Wednesday , November 13 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

Neel Kashkari at Madison: “Kashkari says he takes comfort from yield curve shape”

17 hours ago

Should he? FRB Minneapolis Fed President was at UW Madison today, and stated:
“The fact that the yield curve is now uninverted gives me some indication that we have taken the brakes off the economy,”

Should we rest easy? In some sense, the answer is “yes”.
Take the plain vanilla term spread model;  run a probit regression of recession 12 months ahead on the simple 10yr-3mo spread, and one obtains an 50% probability of recession in August 2020, declining to 39% by October. This point supports Kashkari’s view. In addition, as many have pointed, the historical correlations may not provide a reliable guide to recession probabilities, given the drastic change in the size and sign of the term premium, and the implied recession probability is actually substantially lower.
Simply subtracting off

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The Trumpian World as Natural Experiment

2 days ago

The Trump economic policy regime (if it can be called that) has provided several “natural experiments”. Do corporate tax rate reductions “pay for themselves”? Does expansionary fiscal policy at full employment lead to large increases in output? Does increasing trade protection necessarily lead to an increase in the trade balance? Does a bellicose and confused trade negotiating stance accelerate fixed investment? I think the answers are No, No, No, and No. On this last point, see Altig et al. on Macroblog:

Amid reports of softening manufacturing conditions in the U.S., slowing growth in payroll employment, and a drop-off in business investment, it’s natural to wonder whether trade policy is at least partly to blame. Professional forecasters seem to think so. For instance, the

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“CBO’s Economic Forecasting Record: 2019 Update”

6 days ago

From the Highlights of a new CBO study:

Comparison With Other Forecasts. For the most part, CBO’s and the Administration’s forecasts exhibit similar degrees of centeredness, but CBO’s forecasts are slightly more accurate and have smaller two-thirds  spreads. For all three quality measures, CBO’s forecasts are roughly comparable to the Blue Chip consensus forecasts.
Sources of Forecast Errors. All forecasters failed to anticipate  certain key economic developments, resulting in significant forecast errors. The main sources of those errors are turning points in the business cycle, changes in labor productivity trends and crude oil prices, the persistent decline in interest rates, the decline in labor income as a share of gross domestic product, and data revisions.
The entire report is here

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If the Administration Is So Concerned about Corruption…

7 days ago

Shouldn’t it be doing something about the Russian Federation as well?

Figure 1: Corruptions Perception Index for 2016. Darker denotes higher perceived corruption. Source: Transparency International.
The indices for Ukraine as well as Russia are at 29, tied ranking 131/176 countries. US index at 74, ranked 18th.
The Inter Country Risk Guide (ICRG) says Russia is worse than Ukraine…

Source: Goel, Saunoris, Public Choice (1984).

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Wisconsin Manufacturing Employment Peaked in September 2018

8 days ago

National manufacturing employment peaks nearly a year later, August 2019.

Figure 1: Manufacturing employment in US (blue), and in Wisconsin (dark red), both in logs, 2018M09=0. Light orange denotes Walker administration. Source: BLS, and author’s calculations.
See a discussion of how employment is faring in several Midwestern states in this WaPo article.

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Gross vs. Net Investment, Pre- and Post-TCJA

10 days ago

In other words, the sugar high fades. Brad Setser has noted how weak nonresidential fixed investment has been, despite the TCJA. It looks worse when looking at net — rather than gross — investment.

Figure 1: Gross nonresidential fixed investment (blue, left log scale), and estimated net nonresidential fixed investment (brown, right log scale), all in billions Ch. 2012$, SAAR. Net investment calculated by subtracting quadratically interpolated annual capital consumption, and assuming annualized 0.08% increase throughout 2019. Light orange denotes TCJA in full effect, very light orange denotes TCJA application to equipment. Source: BEA and author’s calculations.

