Monday , January 17 2022
Home / Menzie Chinn
Menzie Chinn

Menzie Chinn

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

Articles by Menzie Chinn

Using Chained Quantities when Relative Prices Change a Lot

25 days ago

Usually, summing up chained quantities yields relatively small errors. However, when relative prices change a lot, then the differences can be large. That’s the case with relative prices of consumption since the pandemic. Hence, the sum of the components does not equal the total for consumption.

Figure 1: Personal consumption expenditures (blue), and arithmetic sum of PCE services, PCE nondurables, and PCE durables (brown), all in bn.Ch.2012$, SAAR. Source: BEA, and author’s calculations.
So…friends don’t let friends sum chained quantities.

Read More »

Business Cycle Indicators, End-2021

25 days ago

With the release of personal income and consumption, we have some of the last readings we’ll receive this year (although December’s readings will still be coming in in January). Here are some key indicators followed by the NBER BCDC.

Figure 1: Nonfarm payroll employment (dark blue), industrial production (red), personal income excluding transfers in Ch.2012$ (green), manufacturing and trade sales in Ch.2012$ (black), consumption in Ch.2012$ (light blue), and monthly GDP in Ch.2012$ (pink), all log normalized to 2020M02=0. NBER defined recession dates, peak-to-trough, shaded gray. Source: BLS, Federal Reserve, BEA, via FRED, IHS Markit (nee Macroeconomic Advisers) (12/1/2021 release), NBER, and author’s calculations.
Note consumption is flat in November (with some movement toward

Read More »

More on Market Indicators pre- & post-Manchin

25 days ago

Following up on the previous post on expectations responses from the market to Manchin, Just putting together all the pieces of betting odds on the size of the reconciliation package, and the impact on implied expected inflation, real rates, and future economic activity. I plot on a 7 day frequency so as to include the odds from PredictIt, which do not stay constant over the weekend.

Figure 1, Top Panel: Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield, % (sky blue, left scale), sum of contract prices for reconciliation package passed by 7/1 in excess of $0.6 trillion (tan, right scale). Middle Panel: Five year TIPS yields, % (sky blue, left scale), sum of contract prices for reconciliation package passed by 7/1 in excess of $0.6 trillion

Read More »

Breakevens and Term Spreads Pre- & Post-Manchin

26 days ago

Manchin’s announcement that he would vote against BBB constituted a kind of event study. Here are the market indicators of expected inflation and economic activity.

Figure 1: Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (dark blue line), five year breakeven adjusted by inflation risk premium and liquidity premium per DKW (light blue thin line), five year five year forward expected inflation calculated  from Treasury and TIPS yields (red), all in %. Source: FRB via FRED, Treasury, Kim, Walsh and Wei (2019) following D’amico, Kim and Wei (DKW) accessed 12/22, and author’s calculations.
The five year inflation breakeven barely budged going from Friday close (12/17) to Monday close (12/20), suggesting — in line with most analyses — that

Read More »

Per Capita GDP Doing Just Fine, Linearly, since 1947

27 days ago

If you don’t believe me, take a look at this time series plot of available US GDP per capita.

Figure 1: GDP per capita, in Ch.2012$ SAAR (blue); Linear trend (brown). Source: BEA via FRED, and author’s calculations.

Linear regression yields t-stat on time trend of about 60 using robust standard errors. GDP per capita is rising about 40 Ch2012$ per quarter.
Or, one might think to plot on a log scale.

Figure 2: GDP per capita, in Ch.2012$ SAAR (blue, on log scale). Source: BEA via FRED, and author’s calculations.
Which one is misleading? One reader thinks:
In general, log scales are to be avoided for all but professional audiences, notably when exponential growth rates are involved. I would almost never use one in a commercial setting or for a general audience, because they are so easy

Read More »

On Confidence Intervals and Logs

29 days ago

Confidence Intervals

Reader Steven Kopits is critical of them:
If the historical data is relatively stable compared to future events, then confidence intervals or the like can be useful. So, for example, if we take traffic on the George Washington Bridge and adjust for weather, time of day, day of year, and weekend/holiday, then I think a confidence interval is a useable piece of information. You can make decisions on that basis. …
However, if the data is unstable or not well understood, if the methodology is new or not well understood, and if the exceptions to the general rules are not well understood, then confidence intervals can provide a false sense of confidence. For example, if I fail to adjust GW Bridge numbers for time of day, then confidence intervals will be effectively

Read More »

Guest Contribution: “Is China’s growth rate negative?”

