Category Archives: recession

China COVID Lockdowns, Ukraine Invasion Sanctions Continue Shrinking Earth’s GDP

The latest view from the volcano points to a higher level of economic gloom for the global economy.

The explanation for that worsening situation is the same as last month: the expanding economic sanctions imposed against Russia following its invasion of Ukraine and, more significantly, China's government's continuing lockdown of Shanghai that threatens to expand to other areas of China.

We're seeing the effects of both situations show up at the remote Mauna Loa Observatory, located atop a volcano on the big island of Hawaii in the middle of the Pacific Ocean, which measures the concentration of carbon dioxide diffused in the Earth's atmosphere. The following chart reveals the sharp, steep decline in the pace at which carbon dioxide is being added to the Earth's atmosphere since February 2022.

Trailing Twelve Month Average of Year-Over-Year Change in Parts per Million of Atmospheric Carbon Dioxide, January 2000 - April 2022

The following tool may be used to convert the decline in the rate of CO₂ accumulation into an estimate of the net GDP loss in the global economy associated with it. If you're accessing this article on a site that republishes our RSS news feed, please click through to our site to access a working version of the tool.

Change in Atmospheric Carbon Dioxide
Input Data Values
Change in Carbon Dioxide in Atmosphere [Parts per Million]
World Population [billions]

Change in Amount of Carbon Dioxide Emitted into Atmosphere
Calculated Results Values
Carbon Dioxide Emissions [billions of Metric Tonnes]
Estimated Net Change in World GDP [trillions]

Using the default value of a -0.27 parts per million to account for the change in the rate of growth of atmospheric carbon dioxide since February 2022, we find the equivalent net loss to global GDP attributable to the spread of COVID in southeast Asia and to China's fossil fuel shortage is $9.0 trillion. Going back to the beginning of the coronavirus pandemic in December 2019, the reduction of 0.92 part per million in the rate at which carbon dioxide is being added to the Earth's air corresponds to a net loss to global GDP of $30.6 trillion.

Analyst's Notes

We've updated the population data entry in the version of the tool presented above to reflect Earth's estimated 2021 population. Otherwise, the methodology behind the tool is unchanged from when we first introduced it in 2020.

Meanwhile, since we've forayed into planetary level economic analysis, we should note it has been five months since we developed the first-ever estimate of Mars' GDP. We're about a month away from the end of the latest Martian quarter and our next estimate of Mars' GDP, which is coming due because Martian quarters are roughly twice as long as business quarters on Earth.

References

National Oceanographic and Atmospheric Administration. Earth System Research Laboratory. Mauna Loa Observatory CO2 Data. [Text File]. Updated 5 May 2022. Accessed 5 May 2022.

U.S. Central Intelligence Agency. World Factbook. 1 July 2021 Population Estimate (World). [Online Article | Archived Document]. Accessed 8 May 2022.

Better Ways to Sort Out What the U.S. Treasury Yield Curve Is Saying

Part of the U.S. Treasury yield curve inverted and all we got was lousy analysis!

Examples of U.S. Treasury Yield Curve, Inverted and Normal

That's actually something of an understatement. There has been an explosion of reporting about the inversion of the U.S. treasury yield curve in recent weeks. If you read any of it, you likely found it leaves a lot to be desired. Here's a random selection of recent headlines:

It's not any better if you read what academic economists have been writing either, much of which has the intellectual consistency of muddled hash. In fact, if all that analysis were laid out end to end, the last thing you'd ever reach from reviewing it all is a conclusion. You'd think achieving some sort of clarity would be both desirable and a priority because the inversion of the Treasury yield curve is believed to portend recession in the future for the economy.

Part of the problem is because the U.S. Treasury yield curve has more than one part to it than can become inverted. A lot of people will focus on some select parts of it, without taking what's going on in the rest of it into account.

That realization lies behind some more interesting analysis by MetricT at r/dataisbeautiful that offers a path to reach the kind of conclusions you'd want to reach whenever the treasury yield curve becomes inverted. Here's that original analysis from 28 March 2022, which has been updated with charts showing yield curve data through 15 April 2022 (in addition to some other minor tweaks):

Mean Yield Spread across all US Treasury Maturities as a (slightly) better recession gauge than the 10y/2y and 10y/3m yield curve spreads

The US Treasury yield curve spread (most commonly the 10 yr/2 yr and 10 yr/3mo spreads) are popular gauges of incoming recession. But those measures aren't perfect. In particular:

  • There is a noticable false positive from Sep 1966 - Feb 1967 where the 10 yr/3 mo yield curve inverted but no recession followed.
  • A "is it or isn't it?" event in 1998 where the yield curve almost inverted before returning to normal. This caused a lot of consternation at the time until it was subsequently shown to be another false positive.
  • Another "is it or isn't it?" event in 2019 where the yield curve inverted, but pundits wondered if it "inverted enough" to trigger a recession. Narrator: It did...

