A counterintuitive read on the economy

Wednesday, December 13, 2023

Good afternoon,

Here's the agenda today:

UP FIRST: A surprising take on Americans' dwindling savings

CATCH UP: The fine print on the COP28 deal

—Dylan Scott, senior correspondent

UP FIRST

People's savings are down, but actually, that may be a good thing

Samsul Said/Bloomberg via Getty Images

Americans appear to be running low on the excess cash they saved during the pandemic. But while that sounds like bad news, the bigger picture reveals an economy that seems to be stabilizing.

Vox's Abdallah Fayyad makes a compelling case that while dwindling savings have given some economic prognosticators pause, they can instead be interpreted as a promising indication that the US economy is settling into a new normal after the disruption of the pandemic.

If you're tempted to close this newsletter and send us a nasty email, I'd understand. But hear him out. I asked Abdallah for his elevator pitch and I think it may ameliorate those feelings: "Wage growth is a far more sustainable safety net for people than one-time pandemic savings, which were never going to last."

Read on to see how it all clicks together.

American households had accumulated $2.1 trillion in so-called "excess" savings by August 2021, according to the most recent estimates. Savings surged because much of the economy shut down and, at the same time, the government provided unprecedented financial assistance to much of the public.

But economists now estimate Americans possess "only" $430 billion in excess savings. That would suggest they have spent a lot of money. Some analysts see that decline as a warning sign about the state of the economy, perhaps a harbinger of the recession that was expected once inflation started heating up.

But Abdallah sees it differently. A broader survey of our economic metrics may indicate that the economy is heading for a "soft landing" from the inflation crisis, averting that long-feared recession. Our data on savings is also surprisingly unreliable, with projections varying widely, so it may not be as useful as we would think in evaluating the economy.

Here's the rest of the case:

Savings helped to cushion consumers against inflation. First of all, those excess savings helped people afford the increase in prices at the worst of the inflation crisis. The economy is in a good position to avoid a recession because consumer spending stayed high even after the Fed hiked interest rates. (The Fed decided today to leave rates unchanged for now, a good sign for the near future.)
Wages are now the key to sticking a soft landing. Wages have been growing while unemployment has been low. That has made people less reliant on their excess savings to handle inflation. If labor force participation and wage growth remain high, people should be better positioned to afford any further increases in prices.
There are reasons to remain cautious in our economic optimism. We aren't out of the woods and, inevitably, the economy will slow down at some point. Recent upticks in credit card debt are one concerning trend that is worth keeping an eye on. The resumption of student loan payments has put pressure on some people.
The economy looks like it's stabilizing. Consumer spending has dipped slightly but spending trends premised on higher wages instead of events that create one-time savings should be more sustainable. Inflation has been easing, while the labor market remains robust but not overly hot. For now, the US economy looks like it will continue to defy the doomsayers.

Read the rest of Abdallah's analysis here.

CATCH UP

Read the fine print on COP's fossil-fuel phaseout

Lead pipes, broken open to show their toxic interiors, lay on a tiled surface.

Hannes P Albert/picture alliance via Getty Images

The pageantry of COP28 and breathless headlines about a historic climate agreement disguise what has amounted to much ado about ... if not nothing, then not enough.

The scientific data grows more dire by the day: 2023 is projected to be the first year on record in which global temperatures are on average 1.5 degrees Celsius warmer than they were in the 19th century when modern recordkeeping began. The goal of the 2015 Paris climate agreement had been to prevent the planet from surpassing that threshold (on a 10-year average) during the 21st century.

Global emissions would need to shrink by 43 percent by 2030 to keep that target within reach. Instead, humanity's output has been increasing. And the deal struck at COP28 does not appear to have the teeth to change the trajectory of our warming climate.

Here are COP28's biggest takeaways, according to Vox's Umair Irfan:

The fossil-fuel "phaseout" is underwhelming. On the one hand, the world's nations agreeing, even only in principle, to end the age of oil is noteworthy. But the mechanics of this particular deal are pretty weak. The accord doesn't set a specific timeline, benchmarks, or investment goals to achieve it. Oil-rich countries fought hard against any such binding language.
The 1.5-degree goal has already slipped out of reach. World leaders have already begun to waffle on the Paris Agreement's target. Sultan al-Jaber, the president of COP28, said prior to the summit that the goal was "keeping 1.5 alive" but then said during the meeting that it wasn't strictly necessary to stop using fossil fuels to achieve it.
There is no substitute for getting rid of fossil fuels. The COP28 deal includes a commitment to tripling renewable energy capacity by 2030, but that would require the world to spend $10 trillion over the next decade. The gap between the funding countries are putting behind their pledges to reduce greenhouse gas emissions and what is required continues to grow. At the end of the day, the only way we're going to arrest the planet's warming is to cut emissions.

VERBATIM

🗣️ "I don't think the entire work is garbage. ... But the analysis of the products clearly failed. Completely."

—Leslie Schoop, a solid-state chemist at Princeton University in New Jersey, after a robotic AI lab assistant was said to have created new synthetic materials. Critics have called on academic papers that made the claim to be retracted. [Nature]

AROUND THE WEB

AI made from living brain cells recognizes human speech. Sometimes there is nothing I can add to these wondrous news stories: "Balls of human brain cells linked to a computer have been used to perform a very basic form of speech recognition." If you are wondering about the practical implications, researchers aspire to replace silicon chips with the cells, a much less energy-dependent material. [New Scientist]
Nearly 50 million people are at risk of hunger in Africa next year. Political violence across the western and central regions of the continent is making it harder for people to access safe, healthy food. [AP]
Why are so many pedestrians dying at night? Starting in 1980, pedestrian deaths had been declining for 30 years until suddenly, in 2010, they started to tick back up. The recent increase has been driven by one particularly curious trend: More people are dying at night. [NYT]