December 17, 2021

Today, we are pleased to present a guest contribution written by John G. Fernald, Jack Mueller, and Mark M. Spiegel (all of the Federal Reserve Bank of San Francisco).  Our views are our own, and not necessarily those of the Federal Board of Governors or the Federal Reserve Bank of San Francisco.

China has announced, through the third quarter, quarterly growth figures for 2021 that are far below its robust pre-pandemic trend. In the first half of 2021, published quarterly growth averaged an annual rate of 2.8 percent, but the pace slowed to an annual rate of just 0.8% in the third quarter. It is no surprise that these figures are well below the outsized growth rates in the final three quarters of 2020, when the economy grew at a 24 percent annual rate as it rebounded from the deep

Read More »

Gasoline Prices Now… and Standard Errors

December 17, 2021

Reader rsm is perpetually concerned about the precision of economic data, most recently here in re: gasoline prices.
Why am I paying 12-15% more than the graph? What possible reason do you have for not including standard errors? Would error bars stop you from making all these claims about noise?
Below is the price of regular gasoline, plus/minus 1.96 standard errors.

Figure 1: Price of regular gasoline, $/gallon (black line), +/- 1.96 standard error band (blue gray lines). NBER defined recession dates shaded gray. Source: DOE EIA (accessed 12/17/2021), NBER, and author’s calculations.ec
In my view, reporting of standard error bands does not change one’s views regarding the course of gasoline prices.
Note that the webpage for these data comes up in a google search first time around when

Read More »

Gasoline Prices Now

December 16, 2021

Are declining as of the beginning of this week:

For reference, here is the price of Brent:

Jim Hamilton’s rule of thumb from back in 2013 is 2.5 cents for every dollar in change in Brent.
Front month Brent (February) is 74.6 $/bbl; June 2022 is 73.4 $/bbl.

Read More »

Five Year Expected Inflation Now, Five Years from Now

December 16, 2021

From the markets:

Figure 1: Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (dark blue line), five year breakeven adjusted by inflation risk premium and liquidity premium per DKW (light blue thin line), five year five year forward expected inflation calculated  from Treasury and TIPS yields (red), all in %. Source: FRB via FRED, Treasury, Kim, Walsh and Wei (2019) following D’amico, Kim and Wei (DKW) accessed 11/5, NBER and author’s calculations.
Markets seem to indicate average CPI inflation of about 2.7% over the next five years, down considerably from a month ago. Long term expected inflation, as proxied by the 5 year 5 year forward spreads, is also down from two months ago.

Read More »

How Much of the Trade Deficit Is Government Spending Induced?

December 16, 2021

Some of it – but some indications are that it’s not the majority.

Let’s define the trade balance in NIPA terms, so we look at “net exports”, in this case normalized by GDP.

Where ex is exports, im is imports.
Assume US exports depend on foreign economic activity, imports on US economic activity. This assume that imports are largely not substitutable for exports, and exports are not very substitutable for domestic use goods.

Where y is GDP, q is the trade weighted real exchange rate, defined as real $/real foreign currency unit.
This specification implicitly assumes perfect supply elasticity for exports, and for imports. This seems counterintuitive, but I haven’t found evidence for a time series effect (see this paper). Hence, in my research, I focus on the variations of the above

Read More »

As the Nation Approaches 800,000 Covid Fatalities [updated graph]

December 15, 2021

Commenter Rick Stryker wrote confidently on August 20, 2020:
If I’m right, then we’d get a total death toll of 368K.
As of the 12/13/2021 CDC release of officially tabulated Covid-19 fatalities, cumulative fatalities through the week ending 11/27 were 793.834, somewhat exceeding 368,000.
[updated 12/16, 10:30am Pacific] Here is a graph to depict what this “forecasting miss” looks like:

Figure 0:  Cumulative weekly fatalities due to Covid-19 as reported to CDC for weeks ending on indicated dates (black), cumulative excess fatalities calculated as actual minus expected (teal). Note excess fatalities equals zero for early observations where expected exceeds actual. Light green shading denotes CDC data that are likely to be revised. Source: CDC  12/13/2021 vintage, and author’s

Read More »

What Happens When One Runs Around Saying Things without a Model

December 14, 2021

Steven Kopits writes:
We might expect a massive stimulus coupled with a major loss of jobs to lead to an explosion of the trade deficit, which it has.

