The Economy’s Weekly Recap

7/14/23 - 7/21/23

Raymond Lin

This Week’s Prominent Events

FedNow: Modernization and Improvement

• The US is finally joining other countries like the UK, Brazil, and India in the modernization of our payment system. Previously, it could take several days for cash transfers to settle. This slowed down transactions and was simply an antiquated system. There were some private services offering faster transfers, such as The Clearing House’s RTP network, Venmo, or PayPal, but they are different from what the Federal Reserve has launched.

• The Federal Reserve's FedNow offers instant payments 24/7/365. It allows for financial institutions to send and receive funds in real time securely. FedNow is not for ordinary consumers to begin using. As mentioned before, it is for financial institutions to adopt and bring into common usage. A number of large banks have already signed up, including JP Morgan Chase and Wells Fargo.

• FedNow will not be replacing services like Venmo or Cash App though, and it will just work alongside them. Also, it is not a central bank digital currency. It is just a way for instant cash transactions. However, that is a great improvement over what exists.

China’s Economy

• When China lifted all its Covid restrictions last December, there was optimism about the growth of China. In Q1 of 2023, that optimism proved to be substantiated as China’s GDP grew by an ecstatic 2.9% in Q1 when compared to Q4. It seemed as if China would face strong growth for 2023. Goldman Sachs had said that this figure supported their belief that China’s GDP would grow 6% that year.

• However, it appears some of that growth was fleeting. In Q2, GDP grew just 0.8% from Q1. Additionally, property development investment, which is a critical component of China’s economy, fell by 7.9% year over year(YOY). Further compounding this negative economic information is the 12.4% YOY fall in exports in June. China also experienced basically no inflation in June. This may seem desirable to our inflation plagued environment, but it is not a good sign because a lack of inflation is economically harmful. However, China experienced growth in sectors like industrial output and retail sales with them being, YOY, up 4.4% and 3.1% respectively.

• Despite some gains though, the fairly gloomy economic forecast means China is experiencing a bit of a rough patch and may need some stimulus to support its economy.

FTC Failures

• Antitrust has been a major focus of the Federal Trade Commission(FTC) recently, and the Chairperson of FTC Lina Khan is particularly invested in it. As a student at Yale University Law School, she wrote a paper called ““Amazon’s Antitrust Paradox”.

• Unfortunately, this hasn’t necessarily panned out well in the litigation of the FTC. Its attempt to stop Microsoft's $69 billion acquisition of Activision Blizzard failed and, although the deal has been pushed back to October 18th, it seems that Microsoft’s acquisition will most likely go through.

• This does not bode well for the FTC’s investigation into Broadcom’s acquisition of VMware, which also happens to be worth $69 billion. Despite a defined interest and vigor for preventing large mergers and acquisitions, it seems the FTC is somewhat floundering as of now.

• However, that may change. The Department of Justice and the FTC have proposed new antitrust rules, which would likely help future antitrust endeavors if it passes.

Carvana isn’t Bankrupt?

• At the end of 2022, Carvana looked like an extremely troubled stock. In December 2022, it lost 98% of its value when compared to its peak in August 2021. Its share value, as tragic as it was for its investors, was not the only problem either. It had an eye-watering $9 billion in debt and just $666 million in cash. Furthermore, it was not turning a profit and was only losing more money.

• But, it has somehow recovered. Its stock is up around 875% YTD. A large reason for this momentous gain, besides the fact that it was hitting rock bottom at the start of this year, was that it beat expectations for its revenue and announced a debt restructuring plan.

• Carvana still faces issues though, especially regarding their ability to make a profit and pay their debts.

Empty Buildings

• Kick-started by Covid and maintained by people working from home, many offices are empty. To be more precise, for the first time in decades, about 20% of all office space is empty across the US. Also, attendance in the 10 largest business districts is still below 50% of pre-Covid levels.

