The Capital Note

The Capital Note: Third Quarter GDP – Half Empty or Half Full?

(Sviatlana Lazarenka/Getty Images)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: Third quarter good and bad, Apple’s challenge to Google (maybe), cannabis drinks mystery, the return of macaroni cheese, the return of Argentinian debt misery, NYC’s “price gouging” mess.

Third Quarter GDP: Hold the Champagne
Who could not like the fact that the economy grew on an annualized basis by a record 33.1 percent? And who could not be amused by the fact that some in the media seem to have finally come round to putting (correctly, as it happens) more emphasis on the less dramatic-sounding quarter-on-quarter number (7.4 percent) now that the numbers are back in the black?

Nevertheless, while progress beats the alternative, the U.S. is still not where it was at the beginning of the year.

The Wall Street Journal notes these numbers put the “economy about 3.5% smaller than at the end of last year, adjusted for inflation and seasonal fluctuations.”

And:

The third-quarter increase followed a 9% quarter-to-quarter decline in the second quarter, or a 31.4% annualized drop.

 Forecasters expect the economy to expand through the fourth quarter, though more slowly, amid a pandemic still disrupting lives and commerce as the virus infects tens of thousands of people a day. Analysts project the economy will end 2020 smaller than a year earlier, but grow in 2021.

That, I think, is correct. The absence of a stimulus package is likely to slow down consumer spending and an apparent renewed surge in the virus obviously adds concern. In looking though at the final quarter, we should also be concerned about whether the adverse economic effects of the coronavirus’ seeming (and to my mind) always inevitable revival are going to be made worse by an overreaction by those “in charge.” The dismal precedent from the spring, and the apparent refusal to have learned anything from its consequences do not inspire confidence.

It’s easy enough to justify the early lockdowns. The country was dealing with much more of an unknown than it is now, and there were legitimate concerns that healthcare systems could be overrun. Things started to go wrong when the authorities switched their goal from flattening the curve (sensible) to a longer-term “suppression” of the virus (nuts), a decision that can only have been taken by policy-makers with no understanding of trade-offs or, for that matter, of how an economy really works (so far as the latter is concerned, please also check out today’s Random Walk below and, for that matter, some possible news from Apple, also discussed below.)

Instead of trying to “live with” the virus, with measures such as sensible social distancing and, yes, wearing a mask, my best guess is that many parts of the U.S. are close to making the same mistake again. Looking at the repeat shambles over in the UK, and plans for even more draconian lockdowns there, I tweeted yesterday that this was analogous to the behavior of General Haig after the first week of the battle of the Somme: “We just need to iron out some snags, so let’s give walking slowly into machine gun fire another go.”

I suspect that something similar will be the case here, and I suspect too that people know it, and that this might go some way to explaining the drop in overall economic sentiment seen earlier this month. People dread the disease, and they dread the steps taken to “suppress” the disease. A plateau in consumer confidence under the sort of economic conditions we are currently “enjoying” is also cause for concern:

Dion Rabouin, writing for Axios:

A plateau of consumer confidence is uneventful in a strong economy, but during a downturn it can signal larger problems, analysts note. Households’ personal finances are already weak, and without additional improvements to the economy, consumption is poised to contract.

Also at Axios, Felix Salmon grumbles that normally quarterly GDP numbers are quite enough, but this time round, month by month would be helpful. He’s right. My guess? October was less than impressive.

Meanwhile, the Washington Post digs into the numbers that we do have:

Constance Hunter, chief economist at KPMG, said Thursday’s data reflects the wide gap between spending on services and spending on goods. Think stationary bikes, backyard grills and cars in lieu of sporting events and concert tickets.

But those habits may not stick around for long. Hunter said that “there’s only so many fire pits and backyard furniture sets you can purchase.” Plus, jobs in service sectors won’t come back until people feel comfortable rescheduling a haircut or booking a hotel room.

“If we don’t get a handle on the pandemic, services consumption is not going to rebound,” Hunter said. “And if services consumption isn’t going to rebound, we’re not going to see employment rebound, and that’s going to have spillover effects over the whole recovery.”