I've been looking at ways to improve the traditional yield curve measures. A few months ago I posted R code to graph the percent of all yield curve spreads that are inverted, which made it much more obvious that a recession was the likely outcome in 2019.

So the idea occured to me: There are (at present) 55 different yield curve combinations. What would the average of all yield curve combinations look like? That should give us a better measure of how distorted the yield curve is than looking at a single pair of spreads.

As it turns out, the average does perform a bit more accurately than the 10y/2y and 10y/3m yield curves. In particular, it fails to invert in 1998, meaning our "is it or isn't it?" has a much clearer "no" answer. And it did invert during the similar "is it or isn't it?" event in 2019 and correctly predict a recession. So it sends a clearer signal than the better known 10y/2y and 10y/3m curves.

Graph 1:

Graph 1

Top: The US Treasury yield curve as of April 15 2022. A healthy yield curve should be upward sloping. Notice the obvious bear flattening between 3 yr <-> 10 yr Treasuries. There are already inversions between several longer-duration Treasuries (inverted points highlighted in red). There is currently a technical inversion in the 30yr/20yr curve due to a preference for 30 year Treasuries due to the relative newness of 20 yr Treasuries.

Middle: The usual 10y/2y and 10y/3m spread alongside the average yield spread for all maturity combinations. Notice that while the 10y/2y is rapidly nosediving (and getting a lot of press in doing so), the average is still relatively stable, though that may or may not last much longer. So keep an eye on things, but don't overreact just because the 10y/2y curve inverts.

Bottom: Shows the percent of all Treasury combinations that are inverted. It's graphed as a percent because the total number of maturities has changed over time (for instance, the Fed introduced 7 yr Treasuries in 2009), so graphing the percent allows you to do an apples-to-apples comparison. The color scheme is simply "blue if the average yield curve spread is < 0, red if it's > 0".

Graph 2:

Graph 2

Graphs the Federal Funds Rate since 1985 and highlights times when the average yield curve is inverted. As you can see, Fed tightening has come to a screeching halt almost immediately once the average YC is inverted, and quickly starts heading downward. It suggests the Fed is going to have great difficulty raising the Fed rate, as they probably only have a few months before the average inverts.

I'll clean the code up and eventually post it on my Github repo, though it will probably take a few days.

There are two bits of good news. First, MetricT's code is available! Second, through 15 April 2022, the average of all yield curve combinations hasn't changed the low probability of recession signal of MetricT's original analysis from 28 March 2022.

We're not the only ones who recognize there's a lot lacking in current day analysis of the treasury yield curve. For additional discussion, we'll recommend adding Scott Grannis' exploration of better measures of the yield curve to your reading list as well.

Previously on Political Calculations

Ukraine Invasion, COVID Spread in China Shrink World Economy

In just a month, the global economy has gone from showing signs of stalling growth to providing strong evidence the Earth's economy has resumed shrinking.

That's evident from the sharp drop in the pace at which carbon dioxide is increasing in the Earth's atmosphere recorded at the remote Mauna Loa observatory during the last month. The following chart confirms that outcome as measured by the trailing twelve month average of year-over-year change in the atmospheric concentration of carbon dioxide:

Trailing Twelve Month Average of Year-Over-Year Change in Parts per Million of Atmospheric Carbon Dioxide, January 2000 - March 2022

There are two driving factors behind this development. First, Russia's 24 February 2022 invasion of Ukraine has disrupted coal, oil and especially natural gas flows from Russia to the European Union, as many EU nations are boycotting or have implemented economic sanctions against Russian firms.

The second major factor is China's increasing use of lockdowns as the government struggles to prevent the spread of COVID-19 within the country, which is also the world's largest emitter of carbon dioxide. The lockdowns have shut down the country's largest economic center and are now spreading to more regions along with coronavirus infections.

In terms of overall impact for the global economy, we view Russia's invasion of Ukraine as a secondary event, while China's ongoing use of lockdowns clearly represents a continuation of the global coronavirus pandemic recession that originated within the country in 2019.

