Wednesday , August 21 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

If a Recession Occurs, Plenty of People Will Have Predicted It

2 days ago

NABE survey, WSJ survey, Bloomberg survey, PredictIt

Source: NABE, Economic Policy Survey,19 Aug 2019. Survey 14 July-1 August 2019.

Source:WSJ, August 2019 survey of economists.

Source: Bloomberg, 8 Aug 2019.

Source: PredictIt, 16 Aug 2019.
All of these polls were conducted before the stock market drop on 14 August; the PredictIt market price was obtained on 16 August, so incorporates the news regarding inversion of the 10yr-2yr.

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Recession Probability If the Rest of August Is Like the First Half

2 days ago

…using plain vanilla 10yr-3mo probit regression, over 1986M01-2019M08 period, using data shown below in Figure 1

Figure 1: Treasury 10yr-3mo spread (blue), and 10yr-2yr spread (red), both in %. August observation is average over 8/1-16. NBER defined recession dates shaded gray. Source: Federal Reserve via FRED, Treasury, NBER, and author’s calculations.
The critical assumption is that the 10yr-3mo Treasury spread over the rest of August is the same as the first half, and the spread does not move toward zero, nor continue to fall.
The regression estimates:
Prob(recessiont+12) = -0.329 – 0.869 spreadt + ut+12
McFadden R2 = 0.29, NObs = 392. Coefficients significant at 5% msl bold. The spread is in percentage points.
Here are the predicted probabilities:

Figure 2: 12 month ahead

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“The data are pretty clear that we are not in a recession”

3 days ago

Surprisingly, that’s not a quote from Larry Kudlow on today’s news shows. Rather that is then Council of Economic Advisers Chairman Ed Lazear on May 8, 2008. Just to remind people, that is 5 months after the recession start determined by NBER.
Compare and contrast (Bloomberg):
“I don’t see a recession at all,” Kudlow said on “Fox News Sunday.” He added that there were no plans for additional fresh measures to boost the economy, and that the Trump administration would stay the course on its current agenda.

“Consumers are working. At higher wages. They are spending at a rapid pace. They’re actually saving also while they’re spending — that’s an ideal situation,” he said on NBC’s “Meet the Press.”
What did Ed Lazear see as of May 8, 2008?

Figure 1: Nonfarm payroll employment (blue),

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Winning: Midwest Manufacturing Employment

4 days ago

Michigan, Pennsylvania and Wisconsin drop, as US manufacturing employment rises.

Figure 1: Manufacturing employment in US (blue), and aggregate of Michigan, Pennsylvania, and Wisconsin (red), both in logs, 2018M12=0. Source: BLS, author’s calculations.

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A History of Trade Policy Retaliation: Soybeans Edition

5 days ago

As the date of the resolution of the US-China trade dispute drifts further and further — perhaps past the 2020 elections according to Mr. Trump — it behooves us to look at what soybean futures contracts for September 2019 indicated as of Trump’s announcement of Section 301 action against China ($10.30 bushel on 3/22/2018) vs $8.67 today (Sept. 2019 is the front month future for soybeans now).

Source:, accessed 8/16/19 1:51pm Pacific.
While some forces have driven down prices relative to what they otherwise would have been — African Swine Fever — other factors have driven them up (bad harvests elsewhere). But certainly tariffs, and Chinese guidance to Chinese firms not to purchase American soybeans, have had an impact.
Interestingly, the Sept 2019 futures price has continued

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Does the Safe-Haven Aspect of the US Explain Declining Treasury Rates

5 days ago

That’s what reader Ed Hanson surmises:
Why are long term interest rate coming down. There is one obvious answer. The world sees the US as the safest and best place to invest with their bond holdings because of rigorous US economy brought on by the Trump administration with its tax and reduced regulation policy. Perhaps it is this circumstance of inversion that means it is not indicating recession, at least for the US.
Just glance at today’s Economist for an alternative interpretation:

Pakistan, Argentina and Peru have year-on-year increases in the ten year rate (no change for Egypt and Saudi Arabia). Every other country experiences a decline.
So, as long term US Treasury rates continue to collapse, think “slowdown” rather than Trumpian triumphalism.

Figure 1: 10 year-3 month Treasury

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Key Business Cycle Indicators, August 15th

6 days ago

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 (7/25 release), and author’s calculations.

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Implications of Yield Curve Flattening for the UK

7 days ago

In today’s Bloomberg:

In Chinn and Kucko (2015), we find that the 10yr-3mo spread is not particularly informative regarding recessions (as defined by ECRI) or industrial production growth in the UK. It is informative regarding real time GDP, however (which is what we’ll see in the coming months regarding 2019-2020). We didn’t report the 10yr-2yr spread results.

Source: Chinn and Kucko (2015).

