencing an increase in home values while 100% are showing prices that are flat or declining (see Chart 3). Until expectations of home values turn up, households’ propensity to spend will be constrained.

    The healthiest way to generate a positive sustained improvement in home values is to stimulate aggregate demand in the economy that boosts consumption and increases jobs that results in rising demand for housing that will absorb excess inventories. This requires a significant increase in deficit spending. Both Japan and the U.S. incurred large increases in government debt and sustained periods of zero interest rates to stabilizing their real estate sectors.

    Chinese leaders already face high debt (in various government levels and artificial entities such as Local Government Financing Vehicles) and are reticent to take on more. (Another way to reduce China’s housing excesses would be to destroy a massive number of vacant apartment buildings, but that would harm government credibility and be anti-growth…remember President Obama’s “cash-for-clunkers” which offered financial incentives to people who had their motor vehicles destroyed in an effort to stimulate energy-efficient cars?)

    President Trump’s misguided tariffs come at a particularly bad time for China. In 2018, when Trump first imposed high tariffs on China, its economy was strong and its leaders confident. Now, China’s domestic economy is weak. It relies heavily on exports for sustaining growth in its high wage manufacturing sector. It can only sell overseas so many EVs. While China’s exports to non-U.S. trading partners have picked up, its exports to the U.S. have fallen sharply since 2023. Importantly, China relies heavily on its high value-added exports of high-tech materials and components to the U.S., including computer chips and smart phones.

    Trump has placed a deadline of July 9 for imposing higher tariffs, but at this writing is indicating that deadline may adjust to August 1. Trump likes negotiating deals and likes to be popular. As I have emphasized, this is a terrible approach to conducting economic policy. But China’s domestic dilemmas make it open to negotiating with the U.S. to lower tariffs and trade barriers. The result—backing off from Trump’s threats and lowering the U.S.’s average effective tariff—would be a positive and is expected within a month.

    by:Mickey D. Levy

    |in:Viewpoints

    USA    | Jul 07 2025

    Fiscal Dominance or Fiscal Crisis?  2025 Resembles 2005, Not 1995

    Is the US economy on the verge of entering a new phase of "American Exceptionalism," or is it approaching the edge of another financial crisis?These two perspectives represent the extreme ends of potential outcomes. Certainly, the economic outlook for 2025 is not grounded in strong fundamentals, as it was in 1995 when America embarked on a long period of "exceptionalism." However, there are some parallels to 2005 (excessive risk-taking and borrowing) that culminated in a significant financial crisis.

    Between 1995 and 1999, over a span of five years, the US experienced an average real GDP growth of 4% per year, a feat unmatched since the 1960s. However, even more remarkable than this growth performance was the fact that America settled its "current bills," concluding that period with a balanced budget, and didn't pass legislation that increased future deficits.

    In 2025, the US is experiencing minimal growth and facing a budget deficit projected at $2 trillion, suggesting it is not covering its "current bills." Furthermore, Congress's passage of the "Big Beautiful Bill" (BBB) adds an additional $4 trillion over the upcoming decade, leading to an anticipated cumulative annual deficit nearing $25 trillion for the next ten years, as reported by the Congressional Budget Office. When it comes to federal borrowing, 2025 is fundamentally different from 1995 and the years that followed.

    However, 2025 resembles 2005. In 2005, American households borrowed trillions to purchase primary and secondary homes and took out additional home equity loans to fund their spending. Likewise, in 2025, the US government is borrowing unprecedented amounts, not only for the present year but also increasingly for the next decade, to maintain and support the economy's growth trajectory.

    As house prices declined, the excessive risk-taking and leverage by households resulted in a series of adverse effects on the financial markets and the economy. While the federal government has more borrowing options and capacity compared to the private sector, it is not limitless.

    In 2009, Kevin Hassett, who is the White House Director of the National Economic Council, co-authored an article titled "The Deficit Endgame" for the American Enterprise Institute. In this article, the authors noted "countries most at risk of defaulting on their government debts were those heavily dependent on foreign capital flows to finance their government deficits." The authors also that high levels of domestic debt could and have led to defaults.

    The US fits both of these descriptions; it is heavily reliant on foreign capital and operates with a current debt-to-GDP ratio well above the thresholds that have led to previous sovereign defaults in other countries.

