Holding to the Old Faith
Figure 1: Ten year-3 month Treasury yield spread (bold dark blue), and ten year-two year Treasury yield spread (bold dark red), and projections at current pace using 2017M01-18M08 sample (light blue and pink lines), in percentage points. August 2018 observation through August 27th. NBER defined recession dates shaded gray. Light orange denotes Trump administration. Source: Federal Reserve Board via FRED, Bloomberg, NBER, author’s calculations.
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I’ve recently read some commenters talking about consumption behavior as if it’s a settled matter, particularly with respect to theory. Let me just put that idea to rest.
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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 version appeared earlier on his blog.
Assume a closed economy, no government spending and no taxes, and no depreciation. National income accounting states unambiguously:
C + I ≡ Y ≡ C + S
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With the election, and anticipation of a large fiscal impulse (tax cut, infrastructure spending), the dollar rose and the term spread increased. As expectations of the latter disippated, both the dollar and spread shrank. But recently, the comovement has broken down.
Measuring the level of global economic activity is of key interest. But the measures we have on variables like industrial production don’t cover all countries and are only available with a significant lag. Michigan Professor Lutz Kilian suggested in an influential paper published in 2009 that we could get a useful timely indicator by looking at average shipping costs. I recently had a chance to look into the details of how that series is constructed and have some suggested improvements.
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The CBO’s Budget and Economic Outlook is a must read. In addition to the widening budget deficit (no supply side miracle here), and the downward revision in projected 2018 growth, there is this commentary in the section blandly titled “Some Uncertainties in the Economic Outlook” (page 14 onward):
A sizable uncertainty in the U.S. trade and inflation forecast stems from recent changes to U.S. import tariffs and the retaliation of the country’s key trading partners.
Statement yesterday, as reported by Washington Examiner:
“[That country] really needs to make up its mind” … “Do they want to be in the community of nations, do they want to be part of the WTO and just behave like everybody else, or don’t they?”
…“And if they don’t, then we, the community of nations, are going to have to think about what are we going to do about that?”… “Are we going to let them stay in the WTO?”
In this post, I used IMF estimated data for predicting the counterfactual mortality levels, necessary to calculate excess deaths. It is important to note that by not taking into account the recent population decline, one is probably biasing down estimates of excess deaths.