Policy Backgrounders

The Weekly Round-Up: Developments on the Economy (January 20 2023)

January 20, 2023

CED & ESF ECONOMIC & POLICY BRIEF

The Weekly Round-Up:

Developments on the Economy

January 20, 2023

Since the announcement of the United States reaching its debt ceiling last Friday, the Treasury Department has begun a “debt issuance suspension period” from January 19 to June 5, 2023 in hopes to give Congress more time raise the debt ceiling. There have been mixed opinions on how to address the issue with Speaker Kevin McCarthy (R-CA) saying that an increase in the debt limit would need to be paired with fiscal reforms limiting spending. Senator Joe Manchin (D-WV) suggested that Congress could borrow some ideas from the 2010 Bowles-Simpson commission on the debt and tie implementation of them to increasing the debt ceiling, though he did not suggest cutting entitlement programs.

Retail sales fell for a second consecutive month in December but remained significantly higher when compared to the previous year. The main contributor to the decline in this month’s figure is the decrease in spending at gas stations, but spending in other sectors fell modestly as well. The Conference Board’s Economy, Strategy, and Finance Center states that they expect this lower consumer spending to continue as the US economy enters a recession early 2023.

According to Federal Reserve data, industrial production decreased in December. The decline was extremely broad-based, encompassing all but one category (utilities, which increased sharply at 3.8 percent), which the Federal Reserve attributed to cold temperatures across the US increasing the demand for heating.

In 2023’s first edition of the Beige Book, most Federal Reserve Districts reported little change in economic activity. However, interviewees said they expected little growth in the months ahead. Consumer spending in most districts grew with robust holiday spending and travel. However, manufacturing activity declined, matching Federal Reserve data showing declining industrial production. Most districts reported employment growth, but firms continued to report difficulty filling open positions. Most districts also reported slowing price growth, with lower freight and commodity costs for businesses, and retailers stated that consumers were less willing to accept price increases.

The Department of Labor reported a decrease in the initial claims for unemployment insurance for the week ending January 14, reaching its lowest level since May 2022. The latest economic forecast from The Conference Board shows the unemployment rate rising to 4.5 percent by the fourth quarter of 2023.

For more information on these and other events, please see below:

1. US BEGINS “EXTRAORDINARY MEASURES” TO ADDRESS DEBT CEILING

2. RETAIL SALES DECLINE

3. INDUSTRIAL PRODUCTION DECLINES

4. BEIGE BOOK SHOWS SLOWING GROWTH

5. INITIAL UNEMPLOYMENT CLAIMS FALL SHARPLY

6. EUROPEAN RESPONSE TO US INFLATION REDUCTION ACT

7. FIRST SMALL MODULAR NUCLEAR DESIGN APPROVED

8. NEW YORK CITY NURSING STRIKE ENDS WITH TENTATIVE AGREEMENT

9. NTIA, FCC REJECT CALLS FOR ADDITIONAL TIME TO CHALLENGE BROADBAND MAPS

10. STATE EDUCATION INITIATIVES

11. MONKEYPOX UPDATE

1. US BEGINS “EXTRAORDINARY MEASURES” TO ADDRESS DEBT CEILING

On Thursday, the Treasury Department began taking “extraordinary measures” as the United States formally reached its debt ceiling of $31.4 trillion, as it had announced in a letter to Congress last Friday. Treasury Secretary Janet Yellen sent another letter to House Speaker Kevin McCarthy (R-CA), noting that because of reaching the statutory debt limit, Treasury would not invest the portion of certain government civil service and Postal Service retirement funds “not immediately required to pay beneficiaries,” beginning a “debt issuance suspension period” from January 19 to June 5, 2023. This effectively moved these Federal obligations off government balance sheets temporarily. She noted that her “predecessors have declared debt issuance suspension privileges under similar circumstances.”

While the “X date” after which the US would not be able to pay any bills can change based on actual receipts and expenditures of the government, the letter indicates that it is unlikely to be before June 5, giving Congress some time to address the issue and raise the debt ceiling. Secretary Yellen has said that a default by the US could cause “irreparable harm to the US economy.”

In response to Secretary Yellen’s letter, Senate Majority Leader Charles Schumer (D-NY) and House Minority Leader Hakeem Jeffries (D-NY) called for a quick resolution to the debt ceiling issue in a joint statement. However, a debt ceiling deal will require at least some bipartisan cooperation. House Speaker Kevin McCarthy (R-CA) stated that an increase in the debt limit would need to be paired with fiscal reforms limiting spending, and House Republicans began to plan a set of instructions for the Treasury Department to prioritize payments, including interest on the national debt, if there is no agreement to increase the debt ceiling. Senator Joe Manchin (D-WV) suggested that Congress could borrow some ideas from the 2010 Bowles-Simpson commission on the debt and tie implementation of them to increasing the debt ceiling, though he did not suggest cutting entitlement programs.

