The Economy’s Weekly Recap

10/20/23 - 10/27/23

Raymond Lin

This Week’s Prominent Events

Another Massive Oil Acquisition

• For the second time this month, an oil giant has acquired a smaller competitor for a hefty sum. Besides Exxon Mobil’s $60 billion acquisition of Pioneer Natural Resources, this month just saw Chevron’s announcement about acquiring fellow oil company Hess for $53 billion dollars.

• Chevron’s announcement furthers the recent consolidation of the oil industry as turbulent times and high energy prices induce companies to secure their positions.

• The acquisition of Hess will lead to Chevron acquiring Hess in its entirety as well as its shale fields, offshore production, and natural gas business.

• This acquisition will also let Chevron access the burgeoning Guyanese oil industry. While oil facilities in offshore Guyana were producing nothing just 4 years ago, they are now producing 400,000 barrels of oil a day. Furthermore, that output is expected to triple by 2027, which will lead to Guyana making up more than 1% of global oil production.

• All this increased oil production and revenue will increase Chevron’s free cash flow, which the company has decided to utilize by increasing share buybacks by $2.5 billion to $20 billion a year.

Tech Earnings

• This week saw a number of large tech companies report their earnings, such as Microsoft, Alphabet, Meta, and Amazon. All in all, the companies topped earnings expectations, but some companies saw their stock prices drop in value anyways.

• For example, Alphabet reported revenue and profits above expectations, but their meager 22% growth in Google Cloud spooked investors and led to Alphabet’s stock falling 10%. Investors had expected higher growth, likely because Alphabet had previously had a 28% growth in Google Cloud in June.

• Another possible reason for Alphabet’s drop in value may have been that Microsoft’s earnings came out mere minutes within Alphabet’s. Microsoft had a fabulous quarter, with its Azure cloud business growing 28%, higher than expectations of just 25%-26%.

• Overall, tech companies seem to be doing well and growing significantly, although reality may have just hit some of these companies’ investors.

Meta’s Lawsuit

• Although Meta may have had solid earnings, it still faces bad news. Meta has been sued by 41 states for violating consumer protection laws through addictive features that harmed children.

• The attorneys are seeking financial penalties and an injunction to stop Meta from using certain tech features that allegedly harmed young users.

• This lawsuit has been brewing for a while, and it is the culmination of a large-scale investigation in 2021 that revealed Meta exploited young users for profit, misled them about safety, harvested their data, and violated child privacy laws.

• To elaborate on the lawsuit, the states have accused Meta of using persistent notifications and infinite scroll to induce young people to spend more time on the Meta platforms. This, according to the prosecutors, leads to children and teenagers discovering harmful content. Additionally, Meta has been charged with unlawfully collecting the data of young users.

• Meta is expected to try to dismiss the case and, if that doesn’t work, fight tooth and nail to win it. Section 230, the law that protects digital platforms from being held responsible for the content on their platforms, may play a large role in Meta’s defense.

Bitcoin Recent Rise

• Bitcoin has, for the first time since May 2022, topped $35,000, which means that Bitcoin has risen 26% in the last month and 104% YTD. A major cause for this rise and associated optimism has been the belief that a Bitcoin ETF will be approved by the SEC soon.

• A Bitcoin ETF would lend Bitcoin some credibility and would expose it to retail and institutional investors, possibly furthering Bitcoin’s usage and valuation.

• Additionally, BlackRock’s registration for a bitcoin ETF has helped inspire confidence among Bitcoin owners that wider adoption and spread may be not that far away. The failure of the SEC to block Grayscale from converting its bitcoin fund into an ETF also seems to have spurred Bitcoin enthusiasts.

• However, the SEC has yet to approve Bitcoin ETFs, and the regulatory process may take a while to do so, assuming it does in the first place.

