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Halloween candy

Halloween is upon us─the only time children are encouraged to receive candy from total strangers. And it feels like this ritual is becoming more important every year, which might put pressure on the market for candy. FRED does not have data about candy sales, but it does have a price index for it. If we compare that index with the general consumer price index, maybe we can unearth something about our hypothesis.

It turns out this is a ghostly idea: There’s literally nothing to see. Candy price data start in December 1997; so, after setting both series to 100 at that date, the current numbers are virtually indistinguishable. This may be due to uncanny luck, as candy prices were at times as much as 10% below general prices, including at the end of the last economic boom. So maybe this shadowy idea about candy price pressure applies only to the time since the Great Recession. Or perhaps our hypothesis simply has no bearing on the price of candy because candy supply can easily accommodate fluctuations in demand. All in all, nothing scary to report.

How this graph was created: Search for “candy” and the candy price index should be your first choice. Then add the CPI  series. Modify the latter’s units to show 100 in 1997-12-01.

Suggested by Christian Zimmermann

View on FRED, series used in this post: CPIAUCSL, CUUR0000SEFR02

The changing composition of U.S. trade

Over the past 30 years, the composition of U.S. trade among its partners has changed dramatically. New economic powers, trade agreements, technological advancements, and changes in policy preferences are all contributing factors. The four graphs in this post examine the evolution of imports, exports, and trade balances between the U.S. and four of its largest trading partners: China, Canada, Mexico, and Japan. The graph above shows trade patterns between the U.S. and China from 1985 to 2015. Both imports and exports have dramatically increased, but imports have outpaced exports, resulting in a large trade deficit. (See the green line, which corresponds to the right y-axis: Points below zero indicate a trade deficit.) This pattern is not the same for all trading partners, however. In the graphs below, imports and exports have increased for both Canada and Mexico as well, but they have remained relatively flat for Japan. Similarly, although the U.S. trade deficit has increased with Canada and with Mexico, it has done so at a much slower pace than it has with China. After the latest recession, trade deficits have moderated, which is most noticeable for U.S. trade with Canada, which has become almost balanced.

How these graphs were created: Search FRED as follows: For imports, search for the “U.S. imports of goods from [country x] customs basis.” For exports, use the “Add Data Series” option to search for and add “f.a.s. basis series for [country x].” Use the “Create your own data transformation” option (under the “Edit Data Series” section) to transform both series to natural logarithms (logs). For the third series, use the “Add Data Series” option to re-add the imports series as a new series; then, use “Add Data Series” option again to add the export series, but under the “Modify existing series” option for Data Series 3; finally, under the data transformation option, type “b-a” into the transformation field and set this third series to appear on the right y-axis.

Suggested by Maxmiliano Dvorkin and Hannah Shell.

View on FRED, series used in this post: EXPCA, EXPCH, EXPJP, EXPMX, IMPCA, IMPCH, IMPJP, IMPMX

Illiquidity in the bond market

An asset is said to be “liquid” if traders can convert it quickly to cash without materially affecting its market price. The market for large cap stocks is liquid because equity claims are relatively homogeneous and there are normally large numbers of buyers and sellers trading on centralized exchanges. Most bond markets are highly illiquid, primarily because bonds are highly idiosyncratic. Even bonds issued by the same entity normally differ along several dimensions, including maturity, coupon rate, and covenants. Because this is so, bonds typically trade over-the-counter (OTC)—that is, in a decentralized trading environment where idiosyncratic bonds must be matched with willing buyers. These markets are typically very thin, and most bonds do not even trade on secondary markets. The bonds issued by sovereigns and large corporations are an exception. But even these bonds trade largely in decentralized OTC markets.

There has been a growing concern as of late that liquidity conditions in even relatively liquid bond markets have deteriorated in recent years. If this is so, then even modest events may trigger an unexpected and undesirable disruption in financial markets. In the summer of 2013, for example, when Fed chair Ben Bernanke hinted at a possible slowdown in the pace of Fed bond purchases, the bond market reacted violently in what was described as a “taper tantrum.” Another example is the Oct. 15, 2014, “flash rally” in which the 10-year on-the-run U.S. Treasury experienced an incredible 40 basis point movement in a single day for no apparent reason. According to a report released by the U.S. Treasury Department, it seems that for a brief period of time there were far more trades to buy Treasuries than trades to sell. That this happened in the most liquid of all bond markets raises a concern with other less-liquid bond markets. Might a modest increase in the Fed policy rate induce a “rush to the exits,” forcing a fire sale of bonds into an illiquid market to meet redemption payments?

It is, in fact, very difficult to know whether liquidity conditions are deteriorating in bond markets. Standard measures, such as bid-ask spreads, are of little help because historically narrow bid-ask spreads can widen suddenly in a liquidity event. Some commentators have pointed to the post-financial-crisis behavior of the 22 primary dealers, who play an important role as market makers for bonds. In fact, primary dealer inventories in corporate bonds have declined from over $250 billion in 2007 to about $50 billion in 2015. Since 2007, the supply of U.S. corporate bonds has increased from about $3.2 trillion to almost $5.0 trillion (see graph above), so that the dealer inventory relative to outstanding debt has dropped precipitously. Moreover, prior to 2007, dealers were net long in corporate bonds and net short in U.S. Treasuries. Dealers are now net long in Treasuries. This, together with their reduced holdings of corporate securities, suggests that dealers’ willingness and/or ability to take on risk has diminished greatly since 2008. Many commentators blame the Volcker rule, which was designed to curtail the proprietary trading activities of dealer banks.

