Can the same House that barely elected a speaker manage to raise the debt ceiling?

Summary:

It may take pressure from Wall Street.

Going into the new Congress, the debt ceiling was an obvious flashpoint — and that was before a multiday standoff over electing a speaker of the House that has prevented members from being sworn in, let alone debating spending bills.

Mainstream Republicans, including Rep. Kevin McCarthy (R-Calif.) himself, had previewed a strategy to extract some kind of spending reduction in exchange for a debt ceiling increase, but the deep dysfunction exhibited by the speakership elections have cast doubt on their ability to get any type of controversial or contentious bill through, including bringing along Republican voters for a debt ceiling bill that the Senate and White House could agree to.

So far, analysts from Wall Street to K Street who spoke with Grid believe negotiations will be tough and likely include some kind of spending reform, not so different from previous Republican majorities. But there’s a lingering question about how far the hard-liners currently preventing McCarthy from winning the speakership will go — and how much pressure those hard-liners will face from financial markets.

The debt ceiling, the statutory limit on the amount of debt the federal government can amass, will likely be hit sometime this summer, requiring Congress to come up with a bill to increase it so that the federal government can fund spending that it had already approved. Separately, at some point Congress will have to pass a new spending bill in order to keep the federal government in operation. Both of these processes have become regular flashpoints, especially when Democrats control the White House and Republicans control of at least one chamber of Congress.

“Our base case was that the debt ceiling would be tougher to clear,” Isaac Boltansky, an analyst at the investment bank BTIG, told Grid. “What we’re seeing now is not in and of itself an event that should alter our view about what this Congress can and can’t accomplish — it’s a reaffirmation. This will rival the do-nothing congresses of lore. This is going to be a particularly dysfunctional Congress.”

The Clinton years featured a lengthy government shutdown, while the Obama years included multiple standoffs over the debt ceiling and government funding. The debt ceiling fight of 2011 resulted in real concessions from Democrats, facing pressure from Republicans on limiting discretionary spending. That offers a blueprint for the incoming Republican House majority — and a warning for Democrats who don’t want to repeat their mistake.

The debt ceiling and government spending bills became a running undercurrent of the fight over McCarthy’s speakership bid, with Freedom Caucus members trying to ensure a hard line. “Is he willing to shut the government down rather than raise the debt ceiling? That’s a nonnegotiable item,” South Carolina Republican Rep. Ralph Norman told reporters Wednesday. Meanwhile, the Biden administration and Democrats are previewing a no-concessions approach.

The speakership fight was a “stark confirmation of what we already knew — that the results of the election have empowered and emboldened hard-liners within the conference and weakened the hand of leadership,” Liam Donovan, a Republican lobbyist, told Grid. It’s not clear that “any speakership” — McCarthy or otherwise — could survive putting forward a debt ceiling increase that Democrats could live with. “The challenge over the next six to eight months will be finding some sort of mutually acceptable fig leaf that would avoid a downgrade or default scenario.”

While exactly what would happen if the federal government found itself without authorization from Congress to issue new debt in order to pay its existing obligations — everything from Social Security checks to interest on its existing debt — is unknown, it would be a completely novel shock to a world financial system that runs substantially on the full faith and credit of the federal government to pay its trillions of dollars’ worth of debt.

But Democrats may not be in the mood to deal, viewing the debt ceiling as something that shouldn’t be used as a bargaining chip.

“One thing we will not do is allow extreme MAGA Republicans to try to hold the American economy hostage, or detonate Social Security and Medicare, which many of them want to do, or else default on our nation’s debt for the first time in American history,” House Minority Leader-elect Hakeem Jeffries (D-N.Y.) told reporters on Thursday. “That’s an important issue that’s in front of us, and every day that goes by when Congress doesn’t organize is the day we get closer to a historic default on our debt.”

Boltansky did think the debt ceiling would be raised without a calamitous breach, calling into question the full faith and credit of trillions of dollars of debt issued by the federal government. “Ultimately, my message is that we will raise the debt ceiling,” Boltansky said. “I feel confident that D.C. understands the real-world economic implications of crashing through the debt ceiling. There will ultimately be an agreement. What I’m concerned about is first the incredibly ugly … theater that will proceed any type of deal.”

Boltansky pointed to comments made by Rep. Patrick McHenry (R-N.C.), a McCarthy ally and the likely next chair of the House Financial Services Committee, in December that there would be no debt ceiling breach.

But there may be, Boltansky warned, some spending cuts as the price to pay for the hike, and they could come at a moment when the economy is wavering or already in a recession, as many analysts expect to happen sometime next year.

