February 26, 2010
Exit strategy, tactics, and decision makers
Vincent Reinhart, resident scholar at the American Enterprise Institute and former senior official of the Federal Reserve Board of Governors, heard the Chairman speak and seems to have come away not wholly satisfied.
"… Bernanke will talk about reverse repurchase agreements and interest on excess reserves as congressional committee members nod in agreement. Mastery over tactics, the bet runs, will restore faith in an otherwise undefined future. It is a difficult trick, this confidence game. The Fed will provide enough detail about its tactical exit from its unusual policy accommodation to allay concerns, but not so many specifics as to lead market participants to believe it intends to head for the exit soon.
"Lost in this thicket of expertise will be important public policy questions basic enough to be assigned as homework in a high-school journalism class.
"When will the Fed begin to raise the short-term market interest rate?"
Interestingly, Reinhart himself has his own answer to that question:
"The Fed has the dual responsibility of fostering employment and price stability. As of now, the Fed continues to forecast substantial and lingering unemployment that puts downward pressure on inflation. Until policy makers can produce a forecast that gives a reason to tighten, they will not tighten. That outlook is not likely to change until late this year."
That judgment is certainly not a matter of inside information or any special insight, as there are plenty of statements like this one from Dennis Lockhart, our boss here at the Atlanta Fed:
"I continue to support an interest rate policy described in recent FOMC statements as low for an 'extended period.' What does 'extended period' mean? I don't want to put a date on it. To me, it means the policy rate will be kept low until recovery has shown momentum that is based on private business and consumer demand, job growth is established or at least imminent, and the downside risks appear to be safely navigable. This unwinding is in the context of well-behaved inflation, of course."
In fact, Chairman Bernanke said very much the same thing Wednesday in the first installment of his semiannual testimony before Congress:
" 'The federal funds rate is likely to remain exceptionally low for an extended period,' Bernanke said, repeating language that has been in every Fed statement on monetary policy for the past 14 months…
" 'As the impetus provided by the inventory cycle is temporary and as the fiscal support for economic growth will likely diminish later this year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services,' Bernanke said. 'The job market remains quite weak.' "
Though much of the discussion lately has been about the tools of implementing policy decisions, that is only natural. The objectives of the central bank—including a broad understanding of what sort of economic conditions will drive a change in policy direction—seem to be well understood. What is new is the instruments that may be brought to bear in light of the very large size of the Fed's balance sheet, a legacy of what I view as successful efforts to manage the fallout of the financial crisis.
Reinhart does make note of an interesting governance question that presents itself if the so-called "exit strategy" involves the payment of interest on reserves that banks deposit with the central bank:
"How will the Fed raise the short-term market interest rate? The old-fashioned way of tightening monetary policy is to shrink the amount of reserves outstanding by selling assets. …[T]he Fed will raise the rate it pays on excess reserves (or deposits of banks at the Fed). Banks will pull up interest rates in the money market as the alternative use of reserves—parking them at the Fed—becomes more remunerative.
"Who at the Fed will raise the short-term market interest rate? Congress explicitly gave the authority to raise the interest rate on excess reserves to the Board of Governors (or the seven appointed officials who work in Washington), not the Federal Open Market Committee (FOMC, or the board governors and a subset of reserve bank presidents who normally vote on reserve conditions). Thus, the balance of power within the Fed will shift toward the governors when the instrument of policy becomes the interest rate on reserves. (Bernanke elided this issue in his recent testimony when he left the impression that the FOMC will still set policy in conjunction with the board. In fact, the Federal Reserve Act prohibits the board from delegating monetary policy to others.)"
