The Economy’s Weekly Recap

6/14/24 - 6/21/24

Raymond Lin

This Week’s Prominent Events

The “Most Intelligent” AI

• Recently, Anthropic, the developer of the Claude AI family that is supported by Alphabet, Salesforce, and Amazon and that has raised $7.3 billion over the last year, has announced a new AI model: Claude 3.5 Sonnet. 

• According to Anthropic, Claude 3.5 Sonnet…

  • Is twice as fast and 5 times cheaper than its predecessors, also outperforming other AI models like ChatGPT-4o and Google’s Gemini 1.5 Pro. 

  • Is capable of displaying nuance and humor, making its usage more authentic.

  • Is going to dynamically display generated content in real time to be updated, such as with code or web design. This system will be called “Artifacts” and is likely targeted towards enterprise users.

• Claude 3.5 Sonnet will be available for free up to a certain limit while Anthropic’s target audience enterprises can access it more frequently. 

• Anthropic’s claims of Claude 3.5 Sonnet being the “Most Intelligent” AI are audacious and yet to be verified, but they underscore the fact that the AI space is ever changing and is highly relevant to the economy and our lives. OpenAI’s ChatGPT might be the most prominent chatbot in the public imagination, but it is only one of several viable options, such as Anthropic’s Claude or Google’s Gemini. As with most industries, competition is healthy and one should never let their investment decisions or economic knowledge be clouded by the popularity of just one company. 

Buy Now Pay Later Companies

• The idea of buy now pay later(BNPL) companies is that they loan money interest free to consumers so consumers can purchase things. Afterward, consumers have to pay back the loans, but they don’t pay any interest. Instead, the way BNPL companies make money is through charging merchants a high % fee. Merchants accept if they believe the higher sales from BNPL will be worth the fee. 

• This novel idea has expanded greatly in the last few years, with the value of BNPL loans increasing from $2 billion in 2019 to $24 billion in 2021. This created much excitement in the fintech space, with one of the largest BNPL companies Affirm reaching a valuation of $45 billion. 

• However, nowadays, such hype has seemingly died down as high interest rates have impacted consumer spending and inflation has strangled many household’s wallets, contributing to Affirm falling to a valuation of just around $9.5 billion.

• Another example of the decline of BNPL can be found in Apple discontinuing its own BNPL program. Merely two years after announcing the Apple Pay Later program, Apple announced this week it would be pivoting away from it, choosing to partner with other companies instead of directly engaging in BNPL. 

• The BNPL is still nascent and growing, but the extreme excitement surrounding it has declined over time as financial realities have come to light.

Amazon’s Plastic

• 15 billion plastic air pillows. Hard to imagine right? Well, that’s the amount used by Amazon for shipping packages annually. However, that figure will be drastically reduced in 2025 as Amazon announced that it has replaced 95% of the plastic air pillows with paper and plans to completely eliminate it by the end of this year.

• To elaborate, the plastic air pillows that help contribute to 33 billion pounds and that enter the ocean every year and increase the world’s $13 billion per year plastic clean up cost, will soon be replaced by paper filler. 

• However, this is seemingly not just some ESG inspired change as Amazon found that paper filler is simply better. For one, it has environmental benefits, being 100% recyclable while offering equal if not better package protection. Additionally, it is easier to work with because it gives workers more space to pack orders. 

• While this is a major change for Amazon, it is a drop in the bucket for the wider problem of plastic pollution. Amazon, along with other companies, can still do much more to avoid the environmental catastrophe we are heading towards. However, Amazon’s actions demonstrate that attempts to be more environmentally friendly can not only protect the environment and avoid the costs associated with environmental damage but also improve a company’s operations and public perception. 

Adobe Lawsuit

• Adobe, the creative giant behind applications like Photoshop and After Effects, was sued this week by the FTC for failing to properly disclose subscription terms, such as a subscription being annual and the presence of a cancellation fee. Additionally, the FTC also alleges that Adobe intentionally makes it difficult for people to cancel their subscriptions and continues to charge people after cancellation requests. The FTC is asking the court to stop Adobe from continuing its practices and to punish Adobe financially for each violation. 

• This lawsuit is similar to the one brought against Amazon last year where the FTC alleged that Amazon made it hard to cancel Amazon Prime subscriptions, which is still ongoing. Both lawsuits demonstrate the gusto that the Lina Khan led FTC has had when suing companies as antitrust and consumer protection lawsuits have come every few months in the recent past. 

• Despite this lawsuit, Adobe’s stock has remained strong due to quarterly results that exceeded investor expectations as well as the concept of further AI implementation into Adobe’s products driving growth.

An Active IRS

• Often, the IRS only attracts most people’s attention when it’s tax season. However, the IRS is actively working on government programs and improving government finances, something seen very clearly this week. 