But since past debt ceiling standoffs have been resolved without a breach, it’s possible that either the White House or the House may be more comfortable holding to their position in the expectation that the other side would cave. Similarly, it’s possible that the financial markets may not start reacting to the possibility of a debt ceiling breach until much later in the process, providing little outside pressure to reach a deal. “I think the X factor here is whether the mess on display wakes up [Wall] Street. They have underreacted in the past assuming it would all work out, which in turn emboldens guys who insist it’s all Chicken Little stuff. They’ll probably have to feel some pain to do what’s necessary,” Donovan said.

Source：Grid.news

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Justin

Central Bank

Economic

Forex

BoC to ponder one last rate hike

After having spent much of the last year front loading rate hikes, many central banks are now nearing the end of their tightening cycle and this theme is likely to dominate at least the first half of 2023. The Bank of Canada could take the lead in pausing rate hikes when it meets on Wednesday, but in all probability, it will raise its overnight rate by 25 basis points to 4.50% in one final tightening round.

Week Ahead - BoC May Hike One Final Time; Will Flash PMIs Spread Gloom or Optimism?_1

Inflation in Canada peaked back in June but then stubbornly hovered slightly below 7%. There was better news from the December data as the retreat in CPI gathered pace, sliding to 6.3% y/y. However, underlying measures of inflation haven’t budged much in the last few months. What’s more, employment surged in December, making a pause appear somewhat questionable.

Markets have assigned about a 60% probability of a 25-bps rate rise, with the remaining bets placed on no change. This gives the Canadian dollar some scope for gains should the BoC lift rates in line with expectations. However, if the Bank maintains the same language as last time that it “will be considering whether the policy interest rate needs to rise further”, the loonie is more likely to slip after the decision.

US data could be a mixed bag for the dollar

Just south of the border, the Fed is far from done with rate hikes and investors are getting more and more jittery about an impending recession. Inflation in America is well and truly on the way down, but so is pretty much everything else as cracks are appearing across the economy. The hot labour market is fast becoming the sole bright spot. But with payrolls being a lagging indicator, markets are increasingly out of lockstep with the Fed as they are not convinced it will be able to stick to its rate hike path where the terminal rate is somewhere above 5%.

The US dollar has been a big casualty of this divergence and next week’s releases could potentially stir even more confusion. Data on durable goods orders and the initial estimate of Q4 GDP are expected to be upbeat, with the former seen rising by 2.5% m/m in December and the latter by an annualized 2.8% q/q. Both are due on Thursday.

Week Ahead - BoC May Hike One Final Time; Will Flash PMIs Spread Gloom or Optimism?_2

However, the flash S&P Global PMI readings out on Tuesday could point to another contraction in business activity in the early parts of January, while Friday’s personal income and spending numbers for December could be soft again. More importantly, the core PCE price index – the Fed’s preferred inflation gauge – could make further progress towards the 2% target.

There could be support for the dollar if the US indicators overall aren’t as dire as some of the more recent ones, such as the ISM non-manufacturing PMI and retail sales. But for Wall Street, traders might shrug off the data and focus on the Q4 earnings season as tech favourites Microsoft and Tesla will be among the many reporting their latest financial results.

Not as bad as feared for the euro area

In Europe, the flash PMIs will be taking a more prominent role when released on Tuesday. Although the PMI numbers since the summer have been mostly knocking the euro down, lately, the picture from the surveys has been improving and this could be repeated in January. The manufacturing PMI is forecast to edge up from 47.8 to 48.5, while the services sector is expected to return to growth, with the PMI increasing to 50.2 from 49.8.

Week Ahead - BoC May Hike One Final Time; Will Flash PMIs Spread Gloom or Optimism?_3

The current shift in the economic backdrops on either side of the Atlantic whereby there are growing signs that any recession in Europe will be a mild one but that the much-hoped soft landing in the US might not be possible after all has been a game changer for the euro.

The single currency is trying to establish a foothold above the $1.08 level and its prospects for 2023 look promising as the European Central Bank has reiterated its pledge for several more 50-bps rate hikes in the coming meetings.

If the PMIs provide further evidence that the worst is over for the continent from last year’s energy crisis, the euro’s uptrend could have further to go.

Sterling eyes new highs with UK PMIs

It could be said that the United Kingdom is in a very similar boat as the Eurozone but not quite. The odds of the British economy dodging a recession are somewhat lower and even if some of the gloom around the UK and sterling has been overdone, Brexit and the political chaos have seriously dented the outlook for the country.

Still, with the dollar on the backfoot, further positive surprises in UK data could help the pound surpass its December peak of $1.2445.

Week Ahead - BoC May Hike One Final Time; Will Flash PMIs Spread Gloom or Optimism?_4

The flash January PMIs are due on Tuesday and investors will be looking out for an uptick in both the services and manufacturing prints. On Thursday, the producer price index for December might also attract some attention.

Aussie and kiwi on inflation watch

The coming week will be relatively quieter in Asia as Chinese markets will be closed for the Lunar New Year celebrations. But for the antipodean currencies, there should be plenty of excitement from the incoming CPI data.

