Talking about the Economy, 2018 Edition
From bitcoin trading behavior to opioid Rx side effects on disability claims, here’s a round-up of our most talked-about Economic Letter topics of 2018.
The Yield Curve
The term spread—the difference between long-term and short-term interest rates—is a strikingly accurate predictor of future economic activity. Every recession in the past 60 years was preceded by a negative term spread, and all but one negative spread was followed by an economic slowdown. Despite the somewhat special current conditions, the predictive power of the term spread appears intact.
The yield spread between long-term and short-term Treasury securities is known to be a good predictor of economic activity, particularly of looming recessions. One way to learn more is through a careful scrutiny of the historical variation of such yield spreads and how they relate to the current slope of the Treasury yield curve. The results suggest that the recent flattening of the yield curve implies only a slightly elevated risk of a recession in the near term relative to any other month.
Bitcoin’s price climbed dramatically to nearly $20,000 in the second half of 2017 but fell rapidly starting in mid-December 2017. The peak price coincided with the introduction of bitcoin futures trading on the Chicago Mercantile Exchange. The rapid run-up and subsequent fall in the price after the introduction of futures appears consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.
Thanks in large part to recently enacted tax cuts, U.S. fiscal policy has taken a decidedly procyclical turn—providing stimulus when the economy is growing. This matters because many recent studies have found that fiscal stimulus has a smaller impact when the economy is strong, implying that the near-term boost to GDP growth could be two-thirds or less of that from previous tax cuts.
Slow Post-crisis Recovery
A decade after the financial crisis, the U.S. economy remains significantly smaller than it should be based on its pre-crisis growth trend. One possible reason lies in the large losses in the economy’s productive capacity following the crisis. The size of those losses suggests that output is unlikely to revert to its pre-crisis trend level, representing a lifetime present-value income loss of about $70,000 for every American.
The slow U.S. output recovery is counter to normal expectations. Removing cyclical effects reveals that the deep recession was superimposed on a sharply slowing trend in underlying growth. This trend reflects two factors: slow growth of innovation and declining labor force participation. Both were present before the recession and thus were not the result of the crisis or subsequent policy changes.
Labor force participation among prime-age U.S. workers has been declining for nearly 20 years, a stark contrast with rising participation in Canada. Three-fourths of the difference between the two countries can be explained by labor force attachment of women. If the U.S. could match Canada’s participation trend, it would see 5 million additional prime-age workers join the labor force.
Estimates from workers’ compensation data shed light on the relationship between opioid prescriptions and the return to work among people who suffer low-back injuries. Different prescribing patterns across areas demonstrate varied impacts on how quickly people return to work. When opioids are prescribed for long-term treatment, workers have considerably longer temporary disability following an injury.
The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.