• For example, the IRS has been cracking down on the Employee Retention Credit. The Employee Retention Credit was created in 2020 by former President Donald Trump to help provide companies with funds so they could keep paying workers during the COVID-19 pandemic, allowing companies to collect up to $26,000 per employee. However, it has now come to light that many of the applications, possibly up to 90%, were fraudulent, which may mean that much of the $230 billion paid out may have been incorrectly done so. To combat this, the IRS has frozen new applications while it audits recipients and inspects the remaining 1.4 million claims carefully. 

• The IRS also announced this week that it would be raising $50 billion by ending a major tax loophole for the wealthy. The new rules the IRS will be implementing will prevent businesses and people from engaging in partnership basis shifting, which is when assets are moved between parties to avoid paying taxes. Through this, the IRS expects to successfully tax these parties and raise $50 billion, which will help deal with the US’ enormous deficit and the $160 billion gap between what the top 1% of earners owe in taxes and what they pay.

Future Events

Cyberattacks And Modern Infrastructure

• Cyberattacks have been around since the inception of the internet, but they have become increasingly prominent in recent years as hackers target companies to extract information to blackmail the company or to sell it to interested buyers. In the process, they can not only hurt the companies and people directly affected but also the people reliant on the companies’ services. 

• One recent example of this was UnitedHealth Group, which experienced a cyberattack on its Change Healthcare unit. This cyberattack crippled a vital piece of digital infrastructure that handles almost 30% of US patient records, which led to many unable to obtain insurance approval for medical procedures and prevented medical providers from being paid. 

• Another example that happened this week was the cyberattack on CDK Global, which provides important software handling car financing, insurance, and repairs to over 15,000 car dealerships. An attack on CDK Global left its systems unavailable for the last few days, which is expected to continue next week. Due to this, car dealerships have had to work by hand and slowed sales, although dealerships are still operating intact, unlike the UnitedHealth cyberattack.

• Nonetheless, both examples still highlight the growing danger of cyberattacks to companies. Critical infrastructure can be very fragile, with private information at risk and massive financial costs possible. After all, cybercrimes were estimated to have cost $320 billion in 2023 and are expected to grow in cost over the next decade. (If only Phi Fiscal could be sponsored by a cybersecurity company, for it would fit perfectly here)

Heat Waves And The Economy

• Over the last week, a heat wave has hit much of the East Coast, causing record temperatures in many places. Some examples include…

  • Philadelphia’s new record daily temperatures of 98 degrees, beating the old 1888 97 degrees record

  • Baltimore's record 101 degrees, narrowly surpassing 1988’s 100 degrees

  • Arlington’s record 99 degrees, beating its 1988 record

• These heat waves, while natural, have been exacerbated by climate change, which has made these heat waves more intense and more common. This fact can be seen in the average number of heat waves traveling in the last 60 years as well as the fact that 2023 was the hottest year on record and that new record temperatures are being recorded.

• The result of these extreme heat waves is not only environmental or personal thought as it affects the wider economy. According to a 2022 study by Callahan and Mankin, extreme heat has led to cumulative costs of between $16 trillion and $50 trillion globally between 1992 and 2013, with tropical and poorer regions being particularly impacted. Poorer regions lose up to 8% of GDP per capita while wealthy regions lose only 3.5%. 

• Even the US, which is a wealthy country globally, faces these same effects as Texas’s hot 2023 summer could have led to a 1% decline in GDP, which is $24 billion. When there is extreme weather, farms and outdoor workers suffer, lowering economic productivity. 

Blistering Home Prices

• The median price of a home has climbed once again for the eleventh consecutive month, according to the National Association of Realtors, and has now reached a record high of $419,300, up 5.8% from last year. 

• Well, you might think, shouldn’t home prices go down? Mortgage rates have been astronomically high recently, even if they’ve come down slightly in recent months, so shouldn’t there be less demand and lower home prices? 

• While you are right in the sense that there’s less demand as existing home sales have dropped 2.8% on an annual basis, there’s also less supply as existing homeowners choose not to sell their home with a low interest rate mortgage. This leads to less supply being available, counterbalancing the lower demand and causing higher home prices. 

• However, there is some good news regarding the supply of homes. Inventory for the month of May was 6.7% higher than in April and 18.5% higher than in May 2023. If inventory continues to grow, then it is possible home prices could come down, especially if interest rate cuts lead to more people also selling their homes. 

• But don’t expect new homes to meaningfully help this supply issue anytime soon. In May, housing starts, when construction on a home starts, fell 5.5% from April and 19.3% from May 2023. Similarly, building permits, which are required to begin construction, fell 3.8% from April and 9.5 from May 20923.

Weekly Question

Which of the following companies mentioned AI most in its quarterly report?

• A: Amazon

• B: Tesla

• C: Apple

• D: Meta

Answer: D. Meta. Meta mentioned AI 93 this quarter, above Amazon’s 37, Tesla’s 14, and Apple’s 20.