Both Australia and New Zealand will publish quarterly readings on the consumer price index on Wednesday. The Reserve Bank of Australia’s fight against inflation suffered a setback recently after the annual CPI rate crept back up to 7.3% in November. If there is a further deterioration in December and for the fourth quarter as a whole, investors are likely to increase their bets of a 25-bps rate rise at the February meeting from the current odds showing it’s a coin toss between a hike and keeping rates unchanged.

Week Ahead - BoC May Hike One Final Time; Will Flash PMIs Spread Gloom or Optimism?_5

The aussie will also be keeping an eye on the flash PMIs and business confidence figures on Tuesday.

As for the kiwi, it’s likely to benefit more substantially from stronger-than-expected CPI prints as investors have priced in about a 25% chance of a bigger 75-bps rate increase by the Reserve Bank of New Zealand at its February gathering. The RBNZ’s cash rate is seen peaking well above 5% and at the current level of 4.25%, the bank could be hiking long after its peers have paused, so any upside surprises are likely to boost the local dollar.

Source:XM

To stay updated on all economic events of today, please check out our Economic calendar

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Ukadike Micheal

When Ghana suspended interest payments on most of its external debts this month, it was the national equivalent of someone not making the minimum payment on their credit card.

For years, the small West African nation had made the most of historically low global interest rates to borrow, borrow, borrow — and investors, lured by high growth rates as Ghana’s economy enjoyed a debt-fueled boom, had been more than happy to lend, lend, lend. So much so that when the country tried to raise $3 billion in new borrowing as recently as 2020, five times more investors than needed lined up to lend the country money.

But that was then. Now, Ghana has been locked out of the international markets where countries go to raise money from investors, its credit card effectively frozen.

The result: A country of 31 million people raking in funding not long ago has been forced to seek a bailout from the International Monetary Fund (IMF), the global backstop for struggling economies, as its government and its people struggle to make ends meet. The capital Accra has seen repeated protests by ordinary Ghanaians who are suffering as prices of everyday goods rise at an eye-watering pace, climbing last month at a rate of more than 50 percent — a 21-year high. Public sector hiring has been frozen, while a host of government officials have been forced to take pay cuts. As the country’s president, Nana Akufo-Addo, whose salary has also been reduced, conceded in a recent address to the nation: “We are in a crisis, I do not exaggerate when I say so.”

It is a crisis that has been in the making for years: the latest in a series of so-called debt bombs that have pummeled nations around the world.

Accra was only one of several capitals that took out cheap loans in recent years. As Grid has reported, those loans have become enormous burdens in many countries as inflation and interest rates rise. It’s a phenomenon that is squeezing budgets everywhere from Lebanon to Egypt, Kenya, Pakistan and beyond. In turn, this is forcing governments to cut back on spending at a moment when they are still dealing with the fallout from covid-19.

Throw in the effect of the war in Ukraine, which has fanned global food and fuel prices, driving up the cost of living internationally, and the world is left facing the very real prospect of a series of economic explosions that could affect the lives of tens of millions of its poorest people.

This is why Sri Lanka — which earlier this year saw its government implode following a wholesale economic collapse — was seen by many experts as a warning signal.

It is also why the news from Ghana “did not come as a surprise,” as Francesc Balcells, an expert on debt in emerging markets at the London-based investment firm FIM Partners, told Grid.

“It was pretty clear that their debt was unsustainable,” he said. “One very clear indicator for example was how much of their revenue they spending servicing their debt — the number was staggeringly high.”

A case of exploding balance sheets

So then who comes next? Which countries, in other words, are most vulnerable to Sri Lanka- and Ghana-style financial nightmares?

In Ghana’s case, the country was spending around 70 percent of its revenues on paying the interest on the loans it had taken out, according to Reuters figures.

The comparable figure for Sri Lanka is over 100 percent. After Ghana, next in line is Pakistan, which is spending just over 41 percent of its revenues on interest payments; Egypt is in an identical predicament. Pakistan is already reliant on IMF support; ditto for Egypt. The support has been critical to the countries avoiding catastrophic defaults.

Looking ahead, in Africa, analysts are closely tracking countries that face hefty payments in coming months on the bonds they issued to investors: Nigeria, for example, has a $500 million payment due next summer, according to the Fitch financial ratings agency.

In total, over the course of 2022, the World Bank estimates that public and private debt service payments by the world’s poorest countries stood north of $60 billion — or 35 percent higher compared with 2021. The fallout from this couldn’t be clearer; as the bank’s president, David Malpass, put it just weeks ago, “The debt crisis facing developing countries has intensified.”

