LNG and Long Tail (It's a Groundhog, not a Chipmunk)

Episode Summary

Executive Summary: Moody’s Analytics economists discuss a late-2021 U.S. soft patch driven by Delta-related supply chain disruptions, high natural gas prices, and fiscal-policy uncertainty, while still expecting a Q4 rebound and continued business investment. The episode centers on how near-term data are weakening even as longer-term pandemic effects—debt, demographics, and remote work—reshape the economy.

Main Topics: Near-term economic slowdown and Q3 softness (Priority: 5/5): The hosts assess a third-quarter slowdown, noting that GDP growth was being supported heavily by inventories while underlying private demand looked weak. They debate whether Q4 will rebound as Delta cases fade. Supply chain stress and manufacturing bottlenecks (Priority: 5/5): Ryan highlights elevated ISM supplier deliveries and the new supply chain stress index, arguing that persistent global bottlenecks are limiting manufacturing output and could push growth into next year. Natural gas price shock and consumer pressure (Priority: 4/5): Chris focuses on surging U.S. and European natural gas prices, connecting them to geopolitical tensions, LNG flows, and higher household utility bills that could restrain spending. Business investment and labor-saving technology (Priority: 4/5): The group sees strong core capital goods orders as evidence that firms remain optimistic and are investing in equipment and automation, partly to offset labor shortages and improve productivity. Interest rates, the Fed, and fiscal policy (Priority: 4/5): They explain the rise in the 10-year Treasury yield as driven more by expected Fed tightening and tapering than inflation expectations, while also debating the likely size and market impact of infrastructure and reconciliation bills. Long-term pandemic consequences (Priority: 5/5): The discussion shifts to durable effects: higher sovereign debt, potential future debt crises abroad, demographic deterioration, and a lasting rise in remote work with major implications for cities, real estate, and labor markets.

Key Arguments: Supply chain disruptions are the main reason inventories are driving GDP; if bottlenecks persist, growth could be pushed further into 2022. Natural gas prices are a significant downside risk because they can squeeze European consumers and eventually U.S. households through higher utility bills. Despite a weak soft patch, business investment remains fundamentally strong, suggesting firms are still optimistic and adapting to labor shortages with technology. The rise in the 10-year Treasury yield reflects higher expected Fed policy rates and term premium from tapering, not a surge in long-run inflation expectations. Fiscal negotiations are likely to produce some compromise, but the exact size of the reconciliation package is uncertain and is already partly priced into markets. The pandemic’s long-run legacy includes higher public debt burdens, demographic headwinds, and a more permanent shift toward remote/hybrid work. Remote work is likely to persist and redistribute population and economic activity away from urban cores toward suburbs, exurbs, and lower-cost metros.

Data Points: ISM supplier deliveries index: 73.4 - Ryan’s statistic for manufacturing supply chain delays; elevated readings indicate slower deliveries and bottlenecks. Recent high in supplier deliveries: 78.8 - Highest recent reading referenced for the ISM supplier deliveries component. Supply chain stress index: record high / highest in past three years - Composite high-frequency index built by Moody’s Analytics to gauge global supply chain strain. Natural gas price: $5.60–$6.00 per million BTU - Chris’s statistic showing a sharp spike in U.S. natural gas prices. Natural gas price increase: up 130%–140% year over year - Illustrates the magnitude of the energy price shock. Excess household saving: about $2.5 trillion - Estimated cumulative excess savings in Q2 2021 versus a no-pandemic baseline. Core capital goods orders ex-transportation: +0.5% - Mark’s indicator of business investment strength from the latest monthly durable goods report. Q3 GDP growth estimate: 3.9% - Moody’s high-frequency nowcast for third-quarter GDP prior to final monthly data updates. Inventory contribution to Q3 GDP: about 3 percentage points - Most of the 3.9% Q3 GDP estimate was expected to come from inventories. Open job positions: almost 11 million - Used to support the argument that businesses are expanding but facing labor shortages. Typical open positions in a strong economy: 6.5–7 million - Benchmark for comparison with the current vacancy level. Initial unemployment claims: 362,000 - Latest weekly claims reading, up 11,000 and seen as a sign of a soft patch. 10-year Treasury yield low point: ~1.2%–1.25% - Approximate spring/early summer low referenced in discussing the recent rise in yields. 10-year Treasury yield recent level: ~1.5% - Current approximate level at the time of discussion. 10-year Treasury yield spring level: 1.75% - Referenced as a prior level earlier in 2021. Debt-limit drop-dead date: October 18 - Yellen’s estimated date when Treasury’s financing options would be exhausted absent a debt-ceiling increase. Continuing resolution duration: through early December - Short-term funding bill keeping the U.S. government open. Infrastructure package: $550–$575 billion over 10 years - Expected public infrastructure spending under the discussed compromise. Reconciliation bill discussed: $3.5 trillion on the table; compromise around $2.5 trillion - Range of spending under negotiation among Democrats. Manchin’s acceptable level: $1.5 trillion - Referenced as the centrist ceiling for a reconciliation deal. Likely paid for by tax increases: ~$1.5 trillion or a bit more - Portion of the compromise package expected to be offset. Federal deficit impact: ~$1 trillion higher over 10 years - Estimated net increase in deficits under the assumed fiscal compromise. Urban-core outflow before pandemic: 275,000 more people leaving than entering - Net migration away from U.S. metro urban cores in the year through February 2020. Urban-core outflow in August 2021: close to 600,000 more people leaving than entering - Shows the pandemic-era acceleration of migration away from cities.

Pivotal Quotes: "You will buy my gas. You will buy my gas." — Mark Sandy: A personal anecdote about a Gazprom event in London used to illustrate Europe’s dependence on Russian natural gas. "If you strip out inventories, we barely grew in the third quarter." — Mark Sandy: Summarizing how fragile underlying economic momentum was beneath headline GDP growth. "I think this is a new trend. This is kind of an inflection point." — Mark Sandy: Describing the pandemic’s lasting impact on remote work and migration patterns away from urban cores.

Implications: Listeners should expect continued near-term volatility from supply bottlenecks, energy prices, and fiscal negotiations, but also a durable post-pandemic shift in work, migration, and investment. The bigger risks are higher debt burdens abroad and labor-supply constraints at home.