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Wall Street Haruspicy Watch

7 days ago

Source: Bloomberg, updated 8/14.

Reader Rick Stryker accuses me:
progressive economists are practicing a modern form of haruspicy, in which they compulsively examine the entrails of the economy that they are so willing to sacrifice to recession, desperately searching for some downturn prophesy that will be realized before 2020.
If I’m engaging in haruspicy, a lot of Wall Street economists are too. Bloomberg updated today:
Mounting signs of a global economic slowdown hammered stocks and drove demand for sovereign bonds to such an extent that shorter-term yields rose above long rates in the U.S. for the first time since 2007.

The S&P 500 sank 2% as the inverted gap in rates for two- and 10-year Treasuries flashed a warning that has normally preceded a recession. European shares plunged

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Do Tariffs Matter? Soybean Edition

7 days ago

A year ago, there was some debate (e.g., S. Kopits) whether tariffs on US soybeans would have any impact on US soybean exports — that is since soybeans were highly substitutable, US soybean exports would be redistributed w/o an impact on prices.
From Deutsche Bank today:

As of July, year-to-date cumulative US exports of soybeans were down roughly 11.4
million metric tons compared to the same period last year but soybean exports to
China were down around 17.4 million metric tons.
DB Figure 2 says it all.

Source: Ryan, et al. “Trade Update: (Soy)bean counting,” Deutsche Bank, 13 August 2019.
Had soybeans been perfectly fungible, then US exports would’ve been pretty flat given global exports over the previous 12 months (see page 1, Oilseeds: World Trade and Markets, August 2019).

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Teaching Begins Early This Fall: News, Efficient Markets Hypothesis, Asset Prices

8 days ago

Figure 1: September 2019 corn futures, accessed 8/13/2019. Source:
Reader CoRev apparently cannot read an article on “event studies” and understand it. CoRev writes:
Which small window and which news takes preference over this past year+? ” As usual, you have missed the point of the discussion, which are event studies, for which we look at a small window around arrival of news…” Continuing to act as if only a singular eventis the cause of the price changes defies Fama.
He asks for an example. The above — the release of the USDA’s WASDE August report — is the event. Are all WASDE’s news? No; it’s if there is new information:
Corn futures are 5 to 15 cents per bushel lower in the aftermath of the Monday USDA data dump. They were limit down on Monday as USDA’s crop estimate was

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Guest Contribution: “RMB reaches 7.0; US names China a manipulator”

9 days ago

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared in Project Syndicate on August 9th.

The US-China trade war heated up in the first week of August.   On August 1, Donald Trump abruptly announced plans to impose a 10 % tariff on the remaining $300 billion of imports from China that he had not already hit with earlier tariffs.   The Chinese authorities then allowed their currency, the renminbi (RMB), to fall in value below the highly visible line of 7.0 RMB/$.  The US Administration promptly reacted on August 5 by naming China a “currency manipulator” — the first time any country had been given that designation in 25 years.

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On the Eve of Recession? Five Graphs from Two Courses

9 days ago

I get to teach Public Affairs 854, “Macroeconomic Policy and International Financial Regulation” and Economics 435 “The Financial System” this fall. There’s a cosmic confluence this year, in terms of the subject:

Figure 1: 10yr-3mo term spread in %, lagged one year (blue, left scale), and Q/Q growth rate SAAR, in % (red), and forecasted using spead, time trend over 1986-2019Q2 (green). 2019Q3 is July data. NBER recessions shaded gray. Forecast period shaded light green. Source: Federal Reserve via FRED, BEA 2019Q2 advance release, NBER and author’s calculations.

Figure 2: 10yr-3mo term spread in % (blue, left scale), and implied probability of recession, in % (red), probabilities estimated using probit on 10yr-3mo term spread estimated over 1986-2019Q2 (green). NBER recessions shaded

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Undervaluation, Misalignment, and China in the 2019 IMF External Sector Report

9 days ago

Donald Trump’s pronouncements can typically be taken as contra-indicators. In other words, what he says is invariably wrong. So, you gotta wonder on China…
From the 2019 IMF External Sector Report (released last month), the evolution of the Chinese current account and real exchange rate.

Source: Gopinath, IMF Blog, July 2019.
In contrast to what Mr. Trump has alleged, the IMF’s assessment is that the CA and the real effective exchange rate are close to their equilibrium values.

