Friday , February 28 2020
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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

Recession Probability for Term Spread thru 2/24

3 days ago

If the last few days of February is like the rest, then recession probabilities are up. Using a plain-vanilla probit model of recession based on the10yr-3mo spread, the following recession probabilities are obtained.

Figure 1: 10 year-3 month Treasury spread (blue, left scale), recession probability from probit model (red, right scale), NBER recession dates shaded gray. Feb2020 observation for data through 2/24. Source: Federal Reserve via FRED, NBER, and author’s calculations.
Of course, the usual caveats regarding the term premium apply.
Interestingly, market expectations of a recession by January 2021 have risen substantially in the past few days.

Figure 2: 10 year-3 month Treasury spread (blue, left scale), recession probability in Trump’s first term, from PredictIt (red, right

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10yr-3mo Treasury Spread and TIPS 10yr

4 days ago

Figure 1 shows both of these at monthly frequency, with February data through 2/21.

It could be argued that the 10yr-3mo spread is reduced due to a compression of the term premium, as deflation becomes a larger concern. The 10 year TIPS yield should not be susceptible to this sort of effect, so the fall in the real yield is worrisome. Even if the trend in the real rate is downward due to demographics, etc., this latest drop since late 2018 seems cyclical.

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Remembering Representative Ryan’s Legacy

6 days ago

Brian Riedl writes:
I’ve never understood the intense hatred of Paul Ryan. Agree or disagree on policies — he treated people well (even when they didn’t return the favor), avoided demagoguery, good family man, no scandals. Thats what we should want out of elected officials.

Since Mr. Riedl has blocked me on twitter (apparently – I’m not a techie person), I’ll comment here.
We know that Paul Ryan engaged in inflation and counter-cyclical fiscal policy fear-mongering, foisted a “Path to Prosperity” blueprint for austerity that kept thousands unemployed longer than necessary. So yes, I despise a person for unecessarily causing harm to my fellow human being because they are wilfully blinded by ideology. People in positions of power need to be held to account for their decisions.
Here is a

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Explaining the Administration’s Economic Forecast

8 days ago

The Economic Report of the President, 2020 is out as of today. Chapter 9 presents the underpinnings for the seemingly implausible GDP forecast presented in the Budget last week — a forecast that’s a full percentage point faster than CBO’s.

Source: Economic Report of the President, 2020. 
This figure highlights the fact that the out-year forecasts are driven by implementation of deregulatory initiatives and trade liberalization. From page 297:
we have decomposed this forecast into a current-law baseline and intermediate and top lines that reflect estimated growth effects discussed in this Report, as well as in the 2018 and 2019 Reports and the President’s Fiscal Year 2021 Budget. We then build up to our top-line, policy-inclusive forecast by successively adding to the current-law

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Pre-Benchmarking Manufacturing Employment in MI, PA, and WI

11 days ago

The pre-benchmarked establishment survey suggests declining employment in key industrial states of Michigan, Pennsylvania and Wisconsin. Using the methodology I used to inferring the national establishment survey, can we anticipate the revision to manufacturing in these states?

First, here’s the establishment series (seasonally adjusted), and Quarterly Census of Employment and Wages (not seasonally adjusted).

I seasonally adjusted the QCEW series using Census X-12 over the 2010-2019M06 period, with log transform. The truncated sample is used because using the sample back to 2001 leads to substantial overprediction in the years 2015-16.
I then estimate a log-log specification 2010M01-2018M03 (when the last benchmark date is), and fit out to 2019M06 (last available QCEW data).


