Andrew Cates

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It's always tough to generalise about emerging market (EM) economies. Even knowing if they are emerging economies can be tricky as they are classified in different ways by different organisations. China's role and relative dominance in world trade and financial market flows in recent years has arguably further complicated matters not least given the underlying exposure of many smaller emerging economies to that trade and to those flows.

Rightly or wrongly, however, many observers of the global macro scene wish to understand how this aggregate grouping of EM economies are evolving, how they are coping with the COVID crisis and what their outlook might be? In this brief commentary we offer some perspective on these issues.

In summary, with the notable exception of China, the crisis is far from over for most EM economies. The underlying economic backdrop for most has been weak and a recovery in recent months has so far been fragile or elusive. While fiscal and monetary policy support have often been impressive, that has still exposed some debt-related vulnerabilities. Absent more solid foundations for income generation – and firmer export growth in particular – those vulnerabilities could weigh more heavily on the economic outlook in the period ahead.


&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Figure 1: Structural weakness in EM trade&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Figure 2: EM current account balance has dipped into deficit territory 
<a href="/comment/201005t1.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201005t1.png"></a>
 <a href="/comment/201005t2.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201005t2.png"></a>


Figure 3: Weak EM growth has led to a sharp deterioration in government finances 
<a href="/comment/201005t3.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201005t3.png" align="left"></a>
Fragile foundations 

The underlying backdrop for many emerging market economies before the current COVID crisis made a mark was weak. We explored some of the issues in a post on Asia a few weeks ago (see <a href="http://www.haver.com/comment/comment.html?c=200827SP.html">Asia's De-globalisation Nightmare and Covid-19</a>) but they are worth re-stating because they apply to other emerging regions too. They concern a sharp structural erosion of export income flows and a commensurate deterioration from surplus to deficit in the aggregate current account balance (see figures 1 and 2 above). Partly because of this public finances have also been drained as economic growth has slowed. And this has meant that fiscal space has been severely depleted in recent years as well (see figure 3). Public debt ratios in the meantime have been climbing as a result.



Modest recovery from hefty Q2 contraction 

Against this rather sobering backdrop the current COVID crisis could not have come at a worse time. Indeed the impact on economic activity in many EM countries has so far been wretched. In figure 4 below we illustrate the quarterly change in GDP in Q2 for those large EM economies where the data are available. With the notable exception of China, every country on our list experienced an economic contraction and typically a very large economic contraction. China is an outlier in experiencing an advance simply because the worst of the virus and lockdown policies had unfolded in Q1 and the unwinding of these policies allowed a recovery to unfold in Q2.


&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Figure 4: GDP growth in Q2 collapsed in most major EM economies 

<a href="/comment/201005z4.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201005z4.png"></a>

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Source: National sources/Haver Analytics


Figure 5: EM industrial production has been slow to recover 
<a href="/comment/201005t5.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201005t5.png" align="left"></a>
Most of these economies have recovered some poise in more recent months. But high frequency indicators such as industrial production and retail sales growth are still languishing well below pre-COVID levels (see figure 5).

Testing times with COVID 

Meanwhile with one or two exceptions – and China is again one of them – the latest data that concern COVID-19 in these economies do not look that healthy either. Case numbers per million of the population are often high (and rising) as are the positive rates from current testing for some (see figures 6 and 7 below).
 

&nbsp;Figure 6: COVID-19 case numbers per million population&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Figure 7: The Positive Test Rate in Emerging Market Economies 
<a href="/comment/201005z6.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201005z6.png"></a>
 <a href="/comment/201005z7.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201005z7.png"></a>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Source: Oxford University/Haver Analytics&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Source: Oxford University/Haver Analytics 


Policy response often impressive 

Policymakers have responded to the crisis with a plethora of support measures with both fiscal and monetary policy playing prominent roles. Brazil, South Africa and China in particular stand out on the fiscal front. Turkey also stands out with an impressive degree of liquidity support via loans, equity injections and guarantees (see figure 8 below).