The institutional fact is certainly correct—the authority to set the interest rate paid on reserves is granted to the Board of Governors, not the FOMC. But, in my view, this is of more theoretical than practical interest. The minutes of the January meeting of the FOMC made clear that, though no definitive decision has yet been made, it may well be the case that the payment of interest on reserves is employed as a transitional tool employed along the road to an environment in which the federal funds rate again reigns supreme:
"With respect to longer-run approaches to implementing monetary policy, most policymakers saw benefits in continuing to use the federal funds rate as the operating target for implementing monetary policy, so long as other money market rates remained closely linked to the federal funds rate. Many thought that an approach in which the primary credit rate was set above the Committee's target for the federal funds rate and the IOER [interest on excess reserves] rate was set below that target—a corridor system—would be beneficial. Participants recognized, however, that the supply of reserve balances would need to be reduced considerably to lift the funds rate above the IOER rate. Several saw advantages to using the IOER rate, rather than a target for a market rate, to indicate the stance of policy. Participants noted that their judgments were tentative, that they would continue to discuss the ultimate operating regime, and that they might well gain useful information about longer-run approaches during the eventual withdrawal of policy accommodation."
It is also worth noting that if you pick up any old money and banking textbook, you will likely see listed a trio of tools that the central bank has to affect the money supply: open market operations, reserve requirements, and the discount rate. The latter two have always been the sole or primary province of the Board of Governors. In practice, however, they have been employed as adjuncts to the decisions of the FOMC. As of now, there really is no indication that this is likely to change.
By David Altig, senior vice president and research director at the Atlanta Fed
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February 23, 2010
Looking behind the core inflation numbers
Last Friday's consumer price index (CPI) report showed headline inflation in January remaining stable from the previous month at a 2 percent annual rate, a bit above most private forecasts, boosted by higher fuel costs. But the show was stolen by the core measure. Excluding food and energy, consumer inflation saw the largest monthly drop in more than 27 years and its third largest decline in 47 years.
Several factors were behind the decline in the core index (such as falling airline fares, a dip in new car prices, and ongoing declines in prices for household furnishings and operations), but a sizeable drop in shelter prices, which account for more than 40 percent of the core CPI index, was a significant factor in January's dip. A concern that decelerating shelter prices could skew the core inflation measure was noted in the minutes of January's FOMC meeting:
“Though headline inflation had been variable, largely reflecting swings in energy prices, core measures of inflation were subdued and were expected to remain so. One participant noted that core inflation had been held down in recent quarters by unusually slow increases in the price index for shelter, and that the recent behavior of core inflation might be a misleading signal of the underlying inflation trend.”
Chart 1 illustrates the recent decline the in shelter component of the CPI and how, excluding shelter, core inflation has been growing at a more robust pace than is indicated in the overall number.
However, once we've opened the door for pruning sectors that have displayed unusual price behavior in recent months, we can find a slew of outlying components to pare. Take, for example, vehicle prices. With the impact of the ailing state of U.S. automakers, the federal government's “Cash for Clunkers” program, and the major recalls from Toyota, auto prices have been particularly volatile lately. Used car and truck prices have grown at annual rates between 20 percent and 44 percent in each of the past six months, skewing, some could argue, the core measure upward.
Chart 2 shows core CPI after subtracting both shelter and used vehicle prices, a picture that shows a lower inflation rate—more in line with the numbers in the overall core CPI.
My point here is not to advocate lopping shelter and vehicles, along with the already excluded food and energy prices from inflation—which, by the way, would leave us with less than 45 percent of the overall CPI index. In fact, my argument is the opposite. There are always some components of the index that seem anomalous—on either side of the distribution. Discriminately cropping entire sectors from the CPI may not be the best method for teasing out true underlying price pressures.
The Cleveland Fed uses a more methodical approach to exclude the CPI components that show the most extreme price changes each month. Their calculations show a more subdued underlying inflation environment, with median and trimmed mean CPI hovering around 1 percent for the past several months (chart 3). I'm not endorsing this method as a perfect estimation of “true” underlying inflation, but it does provide an example of indiscriminately trimming the outliers to see what's beneath.
By Laurel Graefe, senior economic research analyst at the Atlanta Fed
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February 19, 2010
Should the Fed stay in regulation?
One of the central issues in the postcrisis effort to reform our regulatory infrastructure is who should do the regulating. The answer to some in Congress is none of the above:
"… under consideration is a consolidated bank regulator, one aide [to Alabama Senator Richard Shelby] said. The idea is supported by [Connecticut Senator Christopher] Dodd, who proposed eliminating the Office of Thrift Supervision and Office of the Comptroller of the Currency, and moving their powers, along with the bank-supervision powers of the Federal Reserve and the Federal Deposit Insurance Corp., to the new agency.
