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There are more solar and wind power projects under construction in China than in all other countries combined, see chart below.
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In Canada, demand for foreign labor doubled starting in 2022, see chart below.
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If AI is having such a profound impact on call centers, telemarketing, and other business process outsourcing jobs, then unemployment in the Philippines and India should be moving higher. But that is not what the data is showing, see chart below.
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The latest data from the Treasury shows that the US government now pays out on average $3 billion in interest expenses per day, including weekends, see chart below.
If the Fed cuts interest rates by 1%-point and the entire yield curve declines by 1%-point, then daily interest expenses will decline from $3 billion per day to $2.5 billion per day.
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The Chinese population is shrinking, and the UN forecasts that the Chinese working age population will decline by roughly 100 million people every decade. These demographic headwinds are significant and a major drag on growth in China, see below and in our chart book available here.
A shrinking population with fewer working age individuals means fewer taxpayers, more spending on government services for retired people, and overcapacity, as companies can no longer fill existing factories with workers.
For investors, the implication is slower growth, more disinflationary pressures, and weaker global demand for commodities.
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It used to be the case that the percentage of foreign companies listed on European and US stock exchanges was very similar at around 15%, see chart below. But, over the past decade, the share of foreign companies listed on stock exchanges has declined significantly in Europe and increased significantly in the US.
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This week, jobless claims declined, GDP was revised higher, and personal income was higher than consensus expected. Our daily and weekly indicators continue to show no signs of a slowdown, see our chart book.
Or, from a markets perspective, if the economy is about to enter a recession and the unemployment rate is about to go up, why is Walmart’s stock price trading at an all-time high?
With this backdrop, let’s quantify what Fed cuts will do to the economy.
The Fed is saying that monetary policy is restrictive and the Fed funds rate needs to normalize and come down to r-star, which they estimate to be around 3%.
We ran a simulation on a simplified version of the Fed’s model for the US economy, FRBUS, to quantify what the normalization of interest rates means for GDP and inflation.
Assuming a 100bps cut to the Fed funds rate this year and an additional 150bps in forward guidance about more cuts coming will boost GDP by 2% and inflation by 1%, see simulations below.
In short, the current excitement about a dramatic amount of rate cuts is ignoring the significant positive effects these cuts will have on the stock market, credit spreads, consumer spending, capex spending, corporate earnings, and inflation.
Combined with a continued strong tailwind to the economy from fiscal policy and massive investments in AI, the risks are rising that Fed cuts are going to boost stock prices and tighten credit spreads and trigger a reacceleration in GDP and inflation, see again simulations below.
The bottom line is that the r-star framework is missing what “normalizing interest rates” means for the economy, and this is particularly problematic when the Fed funds rate is significantly higher than the model-calculated terminal policy rate.
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Worldwide employment in all US multinational companies is 44 million.
About 70% of employment in US multinational enterprises, or about 30 million jobs, are in the US, and 14 million jobs in US multinational firms are outside the US.
With total nonfarm payrolls in the US at 159 million, 19% of US employment is in multinational enterprises.
Put differently, more than 80% of jobs in the US economy are outside the S&P 500 companies, and privately owned companies continue to be the lifeblood of the US economy.
For more, see this new data from the BLS.
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MSCI defines the free float as the proportion of shares outstanding that is deemed to be available for purchase in the public equity markets by international investors.
A higher free float normally means lower volatility and higher liquidity. The free float is higher in the US, UK, and Australia, and generally lower in emerging markets, see charts below.
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The economics textbook says that higher interest rates should slow capex spending.
But capex spending is currently much less sensitive to interest rates because of massive investments in AI.
Despite the Fed funds rate being at the highest level in decades, capex spending by the Magnificent Seven is at record-high levels, see chart below.
This is another reason why the monetary policy transmission mechanism is much weaker than usual. Fed hikes are having a much smaller negative impact than normal on business investment decisions because of the strong appetite among firms to invest in AI.
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