&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Figure 8: EM fiscal responses to COVID-19 

<a href="/comment/201005z8.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201005z8.png"></a>

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Source: IMF/Haver Analytics


As for monetary policy, short-term interest rates have been lowered quite significantly in many countries. But thanks to large capital outflows government bond yields in many countries jumped sharply as the virus first began to circulate while exchange rates often depreciated sharply as well (see figures 9 and 10 below). And this has complicated efforts to provide policy assistance not least - as we discussed above - because there is not that much leeway to provide too much stimulus from fiscal policy.


&nbsp;Figure 9: Lower policy rates in EM, but higher long-term rates&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Figure 10: Weaker exchange rates in EM 
<a href="/comment/201005t9.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201005t9.png"></a>
 <a href="/comment/201005t0.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201005t0.png"></a>


Unconventional monetary policy in play 

This has meant though that many EM central banks have turned to unconventional monetary policy in order to both fend off financial instability and shore up their economies. Specifically 16 EM central banks have announced that they are either ready to engage in government bond purchases (i.e. quantitative easing programmes - QE) or have already done so.

To be fair this bout of monetary easing via either conventional interest rate levers or QE (or both) appears to have met with some modest success. In figure 11 below we show the credit impulse indicators - showing the flow of new credit from the private sector - that we have recently launched (and which can be sourced from our EMERGE database) for a number of emerging market countries. Latest data for Q2 2020 suggest a stronger credit impulse has unfolded of late and particularly in China. Importantly, however, that's not a generic conclusion that one can make for all EM economies. The likes of Indonesia, South Africa and most notably India (given its relative size) faced a negative credit impulse in Q2 notwithstanding the pursuit of QE programmes.


&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Figure 11: Credit impulses are in positive territory in many EM economies 

<a href="/comment/201005x1.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201005x1.png"></a>

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Source: National sources/Haver Analytics


Despite this near-term success for some EM economies, however, and for China in particular, the outlook for many EM economies remains challenging. Aside from the obvious issues that concern the virus and the healthcare policies that are required to control it, there are a number of obstacles to a trouble-free economic existence in the coming months. They concern, in part, the era of de-globalization in which the world economy now finds itself and the consequence of this, namely a lack of export income generation. The absence of that income has already allowed growth to be fuelled by more debt accumulation. And thanks to the virus and the economic policies that are being pursued to stifle its impact, further debt accumulation is inevitable in the period ahead with potential ramifications for capital flows. The sustainability of this together with its potential for generating inflation side-effects will arguably now hold the key for the economic and financial market outlook in many of these countries in the period ahead.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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It's always tough to generalise about emerging market (EM) economies. Even knowing if they are emerging economies can be tricky as they are classified in different ways by different organisations. China's role and relative dominance [...]

Emerging Markets and COVID-19

Charles Steindel

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Unsurprisingly, all states (as well as DC) saw double-digit rates of decline in real GDP decline in the second quarter. The range was wide, varying from DC's -20.4 percent to Hawaii and Nevada's -42.2. In general, the declines were larger in more industrialized states, states more heavily dependent on travel and tourism (as Hawaii and Nevada clearly illustrate), and states which had longer and stricter lockdowns. In general, states in the Northeastern quadrant of the nation saw larger declines than those elsewhere. Delaware and Utah stood out for “modest” rates of declines (respectively, 21.9 and 22.4 percent). Tennessee was an anomaly on the other ends, with a 40.4 percent rate of decline in a state one would not think of as very dependent on travel. However, the drop in travel-related sectors was exceptionally large in the Volunteer State.

Most likely, all—or virtually all—states experienced double-digit rates of growth in the third quarter. An interesting question will be if any fully reversed the declines in the first half of the year.

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Unsurprisingly, all states (as well as DC) saw double-digit rates of decline in real GDP decline in the second quarter. The range was wide, varying from DC's -20.4 percent to Hawaii and Nevada's -42.2. In general, the declines were [...]

