Policy Backgrounders

The Weekly Round-Up: Developments on the Economy (September 16, 2022)

September 19, 2022

CED POLICY BRIEF

The Weekly Round-Up:

Developments on the Economy

September 16, 2022

1. CPI: BROADER PRICE PRESSURES OFFSET FALLING ENERGY PRICES

2. PHILADELPHIA FED MANUFACTURING OUTLOOK MIXED

3. RETAIL SALES RISE IN AUGUST DESPITE INFLATION HEADWINDS

4. UNEMPLOYMENT INSURANCE CLAIMS CONTINUE DECLINE SINCE EARLY AUGUST

5. RAIL UNIONS, CARRIERS REACH TENTATIVE DEAL, AVERTING RAILROAD STRIKE

6. MONKEYPOX UPDATES

7. NEW STUDY ON THE PANDEMIC AND THE WORKFORCE

8. ECONOMIC SPOTLIGHT: GLOBAL SEMICONDUCTOR INITIATIVES

1. CPI: BROADER PRICE PRESSURES OFFSET FALLING ENERGY PRICES

The Consumer Price Index (CPI) rose 8.3 percent year-over-year in August, vs. 8.5 percent in July. Month-over-month, headline CPI rose 0.1 percent—up from zero percent in July. Though energy prices declined substantially in August (CPI for energy declined 5.0 percent, and CPI for gasoline prices fell 10.6 percent) this was offset by broader price pressures in the rest of the economy. Month-over-month, core inflation rose to 0.6 percent, vs. 0.3 percent in July; and in year-over-year terms it rose to 6.4 percent, vs. 6.0 percent in July. One of the largest components of core CPI—shelter, or the cost of housing—increased 0.7 percent in August. The producer price index (PPI), which measures wholesale price changes from the perspective of producers, rose 8.7 percent year-over-year in August but fell 0.1 percent month-over-month in August.

Read the TCB Economics, Strategy and Finance Center’s Insights on the CPI here.

2. PHILADELPHIA FED MANUFACTURING OUTLOOK MIXED

The Philadelphia Fed’s Manufacturing Business Outlook Survey fell in September, the third decline in four months. While most firms (69 percent) reported no change in activity, the diffusion index was -9.9, meaning that the share of firms reporting declining activity (20 percent) exceeded the share reporting increasing activity (10 percent). But the report also stated that 15 percent of firms added workers and only 3 percent decreased employment, while 83 percent reported no change. Fully 56 percent of firms expect increases in third-quarter production, while only 22 percent expect declines in production.  Many firms reported labor supply and supply chain pressures constraining capacity utilization (37 and 34 percent, respectively). The Philadelphia Fed noted that its “survey’s broad indicators for future activity improved but indicate subdued expectations for overall growth over the next six months.”

3. RETAIL SALES RISE IN AUGUST DESPITE INFLATION HEADWINDS

Retail sales data from the US Census Bureau showed consumers continued to spend despite high inflation. Retail spending rose by $2.0 billion to $683.3 billion in August — rising 0.3 percent month-over-month, reversing much of the ground lost in July, and 9.1 percent from a year earlier. Consumer demand grew moderately, as falling gasoline prices granted consumers a reprieve from rising prices elsewhere. Spending at gasoline stations dropped 4.2 percent for the month as crude oil prices continued to slip from their June highs. Despite the challenges of rising prices, consumers remained ready to spend in August. However, the Conference Board’s Economy, Strategy, and Finance Center projects that a combination of inflation and rising interest rates will likely result in a sustained contraction in consumer spending in the near future.

4. UNEMPLOYMENT INSURANCE CLAIMS CONTINUE DECLINE SINCE EARLY AUGUST

In the week ending September 10, initial unemployment claims fell to 213,000, a decrease of 5,000 from the previous week’s revised level, and a decrease of 9,000 from the previous week’s advance figure. Unemployment claims have been falling since early August, after rising between March and August. One trend contemporaneous with the strengthening labor market has been a fall in energy prices over the same period; lower energy prices could allow consumers to reallocate their budgets from energy to other goods and services, increasing demand for labor in non-energy sectors.

