The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.
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March 05, 2015
Could Reduced Drilling Also Reduce GDP Growth?
Five or six times each month, the Atlanta Fed posts a "nowcast" of real gross domestic product (GDP) growth from the Atlanta Fed's GDPNow model. The most recent model nowcast for first-quarter real GDP growth is provided in table 1 below alongside alternative forecasts from the Philadelphia Fed's quarterly Survey of Professional Forecasters (SPF) and the CNBC/Moody's Analytics Rapid Update survey. The Atlanta Fed's nowcast of 1.2 percent growth is considerably lower than both the SPF forecast (2.7 percent) and the Rapid Update forecast (2.6 percent).
Why the discrepancy? The less frequently updated SPF forecast (now nearly a month old) has the advantage of including forecasts of major subcomponents of GDP. Comparing the subcomponent forecasts from the SPF with those from the GDPNow model reveals that no single factor explains the difference between the two GDP forecasts. The GDPNow model forecasts of the real growth rates of consumer spending, residential investment, and government spending are all somewhat weaker than the SPF forecasts. Together these subcomponents account for just under 1.0 percentage point of the 1.5 percentage point difference between the GDP growth forecasts.
Most of the remaining difference in the GDP forecasts is the result of the different forecasts for real business fixed investment (BFI) growth. The GDPNow model projects a sharp 13.5 percent falloff in nonresidential structures investment that largely offsets the reasonably strong increases in the other two subcomponents of BFI. Much of this decline is due to petroleum and natural gas well exploration; a component which accounts for almost 30 percent of nonresidential structures investment and looks like it will fall sharply this quarter. The remainder of this blog entry "drills" down into this portion of the nonresidential structures forecast (pun intended). (A related recent analysis using the GDPNow model has been done here).
A December macroblog post I coauthored with Atlanta Fed research director Dave Altig presented some statistical evidence that in the past, large declines in oil prices have had a pronounced negative effect on oil and mining investment. Chart 1 below shows that history appears to be repeating itself.
The Baker Hughes weekly series on active rotary rigs for oil and natural gas wells has plummeted from 1,929 for the week ending November 21 to 1,267 for the week ending February 27. The Baker Hughes data are the monthly source series for drilling oil and gas wells industrial production (IP) and one of the two quarterly source series for the U.S. Bureau of Economic Analysis's (BEA) estimate of drilling investment (for example, petroleum and natural gas exploration and wells). The other source series for drilling investment is footage drilled completions from the American Petroleum Institute, released about a week before the BEA publishes its initial estimate of GDP.
Chart 2 displays three of these indicators of drilling activity. The data are plotted in logarithms so that one-quarter changes approximate quarterly growth rates. The chart makes clear that the changes in each of the three series are highly correlated, suggesting that the Baker Hughes rig count can be used to forecast the other series. The Baker Hughes data end on February 27, and we can (perhaps conservatively) extrapolate it forward by assuming it remains at its last reading of 1,267 active rigs through the end of the quarter. We can then use a simple regression to forecast the February and March readings of drilling oil and gas wells IP. Another simple regression with the IP drilling series and its first-quarter forecast allows us to project first-quarter real drilling investment. The forecasts, shown as dashed lines in chart 2, imply real drilling investment will decline at an annual rate of 52 percent in the first quarter. This decline is steeper than the current GDPNow model forecast of a 36 percent decline as the latter does not account for the decline in active rotary rigs in February.
A 52 percent decline in real nonresidential investment in drilling would likely subtract about 0.5 percentage point off of first-quarter real GDP growth. However, it's important to keep in mind that a lot of first quarter source data for GDP are not yet available. In particular, almost none of the source data for the volatile net exports and inventory investment GDP subcomponents have been released. So considerable uncertainty still surrounds real GDP growth this quarter.
February 26, 2015
Are Shifts in Industry Composition Holding Back Wage Growth?