State GDP in 2020:Q2

Kelvin Ho-Por Lam

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The decline in Hong Kong retail sales volume eased to -13.4% y/y in August compared to the 23.8% y/y drop in the previous month, declining for the nineteenth consecutive month. Although retail trade still suffered from double digit annual falls, the trend seems to be stabilising somewhat. On a 3m/3m basis, August saw an improvement of 12.3%, suggesting that the worst may be behind us (see Figure 1).

In value terms, retail sales fell by 13.1% y/y compared to -23.1% y/y the month before. The breakdown revealed that tourism related spending remained to be the largest drag on headline growth, detracting -9.9 pp. from the annual rate in August. It is interesting to see that despite the ongoing social distancing measures, a subset of discretionary spending was marginally stronger, with our proxy of household items sales adding to overall growth (0.9 pp.) for the first time since Q4’18. Our measure of household items include electrical goods, furniture and other consumer durable goods. Perhaps the helicopter money distributed by the government earlier did alleviate the dire situation in the retail trade at the margin (HK$10k was given to every Hong Kong resident as part of the government anti-pandemic stimulus). Nevertheless, with the jobs market still in moribund, overall domestic demand stayed weak, shaving almost 4 pp. from headline growth (see Figure 2).


Figure 1: The fall in retail sales volume continued in August&nbsp;&nbsp;Figure 2: Retail sales value: Contribution to annual growth (pp.) 
<a href="/comment/201001z1.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201001z1.png"></a>
 <a href="/comment/201001z2.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201001z2.png"></a>

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Source: Census and Statistics Department, Haver Analytics&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Source: Census and Statistics Department, Haver Analytics 


Taking a closer look at tourism related spending which accounts for a large chunk in total sales, the share came in at just 19.7% in August, sharply lower than the 5-year average of 31.2% prior to the Covid-19 pandemic. Indeed, border shutdown and mandatory quarantine measures had caused inbound Chinese tourist arrivals to plunge to just a total of 2.7 million since the start of the year (see Figure 4), in stark contrast to the 34.5 million witnessed over the same period last year. Figure 3 shows the composition of our tourism spending proxy, of which, sales of luxury goods (jewellery, watches and clocks and value gifts) remained a major drag on tourism related sales, followed by medicines and cosmetics. Note that sales of medicines and cosmetics could have been even weaker, were it not buoyed by local demand for PPEs against Covid-19.



&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Figure 3: Luxury goods is the largest drag on tourism related sales 

<a href="/comment/201001z3.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201001z3.png"></a>

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Source: Census and Statistics Department, Haver Analytics


&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Figure 4: Chinese tourist arrivals have plunged since the pandemic began 

<a href="/comment/201001z4.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/201001z4.png"></a>

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Source: Hong Kong Tourism Board, Haver Analytics


However, there is one bright spot in August’s data, supermarket sales have been mostly growing at double-digit pace since January. This is because various anti-pandemic measures have led to people dinning more at home. In August, supermarket sales value grew by 13.9% y/y, slowing from 24.1% y/y a month ago.

In a nutshell, we think protracted weakness in the labour market coupled with political uncertainty will hamper retail sales growth in the near term. A potential flare up of the virus during the winter months will only increase the downside risks to both domestic and tourism demand for retail goods. The Census and Statistics Department will release GDP estimate for Q3 on 30th October. Previously, we saw a conspicuous fall in private consumption in Q2, Q3’s print is likely to remain weak but less negative. While we think the softer rate of decline in retail sales growth in recent months point to a less fragile performance in household consumption, we also think there is a new normal of shopper’s behaviour that emerged during the pandemic. This may have supported overall private consumption growth, with local spenders becoming more familiar with online shopping and struggling businesses gradually shifting to online platforms in their quest for survival.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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The decline in Hong Kong retail sales volume eased to -13.4% y/y in August compared to the 23.8% y/y drop in the previous month, declining for the nineteenth consecutive month. Although retail trade still suffered from double digit [...]

Retail Sales (August 2020): Retail Sales Fall at Milder Pace in August

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

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Paul L. Kasriel

The CHIPS (Creating Helpful Incentives to Produce Semiconductors) Act was signed into federal law on August 9, 2022. The CHIPS Act provides various subsidies for the production of semiconductors in the US. Semiconductors are an integral component in numerous kinds of equipment, including defense equipment. A major impetus for passing the CHIPS Act was national security.

