Wednesday , April 21 2021
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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

Company Price Change Announcements and Future Inflation

4 days ago

Goldman Sachs (Walker, “Company Pricing Announcements and the Inflation Outlook”) points out that changes company statements regarding price changes is contemporaneously correlated with PCE inflation, but not predictive. This puts in a different perspective media discussion of impending inflation.

The below is Exhibit 2 from their report:

Source: Walker, “Company Pricing Announcements and the Inflation Outlook,” Goldman-Sachs, April 16, 2021.
The index is a proprietary one, based on text analysis of company earnings calls for Russell 3000 firms.  They find:
…the relationship between price commentary and measured inflation appears to be mostly contemporaneous rather than leading, even though companies sometimes talk about future price changes. …after controlling for core inflation or

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Another Minimum Wage Proposal

5 days ago

There’s a rumored plan by Senators Romney and Sinema to raise the minimum wage to $11. Assuming the phase is four years (as in the proposed Cotton plan to raise to $10) starting in June 2021, the trajectory of the real minimum wage looks like:

Figure 1: Federal minimum wage in 2020$ (black), under Romney-Sinema proposal, assuming 4 year phase in (red), and Sanders proposal (teal). NBER defined recession dates and NBER peak shaded gray. Quarterly CBO CPI projections interpolated by quadratic match. Source: BLS, CBO (February 2021), NBER, author’s calculations.
If the minimum wage is raised to $11 in June 2024, then the real wage will match that last seen in February 1980.
CBO has just revised their interactive tool for evaluating minimum wage proposals.

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Retail Sales: Implications for Consumption

5 days ago

Retail sales jumped 9.8% m/m, exceed Bloomberg consensus of 5.9%. Sales ex-food services rose 9.4% in nominal terms, 8.7% if deflated by the CPI-all.

Figure 1: Retail sales excluding food services, deflated by CPI-all (blue), manufacturing and trade sales in Ch.2012$ (red), personal consumption expenditure deflators in Ch.2012$ (green), all seasonally adjusted. Source: Census Bureau, Federal Reserve Bank of St. Louis, BEA, BLS via FRED, and author’s calculations.
Retail sales ex-food services, deflated by the CPI, kind of tracks manufacturing and trade industry sales, which I’ve been monitoring, following the NBER. It also moves with consumption — but in both cases deflated retail sales have risen faster than either of the latter two series, measured in Chained 2012$. Nonetheless, the

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Business Cycle Indicators as of Mid-April

5 days ago

Industrial production figures were released today, showing a rebound in March. In the context of key macro indicators followed by the NBER Business Cycle Dating Committee:

Figure 1: Nonfarm payroll employment from March release (dark blue), Bloomberg consensus as of 4/1 for March nonfarm payroll employment (light 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. Source: BLS, Federal Reserve, BEA, via FRED, IHS Markit (nee Macroeconomic Advisers) (4/1/2021 release), NBER, and author’s calculations.
Industrial production was whipsawed by weather in February, so it makes sense to look at

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Wisconsin Employment: Employment Drop Revised Away

5 days ago

Wisconsin nonfarm payroll employment has stabilized at a level down 4.9%  relative to NBER peak in 2020M02, vs. 5.5% for the nation overall (according to figures released by DWD today). In addition, the downward decline in February of 1.9% (annualized) has been largely revised away — it’s now 0.3% decline (annualized).

Figure 1: Nonfarm payroll employment from March release (blue), forecast from March 2021 Economic Outlook (teal squares), forecast from November 2020 Economic Outlook (salmon triangles), all in 000’s, seasonally adjusted. Source: BLS, DWD, and Wisconsin Department of Revenue.
Nonfarm payroll employment is currently overshooting the March 31 forecast from the Wisconsin Economic Outlook undershooting the November Wisconsin Economic Outlook forecast, despite upward benchmark

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CPI Surprise

6 days ago

The CPI came in slightly above Bloomberg consensus (2.6% vs 2.5%), and above the WSJ April survey consensus (shown below).

