The Economy’s Weekly Recap

10/13/23 - 10/20/23

Raymond Lin

This Week’s Prominent Events

Significant Gains in American Wealth

• The Survey of Consumer Finances, which is published every 3 years by the Federal Reserve, is a pretty comprehensive set of data about American households’ economic status. It contains info on changes in wealth and income for median households with additional info for different types of families.

• Between 2018 and 2021, American households did quite well despite a global pandemic. Some highlights are…

  • A 37% increase in median household net worth, even after adjusting for inflation

  • A 20% increase in median income, although that doesn’t account for inflation

    • However, income inequality factors into the media income. The average household income only increased 15%.

  • An increase of the bottom quarter of households from $400 net worth to $3500

  • Stock ownership rates went from 15% to 21%, with many of these being new small time investors

• The survey was largely collected in 2021 though in a time of low interest rates and Covid stimulus. It is possible that these trends have changed, but we’ll likely have to wait until 2026 until the next release.

Netflix’s Success

• Ever since the pandemic ended, Netflix has faced stiff competition due market saturation and lower consumer demand since people went back to ordinary life.

• To counter this, Netflix rolled out a subscription tier that came at a lower price but with ads. Furthermore, they cracked down on passwording sharing and increased the price of their subscriptions. While some were uncertain of whether these moves would work, they have seemingly been a resounding success.

• Netflix added 9 million subscribers, made $8.5 billion in revenue, and had a net income of $1.6 billion. These figures represent significant growth for Netflix as, in percent terms, subscribers grew 9% year over year, revenue grew 8%, and net income grew almost 20%.

• On the back of this success, Netflix has announced they will increase the cost of their basic plan from $9.99 to $11.99 and the cost of their premium plan from $19.99 to 22.99. The standard plan will stay at $15.49 a month though.

China’s Growth

• Although China’s economy has been struggling post covid, especially with regards to youth unemployment and the crucial real estate market, it seems that China is still growing significantly

• China reported 1.3% GDP growth from Q3 to Q2, which is a 4.9% growth year over year and was above economists’ expectations. Additionally, industrial production grew 4.5% year over year and retail sales grew 5.5%, both also slightly exceeding expectations.

• However, this doesn’t mean China’s economy is not all sunshine and rainbows. Property investment, which is vital to local governments and the wider Chinese economy, declined by 9.1% in the first 9 months of 2023 when compared to the same timeframe in 2022. The poor state of many of China’s real estate developers, such as the largest private developer Country Garden, only further demonstrates the poor state of the real estate sector.

• China’s persistent lack of inflation, as enviable as it may seem to us in a relatively high inflation environment, is not good for the Chinese economy. CPI in China only rose 0.1% from September to August, which would make it far below China’s inflation target. With low inflation, economic activity and investment is hampered, which is the opposite of what China wants.

Bank Earnings

• A number of large banks, such as JPMorgan Chase, Wells Fargo, and Citigroup, reported their earnings this week, and they have all reported significant profits.

• Collectively, they reported $22 billion in profits, up almost 33% year over year, and their combined revenues rose 14% over the same period. Some contributors to this growth have been high interest rate loans and resilient consumer spending.

• However, the banks appear to be exercising caution, with JPMorgan Chase CEO Jamie Dimon saying “This may be the most dangerous time the world has seen in decades”. Some of his concerns are the ongoing military conflicts, high interest rate environment, and extraordinarily high fiscal deficits and instability of the federal government.

• Additionally, there are some concerns about the fiscal health of consumers, who have seen credit card debt jump more than credit card spending.

• Nevertheless, JPMorgan changed their forecast of a mild recession in Q4 2023 to a soft landing that is expected to continue throughout all of 2024.

Homebuilding

• Inflation, as measured by the Consumer Price Index, is still going strong as it increased 0.4% in September. Half of this increase was driven by just increased shelter costs. Increased housing supply could go a long way towards decreasing this aspect of inflation and could better people’s lives.

• However, while US homebuilding as measured by housing starts increased 7% in September, homebuilding was just 1.358 million, below expectations of 1.38 million. Additionally, it is 7.2% lower than the same time last year. Not helping this trend was the 4.4% decrease in building permits in September.

• A large cause of this trend is, ironically enough, higher interest rates. Higher rates have disincentivized builders from being too ambitious and have restricted many buyers from purchasing a home, both of which lead to less homes being built.

• There is some good news though as homebuilding of projects with more than 5 units rose 17.1%, increasing the availability of shelter for renters. Despite this, the homebuilding situation is broadly fairly stagnant and somewhat grim at the moment.

Future Events

Restriction of AI Processors

• Often, finance and politics intersect. While this is sometimes good, it is often quite bad as political rivalries and tensions get in the way of doing business. Unfortunately, this is largely the case between China and the US, who have been waging a trade and economic war on and off for the last few years.

• This week brought more news regarding this economic war as the US Department of Commerce announced it will stop the sale of more AI processors to China. While the US already banned the sale of the H100, the preferred processor for US AI firms, Chinese companies still had access to processors like the H800 and A800, which are slower versions of the H100.

• However, this new announcement suggests that even these processors will be banned. Furthermore, processors sold by Intel and AMD could be affected by these restrictions.

• This announcement is another sign of the economic warfare between China and the US as well as the importance of AI and technology in the economy and wider world.

The Decline of WFH

• The Current Population Survey(CPS) is reported by the Bureau of Labor Statistics every month and it contains a host of reliable data on a number of things.

• One recent and relevant addition to it has been questions about if the responder teleworks or works at home, as opposed to just going into the office. The data for this month has been quite revealing as it has shown that the rates of people working from home are at their lowest since the pandemic started.

• There is wide variation in the data though as geographical and educational differences play a large role in shaping whether one works from home or not.

• Regardless, it is still clear that rates have dropped greatly, likely because many managers and company leaders want employees to return to offices.

Rising Healthcare Costs

• Healthcare is an extremely expensive but important aspect of life, and it often makes the rounds in political debates due to its unsatisfactory and crippling cost in America. However, concerns about the cost of healthcare were largely restricted to individuals until now.

• With health insurance costs expected to rise 6.5%, health insurance costs are expected to become a greater challenge to companies. Health insurance is already one of the largest expenses for many US companies, and its rapid recent growth may prove to be financially harmful and debilitating.

• Furthermore, health insurance has proven to be a fairly volatile expense, forcing companies to allocate more money to health care and associated insurance. Increasingly, health insurance costs have become more of a burden on companies.

Weekly Question

Which of the following has the highest median household net worth, according to the Federal Reserve’s Survey of Consumer Finances?

• A: White households

• B: Black households

• C: Hispanic households

• D: Asian households

Answer: D. Asian households have a median household net worth of $536,000, surprisingly higher than White households’ $285,000, Black households’ $45,000, and Hispanic households $62,000.