In extremis, such a stimulus might even generate record levels of goods imports, which it has.

This record level of imports would result in record levels of shipping, which it has, with LA in-bound port traffic running about 15% above its prior peak. (Let me add here that US shale oil production has meant that the historical US trade deficit in oil has disappeared. Since oil is imported chiefly through Houston and a couple of other ports — but not LA — the increase in port traffic is showing up in merchandise, not oil, imports. That is, imports are going to cargo ports like Long Beach and LA.) Such ports may not be equipped to handle

Read More »

A Backgrounder on the Current Inflation Episode

December 13, 2021

From EconoFact (update of May 2021 version):

Main points:
Prior to the pandemic, inflation had been relatively low for about three decades, and especially quiescent over the past decade.
Inflation has been rising over the past year, but this comes after especially low inflation in the immediate wake of the onset of the pandemic.
In order to consider whether inflation is likely to continue at high rates, it is important to look at the different factors that contribute to a generalized rise in prices. Economists’ preferred explanation for inflation, sometimes called the “expectations augmented Phillips curve”, looks to some combination of three factors: slack, expectations, input costs.
How much slack is there in the economy?
Economists and households are marking up their expectations of

Read More »

Some CPI Component Movements and Their Implications

December 13, 2021

Dean Baker has an interesting article conjecturing about future declines in the CPI, being driven by gasoline, cars, and food. The argument seems plausible, depending on what happens in the supply chains and the oil markets.  I want to consider what might happen, depending on other components.

First, consider what has driven overall inflation is in large part the surge in durable goods prices.

Figure 1: CPI-all urban (bold black), CPI-durables (light blue), CPI-nondurables (light green), and CPI-services (red), all in logs, 2020M02=0. NBER defined recession dates peak-to-trough shaded gray. Source: BLS (November 2021 release) via FRED, NBER, and author’s calculations. 
Should public health concerns diminish, then as consumption switches back to services, durable goods prices might

Read More »

Inflation Expectations

December 11, 2021

Before and after the November CPI release.

Several surveys and forecasts before the release, for one year ahead horizons.

Figure 1: CPI inflation year-on-year (black), median expected from Survey of Professional Forecasters (blue +), median expected (preliminary) from Michigan Survey of Consumers (red), median from NY Fed Survey of Consumer Expectations (light green), forecast from Cleveland Fed (pink), mean from Coibion-Gorodnichenko firm expectations survey [light blue squares]. Source: BLS, University of Michigan via FRED and Investing.com, Reuters, Philadelphia Fed Survey of Professional Forecasters, NY Fed, Cleveland Fed and Coibion and Gorodnichenko. 

And from the market, after the release on Friday:

Figure 1: Five year inflation breakeven calculated as five year Treasury yield

Read More »

CPI Inflation in November

December 10, 2021

Month-on-month down, even if up year-on-year. Trimmed and sticky price inflation (m/m) are also down.

First, recall 12 month inflation rates (aka y/y rates) are largely backward looking. Month-on-month measures are more reflective of current conditions, albeit more noisy.

Figure 1: CPI month-on-month inflation rate, annualized (blue), 12 month or year-on-year inflation rate (pink), in decimal form (i.e., 0.05 means 5%). NBER defined peak-to-trough recession dates shaded gray. Source: BLS, NBER, and author’s calculations.
What do other measures of overall CPI inflation look like on a m/m basis?

Figure 2: Month-on-month inflation of CPI (blue), chained CPI (brown), 16% trimmed CPI inflation (red), sticky price CPI inflation (green), personal consumption expenditure deflator inflation

Read More »

Business Cycle Indicators as of December 1st

December 1, 2021

Monthly GDP grows 1.5% m/m, pushed by exports. Along with current expectations for this Friday’s employment release, we have the following picture.

Figure 1: Nonfarm payroll employment (dark blue), Bloomberg consensus for NFP as of 12/1 (blue +), industrial production (red), personal income excluding transfers in Ch.2012$ (green), manufacturing and trade sales in Ch.2012$ (black), consumption in Ch.2012$ (light blue), and monthly GDP in Ch.2012$ (pink), all log normalized to 2020M02=0. NBER defined recession dates, peak-to-trough, shaded gray. Source: BLS, Federal Reserve, BEA, via FRED, IHS Markit (nee Macroeconomic Advisers) (12/1/2021 release), NBER, and author’s calculations.
We now have October observations for five of six indicators tracked. This picture suggests that through

Read More »

So You Want to Be a Monetarist!

