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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.


Just one word: Plastics

Relative importance weights of the components of industrial production: Part 2

Actually, this post is not about just one word. There are at least four: plastics, yes, but also textiles, electricity, and ice cream.

As we discussed in the previous post, many sectors of the economy, with their specific products and processes, contribute to the nation’s overall industrial production. This graph traces the relative contributions of four more components from FRED’s 322 series in this category.

Over the past 45 years shown in the graph, the production of plastics has grown in importance pretty consistently; someone in, say, 1967 who invested in that industry might have seen a nice return. With some peaks and valleys, electric power generation has become demonstrably more important, too. And its growth has been largely countercyclical—that is, it revs up through each postwar recession. Textile mills, on the other hand, have been declining in importance in U.S. industrial production for the entire time this data series has been calculated.

And what to make of ice cream? The previous post traced the progress of cheese, another wonderful edible good. And just like cheese, ice cream is a very small part of U.S. industrial production but its degree of importance has remained deliciously tried and true (though these series are seasonally adjusted, which matters most for ice cream).

How this graph was created: Search for “Relative Importance Weights”: As noted above, you’ll find 322 series to choose from. Check the measures you want and click “Add to Graph.”

Suggested by George Fortier.

View on FRED, series used in this post: RIWG22111S, RIWG313S, RIWG3261S, RIWN31152S

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