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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August 31, 2004
Consumer Confidence Takes a Dive
The Conference Board announced today that its Consumer Confidence Index fell to 98.2 in August (from 105.7) in July: www.conference-board.org/economics/consumerConfidence.cfm.
The index has components measuring both survey respondents' assessment of current conditions and their expectations of future conditions. Both components took a hit last month.
The importance of these measures is still a matter of some debate among economists. Yash Mehra and Elliot Martin from the Richmond Fed have recently argued that consumer sentiment is useful in forecasting consumer spending because it is tells us something about consumer expectations of future income, but not because it signals some independent influence on consumer behavior. To put it another way, if we have a good separate measure of households' expectations of future economic conditions, the consumer confidence index per se is not likely to improve our forecasts of retail sales, and so on. (In the econ-geek speak of our 33840 model: A change in consumer confidence represents a shock to expected future income, and not the quantity of consumption households desire for given levels of interest rates and perceived wealth).
Jason Bram and Sydney Ludvigson might, however, say not so fast. Mehra and Martin come to their conclusion based on the University of Michigan's Index of Consumer Sentiment, not the Conference Board's confidence index. Writing in the June 1998 edition ot the New York Fed's Economic Policy Review, Bram and Ludvigson claim that, as a general matter, the Michigan index is the wrong one to use. The Conference Board index, according to them, has superior forecasting properties.
The two articles require some knowledge of basic statistical methods, but even without delving into details you can pretty much get the gist of things. The Bram and Ludvgson article, in particular, has a nice discussion of the differences between the two measures.
The Mehra and Martin article can be found here: www.rich.frb.org/pubs/economic_quarterly/pdfs/fall2003/mehra.pdf;
The Bram-Ludvigson article is here: www.newyorkfed.org/research/epr/98v04n2/9806bram.pdf
Did the Bush Tax Cuts Soak the Middle Class?
Here's a rousing defense of the Bush tax cuts by Donald Luskin in The Detroit News: www.detnews.com/2004/editorial/0408/27/a09-255537.htm. (For the record, I found the link to this article at Polipundit.com).
Don't take Luskin's word for it, though. You can check out the Congressional Budget Office's analysis yourself: www.cbo.gov/showdoc.cfm?index=5746&sequence=0&from=0#anchor.
August 30, 2004
July Income Rises -- But Less Than Expected
The U.S. Commerce Department announced today that personal income expanded by 0.1 percent in July (www.bea.gov/bea/newsrel/pinewsrelease.htm). This was lower than expected -- see, for example, the roundup at Briefing.com: www.briefing.com/Silver/Calendars/EconomicCalendar.htm.
Not surprisingly this is assumed to be less than good news. From Bloomberg (quote.bloomberg.com/apps/news?pid=10000103&sid=aurH23zSCkdc&refer=news_index):
The report supports the Federal Reserve's view that a slowdown in demand and a pickup in inflation because of higher oil prices would prove transitory. More hiring after four months of slowing job growth may be needed to sustain spending as benefits from tax cuts and mortgage refinancing recede, economists said.
"Trends show a sharp surge on auto spending in July but little strength elsewhere," said Robert Brusca of FAO Economics in a note to clients Monday. "Most disturbing is the ongoing sluggishness for services. Demand there is hovering around (annual) gains of 2 percent. That won't create many jobs."
Consumers, however, don't seem so depressed. Consumer spending rose by 0.8%, the fastest monthly expansion so far this year.
Simple pop quiz: If income growth slow, but consumption growth rises, what does that suggest about consumer expectations of future income?
One other piece of news in the release -- consumer prices (as measured by the Index for Personal Concsumption Expenditures (www.investopedia.com/terms/p/pce.asp) -- did not increase in July. That really warms a Fed economist's heart (at least until we start worrying about deflation again).
Employment Growth in High-Paying Sectors
Since the beginning of the year, roughly 1.25 million jobs have been added to payrolls, consistently outpacing population growth for the first time in four years. With the jobless recovery apparently complete, it is natural to examine next the type of jobs being created.
See the article by Daniel Aaronson and Sara Christopher from the Federal Reserve Bank of Chicago: www.chicagofed.org/publications/fedletter/cflseptember2004_206.pdf.
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Manufacturing Production vs. Goods Output: Why Do They Differ?