December 1, 2021

Consider the velocity of M2…

Figure 1: Velocity of M2, defined as nominal GDP divided by M2. NBER defined recession dates peak-to-trough shaded gray. Source: BEA, Federal Reserve, NBER and author’s calculations.
This ratio fails to reject the unit root null using a standard ADF test (constant, trend, using BIC to choose the lag length), a Elliot-Rothenberg-Stock DF test, and rejects a trend stationary null using a Kwiatkowski-Phillips-Schmidt-Shin test.
A Bai-Perron test for structural breaks ( of L+1 vs L sequentially  determined breaks, max breaks =5) indicates 5 breaks.
’nuff said.

Read More »

Financial Markets and Omicron and Powell

December 1, 2021

Five year inflation breakeven (unadjusted) down, 10yr-3mo term spread down, VIX and EPU up, and S&P 500 down.

Figure 1: Five year inflation breakeven (blue), ten year – three month Treasury spread (red), both %. Source: Treasury via FRED, and author’s calculations.
Ignoring adjustments for inflation risk term and liquidity premia, implied expected 5 year inflation is down to 2.8%, while growth prospects also revert back to September levels.

Figure 2: VIX (blue, left scale), and Economic Policy Uncertainty index (red, right scale).  Source: CBOE via FRED, policyuncertainty.com.
Risk and policy uncertainty are also at recent highs, but still are dwarfed by Trump era highs (83 for VIX at 27.2; 862 for EPU at 180 on 11/29).

Figure 3: S&P 500 index (blue, log scale). Source: S&P via

Read More »

Consumer Confidence, Inflation and Unemployment

November 30, 2021

There’s a lot of discussion regarding the negative impact of inflation on consumer sentiment. That’s definitely there – but unemployment also has a negative impact. And there is a (at least short run) tradeoff between the two. Relevantly, what would unemployment be in the absence of the American Recovery Plan, the CARES Act, and expansionary monetary policies of the Fed?

Here’s a plot of the University of Michigan consumer sentiment index, month-on-month annualized inflation rate, and the unemployment rate (the latter two rates in decimal format).

Figure 1: Top panel, University of Michigan Consumer Sentiment; Middle Panel, month-on-month CPI inflation rate annualized (log terms, decimal format); Bottom Panel, unemployment rate (decimal format). NBER defined recession dates

Read More »

Guest Contribution: “Inflation is Back, But the 1970s Aren’t”

November 29, 2021

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 at Project Syndicate.

Are the US and other advanced countries experiencing stagflation?  Stagflation is the unfortunate combination of high inflation with low growth in output and employment that characterized the mid-1970s.  Are we back in that decade?
No.  At least not the US. What it is experiencing now is simply (moderate) inflation, without the stagnation part.  More like the 1960s than the 1970s.
It is true that the US headline CPI inflation rate reached 6.2 % over the 12 months to October, the highest since 1991.  Few are still forecasting an early return to 2 % ,

Read More »

Forward Guidance Effectiveness, Now vs. Then

November 29, 2021

I’m teaching unconventional monetary policy in Financial Systems course. Here’s some interesting graphs (not altogether new), relating to forward guidance effectiveness.

Figure 1: Three month Treasury yield (blue), and Survey of Professional Forecasters average forecasts as of Q3 survey (red +).  Three month yield is from secondary market. Blue dashed line implementation of forward guidance on Fed funds rate. Source: FRED, Philadelphia Fed SPF.
Since the forecasts pertain to the short rate, here the forecasters are essentially predicting Fed behavior. Notice that after announcing explicit forward guidance (January 25, 2012), expectations of future short rates declined.
In the most recent episode, the response of expectations has been more definitive.

Figure 2: Three month Treasury

Read More »

Two Pictures from the Financial Markets

November 27, 2021

Usually, the Friday after Thanksgiving holiday is a quiet trading day. Today, there was lots of news to react to.

Figure 1: Five year inflation breakeven, calculated as 5 year Treasury yield minus 5 year TIPS (blue), and ten year – three month Treasury spread (red). Source: Treasury via FRED, author’s calculations.
The inflation breakeven (5 year) has fallen (although this spread is not adjusted for risk and liquidity premia), while the yield curve has flattened, suggesting slowing growth.
Consistent with downwardly revised growth prospects — for now — real rates have fallen, while implied uncertainty has risen.