It all adds up to a reversal on a grand scale. Until a few years ago, low interest rates meant that borrowing was easy and cheap for these countries, helping fuel growth (as in the case of Ghana). But as interest rises, the debt that drove growth has turned into an economic curse of sorts. To be sure, in many cases, the pressures have been exacerbated by bad decision-making. As Grid has reported, in Sri Lanka’s case, for instance, policies last year to ban chemical fertilizer imports proved catastrophic for the country’s farm sector, a central pillar of its economy, ultimately worsening its financial woes.

Still, not all indebted emerging economies are the same, as Balcells, from FIM, told Grid.

“When you think of emerging markets — when you think about the traditional countries like Mexico, South Africa, India, Brazil and others — those guys are fine,” he explained. Their economic systems, he said, have developed over the years in a way that makes it possible for them to deal with current global economic pressures.

But there is a subset, “maybe 10 percent of the emerging market universe,” where the picture is different. “A lot of it is in Africa,” Balcells said. It is not limited to the continent, however; the risks extend far beyond to countries such as Pakistan.

Beyond the markets

And as Ghana’s example shows, the pressures these countries face matter well beyond the financial markets.

“Debt service payments take away scarce fiscal resources from health, education, social assistance, and infrastructure investment,” World Bank analysts warned in a new report issued earlier this month.

Take Nigeria: The country has been spending more on debt payments than it spends on education and healthcare.

In Pakistan, similar pressures have led to calls for its creditors to cancel the nation’s debts, particularly in the aftermath of the recent flooding that devastated the country.

“Pakistan’s unsustainable debt levels means less fiscal space and opportunities to address adaptation and mitigation and recovering from loss and damage after a climate disaster,” Hussain Jarwar, the head of Indus Consortium, a local nonprofit, said recently at the launch of a campaign by civil society organizations to ease the country’s debt burden. “Without debt cancellation, Pakistan will be forced to continue taking on more debt to meet the huge economic costs of damage created by floods. This must stop.”

The worry raised by Jarwar — that Pakistan’s debt load would affect critical development work — was echoed in October by the U.N., which identified 54 developing countries with “severe debt problems.” This included 28 countries that the U.N. said were among the 50 nations most vulnerable to climate change.

All told, those with the worst debt problems accounted for only around 3 percent of the global economy. But that understates the problem.

As the head of the U.N.’s Development Agency, Achim Steiner, said at the time, that list of 54 might not rank high in the world’s economic league table, but they were home to “more than half of the world’s poorest people.”

Source：GRID.NEWS

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Michelle

For all the sanctions imposed against Russia since its invasion of Ukraine, and all the costs of its nearly yearlong war, Russia has kept its financial coffers well stocked — thanks in large part to strong exports of energy and food staples. That’s why this week’s news from the Russian finance ministry made headlines: Russia ran a severe budget deficit in 2022 — its second-worst fiscal performance since the breakup of the Soviet Union three decades ago.

The obvious reason: a spike in several war-related expenditures, as the conflict drags on far longer than the Kremlin had anticipated.

The numbers? Russia’s 2022 deficit reached 3.3 trillion rubles ($47 billion), or 2.3 percent of gross domestic product, Finance Minister Anton Siluanov said during a Tuesday briefing. A year prior, Russia had enjoyed a $6.7 billion surplus. According to the business newspaper RBC, Russian federal spending jumped by more than 6 trillion rubles ($92 billion) in 2022. Siluanov said the increases “were mainly aimed at helping the population,” including the families of troops fighting Ukraine.

Others took issue with that characterization. According to Bloomberg, outside analysts say the numbers have more to do with big increases in defense and security spending.

How damaging is this for Russia? It’s nothing like the catastrophic collapse that many economists had forecast when the raft of sanctions were imposed last spring. And perhaps unsurprisingly, Russian officials tried to paint a positive picture this week. Prime Minister Mikhail Mishustin said that “overall, those indicators aren’t bad.” And for his part, Siluanov, the finance minister, said that “despite the geopolitical situation, the restrictions and sanctions, we have fulfilled all our planned goals.”

The problem for Russia is that such expenses are only likely to rise — be it for funds for a larger mobilization, ammunition stocks, or the purchase of more weapons and maintenance of existing weaponry. Already, RBC reports that military spending is expected to jump by nearly 5 trillion rubles ($71 billion) in 2023, with spending on domestic security and law enforcement expected to soar by nearly the same amount. All of which means the deficit may grow as well.

We offer a comprehensive set of data points on the war in Ukraine below. Grid originally published this document March 24, the one-month anniversary of the war. We update it every Thursday to provide a fuller picture of the conflict.

Civilians killed: at least 6,900 (probably thousands more)

On June 7, a Ukrainian official said at least 40,000 Ukrainian civilians had been killed or wounded since the war began. The official offered no breakdown of dead versus wounded civilians. The United Nations’ latest estimate of civilians killed is more than 6,900, but it consistently notes the figure is an underestimate, as is its estimate of total casualties — a combination of deaths and injuries — given as more than 18,000. (Updated Jan. 11; source, source, source.)

