The Economy’s Weekly Recap

12/15/23 - 12/22/23

Raymond Lin

As the year comes to a close, Phi Fiscal will be celebrating next week by focusing next week’s newsletter on some of the most significant events this year and what has occurred after we reported on them. Until then, Merry Christmas!

This Week’s Prominent Events

US Steel Acquisition

• US Steel has a storied history. Having been founded by J.P. Morgan and Andrew Carnegie in 1901, US Steel has been a symbol of American industry for over a century, but it has shrunk in prominence and financial size over the last few decades. This decline in prominence has led to it becoming a much smaller player in the global steel industry, being dwarfed by 26 other companies in terms of steel production. 

• This diminished size and prominence has led this once mighty company being the subject of acquisition attempts by several firms. The one that seems to have succeeded is Nippon Steel, a Japanese company that will be acquiring US Steel for $14.1 Billion. This deal will create the third largest steel producing company as Nippon Steel is fourth already. 

• However, this deal may not go through as it has received criticism from labor unions and US government officials. The labor union United Steelworkers opposes the sale because it is not convinced that existing labor agreements will be upheld post-acquisition. Meanwhile, the US government is scrutinizing the deal on national security grounds as some perceive the acquisition of a storied and vital American by a foreign company to be dangerous, even if the acquirer is from an allied free and democratic country. 

When AI Goes Wrong

• Between 2012 and 2020, Rite Aid used AI based facial recognition technology in stores to identify whether customers were likely to engage in criminal activity like shoplifting. 

• However, it was very flawed and led to thousands of false positives where people were confronted by Rite Aid employees for stealing. 

• Furthermore, this technology was mostly deployed in neighborhoods with high Black, Latino, and Asian communities, leading the FTC to conclude in its complaint that Rite Aid "disproportionately impacted people of color”. 

• Rite Aid has said that it disagrees with the FTC’s claims, but it will accept an agreement with the FTC where Rite Aid is barred from using the AI face recognition technology in its stores for the next five years.

A Tentative Deal

• So far this year, three to four of the major airlines have had new union contracts with their pilots that boosted wages by between 34% to 46% over the next few years. The sole remaining one, Southwest Airlines, reached a deal this week with its pilots union to raise wages 50% over the next few years and increase retirement benefits. 

• This deal will be worth $12 billion and be left up to the votes of the more than 11,000 members of the pilots union. Due to this, there is a chance that the deal could be rejected, as Southwest’s flight attendants did earlier this month. If the deal goes through, it will last until December 2028 and prove lucrative to Southwest’s pilots.

• Reflecting on the year, this deal seems to be a part of a larger string of labor union successes. When taking the successes of unions like the UAW, the Teamsters, WGA, and SAG-AFTRA, one has to wonder what role unions will play in the future and whether their influence will expand. 

Another Sign of the Times

• In the last few years, the excitement of the innovation technology can bring has died down because of companies like WeWork and Carvana disappointing and causing serious losses to investors. This has occurred as a result of higher interest rates, leading to less funding being thrown around helping unsustainable ventures.

• This has exposed many a failing and unsound company, such as the ones mentioned before. Now it seems another one will be joining their ranks: the electric scooter company Bird. 

• Bird gained popularity in 2019 due to its environmentally friendly electric scooters and raised $275 million 2019, valuing the company at $2.5 billion. However, it has now declared bankruptcy at a tiny fraction of its former valuation. 

• It serves as another sign of the times and how not all ventures are innovative or successful. Sometimes, faith is misplaced and investors should always detach themselves from their emotions and look at companies like Bird and its companions critically. 

Figma Acquisition Failure

• More than a year after the announcement of Adobe's $20 billion acquisition of Figma, which is a new high growth player in the creative software market, the deal has been canceled due to regulatory scrutiny stalling and challenging the acquisition. 

• Regulators harassed the deal because of Adobe’s near monopoly in the design software market. They feared that the acquisition of the high growth Figma would only harm innovation and consolidate Adobe’s hegemony. Seeing the writing on the wall, Adobe and Figma mutually decided to end the acquisition agreement.

• As a result of this termination, Adobe will be forced to pay $1 billion to Figma as a fee, although Adobe stock

Future Events

The Red Sea

• The Yemen based Houthi militants have begun attacking commercial vessels traveling through the Red Sea, a vital shipping corridor that much of the world’s goods flow through. As a result, more than $80 billion of goods has been diverted from the Suez Canal, which flows directly into the now dangerous Red Sea. 

• These ships have been diverted to the long way around Africa: the Cape of Good Hope. This means that ships now have to sail around all of Africa since they cannot access the Red Sea and Suez Canal safely. This makes trips and associated shipping costs much higher, with a trip from Singapore to Rotterdam increasing 40% in length and about 30% in cost. 

• These costs will be passed down to consumers via higher prices, so it is in all people’s economic interest to hope that the international task force led by the US can stop Houthi militants from attacking innocent commercial vessels. 

Self Driving

• Often, our idea of the application of AI is a bit narrow. For example, when you think of self-driving vehicles, what comes to mind? A car, right? After all, most headlines about the advancement or problems of self-driving vehicles are focused purely on cars. 

• However, there is more to self-driving vehicles than cars as automation plays a major role within warehouses and similar storage centers. They can help with labor shortages and cost of labor, increasing efficiency and cost savings. 

• Furthermore, self-driving vehicles are able to handle heavy loads without complaint or break and are able to become accustomed to the very stable warehouse setting quickly, unlike what self-driving carts face. As time goes on and AI is implemented across different industries, it is likely that many mundane and back end jobs may be replaced by AI like the self-driving forklifts of Kimberly-Clark’s warehouses. 

The Housing Market’s Good News

• While having mortgage rates fall from record highs is already good news, the housing market has something else to be optimistic about. New home construction rose 14.8% in November, with 1.56 million in November compared to 1.37 million in October. 

• This increased home construction along with decreasing mortgage rates means that the demand and supply will grow for homes, ensuring a robust market in 2024. However, supply will not grow fast enough to meet demand as the chief economist for the National Association of Realtors noted that “Home price appreciation can only moderate from drastically improved supply. Another 30% rise in home construction can easily be absorbed in the marketplace, especially in light of recent weeks’ plunge in mortgage rates”.

• All in all, this provides an optimistic view of the future of the housing market as more homes are built and more people are able to own homes due to lower mortgage rates and increased housing supply.

Weekly Question

What was the first billion dollar company?

• A: Standard Oil

• B: US Steel

• C: Ford Motors

• D: J.P. Morgan

Answer: While all of these are certainly storied and large companies, the first company to reach a billion dollar valuation in terms of market cap was US Steel due to the planning of J.P. Morgan.