The invasion of Ukraine

 On February 24th Cleveland Fed president Loretta Mester said that the Ukraine conflict might play a part in the pace of rate hikes. The invasion is putting the global economy in uncharted territory. Even though it was little, with the impact that Ukraine had on the U.S economy back in 2014 it is likely that interest rates will be pushing high. The Fed is looking and willing to wait until next month (March) to see if the conflict has an impact on the key policy interest rates. They will just have to keep a close eye and be prepared for the unexpected. 

https://www.marketwatch.com/story/economic-impact-from-war-between-russia-and-ukraine-seen-as-limited-for-u-s-11645548528?mod=federal-reserve

A Potential Housing Crisis in Our Near Future?

 There is currently a supply deficit in the housing market. Although housing is only a small part of our collective economy in the United States, it has been known to upset the larger economy in very large ways. For example, it is hard to forget about the housing crisis of 2008. That situation involved banks allowing people to take out loans for homes that they could not realistically afford at the time. The practical application in 2008 was that people could not afford their housing payments, and would end up losing their house. That entire situation applied large amounts of financial stress on an individual level to a large amount of Americans at the time.

With housing costs soaring, it is becoming difficult for people to afford homes in America. There are multiple possible implications of this. Many Americans will flock to apartment living rather than choosing to pay on a mortgage. Some others will choose to live in smaller homes while a non-insignificant population will still choose to pay on a more expensive mortgage loan, spending less money on other goods and services. Whatever happens, the overall economy will likely worsen due to decreased consumer spending. Although it is not a guarantee by any means, unless the housing supply deficit is improved, the United States economy is at risk.

Thorsby D. Dec. 15, 2021. What To Expect From the Housing Market in 2022. Retrieved from https://realestate.usnews.com/real-estate/articles/what-to-expect-from-the-housing-market

Germany Increases Funding of Armed Services in Response to Ukraine Invasion

 In response to Russias invasion of Ukraine, Germany will be increasing its spending on armed forces and their weapons. They are spending 100 billion Euros to fund this and its defense spending will increase to be over 2% of its GDP. This spending sparks a large change to a policy that has been around since World War II, but it is seen as necessary in order to defend against attacks and prepare themselves for anything that will come. They will be sending supplies directly to Ukraine after lifting restrictions that did not allow for these weapons to be sent directly into conflict zones. They will be sending1000 (anti-tank) weapons and 500 missiles to Ukraine to help them out, which is surprising considering they were very recently not willing to help Ukraine. When troops began building around Ukraine and there was threat of invasion, Germany was not willing to help and did not offer much because they did not take the threat seriously. After the Invasion, they have now changed their views and are helping by sending resources and weapons.

https://www.cnbc.com/2022/02/27/scholz-germany-pledges-defense-spending-increase-in-shift-in-strategy.html

Gas Prices Rise as a Result of War in Ukraine

Gas prices in the United States are expected to continue to increase as a result of Russia's invasion of Ukraine. President Biden warns Americans that the escalation of the conflict could mean trouble for the US economy and fuel inflation. President Biden has also hinted toward tapping into petroleum reserves if necessary to help ease the pain that many Americans are feeling at the gas pump.

It will be interesting to see how Russia responds to the sanctions that many NATO countries have begun implementing. This could significantly increase oil prices as tensions begin to rise between Russia and NATO leaders. Russia is the third-largest producer of oil and the second-largest producer of natural gas, so it is unlikely for Russia to cut exports as their economy heavily relies on revenue from oil and natural gas exports. 

Over the past year, we have seen gas prices continue to rise mostly due to the increase in demand as COVID fears ease. Gas prices have played a critical role in rising prices in the United States, accounting for about a quarter of the 6.1% rise in inflation. The rise in prices and increased tensions have pushed many world leaders to reduce reliance on oil natural gas. Overall we can expect an increase in prices at the pump due to inflation and the war in Ukraine, however, I believe the Biden Administration will do the best they can to keep prices stable even if that means tapping into reserves.

https://www.washingtonpost.com/us-policy/2022/02/24/oil-price-russia-ukraine/

Retail Sales Rise 3.8% in January, Better Than Forecast

Retail sales rose by 3.8% in January, which was double that of the forecast. Retail sales were previously decreasing and decreased by 2.5% in December. The decline is estimated to be caused by consumers buying early Christmas presents in fear the products will be out of stock. There was a 33.4% yearly increase in gasoline sales and a 27% increase in sales at restaurants and other food and drink establishments. This could have been a driving factor in the 4.4% increase in overall retail sales. Another factor could have been due to inflation since retail sales are only adjusted for seasonality and not changes in price.

In January, consumer prices rose at an annual rate of 7.5%, and wages have also been rising at an annual rate of 4.7%. An increase in wage and the economy re-opening has led to consumers spending more money. Marwan Forzley, the CEO of Veem, has optimistic hopes for sales in the new year. The market interest rates are higher and have a yield of about 2% on the 10-year Treasury. The Fed is predicted to be more aggressive in the first half of the year in order to moderate inflation. 

https://www.usnews.com/news/economy/articles/2022-02-16/retail-sales-rise-3-8-in-january-better-than-forecast

How to avoid a fatal backlash against globalisation - Studying how the first era ended could help preserve the second

 In the the 19th century there was an a rapid integration of markets because of advancements in technology such as the telegraph, steamships, and railways. This made it cheaper, faster, and more efficient to move products, services, and people across boarders. Additionally this brought together Britain and the United States, who lived very different economic life styles at the time. The United States was very cheap with high wages, while Britain was the opposite and their wheat prices were 60% higher even. This integration leads to this 60% gap nearly closes as the pricing of their markets practically converged by 1890. The United States was much more expensive, while  Britain was a lot cheaper. These actions ended up changing markets forever. 