Ukrainian soldiers killed: at least 13,000

Mykhailo Podolyak, an adviser to Ukrainian President Volodymyr Zelenskyy, estimated in early December that as many as 13,000 Ukrainian soldiers had been killed since the war began. In early November, the chairman of the U.S. Joint Chiefs of Staff, Gen. Mark Milley, estimated that both sides had seen about 100,000 soldiers killed or injured. (Updated Dec. 7; source, source.)

Russian soldiers killed: between 5,937 and 112,000

From the early days of the war, casualty counts for Russian soldiers have varied widely — depending on the source. Ukraine raised its estimate of Russian soldiers killed in the conflict to more than 112,000 on Wednesday. These numbers have been updated frequently through the Facebook page for the country’s General Staff of the Armed Forces. In its first update on casualties since March, Russia claimed in late September that there had been 5,937 Russian military deaths. Kremlin spokesman Dmitry Peskov said in April that there had been “significant losses of troops, and it’s a huge tragedy for us.”

A report by Meduza, an independent Russian media outlet, and the Russian branch of the BBC confirmed at least 10,000 dead Russian soldiers as of Dec. 9.

Russia has also suffered a high rate of casualties among senior officers. Thirteen Russian generals have been killed, according to Ukrainian authorities; the U.S. Defense Intelligence Agency puts the figure at eight to 10. Grid’s Tom Nagorski and Joshua Keating previously reported on the possible explanations for this “inconceivable” toll: poor communications and command-and-control structures within the Russian military. (Updated Jan. 11; source.)

Total displaced Ukrainians: approximately 14 million

There are more than 7.9 million Ukrainian refugees currently reported in other European countries. United Nations data indicates more than 17 million Ukrainians have crossed the border since the start of the war, but millions have returned home, largely from Poland, as Nikhil Kumar and Kseniia Lisnycha reported. In late October, the International Organization for Migration’s latest survey of internally displaced Ukrainians found more Ukrainians returning home from within Ukraine, but 5.9 million remained displaced within their own country.

Source：GRID

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Ukadike Micheal

Millions of low-wage workers all around the country got a welcome gift for the new year: an increase in the minimum wage.

On the first day of January, 23 states and Washington, D.C., increased their minimum wages — the result of specific laws and ballot referendums mandating the change or increases sparked by the rise in the cost of living. But it’s a different story at the federal level, where the minimum wage of of $7.25 has not changed for more than a decade.

A federal minimum wage increase has been just out of reach for years thanks to the 60-vote hurdle in the U.S. Senate and large-scale Republican opposition. Both Barack Obama and President Biden have called for minimum wage hikes, and a few Republicans have put forward proposals as well. These efforts have been foiled by Senate rules mandating they reach a 60-vote threshold and then by opposition from Republicans and some conservative Democrats

That leaves states and localities. These state minimum wage increases are spotty — some states forgo any increases — and are sometimes a patchwork across states. Sometimes states take into account economic disparities either within a state or among different types of businesses when deciding how to implement a higher minimum wage. At the state level, they’re increased by legislators, voters, or statutory adjustments. But that patchwork has one common thread: The minimum wage across the country is rising.

In some cases, there are phase-ins and adjustments for the higher minimum wages. In California, the minimum wage was lower for smaller businesses from 2017 to 2022. In New York, the minimum wage is $14.20 for workers outside the expensive New York City area as opposed to $15 for workers in the metropolitan area. States sometimes do this in order to allay concerns from employers in low-wage regions of a state who claim that a higher minimum wage would stymie hiring. In more than a dozen cities in California, cities chose to increase the minimum wage of their own volition; sometimes that happens in wealthy and more liberal parts of a state.

The movement to increase minimum wage — what works and where

These state-level increases are the fruit of labor groups organizing and campaigning to get laws enacted that raise the minimum wage, often with the shared goal of reaching a $15 minimum wage across the country as well as automatic increases designed to keep up with inflation.

The movement to raise the minimum wage has embraced a variety of strategies. The most effective strategy in conservative-leaning states has been ballot measures. Missouri, Nebraska, and Florida, for example, are very heavily red states that have recently increased their minimum wages thanks to ballot measures.

The largest increase this year was in Nebraska, where the minimum wage jumped from $9 to $10.50 per hour thanks to a ballot initiative passed with support of a coalition of progressive groups, including labor unions. The measures stipulate that the wage will continue to increase annually until it hits $15 in 2026, after which workers are guaranteed inflation-adjusted increases.

