Tuesday , July 23 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

“International spillovers of monetary policy through global banks”

22 hours ago

That’s the title of a new special issue of the Journal of International Money and Finance, co-edited by Claudia Buch, Matthieu Bussière, Menzie Chinn, Linda Goldberg, Robert Hills, drawing on proceedings from an International Banking Research Network conference. From the introductory paper:
International spillovers of monetary policy have been core topics of theoretical and applied work in recent years, and thesubject of intense discussions in policy circles. Recent literature has improved our knowledge of international policy trans-mission, for instance: by investigating the role of global liquidity conditions; by analyzing international bond price orexchange rate responses to monetary policy decisions using very high frequency data and identification of monetary shocks;and by assessing

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Recession Indicators as of July 21

2 days ago

Industrial production is down relative to previous month, and relative to recent peak. GDP, sales, personal income are all below recent peak as well. Nonfarm payroll employment continues to plug along — although at a decelerating pace (1.53% y/y).

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 (6/26 release), and author’s calculations.
Note that manufacturing has recovered somewhat since last posting.

Figure 2: Manufacturing employment (blue), aggregate hours of production and nonsupervisory workers (red) and

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Is California in Recession (Part XVII)

2 days ago

June employment figures are out. Time to re-evaluate this assessment from one and a half years ago in Political Calculations that California was in recession.
Going by these [household survey based labor market] measures, it would appear that recession has arrived in California, which is partially borne out by state level GDP data from the U.S. Bureau of Economic Analysis. [text as accessed on 12/27/2017]
The release provides an opportunity to revisit this question. It’s (still) unlikely that a recession occurred in California.

Figure 1: Nonfarm payroll employment in California (blue), in 000’s, s.a., on log scale. Source: BLS.
Admittedly, these data will be revised, particularly with the benchmark revisions coming out in the new year. Still it’s hard to see how the data as reported are

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What Does Judy Shelton Believe GDP Growth and Inflation Is in 2019?

4 days ago

In a 2015 Cato Institute session, Fed Board Nominee Judy Shelton discusses whether to trust or not official GDP and inflation statistics (she says no — see 1:07:07) (h/t Sam Bell).

This makes me wonder (1) what is the basis for her beliefs, and (2) what would she use that is different.
Let’s consider inflation, presumably CPI inflation. One recent innovation is the Billion Prices Project’s price value indicator (see Jim’s post on this subject). For the US, the comparison against the official CPI series is depicted below.

Source: Billion Prices Project, accessed 7/19/2019.
With both series rescaled to July 2008, the price levels are virtually the same at July 30, 2015, the day of Dr. Shelton’s speech. It might be that Dr. Shelton is consulting Shadow Government Statistics; if so, I hope

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The Course of the US-China Trade War, Viewed through the Lens of Soybeans

5 days ago

Or, hope died in August 2018…

Figure 1: (Log) July 2019 soybean futures contract price minus spot price (blue). Source: ino.com and macrotrends.com, and author’s calculations. Red dashed line at 7/12/2018, one year before expiration of July 2019 futures contract. Dates from Dezan Shira and Assoc.
Typically, the futures and spot should differ by cost of carry, but for soybean futures, but at the 3, 6 and 12 months horizons, the futures are an unbiased predictor of future spot rates (see Chinn and Coibion, 2014). Hence, the spread can (roughly) be interpreted as an estimate spot rate rising in the future, which is inversely proportional to the probability of a resolution of the US-China trade war (cost of carry is going to vary over the year, so the spread is only partly indicative).

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Predictions of Soybean Prices from One Year Ago

6 days ago

On July 9, 2018, reader CoRev disparages futures prices as accurate predictors of future spot prices for soybeans, writing:
no one has denied the impact of tariffs on FUTURES prices. Those of us arguing against the constant anti-tariff, anti-Trump dialogs have noted this will probably be a price blip lasting until US/Chinese negotiations end. We are on record saying the prices will be back approaching last year’s harvest season prices.
My assertion was, based on econometric analyses in Chinn and Coibion (2014), the best forecast for the price of soybeans one year from date of forecast was the futures contract price for expiration one year away. So as of July 15, 2018, I would use the then closing price for the July 2019 contract: 872. (There is a subtlety that the contract expires on

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Of Big Macs, PPP, the Penn Effect, and Currency Misalignment

8 days ago

From Anneken Tappe in CNNBusiness:
The Economist’s Big Mac Index — a lighthearted way to make the value of currencies more tangible — showed that nearly all currencies in the index are undervalued against the dollar.
The Big Mac Index, released Wednesday, is rooted in the theory of purchasing power parity: Exchange rates reflect the value of goods a currency can buy. If currency X can buy an item at a lower price than currency Y, then currency X may be comparatively undervalued and currency Y could be overvalued.

