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June 25, 2009
Private sector forecasts at variance
Economic forecasts are notoriously inaccurate. That isn't a statement about the ability of forecasters, but rather a statement about the complexity of the economy. If you're looking for a humbling experience, I recommend you give it a try.
And today's economy would seem to be an exceptionally difficult environment in which to forecast. As economists peer into the future, there seems to be an unusually wide range of opinion about what to expect. Uncertainty is running pretty high right now in the minds of the top prognosticators.
Consider the following predictions from the Blue Chip panel of economists concerning the economy's growth rate a year and a half from now (fourth quarter 2010). The average growth rate expected in that time frame from the panel is 3 percent, which isn't that different from the six-quarter-ahead forecast they have made every June during the past 10 years or so. But if you compare the difference between the economic optimists (the 10 highest growth forecasts) relative to the economic pessimists (the 10 lowest growth forecasts), the discrepancy between the two views is large relative to recent history. In short, the forecasts on the optimistic end of the spectrum are now more optimistic while the pessimistic forecasts are a little more pessimistic.
Uncertainty over the medium-term outlook is particularly large regarding the experts' views on inflation. In the latest survey of the Blue Chip panel, the difference between the 10 highest and the 10 lowest inflation predictions for the fourth quarter of 2010 was a gaping 3.7 percentage points (compared with an average of about 1.5 percentage points over the past decade and a half). This wide range of opinions about inflation prospects started to emerge last year as economic conditions deteriorated.
Disharmony in the panel's inflation outlook doesn't so much suggest that those expecting inflation now see greater inflationary risks—at 3.2 percent the medium-term inflation prediction of the highest 10 inflation forecasts isn't materially different from where it has been since the late 1990s. Instead, the larger variance in the inflation outlook is coming from those at the bottom of the panel's forecast distribution that are anticipating even more downward price pressure than in previous years.
Pinpointing the future trajectory of the economy is generally considered more difficult near turning points in the business cycle—though the current uncertainty would appear to be particularly large, recession or not. Such uncertainty about the future is surely adding to the challenges facing the business community as it strives to get back on its feet.
By Laurel Graefe, economic research analyst at the Federal Reserve Bank of Atlanta
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June 18, 2009
CPI: The left and the right of it
Updated 11:30 a.m.
We got a good reading of May's inflation numbers this week. On both the producer and the consumer sides, price measures for the month came in well short of market expectations. The prospect of deflation has been getting a good deal of coverage in the blogosphere; see Andy Harless' blog, Economist's View, and Paul Krugman's column.
Greg Mankiw, however, points out that a trimmed mean estimate of the consumer price index (CPI), which removes the large relative price changes in each month, makes the deflation story seem a bit, uh, exaggerated.
"As every grade school student learns when the teacher reports results of the latest test, the average of any data set can be thrown off by a few extreme outliers; the median is a more robust statistic to estimate the central tendency in the data.
"Right now, the two measures of inflation are diverging substantially. The standard CPI shows deflation over the past year, but that average is due to a few anomalous sectors, such as energy. If you look at the median CPI, which shows what a more typical price is doing, the inflation rate does not look very unusual."
While the median is certainly a valuable way to look at inflation, there is also some interesting information that can be gleaned from breaking down the whole distribution of prices.
The chart below (hat tip to Brent Meyer at the Cleveland Fed) shows another interesting feature of yesterday's CPI release. Notice the clear downward shift in the distribution of CPI component price changes. Over half of the prices within the CPI market basket posted growth at or below 1 percent last month, up from an average of 29 percent in 2008, with a whopping one-third of the price index posting declines in May.
Of course, one month does not a trend make, but the month's price numbers were nonetheless noteworthy.
By Laurel Graefe, economic research analyst at the Atlanta Fed
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June 11, 2009
Price stability and the monetary base
Arthur Laffer, as several readers (and friends) have pointed out to me, is taking aim at the Fed:
"… as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.
"About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base—which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash—by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position."
I have a few problems with that statement. To begin with, the notion that the Federal Reserve signaled a 180-degree shift in focus to move "from an anti-inflation position to an anti-deflation position" is about equivalent to saying that the temperature control system in your house has a fundamentally different objective when the heater kicks off in June and the air conditioning kicks on. The essence of an inflation objective—even an implicit one—is that a central bank will lean against price-level changes substantially below the desired rate, as well as changes substantially above the desired rate. You can certainly argue with the policymakers' forecasts and diagnoses of risks at any given time, but it serves the debate well to not muddle tactics (focusing on inflation or deflation as the economic weather requires) and objectives (the control of the inflation rate that is Mr. Laffer's true concern).