Whether these behaviors contribute to reduce bond market liquidity is difficult to judge. In fact, one could make the case that the dealer banks are in much better position than they were in 2007 to absorb a liquidity event, for example, by absorbing a sell-off in corporate bonds with sales of Treasuries. Much of the bond supply is intermediated through money market mutual funds. Historically, these funds have sought to maintain fixed exchange rate regimes subject to speculative attack. The vulnerability of these funds to mass redemption events, however, may be curtailed with the passing of Rule 2a-7 by the U.S. Securities and Exchange Commission. This new rule requires that funds adopt a floating exchange rate regime (floating net asset value) and permits the imposition of liquidity fees and redemption gates at the discretion of the funds’ board of directors. These rules are consistent with the ones prescribed in Diamond and Dybvig (1983) for the prevention of bank runs.

It is important to understand, however, that such measures are not a guarantee against price volatility. They are simply measures to mitigate the “excess” price volatility that accompanies thinly traded markets. If everyone wants to sell bonds, their price will decline even in the most liquid of bond markets.

How this graph was created: Search for the (quarterly) series shown above and add it to the graph. Restrict the sample period to start in 2001.

Suggested by David Andolfatto

View on FRED, series used in this post: NCBDBIQ027S

Presidential inflation beauty contest

Fair or not, U.S. presidents are often judged by the performance of the economy during their tenure—despite the fact that presidential policy, if it does have an impact, may have only a delayed impact. Worse, they may inherit the impact of the previous president’s policies. For example, Carter’s presidency is associated with high inflation even though his policies likely did nothing to instigate accelerating price increases. Similarly, historical views of Reagan’s presidency are no doubt positively affected by the decline in the rate of inflation during his term—even if that decline was caused by monetary rather than fiscal policy. Still, it’s fun to engage in armchair politics to compare economic outcomes across presidencies.

The graph plots the path of the all-items consumer price index for the past 10 presidents, from Kennedy to Obama. We normalize each path so the initial month has a value of 100, which allows us to quickly assess the total amount of inflation that occurred during a given term. Some paths are short, like Ford’s (which starts in August 1977), because only a portion of a single four-year term was served. Others are long, like Clinton’s (which starts in January 1993), because they include two full four-year terms.

The path for prices during Carter’s term is striking. In just one four-year term, prices accelerated 47.2%. In contrast, prices during Reagan’s eight years in office rose a total of 38.4%. The difference in these totals (47.2% and 38.4%) is substantial but not orders of magnitude different. The difference is, of course, the rate at which the increases occurred. During Carter’s term it was fast and furious, averaging 10% per year; during Reagan’s term it was slow and steady, averaging 4% per year.

How this graph was created: Using President Obama as our example, search for “CPI” and select the seasonally adjusted monthly series “Consumer Price Index for All Urban Consumers: All Items.” Change the units from “Index 1982-1984=100” to “Index (Scale value to 100 for chosen period).” Enter a day during the first month of Obama’s presidency (January 2009) as the observation date for which the series will be scaled to 100. Check the box “Display integer periods instead of dates (e.g. …,-1,0,1,…) with the value scaled to 100 at period 0.” Set the integer period range to start at 0 and end at the number of full months Obama has been president minus one (since month 1 of his presidency is represented on the scale as period 0). At this point, the graph will display the CPI during Obama’s time in office scaled to 100 during his first month. To add the remaining nine presidents, start by adding the CPI data series to the graph nine more times. For each of these additional series, adjust the settings as you did for Obama’s CPI but use the specific start dates and durations of each president’s time in office. Be sure to select each president’s first month in office as the data point to be scaled to 100; then set the integer period range to start at 0 and end at the number of full months each president was in office minus one.

Suggested Michael McCracken

View on FRED, series used in this post: CPIAUCSL

Canada votes. What’s up?

Canadians are heading to the polls on Sunday, October 18, 2015, to elect a new parliament and government. Voters often consider the current state of the economy during election season, and FRED can help you track the economic situation for the U.S.’s neighbor to the north. Although data from Statistics Canada aren’t included in FRED, plenty of Canadian data from other sources are available, although sometimes with a delay. At the time of this writing, the tag for Canada has 2226 series listed in FRED.

The graph above shows some of the economic aggregates that are likely to matter the most for Canadians: the unemployment rate, GDP, inflation, and the exchange rate with the U.S. dollar. Canada did relatively well during the previous recession, at least compared with the U.S. Unemployment has remained relatively high, though, and the economy is currently suffering from the massive decrease in several commodity prices, which is readily visible with the weakening of the Canadian dollar. If you are reading this blog post some time after it was published, the graph will have updated automatically with the latest data. And, reader from the future, you will be able to see how the Canadian economy has fared and know whether the conservative government was reelected.

How this graph was created: Search by using the Canada tag, select the four series shown in the graph, and click “Add to Graph.” Three of these series need a little attention: CPI and GDP need to be expressed as growth rates, which is done by opening their respective panels and selecting “Percent Growth Rate from Previous Year” under “Units.” Finally, the axis for the exchange rate needs to be moved to the right because the unit range is so different from the others.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: CANCPIALLQINMEI, EXCAUS, LRUNTTTTCAQ156S, NAEXKP01CAQ189S

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