Prices, GDP, SBF, a Bridge in Baltimore

Update 767 — Weekly Econ. Roundup:
Prices, GDP, SBF, a Bridge in Baltimore

While Congress began a two-week recess, the economic world took no time off, with new readings in on prices and GDP, a decades-long prison sentence for fraud for the disgraced Sam Bankman-Fried of FTX notoriety, and an infrastructure disaster in Baltimore that Congress will address upon its return.

The GDP Q4 2023 third revision this week closes the book on 2023, which saw gains of a strong 2.5 percent, the most in eight years, outside of the aberrational post-COVID rebound 5.8 percent figure of 2021. Inflation, meanwhile, remained relatively stable last month but remains on a path toward the Fed’s two percent target. We cover these developments and more below.

Good weekends, all.




Inflation Up Slightly but Holding Stable in February 

The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, rose by 0.3 percent last month and by 2.5 percent on an annualized basis in February, according to February PCE data released by the Commerce Department this morning. The figure is slightly up from the 2.4 percent annualized increase in prices in January, but slightly down from the 2.6 percent annualized increases in prices in December and November. 

Core PCE, which excludes food and energy prices, rose by 0.3 percent last month and by 2.8 percent on an annualized basis, in line with expectations. Core PCE also remained relatively stable on an annualized basis, with prices also rising by 2.8 percent over the prior twelve months in January and by 2.9 percent in December. 

While annualized PCE inflation data over the past few months has been slightly less in line with the downward trend of the past year or so, inflation remains on the path to moderation. The headline figure of 2.5 percent and core figure of 2.8 percent remain well below the respective peaks of 7.1 percent and 5.6 percent seen in 2022. 

Source: Council of Economic Advisers

Prices for goods rose by 0.5 while prices of services rose by 0.3 percent over the month. Within services, the largest contributors to the increase were financial services and insurance, transportation services, and housing and utilities. Within goods, the largest contributor to the increase was spending for motor vehicles and parts. The price of food rose by 0.1 percent in February after rising by 0.5 percent in January. Meanwhile, energy prices increased 2.3 percent last month after falling by 1.4 percent in January. 

Overall, consumer spending as measured by consumption rose by 0.8 percent on a monthly basis in February. 

The February inflation data is just one factor that the Federal Open Market Committee (FOMC) will consider when it meets next to determine the fate of interest rates on April 30 and May 1. Forecasters project that prices will rise at a slower pace in March and April. March inflation data, which will be released in the interim, will give FOMC officials a clearer picture of inflation’s progress towards its two percent goal. 

Other Developments

Baltimore Bridge Collapse; Questions re US Infrastructure

Early on Tuesday morning, the Dali cargo ship collided with the Francis Scott Key Bridge in Baltimore, leading to the bridge’s collapse. Six people are presumed dead, and federal officials stated that it could cost at least $2 billion to rebuild the bridge — to say nothing of the cost of lost economic activity due to the temporary closure of the Port of Baltimore, which adds up to roughly $15 million a day. Congress is debating the extent to which the federal government should get involved in rebuilding the bridge, though the Biden Administration has promised to cover all reconstruction costs – a move that upset Congressional budget hawks.

One of the immediate questions raised by the collapse of the bridge is whether American infrastructure is sufficiently resilient to endure similar unexpected and devastating accidents. Whether that is a fair response to this particular disaster is up for debate. The bridge was technically fully up-to-code; however, the main problem is that the “code” in question was written before anyone had to worry about collisions from modern supersized container ships.

Either way, it raises questions about funding for maintaining and modernizing America’s aging infrastructure. Many of America’s bridges were built in the “peak interstate construction period” from the 1950s to the early 1970s, and after decades of wear and tear, about 1 in 3 US bridges either need repairs or need to be replaced. According to the Federal Highway Administration, as of 2023, 300,000 bridges in America were rated “fair” — the same rating as the Francis Scott Key Bridge before its collapse — and an additional 42,000 were rated “poor.” While new infrastructure spending is being provided, such as funding through President Biden’s Infrastructure Investment and Jobs Act, the rate of wholesale repair is slow and could take decades, with some experts estimating that it would take nearly 75 years to repair all of America’s bridges at the current pace.

GDP Revised Up To 3.4% in Final Quarter of 2023 

U.S. real gross domestic product (GDP) growth was revised up to 3.4 percent in the fourth quarter of 2023, according to the third estimate released by the Bureau of Economic Analysis yesterday. The upward revisions defied expectations that growth over the quarter would remain at 3.2 percent, as outlined in the second estimate.

The upward revision primarily reflected upward revisions to consumer spending, nonresidential fixed investment, and state and local government spending. These upward revisions were partly offset by a downward revision in private inventory investment and exports. Imports, which are a subtraction in the calculation of GDP, were revised down.