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Recession Probabilities, September-October 2020

11 days ago

Plain vanilla 10yr-3mo probit yields 37% probability of recession in October next year. Adjusting the spread by the 10 year term premium estimate (Kim-Wright) implies only a 6.5% probability in September (vs. 46.4% plain vanilla). Augmenting the term spread with the 10 year term premium implies a 42.2% probability for September…

Figure 1: 12 month ahead probability from probit regression on 10yr-3mo spread, (blue), 10yr-3mo adjusted by 10 year term premium (chartreuse), and 10yr-3mo specification augmented with 10 yeR term premium (red). Kim-Wright term premium estimates from FRB via FRED. NBER defined recession dates shaded gray. Forecast period shaded light green.  Source. NBER and author’s calculations.
A Wald test for whether the coefficient on (the negative of the) estimated term

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12 days ago

As noted by Jim. Over the last week, we’ve received new readings on employment, income, sales, and monthly GDP:

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 bold), all log normalized to 2019M01=0.  Source: BLS, Federal Reserve, BEA, via FRED, Macroeconomic Advisers (10/28 release), and author’s calculations.
While there is no clear downturn (save in industrial output), deceleration is apparent. This is most obvious in the smoothest series, nonfarm payroll employment.

Figure 2: Nonfarm payroll employment excluding temporary Census workers (blue), October value adding in striking GM workers at 50,000 (blue +), and

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Real House Prices Decline

15 days ago

Case-Shiller indices came out today. August prices for the 20 city index declined m/m, and Zillow’s forecast for the CS 20 city index in September was for another decline. This is shown in Figure 1:

Figure 1: Case-Shiller 20 city home prices (blue, left log scale), Zillow forecast of Case-Shiller based on Zillow prices from September for August, from October for September (red +, right log scale), Zillow single family home prices, in 2018$ (brown, right log scale), all deflated by CPI-All. Source: Zillow, S&P, BLS, and author’s calculations.

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Exactly How Much Does the Mainstream Literature Ignore Demographics?

16 days ago

Reader Steven Kopits writes about the economics profession:

We now have three presentations by headline economists — Ken Rogoff, John Williams and Jim Hamilton — that are noting declining yields without so much as a peep about the underlying causes.
Not one word about demographics in any of these presentations. Williams (in the previous post) notes that short term rates have fallen from about 4.5% to 2% without so much as a hint as to why this might be happening. And then he assures us that , notwithstanding this development, the Fed has plenty of firepower to handle the next recession, even though short rates are around 2% and the Fed normally cuts rates by 4-5% in a recession. WIlliams claims that another round of QE would do the trick (again, this is simply a bizarre assertion wrt the

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MMT in (Relatively) Plain English

17 days ago

From Grant Driessen and Jane Gravelle, “Deficit Financing, the Debt, and ‘Modern Monetary Theory’,” Congressional Research Service Report R45976, October 21, 2019 (summary):

Explaining persistently low interest rates despite large deficits and rising debt has been one of the central challenges of macroeconomists since the end of the Great Recession. This dynamic has led to increasing attention to Modern Monetary Theory (MMT), presented as an alternative to the mainstream macroeconomic way of thinking, in some fiscal policy discussions. Such discussions are at times restricted by a difficulty, expressed by policymakers and economists alike, in understanding MMT’s core principles and how they inform MMT’s views on fiscal policy. MMT suggests that deficit financing can be used without

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Guest Contribution: “Weaponization of the Dollar May Backfire”

18 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.

This is a good time to gauge the rankings of the dollar and its rivals as major international currencies.  The Bank for International Settlements came out in September with its triennial survey of turnover in the world’s foreign exchange markets.  The IMF’s statistics on central bank holdings of foreign exchange reserves have gotten much more reliable lately, because China has joined in on reporting its holdings to the IMF (as Eswar Prasad explains).  And SWIFT offers every month its numbers on use of major currencies in international payments.

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Growth Deceleration?

19 days ago

The nowcasts indicate slowdown.