There are two key aspects to recall from this exposition: (1) the dollar is the benchmark, and (2) PPP is the metric. Using (1), if a particular currency is overvalued relative to the dollar, the dollar must be undervalued relative to the particular currency. That makes sense

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To Worry or Not To Worry: Adjusted and Unadjusted Spreads

8 days ago

Torsten Sløk at Deutsche Bank had an interesting commentary [not online] this morning, noting the disjuncture between the different estimates of estimated term premia from affine (no arbitrage) models of the term structure emanating from the NY and SF Feds. I adjust the term spread by the term premium from SF and show the implied probability of recession, alongside that from the conventional 10yr-3mo.

Figure 1: Implied recession probability from probit regression on 10yr-3mo term spread (blue), and same augmented with BAA-UST spread (red), both estimated over 1986M01-2019M06, and 10yr-3mo term premium adjusted spread (green), estimated over 1998M01-2019M06. 3 month Treasury is secondary market yield. NBER defined recession dates shaded gray. Source: Federal Reserve via FRED, SF Fed,

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Guest Contribution: “A Blockchain solution for the technology war between China and the US “

8 days ago

Today we are pleased to present a guest contribution by Alessandro Rebucci, of the Johns Hopkins Carey Business School. This post is based on “Blockchain Technology and Government Applications: A Proposal for a Global Patent Office” (with E. Di Nicola Carena and P. La Mura), in A. Fatás (editor), The Economics of Fintech and Digital Currencies, CEPR ebook, Fintech and Digital Currencies Policy and Research Network, CEPR March 2019.

There is broad support among economists and policy makers for the notion that a certain degree of protection of property rights with patents and trade-marks provide incentives to innovations and fosters growth. The existing system of national patent offices, however, imposes lengthy and costly processes. Moreover, as the ongoing dispute between the US and

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Born in the U.S.A.

9 days ago

Today, Mr. Trump tweeted about four congresspersons of color:
….viciously telling the people of the United States, the greatest and most powerful Nation on earth, how our government is to be run. Why don’t they go back…

It needs to be emphasized that this statement is part of a continuing Trump program to characterize non-caucasian Americans as “un-American” or “foreign”, even when born in the United States. Of “The Squad”, Ayanna Pressley was born in Chicago, Alexandria Ocasio-Cortez  was born in NYC, and Rashida Tlaib was born in Detroit. Only Ilhan Omar is not native born American (Somalia). There is a long tradition of America welcoming (intermittently) immigrants and refugees from foreign shores, but as we know, Mr. Trump does not subscribe to that view (unless they come from

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Why Drop Rates?

10 days ago

My answer on Marketplace yesterday was essentially “why not”. On macro grounds, with prospects for economic activity softening, a bit of insurance isn’t too crazy.

Source: Atlanta Fed.
The yield curve has partly uninverted due to the heightened likelihood ascribed to a rate reduction at the next meeting (23% of a 50 bps cut; 77% of a 25 bps cut according to Fed funds futures).

Figure 1: 10yr-3mo Treasury spread (blue), 10yr-2yr (red), 5yr-3mo (teal). Source: Fed via FRED, author’s calculations.

Source: CME, accessed 7/12/2019.
The reason to hold fast was essentially a political economy one, in my view: once Trump perceives that the Fed can be pressured (whether it was or not), he’ll be tempted to pressure again. On the other hand, one could argue he would pressure relentlessly,

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Exchange Rates: Some Recent Papers

10 days ago

I’ve spent the last week at the NBER’s Summer Institute, attending sessions on International Finance and Macro, International Asset Pricing, and International Trade and Macro (among others)…Here are some interesting/provocative exchange rate papers I saw presented (if off the list, I might’ve missed the paper’s presentation). Other interesting papers in a near-future post.

Andrew Lilley, Harvard University
Matteo Maggiori, Harvard University and NBER
Brent Neiman, University of Chicago and NBER
Jesse Schreger, Columbia University and NBERExchange Rate Reconnect
Discussant: Hélène Rey, London Business School and NBER
Sebnem Kalemli-Ozcan, University of Maryland and NBER
Liliana Varela, London School of EconomicsExchange Rate and Interest Rate Disconnect: The Role of Capital Flows and Risk

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Is There a Relationship between Inflation and Unemployment?

