Washington Insider-- Monday

Why Markets Boomed

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

US To Adjust Retaliation In Airbus Dispute

The U.S. will adjust its tariffs that it imposed on European Union (EU) goods in the wake of winning a dispute at the WTO over subsidies provided to Airbus.

The U.S. took issue with the time period that the EU used to hit the U.S. with retaliatory tariffs after it was cleared to impose sanctions on the U.S. for subsidies to Boeing that the world trade body said ran counter to U.S. WTO commitments. The U.S. will now apply additional tariffs include aircraft manufacturing parts from France and Germany, certain non-sparkling wine from France and Germany, and certain cognac and other grape brandies from France and Germany, according to the Office of the U.S. Trade Representative (USTR).

“The EU used trade data from a period in which trade volumes had been drastically reduced due to the horrific effects on the global economy from the COVID-19 virus,” USTR said in announcing the shift in tariffs. “The result of this choice was that Europe imposed tariffs on substantially more products than would have been covered if it had utilized a normal period.”

Given that, USTR said the U.S. is “forced to change its reference period to the same period used by the European Union.” But the U.S. will adjust the product coverage by less than the full amount that would be justified utilizing the EU's chosen time period. The new U.S. tariffs will take effect January 12.

UK Approves Post-Brexit Trade Deal

Britain's post-Brexit trading agreement with the European Union was signed into law, after being overwhelmingly approved by Parliament. It comes into effect tonight. The UK government overwhelmingly approved the post-Brexit trade deal with the EU after a marathon 14 hour long parliamentary process.

Earlier Wednesday, the post-Brexit trade deal was signed by European Council President Charles Michel and European Commission President Ursula von der Leyen in Brussels.

When signing the deal into law, UK Prime Minister Boris Johnson thanked his parliament for passing the Brexit bill in one day and said it marks a new chapter dealing with the EU.

The deal will redraw the UK's ties with the EU and see importers and exporters face a new trading dynamic from January 1 and it has spurred concerns that trade could be disrupted in agri-food products.


Washington Insider: Why Markets Boomed

The New York Times says this week that “the central, befuddling economic reality of the United States at the close of 2020 is that everything is terrible in the world, while everything is wonderful in the financial markets.” It thinks this reveals the “sharp disparity between the pandemic year's haves and have-nots.”

The report uses government data to conclude that salaries and wages fell less, in the aggregate, than even a careful observer of the economy might have thought. Employee compensation was down only 0.5% for the recent period, “more akin to a mild recession than an economic catastrophe.”

The Times says the numbers are hard to understand since job numbers fell 6.1% in November compared with a year earlier, so how can employee compensation be down only 0.5%? The answer is found in the types of jobs lost, the report says.

The millions of people no longer working because of the pandemic were disproportionately in lower-paying service jobs. Higher-paying professional jobs were more likely unaffected and a handful of were booming, such as warehousing and grocery stores, leading to higher incomes for those workers.

The result is that wages, salaries and other forms of workers' compensation dropped modestly — $43 billion over the nine months — despite mass unemployment. “For all the attacks on the CARES Act that Congress passed in late March, the degree to which it served to support the incomes of Americans, especially those who lost jobs, is extraordinary,” the Times observes.

Americans' income from unemployment insurance benefits was 25 times higher from March through November 2020 than in the same period of 2019 — partly because millions more jobless people were seeking benefits, of course.

In total, unemployment insurance programs pumped $499 billion more into Americans' pockets from March to November than the previous year; $365 billion of it was a result of the expansion in the CARES Act. The $1,200 checks included in that legislation contributed a further $276 billion to personal income — much of which accrued to families that did not experience a drop in earnings.

And the law's signature program to encourage businesses to keep people on their payrolls was the Paycheck Protection Program which pushed profits that accrued to owners of businesses and farms up narrowly, by $29 billion, but would have fallen by $143 billion if not for the PPP and a coronavirus food assistance program.

The Times says that in total, Americans' cumulative after-tax personal income was $1.03 trillion higher from March to November of 2020 than in 2019. Some of the pessimism among economic forecasters (and journalists) in the spring reflected a failure to understand just how large and influential those stimulus payments would turn out to be, the report said.

There's more: spending fell.

One obvious result was a decline in spending on services, including restaurant reservations never made, flights not taken, sports and concert tickets not bought and the like which added up to serious money. Services spending fell by $575 billion, or nearly 8%.

Less obvious were some of the other patterns affecting consumer spending in a pandemic. Also, durable goods spending was up by $60 billion while nondurable goods spending rose by $39 billion. But those outlays did not exceed the drop in spending on services as households' personal interest payments and other miscellaneous outlays dropped by $59 billion.

Not only were American households, in the aggregate, taking in more money, but they were also spending less of it. Total outlays fell by $535 billion.

This combination of soaring personal income and falling spending pushed savings up sharply. From March through November, personal savings was $1.56 trillion higher than in 2019, a rise of 173%.

So, in spite of the economic hardships, Americans in the aggregate were building savings at a startling rate. Holding extra cash was one option — and sure enough, currency in circulation has spiked by $260 billion since February, a 14% increase. Deposits in commercial banks are way up — by 19% since the first week of March.

And, for those a little more comfortable with risk, there was investing in stocks, which helps explain the 16% rise in the S&P 500 for the year. Or you could have used the occasion of the pandemic to buy a new house: home sales surged, and the S&P CoreLogic national home price index was up 8.4% in October from a year earlier.

Essentially, the rise in savings among the people who avoided major economic damage from the pandemic has created a tide lifting the values of nearly all financial assets.

And, the Federal Reserve played a role by lowering interest rates to near zero and promised to keep them there for years; bought government debt; and supported corporate bond markets. But the surge in asset prices has made its way into many sectors far from any form of Fed support, like stocks and Bitcoin. And the surge has, if anything, accelerated this fall despite a lack of additional stimulative action from the Fed.

Still, the Times warns that the high asset prices may not hold and the fact that different groups fared so much differently likely signals growing pressure for specific, better focused programs in the future. It also notes that the 2021 economic narrative has yet to be written. If 2020 teaches one thing, it is that the story arc is far less predictable than you might think. Clearly, many of these trends are likely to receive significantly greater attention and emphasis in the future than in the past, trends producers should watch very closely as the year proceeds, Washington Insider believes.

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