The sharp divergence in the 2001 recession between two key economic indicators—manufacturing production and goods output—could suggest that one indicator is flawed, casting doubt on the reliability of its overall series. This analysis finds no evidence of error. Rather, the strength of spending on consumer—relative to capital—goods and the growth of merchandising services in the sale of consumer goods more likely explain the recent deviation.
So according to New York Fed economist Charlie Steindel. Read the whole story at www.newyorkfed.org/research/current_issues/ci10-9.html.
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August 29, 2004
On Regional Free Trade Agreements
The Region also has an interesting article (by Ronald A. Wirtz) on the growth of Regional Trade Agreements, and the controversy about their effectiveness: woodrow.mpls.frb.fed.us/pubs/region/04-09/wirtz.cfm
This is the second post related to this publication. In fact -- just take a look at the table of contents: woodrow.mpls.frb.fed.us/pubs/region/04-09/. The whole thing is worth reading.
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Supply, Demand, and Labor Markets
Harvard economist Claudia Goldin explains how labor markets work in the Septmber 2004 issue of the Minneapolis Fed's The Region(woodrow.mpls.frb.fed.us/pubs/region/04-09/goldin.cfm). Here's an excerpt:
REGION: Married women roughly tripled their hours in the workforce between 1950 and 1990, while men and single women barely changed their participation. Several standing theories try to explain the trend through declines in wage discrimination, liberation from housework by labor-saving technology, etc. What is your understanding of this phenomenon?
GOLDIN: ... When you have a complicated problem such as this one, it’s very useful to organize one’s thoughts along the lines of simple supply and demand. Is it supply shifts, and what do we put on the supply side? Or is it demand shifts, and what exactly are we putting on the demand side?
...the starting point that I always use is Jacob Mincer’s. In one of his most famous papers written in the 1960s, Mincer was trying to understand changes in female labor force participation from the 1940s to the 1960s.
His working hypothesis was that we have a supply function of female labor and we have a demand function, and the demand function is shifting across a relatively stable supply function. The demand shifts were much greater than the supply shifts. What is the information we have available to us to assess this? Well, we have the fact that the real wages of women were rising at the same time that female labor force participation was increasing.
Behind the labor supply function are several variables and parameters of which the substitution and income effects are among the most important for study. Individuals make decisions about whether the value of their time in some other activity—let’s say in home production or in leisure—is greater or less than their value in the market. And as this real wage rises, more and more are going to get pulled into the labor force.
Mincer realized that there is a little bit of a problem here because if the wages of women are rising, then it’s most likely that the wages of men are rising, and if that’s true, then we have to consider the fact that there’s also an income effect. That’s how he viewed this: That the increase in female labor force participation is going to depend largely on whether the substitution effect is greater than the income effect.
In the period he was looking at, voilà, the impact of the substitution effect was monumentally greater than the income effect, and therefore he could go a long way in explaining this increase without considering any of these enormous complications.
That's just the beginning, as Goldin goes on to discuss her work on the gender gap, again applying simple (but clearly powerful) supply and demand arguments:
The back-of-the-envelope calculations in my book long ago were that from 1890 to 1930 supply-side factors were most important, whereas from 1940 to 1960 demand-side factors were most important. Well, that was the period Mincer was looking at, when this demand curve was shifting out over a very elastic female labor supply function. In the earlier period when the income effect was much stronger you have a far steeper supply function. So you can send that demand curve out to Neptune and it’s not going to have a very great effect on quantities. Prices are going to change but quantities aren’t.
And from 1960 to 1980, supply factors and demand factors are sort of sharing the load. What about from 1980 to 2000, which I didn’t do because I finished the book [Understanding the Gender Gap: An Economic History of American Women] in the late 1980s. I think it’s probably the case that demand factors have regained more importance, but I must confess that I haven’t looked at it. The important thing is to understand what the substitution elasticity is and what the income elasticity is.
It is worth reading the whole article to get this eminent economic historian's views on education, slavery, discrimination, and many other topics.
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SF Fed's New Research Center
The Federal Reserve Bank of San Francisco has created a Center for the Study of Innovation and Technology (CSIP): www.frbsf.org/csip/index.php . Here, in the Bank's words, are the Center's objectives:
"CSIP's goal is to promote understanding of the roles of innovation, technological progress, and productivity in the global, national, and regional economies."
The site includes links to articles are aimed at general audiences and economists alike.
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