11 days ago

Or, old fogey downloads data, finds a negative relationship, a.k.a. the Phillips Curve…

Much was made of the meeting of minds of AOC and Larry Kudlow regarding the Phillips Curve, to wit (from Bloomberg):
… Ocasio-Cortez said many economists are concerned that the formula “is no longer describing what is happening in today’s economy” — and Powell largely agreed.
“She got it right,” Kudlow told reporters at the White House later on Thursday. “He confirmed that the Phillips Curve is dead. The Fed is going to lower interest rates.”
Well, since I’ve been teaching the Phillips Curve for lo these thirty odd years, I thought I’d check to see if I’d missed something. First, it’s important to remember that while we talk about the negative relationship between inflation and unemployment, or the

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Using Survey Expectations in FX Analyses

12 days ago

At the NBER IFM Summer Institute session on exchange rates yesterday, the debate over the use of survey data rekindled. In Exchange Rate and Interest Rate Disconnect, Şebnem Kalemli-Özcan and Liliana Varela used survey data on exchange rate depreciation. The discussant Adrian Verdelhan (MIT) and audience members questioned whether such data actually measured what we thought they measured market expectations.

I was somewhat surprised at this debate. Thirty years ago, the rational expectations hypothesis dominated. Now, survey data on inflation expectations is regularly cited, and used in academic studies. Market practitioners look at confidence indicators as means of tracking economic activity. A few months ago, the NBER Reporter had an article entitled “The Return of Survey

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Did So-Called Obama Era Regulatory Uncertainty Hurt Agricultural Equipment Investment?

12 days ago

Mebbe. Doesn’t look like it at first glance. On the other hand, through 2018, Trump’s trade policies and associated trade policy uncertainty haven’t helped much…

Figure 1: Gross investment in agricultural equipment, in mn. $ (blue), and mn. Ch.2012$ (red), both SAAR. Quarterly real figures obtained by deflating by quadratic interpolation of annual deflator. Source: BEA via FRED, and author’s calculations.
And what about uncertainty. Using the Baker-Bloom-Davis index…
Figure 2: Gross investment in agricultural equipment, in mn. Ch2012$, SAAR (red, left scale), and economic policy uncertainty (baseline) (teal, right scale). Quarterly real investment figures obtained by deflating by quadratic interpolation of annual deflator. Source: BEA via FRED, policyuncertainty.com, and author’s

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The New Fama Puzzle Persists

13 days ago

In previous posts [1] [2], I described how in data up to the beginning of 2016, the Fama puzzle was overturned for major currencies. One question was whether the change would persist post-crisis and post-Zero Lower Bound (ZLB) exit. The short answer is, so far, yes.

This is shown using data from a forthcoming paper w/Jeffrey Frankel (earlier version here), where we demonstrate that the reversal of the Fama regression coefficient holds, including when using forward rate data instead of interest rate data.  First, consider the Fama regression:
s+1 – s = α’ + β'(i-i*) + error
ε(s+1) is subjective market expectations of the future spot exchange rate (proxied using Currency Forecasters Digest/FT FX forecasts/FXForecasts survey data).
Fama regression coefficients are the  β’ is the OLS

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Of Sugar Highs, Uncertainty, and Recession

15 days ago

Growth is already slated to decelerate, but in the absence of the Tax Cuts and Jobs Act, it might have decelerated even more; on the other hand in the absence of crazy high policy uncertainty, growth might have been faster…
Figure 1: Real GDP growth as reported (dark blue), GDO (blue), Atlanta Fed GDPNow (black square), NY Fed Nowcast (pink triangle), Macroeconomic Advisers (chartreuse *), Merrill-Lynch (teal square). Source: BEA 2019Q1 3rd release, all forecasts as of July 5, except for NY Fed (July 3), and author’s calculations.
What is the Trump factor in all this. The Tax Cuts and Jobs Act is the signature legislative accomplishment of the Trump era. Goldman Sachs’s estimated the impact of the TCJA on GDP as follows:Source: Phillips, Mericle, “US Daily: Tax Reform Through the Eyes of

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Guess the Expiration Price of July 2019 Soybean Futures

17 days ago

On July 12, 2019, the soybean futures contract (CBOT) for July 2019 expires (first delivery on 7/16). On July 12, 2018, the closing price was 885.75 (data from ino.com here). What’s your guess on what the expiration price will be?