Figure 1: CPI All urban (blue), Bloomberg consensus as of 4/12 (pink inverted triangle), WSJ April survey mean implied by forecasted inflation rate (teal square), and 2016-19 trend line (red), all on log scale. Source: BLS via FRED, Bloomberg, WSJ April survey, and author’s calculations.
In other words, the March release is above the path implied by the WSJ survey that had only been taken a week or so earlier.
That being said, there is barely a blip in markets showing an increase in inflation expectations.

Figure 2. Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (blue), five year breakeven adjusted by term premium

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The WSJ April Survey: Accelerating Growth Prospects

9 days ago

The survey results are out, and once again, the outlook improves.

Figure 1: GDP actual (bold black), WSJ April survey mean (blue), February (red), December (green), October (light blue), CBO estimate of potential GDP (gray), all in billions Ch.2012$, on log scale. Forecasted levels calculated by cumulating growth rates to latest GDP level reported. Source: BEA (2020Q4 3rd release), WSJ surveys (various), CBO (February 2021), and author’s calculations.
The implied output gap by 2022Q2 is 1.9%, compared to 1.3% from last month’s survey (discussed here).
Despite the improvement in the central tendency of forecasts, there remains wide disagreement.

Figure 2: GDP actual (bold black), WSJ April survey mean (blue), Cummins/Nat West Markets (red), Fienup, Hamilton/California Lutheran

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When (US) Corporate Tax Rate Reductions Last Bloomed

10 days ago

Under the Tax Cuts and Jobs Act, no enormous surge in capital investment appeared, above and beyond what could be explained by aggregate demand changes. From the conclusion to U.S. Investment Since the Tax Cuts and Jobs Act of 2017, by Emanuel Kopp, Daniel Leigh, Susanna Mursula, and Suchanan Tambunlertchai.

In the year following the passage of the TCJA, U.S. business investment grew strongly  compared to pre-TCJA forecasts and outperformed investment growth in other major  advanced economies.
Evidence suggests that the overriding factor supporting that growth has been the strength of  U.S. aggregate demand, likely propelled by higher disposable household income or wealth  gains due to the tax cuts and the government spending stimulus from the BBA which occurred simultaneously. While the

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The Trade Balance: Macro Dominates Tariffs

12 days ago

Like I said four years ago. By Trump’s own criterion, the trade war was lost. My view – that was a stupid criterion in any case.

Figure 1: Annualized trade balance (billions $, SAAR) (blue, left scale), and trade balance to (interpolated) GDP ratio (red, right scale). Orange shading denotes Trump administration. Source: BEA, and author’s calculations.
Even if one takes Mr. Trump’s quasi-Marxian view that only goods matter in the trade balance, one finds a similar pattern.

Figure 2: Annualized merchandise trade balance (billions $, SAAR) (blue, left scale), and merchandise trade balance to (interpolated) GDP ratio (red, right scale). Orange shading denotes Trump administration. Source: BEA, and author’s calculations.
I expect further increase in the trade deficit, given the greater

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The Market’s Expectations of Inflation over the Next Five Years

14 days ago

As of today, the five year constant maturity Treasury yield has stabilized for the last month at about 0.9%. The inflation breakeven implied by the spread between Treasurys and TIPS has plateaued at 2.52%. After accounting for the estimated term premium and liquidity premium, the implied inflation rate is 1.90% .

Figure 1. Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (blue), five year breakeven adjusted by term premium and liquidity premium per DKW, all in %. Source: FRB via FRED, KWW following D’amico, Kim and Wei (DKW), and author’s calculations.

The unadjusted 5 year Treasury-TIPS spread is:

Where tp is the term premium on the Treasury yield, and the lp is the liquidity premium on the TIPS yield. Using the DKW estimates of the

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“Re-examining the Effects of Trading with China on Local Labor Markets: A Supply Chain Perspective”

15 days ago

From the paper by Zhi Wang, Shang-Jin Wei, Xinding Yu & Kunfu Zhu:
The United States imports intermediate inputs from China, helping downstream US firms to expand employment. Using a cross-regional reduced-form specification but differing from the existing literature, this paper (a) incorporates a supply chain perspective, (b) uses intermediate input imports rather than total imports in computing the downstream exposure, and (c) uses exporter-specific information to allocate imported inputs across US sectors. We find robust evidence that the total impact of trading with China is a positive boost to local employment and real wages. The most important factor is employment stimulation outside the manufacturing sector through the downstream channel. This overturns the received wisdom from the