5. RAIL UNIONS, CARRIERS REACH TENTATIVE DEAL, AVERTING RAILROAD STRIKE

After a long bargaining session, freight railroads and union representatives reached a tentative agreement in advance of Friday’s deadline, averting a potential strike that would have snarled supply chains and exacerbated inflation. The agreements are still subject to ratification by union membership. The Association of American Railroads, a trade group representing freight carriers, noted in a statement that the deal provides employees with a 24 percent wage increase from 2020 to 2024 (part is retroactive), including an immediate payout averaging $11,000 on ratification. The Transportation Division of the International Association of Sheet Metal, Air, Rail, and Transportation Workers (SMART-TD), in a statement, said union representatives “were able to obtain negotiated contract language exempting time off for certain medical events,” which was one of unions’ highest priorities. The President, whose Administration had worked with both sides on the negotiations, said in a statement that the agreement would mean “better pay, improved working conditions, and peace of mind around their health care costs” for railroad workers” and thanked Labor Secretary Marty Walsh “for his tireless, around-the-clock efforts that delivered a win for the hard working people of the US rail industry.”

US freight railroads had spent the week preparing for a strike and o Monday began stopping shipments of hazardous materials so they are not stranded in the event of a strike. A Presidential Emergency Board (PEB) under the Railway Labor Act made recommendations for a settlement which essentially drew a middle line between the railroads’ and unions’ offers. As of Wednesday, eight unions had accepted a tentative deal but four (including two of the largest, covering conductors and engineers) had not, forcing the marathon negotiations leading to Thursday’s agreement. Unions have now agreed not to strike during the contract ratification process, which may take several weeks.

Read CED’s statement on the negotiations here.

6.  MONKEYPOX UPDATES

As of September 14, the US has confirmed 22,774 cases of monkeypox. States with the highest case numbers include California (4,300), New York (3,694), Florida (2,301), Texas (2,017), and Georgia 1,614). Globally, 59,179 cases have been confirmed, with 58,602 cases confirmed in locations that have not historically reported monkeypox. The countries with the highest case numbers include the US (22,692), Spain (6,947), Brazil (6,033), France (3,833), and the UK (3,552). Nine deaths have been reported in locations that have not historically reported monkeypox. On Wednesday, CDC Director Dr. Rochelle Walensky testified that while the virus is still spreading at a rapid rate in certain regions of the US, the growth of new cases across the country and globally has been slowing in recent weeks.

Monkeypox vaccines, treatments, and tests remain unavailable in much of the world. Brazil, which has roughly 10 percent of global monkeypox cases, currently has no vaccine or treatment. The scramble for vaccines and treatments has been centered on the US and Europe, where supplies are stretched thin. Public health experts and groups have criticized the WHO for not doing more to ensure the swift movement of supplies once the WHO declared monkeypox a public health emergency of international concern on July 23, saying the issues echo those seen with COVID-19. James Krellenstein, a founder of PrEP4All, a medicines access advocacy group, said that “It doesn’t seem prudent to declare an emergency without saying anything about the tools to respond.”

7. NEW STUDY ON THE PANDEMIC AND THE WORKFORCE

According to a study released Monday by the National Bureau of Economic Research (NBER), illness from COVID-19 reduces the US labor supply persistently. Researchers found that workers who experience week-long absences from work because of COVID-19 illness are seven percent less likely to be in the labor force one year later compared to otherwise similarly-placed individuals who did not miss a week of work due to health issues. According to the study’s authors, economists Gopi Shah Goda of Stanford University and Evan J. Soltas of the Massachusetts Institute of Technology, COVID-19 illness shrank the US labor force by approximately 500,000 people. “If we stay where we are with Covid infection rates going forward, we expect that 500,000-person loss to persist until either exposure goes down or severity goes down,” said Mr. Soltas.

The authors “provide the most credible evidence to date about labor-market impacts for a large set of workers,” said Aaron Sojourner, an economist at the W.E. Upjohn Institute for Employment Research, who wasn’t involved in the study. The study was based on a representative population of over 300,000 workers followed over the course of 14 months in the Census Bureau’s monthly household survey, covering the period from January 2010 to June 2022. The economists used health-related, week-long absences as a proxy for probable COVID-19 illnesses. From March 2020 to June 2022, approximately ten workers per thousand missed a week of work due to health reasons, up from approximately six per thousand over the decade before the beginning of the pandemic.

8. ECONOMIC SPOTLIGHT: GLOBAL SEMICONDUCTOR INITIATIVES

On August 9, the President signed into law the CHIPS and Science Act of 2022 which includes a historic $50 billion investment to surge production of US-made semiconductors and address supply chain vulnerabilities, among other initiatives. However, the US is not the only advanced economy investing in its semiconductor capabilities during this time of tumultuous global supply chains. (For a CEO Perspectives discussion of the Global semi-conductor supply chain challenges between CED President Dr. Lori Esposito Murray and TCB President & CEO Steve Odland click here.)