That’s not wrong, but the form that “handle” will take is all-important. My guess is that a quote found in Tacitus provides the answer: “Ubi solitudinem faciunt pacem appellant” (They make a desert and call it peace.)

Maybe the market works after all
As I’ve said before, and will, doubtless, be saying again, antitrust is (in most cases), nothing more than central planning dressed up in pro-market clothing.

Despite occasional moments of amusement (I did like the comment by the wag who wondered when Twitter’s Jack Dorsey was going to sort out the Tsarevich’s hemophilia), and whatever one’s views on big tech’s political bias (spoiler: not a fan), the recent flurry of high tech hearings in Washington have been a grubby, depressing spectacle, as the Left, and in some cases, the Right, showed a revealing lack of trust in the operations of a market economy, made all the more distressing by the fact that the Internet, above all, is an area where a company can go from hero to zero and back again (yes, there’s a computing joke in there somewhere, but I cannot think what it is): “I for one, welcome our Netscape overlords,” as no one has said for a very long time.

So, it was interesting to read this in the Financial Times:

Apple is stepping up efforts to develop its own search technology as US antitrust authorities threaten multibillion-dollar payments that Google makes to secure prime placement of its engine on the iPhone.

In a little-noticed change to the latest version of the iPhone operating system, iOS 14, Apple has begun to show its own search results and link directly to websites when users type queries from its home screen.

That web search capability marks an important advance in Apple’s in-house development and could form the foundation of a fuller attack on Google, according to several people in the industry.

The Silicon Valley company is notoriously secretive about its internal projects, but the move adds to growing evidence that it is working to build a rival to Google’s search engine.

Two and a half years ago, Apple poached Google’s head of search, John Giannandrea. The hire was ostensibly to boost its artificial intelligence capabilities and its Siri virtual assistant, but also brought eight years of experience running the world’s most popular search engine.

That Apple was doing this two and a half years ago might well suggest that this move cannot just be explained away as anticipation of the antitrust case.

Search marketing experts also point to increased activity from Applebot, the iPhone maker’s once-obscure web crawler, which is used to build the vast database of online material that forms the foundation of any search engine.

Suganthan Mohanadasan, a digital marketing consultant, said Applebot has shown up “a ridiculous number of times” on his clients’ websites in recent weeks. “When the crawl rate increases, that tells us they are trying to gather more information.”

Most significantly, iOS 14 nudged aside Google for certain search functions. Queries made in the search window accessed by swiping right from the iPhone’s home screen — which Apple calls the “Today View” — show an Apple-generated list of search suggestions rather than Google results. These results include “autocomplete”-style suggestions generated by Apple, showing that it is learning from its 1bn users’ most common queries.

Apple declined to comment.

Hmmm . . .

Around the Web
Not out of the weeds . . .

Reuters:

Investors pinning hopes on cannabis-infused drinks to propel growth of the legal marijuana industry may have to wait a bit longer, as companies struggle to produce and distribute the highly-sought beverages in a profitable way.

Canada at the start of this year allowed sales of so-called Cannabis 2.0 products, which include edibles, vapes and drinks. The products have been a big hit with customers during coronavirus-induced lockdowns, but producers have struggled to maintain timelines for the launch of the THC beverages.

Analysts and industry insiders had eagerly anticipated these beverages, hoping they would attract large swathes of the public to pot from booze, and bring back investor dollars after the industry fell out of favor due to a lack of profitability.

Common production challenges include short shelf-life, maintaining a consistent taste, inconsistent potency, and the length of time it takes to achieve the desired “high,” said Karan Wadhera, managing partner at cannabis venture capital firm Casa Verde Capital.

Fair enough, but I was a little surprised to see that, judging by the photograph that accompanied this story, there is a cannabis energy drink.

My first reaction is that this was somewhat counter-intuitive, but further research seems to suggest that this is a hemp seed product, rather than anything involving THC, so it’s possible that this is not (quite) as New Coke as it seems.

The return of processed food (and about time).