My guess is the expiration price will by 885.75; Friday’s last price was 872.25. (Note that the front month futures price is often used as a proxy for the spot price, given the higher liquidity in the futures market. This is true in many commodities markets).
As of April 2018, before the Section 301 salvos were launched by the Trump administration, the price for this contract was around $10.50…What some people have characterized as a “blip” in soybean prices has lasted something like a year and two months now.

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Recession Watch, July 2019

18 days ago

With the release of nonfarm payroll employment (NFP) numbers today, we have a new set of readings on indicators emphasized by the NBER BCDC (used in dating the end of the 2001 recession), since my last post on recession indicators. While NFP continues to trend upwards, industrial production, personal income excluding current transfers, manufacturing and trade industry sales are all below recent peaks. Monthly GDP has risen to match the last peak in January 2019.

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 (6/27

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George Washington and Victory at IAD

18 days ago

Source: Terry Australis

Also, Mr. Trump has noted:
“Frederick Douglass is an example of somebody who’s done an amazing job and is being recognized more and more, I notice.”
Pretty sure I cooled my heels sitting under this painting in the WH for half an hour once. Don’t remember the B-24 Liberators…
Source: Guillotine Wolf.
Source: economistmeg
More at twitter.

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Nonfarm Payroll Employment Growth in Context

18 days ago

Blockbuster (absolute level) growth number for nonfarm payroll employment. But does the percentage growth rate in NFP dispell the prospect of recession in the near future? I don’t think so.

Figure 1: Growth rate in nonfarm payroll employment, month-on-month annualized (blue), and year-on-year (red). NBER recession dates shaded gray. Green dashed line at June 2016 M/M annualized growth rate. Orange shading denotes Trump administration. All growth rates calculated as log differences. Source: BLS, NBER, author’s calculations.
As can clearly seen, the recent growth rate (as opposed to change in level) is not particularly impressive, and similar M/M growth rates have been recorded within months of the beginning of a recession: 9 months before the 2007-09 recession, and 4 months before the

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Guest Contribution: “Economic Policy Uncertainty and Recession Probability – July 2019 Update”

19 days ago

Today, we are fortunate to present a guest contribution written by Paweł Skrzypczyński, economist at the National Bank of Poland. The views expressed herein are those of the author and should not be attributed to the National Bank of Poland.

In January 2019 I presented on Econbrowser a couple of probit model examples that enhance the standard U.S. Treasury yield curve slope model with the U.S. Economic Policy Uncertainty Index (EPUI) as measured by Baker et al. (2016). Today, after six months, I present an update that includes the data ending in June 2019. Figures below present the obtained U.S. recession probabilities in-sample and their out-of-sample forecasts. The predicted probabilities along with the forecasts made in January 2019 are reported in the figures and table below.


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Judy Shelton Confuses Me: On Interest Rates, Currency Manipulation

20 days ago

With Judy Shelton’s nomination to be a Fed governor, it behooves us to consider her views on the world. I will point out two salient (there are many) areas of confusion about her views: (1) interest rates and monetary policy easing, and (2) currency manipulation.

Does a Zero Interest Rate on Excess Reserves Guarantee a Zero Fed Funds Rate?
On the first point, Dr. Shelton has been known to argue for a reduction in the interest rate on excess reserves (IoER). From  WaPo (June 19, 2019):
“Because I’m so against paying interest on excess reserves, in a way, I’m radically in favor of eliminating 235 basis points [on interest rates],” Shelton said. She suggested a “glide path” of “maybe one to two years” to take the interest rate the Fed pays on excess reserves from the current level of 2.35

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The Trump Administration Is No Friend of the Farmer: Part 15,327

20 days ago

Price index for gross value added in farm sector is falling (cumulative 8% under Trump) while that in the nonfarm business is rising (cumulative 3.5%).

Figure 1: Log price index for nonfarm business sector (blue), and farm sector (red), 2017Q1=0. Pnk shading denotes period during which China has tariffed US soybeans. Source: BEA 2019Q1 3rd release, authors’ calculations.

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Soybean Watch in the Wake of the Trump-Xi Standstill

21 days ago

On July 12th, 2018, the closing price for a CBOT soybean futures contract expiring on July 12, 2019, was 885.75. As of 1:40PM Central on July 2nd, the price of the July 2019 contract was 877.00, 0.99% difference. In other words, soybean futures are (still) doing pretty well in terms of forecasting.