Figure 1: Quarter-on-quarter output growth as measured by GDP (dark blue), nowcasts as of October 25, from Atlanta Fed (black square), NY Fed (red triangles) and Macroeconomic Advisers (chartreuse *), all SAAR. Source: BEA, Macroeconomic Advisers, NY Fed, and Atlanta Fed.
Where are things likely to land, with next week’s GDP release? Deutsche Bank reports:

Source: Luzzetti et al. “Tracking the GDP trackers,” US Economic Perspectives, July 24, 2019.

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Real Home Prices

19 days ago

Case-Shiller August prices come out next week. For now, we have Zillow prices through September, and Zillow forecast. Here are the CPI deflated prices.

Figure 1: Zillow single family home prices (blue, left log scale) in 2018$, Case-Shiller 20 city home prices (red, right log scale), Zillow forecast of Case-Shiller based on Zillow prices (pink triangle, right log scale), all deflated by CPI-All. Source: Zillow, S&P, BLS, and author’s calculations.

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Where Did All the Stimulus Go?

22 days ago

By April 2018, the Tax Cut and Jobs Act and the Bipartisan Budget Act of 2018 had been put into law. The CBO projected a bump in GDP growth, relative to counterfactual. However, the actual record has been fairly plodding, as shown in the below figure.

Figure 1: Reported GDP (dark blue), Macroeconomic Advisers nowcasts of 10/22 (light blue), CBO projection of April 2018 (dark red), and Trump 4% prediction starting from 2018Q1, all in billions of Ch.2012$, SAAR, on log scale. Trump administration shaded orange. Source: BEA 2012Q2 3rd release, Macroeconomic Advisers, CBO, and author’s calculations.
Note that Trump’s December 2017 prediction:
I think [GDP growth] could go to 4, 5, and maybe even 6%, ultimately.
Did not come to pass, as the trajectory is below the light red line of 4%

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Where’s That 4% Growth Trump Promised (or For That Matter, 5%)?

22 days ago

We have two and a half years of observations on GDP, and a couple quarters of nowcasts, to consider. (And if you’re planning to pull a “Mick Mulvaney” and say Trump never predicted 4% or 5%, see here.)

Figure 1: GDP in bn. Ch.2012$, SAAR (dark bold blue), Macroeconomic Advisers nowcasts (light blue), and 4% trend (red), all on log scale. Light orange shading denotes Trump administration. Source: BEA, 2019Q2 3rd release, Macroeconomic Advisers (10/22), and author’s calculations.
Well, I’ll file this prediction with “The Kurds are happy” and “phoney emoluments” clause.

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What Does It Mean to Say Futures Contracts Forecast?

24 days ago

Despite repeated explanations, some readers still don’t understand futures contracts and forecasting exercises. One point of Chinn-Coibion (2014) is that at the one year horizon, the best predictor of future soybean prices at a one year horizon is the futures contract expiring one year ahead.
He writes:
And yet ~$9.34 is NOT $8.72. Neither in July 2019 nor in October 2019 was it a correct estimate.
However, the relevant comparison is November 2018 vs. November 2019. As November 2019 contracts expire on 14th , the relevant forecast date is November 14, 2018. On that date, the November 2019 contract closing price was 935-6. Latest (October 18, 2019, nearly a year subsequent) contract price was 934 — pretty close in my book. The relevant question is how close, over repeated realizations, is

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Manufacturing Output under Last Obama Term, Now

25 days ago

So much misleading prose circulates these days:
“Manufacturing came back quickly after the recession as it has done in prior recessions, but then flattened out and declined during Obama’s second term.”

At least, I thought this was misleadingly written. At most, well…In any case, I thought it might be useful to look at data (the blue line is the one referred to above).

Figure 1: Real output in manufacturing from BLS (blue), and Federal Reserve Board manufacturing production index, quarterly average of monthly data (red), both in logs, 2013Q1=0. Light green denotes Obama administrations. Orange line denotes when China retaliates against US Section 301 measures. Source: BLS, Federal Reserve Board via FRED, and author’s calculations.
In point of fact, by both measures, manufacturing output

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The Manufacturing Downturn Compared to 2014-16

26 days ago

In 2014-16, production and non-supervisory employment continued to rise even as hours and production declined. In 2018-19 (as discussed here), all three have declined relative to peak.