But that point is a quibble. The increase in the U.S. monetary base has indeed been something to behold, and the Laffer article gives a good explanation about why you might be worried about that:
"Bank reserves are crucially important because they are the foundation upon which banks are able to expand their liabilities and thereby increase the quantity of money.
"Banks are required to hold a certain fraction of their liabilities—demand deposits and other checkable deposits—in reserves held at the Fed or in vault cash. Prior to the huge increase in bank reserves, banks had been constrained from expanding loans by their reserve positions. They weren't able to inject liquidity into the economy, which had been so desperately needed in response to the liquidity crisis that began in 2007 and continued into 2008. But since last September, all of that has changed. Banks now have huge amounts of excess reserves, enabling them to make lots of net new loans…
"At present, banks are doing just what we would expect them to do. They are making new loans and increasing overall bank liabilities (i.e., money). The 12-month growth rate of M1 is now in the 15% range, and close to its highest level in the past half century."
OK, but in my opinion it is a bit of a stretch—so far, at least—to correlate monetary base growth with bank loan growth:
Let's call that more than a bit of a stretch.
The Laffer argument is in large part about what the future will bring. But we know that the payment of interest on bank reserves—which we have discussed in this forum many times (here and here, for example)—means a higher demand for reserves in the future than in the past. This change, of course, means that levels of the monetary base that would have seemed scary in the past will become the new normal. How big can the "new normal" be? That's a good question, and one I will continue to contemplate. But the assertion in the Laffer article that "a major contraction in monetary base" is required cannot be supported by either current evidence or simple economic theory.
There is, however, more. Whatever policy choices are required to deliver a noninflationary environment going forward, Mr. Laffer seems convinced that the central bank is not up to making them:
"Alas, I doubt very much that the Fed will do what is necessary to guard against future inflation and higher interest rates. If the Fed were to reduce the monetary base by $1 trillion, it would need to sell a net $1 trillion in bonds. This would put the Fed in direct competition with Treasury's planned issuance of about $2 trillion worth of bonds over the coming 12 months. Failed auctions would become the norm and bond prices would tumble, reflecting a massive oversupply of government bonds."
On this I will just turn to my boss, Atlanta Fed President Dennis Lockhart, who addressed this very issue in a speech given today at the National Association of Securities Professionals Annual Pension and Financial Services Conference in Atlanta:
"The concerns about our economic path are crystallized in doubts expressed in some quarters about the Federal Reserve's ability to fulfill its obligation to deliver low and stable inflation in the face of very large current and prospective federal deficits. In a word, the concerns are about monetization of the resulting federal debt.
"I do not dismiss these concerns out of hand. I also recognize that the task of pursuing the Fed's dual mandate of price stability and sustainable growth will be greatly complicated should deliberate and timely action to address our fiscal imbalances fail to materialize. But I have full confidence in the Federal Reserve's ability and resolve to meet its inflation objectives in whatever environment presents itself. Of the many risks the U.S. and global economies still confront, I firmly believe the Fed losing sight of its inflation objectives is not among them."
'Nuff said, for now.
By David Altig, senior vice president and research director, at the Atlanta Fed
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June 08, 2009
Are there green shoots in the labor market?
In the first part of 2009, the labor market continued its general weakness, which carried over from 2008. However, the April and May employment data introduced some movements in a seemingly positive direction—green shoots, perhaps?
The first bit of relatively good news is that the decline in May payroll numbers of 345,000 is the lowest level of decline since September 2008 and about half of the average monthly job losses over the last six months. In addition, job losses were revised downward for both March (–699,000 to –652,000) and April (–539,000 to –504,000).
For the most part, the moderation was widespread across industries, as shown in the employment diffusion index, which increased from 25.8 percent in April to 32.7 percent in May. In addition, temporary help services, which has historically been thought of as a leading labor market indicator, experienced a relatively small number of job losses (–7,000) compared to the average of 73,000 losses per month over the last six months. Construction employment losses also moderated in May while manufacturing losses held steady at just over 150,000.
Another piece of somewhat encouraging news came from the initial claims data. Initial claims (four-week moving average) began a downward trend on April 11. The number of initial claims has declined for three consecutive weeks since the week ending May 9, although the levels are still slightly up compared to the May 2 levels.
A decline in initial claims has occurred at the end of the last five recessions so it would seem that this development is a positive signal. Historically, declines in initial claims at the end of prior recessions have also been accompanied by declines in continuing claims, which we saw for the first time in the week of May 23, when the number of continuing claims decreased by 15,000 relative to the preceding week. The four-week moving average for continuing claims continued to increase as the level for the week ending May 23 is still the second-highest level ever reported.
