Kevin Drum

Yesterday the yield curve inverted: interest rates on 10-year Treasuries were lower than rates on 2-year Treasuries. This upends the normal order of the universe, in which you have to offer higher rates to investors to get them to buy long-term bonds. This has long been taken as a sign that we're in an economic twilight zone and are about to enter a recession.

But the the Fed says fuggedaboutit. The conventional 2-10 yield spread is useless as a recession indicator. Instead we should look at the near-term yield spread, which is currently extremely healthy:

The near-term spread was created a few years ago by a couple of Fed economists looking for a better predictor of recessions. They came up with a "more intuitive" metric that "gauges the slope of the Treasury term structure":

[This] be interpreted as a measure of the market’s expectations for the trajectory of conventional near-term monetary policy. When negative, it indicates market participants expect monetary policy to ease on net over the next several quarters, presumably because they expect monetary policymakers to respond to the threat or onset of a recession. [Thus, when positive, it means investors think the Fed isn't worried about a recession. -kd] The predictive power of our near-term forward spread indicates that, when market participants expected—and priced in—a monetary policy easing over the next 18 months, their fears were validated more often than not.

The authors doubled down on their prediction here. More importantly, earlier this week Fed Chair Jerome Powell himself sang the praises of near-term spreads:

On Monday, Powell cited the steepening gap between the forward-implied rate on three-month Treasury bills versus the current three-month level as a tell-tale sign that the bond market has actually given an economic all-clear. Powell’s message at the National Association for Business Economic was unmistakable: the Fed has plenty of room to aggressively jack up rates to fight inflation without choking growth.

Let me get this straight. When the near-term spread is positive, it means that investors think the Fed isn't worried about a recession. Fed chair Jerome Powell then suggested this means the Fed shouldn't be too worried about a recession.

That sounds a little circular to me, but what do I know? In the meantime, I'll point out a problem: The 2-10 spread is easily available on a daily basis. Conversely, the near-term spread is based on a complicated calculation and is only available when someone decides to calculate it. This means that news outlets can obsessively keep track of the 2-10 spread but they generally have no idea of what the near-term spread is. Until that changes, no one is going to pay attention to it.

In an aside to a longer post, Charlie Stross says:

It should be noted that Donbass has the second largest gas reserves in Europe: this is economically as much an oil/gas war as was the Iraq war before it.

I did not know that! However, although this is technically true, there are some caveats. First, Ukraine might be second in Europe (behind Norway) but it's 26th in the world and has only about 2-3% the level of Russian reserves. Is that really enough for Russia to care much about?

Second, gas production in the Donbass has declined substantially from its peak in the 1970s and has been flat for decades even though production is far lower than consumption, which forces Ukraine to import huge amounts of natural gas. This is because most of its untapped reserves are hard to access.

That said, the Donbass does have substantial reserves of natural gas in addition to lots of other mineral wealth (coal, lithium, uranium, etc.). The USSR sure cared about all this stuff back in the day, so it makes sense that Russia still cares about it now even if it's not the proximate cause of their invasion.

I've become a little obsessed with our inflation crisis, and yesterday evening I ran into a tweet about our old friend NGDP. This is nominal GDP—i.e., not adjusted for inflation—and there's a small cadre of economists who believe that this, not interest rates, is what the Fed should target. A common proposal is to target 5% growth annually in the NGDP level, which might consist of 2% inflation and 3% actual economic growth.

Or it might be 3% inflation and 2% economic growth. Or 5% and 0%. As long you hit the overall target, the economy will remain stable. When economic growth is low, the Fed will be forced to target higher inflation in order to bring the economy back to life. Likewise, when economic growth gets too hot and inflation goes up, the Fed will be forced to target lower growth in order to maintain its 5% overall target, and this will get inflation down.

But what if the Fed fails to hit the target? No problem. Since they're targeting the level of NGDP, it means they should make up for past years that failed to hit the target. If, say, 2021 ended with 4% growth, then the target for 2022 should be 6% in order to get the NGDP level up to where it should be.

Advocates argue that NGDPL targeting is better than current Fed policies because it works to stabilize not just demand shocks, but also asset bubbles and supply shocks. However, I've always been skeptical of the whole NGDPL argument, partly because it's not clear to me what mechanism the Fed would use to maintain its target levels. I also wonder why more smart economists haven't bought into it. Still, I thought it might be interesting to see how we're doing in a hypothetical NGDPL regime. Here it is:

As you can see, in the two years before the pandemic NGDP was growing pretty steadily at 4.5% per year. If you extend that trendline, we are now just slightly above it.

On the other hand, if you look at a 5% growth trendline, then the NGDP level is still slightly under where it should be.

In either case, you can't really say that the economy is running especially hot by NGDPL standards. We're more or less where we're supposed to be. The only caveat is that in the final quarter of 2021 NGDP grew at an annualized rate of 14%. If that keeps up, we would quickly shoot far beyond our ideal NGDP level.

That said, it looks like the Fed—whether deliberately or not—has followed an NGDPL regime pretty well. By NGDP standards, we're right where we should be.