The encouragement of domestic semiconductor production seems to be coming to fruition. In the advance estimate of Q1:2025 real GDP, released on April 30, 2025, the annualized change in the production of real information processing equipment skyrocketed to 69.3%, as shown in Chart 1.

250430X1.jpg

Those who are in the economic forecasting “profession” likely had penciled in a large increase in their forecast of Q1:2025 information processing equipment in that there was a large increase (29% annualized)  in the production of semiconductors in the Federal Reserve’s Q1:2025 industrial production report (see Chart 2). The Federal Reserve also provides monthly data on the production of semiconductors. The monthly annualized percent changes in semiconductors are plotted in Chart 3. As you can observe, in both Q1:2024 and Q1:2025, the surges in semiconductor production were “front loaded” in the sense that January increases were much larger than the subsequent February and March increases. (I’ll leave it to reader(s) as to why I am highlighting the January 2025 increase.)

250430X2.jpg

250430X3.jpg

So, we might say “mission accomplished” in terms of the CHIPS Act stimulating the domestic production of semiconductors. But the current presidential administration has indicated that it wants to scrap the CHIPS Act and replace it with tariffs on imported semiconductors. If it ain’t broke, why fix it? Subsidies or tariffs – which one would be better for aggregate economic welfare? Tariffs on semiconductors would penalize all of the consumers of the end products in which semiconductors are a component. Moreover, domestic producers of semiconductors would have an incentive to raise their prices under the umbrella of higher-priced imports subject to the tariff. Government subsidies to semiconductor producers are not free. Current or future taxpayers will bear the cost of the subsidies. But should not the cost of national security be “socialized”? My bet is the cost of the government subsidizing the semiconductor sector is less than the cost of imposing tariffs on imported semiconductors. Hmm, this might apply to other things deemed important for national security such as steel and aluminum.

Good Bye Mr. CHIPS?

The Federal Reserve Bank of Philadelphia’s state coincident indexes in March were a touch firmer than in February, but not robust. In the one-month changes, West Virginia was on top with a .77 percent gain, while South Dakota, Indiana, Montana, and South Carolina were also up more than .5 percent. Nine states were down, with Connecticut’s .23 percent drop being the largest. Over the three months ending in March, five states were down, with Massachusetts off .48 percent (Connecticut and Rhode Island also showed declines, obviously suggesting some softness in southern New England). West Virginia was up 2.06 percent, and South Carolina, Montana, Indiana, and South Dakota also rising more than 1 percent. Over the last twelve months, Iowa and Michigan were down, and twelve others saw increases of less than one percent. No state had an increase higher than four percent, and only four were at or higher than three percent. Utah’s index rose 3.33 percent, while Michigan was down 1.48 percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .61 and 2.44 percent. Both measures appear to be a bit weaker than the state numbers.

State Coincident Indexes in March 2025

March was another month of little change in state labor markets. The sum of payroll changes among the states was close to the national result, and revisions eliminated most of the gap initially seen for February. Six states saw statistically significant gains in jobs in March, with Pennsylvania increasing by 20,900 and Missouri up .5% (Texas reported a larger, not statistically significant, gain than Pennsylvania). A few states had insignificant declines.

Three states (Connecticut, Massachusetts, and Virginia) had statistically significant changes in their unemployment rates, with Connecticut’s .2 percentage point rise being the larges. Indiana reported a significant .2 percentage point drop. The highest unemployment rates were in Nevada (5.7%), DC (5.6%), Michigan (5.5%) California (5.3%), and Kentucky 5.2). Hawaii, Montana, Nebraska, 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 5.3% and the island’s job count moved up by 800.

State Labor Markets in March 2025

Viewpoints: October 2020

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Emerging Markets and COVID-19

State GDP in 2020:Q2

Retail Sales (August 2020): Retail Sales Fall at Milder Pace in August