In more liberal states, advocates for a higher minimum wage get a friendlier hearing in state legislatures. In 2016, California passed a $15 minimum wage that will have gone into full effect only this year. The new minimum of $15.50 puts the state’s minimum wage up by just over a third in seven years. California’s increase came through a combination of legislation and adjusting for inflation. The Economic Policy Institute estimates that 3.2 million workers in California, almost a fifth of the state’s workforce, will see an increase in their wages, making up over a third of all workers nationally who will be affected by hikes in the minimum wage this year. Where is the minimum wage increasing in the U.S.? Here are the 23 places enacting a pay bump in 2023_1

Where is the minimum wage increasing in the U.S.? Here are the 23 places enacting a pay bump in 2023_1

Who benefits the most from wage hikes?

Thanks to inflation and a smaller workforce than before covid, paychecks have been rising, putting many workers above not just the federal minimum wage but the $15 wage that labor and progressive groups have campaigned for at both the state and federal level.

Workers at the bottom of the wage scale have seen faster growth, according to the Federal Reserve Bank of Atlanta, with the lowest paid quarter of workers seeing their wages go up by 7 percent in the last year. Walmart, which has over 1.5 million employees in the United States, raised its lowest wage to $12 an hour last year, while Amazon has a $15 minimum wage and frequently pays more in its warehouses. According to the Bureau of Labor Statistics, average hourly earnings have risen 4.6 percent in the last year to almost $33.

The forces pushing up statutory minimum wages and the wages actually paid by employers are the same. Following covid, there’s been both an extreme level of worker displacement and price inflation. When a large number of workers are changing jobs, they can bargain for the higher wages they need to help keep up with the rising cost of living.

“It is a good thing that in the last two years we’ve seen large wage growth for workers in the bottom of the wage distribution; it’s wage growth we haven’t seen for more than a generation,” EPI’s Sebastian Hickey told Grid. “Twenty-two million workers are paid less than $15 per hour and there was nowhere in the country where a single adult could live and afford basic expenses at $15 an hour.”

Source：GRID

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Central Bank

1.US recession risks

US composite PMI output index vs. GDP

Recession risks and inflation indicators: previewing January's US flash PMI data_1

The headline output number from the PMI survey is typically always the first port of call when assessing the current underlying economic climate, and the recent PMI data from S&P Global have been mostly gloomy. In December the composite output index covering manufacturing and services hit the second-lowest since the global financial crisis if early pandemic lockdown months are excluded. While backward-looking GDP estimates are so far showing surprising resilience for the fourth quarter in the face of Fed rate hikes, the PMI is an early warning indicator that all is not well in corporate America. Any further weakness in January would add fuel to recession worries.

2.US sector trends

While the plethora of manufacturing surveys have sent a consistent message of industrial malaise, the picture has been more varied for the service sector. However, a plunge in the volatile ISM non-manufacturing index in December has brought the institute's gauge somewhat more back into line with the other surveys, albeit with the service sector index from S&P Global showing a particularly worryingly pace of contraction .

However, note that, unlike the ISM survey, the S&P index excludes government-provided services (which tend to sustain growth in a recession) and energy (which has been performing well since the Ukraine war) - and instead focuses on more cyclical corporate-provided services, both B2B and B2C.

The S&P services PMI data will therefore likely be a key gauge to watch in terms of testing the broader US business community's resilience in the face of higher borrowing costs. Note that financial services had led the decline in the closing months of 2022, adding to evidence that high interest rates are taking their toll.

US services survey comparisons

Recession risks and inflation indicators: previewing January's US flash PMI data_2

US sector output

Recession risks and inflation indicators: previewing January's US flash PMI data_3

US manufacturing survey comparisons

Recession risks and inflation indicators: previewing January's US flash PMI data_4

3.US inflation gauges

Another important aspect of the PMI surveys will be the inflation indicators. Perhaps most eagerly awaited will be the input cost indices - especially for services, as this gauge includes staff costs.

US PMI input cost and selling price gauges

Recession risks and inflation indicators: previewing January's US flash PMI data_5

Both the manufacturing and service sector input cost indices have fallen sharply in recent months, down across both sectors as a whole to a two-year low, boding well for inflation to cool ̶ perhaps markedly ̶ in the early months of 2023 from its current rate of 6.5%.

US input costs vs. annual CPI inflation

Recession risks and inflation indicators: previewing January's US flash PMI data_6

The cooling of inflation has been a function of demand (as measured by the PMI new orders index, which fell to a new post-pandemic low in December) being subdued in part by higher interest rates. However, weaker price pressures are also reflective of improving supply. December's survey showed average supplier delivery delays having eased markedly, to an extent which signifies the start of a theoretical shift from the sellers'- to a buyers'-market.

We therefore stress the need to not only watch the various PMI input cost and selling price gauges, but also closely monitor the suppliers' delivery times index.

