February 09, 2022
👋 Hello folks! Emily here. It's Wednesday and we're bringing you all kinds of charts, so get ready.
- But first, in the spirit of this midweek moment, I need to get over the hump of owning up to an error I made yesterday. I told you a million more men than women entered the job market in January, but the monthly comparison was not accurate due to how the BLS re-weights population data at the start of the year. Read more here.
- Sorry about that. I'm grateful for smart readers who wrote in to keep us on our toes, so keep the emails coming! Write us at [email protected].
OK, on to the show...
Today’s newsletter is 957 words, 4 minutes.
1 big thing: Americans bought a lot of stuff
The trade deficit hit a record last year, as Americans attempted to ease pandemic-era sorrows by acquiring a mountain of consumer goods, Matt writes.
Driving the news: The trade deficit for the full year of 2021 hit a record $859 billion, 27% more than the previous year, as Americans bought cellphones, toys, games and household goods, the Bureau of Economic Analysis reported.
Why it matters: Some thought the pandemic — and recent supply chain snarls — might force a rethink of the consumption-heavy structure of the American economy, perhaps by boosting activity at American factories.
- But the trade numbers suggest COVID could actually amplify the economy's emphasis on consumption, at least for now.
How it works: The trade deficit is the gap between what the U.S. sells and what it buys from foreign countries. Typically when the trade deficit grows, it's because American consumption — a key driver of the economy — is relatively strong.
- That doesn't mean a large deficit is always a great thing, however. The growth of the U.S. trade deficit is closely connected to the deindustrialization that's taken place since the 1970s — and the loss of factory jobs.
State of play: The pandemic drove Americans to shift spending away from services — eating out, haircuts, trips to the movies — and toward goods — cellphones, home furnishings, cars, etc. — a lot of which are imported.
- That occurred, largely, because the government's pandemic-related stimulus checks ensured people had the money to spend.
Of note: U.S. exports also surged last year, rising 18.5% — just not as much as imports, which rose 20.5%.
Our thought bubble: A rather poetic symbol for the transformation of the American economy over the last 50 years is the self-storage space. These goods graveyards often occupy former factory buildings, which once churned out products and provided jobs.
- Today they're simply places to sock away excess junk. Hardly anybody works there.
What we're watching: The dollar. The greenback could strengthen this year if the Fed lift rates. (Here's why.) A stronger dollar makes U.S. exports harder to sell abroad and makes imports cheaper. That's a recipe for the trade deficit to get even bigger.
Bonus chart: U.S. trade deficit
2. Catch up quick
3. Charted: Brazil stocks boom
Brazil's stock market is emerging as an early winner in 2022, with its performance trouncing most other major indexes so far.
Why it matters: The rally in the Ibovespa underscores how commodity producers can benefit in an inflationary environment.
- Brazil is a major producer of raw materials like iron ore, soybeans and petroleum, and its markets are dominated by companies like energy giant Petrobras, and Vale, a massive iron miner.
Yes, but: The markets are not the economy. What's good for commodity companies — higher prices — can hurt elsewhere.
- Surging consumer prices have prompted Brazil's central bank to repeatedly raise interest rates, and that's helped push the country into a recession.
4. Patience vs. recession
Want to bring down inflation? The great dilemma is this: The only real options are to be patient, or cause a recession, Axios' Neil Irwin writes.
Why it matters: It is a pick-your-poison environment for the Biden administration and the Federal Reserve, who face public discontent over economic conditions — and the risk that discontent would only get worse if the alternative was a new recession.
- The inflationary pressures from strained supply chains and labor shortages look likely to persist through 2022 and maybe beyond.
- But the measures that would be needed to bring inflation down more rapidly would risk sending the economy into a tailspin.
The big picture: In the decades after World War II, episodes of inflation have ended when the Fed took steps to tighten the money supply, causing recessions.
- In other words, companies can't hike prices and workers can't demand higher pay if the economy is contracting and more people are out of work.
- In the most extreme example, Fed chair Paul Volcker engineered a steep downturn in the early 1980s that ended the double-digit inflation of that era — but at the cost of double-digit unemployment that pummeled President Reagan's popularity.
This time around, the goal is a soft landing. The Fed is looking to move toward higher interest rates gradually, not with the kind of shock Volcker engineered.
5. On deck: fresh inflation data
The next round of inflation chatter will kick 0ff tomorrow. Gird yourself, Matt writes.
- The Consumer Price Index for January will be released at 8:30am ET tomorrow.
State of play: Economists think it will show prices in January were up 7.3% compared to last year. If they're right, it'll be the fastest price rise since early 1982.
Why it matters: Inflation is the single most important issue for investors to understand this year.
- If prices continue to arrive higher than economists — and the Federal Reserve — expect, then the central bank could raise rates fast. That's something hardly anyone has been expecting.
- It was just such a realization — that the Fed was going to lift rates soon — that pushed the market to one of the ugliest starts on record this year. The S&P 500 was down by nearly 10% at times in January.
- It's since clawed back a fair bit and is about 5% lower.
What we're watching: The two largest drivers of the surprisingly high inflation in recent months have been the costs of shelter — up 4% in 2021 — and used cars — up 37%(!). Any big moves in those categories could translate into a big swing in the official reading on prices.