May 23, 2022
Morning. It's Matt. The Fed's trying to slow the economy, and guess what? It seems like the economy is slowing. Also, quantifying the impact of WFH on home prices. Plus, dogecoin and Shiba for crypto-lolz. Happy Monday!
Today's newsletter, edited by Kate Marino, is 1,025 words, 4 minutes.
1 big thing: Shrinking growth forecasts
Economic growth is on track to slow way down in the months ahead, according to an emerging consensus among forecasters. And that may be exactly what the U.S. economy needs, Axios' Neil Irwin writes.
Why it matters: If earlier projections of continued speedy growth were coming true, it would mean rising, rather than falling, inflation pressures. The latest round of forecasts is more consistent with the economy downshifting toward normal.
- The bad news is that slower growth leaves the economy more vulnerable to recession, especially if some unlucky negative shocks show up.
By the numbers: In a survey out today from the National Association for Business Economics, the median forecaster expects 2022 gross domestic product to rise 1.8%, compared with a median projection of 2.9% in February. (GDP growth was 5.5% in 2021.)
- That meshes with other measures of economic consensus. For example, the Philadelphia Fed's Survey of Professional Forecasters showed 2.5% expected 2022 GDP growth in a May 13 release, down from 3.7% in February.
Those revised forecasts reflect all that has happened in the last three months. Financial markets have started to price in more aggressive monetary tightening from the Federal Reserve, and the negative effects of the Ukraine war and China's COVID lockdowns.
- It's also clear that the risk of a recession has increased lately. Some 77% of participants in the NABE survey see risks tilted to the downside, and more than half see the odds of a recession in the next year at over 25%.
- But the downgrade in growth forecasts is just what policymakers are seeking as they try to bring inflation down.
The intuition: In the long run, economic growth is limited by the number of workers and gains in productivity. Fed leaders, for example, think the long-run potential growth rate of the U.S. is around 1.8%.
- Growth can surge above that for short periods, like when people are coming back to work after a recession. It can also change depending on things like immigration policies (that can bring in more workers) or technological advancements (that generate higher productivity).
But in an economy like 2022's, with the labor market already extremely tight, growth along the lines of the 2.9% forecasters expected months ago would imply yet more of the overheating that has fueled higher prices and discontent over shortages.
What they're saying: "The expected growth slowdown should deliver more benign inflation outcomes," wrote JPMorgan economists in a research note last week. They cut their forecast for growth in the second half of the year to 2.4% from 3%.
- They acknowledged that the link between inflation and GDP has been tenuous lately. "But directionally at least, subpar growth increases our confidence that inflation will gradually move back down toward 2%."
The bottom line: Recession risk is real, but the pullback in growth that forecasters are seeing now looks like a healthy thing.
2. Catch up quick
3. Remote work drove home price surge — report
It’s no secret that Americans’ newfound remote work lifestyles drove demand for larger homes with more comfortable workspaces, Axios’ Kate Marino writes.
What's new: That demand may be responsible for more than half of the surge in real estate prices during the pandemic, according to a working paper published by the National Bureau of Economic Research.
- It's one of the first papers that aims to quantify how remote work reshaped the housing market.
Why it matters: If the research holds up, it signals a fundamental shift in the housing market — that it wasn't just low-interest rates and fiscal stimulus that drove up housing prices.
By the numbers: It found that remote work led to about 15 percentage points of the 24% average increase in house prices between December 2019 and November 2021.
Details: The paper’s authors are John A. Mondragon, an economist at the Federal Reserve Bank of San Francisco, and Johannes Wieland, of the University of California, San Diego’s economics department.
- The researchers found that after controlling for COVID migration, regions with the highest rates of remote work experienced much higher home price growth during the period.
- They also observed a similar effect on residential rents — along with declines in commercial rents — in these areas.
What they’re saying: This implies a shift in demand, as many pandemic homebuyers and renters sought to upgrade to larger, and more expensive homes to support their telework lifestyles, Mondragon told the San Francisco Chronicle.
The bottom line: Policymakers like those at the Fed would be wise to pay close attention to the evolution of remote work because it will help determine the future of home prices — and of overall inflation, the economists wrote.
4. Charted: 🐶 Memecoins!
Memecoins are cryptocurrencies that were launched as a joke about cryptocurrencies — but there's a certain kind of crypto degenerate that loves jokes like that, Axios Crypto’s Brady Dale writes.
The big picture: The world’s best-known meme coins, dogecoin and Shiba Inu, have achieved virality at different times — but price movements have behaved pretty similar, and generally followed the same trajectories as the rest of the crypto market.
Flashback: Dogecoin is the most emblematic, a cryptocurrency launched in honor of the beloved internet dog meme.
- It started all the way back in 2013. It's had various moments in the sun, usually somewhere in the middle of every crypto boom, but it always comes crashing back down.
- It's a coin with an unlimited supply, that has had — at times — no developers working on it and a fanbase that goes from diehard to hard-to-find, depending on little more than vibes.
Shiba Inu started as a joke about dogecoin in August 2020. It doesn't even have its own blockchain, as dogecoin does. It just runs on Ethereum.
- The joke of Shiba Inu caught on so ferociously that it's been, on some level, one of the best "investments" of all time — but you could describe a lottery ticket the same way.
The bottom line: There are those that argue that all investments are just memes, but some investments are more transparent about that reality than others.