Source: IMF External Sector Report , July 2019.
Notice there are two estimates in each case; one is the “EBA” based upon a saving-investment balance approach, and the country desk assessment. For more on the former, see this post.
In words, the external balance approach (EBA) relies upon a saving-investment

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SitRep from the Midwest

12 days ago

No end to “the blip“. From today’s Des Moines Register:

Iowa farmer Lindsay Greiner no longer uses “dispute” to describe escalating trade tensions between the U.S. and China.
“I’ve tried to avoid calling this a war, but that’s what it really is. It’s not going to be resolved anytime soon,” said Greiner, who raises corn, soybeans and pigs near Keota.
China said this month it would no longer buy American farm goods, deepening concern that a new trade deal could take months, if not years, to resolve.
It was unwelcome news for Iowa and U.S. farmers, already facing spring flooding that kept many from planting crops, adding to struggles with low prices and growing supplies of corn, soybeans, pork and milk.

Further Federal government subsidization of American farmers would require

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The Journal of Economic Perspectives in the Classroom

13 days ago

A collection of JEP articles readers have cited as useful for instruction, by category:

Principles or Introductory CourseIntermediate MicroeconomicsIntermediate MacroeconomicsMoney and BankingFinancial MarketsInternationalEconometricsExperimental MethodsLabor EconomicsHealth EconomicsEducationPublic FinanceEnvironment/EnergyBehavioral EconomicsGame TheorySocial Norms and NetworksIndustrial OrganizationLaw and EconomicsHousehold EconomicsDevelopmentImmigration and EmigrationEconomic HistoryUrban EconomicsSports EconomicsEurope: Topics CourseChina: Topics CourseSoviet and Post-Soviet: Topics CourseJapan: Topics CourseLatin America: Topics CourseMiddle East: Topics CoursePublic PolicyPolitical EconomyEconomics Profession
These articles can be helpful in elevating the level of discourse on

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The Never-Ending Blip

13 days ago

On July 9, 2018, almost exactly a year ago, reader CoRev wrote:
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.
Yesterday, from Modern Farmer, “China Stops Buying US Agricultural Products Entirely: This is…very bad“:
The latest escalation of the Trump-China trade war has led to an iron door slamming shut.
On Tuesday, the Chinese Commerce Ministry announced that China will no longer be buying American agricultural products, a decision with huge, wide-ranging implications. Zippy Duvall, president of the normally conservative-leaning American Farm Bureau, called the decision a “body

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Prospects for a Resolution to the US-Trade Dispute Inferred from Soybean Futures

13 days ago

Asset price movements around “news” regarding policy can illuminate the market’s assessment of the outlook for trade policy. Looking at a small window (say half hour) around an event can allow one to separate other factors (weather, other demand factors) from other. With that, let’s look at soybean futures (September 2019)…

Figure 1: Graph accessed 8/7 8pm Central at
No doubt some of the other fluctuations over the past month can be attributed to weather and market forecasts (WASDE is issued on this coming Monday), but around these events, we can attribute most movement to policy “news”.
The Chinese devaluation seemingly drove the price down from 862 to 850. This is minor compared to the July 2018 experience, when the tariffs were made definite – but the drop since Trump

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“Purchasing Power Parity and Real Exchange Rates”

14 days ago

That’s my new entry in the Oxford Research Encyclopedia of Economics and Finance.
The idea that prices and exchange rates adjust so as to equalize the common-currency price of identical bundles of goods—purchasing power parity (PPP)—is a topic of central importance in international finance. If PPP holds continuously, then nominal exchange rate changes do not influence trade flows. If PPP does not hold in the short run, but does in the long run, then monetary factors can affect the real exchange rate only temporarily. Substantial evidence has accumulated—with the advent of new statistical tests, alternative data sets, and longer spans of data—that purchasing power parity does not typically hold in the short run. One reason why PPP doesn’t hold in the short run might be due to sticky

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Mass Shootings and the Trump Effect (Part II)

14 days ago

Casualties (killed, wounded) from mass shootings are not continuously distributed; this suggests an alternative approach — given the high variance (shown in Figure 1 below for a subsample of the data) — I estimate a negative binomial regression (quasi-maximum likelihood).

Figure 1: Mass shooting fatalities (dark red), and wounded (light red). Orange denotes Trump administration. Source: Mother Jones accessed 8/5/2019, author’s calculations.
Estimate over 1982M08-2019M08 (through 8/5/2019 for August):
casualtiest = -2.60 – 0.64 bant + 1.54 trumpt + 0.014 time
Adj-R2 = 0.048, SER = 29.95, NOBS = 445. Bold denotes significance at 10% msl, standard errors corrected for overdispersion (GLM option in EViews).
In words, each year under a Trump administration, 18 more people are injured or

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Mass Shootings and the Trump Effect

15 days ago

Poisson regression, 1982M08-2019M08 (thru 8/4 for August):
eventst = -9.84 + 0.723 trumpt – 0.424 bant +  0.0039 time
Adj-R2 = 0.17, SER = 0.480, NOBS = 445. Bold denotes significant at 10% msl.
Addendum, 8/6 8am Pacific: events is mass shooting event count as defined by Mother Jones tabulation, ban is assault weapons ban dummy, trump is a Trump administration dummy, time is a linear time trend.

