A globe and stand made out of dollar bills.
Jan 27, 2022

Axios Capital

🚨 Situational awareness: Tomorrow morning, all eyes on will be on the normally-obscure Employment Cost Index, an indicator of wage inflation trends. Last month, Federal Reserve chair Jerome Powell flagged its surge as a reason for the central bank's newfound hawkishness. 🏦🪶

  • In this week's newsletter: We look at the less-predictable economic ripples of the pandemic, including on ethical sourcing of supplies (way down!), trade deficits (way up!), and Buffalo chicken wings (more expensive!). 🍗🍗

... all in 1,413 words, a 5-minute read.

1 big thing: Epic pandemic trade gap
Chart: Axios Visuals. Data: Census Bureau/Bureau of Economic Analysis

The details of the blockbuster fourth quarter GDP report released this morning tell a vivid story of how the underpinnings of the world economy have been reshaped by the pandemic.

  • One example: In the arithmetic around U.S. economic output, trade acted as a more severe drag last year than it has in a generation.

Why it matters: High trade deficits are enabling Americans to get the things they need in the pandemic. The flip side is the higher U.S. government debt that helped fund the surge in spending, much of it now held by overseas investors.

What's happening: Americans' spending on imported physical goods has gone through the roof, while exports are growing slowly, making the U.S. the world's consumer of last resort.

By the numbers: In 2021, net exports subtracted 1.39 percentage points from overall economic growth, the highest since 1984. Before that, you have to go back to 1948!

  • That is closely related to higher consumer spending on durable goods, which added 1.38 percentage points to the GDP, the most since 1955.
  • The same thing shows up in trade deficit data. Through the first 11 months of 2021, Americans imported $290 billion more in goods than in the same period of 2019, as exports of goods rose only $86 billion. The overall trade deficit from January through November is 48% higher than in 2019.

Supply shortages and inflation would be worse if somehow policymakers had used tariffs or import quotas to prevent the trade balance from blowing out.

  • "It's not clear that wishing anything else had happened would have led to a better place," Mary Lovely, a senior fellow at the Peterson Institute for International Economics, told Axios. "I don't see how it would have been better if I hadn't been able to buy a new laptop during the pandemic."

Yes but: the flip side of higher trade deficits is higher debt. In the third quarter, net U.S. borrowing from abroad was $127 billion as the current account deficit widened 8.3%.

  • The ships lined up U.S. ports waiting to deliver physical goods while overseas companies, and government entities buy up Treasury bonds and other U.S. financial assets are part of the same circular system.

The bottom line: Bigger trade imbalances allowed Americans to keep consuming through the pandemic, but could fuel global financial imbalances if they become a fact of life.

2. A pandemic victim: Ethical supply chains

Illustration: Aïda Amer/Axios

Over the last decade, global companies have put in place elaborate policies to ensure their suppliers protect worker safety and human rights. They're struggling to comply with those policies in the pandemic.

  • COVID-era disruptions have caused a spike in noncompliance with health and safety rules, according to new data from Qima, which audits supply chains.

Why it matters: Companies have spent years trying to appeal to consumers by promising ethical consumption. The supply chain crisis has made those promises worth less.

By the numbers: Qima, which inspects suppliers of consumer goods and food products in 80 countries, said that 29% of factories audited in 2021 were "critically non-compliant," requiring immediate intervention — up from 18% in both 2019 and 2020.

  • The share of factories experiencing critical violations of health and safety guidelines doubled to 16%.

The big picture: As the pandemic caused rolling shutdowns across the world economy, companies needed to act nimbly, shifting production to new countries and new facilities. Some of those factories cut corners to fulfill the new demand.

  • "Put yourself in the shoes of a factory manager in Vietnam or China. You have no visibility into the future, you see brands canceling orders overnight. It's very tempting for them to take shortcuts," says Mathieu Labasse, vice president at Qima.

The bottom line: It's one thing to gain a PR advantage from talking about an ethical supply chain. It's quite another to stick to those policies when the going gets tough.

3. High earners' wage catch-up
Data: Atlanta Fed Wage Growth Tracker; Source: Axios Visuals

The great pay-reset of 2021 was disproportionately a story of workers at the lower end of the income scale getting big raises. A big question for the economy in 2022 is whether higher-earning salaried workers start to see the same level of growth.