2. RETAIL SALES DECLINE

Retail sales fell -1.1 percent in December on a seasonally adjusted basis from $685.0 billion to $677.1 billion (not adjusted for inflation). This marked a second consecutive month of decline. However, over the last 12 months, retail sales rose 6.0 percent over December 2021’s figure. The largest contributor to the $7.9 billion decline was spending at gas stations, which fell $2.9 billion as gas prices moderated at the end of the year. However, spending also fell modestly across a wide variety of other categories, including motor vehicles, furniture, health and personal care, clothing, and general merchandise. In an analysis of the retail sales data, The Conference Board’s Economy, Strategy, and Finance Center states “we expect consumer spending to continue to contract as the US economy slips into recession early this year.”

3.  INDUSTRIAL PRODUCTION DECLINES

Industrial production decreased 0.7 percent in December, according to Federal Reserve data released on Wednesday. The decline was extremely broad-based, encompassing all but one category (utilities, which increased sharply at 3.8 percent), which the Federal Reserve attributed to cold temperatures across the US increasing the demand for heating. Production of final products declined 0.5 percent, including the subcategories of consumer goods (-0.1 percent) and business equipment (-2.0 percent). Nonindustrial supplies (-1.3 percent), construction (-1.4 percent), and materials (-0.7 percent) all also declined. Among major industry groups, production in manufacturing (-1.3 percent) and mining (-0.9 percent) also fell.

4. BEIGE BOOK SHOWS SLOWING GROWTH

On Wednesday, the Federal Reserve published 2023’s first edition of the Beige Book, which collects information on current conditions in each of the twelve Federal Reserve Districts through interviews with key economic participants and analysts. Overall, the districts reported little change in economic activity; five districts reported slight or modest increases in overall activity, six reported no change or slight declines, and one reported a significant decline. On average, interviewees expected little growth in the months ahead. Consumer spending in most districts grew with robust holiday spending and travel. However, manufacturing activity declined, matching Federal Reserve data showing declining industrial production. Real estate was weak in both the residential and commercial markets, with bankers reporting low residential mortgage demand in the face of high interest rates. Most districts reported employment growth, with only one reporting a decline and one with unchanged employment. Firms continued to report difficulty filling open positions, and many employers noted offering higher compensation to attract workers, but five districts reported that wage pressures had eased somewhat. Most districts reported slowing price growth, with lower freight and commodity costs for businesses, and retailers stated that consumers were less willing to accept price increases.

5. INITIAL UNEMPLOYMENT CLAIMS FALL SHARPLY

The Department of Labor reported Thursday that initial claims for unemployment insurance, a weekly indicator of labor market health, were 190,000 for the week ending January 14, a decrease of 15,000 from the previous week’s revised level of 206,000, its lowest level since May 2022. This level of claims is low or moderate by historical standards and well below the July highs of 261,000, reflecting continued labor market strength even as some leading economic indicators tip into negative territory. The latest economic forecast from The Conference Board shows the unemployment rate rising to 4.5 percent by the fourth quarter of 2023.

6. EUROPEAN RESPONSE TO US INFLATION REDUCTION ACT

European Commission President Ursula von der Leyen used her address at the World Economic Forum in Davos to announce that the EU will propose a “Net-Zero Industry Act” that will be a response to the US’ enactment of the Inflation Reduction Act (IRA) last year with its strong incentives for clean energy production. Von der Leyen said that “[t]o keep European industry attractive, there is a need to be competitive with the offers and incentives that are currently available outside the EU.” More broadly, the EU’s Commissioner for the Economy, Paolo Gentiloni, stated that the EU plans “decisive steps to safeguard European competitiveness” to respond to the IRA, targeting its “Buy American” provisions, and “streamlining [the EU’s] state aid rules while avoiding fragmentation in the single market, including through the establishment of a European sovereignty fund” to support EU member states in their transition to clean energy. France is among the EU countries pushing for a stronger response, with Finance Minister Bruno LeMaire declaring there is “no time to lose in establishing a new European industrial policy to support green industry and encourage industries to relocate to European territory,” including subsidies for hydrogen, electric batteries, solar panels, and semiconductors -- sectors that match those in recent US actions including the IRA and the CHIPS and Science Act.

