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By Julia Horowitz • Friday, November 12

Good morning. In today's newsletter: Former Fed economist Claudia Sahm thinks America's economy still needs trillions of dollars despite surging inflation. She answers our questions. Plus, more big companies are splitting up, and firms are ordering a record number of robots.

 

US stock futures are up after a mixed session on Thursday. Markets in Europe are struggling to find direction, while stocks in Asia gained ground.

 

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MARKET FLASH

Why America's economy still needs trillions of dollars

 

News that prices for American consumers are rising at the fastest rate in three decades has spooked investors and economists, piling pressure on President Joe Biden and the Federal Reserve to respond more aggressively. 

 

What's happening: Biden and his team are now steeling themselves for high inflation to persist into 2022, a problem for Democrats ahead of next November's midterm elections. Senior Fed official Richard Clarida has indicated that if inflation stays elevated, the central bank could opt to hike interest rates next year.

 

Inflation is currently "much more than a moderate overshoot" of the Fed's 2% target, he said earlier this week. "I would certainly not consider a repeat performance a policy success," he continued.

 

Larry Summers, an economist who served in both the Obama and Clinton administrations, has been sounding the alarm on inflation for months.

 

"I think that the policymakers in Washington, unfortunately, have almost every month been behind the curve," Summers told CNN on Wednesday.

 

But not everyone thinks the Fed and the Biden administration need to change course dramatically. In fact, former Fed economist Claudia Sahm, a Summers critic, believes that America's economy still needs trillions of dollars in additional stimulus.

 

I asked her a few questions about this week's inflation data and the subsequent debate. Our Q&A has been condensed and lightly edited for clarity.

 

What's the big picture takeaway from the latest inflation data, in your view?

 

Big price increases in October, on top of higher-than-normal inflation since the summer, are unambiguously bad for consumers. But Covid, not inflation, is the problem. The rise and fall of cases throughout the pandemic has created immense disruptions in our economic and everyday lives.

 

What does a 6.2% annual increase in the Consumer Price Index say about the narrative that inflation is transitory?

 

The view that inflation would step back down this year was always based on the view that the pandemic would recede. Covid is still here, and as recently as a few months ago, it surged due to the Delta variant. Global supply chains are a mess, largely due to an insufficient global health response. There are no signs that the price increases due to Covid-related factors are spreading into other prices. Transitory means short-lived. As with the pandemic itself, we have been promised that it would get better soon, and it takes longer.

 

A number of other economists are pointing to rising rents as one example that price increases are broadening. Do you disagree with this assessment?

 

I disagree. House prices increased more slowly than usual during the pandemic due to eviction moratoriums, mortgage forbearance, and people waiting to move. The faster house price inflation now is basically a "getting back to normal." That normal is not good, but it is what we had before Covid.

 

Should the Fed stay the course? Or might it need to move faster?

 

The Fed decided to reduce the pace of asset purchases by $15 billion in November and December and then re-evaluate at their next meeting. The world is changing quickly, and it is appropriate for them to get more data before deciding on the pace after that.

 

What should the response be in Congress and/or from the Biden administration? What are the implications for Biden's $1.9 trillion Build Back Better social spending package?

 

Congress needs to pass the Build Back Better legislation immediately. It is an investment in our children, low-wage workers, education, health care and fighting climate change. A half a year of higher-than-normal inflation is not a reason to squander this opportunity to act.  

VOICES

Why US producers aren't rushing to drill for oil

"Stop spending like drunk sailors. That's the message from shareholders."

 

PAVEL MOLCHANOV, RAYMOND JAMES ANALYST

 

Read more from CNN Business.

CORPORATE MONITOR

Two more big companies want to split themselves up

This week could mark the end of an era for more than one iconic conglomerate.

 

The latest: Japan's Toshiba outlined plans on Friday to break up into three independent companies, a pitch that involves spinning off its energy and infrastructure business as well as its device and storage business.

 

The proposal follows a campaign by activist shareholders and a strategic review in the wake of a corporate governance scandal.

 

Toshiba said Friday that it saw splitting the company as the best path forward.

 

"The decision allows each business to significantly increase its focus and facilitate more agile decision-making and leaner cost structures," it said in a statement.

 

The move by the 146-year-old conglomerate comes just days after General Electric said it would split into three separate public companies, spinning out its aviation, healthcare and energy businesses.

 

Step back: What's driving these storied conglomerates to try to dissemble themselves? One factor is the market, which currently favors streamlined operations over sprawling empires. 

 

Another is the role of more aggressive activist shareholders, who build up stakes and then lobby for companies to make large structural changes. 

 

There's more: Johnson & Johnson announced Friday that it's planning to split into two public companies, spinning off its division that sells Band-Aids and Tylenol. Shares are up 4% in premarket trading.

 

I'm also keeping an eye on Shell, which is being lobbied by the hedge fund Third Point to separate its legacy fossil fuel business from its push into renewables. The company has rejected this proposal. But could other shareholders take Third Point's side?

UP NEXT

Warby Parker reports results before US markets open.

Also today: The latest data on the number of Americans quitting their jobs, which has been at a record high, posts at 10 a.m. ET.

 

Coming next week: US President Joe Biden and Chinese President Xi Jinping are expected to hold a virtual summit on Monday, the first such meeting between the leaders of the world's two largest economies.

WHAT WE'RE READING AND WATCHING

▸ Homes now typically sell in a week, forcing buyers to take risks (WSJ)
▸ What does Disney+ need more than anything? A hit (CNN Business)
▸ Alibaba's massive Singles Day sees slower growth (CNN Business)
▸ The priciest gasoline in America is close to record highs (Bloomberg)
▸ Portugal bans bosses from calling after work hours (CNN Business)
▸ The White House says its plans will slow inflation. But when? (NYT)

FINAL WORD

North American companies are racing to order robots

The companies rushing to meet surging demand for goods while struggling to fill open positions are in a bind. Increasingly, they're turning to a new solution.

 

According to the Association for Advancing Automation, or A3, strong sales of robots over the summer brought the total number of orders in North America to 29,000 units so far this year. That's the highest level on record.

 

Breaking it down: The number of units sold is up 37% from the same period in 2020 and trumps the previous high set in 2017 by nearly 6%.

 

"With labor shortages throughout manufacturing, logistics and virtually every industry, companies of all sizes are increasingly turning to robotics and automation to stay productive and competitive," A3 President Jeff Burnstein said in a statement.

 

The group said it wasn't just carmakers placing orders. Nearly two-thirds of sales came from non-automotive industries, including metals and food and consumer goods.

 

Big picture: A3 advocates for the benefits of automation, arguing it makes workplaces safer and frees up people for more rewarding roles. Even if that's true in the long run, it could seriously shake up the job market in the immediate term — another way in which the post-pandemic economy could look very different.