The Economy’s Weekly Recap

7/21/23 - 7/28/23

Raymond Lin

This Week’s Prominent Events

Meta Triumphant

• When Meta announced its year of efficiency earlier this year, it was a pleasing announcement for investors. Meta’s revenue and stock price declined in 2022, and its embarrassingly infantile Metaverse was losing billions of dollars.

• However, with mass layoffs and cost cutting measures, Meta has been able to become leaner and more efficient. It experienced double digits revenue growth of 11% year over year, Besides revenue, Meta also beat expectations for earnings per share, daily active users, and average revenue per user.

• Furthermore, it appears Meta’s future may be even brighter. It recently launched Llama 2, a ChatGPT 4 competitor, and monetization of Instagram Reels.

• However, Meta still faces some problems. Threads has lost a tremendous half of the people who signed up, but Meta is pushing towards adding obvious features and retention hooks. Nascent platform aside, a more persistent issue plagues Meta: the Metaverse. The Reality Labs unit, tasked with developing the Metaverse, lost $3.7 Billion in Q2.

UPS Strikes Avoided

• Although I said I would avoid talking about the strikes mentioned in the last newsletter, the resolution of the UPS strike is critical enough to cover again.

• With 6% of the US GDP moving through its trucks, a strike would have overwhelmed other providers and probably caused economic chaos and billions of dollars, depending on how long it would last. Fortunately, the Teamsters union and UPS have come to a tentative agreement that secures a number of wins for workers. Some concessions include union members making $2.75 more per hour in 2023 with $7.50 more per hour over the course of the contract, part time workers getting a raise to $21 per hour, and new vehicles including air conditioners.

• Union members still need to ratify the deal though and have between August 3 and August 22 to vote.

A Soft Landing

• After months of interest rate hikes, the US economy looks like it may be poised for a soft landing. The US’ real GDP grew 2.4% year over year this quarter while nominal GDP grew 4.7%. Further compounding this good news is the info that inflation has been easing and reached its slowest pace in two years. But ordinary people aren’t just benefiting from slower price increases, they have also been experiencing wage growth that, when adjusted for inflation, rose for the first time in two years. This success has led to the Federal Reserve staff dropping the prediction for a recession, although that doesn’t mean it is impossible.

• Supporting a more pessimistic view is what the Federal Reserve has actually done. The Federal Reserve raised interest rates to their highest level in twenty years to continue to combat inflation. The Fed wants to end high inflation so that it cannot take root in people’s minds and become even harder to fight in the future.

• But, overall, the US economy looks to be in pretty good shape and has a high chance of achieving a soft landing.

The Frontier Model Forum

• Microsoft, Anthropic, Google, and OpenAI have created an industry body that will advance AI safety research, identify the best practices for AI, collaborate with governments and civil society, and support the development of technology broadly.

• Microsoft President Brad Smith said “This initiative is a vital step to bring the tech sector together in advancing AI responsibly and tackling the challenges so that it benefits all of humanity.”

• In essence, these major AI companies are working together to create voluntary guardrails and increase transparency to prevent the misuse of AI and try to better society.

• Meanwhile, governments have also been working on regulating and learning more about AI. The EU is creating the first comprehensive legal framework for AI soon through their AI Act, although it has yet to be finished or enforced yet.

Grimace

• To quote McDonald's CEO Chris Kempczinski, “This quarter, if I’m being honest, the theme was Grimace”.

• The virality of Grimace, which has led to over 3 billion views on Tiktok and essentially done McDonald's advertising team’s job, has played a role in McDonald’s strong performance this quarter.

• McDonald's same store sales grew by 12% while revenue hit $6.5 billion, higher than the $6.27 billion expected. Furthermore, McDonald's reported a net income of $2.31 billion, significantly more than the same time last year when it was $1.19 billion.

• Perhaps inspired by Grimace’s success, McDonald's is launching a new restaurant spinoff chain called CosMc's. CosMc's is based on an old mascot of McDonald's called CosMc who appeared in advertisements in the 1980’s.