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“Global Spillovers of a China Hard Landing”

12 days ago

That’s the title of an October 2019 International Finance Discussion Paper (Fed) by Shaghil Ahmed, Ricardo Correa, Daniel A. Dias, Nils Gornemann, Jasper Hoek, Anil Jain, Edith Liu, and Anna Wong, which has taken on heightened relevance given current events. From the abstract:

This paper analyzes the potential spillovers of acute financial stress in China, accompanied by a sharp slowdown in Chinese growth, to the rest of the world. We use three methodologies: a structural VAR, an event study, and a DSGE model. We find that severe financial stress in China would have consequential spillovers to the United States and the global economy through both real trade links and financial channels. Other EMEs, particularly commodity exporters, would be hit the hardest. The U.S. economy would be

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Air Freight, Global Supply Chains, and Sensitivity to China

13 days ago

Some pictures to envision the impact of covid-19: (1) lots of US int’l trade goes by air, (2) and US sensitivity to disruption to air freight from China, by sector.

Source: Bureau of Transportation Statistics.
Goldman-Sachs attempts to discern the impact from air freight disruption to supply chains.

Source: Goldman Sachs, “US Daily: Chinese Factory Shutdowns and the US Consumer (Hill),” 14 February 2020.

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Guest Contribution: “Questioning the puzzle: Fiscal policy, exchange rate and inflation”

15 days ago

Today we are fortunate to present a guest contribution written by By Laurent Ferrara (SKEMA Business School, Paris, and Director of International Institute of Forecasters), Luca Metelli (Banca d’Italia), Filippo Natoli (Banca d’Italia) and Daniele Siena (Banque de France). The views presented represent those of the authors, and not necessarily those of the institutions the authors are affilliated with.

Few months after its arrival, at the end of 2017, the Trump administration launched a large fiscal stimulus composed of both tax cuts and government expenditures of roughly 1.4% of GDP (Tax Cuts and Jobs Act and Bipartisan Budget Act – although the exact impact on output is difficult to assess, there is a consensus on some positive effects on GDP growth of this pro-cyclical fiscal boost).

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How Plausible Is the Administration’s GDP Forecast?

17 days ago

As has been noted, the Administration’s forecast is about a percentage point higher than CBO’s. This seems like a large economic difference; as I’m teaching econometrics this semester, how does this seem in terms of statistical significance. Figure 1 below summarizes.

Figure 1: GDP in bn Ch.2012$ SAAR as reported (black), Administration forecast (red square), CBO January 2020 projection (blue), ARIMA(1,1,0) on log GDP 2009Q2-2019Q4 (teal), and 67% prediction interval (gray lines). Source: BEA, 2019Q4 advance release, CBO, Budget and Economic Outlook, January 2020, OMB, Budget for FY2021, February 2020, Table S-9, and author’s calculations.
Notice that an ARIMA(1,1,0) on post-recession data (which includes the relative rapid recovery in the first year of expansion) still predicts

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Malleable and Ductile

17 days ago

Those are two characteristics of gold … and of Judy Shelton’s economics. From Deutsche Bank today (Luzzetti & Hooper):

[Judy Shelton’s] policy leanings have appeared fluid in recent years. During the Obama
Administration, Shelton was critical of the Fed’s expansionary monetary policy. In
a Wall Street Journal op-ed, she argued that the Fed’s efforts to raise inflation to 2%
were misguided…. In making her arguments, Shelton admonished then Fed
Chair Yellen to heed a key lesson from Arthur Burns’s tenure as chair. She said that
tenure was “tarnished by the perception—borne out by the Nixon tapes—that he
[Burns] succumbed to presidential pressure to conduct expansionary monetary
policy to spike economic growth in the run-up to the 1972 election.”
More recently, Shelton has changed her tune

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Iron and Steel Primary Production Employment

18 days ago

Down, down, down.

Figure 1: Employment in iron and steel mills and ferroalloy production (NAICS3311), 000’s, s.a. (blue, on log scale). Light orange denotes Trump administration. Source: BLS.
If iron and steel primary employment looks anything like primary metal production overall employment (and it does – Rsquared = 0,81), December employment will be yet again lower.
To add insult to injury, not only is raw steel employment not rising, downstream producer employment is hurting so that the Trump administration is setting in motion cascading protection. From Chad Bown:
On January 24, 2020, Trump delivered some of those tariffs for a handful of high-content steel products, including steel nails and car bumpers. While his new tariffs did not cover kegs, Trump implicitly acknowledged

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Why I Still Think June 2019 Employment Is Lower than Reported

20 days ago

The data from the Quarterly Census of Employment and Wages (QCEW) suggests to me that employment in June 2019 (last available QCEW data) is 505 thousand lower than estimated (although possibly as little as 111 thousand, as large as 899 thousand, using a 95% prediction interval).