Interpretation: Each month of the Trump administration is associated 0.7 more mass shooting events, or approximately 8.4 more events per year.

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The Answer Is No (and No)

15 days ago

Figure 1: CNY/USD nominal exchange rate (red, left inverted scale), 8/5 value (red triangle, left inverted scale), trade weighted real value of CNY against broad basket of currencies (blue, right log scale). Up denotes appreciation. Light orange shading denotes Trump administration. Source: FRED, and BIS.
In a new (and extremely timely) EconoFact memo on Should the United States Try to Weaken the Dollar?, Michael Klein and Maury Obstfeld ask:

Direct intervention by the U.S. Treasury in the foreign exchange market offers one possibility, and several economists have advocated just such a move to counteract potential currency manipulation by foreign countries. In such operations, the Treasury would use dollars to buy foreign currency bonds, bidding up the relative prices of foreign

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Business Cycle Indicators as of 8/4/2019

16 days ago

Still rising, so likely no recession as of June 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 (7/25 release), and author’s calculations.
On the other hand, we need to think about how much punishment the manufacturing sector can take without spillover to the rest of the economy. Employment is resilient, but hours and production indices have dropped, with little evidence of recovery in the former.

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

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The 16 Month-long Blip in Soybean Prices

17 days ago

On July 9, 2018, reader CoRev disparaged 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.
On 3/22, after Trump’s announcement of the Section 301 action against China, the August 2019 soybean futures contract closed at 1030. As of today, the contract closed at 852.

Source: accessed 8/4/2019, 7:30PM Central. Dashed line at 3/22/2018.
That’s a 17.3% decline in the soybean price (as documented in Chinn and Coibion (2015), the futures

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A Business-Cycle Mystery: Manslaughter or Murder?

18 days ago

If recoveries don’t die of old-age, then they either have “accidents” or they’re murdered. I’m not sure what a business-cycle accident is, but we can check what might have killed the recovery, should we enter a recession in 2020, as suggested by some forward looking financial indicators. I’ll look at investment spending, a forward looking variable, highly sensitive to interest rates, and the outlook for economic activity and uncertainty.

One thing to note is that real rates were not particularly high; 1.11% in November 2018, as compared to 2.69% in mid-2007. One could pin the recession of 2020 on that, but it’d be a stretch. On the other hand, what’s been true is that (log)equipment investment spending (equip) has underperformed relative to what one would’ve expected on the basis of key

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Estimated Recession Probabilities, August 2019

19 days ago

Based upon July 2019 spreads

Figure 1: Probability of recession for indicated month, using 10yr-3mo spread (blue), 10yr-3mo adjusted by term premium estimated by SF Fed (orange), and 10yr-3mo spread augmented with BAA-10yr spread (green). NBER defined recession dates shaded gray. Light green denotes out-of-sample. Source: Federal Reserve via FRED, SF Fed, NBER, author’s calculations.
The standard plain-vanilla probit indicates 40% probability of recession in 2020M07, down from 42% in 2020M06. Adjusting by the estimated term premium (SF Fed estimate) implies 18% probability. Augmenting the standard probit with BAA-10yr credit spread implies 50% probability in July, down from 56% in June 2020. (These month by month indications remind one that the cumulative probability of recession by July

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Equipment Investment, Capital Goods Imports, and the Impending Slowdown…Again

21 days ago

Equipment investment is flat; capital goods imports (aside from aircraft and computers) declining 4% per annum.

Figure 1: Equipment investment (dark blue), and capital goods imports excluding aircraft and computers (red), four quarter change  as log ratio to GDP, all in 2012Ch.$. NBER defined recession dates shaded gray. Light orange denotes Trump administration. Orange denotes TCJA in effect. Source: BEA 2019Q2 advance, NBER, and author’s calculations.
Capital goods imports (as a share of GDP) growth is now below zero, while equipment investment growth is at zero. Concurrent negative growth rates signalled the beginning of the 2001 recession, and the worst part of the 2007-09 recession. Of course, concurrent negative growth also signalled the mini- (but not actual) recession of 2016

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Guest Contribution: “Political Pressure on Central Banks”

23 days ago

Today we are fortunate to present a guest post  by Carola Binder at the Department of Economics at Haverford College. Twitter: @cconces

Over the past few decades, central banks around the world have been granted greater independence. Central bank independence (CBI) reforms aim to shield monetary policymakers from political influence and reduce inflationary bias. But as Walsh (2005) notes, “legal measures of Central Bank independence may not reflect the relationship between the Central Bank and the government that actually exists in practice.” Forder (1996) describes how a central bank may be “independent by statute, and it is nevertheless accepted— on all sides— that the government will have its wishes implemented.”
Even without clear acceptance that the central bank will accommodate the

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