US suppliers' delivery times vs. monthly CPI

Recession risks and inflation indicators: previewing January's US flash PMI data_7

4.US labour market

The economic picture is of course not complete without a labour market update, and the employment index from the PMI will help shed some light on the hiring trend at the start of the year. Recent survey data have signaled a marked cooling in the rate of employment growth, albeit with firms continuing to take on staff on average up to the end of the year. This is consistent with the labour market remaining broadly stable and hence showing encouraging resilience. There is as yet no evidence of employment starting to fall and unemployment starting to rise, as had been seen in the downturns of the early-2000s and the global financial crisis, meaning January's data will be keenly awaited for any indications of growing caution in relation to hiring.

US unemployment and the PMI employment index

Recession risks and inflation indicators: previewing January's US flash PMI data_8

5.Fed policy impact assessment

The other 'big picture' signals from the survey will be the assessment of the impact of recent FOMC policy tightening, and the likely future path of rate hikes. Markets are pricing in a less aggressive rate hike path after lower than expected inflation in December, and any further deterioration in the upcoming PMI output data alongside a further moderation of cost pressures will help us assess whether a hike pause could be in play late in the year. Alternatively, sticky input cost inflation in particular will suggest the Fed has more work to do.

US PMI output and price data vs. FOMC policy changes

Recession risks and inflation indicators: previewing January's US flash PMI data_9

Source:S&P Global Market Intelligence

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Justin

Over the past five decades, growing wage inequality has been one of the defining features of the American economy. Since the late 1970s, inflation-adjusted pay for most U.S. workers has largely stagnated, while pay for the country’s highest earners has skyrocketed. This sluggish wage growth for middle-income Americans has been widely acknowledged and recognized by economists and politicians across the political spectrum. Yet, the root causes of these trends have frequently been wrongly attributed as an unfortunate result of apolitical market forces that one neither can nor would want to alter, such as automation and globalization. In fact, disappointing wage growth for most workers in the U.S. economy was not an unintended consequence—it was the intentional outcome of legislative, regulatory, and corporate policies deliberately implemented to constrain labor costs, decisions made on behalf of the rich and corporations and validated by many economists.

Bargaining power is the central though often unspoken determinant of wage outcomes. Generations of economics students have been taught that markets efficiently set wages through supply and demand and that an individual worker’s pay reflects their productivity. This naive textbook model assumes that employees and employers have equal bargaining power, that any worker being underpaid relative to the value they produce for a firm can simply quit and find a better-paying option. But this perfect textbook market is the exception, not the rule. Employers almost always have disproportionate bargaining power, and for much of the last half-century, public policy has been shaped to ensure that outcome.

The simplest illustration of this unequal bargaining power is shown in the divergence between labor productivity and typical worker compensation. Between 1979 and 2019, economy-wide productivity (the amount of income generated in an average hour of work, net of depreciation) grew by 59.7 percent, while the compensation (wages plus benefits) of the median U.S. worker rose by only 13.7 percent—a 46 percentage point divergence between the growth in value of what American workers produced and what the typical worker was paid. During this time, the bottom 90 percent of U.S. workers experienced wage growth slower than the economy-wide average, while top wage earners (mostly in finance and corporate management) and owners of capital reaped large rewards made possible only by this anemic wage growth for the bottom 90 percent.

Patterns of Inequality

Three wage gaps aptly describe how pay has diverged over the last four decades: the gap between low- and middle-wage workers, the gap between middle-wage and highly paid workers, and the gap between the very highest-paid earners and everyone else.

From 1979 to 2019, wages for the lowest wage workers—measured by the tenth percentile wage—barely budged over a 40-year stretch, rising just 3 percent after inflation. Remarkably, the bulk of this minuscule growth occurred only in the more recent past. Wages for low-wage workers fell drastically during the 1980s when the federal minimum wage was frozen amid high inflation. Since 1988, the gap between low-wage workers and middle-wage workers has shrunk somewhat but remains larger today than it was in 1979.

As already noted, wage growth in the middle has been sluggish, with median pay rising just 13.7 percent from 1979 to 2019. In contrast, annual pay for high earners, measured as those in the 90th to 95th percentiles, rose by 51.8 percent over this same period.

Still, this pales in comparison to pay growth for those at the top. From 1979 to 2019, the wages of the top 1 percent rose by 160 percent after inflation, while wages rose 345 percent for the highest 0.1 percent of earners. A major factor driving these changes was the astronomical growth in CEO compensation at large firms, which rose nearly 1,200 percent from 1978 to 2019. As a result of this astronomical growth, these workers’ share of the pie has doubled: the top 0.1 percent went from receiving 1.6 percent of overall earnings in 1979 to 5 percent by 2019, while the top 1 percent share rose from 7.3 percent to 13.2 percent.

In summary, wage growth for the vast majority—those in the bottom 90 percent—has been relatively weak, while those in the top 10 percent, especially those in the top 1 percent, have done exceedingly well.