Figure 1: Nonfarm payroll employment, January 2020 release (blue), estimate using log-log regression on X-13 seasonally adjusted QCEW on 2001M01-2019M03 (green), estimate using log-log regression on QCEW with seasonal dummies on 2001M01-2019M03 (brown), and final revision for March 2019 (dark red square). Source: BLS via FRED, BLS, and author’s calculations.
The data used to generate Figure 1 are here.
If you read the documentation for the benchmark revision, you’ll see that the data after March 2019 data is

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Wisconsin in the Trade War of 2018-

20 days ago

I’m interviewed on Wisconsin Public Radio today, in the wake of declining Wisconsin exports.

Figure 1: Wisconsin goods exports to world (blue, left scale), to China (red, right scale), in bn 2012$. Nominal values deflated using national goods exports deflator. Section 232 and 301 actions shaded gray. Source: ITA TradeStats, accessed 2/7/2020, export deflator from BEA, 2019Q4 advance release, and author’s calculations.
My colleague Jon Pevehouse speaks on WPR about the Phase 1 deal.
Interesting reading on Wisconsin and the trade war (a little out of date), from the Wisconsin Legislative Reference Bureau. Some stats state-by-state from TariffsHurt.

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The Employment Benchmark Revision: Implications for the Economy’s Trajectory

21 days ago

The January numbers are out. March 2019 levels revised down 514 thousands, vs. 501 in preliminary. December numbers revised down 422 thousands. My guess based on December estimates and the March 2019 preliminary benchmark (see this post), the actual reported numbers for December were higher by 79 thousand.

Figure 1: Nonfarm payroll employment from December 2019 release (bold blue), from January 2020 release (bold red), August 2019 preliminary benchmark revision for March 2019 NFP (dark blue square), implied NFP using Quarterly Census of Employment and Wages (QCEW) (bold green), household survey adjusted to nonfarm payroll employment concept (chartreuse), Chinn estimate of BLS benchmark revision using data available in January (pink) Source: BLS via FRED, BLS and author’s calculations.

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Productivity, Product Wage, and Real Wage

22 days ago

Productivity and costs for 2019Q4 were released yesterday.

Figure 1: Nonfarm business sector output per hour (blue), compensation deflated by CPI (brown), and compensation deflated by nonfarm business sector implicit price deflator (green). Source: BLS via FRED, author’s calculations.
Where NFB output per hour is QNFB/LNFB, real compensation is WNFB/P, and product wage is WNFB/PNFB.
Productivity has grown 34 percentage points more than the real wage, calculated using the CPI (urban all). Theory indicates that the marginal productivity of labor, ∂Q/∂L, (output per hour measures average productivity) should equal the product wage, not the real wage (which depends on the consumption basket). Still the product wage (really compensation) has grown 10 percentage points less than productivity,

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What Method Implies 80% Probability of Recession by Nov 2020?

23 days ago

It’s the method described in this intriguing paper, by William Kinlaw, Mark Kritzman, and David Turkington. From the abstract:
The authors introduce a new index of the business cycle that uses the Mahalanobis distance to measure the statistical similarity of current economic conditions to past episodes of recession and robust growth. Their index has several important features that distinguish it from the Conference Board’s leading, coincident, and lagging indicators. It is efficient because as a single index it conveys reliable information about the path of the business cycle. Their index gives an independent assessment of the state of the economy because it is constructed from variables that are different than those used by the NBER to identify recessions. It is strictly data driven;

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DIY Benchmark Employment Release (Establishment)

24 days ago

Friday’s estimate of nonfarm employment will incorporate a benchmark revision, based on unemployment insurance and tax data extending up to 2019Q3. What will we see? Here’s an informed guess, based on what we see now (see the green line in Figure 1).