Figure 2: Five year TIPS yield (blue, left scale), and VIX (red, right scale). Source: Treasury, CBOE both via FRED.

Read More »

One Year Inflation Expectations

November 26, 2021

Expectations and forecasts from economists continue to diverge from consumer based expectations.

Figure 1: CPI inflation year-on-year (black), median expected from Survey of Professional Forecasters (blue +), median expected (preliminary) from Michigan Survey of Consumers (red), median from NY Fed Survey of Consumer Expectations (light green), forecast from Cleveland Fed (pink), mean from Coibion-Gorodnichenko firm expectations survey [light blue squares]. Source: BLS, University of Michigan via FRED and Investing.com, Reuters, Philadelphia Fed Survey of Professional Forecasters, NY Fed, Cleveland Fed and Coibion and Gorodnichenko. 
What forecasts are more unbiased (which is separate from which forecasts more represent agents’ expectations).  Over the 1986-2021 period, the following

Read More »

October Inflation Recap

November 25, 2021

With PCE inflation figures in, we have the key price indices for October.  Core PCE inflation was at market expectations (Bloomberg). Nowcasts for November inflation is down markedly.

Figure 1: Month-on-month annualized CPI inflation (blue), PCE price inflation (red). Light squares are Cleveland Fed nowcasts as of 11/24. Source: BLS, BEA via FRED, Cleveland Fed, and NBER.
Core inflation looks like it will be down as well.

Figure 2: Month-on-month annualized Core CPI inflation (blue), Core PCE price inflation (red). Light squares are Cleveland Fed nowcasts as of 11/24. Source: BLS, BEA via FRED, Cleveland Fed, and NBER.
Note these are month-on-month inflation rates; year-on-year rates will continue to rise through November’s numbers even if these nowcasts prove correct.

Read More »

Monthly Business Cycle Indicators: The Rebound Continues

November 24, 2021

With the earlier rebound in industrial production, slightly accelerated growth in consumption,  key indicators followed by the NBER BCDC look a little better than even a week ago.

Figure 1: Nonfarm payroll employment (dark blue), industrial production (red), personal income excluding transfers in Ch.2012$ (green), manufacturing and trade sales in Ch.2012$ (black), consumption in Ch.2012$ (light blue), and monthly GDP in Ch.2012$ (pink), all log normalized to 2020M02=0. NBER defined recession dates, peak-to-trough, shaded gray. Source: BLS, Federal Reserve, BEA, via FRED, IHS Markit (nee Macroeconomic Advisers) (11/1/2021 release), NBER, and author’s calculations.
Consumption has not grown this fast (0.7%) since March 2021, when m/m growth was 4.5% (not annualized, in log terms).
IHS

Read More »

GDP, GDI, and Forecasts/Nowcasts

November 24, 2021

GDP growth in Q3 was revised up 0.1% (SAAR). Real GDI was released; taking average of GDP and GDI reveals the possibility that actual growth was faster than indicated by GDP alone. And while forecasted levels have been downwardly revised over the past months, the most recent nowcasts suggest acceleration.

Figure 1: GDP (black), and GDI (tan), and arithmetic average (blue), all in bn. Ch2012$, SAAR. NBER defined recession dates, peak to trough, shaded gray. Source: BEA, 2021Q3 2nd release, NBER.
The growth rate of gross domestic output (the average of GDP and GDI) is 4.4% (SAAR), compared to the reported 2.1% for GDP. On a year-on-year basis, the figures were 7.0% vs. 4.9%, respectively.
What’s the outlook for GDP as measured? Figure 2 presents median forecasts from Survey of

Read More »

Now That’s Hyperinflation

November 21, 2021

Over the next week, you’re going to hear a lot about how high prices are, how much more a turkey dinner cost than a year ago. But when you hear somebody, say the word “hyperinflation”, remember this picture:

Figure 1: Month on month headline CPI inflation for US (blue), Brazil (light green), Russia (red), all in percent per month. Cagan’s definition of hyperinflation (red dashed line at 50%). Source: BLS via FRED, Ha, Kose, Ohnsorge, and author’s calculations.
What about the oft-cited example of 1920’s Germany. We don’t have inflation rates measured against a bundle of consumption goods, but we do have a depreciation rate of the Reichsmark against the “gold” mark:

Figure 2: Month-on-month depreciation of Reichsmark against “gold” mark (blue dots and line). All 1923 observations

Read More »