Saturday , May 25 2019
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Menzie Chinn

Menzie Chinn

He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

Articles by Menzie Chinn

A Primer on Misalignment (You’ll Need It If Peter Navarro Has His Way)

1 day ago

Today’s Bloomberg article notes that my one-time coauthor Peter Navarro has pushed to have countervailing duty (CVD) investigations augmented with assessments of currency unvervaluation. A prominent target of CVD investigations has been China.

Figure 1: USD/CNY bilateral nominal exchange rate (blue, left inverted scale), and real trade weighted (broad) value of the CNY (red, right scale). May 2019 observation is for first 20 days. Light orange denotes Trump administration. Source: Federal Reserve via FRED, BIS.

Figure 2: China foreign exchange reserves, in millions of USD, through April 2019 (blue). Source: accessed 5/23.
While the value of the inflation-adjusted CNY in April was the same that it was the month Mr. Trump took office, this is not conclusive evidence

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Inversion (Again)!

1 day ago

Figure 1: Treasury 10yr-3mo spread (blue), 10yr-2yr (red), 5yr-3mo (teal), in %. Source: Fed via FRED, US Treasury.

Figure 2: Treasury 10yr-3mo spread (blue), 10yr-2yr (red), 5yr-3mo (teal), in %, in 2019. Source: Fed via FRED, US Treasury.
Over the last month, the 10yr-3mo spread has averaged 4 bps — so not quite inversion on a monthly basis.

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Yet More Scary Graphs of Manufacturing: Midwest Edition

3 days ago

In every single state in the Great Lakes region, save Michigan, manufacturing employment has either peaked or (charitably) gone on a growth hiatus.

Figure 1: Manufacturing employment by state, in logs, 2019M01=0. Source: BLS, and author’s calculations.
While national manufacturing is still rising (albeit very slowly, essentially flat), it remains less than 0.1% above January levels. And manufacturing employment continues to grow in California (interestingly, a state — California —  by the metrics of the Arthur Laffer-Stephen Moore-John Williams – ALEC economic outlook ranking should be doing very badly is still growing).

Figure 2: Manufacturing employment by state, in logs, 2019M01=0. Source: BLS, and author’s calculations.

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Some Scary Graphs: Manufacturing

4 days ago

Some NBER BCDC key indicators have peaked, as noted in this post. The more volatile manufacturing sector is showing stress as well.

Figure 1: Employment in manufacturing (blue), aggregate hours of nonsupervisory and production workers in manufacturing (teal), and manufacturing production (red), all in logs, 2019M01=0. Source: BLS, Federal Reserve via FRED, and author’s calculations.

Durable manufacturing has witnessed an even more precipitous decline.

Figure 2: Employment in durable goods production (blue), aggregate hours of nonsupervisory and production workers in durable goods production (teal), and durable manufacturing production (red), all in logs, 2019M01=0. Source: BLS, Federal Reserve via FRED, and author’s calculations.
Returning to overall manufacturing, it seems that sector

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Assessing the Business Cycle, Mid-May 2019

5 days ago

Several key series look like they have peaked; nowcasts indicate slowing growth. Forward looking indicators look “iffy”.

Figure 1: Nonfarm payroll employment (blue), industrial production (red), personal income excluding transfers in Ch.2012$ (green), manufacturing and trade sales in Ch.2012$ (black), and monthly GDP in Ch.2012$ (pink), all log normalized to 2018M12=0.  Source: BLS, Federal Reserve, BEA, via FRED, Macroeconomic Advisers (5/3 release), and author’s calculations.

Several series closely followed by tne NBER’s Business Cycle Dating Committee (BCDC) have seemingly peaked — although it could be growth resumes (or series get revised upwards). Industrial production was revised downward in latest release.
Most everybody agrees on a short term deceleration in growth in Q2.

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Driving to War in a Ford Fiesta!

7 days ago

That’s the rationale, according to the Association of Global Automakers, as quoted in Car and Driver! Mr. Trump declares Section 232 tariffs for automobiles.
Thus, the Secretary found that American-owned automotive R&D and manufacturing are vital to national security.  Yet, increases in imports of automobiles and automobile parts, combined with other circumstances, have over the past three decades given foreign-owned producers a competitive advantage over American-owned producers.

So, far I can’t access the report; in fact the Department of Commerce’s Bureau of Industry and Security website has been down for hours.
Imposition of tariffs has been delayed by 180 days. Until then, expect continued uncertainty.

Figure 1: US Trade Policy Uncertainty categorical index (blue), and global

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Guest Contribution: “How East Asia Could Confront the Trade Wars”

8 days ago

Today, we’re fortunate to have Willem Thorbecke, Senior Fellow at Japan’s Research Institute of Economy, Trade and Industry (RIETI) as a guest contributor. The views expressed represent those of the author himself, and do not necessarily represent those of RIETI, or any other institutions the author is affiliated with.