The last payroll employment report from the U.S. Bureau of Labor Statistics (BLS) included some relatively good news on wages. Private average hourly earnings rose an estimated 12 cents in January, the largest increase since June 2007. Even so, earnings were up only 2.2 percent over the last year versus average growth of 3.4 percent in 2007.
What accounts for the sluggish growth in average earnings? The average hourly earnings data for all workers is essentially the sum of the average earnings per hour within an industry weighted by that industry's share of employment. In this piece, Ed Lazear argues that a shift of the U.S. economy away from some high-paying industries to lower-paying industries may have contributed to dampened wage growth. Lazear specifically calls out the reduced share of employment in the relatively high-paying finance industry, at hospitals, and in the information sector as potential culprits. A shift in employment away from relatively high-wage jobs will put downward pressure on the growth in average wages.
To get some idea of the effect of industry composition on wages, I took the 2014 calendar year average wage for each industry group at the two-digit NAICS level and multiplied it by the share of employment in that industry in 2014 (admittedly, two-digit NAICS level of disaggregation is very coarse and masks a lot of potential shifts in job-types within industries). Summing across the industries gives an estimate of total average private hourly earnings in 2014. I then repeated the exercise, but using the 2007 industry shares of employment instead (see the chart).
Would average wages have been higher if we had the same mix of employment across industries as we had before the recession? The answer seems to be yes, but not much higher. If nothing had changed in the economy's industry employment mix since 2007, then average wages would have been about 12 cents higher.
This translates into a 16.8 percent increase in nominal wages between 2007 and 2014 versus a 16.2 percent increase if the actual industry employment shares where used, because the decline in the shares of employment in the relatively high paying industries Lazear cites has not been very large, and some higher-paying industries have seen growth. Moreover, some industries with below-average wages, such as retail trade, have experienced a decline in their share of employment as well.
February 23, 2015
Are Oil Prices "Passing Through"?
In a July 2013 macroblog post, we discussed a couple of questions we had posed to our panel of Southeast businesses to try and gauge how they respond to changes in commodity prices. At the time, we were struck by how differently firms tend to react to commodity price decreases versus increases. When materials costs jumped, respondents said they were likely to pass them on to their customers in the form of price increases. However, when raw materials prices fell, the modal response was to increase profit margins.
Now, what firms say they would do and what the market will allow aren't necessarily the same thing. But since mid-November, oil prices have plummeted by roughly 30 percent. And, as the charts below reveal, our panelists have reported sharply lower unit cost observations and much more favorable margin positions over the past three months...coincidence?
February 20, 2015
Business as Usual?
Each month, we ask a large panel of firms to compare their current sales with "normal times." In our February survey, the firms in our panel reported their sales were approaching normal. Indeed, on average, larger firms (those with 100 or more employees) tell us sales levels this month were right at normal. But smaller firms, although improving, are still lagging their larger counterparts (see the chart).
These qualitative assessments suggest a continuation of the trend we've seen in our quarterly quantitative data (these data are compiled at the end of each quarter). In December, our panel of firms reported sales levels about 2.7 percent below normal—virtually identical to the Congressional Budget Office's estimate of the output gap. Here, too, our survey data show that on average, sales of the larger firms in our panel were essentially back to normal, but smaller firms were still reporting ample slack (see the chart).
Our next quantitative assessment of slack in U.S. business is due for release on March 20.
- Could Reduced Drilling Also Reduce GDP Growth?
- Are Shifts in Industry Composition Holding Back Wage Growth?
- Are Oil Prices "Passing Through"?
- Business as Usual?
- What's (Not) Up with Wage Growth?
- Are We Becoming a Part-Time Economy?
- Contrasting the Financing Needs of Different Types of Firms: Evidence From a New Small Business Survey
- Gauging Inflation Expectations with Surveys, Part 3: Do Firms Know What They Don’t Know?
- Gauging Inflation Expectations with Surveys, Part 2: The Question You Ask MattersA Lot
- Gauging Inflation Expectations with Surveys, Part 1: The Perspective of Firms
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