"Negotiators are still deciding how to monitor firms for systemic risk, including how to define and measure it, what authorities to give a regulator and which agency is best suited to get the power, a Shelby aide said."
As reported in The New York Times:
"The Senate and the Obama administration are nearing agreement on forming a council of regulators, led by the Treasury secretary, to identify systemic risk to the nation's financial system, officials said Wednesday…"
Though the idea of a council to provide regulatory and supervisory oversight is still contentious (the Times article offers multiple opinions from Federal Reserve officials) the formation of a council is not necessarily the same thing as removing the central bank from boots-on-the-ground, or operational, supervisory responsibility. In other words, there is still the question of how to monitor systemic risk and which agency is best suited to get the power.
Earlier this week I made note of a new International Monetary Fund (IMF) paper by Olivier Blanchard, Giovanni Dell'Aricca, and Paulo Mauro, taking some issue with the proposal that central banks consider raising their long-run inflation objectives. Though that part of the paper seemed to attract almost all of the attention in the media and blogosphere, the discussion in the IMF article expanded well beyond that inflation target issue. Included among the many proposals of Blanchard et al. was this, on systemic risk regulation and the role of the central bank:
"If one accepts the notion that, together, monetary policy and regulation provide a large set of cyclical tools, this raises the issue of how coordination is achieved between the monetary and the regulatory authorities, or whether the central bank should be in charge of both.
"The increasing trend toward separation of the two may well have to be reversed. Central banks are an obvious candidate as macroprudential regulators. They are ideally positioned to monitor macroeconomic developments, and in several countries they already regulate the banks. 'Communication' debacles during the crisis (for example on the occasion of the bailout of Northern Rock) point to the problems involved in coordinating the actions of two separate agencies. And the potential implications of monetary policy decisions for leverage and risk taking also favor the centralization of macroprudential responsibilities within the central bank."
Consistent with the even-handedness of the Blanchard et al. paper, the authors did not come to this conclusion without noting the legitimate issues of those who would separate regulatory authority from the central bank:
"Against this solution, two arguments were given in the past against giving such power to the central bank. The first was that the central bank would take a 'softer' stance against inflation, since interest rate hikes may have a detrimental effect on bank balance sheets. The second was that the central bank would have a more complex mandate, and thus be less easily accountable. Both arguments have merit and, at a minimum, imply a need for further transparency if the central bank is given responsibility for regulation."
But, they conclude:
I wonder, then: Would a regulatory council of which the Federal Reserve is a member, combined with operational supervisory responsibilities housed within the central bank, be a tolerably good response to Blanchard's and his colleagues' admonitions?
"The alternative, that is, separate monetary and regulatory authorities, seems worse."
By Dave Altig, senior vice president and director of research at the Atlanta Fed
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February 16, 2010
Do we need to rethink macroeconomic policy?
The aftermath of a crisis is always fertile ground for big thoughts. Big thinking is exactly what we get from Olivier Blanchard (the International Monetary Fund's director of research) and his colleagues Giovanni Dell'Aricca and Paolo Mauro, in their new overview of the financial crisis and what it means for how we think about and, more importantly, practice macroeconomic policy. Titled, appropriately enough, "Rethinking Macroeconomic Policy," one of the more provocative parts of their analysis was highlighted in the Wall Street Journal:
"Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says.
"At a 4% inflation rate, Mr. Blanchard says, short-term interest rates in placid economies likely would be around 6% to 7%, giving central bankers far more room to cut rates before they get near zero, after which it is nearly impossible to cut short-term rates further."
"None of the major Macro work ever done, from Barro forward, has ever found damage to economic growth from 4% inflation."
I suppose that the modifier "major" provides something of an escape clause, but as a general proposition there is at least some evidence that 2% is preferable to 4%. From the IMF itself, for example, there is this…
"The threshold level of inflation above which inflation significantly slows growth is estimated at 1–3 percent for industrial countries and 11–12 percent for developing countries. The negative and significant relationship between inflation and growth, for inflation rates above the threshold level, is quite robust..."