The proposed European Chips Act, presented to the European Commission in February, aims to mobilize €43 billion in “policy-driven investment” for the EU’s semiconductor sector by 2030. The plan serves to enable immediate EU coordination against supply chain disruptions, strengthen and scale up production and innovation throughout the EU semiconductor value chain, further advance EU technical leadership, and build semiconductor international partnerships with like-minded countries. The proposed Act also includes the EU Chips Fund, an €2 billion initiative which seeks to promote semiconductor start-ups in the EU itself and address the tech skills shortage. Member States are encouraged to begin coordination efforts immediately in line with a Recommendation from the European Commission to better understand the current status of the semiconductor value chain across the bloc. Next, the European Parliament and Member States will discuss the Commission's proposals on the Act according to the ordinary legislative procedure. The European Chips Act is expecting its final vote in Parliament’s Committee on Industry, Research and Energy (ITRE) in early 2023.

Japan, in a break with its previous stance of economic nationalism, is seeking to form a coalition with allies such as the US and the EU to build a semiconductor supply chain that is less geographically concentrated, making it better insulated from disasters and geopolitical instability. On July 29, at the “two-plus-two” ministerial meeting in Washington, the US and Japan launched a new high-level economic dialogue aimed at pushing back against China and the disruption caused by the Russian invasion of Ukraine. The two countries decided to establish a joint research center for next-generation semiconductors. The meeting confirmed earlier reports that the US and Japan plan to coordinate to develop leading-edge 2-nanometer (nm) semiconductor process technology to prevent overreliance on Taiwan Semiconductor Manufacturing Company’s (TSMC) factories in Taiwan. A joint statement issued following the meeting noted the two longstanding allies “seek to advance efforts under the Japan-US Commercial and Industrial Partnership and other frameworks to foster supply chain resilience in strategic sectors, including, in particular, semiconductors…”

Last year, South Korea unveiled its plan to spend roughly $450 billion in an effort to build the world’s largest chipmaking base over the next decade. The plan includes tax breaks, lower interest rates, and eased regulations, among other initiatives. The South Korean National Assembly passed the National Advanced Strategic Industry Act during the administration of former President Moon Jae-in, empowering the Minister of Trade, Industry and Energy to regulate the export of advanced semiconductors to foreign companies. In his recent trip to South Korea, President Biden toured a Samsung Electronics plant as well as the semiconductor manufacturing facility that would serve as a model for one to assume operations in Texas by 2024. Biden and newly inaugurated President Yoon Suk-yeol in a joint statement outlined several areas for bilateral cooperation for addressing supply chain vulnerabilities in critical technologies. The two leaders acknowledged the importance of deepening cooperation on economic and energy security, and plan to direct respective National Security Councils to launch an economic security dialogue aimed to align the bureaucratic and policy approaches between the two governments.

China’s 14^th Five-Year Plan (2021-2025) has a core focus on its technology, especially the semiconductor industry. According to analysis from the Congressional Research Service (CRS), the Chinese government appears to be expanding and deepening a statist approach to developing its technologies prioritized in its Made in China (MIC) 2025and other industrial plans. However, details in the new Plan show that the government is still seeking specific foreign capabilities to fill critical gaps. China remains dependent on foreign semiconductor equipment, tools, and design software, many of which come from US companies. Regarding government funding of semiconductor initiatives, China has already channeled an estimated $150 billion to China’s semiconductor industry and in its 14^th Five-Year Plan (2021-2025) has allocated an additional $1.4 trillion for strategic industries, including semiconductors.

The US trade deficit fell 12.6% in July to $70.6 billion, a nine month low. July exports were $259.3 billion, $0.5 billion more than June exports. Higher exports were driven by capital goods ($2.1 billion increase from June) and the automotive sector ($0.9 billion increase), even as food and natural gas exports declined. July imports were $329.9 billion, $9.7 billion less than June imports. Lower imports were driven by a substantial ($7.4 billion) decline in purchases of foreign consumer goods. July’s trade deficit was considerably lower than the $106.9 billion deficit reported in March 2022, a record, and July marked the fourth consecutive monthly decline in the trade deficit. Monetary policy and fiscal policy have tightened in recent months, working to slow US demand.