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Oil prices and business fixed investment in structures

Most economists believe lower oil prices are positive for the economy: They lead to lower gasoline and diesel prices, which tend to reduce headline inflation, which increases consumer purchasing power. Lower oil prices also tend to reduce operating expenses for transportation firms, such as airlines, trucking, and delivery services. The sharp drop in crude oil prices since mid-June 2014 is generally expected to produce positive (if temporary) economic effects. Lower oil prices generally don’t benefit energy producers, but the vast majority of households, firms, and organizations are net consumers, not net producers; so, lower prices still tend to bring net benefits.

One way the effects of lower oil prices reveal themselves is through mining activity. (More precisely, “real private nonresidential fixed investment in mining exploration, shafts, and wells.”) In 2013, fixed private investment in mining activity was about 5 percent of total fixed private investment and only 0.8 percent of real GDP. Still, since the third quarter of 2009, mining activity has increased at a 17.1 percent annual rate—much faster than the 5.5 percent rate of gain in total fixed private investment.

As the graph shows, mining activity (which includes drilling) is positively correlated with crude oil prices. When oil prices rise, this activity increases and so does investment in it. When oil prices fall, this activity slows and investment in it falls.

How this graph was created: Search for mining investment to find the first series, then add “Crude oil prices WTI” for the second. Limit the sample to start in 1999.

Suggested by Kevin Kliesen

View on FRED, series used in this post: E318RX1Q020SBEA, MCOILWTICO

Of sticky and flexible prices

The consumer price index (CPI) is composed of many prices with wildly different characteristics. One dimension in which they can differ is how frequently they change. Everybody is aware that gasoline prices can change daily. Other prices may not even change every year, such as administrative fees. To highlight the difference between these extremes, the Federal Reserve Bank of Atlanta produces separate indices for goods that have flexible prices on the one hand and sticky prices on the other hand. The graph above clearly shows that flexible prices have a much wilder ride. The sticky price index is informative even if doesn’t move much, though. Indeed, it can reflect longer trends in inflation, and these are the ones everyone cares more about.

How this graph was created: Go to the Sticky price CPI source, select the sticky and flexible consumer price indices (percent change from year ago), and add them to the graph.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: FLEXCPIM159SFRBATL, STICKCPIM159SFRBATL

How fast has the unemployment rate declined?

One way to compare recessions is to compare their unemployment rates, and the graph above includes the civilian unemployment rate for the four most recent business cycles. In this case, index values are used to show how the rate for each cycle changed in comparison with the highest rate that occurred in that cycle. (The graph shows each cycle’s unemployment rate relative to the highest rate in that cycle, which has an index value of 100.) None of the four rates seem to stand out; they all follow a similar path downward. But we know that the last cycle’s unemployment rate went higher than any of the others. So, that must mean the most recent unemployment rate declined faster in absolute terms (the actual percentage unemployment rate) because it hit a higher point than any of the other rates but still had a relative decline similar to the other rates.

How this graph was created: Find the “Civilian Unemployment Rate,” then select “Index (Scale value to 100 for chose period)” under Units. Then choose the data to match the highest unemployment rate in the previous cycle. Finally, check “Display integer periods” with values 0 and +60. Add the civilian unemployment rate three more times to the graph (it is preselected) while including the different dates that correspond to the highest value in each of these three earlier cycles.

Suggested by Christian Zimmermann

View on FRED, series used in this post: UNRATE

Bank failures

The previous recession was clearly associated with substantial problems in the financial sectors. As the graph shows, there has been a significant number of bank failures, as recorded by the Federal Deposit Insurance Corporation (FDIC), which is responsible for managing the closure process and insuring depositors. The number of failures, however, is nowhere near the peak around 1989, the time of the savings and loan crisis. The recession around that time involved different financial problems and thankfully was much less deep than the previous recession.

How this graph was created: Search for “bank failures” and then change the graph type to “Area” under graph settings in the graph tab.

Suggested by Christian Zimmermann

View on FRED, series used in this post: BKFTTLA641N

What’s the “normal” unemployment rate?

As the U.S. unemployment rate inches down, it seems reasonable to ask when it will be back to normal. One measure of “normal” is the natural rate of unemployment, sometimes referred to as NAIRU, published by the Congressional Budget Office. This measure is meant to contain all relevant information except for cyclical factors in the unemployment rate. Thus, when there is no difference between the NAIRU and the standard unemployment rate, the standard unemployment rate should be back to normal. Note that the natural rate is calculated, not measured, and thus is subject to the assumptions made. Some of those assumptions relate to whether structural factors should be taken into account. This question led (temporarily) to two different natural rates during the previous recession.

How this graph was created: Search for NAIRU, select both series, and add them to a graph. Then add the civilian unemployment rate. Finally, change the end date to the current date.

Suggested by Christian Zimmermann

View on FRED, series used in this post: NROU, NROUST, UNRATE


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