Ladies and gentlemen, behold the modern conservative movement:

Ingraham: When Republicans get back into power, Apple and Disney have to understand one thing: Everything will be on the table, your copyright/trademark protection, your special status in certain states, and even your corporate structure itself… pic.twitter.com/7kKhPH07Rs

— Acyn (@Acyn) April 2, 2022

This is the kind of revenge culture that Vladimir Putin would understand and approve of.¹ If a corporation does something conservatives disapprove of, they should expect a conservative president to use the full power of the US government to wage war on them. Your copyrights will be toast. The Justice Department's antitrust division will break you up. Any official levers that we can use to make your life miserable, we'll use them. You should understand that we will treat the government as simply an extension of our own personal rage.

Both parties support policies that have the potential to hurt certain categories of companies. Democrats favor labor unions, for example, which has the potential to hurt any company that hates the thought of being unionized. Republicans oppose abortion, which has the obvious potential to hurt any organization that supplies abortion services.

That's fine. But singling out a specific company for state sanctioned revenge because it said or did something your party opposes? That's banana republic stuff. It's also how many Republicans view politics these days.

¹Needless to say, Donald Trump also understands and approves of this. It's basically the guiding principle of his life.

A month ago I posted a chart of European inflation vs. US inflation. The rough takeaway was that over the past year our inflation rate has been about two points higher than Europe's. Today we got the latest estimate of EU inflation, which spiked upward to 7.5% in March:

There are at least four possibilities here:

• The "two point" trend will continue and US inflation will rise about as much as EU inflation. This will produce a US inflation rate for March of nearly 10%. (The March CPI figures will be released on April 12.)
• Europe has caught up to us. From this point forward, US and EU inflation rates will be about the same.
• The spike in Europe is an artifact of the Ukraine war, which has pushed up the price of energy 45%, far more than in the US. This means that US inflation won't rise as much as EU inflation.
• We really ought to be more interested in core inflation anyway, since the headline inflation rate is affected by transitory and regional shortages of food and energy, neither of which affects the true underlying inflation rate. Here it is:
   
  

I really don't know what to expect, but I'm going to guess that the core inflation rate is more important right now, which suggests that the US inflation rate will rise half a point or less and end up just under 8.5% in March. Maybe.

This is Charlie playing with his adored little string thingie. Shortly after this picture was taken, he picked it up in his mouth and deposited it in his water dish. We call this "learning to swim." Marian fished it out, and a couple of minutes later Charlie deposited it yet again in the water dish. This is currently the fate of any cat toy small enough for him to pick up in his mouth.

Adjusted for inflation, average wages have been declining for the past year. But does this really mean lower costs for employers? Maybe health insurance costs more. Maybe office rents have gone up. Let's check:

The ECI is a measure of the total cost of employment, and it's been going down since the start of the pandemic. In 2021 it dropped two full percentage points. Employers continue to complain that they can't find enough workers, but apparently the real problem is that they like their current profit levels more than they like the idea of expanding production by paying higher wages to attract more job applicants.

This chart goes through the end of 2021. Data for the first quarter of 2022 will be available at the end of April.

As I mentioned a few days ago, the 1950 census is now online. You can search it here. Here is my father in 1950:

As usual, click the image to embiggen. For some reason, no employment is listed for my grandfather, even though he was busily engaged as VP of sales at the Smith & Drum Advertising Agency. My father is listed as a "personal man" for the Naval Reserve Armory, which is an odd way of saying that he was—or soon would be—working in the Naval Recruiting Office during the Korean War.

Here is my mother in 1950:

My grandfather is listed as "Electric/Telegraph," which is accurate. He was an electrician for Western Union. My mother's name is spelled Jean, not Jeanne, but otherwise everything is correct.

The census has been made searchable by running the census forms through a machine-learning handwriting recognition engine, and the results are pretty iffy. My search for Drum turned up Drumm, Crum, Dram, Drim, etc., though eventually it produced Harry Drum. My search for Holligers was completely unsuccessful. I only found the record because I knew where they lived and was able to locate their enumeration district, which narrowed the search to a dozen pages.

Still, I can't complain. Handwriting recognition on random, cramped styles is just not very good. Eventually this will all be transcribed by humans and the results will be much better.

An Amazon warehouse on Staten Island has voted to unionize:

2654 yes, 2131 no. It's over.#Amazonlabor

— David Dayen (@ddayen) April 1, 2022

This is great news for the Amazon Labor Union, a new union founded only last year. An Amazon warehouse in Alabama, organized by the Retail, Wholesale and Department Store Union, lost its vote yesterday, but the tally was close enough that it might yet succeed after contested votes are counted.

The American economy gained 431,000 jobs last month. We need 90,000 new jobs just to keep up with population growth, which means that net job growth clocked in at 341,000 jobs. The headline unemployment rate fell yet again to 3.6%.

This is yet another strong jobs report. However, wage growth was terrible: adjusted for inflation, weekly earnings declined at an annualized rate of about 5%. This continues to be puzzling since (a) employers are still complaining that they can't find workers and (b) the labor market is genuinely tight. Here's the participation rate for men and women:

Men are within one percentage point of their pre-pandemic level and women are within a few tenths of a point. And the numbers are even better if you look at the prime working-age population:

The participation rate among prime-age workers went up 0.3% in March and has all but caught up to its pre-pandemic level. This is a level at which employers should be offering higher wages to coax nonworkers into the labor force, but they aren't. So what's going on?