The Economy’s Weekly Recap

4/5/24 - 4/12/24

Raymond Lin

This Week’s Prominent Events

Chip-Making Investments 

• With increasing political and economic polarization between the US and China, fears of an intensively disruptive conflict have begun to factor into government policy and business decision making. One such example of this is with the US’ 2022 CHIPS Act, which involved giving $53 billion to chip makers if they invested in American chip production. These chips are critical to consumer technology, cars, military weapons, and AI, so the US and chip producing companies are both interested in diversifying this chip making in the face of a possible conflict over Taiwan.

• However, these funds have yet to be all distributed as the chip makers began construction of new chip foundries in 2022 and the US needed to approve which companies deserved funding. Earlier this week, there was an addition to the companies that were offered funding: the chip making giant TSMC. 

• TSMC, which controls 61% of the chip market, was offered up to $6.6 billion in funding and possibly $5 billion in government loans to support TSMC’s $65 billion investment in 3 Arizona chip foundries. This would help incentive TSMC to push through with its investment as production delays have pushed the foundries construction and opening back. It would also help target what US Commerce Secretary Gina Raimondo describes as “a national security problem that we don’t manufacture any of the world’s most sophisticated chips in the United States”

•  The chip foundries are expected to open in 2025, 2028, and the last one sometime before 2030. These foundries would likely be essential to achieving the US’ prediction of producing 20% of the world’s cutting-edge chips by 2030 from its current 12% share. 

Google’s Recent Investments 

• Speaking of chip making investments, Google has recently unveiled its own server chips called Axion. These new chips are more powerful and AI-focused than what Google had been previously using in its servers. The chips will also allow Google to save money and customize its resources. 

• Google has already begun powering Google services YouTube ads and Google Earth via these Axion chips. Additionally, customers will be able to utilize these Axion chips via cloud services. However, Google will not be selling the chips themselves, keeping it for internal use and only allowing customers to access cloud usage. 

• One major reason for Google’s exclusive internal use is that it doesn’t wish to enter the competition between Nvidia and Intel as Google believes “Becoming a great hardware company is very different from becoming a great cloud company or a great organizer of the world’s information”.

• This new investment by Google follows in the footsteps of Microsoft and Amazon, who have also developed their own chips for internal usage in the past. 

Medical Acquisitions 

• In the ever changing world of biotech and medicine, acquisitions and new discoveries are the bread and butter of the industry as new treatments or medical devices become the focus of companies. An acquisition emblematic of this trend is Johnson and Johnson’s recent $13.1 billion acquisition of Shockwave. 

• This acquisition would allow J&J to gain exposure to a high growth market and consolidate its medical devices business. This is due in large part to Shockwave’s acoustic energy medical devices that crack calcium in the arteries of people with heart disease, which helped Shockwave grow its revenue by 50% last year and would prove a substantive addition to J&J’s existing heart related medical devices, such as the ones it acquired from its 2022 $16.6 billion acquisition of Abiomed.

China’s Credit Rating

• Matching Moody’s decision in December, credit rating agency Fitch has revised its outlook for China’s credit rating from stable to negative, which insinuates Fitch believes China’s economy has issues that could cause a real downgrade. However, for now, Fitch has reaffirmed China’s A+ credit rating. 

• Some specific pieces of evidence Fitch cited were…

  • Expectations that China’s fiscal deficit would grow from 5.8% in 2023 to 7.1%

  • China’s official government debt rising to 61.3% of GDP from 56.1% in 2023 and 38.5% in 2019.

  • China’s overall debt to GDP growing to a record 287.8% in 2023, up 13.5% from 2022.

  • China’s existing home sales in developed cities falling 6.3% year over year in February, which only compounds the existing real estate crisis in China. This is of particular concern because real estate plays an outsized role in China’s economy since it funds provincial governments. With falling real estate, local governments may be forced to take on more debt or be unable to pay existing debt. 

• Despite these foreboding facts, it should be noted that Fitch’s rating change is on the outlook of the credit rating. China, as of now, is still doing fairly well, with better than expected factory output, exports, inflation, and retail sales that could help China reach its 5% GDP growth target this year. The main issue though is with the long term economic health as fiscal issues and economic uncertainties seem to suggest China will face harder times in the 2020s than the 2010s. 