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Infrastructure Investment and Taxes

17 days ago

I talked about infrastructure investment and taxes on WPR  today. Will higher corporate tax rates and closing of loopholes in the taxation of raise prices of goods produced? Given what happened in the wake of the 2017 reduction in corporate tax rates (i.e., lots of stock buybacks, not much higher investment), I think a resulting price increase not likely. On the other hand, the infrastructure spending could have an impact on productivity and hence prices.

And infrastructure spending has been pretty low…

Figure 1: Government investment as share of GDP (blue). NBER recession dates shaded gray. Source: BEA, NBER, and author’s calculations.
The big question is whether the proposed tax rate increase along with revisions to the measures related to international income taxation will do the

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Employment Surges to 5.5% below Feb 2020

18 days ago

The economy added 916,000 jobs in March, above the Bloomberg consensus of 647,000.

Figure 1: Nonfarm payroll employment (dark blue), Bloomberg consensus as of 4/1 for March nonfarm payroll employment (light blue square), 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. Source: BLS, Federal Reserve, BEA, via FRED, IHS Markit (nee Macroeconomic Advisers) (3/1/2021 release), NBER, and author’s calculations.
On the strength of the labor market, see Baum and Klein at EconoFact.

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Business Cycle Indicators at the Beginning of April

19 days ago

The Bloomberg consensus is for an increase of 674 thousand jobs in March (GS says 775K). That’s heady news, offsetting the somewhat less upbeat news from the estimate of February monthly GDP released by IHS Markit today – a decrease of 0.9% after upward revision in January’s figure by 0.3% (not annualized). Even if expectations are met, employment will still be 5.8% below that recorded at  the NBER peak in February 2020. In the context of key macro indicators followed by the  NBER Business Cycle Dating Committee:

Figure 1: Nonfarm payroll employment (dark blue), Bloomberg consensus as of 4/1 for March nonfarm payroll employment (light blue square), industrial production (red),  personal income excluding transfers in Ch.2012$ (green), manufacturing and trade sales in Ch.2012$ (black),

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Did the Lockdown Cause More Suicides?

19 days ago

A common assertion made by those opposed to public health measures such as lockdowns was that suicides were rising markedly – see e.g., Carney/Washington Examiner via AEI, Arthur Laffer and Stephen Moore, and blog commenters like sammy. The data are in. This article indicates suicides actually went down in 2020, 5.6% relative to 2019.

Source: Ahmed and Anderson (JAMA, 2021).
Figure 1 shows a longer time series – raw statistics (on left log scale) and per million (on right scale).

Figure 1: US Suicides (blue, left log scale), 1999-2016 log linear estimated trend (gray, left log scale), suicides per million (red, right scale).  2020 data is provisional. Source: CDC, Ahmed and Anderson (JAMA, 2021), BEA via FRED (POPTHM) for population, and author’s calculations.
Suicides fall in 2020.

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On the Economic Outlook and More

20 days ago

Three quarters of an hour of me talking on the UW Department of Political Science’s 1050 Bascom Podcast, on “insights into how Covid-19 has impacted the US economy as well as international finance and global trade — and what the future might hold.”

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On “Socioeconomic Roots of Academic Faculty”

20 days ago

From the paper:
Tenure-track faculty play a special role in society: they train future researchers, and they  produce much of the scholarship that drives scientific, technological, and social innovation.  However, the professoriate has never been demographically representative of the general  population it serves. For example in the United States, Black and Hispanic scholars are  underrepresented across the tenure-track, and while women’s representation has increased  over time, they remain a minority in many academic fields. Here we investigate the  representativeness of faculty childhood socioeconomic status and whether it may implicitly limit eorts to diversify the professoriate in terms of race, gender, and geography. Using a  survey of 7218 professors in PhD-granting departments in

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Central Bank Digital Currencies: Some Links

20 days ago

Economists at the Richmond Fed (Romero, Wang & Wong) have been thinking about them (as have many others):
Physical currency in circulation is a liability of the central bank. So most simply, central bank digital currency is central bank liability issued in electronic form. In a sense, the Federal Reserve already offers a digital currency in the form of electronic central bank deposits, also known as reserves. One might think of these reserves as wholesale CBDC since access to them is limited to qualifying financial intuitions. For retail payments, central banks have avoided dealing directly with the general public, relying instead on tiered arrangements in which commercial banks provide direct retail payment activities and services. At present, the only direct connection between the

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Private Nonfarm Payroll Employment for March?

