Wednesday, May 18, 2016

Steppiness aside ...

Happened to take a look at the so-called Natural Rate of Unemployment at FRED:

Graph #1
It's all steppy! I don't remember that. Found an old version from 2011:

Graph #2
Heh, from even before FRED put their logo on their graphs. Tentative but not steppy.

I wanted to compare the two versions of the graph at ALFRED. Clicked the link from the FRED page to bring up NROU at ALFRED. It always comes up as a bar graph at ALFRED -- maybe so we know we're not in Kansas anymore. (Or wherever FRED is.)

I switched the setting to make it a line graph and ...

Graph #3
apparently the steppiness is new. This graph shows the two most recent vintages. The steppiness is the main difference. Otherwise the two lines are mostly the same, except the newer line is lower since 2007.

Let me say that again. The older line, the blue one, is from ten months ago. The newer line, the red, shows changes going back to 2007.

Well, I still want to compare the new one to the one from August 2011:

Graph #4
Yeah, back in 2011 they thought the natural rate would be high forever.

Since the subject has come round to questioning the NROU numbers, did you notice that on all these graphs a vigorous uptrend begins before 1960? I think the uptrend misrepresents the economic conditions of the time. Golden age, remember?

The Natural Rate of Unemployment is the lowest level of unemployment at which inflation remains stable. When they estimate the Natural Rate of Unemployment they take inflation into account. The NROU depends on unemployment and inflation.

If you add the unemployment rate and the inflation rate together to get the "misery index" and then compare the misery index to NROU ...

Graph #5
the Misery Index spikes briefly in 1958, then runs low and stable for near ten years. I think the NROU, which runs perfectly flat thru most of the 1950s, should have continued that same path into the latter half of the 1960s. Or lower. In the '60s, they thought four percent.

And then, in the latter 1990s, the Misery Index starts climbing and continues upward for a dozen years. Yet the NROU runs flat, then falls until it is forced upward by crisis and recession.

It seems to me that a lot of wishful thinking is involved in the calculation of the Natural Rate of Unemployment.

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