The Financial Times:

Kraft Heinz and Kellogg have upgraded their profit outlook for the full year as the pandemic prompts consumers to return to processed fare they had previously shunned in favour of fresher alternatives.

Third-quarter results on Thursday showed that the benefit to the two US food companies was lasting long after the pre-lockdown stockpiling. Executives said strong growth had begun to slow in some markets but remained at elevated levels.

Carlos Abrams-Rivera, who runs the US business for Kraft Heinz, said the company had been “driving down the road at 90 miles per hour to keep up with all the demand”.

Sales on an organic basis jumped 6.3 per cent year on year at Kraft Heinz, whose products include the eponymous ketchup and macaroni cheese.

At Kellogg, the maker of cereals including Rice Krispies, Special K and All-Bran, they rose 4.5 per cent.

(Not an endorsement of macaroni cheese, however).

Wash, Rinse, Repeat:

The Financial Times (October 23):

Some of Argentina’s biggest bondholders have issued a sharp rebuke to the government over its handling of the country’s deteriorating economic situation, just a few months after reaching a compromise to restructure $65bn worth of debt.

In a statement released on Thursday, two creditor groups at the heart of the recent negotiations to resolve Argentina’s unsustainable debt burden accused the government of putting forward policies that “undermine” its own economic recovery, such as its recent decision to tighten capital controls.

They also called into question whether “their sacrifices to provide a debt structure Argentina is capable of servicing were essentially meaningless.”

Spoiler: Yes.

Random Walk
From The Economist:

Unscrupulous traders use a crisis to charge exorbitant prices. Politicians, wanting to protect consumers, crack down on profiteers. But how to work out what price is too high, and what redress is appropriate?

The answer (almost always) is that this is not something in which politicians — particularly from a command and control place such as New York City — should get involved.

But, back to The Economist (my emphasis added), where its correspondent tells the story of his or her local corner shop:

This type of shop was once familiar in New York, but has largely been squeezed out by chains and bank branches. The owner is an immigrant who opens early and closes late. In crises the shop stocks the products that customers need. When flooding from Hurricane Sandy caused a blackout in 2012, it sold batteries, torches, candles and board games. During the pandemic it has been piled high with boxes of sanitiser, bleach, masks and gloves.

Stocking up comes with risks. Acquiring inventory is costly. Demand drops off when normality returns—unwanted board games linger in the back of the shop. And this time, the rules changed. In March a woman bought a box of masks (each mask costing $2), and then said she was from the city’s office of consumer affairs, and charged the shopkeeper for violating new price-gouging rules. Two days later, says the shopkeeper, another inspector charged the shop again, this time offering guidance on the right prices. Masks should cost no more than $1; gloves selling at $19.95 should sell for only $14.95. Each package marked above the permitted price would be fined $500. There were many packages.

Most economists oppose restrictions on price gouging not because they like fat profits, but because higher prices lead to more supply. Indeed, in many places sanitiser and face-masks are now ubiquitous and cheap. Then there is the tricky question of what counts as price gouging—in a pandemic. New York City banned price rises of more than 10% from pre-pandemic levels. But what if the shop had not sold the items before? And why 10%? Price increases “in excess of an amount reflecting normal market fluctuations” were banned. But what, in March, was normal?

In response to a summons, the shopkeeper went twice to court, enduring the security check and the queues, only to find that, because of covid-19, it was not in session. The first time, a guard explained that the summons had been mistakenly sent by computer. Another defendant in a different case said that she had tried calling several times to ask if the court was sitting, but had not got through. (She would have been presumed guilty had she not shown up.)

Shortly before a rescheduled hearing, the shop’s proprietor received an offer to settle the first charge for a little over $7,000. That is much more than his monthly profit, he says from behind the plastic screen now distancing him from customers, looking glumly at a stack of legal papers on his counter. But the fines would be ruinous.

New York City’s consumer-protection agency says it has issued more than 14,600 citations. The shopkeeper will settle, but worries that he may have to pay again for the second charge. Justice in the Big Apple has been opaque and costly—and raises the question of who precisely is being gouged.

It’s not a hard question to answer.

— A.S.

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