… which confirms the results of an earlier IMF study:
"Our more detailed results may be summarized briefly. First, there are two important nonlinearities in the inflation-growth relationship. At very low inflation rates (around 2–3 percent a year, or lower), inflation and growth are positively correlated. Otherwise, inflation and growth are negatively correlated…"
To be sure, there are plenty of studies suggesting modest increases in the rate of inflation from the levels currently targeted by many central banks would not be problematic—here, for example. But the point is that the evidence is not clear cut that an increase from an average rate of inflation in the neighborhood of 2 percent to the neighborhood of 4 percent would be innocuous. And there is always this element, noted by John Taylor in the aforementioned Wall Street Journal article:
"John Taylor, a Stanford University monetary-policy specialist who served in the Bush administration Treasury department, says that inflation could become hard to constrain if the target is raised. 'If you say it's 4%, why not 5% or 6%?' Mr. Taylor said. 'There's something that people understand about zero inflation.' "
So, the issue comes down to whether the uncertain costs of raising the average inflation rate is justified by the goal of avoiding the zero bound. At Free Exchange, the blog of The Economist, there is some skepticism:
"… the value of avoiding the zero bound depends on the seriousness of the macroeconomic situation. From the vantage point of 2010, a higher target rate seems like a great idea, but economic crises this severe are rare events. Even if there are only small costs to a 3% target relative to a 2% target, they may not be worth the trouble if the goal is to avoid serious trouble once every 80 years.
"There is a concern that with a higher level of inflation, inflation will become more volatile and expectations less anchored. At the same time, the higher target might not be enough to handle a recession as deep as the most recent downturn; to achieve the equivalent of a Taylor rule indicated -5% federal funds target without being constrained by the zero lower bound, the Fed would need to target inflation at at least 7%. Separately, these criticisms seem compelling, but taken together they cancel each other out."
Those are good arguments in my view, but my doubts about running policy to avoid the zero bound run even deeper. Among the lessons taken from the financial crisis, I include this: The "zero bound problem" was not all that big of a problem at all.
The Federal Open Market Committee moved the federal funds rate target to its effective lower bound (0 to ¼ percent) on Dec. 16, 2008. After a very rough start to 2009, gross domestic product (GDP) growth improved substantially in the second quarter. By the third quarter, growth was positive and, as far as we currently know, clocked in near 6 percent in the fourth. Is this the stuff of zero bound disaster?
In fact, Blanchard and company acknowledge that…
"It appears today that the world will likely avoid major deflation and thus avoid the deadly interaction of larger and larger deflation, higher and higher real interest rates, and a larger and larger output gap."
… but follow up with this:
"But it is clear that the zero nominal interest rate bound has proven costly."
Clear? Proven? I don't see it, and the IMF authors, in my view, explain why the zero bound problem was of limited relevance in the recent crisis:
"Markets are segmented, with specialized investors operating in specific markets. Most of the time, they are well linked through arbitrage. However, when, for some reason, some of the investors withdraw from that market (be it because of losses in some of their other activities, loss of access to some of their funds, or internal agency issues), the effect on prices can be very large. In this sense, wholesale funding is not fundamentally different from demand deposits, and the demand for liquidity extends far beyond banks. When this happens, rates are no longer linked through arbitrage, and the policy rate is no longer a sufficient instrument for policy." (I added the emphasis.)
The highlighted passage, of course, does not say "the policy rate is no longer a necessary instrument," and I certainly cannot prove that the trajectory of the economy in 2009 wouldn't have been better if only we had another 100 to 200 basis points in the tool kit. But color me a skeptic, and put me down on the petition to not experiment with higher inflation to avoid a problem that was not so clearly a problem.