How can a basketball team guard the Golden State Warriors’ Kevin Durant?  Should they put a shorter man on him to stop him from dribbling?  If so, the 7-foot tall Durant may shoot over the defender.  Should they use two men to defend him?  If so, two other Warriors’ shooters, Stephen Curry and Klay Thompson, may be open.  Every choice has problems, and the ultimate test is whether the strategy works.
Economic policymaking in Asia is like this.  This is clear in the case of

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Phill Swagel to Head CBO

9 days ago

That’s the news, according to Roll Call:
Senate and House budget leaders have chosen Phillip L. Swagel, a University of Maryland economist and former Treasury official in the George W. Bush administration, as the next director of the Congressional Budget Office, according to several sources with knowledge of the discussions.

Phill and I both served on the Clinton and GW Bush Council of Economic Advisers (2000-01) as senior economists, for trade and for international finance, respectively. Phill subsequently served as Assistant Secretary for Treasury in the lead-up to the financial crisis of 2008, as well as chief economist for CEA. Earlier, he served as a economist at the Fed and the IMF.
Phill appears in Econbrowser here:

Chinn and Swagel on Radio Times: “Economic News Roundup”

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A Modest Proposal: “Victory Tofu”

10 days ago

America needs all-tofu school lunches, subsidized tofu pizza, a Tofutti ice-cream substitute campaign… and more. I figure 205.4 pounds of tofu per American should do the trick. The situation facing American soybean farmers is dire, as shown below.

Figure 1: PPI for soybeans, by calendar year (blue, left scale), end-of-crop year soybean stocks, in millions of bushels (red, right scale). Source: BLS via FRED, and USDA ERS, WASDE May 2019. 
End crop year 2018/19 (Sep 30 2019) soybean stocks estimated at 995 million bushels, 798 million bushels below end crop year 2015/16. April PPI for soybeans 16.6% below April 2018.
Suppose we wanted to restore stockpiles to end 2015/16 levels (May WASDE estimates for end 2019/20 levels is 975 million bushels, even before the latest round of escalation

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Inversion! Close-of-Trading 5/13/2019

11 days ago

According to constant maturity rates reported by US Treasury, the 10 year-3 month yield curve was inverted as of today’s close (-0.01%). The 10 year-2 year spread is -0.22%, and the 5 year-3 month spread favored by Cam Harvey is -0.23%.

On the run yields are depicted below:

Source: BondSuperMart.
For discussion of inversions and recessions, see empirical evidence in Chinn and Kucko (2015), recounted in The Economist (July 2018).
I suspect that, if Mr. trump is betting on a strong US economy to leverage against the Chinese, he shouldn’t be too confident.

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Home Before the Leaves Fall – The US in Trade War

12 days ago

Here is the state of play for US tariffs. We’re a developing country!

As Mr. Trump’s trade war lumbers on, with American consumers bearing the bulk of the burden thus far, it’s useful to review the facts regarding the war. Here are the EconoFact articles on trade policy.


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“White House Considers Economist Judy Shelton for Fed Board”

13 days ago

That’s the title of an article in Bloomberg:
Shelton, who’s served as an informal adviser to Trump, holds a Ph.D. in business administration with an emphasis on finance and international economics from the University of Utah.

Here is a recent writing advocating return to “sound money”  in Cato Journal:
The United States is the world’s largest holder of official gold reserves. Comprising 8,311.5 tonnes or 261 million troy ounces, those reserves are carried at a book value of roughly $11 billion. Notably, the market value is significantly higher at $345 billion (based on the London Gold Fixing for September 30, 2016) as cited in the Treasury’s report filed June 30, 2017 (U.S. Department of the Treasury 2017).
In proposing a new international monetary system linked in some way to gold,

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Caligula Trump Asks Who Will Rid Me of These Troublesome Economists

17 days ago

I have been remiss in not bringing people’s attention to this purge. From Politico:
Economists in the Agriculture Department’s research branch say the Trump administration is retaliating against them for publishing reports that shed negative light on White House policies, spurring an exodus that included six of them quitting the department on a single day in late April.
If you do not see a pattern in the bullying of Census, the extreme nontransparency of rules at BIS (Bureau of Industry and Security), and the attempt at Board-stuffing at the Fed, then you are blind.

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A Re-Run: “Who Will Relent – Xi or Trump? On Actual and Perceived Payoff Matrices”

17 days ago

“Re-run” is an archaic phrase from my generation. It means to replay a previously recorded and broadcast television show. Here, this “rerun” seems appropos. I think that the cost to Xi of backing down is even greater given Trump’s tariff threat came close to the day of the 100th Anniversary of the May 4th Movement — a sensitive occasion for the CCP. From an August 2018 post.
Notable differences. US GDP fundamentals less robust than in August. Chinese growth fundamentals (in the short run) are stronger. Remember this despite the fact that that Liu He is joining the negotiating team coming to Washington, D.C.