20 days ago

ADP released their estimates for March today: up 517 thousand. Bloomberg consensus is for +575 thousand.

Figure 1: Month-on-month growth rate (not annualized, in log terms) in private nonfarm payroll employment from BLS October release (black), Bloomberg consensus for March as of 3/31 (teal square), ADP March release (red). Source: BLS, ADP via FRED, Bloomberg, and author’s calculations.

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A Bunch of Year-Ahead Inflation Forecasts

23 days ago

I’m talking about inflation expectations in my macro course, so wanted to show what different measures predicted for the next year.

Figure 1: CPI inflation year-on-year (black), median expected from Survey of Professional Forecasters (blue +), median expected from Michigan Survey of Consumers (red), median from NY Fed Survey of Consumer Expectations (light green), forecast from Cleveland Fed (pink). Source: BLS, University of Michigan via FRED, Philadelphia Fed Survey of Professional Forecasters, Philadelphia Fed, NY Fed, and Cleveland Fed.
Interestingly, the two household based surveys (Michigan, NY Fed) are at the top, while the market/expectations based (Cleveland Fed) and economist survey based (SPF) are at the bottom. In some sense, the household survey results is not too

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Estimating Potential Output

24 days ago

At CBO, is described in detail in this working paper. Also, here is a comparison of implied output gaps from various organizations, through 2016.

Source: Shackleton (2018).
Updated CBO projection here. Discussion of comparison to statistical filters in this post from a few days ago, which includes this graph:

Figure 1: Cyclical component from Hodrick-Prescott filter (blue), from Baxter-King band pass filter (red), Hamilton filter (green), and output gap from CBO (gray), all in logs, estimated from 1967-2020 data. NBER defined recession dates shaded gray. Source: BEA 2020Q4 2nd release, CBO (February 2021), NBER, and author’s calculations. 
A comparison of some other methods in an older Econbrowser post.

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Guest Contribution: “Biden Avoids Mistake of Insufficient Fiscal Stimulus”

24 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 at Project Syndicate.

It has been a year since the US and the world went into recession.  Because of its origins in the sudden pandemic, it was possible to reliably discern the advent of the recession before it was reflected in any of the standard economic statistics, which is rare.  (I hope it shocks no one to learn that economists can’t normally predict recessions.)
By the end of the second quarter of 2020, US GDP had fallen 11 %. This record plunge took the US economy from a level that is estimated to have been 1.0% above potential output at the end of 2019, to a level

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Off the Rollercoaster – Illustrated

25 days ago

If you’re an economic policy analyst, you might get the feeling that the crazy-high uncertainty surrounding policy has abated. You might even feel that more profoundly if your portfolio includes trade policy…

Figure 1. US Economic Policy Uncertainty (news-based) (blue, left scale), US Trade Policy Uncertainty (red, right scale). EPU for March 2021 is for 3/1-3/26. Orange shading denotes Trump administration 2017M01-2020M12. Source: Baker, Bloom & Davis at  policyuncertainty.com. 
(Declining uncertainty in recent years has correlated with dollar value.)

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Wisconsin GDP in Q4

25 days ago

BEA has just released state level GDP for 2020Q4. Wisconsin is down slightly more than the US overall (3% vs 2.4%) relative to NBER peak at 2019Q4, and for 2020 overall at approximately the level forecasted in November. Manufacturing had recovered to prior peak, while accommodation and food services were down 27.6% (all percentages calculated as log differences).