    Financial markets currently perceive a very small risk of the US entering the "default bucket," unlike with other countries with a similar debt profile. However, the potential for another credit downgrade might change this view or at least raise funding costs. In April, S&P Global Ratings, mentioned that "the outcome of forthcoming fiscal negotiations...will be a key factor in our assessment of the US fiscal profile." The approval of "BBB" by Congress represents "fiscal expansion" as opposed to the "fiscal consolidation" typically preferred by credit ratings, which increases the likelihood of a credit downgrade.

    Two decades ago, the notion that home prices might fall was unimaginable for households, as a nationwide decline had never happened, nor did they anticipate challenges in refinancing their debt. Similarly, it's difficult to envision the US government being unable to roll over its debt. However, this scenario can occur at any time, often triggered by factors like the financially reckless 'Big Beautiful Bill'.

    by:Joseph G. Carson

    |in:Viewpoints

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    • China      | Jul 02 2025

      Innovation Without Borders: A Journey Through Modern China

      Last month, we had the opportunity to travel to China as part of a high-level UK delegation of companies and policymakers.

      Over two weeks—starting in Beijing and traveling by bus, train, and plane—we visited Shandong and Zhejiang provinces. Along the way, we engaged with senior government officials and met with dozens of leading Chinese companies operating in energy, AI, robotics, healthcare, and biotech.

      Three Key Takeaways

      1. China Is Back in Business

      As we’ve written before, a primary concern post-COVID wasn’t just economic indicators—it was the deep sense of risk aversion that had taken root in the corporate sector. Years of regulatory crackdowns, state intervention, and surveillance had stifled the entrepreneurial energy that once propelled China’s meteoric growth. Even financially strong private enterprises were hesitant to act.

      The turning point came in February, with DeepSeek. President Xi Jinping—ever the pragmatist—appears to have recognised that revitalising the economy, pushing forward with “Industrial Revolution 4.0,” and achieving “common prosperity” were not possible without the private sector. DeepSeek, a symbol of private-sector innovation, marked a pivotal moment. The publicised meetings between Xi, senior officials, and industrial titans sent a clear message: the private sector is once again central to China’s economic vision.

      This shift was palpable during our visit. The government is stepping back from direct economic management and focusing instead on creating strong incentives for investment. Priority sectors include next-gen technology, biomedical innovation, EVs, advanced materials, smart equipment, and clean energy. The goal is to harness AI and digital tools to modernise manufacturing across all company sizes.

      2. Geopolitics and Trump’s Trade War Are Reshaping Alliances

      Europe is looking East. As we’ve previously argued, Europe stands to lose the most from a Trump 2.0 presidency. His aggressive trade policies, unilateral stance on Ukraine, and NATO funding demands have strained transatlantic ties. Europe can no longer rely on the U.S. for security or technological leadership.

      China, on the other hand, is indispensable—especially if Europe is to meet its net-zero goals. China leads the world in green technologies: from EVs and batteries to solar, wind, and energy optimisation. Chinese firms produce 70% of global EVs and 80% of batteries. A new EV rolls off the line every 76 minutes—built by just 100 people and robots. Xiaomi’s YU7 EV can charge from 10% to 80% in 12 minutes, delivering 620 km of range in just 15 minutes of charging.

      The AI gap with the U.S. is narrowing, and China’s expertise in applying AI to manufacturing and energy optimisation is advancing rapidly. China is also home to some of the most cost-competitive manufacturers in the world. One standout was Unitree, a robotics firm we met that sells factory-ready robots for as little as $16,000.

      Engagement is becoming essential. While national security concerns persist, economic cooperation with China is becoming a necessity for Europe. Meanwhile, China is actively courting new partners. Across dozens of business meetings, Chinese firms were eager to collaborate, expand overseas, and welcome UK investment.

      Foreign companies remain vital to China. We were told that foreign firms account for 13 million jobs, a third of tax revenues and exports. In Beijing alone, there are 49,000 foreign enterprises from 16 countries. New foreign-funded company registrations rose 16% year-on-year in 2024.

      Still, the data shows a recent cooling in inbound FDI. Post-pandemic uncertainty, domestic policy shifts, and geopolitical tensions—especially Trump’s trade war—have caused FDI flows to drop to $18 billion in 2024, their lowest since 2009 (Figure 1). It's no wonder China is accelerating reforms to attract foreign investors and level the playing field.

      by:Sharmila Whelan

      |in:Viewpoints

    • USA      | Jul 01 2025

      The WSJ "Con" Job

      This is extremely embarrassing and a deceptive act by the WSJ editorial team. The current budget baseline relies on what is explicitly stated in the tax code, not on assumptions. According to the existing tax law, individual tax rates are set to return to pre-2017 levels in 2026. That is a fact. Where is written that "Congress was never going to allow" individual tax rates to revert back to pre 2017?