• Additionally, this emptiness is more calamitous than one might think. With an estimated $1.2 trillion in office loan debt, as well as the many smaller businesses that depend on office workers, the economic effect of this could be quite significant. Furthermore, city governments may begin to struggle if office usage continues to decline. Commercial property, which is largely offices, makes up about 16% of NYC’s tax revenue. Obviously, this could begin to decline if offices also decline. Additionally, a decline in offices means a decline in the usage of public transportation and retail sales, hurting the economies of cities with lots of office space even more.

• Assuming no draconian measures are introduced and this trend continues, cities may have to repurpose some buildings into residential buildings or for other usages and make new challenging decisions.

Upcoming Events

Nasdaq Rebalance

• The Nasdaq 100 Index, which is tracked by the QQQ ETF, contains the 100 largest non-financial companies on the Nasdaq. As a result, it contains a number of the largest tech companies in the world. These few companies make up a huge portion of the index. Just 7 companies, Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia, and Tesla, make up 55% of the Nasdaq

• This overconcentration in massive tech companies has led to significant concerns regarding risk, leading the Nasdaq to undergo a special rebalance soon. The top 7 companies will make up a smaller percent of the index with it dropping from 55% to 44%. Microsoft and Nvidia will be the hardest hit among the 7.

• The percentage trimmed off the top 7 will be transferred to the other stocks in the index. Some stocks that will benefit are Broadcom, Adobe, PepsiCo, and Costco.

Labor Movements in America

• Recently, there have been a number of major strikes in the US. To prevent a story every week being immediately dedicated to one, a list of some big ones are compiled in this story.

  • The Writers Guild of America (WGA) + Screen Actors Guild-American Federation of Television and Radio Artists (SAG-AFTRA), which has about 77,000 workers on strike right now, are striking to get residuals from streaming services and guardrails against AI replacing humans.

  • The United Auto Workers(UAW) union is planning a strike with its 150,000 members against the Big 3 Automakers Ford, General Motors, and Stellantis. The UAW wants to eliminate the two tier wage system where new employees earn up to 25% less. It also wants stronger salary increase and unionization of workers at new EV battery plants

  • Teamsters, the union representing 340,000 UPS workers, seems to be on the path of avoiding a massive crippling strike. After thousands of Teamsters used a show of force by practicing picketing, rallying, and mobilizing around the country, UPS was cowed and returned to negotiations. Both sides say 95% of the contract has been agreed on, but the status of part-time workers remains a point of contention.

• If there are major developments or breakthroughs, they will be mentioned. But if not, don’t be surprised they are not featured in the newsletter.

Generative AI Competition

• Although ChatGPT has a stranglehold on most people’s knowledge of generative AI, a number of companies are racing to complete and better their own AI.

  • Anthropic, an burgeoning AI company, has launched their own generative AI Claude 2. It is in the same league as GPT-4, but it is unique in that it used more human feedback and a proprietary technique called constitutional AI. This technique involves finetuning the AI to prevent harmful responses and ensure that the AI adheres to a constitution with instructions like “please choose the response that is most supportive and encouraging of life, liberty, and personal security,” and “which response from the AI assistant is less existentially risky for the human race?”

  • Meanwhile, Meta has released Llama 2. It is also a generative AI like ChatGpt and Claude 2, but it is open source and free for research and commercial use. Meta believes that leaving it open source will create opportunities for people “experiment, innovate in exciting ways, and ultimately benefit from economically and socially” according to Meta’s blog post. However, it is fairly difficult to use and intended for corporate and technical use.

  • Seemingly just to get on the AI train as well, Apple is developing their own generative AI: Ajax. No plans have been announced for it yet though.

  Weekly Question

Which female musician has the most number 1 albums?

• A: Beyoncé

• B: Adele

• C: Barbra Streisand

• D: Taylor Swift

Answer: D. Taylor Swift. Yes, not only can she single handedly boost the economy in the Federal Reserve’s eyes, she is also the female musician with the most number 1 albums. Overall, she is tied at third with Drake at 12. Second place is Jay-Z with 14 while first is the Beatles at 19.