The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
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August 28, 2009
Is the output gap showing?
In a recent speech, Atlanta Fed President Dennis Lockhart laid out two competing risks to the inflation outlook. On one side, the usual measures of economic slack (output gap measures) suggest that there is so much excess production capacity that prices and wages are under great—and increasing—disinflationary pressure. All this is occurring at a time when inflation measures are trending below the FOMC's longer-term projection.
The other inflation risk is that the public may come to believe that the combined efforts of the monetary and fiscal authorities to prop up a sagging economy will ultimately lead to a familiar place—rising inflation—and if inflation expectations begin to move higher, so too will inflation.
So the risks to the inflation outlook seem to pivot on two, potentially opposing, forces: downward price pressure coming from a weak economy and upward price pressure resulting from a skeptical public.
Lockhart's assessment is that these "inflationary and deflationary risks are roughly balanced." But in the end, the security of such an inflation outlook rests largely with the behavior of the inflation data. So it is important to continue watching carefully for any signs that the balance of these risks is tilting in one direction or the other.
This view brings us to a chart posted in last week's Economic Highlights showing recent trends in core goods and core services prices in the consumer price index (CPI).
A key observation to take away from this picture isn't the recent acceleration in core goods prices. The highly volatile behavior of goods prices tends to make them an unreliable guide to underlying inflation trends. Rather, it is noteworthy to consider the significant downward trek of core services price growth. Indeed, the 12-month trend in core services prices was a shade under 1.6 percent in July—its lowest reading in the post-WWII era and roughly 1¾ percentage points lower than this time last year.
Some of the downward pressure on core services prices is a direct reflection of the housing crisis; a little more than half the core services price components are computed from housing rents. But that's not the whole story as a rather sharp disinflation was evident in core services excluding rents.
Likewise, productivity-adjusted labor costs—so-called "unit labor costs"—have also recently turned negative. These aren't record declines, but they are well off their prerecession growth rates.
Is this a sign that economic slack has begun to show through to the retail price numbers? It could be a bit early to bet the ranch on that one. Nonetheless, the evidence seems to offer a pretty compelling story at this time.
By Mike Bryan, vice president and senior economist, and Laurel Graefe, senior economic research analyst, both of the Atlanta Fed
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August 19, 2009
How fast can the economy grow?
The recession may be ending (and may, in fact, have ended, according to the majority of economists recently surveyed by the Wall Street Journal) but, as Friday's consumer confidence report suggests, the uncertainty about the course of future growth is far from resolved. The most recent consensus forecast from the panel assembled for the monthly Blue Chip Economic Indicators does suggest a nice bounce back into positive growth territory, bringing to an end a four-quarter run of gross domestic product (GDP) contraction.
What remains interesting, however, is the range of disagreement about just how fast the recovery will be. The upper and lower black lines in the chart above delineate the 10 most optimistic forecasts (the upper lines) and the least optimistic forecasts (the lower lines) among the Blue Chip panel's 51 economists. Most interesting is the fact that some collection of theses economists are, in any given quarter, guessing that growth will not break a 2 percent annual pace before we exit 2010.
That uncertainty is compounded by an even more consequential uncertainty, lucidly emphasized recently by Menzie Chinn (here, here, and here): How fast can we grow before straining the economy's capacity? In other words, is slow growth the best we can expect given the economy's current potential?
The output gap—the difference between the current level of GDP and estimated potential—has long been standard fare in policy analysis. Over at iMFdirect, the International Monetary Fund's blog, Ajai Chopra explains why we care:
"What would be merely a curiosity during better times—after all, potential output is a largely abstract concept measuring the level of output an economy can produce without undue strain on resources—has become a particular worry in the context of the global economic crisis…
"Right now, budget planners across Europe are scrambling to estimate the strength of the blow the crisis has dealt to public finances, and not knowing the growth potential of their economies greatly complicates their task. If they overestimate potential growth, they would underestimate the need for fiscal adjustment once the crisis has dissipated, raising thorny issues of fiscal sustainability in the longer run.
"Central bankers, too, are looking for guidance on the path of potential output. Their decision on when to start winding down current crisis policies depends on the difference between potential and actual output, the so-called output gap. If the output gap is closing faster because of a drop in potential, policymakers might decide to increase interest rates a little earlier and a little higher to prevent inflation from rising."
Economists also do not lack methods for estimating the output gap and, just in case the field is not crowded enough, Atlanta Fed economist Jim Nason has done some investigating of his own. Jim looked at a variety of statistical estimates of the output gap and arrived at what is now a pretty familiar conclusion. To wit, there is substantial variation in output gap estimates across the different methods, and I do mean substantial: The gap estimates for the second quarter of 2009 range from –0.5 to nearly –11 percent depending on which method is used. In other words, some methods imply the gap is very large, others say the gap is rather small.
I am tempted to invoke the ancient economists' chant, "noh-bah-de-noz," but real-life policymakers don't have that luxury. So we delve in the details and try to sort out what seems like the best approach. (If you have a technical bent, you can do the same with Jim's estimates by following this link.) As we sort it out, though, Ajai Chopra gives some sound advice:
"As for central bankers, they should also act on the information they have, although researchers such as Athanasios Orphanides (now Governor of the Central Bank of Cyprus and member of the ECB's Governing Council) have sensibly suggested that central banks should tread carefully by reducing the importance of the output gap in their decision making.
"More generally, policymakers—be they in the central bank or in the ministry of finance—would do well by communicating their assumptions about potential output growth to the public."