Figure 1: Nonfarm payroll employment (bold blue), August 2019 preliminary benchmark revision for March 2019 NFP (dark blue square), implied NFP using Quarterly Census of Employment and Wages (QCEW) (bold green). Source: BLS via FRED, BLS and author’s calculations. Data used [xls]
The green line is what I guess it’ll be, using the seasonally adjusted QCEW’s historical relationship with nonfarm payroll employment. Here’s the raw material used to obtain this guess:

Figure 2: Nonfarm payroll employment (bold blue), Quarterly Census of

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Eight Graphs Depicting the Macro Situation as of end January

25 days ago

For now, we know as of 2019Q4, we’re not in a recession, according to Jim’s analysis. But Q4/Q4 GDP growth fails to hit Trump targets (again!), business cycle indicators continue to plug along, but RV sales plunge 16% y/y. And yield curve inverts (again)! Is it flight to safety or lower expected future short rates?

Figure 1: Q4/Q4 GDP growth (blue bar), Troika forecast from Mid-Session Review FY2019 (orange line), and Trump-Pence campaign promise (red dashed line). 

Figure 2: 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 2019M01=0.  Source: BLS, Federal Reserve, BEA, via FRED, Macroeconomic Advisers

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Forward Looking Components in GDP

29 days ago

Jim will be writing a more comprehensive assessment of the 2019Q4 advance GDP release tomorrow. For now, I’ll just note that business fixed investment, a forward looking variable, has registered a negative decline for the last three quarters of 2019.

Figure 1: Investment components, in bn Ch. 2012$ SAAR, all on log scale. Source: BEA 2019Q4 advance release.

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Business Cycle Indicators as of 1/29 as Real 10 Year Rate Goes Negative

29 days ago

[unable to retrieve full-text content]Monthly GDP growth is slow in December: 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 2019M01=0.  Source: BLS, Federal Reserve, BEA, via FRED, Macroeconomic Advisers (1/29 release), and author’s calculations. […]

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What Is the Size of Russian Forces in Ukraine?

January 29, 2020

From the Congressional Research Service:

Source: Cory Welt, “Ukraine: Background, Conflict with Russia, and U.S. Policy,” Congressional Research Service Report R45008 (September 2019).

Regarding the Donbass region:
The estimated number of Russian troops in eastern Ukraine has declined since peaking in 2015 at about 12,000.42 In February 2019, Ukraine’s ambassador to the United Nations said that “over 2,100 Russian regular military, mostly in key command and control positions,” were fighting in eastern Ukraine, with the total number of Russian-backed fighters about 35,000.
The conflict’s intensity has declined since 2015, but fighting continues. In 2018, Special Representative Volker characterized the conflict as a “hot war.”44 U.S. officials and others regularly call attention to the

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What Determines the Strength of Interest Rate Linkages between Countries?

January 29, 2020

Decisions regarding the trilemma, but also choices regarding macroprudential policies have an impact. From the revised version of Joshua Aizenman, Menzie Chinn and Hiro Ito, “Financial Spillovers and Macroprudential Policies” (forthcoming Open Economies Review):

In this paper, we empirically investigated whether and to what extent the financial link through policy interest rates between the CEs [Core Economies] (i.e., the U.S. the euro area, and Japan) and the PHs [Peripheral Economies] can be affected by a set of macroprudential policies implemented by the PHs.
We found that macroprudential policies negatively affect the interest rate connectivity between the CEs and the PHs when we focused on the time periods when the CEs implement expansionary monetary policy. This asymmetrical

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Back to Zero

January 28, 2020

Ten year TIPS yields that is; the 10yr-3mo spread is 4 bps.

Figure 1: Ten year – three month Treasury spread (blue), and Ten year TIPS yield (red), both in %. Source: Federal Reserve via FRED, Treasury, and author’s calculations.

