Primer: Why Are Economic Data Revised?

One of the more bizarre things to pop up in the past couple of days is the idea that data revisions by a statistical agency is a “mistake” and thus cause to fire the head of a statistical agency. No, that is not how data revisions work.

A Banana Republic Without Bananas

American institutions continue their slide into being a clown car with the firing of the director of the Bureau of Labor Statistics (BLS). Although the stock line appears to be that this is a dangerous step in a bad direction, that’s been true since before the inauguration. Nevertheless I would be more concerned by the continuous slide in data quality due to budget cuts and the secular decline in survey response rates. Data gathering is in a crisis even without this sacking.

Canadian Curve Comment

Although the Canadian bond bears had some excitement a few years ago, the recent experience has been quite subdued despite a certain amount of macroeconomic fireworks (figure above).

My eyeballing of the Canadian curve suggests that it is pricing a plausible macroeconomic scenario: the economy faces weakness due to a certain someone south of the border hammering out tariff rate posts, but the weakness is somewhat manageable, and possibly only mild cuts are needed. Supply chain disruptions and tariffs might put some upward pressure on prices, but that would be offset by the prospect of weaker growth.

This puts the 10-year Government of Canada at a mediocre valuation level. It incorporates a small term premium against the prospect of mild rate cuts due to weakness, but it does not have a great cushion against a cyclical upswing. Although there is not a lot of evidence of such an upswing, it is entirely possible that a certain someone again chickens out and does not change tariff rates that matter for Canadian growth by that much. At which point, price pressures may start to matter again.

My initial scan of data pointed towards the “mediocre growth at best” story, but I hope to expand upon that impression in a follow up post. Since I have been fairly quiet recently, I wanted to just get this initial comment out first, rather than wait to see what happens with my data filtering. (Statistics Canada changed their website and I was missing Canadian data updates for some time, I finally bit the bullet and incorporated the “stat_can” module to my platform so that I can update again.) If one wanted to take macroeconomic positions, I think Canadian rates are not the best instrument — the Canadian dollar (might) be more exciting, although I am not the person to ask about currency guessing. (I got my first forex call correct, and decided to retire undefeated.)

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(c) Brian Romanchuk 2024

Fed Independence And The Rates/Inflation Debate

The drumbeat from the White House to replace Powell as the head of the Fed is increasing, and we are seeing potential candidates for the replacement echoing President Trump’s line that the United States needs low interest rates now. (President Trump argued Monday that the policy rate should be 1% or lower - link to news article.) I have just written an article about the difficulties finding writing opportunities about economic theory debates, and I guess I needed to be more careful about what I wish for.

Economic Debates Comments

I am catching up after my vacation, and have been somewhat struggling to find timely topics to discuss. One of the problems of the Trump administration for me is that the focus of discussion are on political economy topics — and the administration’s actions do not have a whole lot of serious support.

Trump gave in to his love of posting tariff rates on social media, and just unloaded another broadside on unfortunate (mainly non-OECD) countries. It remains to be seen how sustainable this round of tariffs will be, but it seems more likely that he can ignore domestic complaints that result from trade relations with countries that are smaller trade partners than countries like Canada and Mexico.

U.S. Treasury Curve Comment

Happy Canada Day! I do not have a lot of time to look at new topics, but I saw an article about the Treasury curve that triggered a desire to drop a comment.

The above figure shows the slopes at the front end of the Treasury yield curve. Specifically, the black line shows the 2-year yield less the 3-month bill rate, and the red shows the 2-/10-year slope. The current situation is somewhat unusual in that the 3-month/2-year slope is mildly inverted, while the 2-/10-year slope is mildly positive.

The TACO Principle And Inflation Risk

At the time of writing, President Trump is waffling about the possibility of joining Israel in its attacks on Iran. This adds yet another possible inflation risk story: crude oil prices could spike in response to snowballing conflicts in the Middle East.

To recap, there are four main inflation risks lurking over the U.S. economy.

1. A large tax cut could help fuel demand.

2. Tariff wars are only in a ceasefire, and high tariff rates (particularly for Chinese goods) might resume after the ceasefires expire.

3. A widening of the war might result in a crude oil spike.

4. Widespread deportations are cutting off some industries from labourers, particularly the agricultural industry.