The Economy’s Weekly Recap

1/19/24 - 1/26/24

Raymond Lin

This Week’s Prominent Events

A Successful American Year

• Entering 2023, there were serious concerns about the US economy entering a recession given the interest rate hikes the Federal Reserve was issuing. However, these fears have been conclusively proven misplaced as the US economy grew 3.3% on an annualized basis in Q4 and 3.1% overall in 2023.

• Furthermore, the US was able to tame its inflation, with the Federal Reserve’s preferred measurement of inflation core PCE rising 2% on an annualized basis in Q4 and 2.7% overall in 2023. While the latter figure is above the Federal Reserve's preferred 2%, it is still momentously better than 2022’s 5.9%.

• These two figures, solid economic growth and weakening inflation, paint a good picture for the economic strength of the US in the future. At the very least, consumers seem to be convinced, with the University of Michigan consumer sentiment index suggesting that consumer sentiments increased 13% from December to January across consumers of different age, education, income, and geography. Now, this figure is 20% lower than consumer sentiments before the pandemic, but it still suggests a marked improvement in consumer attitudes, which could find its way into consumer spending and economic growth. 

• However, there are some causes for economic concern that are already apparent, such as credit card spending rising, consumers taking longer to pay off credit card debt, and the personal savings rate falling to 4% from above 5% before the pandemic. 

An Energy Acquisition

• Sunoco, a fuel distributor with thousands of gas stations across the country, is acquiring liquids terminal and pipeline operator NuStar Energy for $7.3 billion. 

• This deal is expected to help diversify and vertically integrate Sunoco’s business as Sunoco gains access to NuStar Energy’s transportation and storage facilities, which includes 9,500 miles of pipeline and 63 terminals. As a result, $150 million of cost savings are expected by the third year after the deal closes. 

• This kind of fossil fuel industry consolidation appears to have become a common trend, with this acquisition coming only a few months after Occidental Petroleum announced its acquisition of CrownRock LP and Chevron announced its acquisition of Hess. Unlike those two though, Sunoco does not expect to face antitrust issues, although that could be subject to change.

The Indian Stock Market

• Earlier this week, India overtook Hong Kong to become the world’s fourth largest equity market at $4.33 trillion vs $4.29 trillion, behind only the US, China, and Japan. This has come about because, in the last 4 years, India’s equity market doubled while Hong Kong’s shrunk by half since 2021. 

• While Hong Kong managed to nab its 4th place back soon after, this displays a fact about the Indian and Chinese economy: India is doing economically well while China faces harder times than in the past and faces Western economic opposition. When taking into consideration China’s demographic crisis and India’s demographic success, it seems India may be poised to become even more economically prominent in the future.

• However, even though this observation may be sound, one should not derive it from just news about equities because it is possible India’s equity market is overvalued while Hong Kong’s is undervalued. 

Tech Layoffs

• Despite the fact that tech companies laid off over 260,000 employees last year, it seems that it will be continuing in 2024. Already, 7785 workers have been laid off, according to Layoffs.fyi. 

• Some examples of these layoffs are…

  • Google laying off hundreds of employees in its hardware and internal software tools divisions with more layoffs to come.

  • Amazon eliminating hundreds of jobs at Twitch.

  • Citigroup removing 20,000 jobs by the end of 2026.

  • Discord cutting 17% of its staff

  • EBay eliminating 1000 employees

  • Microsoft laying off 1900 of its video game staff, many of whom were from its acquisition of Activision Blizzard

• While there is no definite cause, it is likely that these layoffs are as a result of a mixture of things: overhiring during the pandemic, intense efforts for retention during the Great Resignation, more restrictive economic conditions due to higher interest rates, and, while only small factor, the usage of AI. 

• However, it should not be forgotten that US unemployment is still low and that many US companies are still hiring more people, such as Chipotle aiming to hire 19,000 employees in the next few months.

Netflix’s Strength

• When the pandemic ended, streaming services faced a crisis of disinterested customers and unprofitability, such as with Disney+ losing $1.5 billion in Q3 2022. 