Choices that Have Suppressed Wages and Spurred Inequality

EPI has rigorously documented the factors that explain the divergence between productivity and worker compensation—effectively, the choices that have suppressed wage growth for most U.S. workers.

The largest and most obvious factor is excessive unemployment. The Federal Reserve (Fed) is charged with the dual mandate of pursuing the maximum level of employment consistent with stable inflation. However, since 1979, while the Fed has aggressively sought to tame inflation, it has been far more tolerant of high unemployment. Operating under the theory that tighter labor markets inevitably lead to higher inflation as rising wages push up consumer prices, the Fed has consistently reined in job growth by hiking interest rates whenever unemployment approached the allegedly “natural rate,” regardless of whether there was any evidence that inflation was on the rise. Congressional and state lawmakers share culpability here too—until the COVID-19 pandemic-induced recession, fiscal policies to spur recoveries were weak and sometimes sabotaged by state-level austerity, as happened in the recovery after the Great Recession.

The result was an unemployment rate that averaged 6.3 percent from 1979 through 2017, a full percentage point higher than during the previous three decades, denying workers the opportunity to benefit from tighter labor markets. (When jobs are plentiful, workers have more leverage to demand higher pay because the implicit threat of an outside job option becomes more real.) Our research estimates that had unemployment averaged 5.5 percent (a modest goal) rather than 6.3 percent, median wages would have been 10 percent higher in 2017. Had the unemployment rate averaged 5 percent, median wages would have been 18 percent higher.

The erosion of collective bargaining was the second most important factor. In 1979, 27 percent of U.S. workers were union members. By 2019, less than 12 percent of the workforce was unionized. This drop in unionization occurred across many industries, the result of increasingly aggressive corporate anti-union practices, weak labor laws, and the proliferation of an entire industry of union-avoidance consultants that emerged in the 1980s. EPI estimates that the drop in collective bargaining suppressed wages at the median by 7.9 percent overall and by 11.6 percent for the median male worker.

The third most significant factor was globalization; however, it’s again critical to recognize that globalization occurred through the intentional corporate and political choices that deliberately offshored manufacturing and drove increased imports from low-wage nations. This reduced wages by roughly 5.6 percent, or about $2,000 annually, for a full-time U.S. worker earning the median wage.

These three factors alone—excessive unemployment, eroded collective bargaining, and corporate-driven globalization—can account for more than half of the divergence between net productivity and median hourly compensation.

Numerous other now common corporate practices are used to sap workers’ bargaining power. For instance, it has become standard practice to outsource any and all non-core functions—e.g., hotels contract out cleaning, food service, laundry, parking, etc.—a practice whose sole purpose is to lower labor costs (i.e., wages). Increasing misclassification of employees as independent contractors, the use of noncompete clauses in employment contracts, anti-poaching agreements, forced arbitration clauses, and other labor law “innovations” are all an effort to reduce workers’ bargaining power.

Direct policy changes have assisted as well. Many states have dramatically cut and limited access to unemployment insurance benefits, housing assistance, and other safety net programs, pressuring the unemployed to take any job that might be available even if it means a pay cut. The federal minimum wage, stuck at $7.25 an hour since 2009, is worth less today, adjusted for inflation, than at any point since 1956. Similarly, neglected overtime regulations leave far more of the workforce exposed to excessive work hours with no additional compensation than was the case prior to 1980.

The Pandemic and the Path Ahead

The COVID-19 pandemic was an inflection point in these trends. The federal government’s unprecedented relief programs—broad expansions to unemployment insurance and direct cash assistance to households—provided millions of workers left jobless by lockdowns with a financial cushion that kept them afloat until the economy reopened. This, combined with a jobs recovery that was dramatically faster than previous ones—again, a result of strong federal relief programs—has given workers more bargaining power than they have had in decades. Ample job openings have facilitated quitting to take a new, better job.

Consequently, wage growth since early 2021 for low-wage workers has been strong. High rates of inflation, caused by pandemic-induced supply chain snarls and exacerbated by the war in Ukraine, have moderated the impact of these gains, but not entirely. Low-wage workers have experienced real wage growth over the past year, narrowing slightly the gap between those in the middle and those at the bottom of the pay distribution. However, the high inflationary period has been a boon for corporate profits—meaning those at the top have pulled even further away from everyone else.

Reversing the United States’ seemingly unstoppable growth in inequality will require doing more to empower America’s workers. The pandemic recovery illustrates what is possible: a tight labor market, precipitated by strong government protections against financial hardship, and greater public salience around adjacent aspects of job quality—e.g., access to paid sick leave, childcare, remote work—have spurred greater worker organizing, interest in unions, and measurable wage gains in many sectors. Whether this momentum will be sustained remains to be seen; without reforming weak and outdated labor laws, America’s working class still faces an uphill battle.