By Dave Altig, senior vice president and research director at the Atlanta Fed
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February 13, 2010
The punch bowl, the party, the exit
Though weather of the sort usually reserved for Minneapolis, Chicago, and Cleveland kept Chairman Bernanke from delivering his message in person, a message was sent on Wednesday of last week nonetheless regarding one of the central monetary policy questions of the moment. That is, in terms of the nuts and bolts, what exactly is the Fed's "exit strategy?" Chairman Bernanke provided a general description in this excerpt:
"Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding. We have spent considerable effort in developing the tools we will need to remove policy accommodation…"
A summary of thoughts on Chairman Bernanke’s comments is provided by the Wall Street Journal’s roundup of economist’s reactions to the testimony. If you have ten minutes to spend, an interest in the federal funds market and how interest on reserve policy works, and the desire to hear a lecture that would usually cost you good money, I further commend to you the Mark Thoma’s video at MoneyWatch.com.
Here’s the way I think about the options addressed by the Chairman in his prepared remarks. Let's start with a well-traveled metaphor for how "policy accommodation" works:
Step 1: The Fed fills up the punch bowl (by buying assets and lending funds to financial institutions, which corresponds to a like quantity of liabilities on the central bank’s balance sheet, which includes bank reserves).
Step 2: Bankers spike the punch (by leveraging the quantity of bank reserves outstanding into a multiple quantity of loans to the private sector).
Step 3: The party's on (as businesses and individuals support production and consumption from the credit provided).
What does the Federal Reserve have against a party? Nothing, of course, and the provision of liquidity and specialized support in various parts of the financial system was exactly the point of filling up the punch bowl in the first place:
In addition to supporting the functioning of financial markets, the Federal Reserve also applied an extraordinary degree of monetary policy stimulus to help counter the adverse effects of the financial crisis on the economy… A range of evidence suggests that these purchases and the associated creation of bank reserves have helped improve conditions in private credit markets and put downward pressure on longer-term private borrowing rates and spreads.
The concern, of course, is that, as the economy recovers, so much stimulus increases the potential of the party getting out of hand:
"The FOMC anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. In due course, however, as the expansion matures the Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures."
There is nothing new about this issue. This is exactly what monetary policy decision is always about: When is the appropriate time to apply monetary accommodation, and when is the appropriate time to reduce it.
What is different this time is that the usual approach—drain the punch bowl by selling assets on the Fed’s balance sheet—might well cause very large sales that could work at cross-purposes to the objective of maintaining orderly function in the financial markets that policy is still trying support:
"I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery… Although passively redeeming agency debt and MBS as they mature or are prepaid… the Federal Reserve may also choose to sell securities in the future when the economic recovery is sufficiently advanced and the FOMC has determined that the associated financial tightening is warranted. Any such sales would be at a gradual pace, would be clearly communicated to market participants, and would entail appropriate consideration of economic conditions."
If "gradual pace" implemented with "appropriate consideration of economic conditions" does not provide sufficient scope for removing monetary stimulus as the need arises, are we simply stick with a party that is destined to spin out of control?
To me, this is where the alternative tools emphasized by Chairman Bernanke come into play. These approaches would work not by altering the overall size of the balance sheet but by altering the composition of the balance sheet in important ways.
One strategy mentioned by the Chairman—reverse repurchase, or repo, agreements—looks a lot like the standard old drain the punch bowl approach. In outright sales, to put it in simple terms, the Fed sheds assets that are paid for with money (think of it as reserves) that the central bank simply takes out of circulation. A reverse repo does very much the same thing, except that it comes with a promise to repurchase the assets—putting more money back into the system—at some future date. Because this approach has more the character of renting assets versus selling them, the overall asset side of the Fed’s balance sheet stays the same, but the liability side shifts from providing reserves today to an agreement to provide reserves in the future. As long as repurchase agreements are rolled over, the quantity of bank reserves is reduced and monetary stimulus is managed.
Another strategy mentioned by the Chairman was the issuance of term deposits to banks. No need to stretch our imagination too much here. The basic economic intuition is really just like that for reverse repos, except that bank reserves are being exchanged for something like certificates of deposits issued to banks instead of mortgage-backed securities or the like.
The payment of interest to banks for the reserve balances they hold with the Fed, also mentioned, and in fact highlighted, by the Chairman, has a slightly different nature. Like reverse repos and term deposits, the amount of punch provided by monetary policy is not altered. What is altered is the incentive for banks to spike the punch by expanding the quantity of loans.
