Earlier this week I had a chance to rejoin my friend and former colleague Cardiff Garcia on The New Bazaar podcast. I encourage you to listen to the whole conversation using your preferred platform.

Cardiff and I previously collaborated in November. Back then, we drilled down into lots of U.S.-specific economic and financial data. The world has changed in important ways since then, so this time around, we focused on three big global themes: an update on the U.S. economy, the impact of Russia’s most recent invasion of Ukraine, and the consequences of the new round of lockdowns in China.

While we kept our conversation as grounded as possible, there were a lot of numbers getting thrown around. So we both thought that it would be helpful to provide a set of charts to help listeners follow along with our conversation.

There won’t be much text in this piece, but there will be lots of useful visualizations for anyone trying to understand what’s happening. The charts are presented in the order in which we covered each subject.

The U.S. Economy Is Almost Back

Americans produced about 3% more goods and services in October-December 2021 than in October-December 2019 after accounting for inflation. Output ticked down slightly in January-March 2022 on a seasonally-adjusted basis, although there are good reasons to think that may reflect data limitations rather than an outright decline in production.

What really matters, though, is how much we are producing relative to what might have reasonably been expected before the pandemic. There is no single right way to measure this—and longtime readers know that I believe that we as a species have been living below our means for a long time—but one simple approach is to compare actual Gross Domestic Product (GDP) per American against the 2018-2019 average trend.1

Considering everything that’s happened since the end of 2019, the relatively modest gap between the blue and red lines above should be seen as a testament to the effectiveness of the U.S. economic policy response to the pandemic.2 Disbursing trillions of dollars to consumers, businesses, nonprofits, and state and local governments helped avoid outcomes that would surely have been much worse.

Not only that, but the massive influx of money may even have helped set up the U.S. economy for more success in the future. While total GDP was about 3% higher in 2022Q1 than at the end of 2019, total employment is still about 0.5%-1% lower. The difference has come from higher productivity. Perhaps not coincidentally, we have also witnessed a surge in entrepreneurship and new business formation since the summer of 2020.

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Similarly, Federal Reserve officials have been consistently upbeat about the post-pandemic prospects for the U.S. economy, although that may change when they publish their next set of projections in a couple of weeks.

That said, excessive price increases have made the recovery less enjoyable than it otherwise should have been. The good news is that—before the most recent Russian invasion of Ukraine—the average American’s income nevertheless rose by more than the cost of living. Until March, inflation-adjusted U.S. consumer spending was able to rise in line with the pre-pandemic trend without pushing the average American to save less, dip into cash reserves, or borrow more.

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Putin’s Invasion Harms the World

Enough good news. The 2022 Russian attack on Ukraine has displaced millions of people and killed tens of thousands, if not more. The reports of Russian war crimes are horrific. But the costs of the invasion are global.

For the European democracies, the biggest problem is their reliance on Russian energy, especially natural gas. The Putin regime was (probably) using its leverage to force up prices and undermine European cohesion before the invasion, slashing gas deliveries to Europe by more than a third between September 2021 and January-February 2022.

Even worse, however, is the impact of the war on the global food supply. Russia and Ukraine together grow more than a quarter of the wheat that is exported, much of it to the Middle East and North Africa. Thanks to the Russian invasion, the ports and the sea lanes have been transformed into a warzone. While some grain can be shipped overland from Ukraine to Romania and Poland before being rerouted elsewhere—or from the Russian side of the Black Sea to the Caspian and then to Iran—most of the wheat in the region is trapped.

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But even if the fighting stopped tomorrow, it’s unclear how much wheat Ukrainian farmers would be able to grow. Much of their land has been bombed or mined, as has much of their farm equipment and grain storage facilities. And while Russia’s wheat farmers haven’t been hit in the same way, their farm machines will degrade without access to spare parts or replacements due to sanctions. Unsurprisingly, the price of wheat jumped about 50% since the invasion began—and has stayed high.

In theory, the drop in production and exports could be easily addressed by drawing down the ample reserves held in storage. Global wheat inventories are worth several years of combined Russian and Ukrainian exports. China ostensibly has the world’s largest inventories, but even without that, there is a lot of inventory held elsewhere to cover the gap.

Longer-term, American farmers could easily replace missing Russian wheat exports by pivoting away from corn and soy, although this would require changing the existing incentives that prioritize growing animal feed and fuel over human food.

China’s “Covid Zero” Policy Hits Global Supply and Demand

The 2022 Russian invasion of Ukraine has squeezed the supply of commodities from wheat to neon. The Chinese government’s measures to suppress the latest waves of the coronavirus have also been extremely disruptive to the global economy—but in a distinctly different way. At least for now, China’s restrictions on mobility have helped relieve some of the pressure on crude oil supplies. Chinese gasoline demand has cratered by enough to (mostly) offset the shortages coming from Russia.

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Meanwhile, the ongoing collapse in residential construction has helped push down iron ore prices.

But Chinese manufacturing output has also tanked, which could lead to serious problems for consumers in the rest of the world in the form of higher prices and longer delivery times for finished goods. That hasn’t yet shown up in the U.S. data, but it might appear in the next few months.

Anyhow, I hope you found this helpful, and I also hope you listen to the full conversation I had with Cardiff!

1

As it happens, this simple projection is almost identical to what was produced by Congressional Budget Office back in January 2020 in its estimate of U.S. economic “potential”.

2

Nationally, the public health response was poor, albeit with significant variation across jurisdictions.

The Overshoot

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