The Economy’s Weekly Recap

9/30/24 - 10/7/24

Raymond Lin

This Week’s Prominent Events

Crippling Port Strike

• Last Tuesday, for the first time since 1977, around 50,000 workers at ports all across the East and Gulf Coast went on strike. These workers, longshoremen who load and unload cargo, play a vital role in the import and export of goods, so the strike had a massive impact on trade, with 50% of goods shipped to the US going to one of the aforementioned ports and being incapacitated. According to JP Morgan analysts, the strike cost the economy around $5 billion a day, with critical goods like wood, cotton, food, pharmaceutical products, auto parts, etc not able to be imported,

• The union that organized the strike, the International Longshoremen’s Association(ILA), represents 45,000 workers and was seeking a new contract with favorable terms. The ILA had two major demands: higher wages and greater automation protection. It sought a wage increase of 77% over the next 6 years, with hourly wages going from $39 to $63 an hour or an annual raise of 10%. The ILA is pursuing a 0 automation or semi-automated terminal policy, with an executive vice president recently calling automation a “cancer”. 

• Fortunately, the strike has been temporarily called off as port employers offered a 62% increase in wages from $39 to $63 an hour. This means goods will begin to flow again, but the strike has already caused port congestion and supply chain disruptions, with Everstream Analytics estimating the 3 day strike taking 3 weeks for ports to return to normal.

• However, a final agreement is still far from being reached. With a 101 day deadline on January 15th, the issue of automation remains contentious. While the ILA wants to minimize automation, seeing it as taking jobs away from American families. 

• However, employers are likely to not budge on the issue. American ports already use automation to process and handle cargo as it boosts efficiency and lower costs. In fact, the US has a long way to go with efficiency as it is already ranked behind many other countries’ ports, with no US ports in the top 10 and the highest being in 50th for efficiency. 

• This enormous difference in views of automation between the two sides is likely to draw out the negotiation and possibly reignite the strike, but we’ll have to wait and see how the negotiations play out. To catch the deal’s resolution or continued conflict, make sure to keep reading Phi Fiscal and share it with others!

OpenAI’s Funding Round

• Last week, ChatGPT creator OpenAI completed a funding round that raised  $6.6 billion, valuing the company at $157 billion. The funding round, which was led by Thrive Capital and its $1.25 billion investment, also saw Microsoft invest a little under $1 billion, SoftBank invest $500 million, Nvidia invest $100 million, Tiger Global Management invest $350 million, Ark Investment Management invest $250 million, and several other significant investors. 

• The $6.6 billion raised will be critical for OpenAI’s operations and expansion as it is still losing money. Despite having 250 million weekly active users and 11 million paying subscribers, the company is losing around $5 billion while having revenue of just $3.7 billion. It does, however, expect rapid growth in the coming years, with projected 2025 revenue being $11.6 billion. 

• There are some interesting conditions tied to the funds raised though. If OpenAI fails to make its transition to a for profit company within two years, which we covered last week, investors have the right to withdraw their money. OpenAI has also reportedly told investors to not invest in its competitors, such as Anthropic, Safe Superintelligence, and xAI.  

Struggling Automotive Sales

• US automakers have been facing weak sales for much of the last year, and it seems the third quarter has not been any kinder. According to research firm Wards Intelligence, US auto sales fell 1.9% from last year. Q3’s sales put the industry on track to sell 15.7 million cars in the US, slightly better than last year but down from 2019’s 17 million car sales. 

• On top of weak consumer demand for EVs and overseas competition, there are two other major contributors to poor sales: vehicle prices and interest rates. Compared to 2019, when the average car sale price was $34,600, the average in September was $44,467, which highlights the impact of inflation on car prices and the industry’s unaffordability. High interest rates have also hurt sales as they lead to higher borrowing costs for car owners, dissuading them from purchasing cars. 

• Cementing this sentiment is Jeep, Dodge, and Fiat owner Stellantis, which reported a 20% annual decline in sales in Q3. A major contributor to its disastrous sales has been Stellantis’ past refusal to cut prices, which was driven by the pursuit of profit over market share. This has clearly backfired now as Stellantis faces shrinking market share and relevance in the auto industry. 

• There is some good news in the auto industry though. Tesla, which has been struggling in recent months as quarterly sales fell in Q1 and Q2, delivered 463,000 vehicles in Q3, up 4.5% from last quarter and 6.4% from last year. While the sales growth is positive news, Tesla fell just short of investor expectations, leading to its stock falling 3.5% last Wednesday. One reason for Tesla’s growth is that it has targeted the aforementioned price and interest rate problems, cutting its vehicle prices and offering a 2.5 percent financing to qualified US buyers. 

Aftermath of Hurricane Helene

• After making landfall a little over a week and a half ago, the damage that Hurricane Helene has wrought has begun to materialize. On top of killing over 200 people and cutting power for over a million people, Helene’s 500-mile path of destruction has devastated local communities in North Carolina. Many families and business owners have their property swept away, with the mayor of one small town called Chimney Rock saying “Every single business, every single building has been destroyed or severely damaged”. 

• Major infrastructure damage has also occurred as part of the I-40 highway, where a mudslide has destroyed a section of the highway near the Pigeon River Gorge, preventing an estimated 25,000 to 30,000 daily drivers from passing between North Carolina and Tennessee. In other areas of the highway, several lanes have been lost, further restricting the movement of aid and people. The I-26, used for repair materials and workers going from Tennessee to North Carolina has also been heavily damaged.