UAW Reaches A Deal

• After almost six weeks of striking, the United Auto Workers Union has reached a tentative deal with Ford. This deal includes…

  • A 25% pay increase over the course of the agreement, raising top wages to nearly $40 an hour and raising base pay to $83,000.

  • A 68% increase in starting wages to $28 an hour

  • The reinstatement of cost of living adjustments

  • A 3 year pathway to top wages

  • The right to strike over plant closures

  • A number of other benefits

• While the deal must still be approved by local UAW leaders and the 57,000 Ford UAW workers, this still marks the end of the strikes. It marks the end not only because the deal is likely to be approved, but also because workers will return to work during the approval process.

• The closure of the strikes at Ford do not mean that the UAW strikes are over though. Just this week, UAW expanded their strikes as 6,800 workers stopped working at one of Stellantis’ plants.

• The Ford deal puts more pressure on other automakers to reach a deal and invigorates the striking workers to keep fighting.

Future Events

US Economic Growth

• The US economy had a fantastic Q3 as it grew at an annualized rate of 4.9%, much higher than the last few quarters of around 2% growth.

• This growth has been made possible thanks to slowing inflation, a robust labor market, resilient consumer spending, which have all helped offset the economic effects of high interest rates.

• However, this growth is somewhat misleading. 27% of the GDP growth was inventory accumulation, which is when firms stockpile on goods to avoid the effects of inflation. This means that this growth isn’t necessarily useful as these purchases are unlikely to be renewed next quarter, possibly strengthening current economic growth at the expense of future economic growth.

• Furthermore, there are other reasons to be apprehensive about Q4 growth. Disposable income and the personal savings rate decreased in Q3, possibly hindering future consumer spending and economic growth. This, along with student loan payments starting and the effects of high interest rates, may lead to weaker Q4 growth.

US Treasury Rates

• The 10-year US Treasury note hit 5% this week, a milestone last reached 2007. While the causes are not certain, the rise suggests that investors feel nervous and want to pile onto the secure and stable US Treasury note.

• With a possible government shutdown, a war in Ukraine and Israel, and high interest rates, the increasing demand and yield for US Treasury notes seem more reasonable.

• This higher yield will have various impacts. For ordinary people, credit card rates, car loans, student debt, and mortgages will likely have higher interest rates. The higher yield will also create downward pressure on things like stocks, damaging people’s portfolio as the attractive 5% yield on treasury notes takes attention away from equities.

• Additionally, a higher treasury yield means that the government needs to pay more for its borrowing. This may lead to decreased government spending or, more likely, increased government debt in the near future.

Twitter 1 Year Later

• It has been approximately one year since Elon Musk bought Twitter. Since then, a number of changes have been made to the company, such as…

  • Eliminating the name Twitter and the iconic blue bird logo by changing the name to X.

  • Firing most of the employees, such as important engineers, moderators, and managers.

  • Ending the old verification system and launching Twitter Blue before rebranding it as X premium.

  • Limiting content moderation and suppression of hate speech.

• Some effects of these changes have been…

  • A decrease in advertising and revenue, contributing to what could be X’s lowest yearly revenue since 2015. To be more precise, Insider Intelligence estimates that X will have advertising revenue of $1.89 billion, compared to 2015’s $1.99 billion and 2022’s $4.12 billion. This means an annual drop of 54%.

  • A 30% decrease in the number of people actively tweeting and a 14% decrease in global web traffic to X.

  • An increase in the spread of misinformation.

• However, Musk appears steadfast in his goal of making X a sort of everything app with financial services, messaging, livestreams and other kinds of digital content, and other features. In fact, X has recently rolled out audio and video calls, which seemed to suggest the pursuit of an everything app is still on the agenda,

Weekly Question

Which of the following is the largest oil company by revenue?

• A: Shell

• B: Exxon Mobil

• C: Chevron

• D: Saudi Aramco

Answer: D. Saudi Aramco had revenues of $590.3 billion in 2022, making it larger than all of the other options by more than $200 billion.