Why it matters: Bigger raises for high earners would help them keep up with higher prices — but also make it more likely that high inflation persists as employers seek to pass those higher costs on to customers.

At the low end of the pay scale, hourly workers have been quick to take new jobs that pay better, or demand raises from existing employers.

  • At the higher end of the scale, where job market churn is lower and salaries tend to only be adjusted once a year, wages are rising slowly — only 2.8% over the last year at top-quartile earners, far below inflation.

This is an important month for pay raises, Spencer Hill of Goldman Sachs writes in a research note. He calculates that 38% of annual wage growth takes place in January, four times what it would be if pay adjustments happened consistently throughout the year.

The bottom line: High wage growth in January would be a sign that salaried, higher-income employers are finally getting their raises — but it may also fuel higher inflation through the rest of 2022.

4. One weird rule affecting Biden Fed picks

Former Fed chair and quasi-Georgia native Ben Bernanke. Photo: Saul Loeb/AFP via Getty Images

A little-known, often-circumvented provision of the Federal Reserve Act is causing new problems for President Biden's nominees to the world's most powerful central bank.

  • According to the law that established the Fed, each member of the seven-member Board of Governors must come from a different one of the 12 regional districts that divide up the U.S. Three of the president's nominees appear to live in the same Fed district.

Why it matters: Republicans could use this as a reason to oppose Biden Fed nominees — but it exposes a longstanding practice of creative license in applying a century-old law.

The Richmond, Virginia, Fed district stretches from the Carolinas to Maryland, so it encompasses both the Washington, D.C., area, where Biden nominees Jerome Powell and Lael Brainard reside, and the vicinity of Davidson College in North Carolina where Philip Jefferson is a dean.

Sen. Patrick Toomey, (R-Pa.), the top Republican on the Senate Banking Committee, noted the issue in a letter to President Biden, suggesting it may become ground for opposing the nominations.

Yes, but: Presidents of both parties have used great creative license in assigning Fed governor nominees to a particular Fed district in order to make sure their preferred picks can pass legal muster.

  • Former chair Ben Bernanke spent his youth in South Carolina (part of the Richmond Fed district); his young adulthood in Cambridge, Mass. (Boston district) and lived in Princeton, New Jersey, (Philadelphia district) before being named a Fed governor. Yet in nominating him, George W. Bush identified him as coming from the Atlanta Fed district because he was born in Georgia.
  • Current Fed chair Powell, appointed by Presidents Obama, Trump, and now Biden, grew up in the D.C., area, and has spent his adult life in New York and D.C., but is classified as coming from the Philadelphia Fed district. He went to college at Princeton.

The bottom line: Toomey is calling the Biden administration out on a longstanding inconsistency in American financial governance.

5. The great Buffalo wing inflation

Yum. Photo: Smith Collection/Gado/Getty Images

Each chicken only has two wings, which create four wing pieces (two drumettes and two wingettes, to be precise) suitable for being fried, then doused in a mix of hot sauce and butter, then served to people watching NFL conference championship games this weekend.

  • So when demand for wings surges but demand for the rest of the chicken is steady, it creates big price swings — and a fun study in microeconomics.

By the numbers: Chicken wing prices are soaring, not just in absolute terms, but relative to other parts of the chicken.

  • The national retail price of frozen chicken wings was $3.71 a pound last week, according to an Agriculture Department report, 48% higher than a year ago.
  • In the same span, the price of fresh boneless, skinless chicken breast was up only 7.6%. The price of whole chickens was actually down slightly.

Relative demand for fatty, rich, messy parts of the chicken has surged versus the healthy parts of the chicken that most efficiently deliver lean protein.

An apparent culprit: Wings travel well, making them particularly appealing when people don't want to eat in. Pop-up restaurants and ghost kitchens have sprouted up to fulfill that demand, such as Applebees' "Cosmic Wings" delivery business.

The bottom line: People like things that are delicious, and relative chicken prices are starting to reflect that.

Thanks for joining me! See you next week, possibly with messy hands.