Blackstone and Real Estate

• Feeding into at least a few TikTokers’ fears, Blackstone has acquired AIR communities for $10 billion. AIR Communities is a real estate investment trust of 76 rental housing communities, which will make this Blackstone’s largest transaction in the multifamily market.

• The acquisition will compound Blackstone’s January $3.5 billion acquisition of Tricon Residential, which owns 38,000 single-family rental homes. Additionally, it would add to Blackstone’s estimated $586 billion of real estate, assuredly keeping conspiracy theorists awake at night. 

• This acquisition of AIR Communities reflects Blackstone’s focus on rental housing and its recent pivot away from commercial real estate, which has been suffering ever thanks to high office vacancy and interest rates. It also broadly reflects Wall Street’s recent move into commercial real estate, which has been growing over the last few years.

Future Events

Disappointing CPI

• Earlier this week, the consumer price index, which measures consumer inflation, data for March was released. It revealed a 0.4% increase from February and a 3.5% increase from last year. Additionally, core CPI, which is the preferred measure of the Federal Reserve and removes volatile costs like food and energy, rose 0.3% for the month and 3.4% for the year. Both CPI and core CPI were higher than expectations and are obviously both above the Fed’s desired 2% inflation. 

• This inflation seems to have made consumers lose confidence as the University of Michigan’s consumer sentiment index fell from 79.4 to 77.9. A small decrease, but a shift in faith that could continue as high interest rates and uncomfortable interest rates persist. If the index falls further, then one could expect inflation to possibly linger longer and effects on the 2024 Presidential election.

• Additionally, this marks the third monthly uncomfortably high inflation report, dashing hopes for interest rate cuts in the next few months. Instead, it has become a serious question of if and no longer when interest rate cuts will happen. It seems that the narrative of higher for longer will simply become the norm for much if not most of 2024, with high mortgage rates rearing its ugly head again as the average 30-year mortgage rate rose above 7% recently. 

• Compounding this unfortunate reality is the BLS jobs report from Monday, which surpassed expectations as the US added 303,000 jobs in March compared to expectations of only 205,000. While these figures may be revised by next month, it only further pushes the Federal Reserve away from interest rate cuts. 

AI Development

• While AI is always seemingly making breakthroughs, recent signaling by OpenAI and Meta regarding AI reasoning has been particularly intriguing. Both of these companies will be releasing their next generation of AI large language models(LLMs) soon as Llama 3 was announced to be rolling out in the next few weeks and GPT-5 would be coming out “soon”.

• As a part of this, announcements have been made about reasoning. Meta’s vice president of AI research has said that they’re working to get AI “to reason, to plan . . . to have memory”. OpenAI COO has said that they’re starting to “scratch the surface on the ability that these models have to reason”. 

• While these are likely the typical Silicon Valley promises companies make about innovative tech, they do reflect the growing potential of AI and the need to pay attention. Every step along the way to AI development is a step to the creation of AI that may one day mediate “our entire digital diet” in the words of Meta’s chief AI scientist.

What a Time to be Alive…

• While news organizations and humble newsletters like yours truly can often have a negative slant due to those topics being some of the most important and interesting, there really can’t be enough said about the global conflicts in the world. Increasingly, geopolitical tensions and conflicts have seeped into the world of economics and business, so it is more important than ever to be up to date on some of these events. 

• Some recent examples of this are…

  • Geopolitical tensions between China and the US causing a shift towards and reinvestment into American industries, such as with TSMC and the CHIPS Act.

  • The US preventing China from accessing aspects of technology like Nvidia’s or ASML’s equipment. 

  • The Yemen rebel Houthis disincentivizing and effectively preventing access to the Suez Canal.

  • Russia’s invasion of Ukraine leading to European companies losing more than $100 billion. 

• With Iran’s recent strike on Israel in mind, it’ll be important to see how conflicts around the world are unfolding and their possible economic effect. 

Weekly Question

How economically impactful was the solar eclipse on Monday?

• A: It added $400 million to the US economy

• B: Since it lowered internet activity, it led to a loss of $120 million to the US economy

• C: It had no measurable impact

• D: It added $6 billion to the US economy. 

Answer: D, or at least according to one estimate. The Perryman Group believes the eclipse possibly added up to $6 billion to GDP since it led to an influx of travelers and spending.