Module 2 Extra Credit Posts for Spring 2024

For February 19

This will be the last post from which short answer extra credit questions for Test 2 will be drawn.

There's an interesting tidbit of data out this week.

The FOMC makes monetary policy on behalf of the Federal Reserve (the U.S. central bank). 

The FOMC walks a fine line, since they make decisions about setting interest rates. On one hand, they want to be open about their decisions. On the other hand, a lot of money is invested to figure out what they're going to do before they do it. 

One way they balance these is that they do release the minutes of their 1.5 day meetings, but not until about a month after the meeting. Today we got the minutes from the January meeting covered earlier this semester.

Armchair-macroeconomists and politicians will tell you that inflation is down. End of story.  Then the politicians say "Yeah us!"

But there's more to it, since inflation tends to be persistent. And it can ignite again, sort of like the embers of a dying fire. 

Anyway, the FOMC is still worried.

... They remained highly attentive to inflation risks. In particular, they saw upside risks to inflation as having diminished but noted that inflation was still above the Committee's longer-run goal. Some participants noted the risk that progress toward price stability could stall, particularly if aggregate demand strengthened ...  Most participants noted the risks of moving too quickly ... 

In short, they're way more worried about reducing interest rates than, say, the White House is.

Again, this is from Calculated Risk, but it's been reported extensively on the internet this morning. 

For February 16

Recessions worries. Just as it's hard to predict a switch from expansion to recession in the dice rolling simulation, it's hard to predict a business cycle peak as well.

But there have been worrying signs for over a year.

There is not one perfect piece of macroeconomic data to assess business cycles. Not even real GDP, although a lot of countries use only that. 

In the U.S., peaks and troughs are declared by a committee of macroeconomists called the NBER Business Cycle Dating Committee. They rely of 4 well-measured, fairly clear and reliable, monthly indicators. Here's a graph and table from VettaFi Advisor Perspectives, a firm that tracks these so you and I don't have to :-)

All of these are up since the last trough ended, with the end of most of the initial lockdowns. But the color coding in the table shows that two of them haven't been growing the last year.

Note that none of these are forecasts. They don't imply a recession will or won't happen. 

What they do tell us is that we're pretty close to an edge, and it wouldn't take much to tip is over it.

For February 14

The main piece of data used to assess inflation is the change in the Consumer Price Index. The CPI is a weighted average of thousands of prices from across the country. The weights are proportional to how much of a thing people actually buy; so housing, food and so on get heavy weights.

This comes out monthly, so it's always pretty small. But, then, small increases or decreases in it mean a lot, and tend to get people freaked out.

This measure is close to, but not exactly, an inflation rate (the math is trickier for an inflation rate).

It comes out on the second Tuesday of the month, with data for the previous month. Here's the press release from the BLS, and here's a chart (you can find this by scrolling down the BLS home page to the section entitled "Latest Numbers" and then clicking the graph icon to the right of Consumer Price Index).

 

The inflation rate derived from the chart is 3.1% over the last year. That is not a low rate: their target is no more than 0 to 2% per year. But it's also not high.

The inflation everyone was worried about is clearly visible in the chart, and it's now distinctly behind us. It was mostly an issue from early 2021 through mid-2022. 

Macroeconomics is hard. Many economists, myself included, said publicly that there was no way inflation was coming down for at least a decade. We were very wrong.

Part of the story of why inflation came down was aggressive monetary policy choices (raising interest rates to discourage spending on big ticket purchases). The thing is, we have a hard time explaining how the moves they did make were actually big enough to produce the effect seen in that chart. 

It's still a puzzle. Those puzzles are what makes macoreconomics endlessly fascinating for those with a tolerance for being confused.

For February 12

I posted earlier that the real GDP growth rate for 2023 IV came in way higher than expected. 

We've looked at employment and unemployment the last 3 posts, and they are consistent with a growing economy. But that was what was forecast. What was not forecast was the strength of the growth, so where did it come from? 

Note that labor is an input that helps produce output (measured with real GDP).

A similar measure to the unemployment rate (measuring the lack of use of that input) is the capacity utilization rate. It measures the extent to which factories are up and running (again, from Calculated Risk).