Figure 1: Price of contract for soybeans futures expiring July 2019 (black line), fifty data moving average (blue line). Source: ino.com accessed 7/2 1:40PM, and author’s annotations.
In other words, despite the Trump-Xi trade truce, soybean prices remain mired at where they were nearly a year ago (which is why I think Brad Setsers’ “standstill” better describes the outcome).

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Chinese GDP Growth: Now and Near Future

21 days ago

I’ve noticed a tendency for some commentators to believe the Chinese economy is about to topple. One such instance is Gordon Chang writing in the National Interest:
Take the year 2016 as an example. The NBS reported that China’s gross domestic product grew 6.7 percent that year. In 2017, however, the World Bank issued a bar chart showing that China’s GDP increased only 1.1 percent
One has to wonder why in 2019 Chang is citing an unspecified 2017 World Bank report regarding 2016 performance. Well, time to — gasp — look at the data.

Figure 1 shows the official series, as well as the World Bank estimate, and the IMF’s forecast.

Figure 1: Annual growth rates, from Chinese NBS (black), World Bank (chartreuse), IMF World Economic Outlook (teal), and Chen, Chen, Hsieh and Song (red). Source,

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Plain-Vanilla Term Spread Model: Recession Probability for 2020M06=42%

23 days ago

(7/1 – with update including credit spread augmented specification.) Estimated probit over 1986M01-2018M06 period (assuming no recession as of 2019M06):
Prob(recessiont+12=1) = -0.323 – 0.869Spreadt
McFadden R2 0.295, observations = 390, bold denotes significance at 5% msl. Spread in percentage points.

Current spread and current recession dates in Figure 1 (green denotes out-of-sample data).

Figure 1: Ten year minus three month Treasury spread, % (constant maturity) (dark blue). NBER defined recession dates shaded gray. Source: Federal Reserve Board via FRED, NBER, and author’s calculations.
Using the data to forecast out-of-sample yield implied probability of recession equal to 42% in 2020M06.

Figure 2: Probability of recession for indicated month. NBER defined recession dates shaded

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Glasnost in Wisconsin, Perestroika to Come?

23 days ago

The Walker Administration tried to hide lackluster economic progress with the suppression of the Wisconsin Economic Outlook, for nearly 4 years (strangely, just like in Brownback’s Kansas). The new Evers administration has resumed publication, and added a set of nifty interactive tools.

Here’s the report. At a glance…

The U.S. and Wisconsin economies continue growing in 2019, at a slower pace compared to 2018 and with some uncertainties clouding the forecast. Personal consumption growth continues to be strong, helped by tight job markets and low oil prices.
Wisconsin’s unemployment rate remains below the national rate, while both stay near historical lows.
Wisconsin employment grew 0.8% in 2018. The forecast calls for similar growth in 2019 and 2020. Wisconsin personal income grew 4.0%

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The Data Will Make You Free

24 days ago

I am constantly amazed that people write stuff that is easily falsifiable, in an era of easily accessible databases (I am tempted to go into an old fogey rant about “in my day I had to go to the library and hand copy down numbers from the hard copy volumes of International Financial Statistics”…but I will resist). Or ask me for the “raw” data when it’s freely available.
Just to remind the frequent commenters on this blog, there exist freely available data here:

St. Louis Fed economic database Thousands of time series on economic activity, in an easily downloadable form.
IMF International Financial Statistics
IMF World Economic Outlook databases.
World Bank World Development Indicators.
YCharts Macro and equity market data series.
ino.com Futures data.
Federal Reserve Board

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Why Friends Don’t Let Friends Apply Deterministic Time Trends to Nonfarm Payroll Employment

25 days ago

Suppose you wanted to detect anomalies in nonfarm payroll employment (NFP). Would you want to apply a filter that relied on trend stationarity of NFP (like reader CoRev does in his “anomaly analysis”)? My short answer is “no”…

First, consider what a series of (deterministic) trend estimates looks like, over 20 year spans, 1947-2019.

Figure 1: Nonfarm payroll employment, 000’s, s.a. (black), and linear deterministic trends estimated over 20 year subsamples. NBER defined recession dates shaded gray. Source: BLS, May employment situation release, NBER, and author’s calculations.
If the series were trend stationary, then one would expect the fitted trend lines to not vary overmuch. But they do… (for more on the trend stationary/difference stationary distinction and cointegration, see

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