Category Archives: economics

Rate of Atmospheric CO₂ Accumulation Points to Rebound for Global Economy

August 2022 saw a rebound in the rate at which carbon dioxide is being added to the Earth's atomosphere. That change directly follows July 2022's rebounds for the U.S. and China following months of sluggish economic activity in both countries during the first half of 2022.

That's the latest development for the global economy as measured by atmospheric carbon dioxide concentration data recorded at the remote Mauna Loa Observatory. The rebound can seen in the latest update to Political Calculations' chart revealing the rate at which CO₂ accumulates in the Earth's air.

Trailing Twelve Month Average of Year-Over-Year Change in Parts per Million of Atmospheric Carbon Dioxide, January 2000 - August 2022

China is, by far and away, the world's biggest producer of carbon dioxide emissions, a status it has undisputably held since 2006. In 2020, China's CO₂ emissions were nearly 2.3 times larger than those of the second-ranked United States, accounting for almost 31% of the world's carbon dioxide emissions. The two countries together accounted for 44.2% of the world's CO₂ emissions, which is directly linked to the output of their national economies.

That China's economy was struggling during the first half of 2022 was confirmed by the Helsinki-based Centre for Research on Energy and Clean Air, which measured a decline in China's CO₂ output:

China’s carbon emissions fell almost 8 per cent in the April-to-June quarter compared with the same period last year, the sharpest decline in the past decade, according to climate research service Carbon Brief.

The fall in emissions reflects a dramatic slowing in Chinese economic growth caused by large-scale coronavirus lockdowns and a crisis in the heavily indebted property sector. It was the fourth consecutive quarter in which emissions have fallen in China, the world’s biggest emitter.

Lauri Myllyvirta, an analyst at the Helsinki-based Centre for Research on Energy and Clean Air, which compiled the data for Carbon Brief, said there had been a drop of 44 per cent in the number of construction projects started and a 33 per cent fall in those completed during the second quarter.

Lauri Myllyvirta's analysis for China is available here, which indicates "emissions from power generation have rebounded in July and August". Given the several week lag for atmospheric carbon dioxide concentration data to reflect changes in economic activity, we anticipate the next month's data will continue showing upward movement in the pace at which carbon dioxide accumulates in the air.

References

National Oceanographic and Atmospheric Administration. Earth System Research Laboratory. Mauna Loa Observatory CO2 Data. [Text File]. Updated 5 September 2022. Accessed 5 September 2022.

Why Hasn’t the Price of Gold Fallen More with the Fed’s Rate Hikes?

On 16 March 2022, after a nearly a year of letting building inflation in the U.S. go unaddressed, the U.S. Federal Reserve finally decided to do something about it. The Fed announced it would begin hiking interest rates, raising them above the near-zero level it had been maintaining. Coincidentally, a week later, we featured a snapshot of the inverse relationship between the price of gold and the inflation-adjusted yield of the 10-Year Constant Maturity Treasury Bond from 2 January 2007 through 17 March 2022. Here's the chart we featured:

Gold Spot Price vs Inflation-Indexed Market Yield of 10-Year Constant Maturity U.S. Treasury, 2 January 2007 - 17 March 2022

It would be reasonable to expect that as the Fed has continued to hike interest rates, the inflation-adjusted yield of a 10-year U.S. Treasury would rise as well. And sure enough, that is what has happened in the five months since. It would also be reasonable for the price of gold to retrace its path along the curve shown in this chart, falling as real interest rates rise. We can confirm that's happened too. But as we're about to reveal in the next chart, by nowhere near as much as the relationship established in the previous 15 years implies:

Gold Spot Price vs Inflation-Indexed Market Yield of 10-Year Constant Maturity U.S. Treasury, 2 January 2007 - 19 August 2022

The red line added to the chart tracks the daily spot price of gold with respect to the real yield of the 10-Year Constatn Maturity U.S. Treasury from 16 March 2022 through 19 August 2022. During this period, the price of gold has averaged being $439 higher than the level indicated by the black-dashed curve modelling the inverse relationship between these variables.

That outcome suggests the Fed's current strategy for combatting inflation may be failing to achieve the full effect Fed officials are counting upon. That's also despite their policies' seeming success in boosting the value of the U.S. dollar, which should also contribute to reducing the price of gold:

The dollar is soaring against the world's major currencies, heading for its biggest calendar year rise in almost 40 years and third biggest since President Richard Nixon took the dollar off the gold standard over half a century ago.