 

It's been peaking out at about 80% the last few decades. Since that's at a peak, it suggests the other 20% is what's required of factories for routine maintenance. 

This also seems inconsistent with the high rate of real GDP growth, since capacity utilization has been declining for about 18 months.

For February 9

Some data gets more play in the news simply because it's announced more often. It's cynical, but realistic, to recognize that journalists looking for easy stories to file, will pay attention to frequently announced data (ooh, new data, write quickly and take the rest of the day off). This is actually a big explanation for why they report how the stock market did today on every news report every day.

A macroeconomic series that's like this is initial claims for unemployment. This is the count of people who go down to the unemployment office for the first time, tell them they've lost their jobs, and ask for checks to start being issued to them. This comes out weekly!

Here's what it looks like historically:

Again, thanks to Calculated Risk, which published decent graphs and makes them freely available. There is a little post linked there, but it's not required by me, since there's not much news on this front.

It's a bit hard to read, but this data goes back to 1967, and you can see that it covers the last 8 recessions. The dashed line is just the average over the last month.

One thing to note is how unusual CoVid and the lockdowns actually were.That note up there indicates that the peak would be a couple inches off the top of your screen.

For February 7

Exam day.

For February 5

That BLS news release from Friday contained a lot of other information. No you don't have to learn it all, but you do need to learn about the labor force participation rate. This is the percentage of people who have or are looking for a job (the labor force) divided by the number of people who may/can have jobs (that's the one with the long name of civilian non-institutionalized population over 16).

Currently it's at 62.5%.

A way to think about this is that for every 10 people, about 8 of them can work, and 5 of those choose to work. Even better, for every 60 people, 48 of them can work, 30 choose to, and 1 of those is looking for a job. 

If you go to FRED, it will show a graph of this rate:

The sudden dip on the right was CoVid and the lockdowns. You can see that we're still not up to where we were before that. This is because a lot of people retired a bit early because they didn't want to deal with the hassle of the lockdowns (I personally know 2 SUU professors who did that, and there are probably a lot more).

The big hump is the baby boom: the large generation born in the U.S. after World War II. They started working in the mid-60s, and taking early retirement around 2000. A lot of them are still around (like me).

You'll notice that the hump is higher on the right hand side. It's probably not politically correct to say this, but macroeconomically, the truth is that the increase in the number of women in the workforce was historic ... but not that big. It's big enough to see, in that the rate is in the mid-50s then and the low 60's now. But it's small enough that it helps to point it out. 

The reason it is not large (and really obvious in the graph) is that women always worked outside the home (and in surprisingly large numbers). What changed starting in the 1960s was the number of women with only younger children at home who worked outside the home. That's a much smaller group (that underwent a big change).

So, personal example, my mom worked outside the home when she was single, and when she was married, and for a little while after my older brother was born (about 7 years). Then she stayed home until I was 12 (about 20 years). Then she worked for 15 more years. But if you total it up, it was still more than half of the time between 1949 and 1991.

For February 2

In class, we looked at the announcement of the unemployment rate for January. Easy to find in Google: just enter unemployment rate, and click the tab for "News" and you get this.

More specifically, I directed you to the site BLS.gov (of the Bureau of Labor Statistics). This agency collects that data and publishes the rate, amongst many other statistics.

The data comes out in a news release on the first Friday of the month.

The unemployment rate came in at 3.7%, and has been steady for a couple of months.

I also showed a graph like this one. I got this by googling "Fred unemployment rate". FRED is the acronym for an agency that collects macroeconomic data and makes it freely available.

From this, we can see that the current unemployment rate is low by historical standards, but also that it gets this low routinely, once we get away from the last recession (shaded in gray).

I also noted a point I'd made in class before, and made a new one too. 

The one I'd made in class is that the unemployment rate is a lagging indicator: it follows the rest of the business cycle. So naively one might thing that it will start falling when a recession ends. But, it actually keeps going up for months afterwards. This is related to managers and owners hesitating to let people go when the recession starts, and then panicking a bit as it goes on.

The new thing to notice is the asymmetry: the unemployment rate goes up fast, and comes down slow. this is related to the same dynamic: stall when people need to be let go then lay them off in bunches, but then when you start rehiring you do it one at a time.