• In response, streaming services implemented internal cost cuts and price hikes. Unfortunately, this was to no avail for some as Disney+, for example, lost $387 million in Q3 2023. However, one streaming service has managed to not only survive but even grow in subscribers and profitability: Netflix

• The king of streaming has managed to add 13.1 million subscribers in Q4 2023, a 70% increase over the 7.7 million new subscribers they obtained in Q4 2022. Furthermore, revenue increased 12.5% from a year prior to reach $8.83 billion and operating margin rose to 16.9% in Q4 from 7% a year earlier. Netflix’s net profit, although it missed expectations for this quarter, was $937.8 million as opposed to last year’s comparatively puny $55.3 million.

• Furthermore, it seems that Netflix will continue to see success, with the company projecting double digit revenue growth in 2024 and striking a $5 billion deal with WWE to host WWE content on Netflix.

Future Events

Cat Bonds

• If the image didn’t give it away, cat bonds are unfortunately not about cats. While it may seem like a way to describe one’s relationship with their feline companion, a cat bond- an abbreviated form of catastrophe bond- is a type of short term bond primarily issued to investors by insurance companies. 

• With these cat bonds, if a catastrophe like a hurricane, earthquake, or cyberattack occurs, then the bond issuer will have their interest or even principal deferred or forgiven. This means that purchasers may lose parts of or all of their money with these bonds if catastrophes occur while the issuer, often an insurance company, can use the money to cover the costs of insuring property. In return, the purchaser receives high yields usually above other fixed-income securities. 

• Recently, cat bonds have grown significantly with the market reaching an estimated size of $45 billion in 2023 due to increased worries about disasters like wildfires, hurricanes, and cyberattacks, with some hedge funds like Fermat Capital Management obtaining significant success through them. 

• As climate change exacerbates natural disasters on our planet, it is likely the cat bonds market will only continue to grow from here, although that may be a factor of its small size more than anything else.

AI Replacement

• Ever since ChatGPT brought the idea of AI’s powerful potential to the mainstream, the idea of AI replacing human jobs has become ever more present. It has grown to such an extent that even institutions like the International Monetary Fund saying that up to 40% of global jobs will be affected by AI, with inequality exacerbated and workers devalued as possible outcomes. 

• In response, advocates of AI usually respond by pointing out the massive productivity gains and possibility of new jobs being created. However, there may be another factor that adds nuance to both sides: AI replacement may be more gradual than anticipated. 

• A MIT study found that AI, as of now, cannot replace most human jobs because it would not be cost effective. The study found this by comparing the costs of paying workers to do certain jobs versus AI. One of the study’s authors Neil Thompson said “What we’re seeing is that while there is a lot of potential for AI to replace tasks, it’s not going to happen immediately”. 

• However, it should be noted that the study focused on computer vision AI that recognize and categorize images rather than the more powerful and flexible LLMs like ChatGPT or other AIs in headlines. This may mean the study’s conclusions are not as useful for understanding the modern landscape as it initially seems. Nevertheless, it is still informative about the growing issue of AI replacing human jobs.

Chinese Equities

• Chinese equities, as mentioned in the story about the Indian equity market surpassing Hong Kong’s, have been struggling recently. The CSI 300 index, which tracks the top 300 stocks on the Shenzhen and Shanghai stock exchanges, has fallen to 5 year low while the Hang Seng China Enterprises Index that tracks Chinese stocks in Hong Kong has fallen to its lowest level in 20 years. 

• In response to this, Chinese Premier Li Qiang, who handles economic affairs, called for  “forceful and effective measures” to bring stability to the market. According to what people familiar with the matter told Bloomberg, policymakers aim to mobilize $278 billion from Chinese state-owned enterprises to stabilize China’s stock markets by buying shares onshore. 

• Despite this news of stimulus though, which haven’t actually materialized yet, little has fundamentally changed about the stocks themselves and the hostile environment they operate in. 

Weekly Question

How much did China’s GDP growth in 2023?

• A: 3.1%

• B: 6.9%

• C: 5.2%

• D: -0.6%

Answer: C: 5.2%. Despite this growth exceeding the US’ 3.1% though, there are still significant problems with the Chinese economy. Firstly, for China, 5.2% is fairly sluggish growth compared to its past performance of high single digit and even double digit growth. Secondly, the Chinese property market is still doing fairly poorly, with property prices, property sales, and new constructions all declining. Furthermore, China’s demographic situation is still unchanged and the population has shrunk again. The only bit of good news is that China’s youth unemployment data, which was suspended for 5 months most likely due to how high it was, has fallen from its record high of 21.3% in June to 14.9%.