NEC Chair Kudlow in response to the Chinese threat to impose tariffs on an additional $60 billion worth of goods (from Bloomberg).
“Their economy’s weak, their currency is weak,

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Guest Contribution: “Evaluating Central Banks’ Tool Kit: Past, Present, and Future”

19 days ago

Today, we are pleased to present a guest contribution written by Eric Sims and Jing Cynthia Wu (both from the University of Notre Dame), based on their paper of the same title.

In “Evaluating Central Banks’ Tool Kit: Past, Present, and Future,” we develop a structural DSGE model that allows one to simultaneously study the three principal tools of unconventional monetary policy in a unified framework – quantitative easing (QE), forward guidance (FG), and negative interest rate policy (NIRP). The model features the usual real and nominal frictions found in NK-DSGE models. In addition, there exist financial intermediaries that engage in maturity transformation by funding themselves with short term debt from households and holding long term debt that is issued by firms to support investment.

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If Campbell Harvey’s Specification Is Right, We’re (Still) in Trouble

20 days ago

Robust GDP growth, employment rising on pace, perceived recession risk declining… as in this headline. The latest issue of the Economist has an article entitled Fears of recession have faded. But I’m reminded that Campbell Harvey, who wrote early papers on the subject of yield curve predictors, relies on the 5yr-3mo spread (for growth, not recession). And that implied specification signals 44% probability of recession in 2020M04.

From Bloomberg:
“My economic model is not just predicting economic recessions, it’s predicting economic growth,” Harvey said. “If you’re flat or you’re inverted it’s saying the same thing: growth will slow.”
A snapshot of the yield curve Friday, a week earlier, a month earlier, and a year earlier:

Figure 1: Slope of 10yr-3mo curve (yellow dashed arrow), of

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Winning: US Agriculture Edition

20 days ago

Figure 1: Real proprietor farm income with inventory valuation adjustment and capital consumption allowance (dark blue), and 4 quarter trailing moving average (red), both in billions of Ch.2012$, SAAR. Deflated using GDP deflator. Source: BEA 2019Q1 advance release, and author’s calculations.

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March Monthly GDP Growth at 0.1%

21 days ago

That’s from Macroeconomic Advisers today. Turns out a bunch of monthly indicators have recently been released, including today’s employment report. Here are some key ones followed by NBER’s Business Cycle Dating Committee (BCDC).

Figure 1: Nonfarm payroll employment (blue), industrial production (red), personal income excluding transfers in Ch.2012$ (green), manufacturing and trade sales in Ch.2012$ (black), and monthly GDP in Ch.2012$ (pink), all log normalized to 2018M12=0.  Source: BLS, Federal Reserve, BEA, via FRED, Macroeconomic Advisers, and author’s calculations.
Note that normalizing on 2019M01 would have been reasonable as well. Monthly GDP and manufacturing and trade sales peaked in January (as far as we can tell from the reported data).
While the official advance estimate on

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Demented Things People Write

21 days ago

From reader JBH today:
Trump may well be Patton reincarnated as he was born ½ earth revolution after Patton nearly to the day. Enemies of America off balance and greatly confused by Trump’s classic Art of War style. Massive infrastructure rebuilding project coming. Trump will build that… along with the Wall.
I have seen this abbreviation “TDS” for “Trump Derangement Syndrome”. I’ll just say seems like plenty of people have just plain “DS”.
This is by way of alerting readers to the following: I will not censor any comments on reincarnation, George S. Patton, and sealed indictments. However, comments giving credence to Q-anon, racist jokes and misogynistic observations, and arguments that there were indeed “fine people on both sides” of the Charlottesville protests of 2017 will be

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Of Chinese Swine, US Hog Exports, Soybean Prices, and News

22 days ago

Soybean prices continue to plunge (July ’19 futures). Some have argued that decreased demand for soybeans, due to the ongoing African swine fever epidemic in China. The April 9th USDA FAS report contained information on both this, and soy market conditions. If decreased demand for soybeans was due to news about Chinese swine stocks, we would have expected rising US hog and declining soy prices. Yet hog prices have fallen for most of the time since then.

Figure 1: Lean Hog (June 2019) futures (black, right scale), and Soybean (blue, left scale). Red dashed line at 9 April release of USDA FAS Livestock and Poultry report, WASDE briefing. Source:, accessed 2 May 2019.
The USDA FAS report notes:
Official ASF Outbreaks Slow while Hog Inventory Plummets 17 percent
China has

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Guest Contribution: “No Moore Golden Era for Monetary Policy”

23 days ago

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared in Project Syndicate on April 27th.