      If the "Big Beautiful Bill" (BBB) is projected to save $500 billion over the next ten years, as stated by the WSJ editorial team, then why does the BBB include a provision to raise the debt ceiling by $5 trillion? The WSJ editorial team, similar to members of Congress, is currently engaged in using deceptive "budget math".

      However, this will not fool global investors or credit rating agencies, who will soon confront a US debt approaching $50 trillion.

      by:Joseph G. Carson

      |in:Viewpoints

    • USA      | Jun 27 2025

      State Coincident Indexes in May 2025

      The Federal Reserve Bank of Philadelphia’s state coincident indexes in May were generally lackluster. In the one-month changes, Kentucky’s index did rise a reasonably hefty .71 percent, and Indiana, Idaho, New York, and South Carolina had increases above .5 percent. In contrast, 10 states saw declines. These were spread across the nation, with Massachusetts down .52 percent. Over the three months ending in May seven states were down, with Massachusetts on the bottom (down 1.0 percent) here as well. Indiana’s 1.71 percent was the largest gain, while 6 other states had increases above 1 percent. Over the last twelve months, Massachusetts, Michigan, and Iowa were down, and seven others saw increases of less than one percent. No state had an increase higher than four percent (Idaho was up 3.62 percent), and only four were at or higher than three percent.

      The independently estimated national estimates of growth over the last three and twelve months were, respectively, .62 and 2.40 percent. Both measures appear to be a bit weaker than the state numbers would have suggested.

      by:Charles Steindel

      |in:Viewpoints

    • USA      | Jun 27 2025

      State GDP and Personal Income in Q1 2025

      State real GDP growth rates in 2025:1 were weak, ranging from -6.1% in Iowa and Nebraska to 1.7% in South Carolina. Farm output is estimated to have dropped sharply in the nation’s midsection, which explains very weak numbers in the Plains (in reality, of course, excluding seasonal adjustment, farm output is minimal in that section in the winter and estimates are problematic). Other areas were soft, most notably the Pacific Coast and the Northeast (a pronounced drop in financial output weighed heavily in New York, for instance). It is, of course, a bit hard to blame losses in output in Plains state agriculture on the surge in imports, which adds further to the puzzle of understanding the national GDP decline.

      Personal income was stronger with growth rates ranging from Washington’s 3.2% to North Dakota’s 12.7%. In this case, the Plains states were the leaders, greatly aided by higher federal payments to farmers. Increases in transfer payments were unusually rapid, in part reflecting the annual Social Security COLA, as well as ACA tax credits.

      by:Charles Steindel

      |in:Viewpoints

    • Global| Jun 26 2025

      When Growth Eats Its Foundation

      In recent months, I’ve been exploring how deep structural constraints—on labour, capital, and above all, energy—are reshaping the world economy. What’s become increasingly clear is that we’re moving away from the familiar rhythm of demand-led recoveries and into something more constrained, more structural. Growth isn’t just slow—it’s bumping up against hard supply-side ceilings. Some of those were pandemic-induced. Others were physical. Many, increasingly, are ecological.

      Arguably at the heart of that shift is energy. Not as an afterthought or cost input, but as a binding constraint. As I’ve written before, energy isn’t just another factor of production. It’s the factor that makes all other inputs productive. Without energy, capital is idle, and labour is inert. But to understand the full extent of this transformation—and where it’s leading—we need to look beyond energy itself, to the natural systems that support it.

      by:Andrew Cates

      |in:Viewpoints

    • USA      | Jun 24 2025

      State Labor Markets in May 2025

      State labor markets were very little changed in May. No state reported a statistically significant change in jobs. Three states (Iowa, Massachusetts, and Virginia) had statistically significant increases in their unemployment rates, while two (Indiana and New York) had statistically significant declines. None of these moves were larger than .2 percentage points. The highest unemployment rates were in DC (5.9%), Nevada (5.5%), Michigan (5.4%), California (5.3%), and Kentucky (5.0%), though Kentucky’s rate is not deemed statistically different than the national average of 4.2%. Hawaii, Montana, North Dakota, South Dakota, and Vermont had unemployment rates under 3.0%, while South Dakota’s 1.8% was yet again the lowest in the nation.

