The Economy’s Weekly Recap

9/23/24 - 9/30/24

Raymond Lin

This Week’s Prominent Events

Corporate AI

• Originally, ChatGPT creator OpenAI was founded in 2015 as a nonprofit entity dedicated to “advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return.” But since the 2019 creation of a for-profit corporation has led to the displacement of the tenets that originally guided OpenAI, with concerns about outside investment and financially capitalizing on AI becoming more important. 

• This came to a head a few months ago when OpenAI co-founder Ilya Sutskever and other members of the nonprofit board ousted CEO Sam Altman over concerns of the company’s future direction and stance towards safe AI. Merely the next week though, Altman’s return and the resignation of Sutskever clearly marked the shift of OpenAI away from its nonprofit origins.

• And the final nail in the coffin may come soon because Reuters has reported that OpenAI is planning to restructure itself to no longer be de jure controlled by its nonprofit board, becoming a for-profit benefit corporation that aims to gain profits as well as positively benefit society. The original nonprofit will continue to own a minority of the new OpenAI, but this change in corporate governance will be favorable towards investors and future profits. 

• Conspicuously, OpenAI’s CTO Mira Murati has suddenly chosen to leave the company of 6 years last week, accompanied by chief research officer Bob McGrew and VP of research Barret Zoph. Although Altman has said that their departures are natural, it is hard to not speculate that the changes in corporate structure and ideals has impacted their decision making. 

Struggling US Automakers

• As Phi Fiscal has faithfully reported for the last few months, the state of US EVs and automakers has been quite poor, with reduced consumer interest and growth in EVs and overinvestment by automakers tanking some of their stocks. 

• This decline in fortunes was made apparent this week by changes in price targets and rating made by Morgan Stanley analysts. Specifically, Ford, GM, and Rivian were downgraded and had their price targets lowered, leading to their stocks falling 4%, 5.4%, and 5.7% following the downgrade. Those analysts pointed to high inventory, falling prices, weakening consumer demand, and continued competition by Japanese, South Korean, and Chinese automakers as drivers for their decision. Interestingly, Tesla was an exception as it was up 1.1% because it was untouched by analysts, who are expecting a strong third quarter and anticipate news about Tesla’s robo taxis. 

• Generally though, the US automotive industry is struggling, with the Government seeming to have noticed. Top White House economic adviser Lael Brainard announced plans on Monday to safeguard the US auto industry against China by prohibiting Chinese software and hardware on US roads, effectively banning all Chinese cars. While the White House said it was primarily for national security reasons, it seems evident that the increasing prominence of Chinese automakers and the decline of US automakers has played a role in decision making.

Flurry of Lawsuits

• Last week saw several high profile lawsuits break out, each of which could warrant its own story. But for the sake of brevity, they have been compiled and summarized below.

• ExxonMobil was sued last Monday by California's attorney general for carrying out a “decades-long campaign of deception” that exaggerated the impact of recycling. The lawsuit alleges that, by promoting single use plastics as recyclable when only 5% of plastics are recycled, Exxon knowingly fueled the myth of recycling and led consumers to use more single use plastics. California is seeking billions of dollars in damages. Exxon has responded by pointing out that the lawsuit is the result of California’s ineffective recycling system and is only blaming the company for the government’s faults. 

• The US DOJ sued Visa on antitrust grounds, alleging Visa abused its market dominance to force businesses to use Visa and “unlawfully amassed the power to extract fees that far exceed what it could charge in a competitive market”, according to US Attorney General Merrick Garland. The lawsuit claims that Visa has affected the price of all goods through its monopolistic position. 

• The FTC has recently cracked down on “deceptive AI claims and schemes” by suing companies like the AI legal service DoNotPay and an AI driven passive income scam called Ascend, the latter of which has defrauded customers of over $25 million. However, such cases are likely to become increasingly prominent and common in the next few years as AI improves and the hype surrounding it grows. Hopefully, a Theranos situation can be avoided, although the recent news surrounding Super Micro Computer is not great news in that regard.

• Ironically, Google has filed an antitrust complaint against Microsoft in the EU, alleging that Microsoft engages in unfair cloud computing practices that reduce choices and increase costs. Google cites how Microsoft charges nothing for Microsoft Azure users to use window software but charges a 400% markup for buying windows server licenses on other cloud services. The complaint is not a lawsuit or even a government probe, but it is another interesting legal conflict that happened last week and is emblematic of the ongoing competition in the cloud industry.

Government Shutdown Avoided

• Frequently, Congress bickers over funding and government shutdowns, with last month seeing Republicans defeat their own plan. Without a funding bill, a government shutdown would occur and spending on a number of government programs would have to halt operations, such as the EPA, FDA, National Parks, TSA, etc.

• Fortunately though, Congress managed to pass a short term funding bill last week with the support of the Democrats, with the bill passing by a 341-82 margin in the House and 78-18 in the Senate. The short term funding bill, also known as a continuing resolution(CR), will keep the federal government funded until December 20th, which is after the election. The Democrats supported this CR but not the prior one because of the exclusion of the SAVE act, which was a Republican piece of legislation that would require proof of citizenship to vote. 

• While it is good that Congress passed the CR, it is a continuation of a concerning saga that has played out frequently in recent years where polarization of the political parties and the growth of extremism has impaired even basic government functions.

Boeing Worker Strike

• While 2023 saw many more major strikes, 2024 seems to have had a few major ones as well. In addition to the looming port worker’s strike, Boeing’s 33,000 strong International Association of Machinists strike has been going on for 2 weeks. In that time, it has been estimated that it has cost US GDP over $1 billion already and is certain to have hurt Boeing’s bottom line. 