Of the two men whom Donald Trump had intended to nominate to empty seats on the Federal Reserve Board, Herman Cain has now withdrawn his name.  This leaves the other one, Stephen Moore.
The Senate would have to decide whether to confirm Moore. He has some problems roughly analogous to Cain’s:  he is considered to be under an ethical cloud and he often gets his economic facts wrong.  Cynics might respond that he would thereby fit right in with the roster of Trump nominees throughout the government.  But Trump’s earlier appointments to the

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Crazy Things People Write

24 days ago

Reader Zi Zi writes:
Higher short rate actually precedes better [US GDP] growth (not lower): GBP3M
I … don’t … think…so.

Figure 1: Libor 3 month based on British pound (dark blue, left scale), four quarter growth rate of US real GDP (red, right scale), both in %. NBER defined recession dates. Source: IBA, BEA via FRED, NBER, and author’s calculations.
Granger causality (2 lags) test fails to reject US growth rate causes Libor; rejects Libor causes US growth rate.

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The Risk Adjusted Real Long Term Real Rate

24 days ago

One argument against the secular stagnation thesis is that the risk-adjusted real rate is not particularly low. I’m dubious.

In Figure 1, I depict the real ten year Treasury yield, adjusted by survey-based inflation expectations (from the Cleveland Fed, Survey of Professional Forecasters), and the TIPS yield.

Figure 1: Ten year constant maturity Treasury yield adjusted Cleveland Fed ten year expected inflation and Kim-Wright term spread (dark blue), adjusted by Survey of Professional Forecasters median ten year expected inflation and Kim-Wright term premium (teal +), and TIPS yield adjusted by Kim-Wright term premium (red). NBER defined recession dates shaded gray. Source: Fed, Cleveland Fed, NBER and author’s calculations.
Notice that real risk-free rates have declined, particularly

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Equipment Investment, Capital Goods Imports, and the Impending Slowdown

25 days ago

Almost exactly 12 years ago, I noted the decline in equipment and software investment and the contemporaneous plateauing of capital goods imports, and repeated my worries in mid-June. At the time, I didn’t dare suggest an impending recession. Jim Hamilton (in July) warns “All of which is a reminder that the latest GDP numbers do not prove that we’re out of the woods yet” as the recession probability indicator rises to 26.2%.

I was reminded of these developments as I read over the 2019Q1 GDP release Jim discussed in Friday’s post. Here is what I found of interest.

Figure 1: Equipment investment (dark blue), and capital goods imports excluding aircraft and computers (red), four quarter change  as log ratio to GDP, all in 2012Ch.$. NBER defined recession dates shaded gray. Light orange

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Ramesh Ponnuru on the Conduct of Optimal Monetary Policy

29 days ago

I agree with @realDonaldTrump: We need to keep interest rates low now to keep our economy growing.

One might wonder why we should give special credence to someone with an AB in history. It’s a sign of the times (or a commentary on Mssrs. Moore and Cain) that Mr. Ponnuru’s views are more nuanced and intelligent than those two names mooted for the Fed.
In BloombergOpinion in 2018, Ponnuru writes:
There are several reasons for concern about how the Fed will respond to the next downturn. Because it targets inflation, it may be tempted to tighten money inappropriately after a negative supply shock. In 2008, for example, higher oil prices seem to have led to a more restrictive Fed policy than warranted.
Strangely, Ponnuru does not suggest the things that make sense in light of very real

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Who’s Getting the Rents?

April 24, 2019

The import quota rents that is. From Brian Riley/NTUF:

In addition to tariffs, some officials in the Trump administration have embraced the use of quotas to restrict imports. As opposed to taxing imports with tariffs, quotas limit the quantity of goods that Americans can import.
Quotas are worse than tariffs
As bad as tariffs are, at least they generate revenue for the federal government, as President Trump has repeatedly pointed out. In contrast, quotas drive up prices by restricting imports, but the federal government doesn’t collect a dime.
Quotas are also more restrictive than tariffs.

In competitive conditions, any quota can be converted to a tariff and vice versa (when there is no uncertainty). However, if domestic incumbent firms have market power, then quotas are much worse

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Thoughts on the Next Recession

April 22, 2019

CEA Chair Kevin Hassett has stated a recession by next summer is impossible. I’m wary of such definitive statements.

From a May 2008 WSJ article:
“The data are pretty clear that we are not in a recession,” Council of Economic Advisers Chairman Edward Lazear told a meeting of editors and reporters from the Wall Street Journal and Dow Jones Newswires.

“I would be very surprised if the NBER, looking back at this period, would date this as a recession,” Mr. Lazear said. There are even indications that revised first-quarter estimates would be slightly stronger than 0.6%. “The optimists seem to have been closer to right on that than the pessimists,” he said.
From a September 2008 article by Donald Luskin of Trend Macrolytics (and a supporter of Stephen Moore’s candidacy for Fed Governor):

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