Figure 1: Manufacturing employment – production and nonsupervisory workers (blue), aggregate hours (teal), manufacturing production (red), in logs 2014M11=0. Source: BLS, Federal Reserve Board, via FRED, and author’s calculations.

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Manufacturing in September

27 days ago

Production, employment (production & nonsupervisory), and aggregate hours are all declining, and all down relative to recent peak.

Figure 1: Manufacturing employment – production and nonsupervisory workers (blue), aggregate hours (teal), manufacturing production (red), in logs 2019M01=0. Source: BLS, Federal Reserve Board, via FRED, and author’s calculations.
In other news, year-on-year industrial production is now (barely) negative. [1]

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The Yield Curve Has Dis-Inverted. Are We Safe Now?

29 days ago

Figure 1: 10 year-3 month constant maturity Treasury spreads (blue), 10 year-2 year (red), 5 year-3 month (green), in %. Source: Federal Reserve, Treasury. 

Maybe not…Here’s the same graph with the dates:

Figure 2: 10 year-3 month constant maturity Treasury spreads (blue), 10 year-2 year (red), 5 year-3 month (green), in %. Source: Federal Reserve, Treasury. 
The recession began (as dated by NBER) in December 2007.
What does the current situation look like?

Figure 3: 10 year-3 month constant maturity Treasury spreads (blue), 10 year-2 year (red), 5 year-3 month (green), in %. Source: Federal Reserve, Treasury.

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Do Macroeconomists Ignore Demographics (and Secular Stagnation)?

29 days ago

Reader Steven Kopits makes an astounding claim about macroeconomists (including me, and Jim Hamilton, et al.):

…macroeconomists see demographics as outside their domain. Consequently, there’s a tendency to try to force the rules-of-thumb and economic models from the 1980s – 2000s on the current environment. That’s why John Williams says he’s surprised unemployment could go so low. If he had worked through the Japan numbers (happy to send you the spreadsheets), he’d see very clearly what’s happening. And that’s true for Jim or Menzie or Ken Rogoff or Jeff Frankel. Spend two days and work through the exercise. It would change the understanding of the macro environment.
As I remarked, I somehow remember Larry Summers talking about this topic of demographics in relation to secular stagnation

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“More Signs of Contraction – When Will the GDP Turn Negative?”

October 14, 2019

From Cass Freight Index Report – September 2019:
With the -3.4% drop in September, following the -3.0% drop in August, -5.9% drop in July, -5.3% drop in June, and the -6.0% drop in May, we repeat our message from the previous four months: the shipments index has gone from “warning of a potential slowdown” to “signaling an economic contraction.”

The report continues:
The weakness in spot market pricing for many transportation services, especially trucking, is consistent with the negative Cass Shipments Index and, along with airfreight and railroad volume data, strengthens our concerns about the economy and the risk of ongoing trade policy disputes. Weakness in commodity prices, and the ongoing decline in interest rates, have all joined the chorus of signals calling for an economic

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Capital Goods Imports and Equipment Investment

October 13, 2019

The last time we saw equipment investment declining was 08Q1; and capital goods imports  in 08Q3

Figure 1: Imports of capital goods other than automobiles (blue, left scale), and equipment investment (brown, right scale), both in billions of Ch.2012$, SAAR. Source: BEA, 2012Q2 2nd release.
Given depreciation, net equipment investment is probably declining.

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Is World Trade Volume a Leading Indicator?

October 9, 2019

The slowdown could be coming from tariffs, or from decelerating economic growth. You decide…

Figure 1: World trade volume, 2010=100 (blue). NBER defined recession dates shaded gray. Source: CPB Netherlands Bureau for Economic Policy Analysis, and NBER.

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