What Does It Mean to Say Futures Contracts Forecast?

Despite repeated explanations, some readers still don’t understand futures contracts and forecasting exercises. One point of Chinn-Coibion (2014) is that at the one year horizon, the best predictor of future soybean prices at a one year horizon is the futures contract expiring one year ahead.

He writes:

And yet ~$9.34 is NOT $8.72. Neither in July 2019 nor in October 2019 was it a correct estimate.

However, the relevant comparison is November 2018 vs. November 2019. As November 2019 contracts expire on 14th , the relevant forecast date is November 14, 2018. On that date, the November 2019 contract closing price was 935-6. Latest (October 18, 2019, nearly a year subsequent) contract price was 934 — pretty close in my book. The relevant question is how close, over repeated realizations, is the futures with one year maturity matching the ex post price one year subsequent. That is exactly what is evaluated in Chinn-Coibion (for 3 and 6 month horizons as well).

Source: barchart.com accessed 10/20/2019.

If I had a student so dense after so many repeated explanations, I would assign a grade of F.

(By the way, I would not make similar generalizations for other commodities, particularly metals.)

The Manufacturing Downturn Compared to 2014-16

In 2014-16, production and non-supervisory employment continued to rise even as hours and production declined. In 2018-19 (as discussed here), all three have declined relative to peak.

Figure 1: Manufacturing employment – production and nonsupervisory workers (blue), aggregate hours (teal), manufacturing production (red), in logs 2014M11=0. Source: BLS, Federal Reserve Board, via FRED, and author’s calculations.

“More Signs of Contraction – When Will the GDP Turn Negative?”

From Cass Freight Index Report – September 2019:

With the -3.4% drop in September, following the -3.0% drop in August, -5.9% drop in July, -5.3% drop in June, and the -6.0% drop in May, we repeat our message from the previous four months: the shipments index has gone from “warning of a potential slowdown” to “signaling an economic contraction.

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Capital Goods Imports and Equipment Investment


The last time we saw equipment investment declining was 08Q1; and capital goods imports  in 08Q3

Figure 1: Imports of capital goods other than automobiles (blue, left scale), and equipment investment (brown, right scale), both in billions of Ch.2012$, SAAR. Source: BEA, 2012Q2 2nd release.

Given depreciation, net equipment investment is probably declining.