      Puerto Rico’s unemployment rate was unchanged at 5.5% and the island’s job count moved up by 2,000.

      by:Charles Steindel

      |in:Viewpoints

    • USA      | Jun 16 2025

      Household Net Worth and Consumer Spending Resilience

      The Fed just released its latest quarterly report on the balance sheet of households and nonprofit organizations, and the stunning magnitude of household net worth is one reason why consumer spending has remained resilient. Household net worth dipped modestly in 2025Q1 with the stock market correction, but remains staggeringly high, and with the stock market recovery and continued rise in residential home values, it likely will rise to another record high in Q2. Amid uncertain times, it continues to support consumer spending.

      Real (inflation-adjusted) disposable personal income is the primary driver of consumption. Most households spend the vast majority of their DPI and save a small portion. Wage and salaries, the driving force of DPI, have benefited by increasing real wages and continued growth of employment. DPI has risen 36% since pre-Covid, materially faster than the cumulative 34% rise in the CPI.

      Changes in household net worth--the value of real estate and financial assets, net of all debt--affect the propensity to spend disposable income. Increases in household net worth increase the propensity to spend disposable income (and reduce the rate of personal saving) while marked declines in household net worth lead households to more (spend less) and replenish their wealth. Workers who lose their jobs or incur losses in income draw down their savings to smooth their consumption, while others (particularly older people) "dissave" and spend on an array of goods and a lot of services.

      A one (1) percentage point change in the rate of personal saving can have dramatic impact on the rate of growth of consumption, resulting in “sluggish” or “robust” consumption. The increases in household net worth in recent years has raised consumption and reduced the rate of personal saving, just the opposite of the years following the Great Financial Crisis, when households saved a higher portion of their DPI in response to the sharp declines in households’ financial wealth and the value of real estate (Chart 1). That period followed the pre-GFC period of soaring home prices and stock market, which fueled strong growth in consumption and low rates of saving.

      The stunning magnitude of household net worth in the Fed’s quarterly report on the balance sheet of households and nonprofit organizations is one reason why consumer spending has remained resilient. Household net worth dipped modestly in 2025Q1, but remains staggeringly high, and with the recovery of the stock market and continued rise in residential home values, it likely will rise to another record high in Q2.

      by:Mickey D. Levy

      |in:Viewpoints

    • USA      | Jun 10 2025

      On the One Hand, OBBBA; On the Other, Tariffs

      Before the 2024 presidential election my uncontroversial view of the near-term economic outlook was that real GP would grow near 2% for the next few years with the economy remaining near full employment, inflation subsiding towards 2%, and the Fed gradually cutting its policy rate. I assumed the personal provisions of the Tax Cuts and Jobs Act (TCJA) would be extended beyond 2025, and that both the limitations on state and local tax (SALT) deductions and the temporary business provisions in TCJA would sunset as scheduled under current law.

      Now Congress is debating the One Big Beautiful Bill Act (OBBBA) while courts decide the legality of new tariffs imposed by the Trump Administration. Here I offer thoughts on how, directionally, these policies, if enacted, would shift my view of the near-term outlook for real GDP growth. To organize my discussion, I’ll group the policies like this:
      • OBBBA o Extend TCJA o New tax cuts o New tax increases o Increased spending by the Department of Homeland Security o Spending cuts, including Medicaid • New tariffs

      Let’s begin by asking how much failure to extend TCJA might undermine near-term growth. I’m skeptical of estimates suggesting the impact to be large but, given limitations here on space, a picture is worth thousands of words. The nearby chart shows annual real GDP growth from 2011 through 2024, including the first two years (2018 and 2019) when TCJA was in effect, but before COVID punctuated the near-term outlook. Then, like today, the economy was near full employment with inflation near the Fed’s 2% target. I don’t see a significant pickup in growth during those two years even though, as its centerpiece, TCJA cut the corporate tax rate to 21% permanently. Perhaps not all ceteris are paribus here, but would I expect failure to extend the other provisions of TCJA to have a big negative impact on near-term growth? No and in any event, as mentioned above, I expected the personal provisions of TCJA to be extended.

      To help finance the reduction in the corporate tax rate, TCJA made other business tax cuts temporary and also included subsequent business tax increases. For example, under current law “bonus depreciation,” which has fallen from 100% in 2018 to 30% in 2025, ends next year. Limitations on deductions for interest and depreciation of R&D expenditures were implemented in 2022 and 2024. Here OBBBA would not extend current policy but rather would revive the initial TCJA provisions for five years. It also makes the TCJA treatment of certain foreign earnings permanent. I’d not assumed these “extensions” of the business provisions of TCJA, so I consider them new tax breaks that would boost my forecast.

      by:Joel Prakken

      |in:Viewpoints