Figure 1. Wisconsin GDP (blue) and US GDP (brown), in Ch.2012$, normalized to 2019Q4=0. Source: BEA and author’s calculations.
Actual Wisconsin GDP (in billions of Chained 2012$, SAAR) is shown in Figure 2, with the Wisconsin Department of Revenue’s November forecast (in the Economic Outlook) shown in red squares as the annual average GDP.

Figure 2. Wisconsin GDP (blue), and November 2020 DoR forecast (red squares), both in

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On the Word “Eminent”

26 days ago

Reader EConned writes about Judy Shelton:
One can disagree with Shelton’s policy stances, public statements, writings, etc… but there’s no doubt she’s an eminent economist. Debating the substance of her views is great but I certainly don’t see the need to just “hate on her” I. The fashion of this comment (and, honestly, the OP). There are Americans including policy makers of past, present, and future who respect her opinions… for better or for worse.
Now, I know “eminence” is in the eye of the beholder. As an academic economist, I would be tempted to go to “Google Scholar” or the successor to the Social Sciences Citation Index to make my own judgment.
Personally, I don’t know Dr. Shelton, have never met Dr. Shelton, nor corresponded with Dr. Shelton. However, I find her views on

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Wisconsin Employment in February: Trending Sideways

26 days ago

If you’d thought the recovery was in full swing, think again. Wisconsin nonfarm payroll employment has stabilized at a level down 5.6%  relative to NBER peak in 2020M02 (in log terms), vs. 6.4% for the nation overall (according to figures released by DWD today).

Figure 1: Nonfarm payroll employment from February release (blue), forecast from November 2020 Economic Outlook (teal squares), all in 000’s, seasonally adjusted. Source: BLS, DWD, and Wisconsin Department of Revenue.
Nonfarm payroll employment is currently undershooting the November Wisconsin Economic Outlook forecast, despite upward benchmark revisions applying to the series as of January. As of February, NFP employment is about 45 thousand below the 2021Q1 average.
Employment in manufacturing has stopped its rise, as has

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Thus Confirming Everything I Thought about Both The Independent Institute and Judy Shelton

26 days ago

Popping into my email inbox today, a press release titled:
Renowned Economist and Author Judy L. Shelton Joins the Independent Institute as Senior Fellow

The press release reads:
Oakland, CA—The Independent Institute is very pleased to announce that the renowned financial and monetary economist Judy L. Shelton has joined the organization as Senior Fellow. For decades, Dr. Shelton has been a leading advisor on domestic and international economic and financial issues to key officials at the White House, U.S. Congress and the Pentagon.
“We welcome Judy’s extensive expertise on the need for market-based money and finance along with major tax cuts and deregulation as essential to economic growth and job creation,” said David J. Theroux, Founder and President of the Independent Institute. “Her

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Measuring the Informal Sector

March 22, 2021

Some methods for estimating the informal sector, and characterizing the cyclical behavior thereof, from Ceyhun Elgin, Ayhan Kose, Franziska Ohnsorge, and Shu Yu (2019).

Source: Elgin, et al. (2019).
In advanced economies, the size of the informal sector has declined to about about 18% of official GDP, using the MIMIC method. If this estimate is applied to the US, then the total GDP of the US in 2020 would be about $24.75 trillion (vs. $21 trillion official).
More on informal sector estimates cross-country, see Medina and Schneider (2018).
Note that this measure does not include home production. Nor does it include depletion of natural resources, and other aspects of sustainability. (See Nordhaus and Tobin).

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Proxy Measures for the Cyclical Component of GDP

March 21, 2021

The output gap is a key concept in macro. Students in my courses have asked about the characteristics of some of the proxies. Here are some representative examples.

Figure 1: Cyclical component from Hodrick-Prescott filter (blue), from Baxter-King band pass filter (red), Hamilton filter (green), and output gap from CBO (gray), all in logs, estimated from 1967-2020 data. NBER defined recession dates shaded gray. Source: BEA 2020Q4 2nd release, CBO (February 2021), NBER, and author’s calculations. 
Note that the HP filter (lambda = 1600) and band pass filter (EViews default) tend to imply a relatively small cyclical component. The Hamilton filter (using h=8, p=4) implies substantially larger cycles — with a standard deviation about twice that of the other statistical measures over this

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