7. FIRST SMALL MODULAR NUCLEAR DESIGN APPROVED

The Nuclear Regulatory Commission published a final rule approving the design of the NuScale small light water reactor, the first small modular reactor design it has approved. Based on a small light water reactor developed at Oregon State University, the NuScale design consists of up to 12 power modules per reactor each composed of “a natural circulation light water reactor composed of a reactor core, a pressurizer, and two helical coil steam generators located in a common reactor pressure vessel that is housed in a compact cylindrical steel containment.” The modules are “partially submerged in a common safety-related pool” serving as “the ultimate heat sink” for the modules. The design also features new safety measures, includes new approaches “for accomplishing key safety functions, resulting in no need for Class 1E safety-related power (no emergency diesel generators), no need for pumps to inject water into the core for post-accident coolant injection, and reduced need for control room staffing while providing safe operation of the plant during normal and post-accident operation.” CED’s Solutions Brief A Road Map for a Sustainable Clean Energy Transition During Economic and Geopolitical Uncertainty called for encouraging use of nuclear power, “including newer designs such as small modular reactors.”

8. NURSING STRIKE ENDS WITH TENTATIVE AGREEMENT

Last week, more than 7,000 nurses at two New York City hospitals went on strike for three days before an agreement was reached. While other hospitals managed to reach deals before the deadline, negotiations had failed with Mount Sinai Hospital in Manhattan and three locations of the Montefiore Medical Center in the Bronx. Leadership at the New York State Nurses Association (NYSNA) rejected the same 19.1 wage increases over three years agreed to by other hospitals. New York Governor Kathy Hochul supported the plan and had called for binding arbitration to push the parties towards a resolution. The striking workers, however, sought firmer commitments to address what union leaders called “the crisis of understaffing that harms patient care,” where “too often one nurse in the emergency department is responsible for 20 patients instead of the standard two or three.” Initially, Montefiore had committed to over 170 new nursing positions, a fraction of the 760 total nursing vacancies at the hospital, according to NYSNA President Nancy Hagans. The agreement was hailed as historic by workers and organizers, with both Mount Sinai and Montefiore agreeing for the first time to staffing ratios of nurses-to-patients with enforcement mechanisms for compliance.

9. NTIA, FCC REJECT CALLS FOR ADDITIONAL TIME TO CHALLENGE BROADBAND MAPS

The National Telecommunications and Information Administration (NTIA) ruled out additional time to challenge the Federal Communications Commission’s (FCC) broadband data maps, explaining its reasoning in a blog post and noting that NTIA and FCC are working closely together. These maps are a statutory requirement for the release of $42.5 billion in broadband funds from the Infrastructure Investment and Jobs Act and an essential component of the formula that determines how broadband funding for unserved or underserved areas will be allocated. The maps have been the subject of debate because of tension between two priorities, accuracy in targeting the funds and speed of deployment. Though the process has generally been collaborative, with stakeholders working hard on both priorities, there has been disagreement on how to weigh the priorities against each other. In a December letter to the FCC, a bipartisan group of senators stated challenges to the maps “must not be short-cut [.]” However, NTIA stresses the “urgency of this moment to connect the unconnected” and argues “a delay in the timeline would mean a delay in providing funding to communities who desperately need it.”

10. STATE EDUCATION INITIATIVES

This month, many governors have used their “state of the state” addresses to propose significant investments in education to address challenges revealed and exacerbated by the COVID-19 pandemic. Arizona, Colorado, Indiana, and Washington recommended increases in per-pupil spending. Republican Governors Kim Reynolds of Iowa and Jim Justice of West Virginia both proposed increased funding to support parents who choose to send their child to a private school. Idaho, Indiana, Kentucky, Virginia, and West Virginia also proposed raising teacher pay to address the national teacher shortage. Higher education and workforce training initiatives were also notable priorities in 2023 addresses. In Arizona, Idaho, and Indiana, the governors proposed additional funding to expand access and affordability to state colleges and universities within the state. In Iowa, Governor Reynolds proposed increased funding for the health care apprenticeships program. Governor Doug Burgum (R) of North Dakota supported a proposed $10 million innovation workforce grant and matching funds for private sector investment in career and technical centers. Virginia Governor Glenn Youngkin (R) proposed investments in the Earn to Learn Accelerator to build the nursing workforce and encouraged the acceleration of dual-enrollment partnerships between high schools and the community college system as well as a focus on high school and college programs to help recruit 2,000 more police officers. While Minnesota Governor Tim Walz’ (D) address is forthcoming, he has already proposed a $12 billion investment in education from the projected $17.6 billion state budget surplus. His initiatives include tax credits for families with young children, free breakfast and lunch for all students, and increases to the state's general education funding formula. The National Governors Association has issued a summary of state of the state addresses.

11. MONKEYPOX UPDATE

As of January 18, the US has confirmed a total of 30,026 cases of monkeypox. States with the highest case numbers include California (5,706), New York (4,216), Texas (2,893), Florida (2,862) and Georgia (1,985). Globally, as of January 18, 84,855 cases have been confirmed, with 83,650 cases confirmed in locations that have not historically reported monkeypox. The countries with the highest case numbers include the US (29,980), Brazil (10,671), Spain (7,513), France (4,114), and Colombia (4,062). A total of

67 deaths have been reported in locations that have not historically reported monkeypox.