The unemployment rate, however, is still on the rise, increasing from 8.9 percent in April to 9.4 percent in May. This uptick is primarily related to an increase in the number of people losing jobs and persons who completed temporary jobs. Also, labor force participation increased, which works to drive up the unemployment rate, though the increase was slight, from 65.8 percent to 65.9 percent. In addition, after a dip in April, the number of workers that are part-time for economic reasons increased slightly in May.
The slight gain seen in April in average weekly hours for manufacturing workers was erased this month, although hours of overtime maintained April's slight increase.
We also have seen some better news in the Atlanta Fed's Sixth Federal Reserve District. Initial claims have decelerated at a faster rate in the Sixth District than in the nation, most notably in Georgia, Alabama, and Florida. Additionally, in contrast with the national level, where continuing claims have had a persistent rise until this past release, the rate of increase has slowed down in District states.
Also, Florida, which was one of the first states to suffer in the current recession and one of the hardest hit by the housing downturn, posted job gains in April for the first time in more than two years. A large share of these gains came from the employment services industry, which includes the temporary employment sector. Florida's numbers are slightly more positive than the industry's national data.
So are these recent improvements in some of the employment data really green shoots, or are they just weeds? Only time will tell, but it is promising that the labor market is at least producing some variation from the negative trends.
By Melinda Pitts, research economist and associate policy adviser, and Menbere Shiferaw, senior economic research analyst, at the Atlanta Fed
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June 03, 2009
Debt and money
If you are hunkered down on inflation watch, yesterday's news offered some soothing words. From Reuters:
"Chinese officials have expressed concern that heavy deficit spending and an ultra-loose monetary policy could spark inflation, eroding the value of China's U.S. bond holdings.
"But [U.S. Treasury Secretary Timothy] Geithner said: 'We have a strong, independent Fed and I am completely confident they have the ability to do their job under the law, which is to keep inflation stable and low over time, and that they will be able to—and certainly intend to—unwind these exceptional measures as soon as they have served their purpose.' "
And from Bloomberg:
"He said that there was 'no risk' of the U.S. monetizing its debt, a response to a question about whether the government would seek to finance the national debt by expanding the money supply and thus trigger a rise in inflation."
Concerns about such monetization arose in the wake of the FOMC's decision at its March meeting to purchase up to $300 billion of longer-term Treasury securities and that decision's coincidence with the very large fiscal deficits contemplated in President Obama's budget proposals. Those concerns have accelerated as longer-term Treasury yields have moved higher since.
There will, I trust, be plenty of opportunity to expand on these concerns as things develop, but for now I will offer just a little perspective in the form of the chart below, which shows the recent and (near-term) prospective shares of federal debt held by the Federal Reserve. The red line represents the share of debt that will be held by the Fed at the end of fiscal year 2009 if the $300 billion Treasury purchase program is completed and the federal deficit emerges as currently predicted by the Congressional Budget Office.
The financial crisis has, of course, borne witness to the shift in the Fed's balance sheet from Treasuries (which have been much in demand by the private sector) to a variety of loans and mortgage-backed securities. The consequence has been a sharp fall in the fraction of government debt held by the central bank, a fact that will be little changed under the current trajectory of Fed purchases and projected deficit spending.
A large decline in Fed holdings of Treasury bills—securities that mature in one year or less—drives much of the pattern seen in the chart above. The drop-off in share is not as large for Treasury notes—securities in the two- to ten-year maturity range, and some assumptions have to be made to get a picture of how the Fed's share might evolve over the near term. Without knowing how this evolution will occur, I developed two general assumptions for argument sake. If net new issues of Treasury debt follow historical averages, meaning just over half of net new debt is in the form of notes, and if the central bank applies the remainder of the $300 billion of longer-term Treasury purchases (about $170 billion at the end May) to notes, then the Fed would hold roughly 13 percent of the outstanding stock by the end of the year. If the Treasury were to issue nothing but bills or bonds, a $170 billion purchase of notes by the Fed would bring its share up to the neighborhood of 17 percent. Though these numbers are not as unusually low in historical context as is the case for total outstanding debt, neither would they jump off the page as an extreme aberration in the other direction.
Some might argue that "monetization" these days involves a whole lot more than government debt, but Chairman Bernanke has been pretty clear about his intentions regarding the overall size of the Fed's balance sheet. And, as I see it, so far allegations that extraordinary steps are being taken specifically to accommodate fiscal deficits are properly characterized as risk rather than fact.
By David Altig, senior vice president and research director at the Atlanta Fed
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