• So far, a few estimates have come out for the economic toll of the hurricane. An early estimate from Moody’s Analytics puts the damages at over $34 billion, estimating property damage at between $15 billion to $26 billion and economic losses of $5 billion to $8 billion. Moody’s expects the estimate to rise as the full scope of the storm is revealed. 

The Death of Coal

• Having been the origin of industrialization, coal has played an important role in the UK economy, once making up 96% of all electricity generation. However, as of last week, the UK has shut down its last coal fired plant after it started cutting down on coal use in the 1990s. While a handful of small countries have achieved this already, the UK is the largest country to do so and the first among G7 countries, which have all promised to phase out coal by 2035. 

• Coal, among all energy sources, is the most damaging. On top of releasing carbon dioxide, it has serious environmental and health issues, best exemplified by the 1952 London Great Smog that killed over 10,000 people. Thus, it has been the #1 target for replacement in the eyes of policy makers across the globe. To reduce coal use, the UK implemented policies like a cap-and-trade regime where companies must pay for their greenhouse gasses and investment in renewable energy such as offshore wind farms and solar panels.

• While the US has made the same promise as the UK, it has had a slower transition. This is due to the more industrialized US economy and the resistance from lawmakers, who have rejected a carbon tax or emissions cap. Furthermore, an April EPA ruling that coal plants must reduce their emissions by 90% by 2032 has faced legal challenges, and Donald Trump has vowed to overturn it. 

• When it comes to industrializing countries like China and India, coal has maintained its grip on energy generation. Despite the recent western emphasis on green energy investments and reduction in coal usage, it still makes up 61% of energy generation in China and 75% in India, compared to the US’ 19.4% and the UK’s 0%. It is unfair, however, to expect the energy hungry industrializing economies to reduce coal usage when the US and Western European countries have historically produced more emissions. Additionally, China in particular has made attempts to reduce coal usage, with it falling from a 2007 peak of 81% of energy generated to 61% now.

Future Events

Nuclear Energy Renaissance

• The legacies of nuclear disasters of 3 Mile Island, Chernobyl, and Fukushima have lingered in the public consciousness for decades, preventing the growth of nuclear energy as an efficient, safe, and sustainable source of energy. However, with the advent of increased demand for power due to AI, it seems likely that nuclear energy will become increasingly important to the US, helping us move away from coal.

• A recent Department of Energy report confirmed this sentiment, highlighting that the US has pledged to triple nuclear energy investment by 2050 and that there are several pathways to achieving it. Much of the new capacity could come from existing or recently retired nuclear plants and possibly even coal plants. The report also estimates that the cost overruns and delays of the recent Vogtle nuclear power plant units 3 and 4 completion were first time expenses and that lessons have been learned from the construction, with the report citing how unit 4 was 30% more efficient and 20% cheaper to build than Unit 3. Additionally, the DOE found that using nuclear energy will lower decarbonize costs by 37% when compared to just renewable energy. 

• With several projects underway, such as the $1.5 billion DOE revival of the Holtec Palisades nuclear plant in Michigan, $1.6 billion Microsoft 3 Mile Island plant revival, and projects by Amazon and OpenAI, it seems nuclear energy is going in a positive direction and will play an important role in the future energy sources of the US.

September’s Knockout Jobs Report

• With much anxiety in the last few weeks about a weakening labor market and economy, it was to great relief that September’s job report was so positive. While economists had anticipated the addition of around 150,000 jobs, the US economy beat expectations by adding 254,000 as the unemployment rate fell from 4.2% to 4.1%. Additionally, July’s and August’s jobs figures were revised up, increasing by a total of 72,000 jobs and increasing the 3 month average to 186,000 jobs. While that is below the 267,000 jobs of the first 3 months, it is still a remarkable increase from prior estimates. 

• When it comes to what sectors did well, the hospitality sector added 69,000 jobs, health care employment increased by 45,000, and government employment grew by 31,000. However, some sectors have been hurting. Manufacturing employment in particular, which has been in a slump since interest rates started being hiked in 2022, fell by 7,000, much of which was in the auto industry. On the bright side, wages were up 4% from a year ago, higher than core PCE inflation of 2.2%. 

• An interesting trend in September’s jobs report was the breakdown between foreign born and native employment. While native employment fell by 600,000, largely due to retirements by baby boomers, foreign born employment increased by 1.4 million.

• Overall, the jobs report for September was great, providing much needed optimism in a time when geopolitical conflict and election worries are pronounced. 

War In The Middle East

• Speaking of geopolitical conflict, Israel’s killing of Hezbollah’s leader and subsequent incursion in southern Lebanon has sparked conflict in the Middle East, with Iran striking Israel with 180 rockets in response. Putting aside the geopolitical ramifications of the conflict, it has heavily impacted oil prices. 

• While it has been at multi year lows in recent weeks due to expectations of weak Chinese economic growth and oil demand, the conflict in the Middle East has triggered fears about Israeli strikes on Iranian oil fields and broader disruptions in the Strait of Hormuz, both of which would disturb international oil flows. Due to this, Brent crude, the international standard for oil prices, has risen around 9% weekly from around $72 to above $78 per barrel. 

• This largely dragged down the stock market last week, but energy and defense companies’ stocks were up due to their advantageous position, with ExxonMobil climbing 2.3%, ConocoPhillips rising 3.9%, and Northrop Grumman increasing 3%. 

Weekly Question

What percent of Americans are dependent on government aid, as in they receive more than 25% of their income from it?

• A: 11%

• B: 53%

• C: 21%

• D: 33%

Answer: B. While it was just 10% in 2000, it now sits at 53% due to an aging population, rising healthcare costs, and economic inequality.