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The Relative Price of Soybeans vs. Grains, 2014-2019

January 27, 2020

Reader Ed Hanson insists I plot soybean prices from 2014 onward, instead of 2016, to show how factors other than tariffs affect soybean prices. I am happy to accommodate his request. I wonder why soybean prices suddenly deviate from grains overall, staring in March 2018.

Figure 1: CPI deflated PPI for soybeans (blue) and grains (brown), in logs 2018M03=0. Orange shading denotes period during which China Section 301 action is announced/implemented. Brown dashed line is when Chinese tariffs on US soybeans goes into effect. Source: BLS via FRED, author’s calculations.
I am pretty sure I’ve mentioned the dollar as a determinant of US agricultural export prices, years ago. Indeed, see here (nearly two years ago), inter alia.
What is remarkable is how — while showing all this tremendous price

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Have All Agricultural Commodity Prices Behaved As Did Soybean Prices?

January 26, 2020

That’s what reader sammy asserts, trying to support the proposition that Chinese retaliatory tariffs on imports of US soybeans had no impact on US soybean prices.
… chart of soybean prices there are a number of other commodity price charts, such as copper, wheat, coffee etc. They are unaffected by the tariff war yet are remarkably similar to the soybean chart.

That might be true over the past 45 years (I haven’t checked), but we’re talking about tariffs. Since metals are affected by drastically different factors than grains and oilseeds, I thought it might be useful to see what has happened to the relative prices of two ag commodities — soybeans (blue) and grains (brown) — since the announcement of Section 301 actions and corresponding Chinese tariffs.

Figure 1: CPI deflated PPI for

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What a Trump Trade Victory Looks Like: Soybeans

January 24, 2020

Back in July 2018, reader CoRev wrote:
…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.
Back on March 23rd, when Mr. Trump announced intent to launch Section 301 actions, nearest month soybean futures closed at 1028. Latest today is 902. Indeed, prices have been falling since Mr. Trump signed the much heralded (by some) Phase 1 deal. This is shown in Figure 1 below.

Figure 1: Front month soybean futures (black). Trump announces intent of Section 301 action against China (red), Section 301 tariffs and Chinese retaliation in

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Manufacturing Employment Lags in Three Midwest States

January 24, 2020

Figure 1: Manufacturing employment in US (blue), and aggregate of Michigan, Pennsylvania, and Wisconsin (red), both in logs, 2018M12=0. December data preliminary. GM strike in October. Source: BLS, author’s calculations. 
Michigan, Pennsylvania and Wisconsin aggregate manufacturing employment 1% below peak. In contrast, nationwide manufacturing employment (total, including managerial) has been flat from September 2019.

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Spot the Incipient Recession

January 24, 2020

Most accounts these days suggest the risk of recession has abated, given the strength of various indicators, and the un-inversion of the yield curve. This made me wonder what two key indicators look like in real time on the eve of a recession. Take a look at these two graphs, to see which one denotes data just before a recession.

Figure 1: Nonfarm payroll employment, 000’s (blue, left log scale), industrial production (tan, right log scale). Each tick denotes a month. Red arrow and associated number denotes y/y growth rate, in log terms. Source: BLS, Federal Reserve via ALFRED.

Figure 2: Nonfarm payroll employment, 000’s (blue, left log scale), industrial production (tan, right log scale). Each tick denotes a month. Red arrow and associated number denotes y/y growth rate, in log terms.

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Guest Contribution: “Carbon Prices, not Monetary Policies, Are the Tools to Fight Climate Change”

January 23, 2020

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  January 17th.

Everyone agrees that Climate Change is one of the top one or two most important policy issues that we face – everyone except some Trump supporters who apparently believe that it is all a hoax.  Identifying the problem, however, is not much use unless we also identify the appropriate tools to address the problem.
Financial institutions
In my own field of specialization, central bankers [such as recently departed Bank of England Governor Mark Carney] have caught Climate Change fever.  Even the International Monetary Fund and the ECB have

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