This has had an affect in recent times as the integration of markets is happening between the United States and China as a convergence is starting as well. This is narrowing the gap between white collar jobs in China and America. Furthermore, countries that have been attempting to improve education and training since the 19th as a result of migration and integration have taken a more protectionist approach as a cause of this. Things such as tariffs and migration policy has become more strict over time across the world. The issue of protectionism was not actually caused by migration or tariffs in 1914, it was caused by war. Which only cause a short instant of backlash against globalization, but it does relate to the current events going on today. 

Article: https://www.economist.com/finance-and-economics/2022/02/26/how-to-avoid-a-fatal-backlash-against-globalisation

Inflation will go higher, but Ukraine conflict likely won’t halt economic growth in the U.S.

Food and gasoline probably will cost more and the supply chain issues that have bedeviled the economy for the past two years likely will persist or even intensify. But could the Russia-Ukraine conflict somehow tip the U.S. economy into recession? It seems unlikely at this point, though anything is possible.

“What we’ve seen is oil prices have gone up, and equity prices at least initially retreated on all of this. Together, that’s a mild — stress mild — stagflationary hit to the economy,” Wells Fargo chief economist Jay Bryson said. “It’s going to push inflation higher than it is, and it’s probably going to slow growth. But it’s probably not enough to push the economy into recession.” That view is in line with most Wall Street economists.

Nevertheless, at a time when inflation is running at its highest level since the early 1980s, the last thing consumers need is more price pressure. Grain and energy commodity prices catapulted higher in recent weeks, bringing West Texas Intermediate prices up about 22% in 2022 and wheat up by double digits, before receding sharply Friday.

The importance of the two nations as agriculture exporters and producers of elements key to semiconductor manufacturing will exact an economic toll. But the implications shouldn’t be major for a global economy that’s still in a rebound phase from the depths of the pandemic.

The tensions have roiled financial markets, coming as they do at a time when investors already were worried about tighter policy from inflation-fighting central banks including the U.S. Federal Reserve.

Goldman estimates each $10 per barrel increase in oil would raise core inflation excluding food and energy by 0.035 percentage points and headline inflation by 0.2 percentage points, but exacts just a 0.1 percentage point hit to U.S. GDP, which is coming off its fastest full-year growth since 1984. However, Goldman said it doesn’t expect the events in Ukraine to deter the Fed from hiking. Past crises sometimes have triggered the Fed to ease policy, but “inflation risk has created a stronger and more urgent reason for the Fed to tighten today than existed in past episodes,” the firm said.

https://www.cnbc.com/2022/02/25/inflation-will-go-higher-but-ukraine-conflict-likely-wont-halt-economic-growth-in-the-us.html

Gross Domestic Product rose 7% in the fourth quarter.

 

During the fourth quarter, U.S. Gross Domestic Product increased by 7%, likely due to an increase in exports, increase in personal consumption, and a slightly lower government spending budget that was offset by state and local spending. The growth is expected to cool down later in 2022 as we expect the Fed to raise the interest rate, and multiple more rounds of stimulus packages. Rising tension between Russia and Ukraine could affect the global energy market since Russia provides roughly 10% of the global demand for oil, and it provides Europe roughly half of its natural gas. The conflict will most likely lead to global uncertainty, which will cause investors to pour money into the U.S. dollars, causing the currency’s value to go up; it could possibly make United States imports cheaper.

U.S. Consumer Confidence Falls in February 2022

 The Conference Board released its consumer confidence index this week and the numbers are not looking too hot. They reported a number of 110.5, from 111.11 in January following a decline a month earlier. This comes amidst a mix of uncertainty in the world's economy as a whole. The U.S. is expecting large spikes in inflation, gas prices on the rise-scaring the pocket of the average consumer, and a general drop in the purchase of new homes, vacations, cars, and other common consumer goods. Thus, we can tell that Americans are weary about spending too much of their disposable income on items that can be considered non-essential. Major international events, such as the increasing hostilities between Russia and Ukraine may scare off the American consumer even further as the world economy at large seems to be in retreat. Some of these metrics are opposed by more optimistic numbers such as the Present Situation Index which tend to support a happier U.S. consumer. The Conference Board is somewhat hopeful that this metric will stay consistent in the coming months, however, major increases in consumer confidence will take corrections in the health of the domestic and world economies at large.

https://www.usnews.com/news/economy/articles/2022-02-22/consumer-confidence-ticks-down-in-february-on-inflation-fears

January home sales jump 6.7% despite a record low supply

 In January, the sales of previously owned homes rose 6.7% from December.  The rate of this would be 6.5 million units annually according to the National Association of Realtors.  Comparatively, the sales in January of last year were 2.3% greater than they are currently.  Despite the sales increasing, the supply of homes has hit a record low of only 860,000 homes for sale at the end of January.  This is a decrease of 16.5% from the previous January.  At the current rate, it would only take 1.6 months to exhaust the entire inventory of houses in the market.  This rate is much faster than normal with houses typically selling after around 19 days on the market.  Houses that are newly built are also being sold at a much higher rate with a 12% jump from December to January.  Unfortunately, builders cannot keep up with this demand due to supply chain and labor issues.  In the overall economy, this likely means that interest rates are decreasing due to people making investments into expensive things such as houses.

January home sales jump 6.7% despite a record low supply (cnbc.com)