The data provided by the third and final estimate of GDP growth in the fourth quarter of last year cements economic growth of 2.5 percent in 2023, one of the best GDP figures of the past decade, adding support to evidence of a robust economic recovery in the U.S. over the past year. 

March Consumer Confidence Highest Level in Two Years 

U.S. consumer sentiment has risen to its highest level since July 2021, up from the all-time low measured in June 2022, according to the University of Michigan’s Survey of Consumers for March 2024, released this week.

The index of consumer sentiment rose by 3.3 percent in March and by 28.1 percent over the past twelve months to 79.4 percent as consumers were confident that inflation will continue to soften and consumers’ assessments and expectations of personal finances improved modestly. 

Source: University of Michigan

The improved outlook by consumers is a positive sign for Democrats as we head nearer and nearer to the general election after inflation proved to be a central economic issue of the 2022 midterms. While improving consumer sentiment parallels improving economic conditions, as much analysis has noted, risks to the economy remain. Growth will likely stay below two percent in 2024 in the face of the Fed’s rate increases, the effects of which continue to ripple across the economy.

Visa and Mastercard Reach Settlement 

On Tuesday, it was announced that Visa and Mastercard, the world’s largest credit card networks, and banks that issue credit cards with the companies, reached a settlement in a decades-long antitrust case. The settlement will limit the fees charged to merchants when customers swipe their debit and credit cards to make purchases. 

The settlement stems from a 2005 lawsuit filed by merchants claiming that they paid excessive interchange fees (swipe fees) to Visa and Mastercard for them to process each transaction. Visa and Mastercard share those fees with banks that issue cards. 

The settlement, which only applies to U.S. merchants, would reduce swipe fees by $30 billion over five years. The settlement would reduce interchange fees by 0.04 percent for a minimum of three years.

The terms of the settlement must now be finalized by the US District Court for the Eastern District of New York, after which an appeal is still possible. 

GAO Estimates Improper Government Payments in FY23

This week, the Government Accountability Office (GAO) released estimates of improper government payments (payments that should not have been made or were made in the improper amount) for FY23. While total improper payments decreased by $11 billion relative to FY22, the overall value still stands high at $236 billion. 74 percent, or $175 billion of improper payments were overpayments in FY23, representing unnecessary government spending. A breakdown of programs with the largest percentage of improper payments can be seen below: 

Source: GAO

Medicare and Medicaid, while responsible for just under half of improper payments in FY23, are much larger than other highlighted programs. Medicaid in particular made remarkable progress in cutting down improper payments, achieving a $30 billion decrease in such payments from FY22 to FY23. 

On a not-so-bright note, the Earned Income Tax Credit (EITC) saw a 22 percent increase in improper payments from FY22. The $21.9 billion in improper EITC payments is equivalent to around one-third of the tax credit’s total yearly cost. Last year, the IRS announced that they would scale back the review of refundable credits like the EITC due to equity concerns and the high number of eligible non-claimants, signaling that this problem might get more pronounced moving forward.

The $21.9 billion for the EITC offers an opportunity to increase federal revenues through greater IRS oversight and enforcement of claims made through the EITC and further underscores the importance of protecting investments in the agency. As Republicans continue attempts to claw back the enforcement portion of the $80 billion the Inflation Reduction Act (IRA) provided for the IRS, it is crucial to remember the role that the IRS plays in ensuring revenues are not left on the table in the face of soaring national debt and deficits. 

Sam Bankman-Fried Sentenced to 25 Years in Prison

On Thursday, Sam Bankman-Fried, the co-founder of the now-bankrupt FTX cryptocurrency exchange, was sentenced to 25 years in prison for stealing billions of dollars from his customers. The sentence is considerably less than the 40 to 50 years that federal prosecutors had sought for the disgraced former tech CEO, though far more than the 5 to 7 years requested by Bankman-Fried’s attorneys. Bankman-Fried was also ordered to forfeit $11 billion in assets.

The sentence caps off a spectacular fall from grace for a man once considered the wunderkind of the burgeoning cryptocurrency industry. At its height, FTX was the world’s second-largest cryptocurrency exchange, and Bankman-Fried gained celebrity status as the face of the industry. Bankman-Fried became one of the world’s youngest billionaires, with his net worth peaking at $26 billion. The firm came crashing down when it was revealed that Bankman-Fried was misusing funds from FTX to prop up Alameda Research, a cryptocurrency firm that he had co-founded. FTX’s collapse came swiftly, and Bankman-Fried was charged and later convicted of wire fraud, conspiracy to commit fraud and conspiracy to commit money laundering. 

While the cryptocurrency industry has now largely recovered, thousands of FTX customers lost billions of dollars thanks to one of the largest financial crimes in history, raising questions about the need to regulate an industry that has so far fiercely resisted oversight to protect investors.