Recent Posts

Sunday, August 19, 2018

Inventories And The Cycle

U.S.: Inventory Contribution To Real GDP Growth (2 quarter moving average).
Inventory investment is one of the factors driving the business cycle. One of the characteristics of most of the post-1990 experience is lowered inventory investment volatility (in the developed countries), although that changed around the Financial Crisis. I have some doubts that we could use inventory trends to forecast the cycle, rather their importance is the tendency to magnify the effects of a recession.

Wednesday, August 15, 2018

Services And Production Decisions

Chart: US PCE Services As A % Of GDP

One of the problems with many theoretical approaches to the business cycle is that there is an implicit bias towards a manufacturing economy. The modelling of business sector decision making for manufacturing is quite different than for the service sector. This matters, as the developed economies are increasingly services-driven (figure above). For consumer-facing service industries, output is largely demand-driven. This fits much better with the post-Keynesian approach.

Sunday, August 12, 2018

Why Is A Positive Inflation Rate A Good Thing?

One of the questions that often comes up in economic discussions is: why is a positive inflation rate seen as a good thing? There are a few angles to this question, which makes it somewhat more complex. I am somewhat ambivalent on the subject, but I believe the best answer lies in the area of political economy, not economic theory.

Wednesday, August 8, 2018

Primer: Seasonally Adjusting An Inflation Forecast

One exercise that often needs to be done either by fixed income analysts is to generate a forecast inflation series. For an economist, such forecasts are often part of the job description. For a fixed income analyst, even if they are not attempting to forecast inflation themselves, they will need to generate the forecast series to calculate cash flows. For example, we need to calculate an implied inflation forecast to build up a fitted inflation breakeven curve. One thing to keep in mind is that we need a forecast series that is not seasonally adjusted to be useful for inflation-linked bond analytics, but it is often easier to generate a seasonally adjusted series.

Wednesday, August 1, 2018

Heterodox/Mainstream Views On Banking

David Andolfatto recently published "Reconciling Orthodox and Heterodox Views on
Money and Banking," which discusses the theoretical split between recent mainstream thinking and heterodox views on banking. From my perspective, he is addressing heterodox critiques of mainstream thinking that I am not particularly interested in; in fact, based on his criteria, I would be closer to "mainstream" than "heterodox" -- as would possibly be Hyman Minsky. I would view the problem with mainstream modelling as resulting from a blind spot regarding the business sector.

Wednesday, July 25, 2018

Initial Comments On U.S. Fixed Investment

Chart: U.S. Private Fixed Non-Residential Investment
In previous articles (example), I have been arguing that investment is the major driver of the private sector cycles. (I am using the national accounting definition of investment, and not the act of purchasing financial securities.) We can now turn to the data, and the important question: how are we doing right now?

Wednesday, July 18, 2018

The Yield Curve Provides Limited Economic Information

Chart: U.S. Treasury 2/10-year slope

The relentless flattening of the Treasury yield curve has been a topic of ongoing debate -- is this a signal that a recession is near? The key to interpreting the flattening is that bond market participants are not paid to to anticipate economic outcomes (outside the corner case of the inflation-linked market), rather to anticipate the path of short-term rates (and the term premium). The flattening yield curve tells us that market participants (on average) believe that we are near the end of the rate hike cycle, but that does not necessarily mean that a recession is imminent.