• Last week, Boeing issued what it said was its “best and final offer” of a 12% up front raise and guaranteed 6% raises annually for the next 3 years, totaling a 30% increase in pay over the next 4 years. According to Boeing, the average pay for machinists would rise from $75,608 to $111,155 by 2028. Boeing has also doubled its signing bonus to $6,000 and increased its 401k contributions, although it hasn’t restored the pension plan it got rid of in 2008. 

• Despite these substantial changes though, the International Association of Machinists and its members seem poised to deny it. The union has said “Boeing has missed the mark with this proposal”. One major sticking point continues to be pay increase because the union is still fighting for a 40% pay increase over the next 4 years. 

• As the strike continues, Boeing only suffers greater losses, but workers will likely start facing difficulties soon as well because they received their last paycheck two weeks ago and will lose company provided health insurance by the end of the month. 

Future Events

Chinese Economic Relief

• Since the Covid pandemic, China’s economy has been struggling as it first faced prolonged Covid shutdowns, a real estate crisis, and low consumer spending. Although China has maintained its veneer of stability by maintaining its 5% growth target in spite of deflation and rising youth employment, the CCP seems to have finally admitted that its economy needs severe assistance.

• Last week, unconfirmed reports by Bloomberg and the South China Morning Post revealed that China had a series of economic stimuli in the works, such as…

  • Spending $142 billion to recapitalize 6 large state owned banks, encouraging them to lend and spur economic activity.

  • Lowering bank reserve requirements, similarly encouraging banks to lend more.

  • Reducing interest rates, which would encourage consumers to spend and businesses to take loans and expand.

  • Lowering minimum down payments for mortgages, which combined with lower interest rates will lower the cost of owning a home. This is likely to alleviate pressure on China’s beleaguered real estate market, supporting a critical sector of the Chinese economy and increasing GDP.

  • Living allowances. Wonderful as they sound, it is uncertain how much will be paid and those that are paid will likely be families in difficulty. However, according to Reuters, a source familiar with the matter said a monthly allowance of $144 per child for households with more than two children will be created. On top of increasing income and consumer spending, this would incentivise having children, helping to combat China’s demographic crisis.

• While this stimuli is good news as it supports the health of the world’s second biggest economy and a major market for US companies, it suggests the bountiful growth and opportunities the Chinese economy has had in the past will become increasingly hard fought, especially if both America and China continue to engage in antagonistic economic policy.

Presidential Policy

• Last Wednesday, Vice President Kamala Harris delivered a speech outline some major economic policies of hers, which had a major emphasis on manufacturing and the middle class. Specifically, Harris highlighted tax credit plans for biomanufacturing, aerospace, artificial intelligence and quantum computing. While specific details haven’t been released yet, the campaign has estimated the cost at $100 billion over the next 10 years, which would be paid for by implementing a previous international agreement regarding a global tax rate. 

• While distinct, Trump has a similar stance when it comes to US industrial policy. He has said he also wants to support US industry but would do it via lowering corporate taxes and increasing tariffs. Like Harris, specific details have yet to be announced. 

• Nonetheless, the economic soundness of both policies are somewhat dubious. Subsidizing American industry means the Federal government will be incurring costs to support private industry, industry that is otherwise unsustainable. It means US companies aren’t investing and producing as efficiently as possible while the US government increases its spending and debt burden. By increasing tariffs, such as Trump’s promise to slap tariffs on Deere & Co for selling made-in-Mexico equipment in the US, US companies are similarly forced to produce domestically instead of producing goods overseas for cheaper prices. This could raise prices for consumers and lower economic efficiency, both of which could hurt economic prosperity. The reasons behind these economic policies are evidently not economic but rather national security or politically oriented, a possibly valid pursuit at the cost of economic growth and efficiency.

Contrasting Consumer Sentiment

• Much like how the economy is currently in an ambiguous state with interest rates being cut and a weaker labor market, consumers are similarly confused, at least according to two major consumer sentiment indexes: the Conference Board’s Consumer Confidence Index and the Michigan Consumer Sentiment Index. 

• The Conference Board’s Index fell from 105.6 in August to 98.7 in September, the largest decline since 2021. The primary drivers for the fall in consumer confidence were fears regarding a weakening labor market and worse business environment. Those who said jobs were hard to get rose from 16.8% to 18.3%. Inflation remained a fear too despite its recent decline as the 12 month outlook stood as a shockingly high 5.2%. 

• Contrasting the Conference Board’s Index, the Michigan Consumer Sentiment Index actually rose from 67.9 to 70.1, the highest level since April and above expectations of 69.3. According to the Michigan survey, inflation expectations were at 2.7^, more in line with past months and August’s 2.2% PCE inflation. News of lowered interest rates also contributed to increased consumer confidence. 

• The difference in the indexes is likely due to surveying methodology, with the Conference Board being more sensitive to changes in the labor market. Nonetheless, the paradox of these two indexes reveals how, although current economic data is mostly positive, the US economy is in an uncertain state heading into the 2024 election. 

Weekly Question

AI has become widely available and used in the last 2 years, but what percent of small businesses use AI?

• A: 44%

• B: 13%

• C: 67%

• D: 98%

Answer: D. Shockingly, according to a survey by the U.S. Chamber of Commerce and Teneo, 98% of small businesses say they use a tool powered by AI.