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Assessing the Business Cycle, Mid-May 2019

Summary:
Several key series look like they have peaked; nowcasts indicate slowing growth. Forward looking indicators look “iffy”. 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 2018M12=0.  Source: BLS, Federal Reserve, BEA, via FRED, Macroeconomic Advisers (5/3 release), and author’s calculations. Several series closely followed by tne NBER’s Business Cycle Dating Committee (BCDC) have seemingly peaked — although it could be growth resumes (or series get revised upwards). Industrial production was revised downward in latest release. Most everybody agrees on a short term deceleration in growth in Q2.

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Several key series look like they have peaked; nowcasts indicate slowing growth. Forward looking indicators look “iffy”.

Assessing the Business Cycle, Mid-May 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), all log normalized to 2018M12=0.  Source: BLS, Federal Reserve, BEA, via FRED, Macroeconomic Advisers (5/3 release), and author’s calculations.

Several series closely followed by tne NBER’s Business Cycle Dating Committee (BCDC) have seemingly peaked — although it could be growth resumes (or series get revised upwards). Industrial production was revised downward in latest release.

Most everybody agrees on a short term deceleration in growth in Q2.

Assessing the Business Cycle, Mid-May 2019

Figure 2: Quarter-on-quarter SAAR GDP growth 2019Q1 advance release (blue), Atlanta Fed 5/16 GDPNow (red), 5/17 NY Fed GDP Nowcast (teal), and 5/17 Macroeconomic Advisers nowcasts (black). Source: BEA, Atlanta Fed, NY Fed, Macroeconomic Advisers, author’s calculations.

And the term spread (10yr-3mo) has inverted again.

Assessing the Business Cycle, Mid-May 2019

Figure 3: Baker, Bloom and Davis economic policy uncertainty (EPU) index (dark blue, left scale), centered 7 day moving average (red, left scale), and 10yr-3mo constant maturity Treasury yield, % (teal, right scale). Orange shading denotes Trump administration. Source: policyuncertainty.com, Federal Reserve via FRED, Treasury Department, and author’s calculations. 

What is interesting is that the term spread has not been inverted with economic policy uncertainty at such elevated levels, over the period 1985 onward during which we have such an EPU index.

Note the overall index is much more subdued than the trade policy categorical index. As noted earlier, other capital goods imports and equipment investment are declining.

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

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