Will the Fed be worried? Not one bit.

Quite the opposite. All else equal, the dollar's strength will help cool price pressures by reducing import costs, and tighten financial conditions, both desired goals for Jerome Powell and colleagues as they try to bring 40-year high inflation back towards their 2% target.

15 August 2022 marked the 51st anniversary of Nixon's closure of the gold window, when an ounce of gold cost $43. If the price of gold had grown at an average of 2% per year and compounded monthly, that ounce would cost $119.25 today. On 15 August 2022, the price of an ounce of gold was $1,778.57.

Speaking of the rise in the value of the U.S. dollar:

The dollar is hovering around a 20-year peak against a basket of major currencies. It is up 13.5% so far this year - on course for its biggest calendar year rise since 1984, and third largest since the dollar's convertibility to gold ended in 1971.

There's that gold-based reference point again! Why does Reuters columnist Jamie McGeever keep going back to it unless it's somehow meaningful for measuring the Fed's performance? Let's assume it is, which raises some questions.

If the Fed was succeeding in reducing inflation it believes is transitory, shouldn't that calendar year rise in the relative value of the U.S. dollar be much higher? Shouldn't the price of gold have fallen much more than it has? Or has the inflation the Federal Reserve's and President Biden's policies wrought permanently ratcheted up its value?

Or is it all just a matter of time before the value of the U.S. dollar spikes upward even higher and the price of gold collapses? How long does the Federal Reserve think that might take?

Global Economy Continues Cooling in July 2022

According to atmospheric carbon dioxide concentration data collected at the remote Mauna Loa Observatory, Earth's economy continued to cool in July 2022.

That outcome can be seen in the latest update to Political Calculations' chart tracking the pace at which CO₂ accumulates in the Earth's air.

Trailing Twelve Month Average of Year-Over-Year Change in Parts per Million of Atmospheric Carbon Dioxide, January 2000 - July 2022

A falling rate of carbon dioxide accumulation in the atmosphere corresponds to falling levels of economic output. It also occurs as China's economy strengthened following the lifting of its government's zero-COVID lockdowns in several regions and as the U.S. economy likely continued shrinking or stagnating in real terms. The falling rate of CO₂ accumulation points to the established negative trend in the U.S. economy more than offsetting China's economic rebound.

All in all, it's pretty amazing what you can see about the global economy from the side of a remote volcano!

Mauna Loa Observatory at Sunset - Source: NOAA - https://www.esrl.noaa.gov/gmd/obop/mlo/pictures/sunsetmaunaloa1.jpg

References

National Oceanographic and Atmospheric Administration. Earth System Research Laboratory. Mauna Loa Observatory CO2 Data. [Text File]. Updated 5 August 2022. Accessed 5 August 2022.

How Big Mortgage Rate Changes Affect New Home Sales

How do big changes in mortgage rates affect new home sales?

That question has become very relevant to the U.S. economy with the Federal Reserve scrambling to contain President Biden's inflation by hiking short term interest rates. Their actions have directly impacted 30-year conventional fixed mortgage rates, which have risen from December 2021's average of 3.1% to June 2022's 5.4% because of the Fed's rate hikes.

That's a big change in a relatively short period of time for mortgage rates. One that's bound to impact the sales of new homes. In our first chart, we've sought to quantify how much that impact might be by plotting the percentage change in year-over-year new home sales against the year-over-year change in mortgage rates using fifty years worth of monthly data.

Change in New Home Sales vs Change in 30-Year Conventional Fixed Mortgage Rates, June 1972 - June 2022

A simple linear regression shows that changes in mortgages rates have an inverse relationship with changes in new home sales. Rising mortgage rates tend to coincide with negative changes in the sales of new homes, while falling mortgage rates coincide with increases in new home sales.

That makes sense because mortgage rates have a direct impact on the cost that homeowners pay on their mortgages. Given the same sale price, higher rates means a higher cost of ownership.

But the correlation between changes in mortgage rates and new home sales isn't as strong as you might think. The correlation coefficient (R²) is 0.182, which is relatively weak. In looking at the chart, it occurred to us that there's quite a lot of noise in the data associated with relatively small mortgage rate changes, which is where most of the changes are concentrated.