Upcoming Events

Electric Vehicle Infrastructure

• The biggest barrier to people buying EV’s is charging logistics with about 61% of people citing it as a top barrier to buying an EV.

• The leaders in the EV industry know this and have been trying to expand charging infrastructure for the last few years. They have built more charging stations and adopted unified standards.

• However, the lack of charging infrastructure still persists. The National Renewable Energy Laboratory anticipates that 182,000 fast chargers will be needed by 2030. As of now, there are currently just 36,000 fast chargers. If left unaddressed, this could prove to be a serious hurdle to widespread EV adoption and cause the US to fall behind other countries like China.

• In an effort to combat this issue, 7 major automakers, BMW, General Motors, Honda, Hyundai, Kia, Mercedes-Benz and Stellantis, have announced a plan to build 30,000 chargers.

• This would increase the number of chargers in America significantly, especially as companies not in the agreement, like Ford, Volkswagen, and Tesla, also expand their own charging infrastructure. This, in turn, supports greater EV adoption and growth.

The Global Tax Rate

• In 2021, 130 countries pledged to set corporate tax rates at 15% and end loopholes that allowed multinational companies to avoid taxes by moving headquarters.

• These countries include many of the world’s major economies and a number of them are adopting or planning to adopt the pillars laid out in the plan. However, the US, which initially championed this movement, has been slow to adopt it.

• The US has been slow because the Republican House disagrees with the plan and has been unwilling to pass legislation that would bring the US to the international agreement’s standards. If the US continues to not adopt new legislation to follow up on the pledge it signed, US companies may be forced to pay taxes to other countries to reach the 15% tax minimum, effectively taking tax revenue away from the US government.

• Furthermore, the tax that the US makes from US companies operating overseas(GILTI) will decrease because the tax is on the profits of the overseas operations, which would be lowered by the minimum 15% tax in other countries. In effect, US tax revenue would be attacked from two sides.

• This could cause, according to the Joint Committee on Taxation, a $122 billion decline in tax revenue over the next decade if the rest of the world adopts the rate and the US doesn’t. If every country adopts it, the US could still lose $56 billion over ten years. However, if the US adopts it while other countries don't, which is impossible because other countries are adopting it now, the Committee has predicted a $236.5 billion boost over ten years.

• The effect could be more ambiguous though because US companies might choose to stay in the US instead of going overseas, boosting the US tax revenue. At the same time, more taxation abroad means more tax credits in the US and lower taxes paid to the IRS.

• In short, the effects of the deal are still uncertain but the US will likely have to take action of some kind or face decreased tax revenue.

China’s Youth Unemployment

• As reported in the last edition of the Phi Fiscal, China’s youth unemployment rate, which measures the percent of 16-24 year old jobseekers unable to find work, hit 21.3% in June, a 0.5% increase from May. For comparison, the US’s youth unemployment rate is a mere 8.5%.

• A cause for this is that many high skilled jobs that university graduates desire have become more and more scarce. With the suppression of tech companies and the private tutoring sector, hundreds of thousands of employees have been laid off and many positions have disappeared. Furthermore, there is a mismatch between the skills graduates learn and the needs of employers, causing a systemic issue in employment. An example is in education/sports discipline where the number of graduates increased 20% while demand for employees weakened.

• A lack of employed youths means decreased spending at a time when China’s economy is already sputtering. The youth spends heavily on areas like culture and education, rent, transportation and communication, helping to drive economic growth. A lack of employed youths also means a lull in productivity and, possibly, a slow increase in the permeance of this youth unemployment.

• China has taken steps to increase employment, such as by recruiting people into the People’s Liberation Army, but the mismatch of the youth’s skills and the job market means the unemployment may remain high and damage China’s economic prospects for some time.

Weekly Question

Which of the following did Elon Musk not include X as part of the name?

• A: his space company

• B: his social media company

• C: His son

• D: his online bank

• E: None of the above

Answer: E. None of the above. Every single one has a prominent X inserted into it for little reason beyond Musk’s strange tendencies.