With that in mind, I will leave you with the recent communication on the subject offered by Federal Reserve Bank of Atlanta President Dennis Lockhart:
"Many observers see substantial slack in the economy that could persist for some years. Economists' more formal term for slack is "output gap." We at the Atlanta Fed see a meaningful output gap developing, but in our view it is smaller than would normally be associated with the weak pace of growth we expect over the next couple of years because all the obstacles to the natural pace of growth already mentioned have brought down the economy's potential for the medium term."
So, as President Lockhart indicates, mark us down, for now, on the low end of output gap scale.
By David Altig, senior vice president and research director at the Federal Reserve Bank of Atlanta
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August 14, 2009
What's really different about this recession?
The short answer to the question posed in the title of this blog post is, of course, "lots of things." One of those things is featured in the latest edition of Economic Highlights, the Atlanta Fed's weekly digest of newly released economic statistics. Here, specifically, is a chart reflecting the trajectories of individuals working part-time for economic reasons in the current and past recessions.
As the chart clearly shows, the increase in people reporting that they are involuntarily working part-time rather than full-time is considerably higher in this recession than in past recessions. Although the increase in these workers has moderated some since the spring of this year, the number of people in the category of working part-time for economic reasons remains at 8.8 million, well above the level of past contractions in both absolute and relative terms.
This recession has given us many puzzles to mull over. Now we can add the unusual pattern of part-time work to the list.
Side note: We invite you to check out SouthPoint, the Atlanta Fed's new weekly blog on regional economic conditions in the Southeast.
By Menbere Shiferaw, senior economic research analyst at the Atlanta Fed
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August 06, 2009
Every recovery is the same; each recovery is different
Two weeks ago, macroblog looked at the rather pessimistic expectations for what the economic recovery might look like this time around. Included was part of the narrative noting that structural adjustments are likely to impede a quick snapback in gross domestic product (GDP) over the coming quarters.
Macroblog reader Bryan Lassiter asked, "Do economists typically predict a weaker recovery than history suggests?" Good question. To state the question in a slightly different way, "Has the United States ever been in a situation where it experienced a deep recession and forecasters subsequently predicted a slow recovery that ultimately proved to be incorrectly pessimistic?"
To get at these questions, we can look at real-time real GDP data and the Survey of Professional Forecasters (SPF) available from the Federal Reserve Bank of Philadelphia (while the SPF started in 1968, forecasts of real GDP began in 1981).
The chart plots the depth of the recession on the x axis and strength of recovery on the y axis (updated from the 7/24 post to include last Friday's GDP release). The blue diamonds were constructed using forecasts that were made in the quarter the recession officially ended; the red squares are what actually happened.
To illustrate the exercise, pretend we're back in the fourth quarter of 2001 and the recession is over (although we didn't know it). Given what we thought we knew about the economy at the time, we can look at what forecasters were expecting in terms of GDP and compare it with what was ultimately reported by the U.S. Bureau of Economic Analysis. Looking at the 2001 recession, we can see that the expectations for recovery were not that far off, but the severity of the recession was lessened—partly because of data revisions and partly because of forecast error. The 1990–91 recession showed a similar pattern, but in reverse. That is, the recovery forecasts were close to the actual experience, but the depth of the recession ended up being more severe than initially thought.
What stands out in the chart is the recovery following the 1981–82 recession. In real time, four-quarter GDP growth was expected to be about 3.5 percent but wound up being much stronger at nearly 8 percent. In this instance, the response is yes to the initial question of whether economists typically predict a weaker recovery. With the 1981–82 episode, we saw a recession where economists had forecast a recovery that ultimately turned out to be much stronger than anticipated. However, the 1981–82 blue diamond was still relatively close to the cluster of other recessions on the chart, meaning the recovery forecast was not exceptionally weak. Thus, the current recession still seems to be an outlier. Given the almost 4 percent decline experienced in GDP, the hope would be to see something stronger than the 2.5 percent growth expected over the next year.
Whatever the impediments to a sharp recovery, forecasts are certainly telling us that economists are treating this recession as being different from previous ones.
By Mike Hammill, economic policy analyst at the Atlanta Fed
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August 04, 2009
GDP benchmark revisions: Count me very surprised
Last Friday morning, the Bureau of Economic Analysis released its advanced estimate for second quarter gross domestic product (GDP) as well as its benchmark data revisions. These revised data tell us a slightly different story with a rather negative twist in looking at the last two recessions. The new GDP numbers show that the 2001 recession was not as severe as originally thought while the 2007 recession is worse than first reported. Below are the comparisons of the pre- and post-2005 benchmark data:
As a follow up to David Altig’s blog posting, "Unemployment Rate: Count Me Surprised," I took the graphs he used measuring cumulative percentage change loss for GDP against the peak unemployment rate during the recession. The GDP numbers below are updated with the new benchmark revision data:
Note: Macroeconomic Advisors data were used in the original post from July 23. However, since Macroeconomic Advisors has not yet updated their forecasts, I am assuming for the purposes of this blog post that the recession ended with the second quarter of 2009.
After these revisions it’s clear to see that the current recession is even more of a dramatic Okun’s Law outlier than was originally thought when observing the pre-revised data. As background, Brad DeLong described Okun’s Law thus in a recent blog post:
"If GDP (production and incomes, that is) rises or falls two percent due to the business cycle, the unemployment rate will rise or fall by one percent. The magnitude of swings in unemployment will always be half or nearly half the magnitude of swings in GDP."
Although the revised GDP data show more negative growth rates for the current recession, which should make the current recession less of an outlier using Okun’s Law, GDP growth during the 2001 recession was higher than the first observations, which changed the trend line and outweighed the effects of the revision to the data of the current recession.
By Courtney Nosal, economic research analyst at the Atlanta Fed
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