What would happen if we simply omitted the data where the absolute year over year change in mortgage rates was less than 1.0%? The next chart shows the results of that analysis.

Change in New Home Sales vs Change in 30-Year Conventional Fixed Mortgage Rates, Omitting Small Changes in Mortgage Rates, June 1972 - June 2022

Here, the correlation shows a moderately strong relationship between these two factors. Interestingly, there's little change in the linear regression itself after omitting the data, which still shows that for a given year-over-year change in mortgage rates, new home sales will move in the opposite direction by 8.5-9.0%. For June 2022, the most recent month for which we have initial data for new home sales, the 2.6% increase in mortgage rates over the past year corresponds to a negative 20% change in new home sales, which is nearly in line with what the linear regression would predict.

There's still quite a lot of noise in the underlying data however, so for us, it's not yet worth developing into a forecasting tool. Moderately strong correlations are mainly good for putting you in the right ballpark, so while they're useful for answering questions like how big mortgage rate changes affect new home sales, they come with a wider than desirable margin of error for telling you the exact change to expect when they occur.

Mars Recovers from First Recessionary Event

On 7 December 2022, we documented the birth of the Martian economy and estimated the planet's GDP. Six Earth months and just over one Martian quarter later, we're ready to revisit the Red Planet to find how things have changed.

And change they have, because in between then and now, Mars' economy experienced its first recession-like event. After collecting its sixth cored rock sample on 29 December 2022 and putting it into inventory, the Perseverance rover ran into a technical problem that prevented it from collecting more samples, effectively suspending economic activity on the planet. Here's the story from NASA's press release:

On Wednesday, Dec. 29 (sol 306) Perseverance successfully cored and extracted a sample from a Mars rock. Data downlinked after the sampling indicates that coring of the rock the science team nicknamed Issole went smoothly. However, during the transfer of the bit that contains the sample into the rover’s bit carousel (which stores bits and passes tubes to the tube processing hardware inside the rover), our sensors indicated an anomaly. The rover did as it was designed to do - halting the caching procedure and calling home for further instructions.

NASA subsequently determined that rocky debris from its latest core sample blocked the rover's drilling equipment from seating properly, taking it out of action until it might be cleared. Here's a photo of the debris, which you can see at the bottom of the rover's drilling bit carousel:

Debris in Perseverance's Bit Carousel: Pebble-sized debris can be seen in the bit carousel of NASA’s Perseverance Mars rover in this Jan. 7, 2022, image. Credits: NASA/JPL-Caltech/MSSS

It took almost a full Earth month to do it, but NASA's engineers succeeded in ejecting the debris from the bit carousel, allowing the rover to continue its rock core sample collecting mission. The rover would proceed to collect its seventh rock core sample on 8 March 2022 after traveling to its location in Mars' Jezero Crater. One week later, the rover collected its eighth sample that will someday be exported to Earth.

Since then, NASA engineers directed the Perseverance rover to travel to a new location in an ancient river delta within the crater to scout where it might collect additional rock samples. It has not collected more as of the end of the Martian quarter.

That brings us to the first revision of Mars GDP for its first quarter and the first estimate of its GDP in its second economic quarter.

We find our first estimate of Mars' quarterly GDP missed the collection of the fourth sample on 24 November 2021, so we need to adjust the estimate to account for it. We find Mars' GDP in its first economic quarter would fall in a range between $88,624 and $702,464. That range is up from the previously estimated range of $66,468 to $526,848.

Having added four samples to those original four in Mars' second quarter, we estimate the red planet's GDP will likewise fall between $88,624 and $702,464. With NASA engineers making a concerted effort to be more discriminating in selecting rock samples to core and store for future export to Earth, we think Mars' GDP will run to the higher end of that range.

We should also point out that had the debris issue not arisen and required a month to resolve, the Perseverance rover might have already collected its ninth rock sample. Martian GDP has fallen below its potential GDP for the first time.

If you're curious how Mars' future export economy will work, the following video explains what planetary scientists have in mind:

Back on Earth, NASA selected Lockheed Martin to develop the rockets that will be sent to Mars to collect the rock samples currently held in inventory by the Perseverance rover on the planet's surface on 7 February 2022.

Previously on Political Calculations

Postscript

Just because it's cool, here's video of a solar eclipse as seen from the surface of Mars involving its moon Phobos!