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Tracking the U.S. economy and financial markets during the COVID-19 outbreak

Use FRED dashboards to monitor the economy

Financial FRED dashboard Economic FRED dashboard

To help FRED users navigate the rapidly changing economic and financial environment, the Federal Reserve Bank of St. Louis has assembled two dashboards of FRED graphs. The first dashboard collects higher-frequency financial market variables. The second dashboard collects mostly monthly indicators that track expenditures, employment and unemployment, and key business and consumer surveys.

For some background on why and how economists and other analysts track economic and financial variables during stressful times, read on:

The World Health Organization declared the novel coronavirus—known as COVID-19—a pandemic. Johns Hopkins University is monitoring the spread of the virus and mapping the number of confirmed COVID-19 cases and fatalities worldwide.

The number of confirmed cases in the United States is rising, and U.S. financial markets have been tumultuous. For example, since hitting an all-time high on February 12, the Dow Jones Industrial Average has fallen by about 33 percent as of the writing of this post. Yields on 10-year Treasury securities plunged to an all-time low of 0.54 percent on March 9, though they have since rebounded modestly. Other key financial market indicators, such as commercial paper yields and yields on corporate bonds, have also exhibited stress. Financial market–based measures of inflation expectations have fallen sharply.

These financial market stresses have triggered numerous policy responses by the Federal Open Market Committee (FOMC), including two reductions in the FOMC’s federal funds target rate.

Clearly, the COVID-19 outbreak is a significant and rare event in U.S. history. It has led to widespread disruptions in economic activity, with an unknown duration and magnitude. But it can be characterized and monitored as an economic shock. So, economists and policymakers are monitoring key cyclically sensitive indicators such as initial claims for unemployment insurance, changes in employment, retail sales, and sales of light motor vehicles and new and previously sold (existing) homes.

During times of high and rising uncertainty, financial market variables often serve as reliable forward-looking signals of future economic conditions in the broader economy. A key example is the Treasury yield curve, which usually inverts prior to recessions. This forward-looking perspective is important because most of the important “real” data that economists and policymakers monitor—such as the unemployment rate or industrial production—are backward-looking. For example, the payroll employment numbers for March 2020 will be released on Friday, April 3. However, they will capture only payrolls for the survey week ending March 12. Labor market conditions could have changed dramatically since then, given the fast-moving nature of the COVID-19 outbreak and the responses by firms and the government. To get a more timely measure of labor market conditions, an analyst might instead look at the weekly initial claims data.

Our two new FRED dashboards collect these useful variables to help you monitor and better understand the trajectory of the economy and the state of financial markets. FRED account holders can create their own dashboards, either from scratch or by taking these two as starting points.

Suggested by Kevin Kliesen.

What’s worrying the markets?

More data on policy uncertainty

For some time now, FRED has offered various economic uncertainty indices from the work of professors Baker, Bloom, and Davis. We now have even more detailed data on uncertainty about specific economic policy categories; a handful are shown in the graph above.

Before we dive into any interpretations, we need to first understand the data. Basically, they track the number of mentions of specific economic policies in over 2,000 U.S. newspapers. Some policies are considered more important than others by journalists and the general public; some are perennial favorites and some are rarely discussed.

Overall, higher values likely show how worried the press, and probably the general public, are about that aspect of economic policy. High values are a combination of high uncertainty and the importance of the policy. A policy considered less important will be less likely to spike up even when there’s a lot of uncertainty about it.

Back to the graph: We selected five categories. The blue line clearly has the most action lately: It depicts uncertainty about trade policy, which is obviously tied to the ongoing trade war with China and other countries. The data also show significant trade policy uncertainty around 1994, the year NAFTA was introduced. A regular standout is the series in red—sovereign debt and currency crises—which has mostly to do with the recurring threats of government shutdowns when Congress struggles to pass a budget. The line in…teal, let’s call it, depicts uncertainty about financial regulation, which is clearly visible after the 2007 Financial Crisis, when Congress worked out the Dodd-Frank Act. Health care policy, in purple, has regularly been in the news since 2008 thanks to Obamacare. Finally, government spending, in light green, appears mostly in the years after the Financial Crisis as TARP was being implemented.

How this graph was created: Start from the Economic Policy Uncertainty index release table: Select “United States Indices,” then “Monthly Indices,” and then “Categorical…” Check the series you want and click “Add to Graph.”

Suggested by Christian Zimmermann.


The economics of oil sanctions

A look at Iran, the law of one price, and the global bathtub

Recently, we’ve heard a lot about new sanctions the U.S. government may impose on the Iranian economy—in particular, against Iranian oil. Sanctions are a common policy tactic, but how do they work from an economic perspective?

First consider the supply of oil, which economists have described as a “global bathtub“: The tub is filled by “spigots” from various suppliers and depleted by “drains” from various consumers. The global oil price is determined by the sum of these supplies and demands for oil. The graph above shows global oil prices for West Texas Intermediate, Brent, and Dubai crude oil. We can see their global prices are fairly similar over time, with small differences between them. (Read this 2016 FRED Blog post for more info on these slight, temporary price differences between types of oil.)

The idea behind a global price for oil is the “law of one price” in international trade: If a homogenous good has negligible transportation or transaction costs, its price should be the same in all markets. This holds for crude oil, although not for a consumer good like a Big Mac, for example. Given that the global oil market is an integrated market, a shortfall in one region can be adjusted for by shipping the same or similar oil from another region in the world.

Now, what if a country is targeted by a ban on oil exports, as Iran was in 2012? The graph below show Iran’s oil production and oil exports, with noticeable declines beginning in 2012 that contributed to its 15-20% decline in per capita GDP. The last graph shows how the U.S. stopped importing oil from Iran, with the value of U.S. imports dropping to almost zero in 2012-15. Note: We can’t conclude from these data that the sanctions affected the price of Iranian oil, only that there was a decline in the quantity produced.

So why did these sanctions work in reducing oil exports from Iran? Economists say these sanctions were effective because of the international coalition that included key Asian countries that are heavy importers of oil. As for the global price of oil, it was fairly consistent in 2012-15, without any substantial changes. More FRED data series show how U.S. oil production has increased since 2012, compensating for the decline in production levels of other countries during that time. So, U.S. oil acted as a substitute for Iranian oil during this period and helped keep global oil prices stable. Exactly what we’d expect given the law of one price.

How these graphs were created: Search for “global price crude” (first graph) and “crude oil Iran” (second graph), select the series, and click “Add to Graph.” For the third graph, search for and select “goods imports Iran” and click “Add to Graph.”

Suggested by Suvy Qin and George Fortier.


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