Update 20 April 2022

Welcome MarketWatch readers! For those interested, we have created a tool to estimate how the change in atmospheric carbon dioxide translates into lost GDP for the planet. Here are the earliest and most recent posts from that series where we've put a number on that impact:

A quick back of the envelope calculation with a net reduction of -0.80 parts per million in the rate at which carbon dioxide is being added to the Earth's atmosphere from December 2019 through March 2022 puts the estimated net global GDP loss at $26.6 trillion. This estimate is likely on the high side of what the IMF and World Bank would estimate.

Reference

National Oceanographic and Atmospheric Administration. Earth System Research Laboratory. Mauna Loa Observatory CO2 Data. [Text File]. Updated 8 April 2022. Accessed 8 April 2022.

Signs of Stalling Growth for Earth’s Economy

The pace at which carbon dioxide is increasing in the Earth's atmosphere slowed significantly according to data recorded at the remote Mauna Loa observatory for March 2022. The following chart shows the latest development for the trailing twelve month average of year-over-year change in the atmospheric concentration of carbon dioxide:

Trailing Twelve Month Average of Year-Over-Year Change in Parts per Million of Atmospheric Carbon Dioxide, January 2000 - March 2022

That change interrupts what had been a robust upturn in CO₂ emissions, driven primarily by China's record coal spree in recent months. The new change however coincides with indications that China's economic growth has sharply slowed in 2022, as indicated by its negative year-over-year growth rate for imports from the United States for December 2021 and January 2022.

Year Over Year Growth Rate of Exchange Rate Adjusted U.S.-China Trade in Goods and Services, January 1986 - January 2022

That reduction is attributable to China's ongoing struggle with COVID-19, which disrupted economic activity in the Earth's biggest emitter of carbon dioxide in both December 2021 and January 2021. Allowing for the lag in China's carbon dioxide emissions to diffuse into the Earth's air, we think that economic slowdown is now showing up in March 2022's atmospheric CO₂ measurements. With China's government still committed to its COVID-zero policies and still locking down millions of China's productive population for weeks at a time as coronavirus infections continue to spread in the country despite its measures, we anticipate reduced carbon dioxide emissions will show up in the Earth's air from the world's biggest carbon emitter over the next several months.

National Oceanographic and Atmospheric Administration. Earth System Research Laboratory. Mauna Loa Observatory CO2 Data. [Text File]. Updated 7 March 2022. Accessed 9 March 2022.

U.S.-China Trade Growth Recovery Underperforming "Great Recession"

Having closed the door for assessing the performance of the January 2020 'Phase 1' trade deal between the U.S. and China, we've refocused our ongoing trade analysis to focus on the trade recovery from 2020's coronavirus pandemic.

To do that, we need to compare the actual trajectory of the trade between the U.S. and China with a counterfactual - a projection of what the future for trade could reasonably look like following a recession. For our purposes, we opted to model a counterfactual after the recovery in trade between the U.S. and China that followed the so-called "Great Recession". The following chart shows the trailing twelve month average of the combined value of that trade as the heavy black line, where the counterfactual is shown by the dashed red line. We're using the trailing twelve month average to account, in part, for the seasonality in the actual monthly data, which we've shown as the thinner purple line.

Combined Value of U.S. Exports to China and U.S. Imports from China, January 2017 - January 2022

Going by the trailing twelve month average of the combined value of goods exchanged between the U.S. and China, the recovery in trade between the two countries began after this measure bottomed in September 2020. In the first ten months since, up to July 2021, the rate of growth of trade outperformed what was observed in the recovery following the "Great Recession". But since July 2021, the level of trade has consistently underperformed the Great Recession trade recovery. In January 2022, it would take an additional $1.2 billion of goods traded between the two countries to match that earlier recovery.

In truth, that underperformance took hold several months earlier, following March 2021, after a spike in the value of goods traded between the two countries was recorded. This period roughly coincides with a growing backlog of container ships at the U.S.' west coast ports, and specifically at the ports of Los Angeles and Long Beach in southern California. These two ports typically account for 40% of all imported goods processed into the U.S. economy, where congestion at these two ports built up and was allowed to fester for months without any action to correct the worsening situation by the Biden administration.

The good news is that after months of neglect, the Biden administration was finally forced to take steps to address the problem. There are indications the worst of the trade congestion at these two ports is in the rear view mirror.

That's a positive development, which we see in the small narrowing of the gap between the counterfactual and the actual trajectory of the U.S.-China trade level in January 2022. We'll see how well that progress might continue in the months ahead.