There is a good argument for the case that there is no need to alter those incentives in the current environment. As Mr. Bernanke indicates:
"The FOMC anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
But once the party heats up, the need to restrain credit expansion through the various tools available will be essential. On this, the Chairman gets the last word:
"… we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus. We have full confidence that, when the time comes, we will be ready to do so."
Update: Jim Hamilton adds his thoughts.
By Dave Altig, senior vice president and research director at the Atlanta Fed
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February 09, 2010
If your economic forecast for the coming year embeds something like robust growth in consumer spending, last Friday's Federal Reserve report on consumer credit should probably give you pause.
At least some folks look at that picture and see a slow slog ahead. Calculated Risk sums up the concern:
"Consumer credit has declined for a record 11 straight months—and declined for 14 of the last 15 months and is now 4.8% below the peak in July 2008. It is difficult to get a robust recovery without an expansion of consumer credit—unless the recovery is built on business investment and exports (seems unlikely to be robust)."
At Angry Bear, the question is a little more pointed:
"Remind me again why all those banks were 'bailed out?' Wasn't it supposed to be to kick-start the economy again?"
Well, here's the thing. That consumer credit picture embeds both the supply of credit and the demand for credit. Though both tighter credit standards and weak loan demand are certainly at play, it is does seem that, at the moment, weak demand is the factor most responsible for slow loan growth in the United States. Recall, for example, this information from the Federal Reserve's January Senior Loan Officer Survey:
"The January survey indicated that commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years. The net percentages of banks reporting tighter loan terms continued to trend lower. Banks reported that loan demand from both businesses and households weakened further, on net, over the survey period."
As regular readers of macroblog know, our own Atlanta Fed surveys (here and here) are indicating that soft customer demand, not credit access, is a significant story in business capital expenditure and expansion plans.
Of course, we don't really know whether credit availability will become a more significant problem when demand begins to recover. This uncertainty is behind what is the real back story at this critical point of the recovery. As we peer ahead, we essentially have two competing, and contradictory, economic histories as our guides. First, there is the statistical regularity that deep recessions in the United States have in the post-WWII period been reliably followed by rapid recoveries. But second, there is the Reinhart-Rogoff statistical regularity that recoveries from financial crises are slow and difficult.
A Wall Street Journal interview with Carmen Reinhart provides reasonable arguments as to why slow and painful is a sensible bet. On the other hand, one could argue that the advance fourth quarter gross domestic product figure is consistent with the sharp bounce-back scenario. (If you are looking for that argument, Brian Wesbury and Robert Stein oblige.)
One thing is certain. At least one history is going to be revised.
By Dave Altig, senior vice president and director of research at the Atlanta Fed
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February 05, 2010
Is good news hidden in bad employment numbers?
In case you needed a reminder that the nascent recovery in the United States is, well, nascent, today's employment report should do the trick. You can find a discussion of the ins and outs of the report at Calculated Risk (to give but one example), but overall the news was a mixed bag of a little better news than was expected (the fall in the unemployment rate even as the labor force participation rate rose), a little worse news than was expected (the net three-month loss in payroll employment), and some relatively bad news that was largely expected (the large downward revision in employment growth for the period April 2008 through March 2009).
Certainly, the employment picture is a lot better than this time last year, but it is still a good distance from what anyone would regard as "cheery." Hence the focus in the Administration's latest budget proposal on programs aimed at job creation.
Over at the Becker-Posner blog, Gary Becker strikes a skeptical chord about at least one element of the Administration's package, the element related to subsidies designed to spur job growth in the small business sector. Despite his reservations about the specific tax credit in play, Professor Becker is fully on board with the proposition that "smaller businesses are an important source of innovation and progress." One particular observation in the Becker post caught my eye:
"The US is tied for first place [according to estimates by the World Bank] on the ease of employing workers. It is much easier for American small and medium size business to reduce their employment during bad times than it is for similar-sized companies in Europe, Latin America, or India. This helps explain why employment fell, and unemployment rose, more sharply during this recent recession in the US than in say Germany, Italy, and many other countries that have much less flexible labor markets, even when other countries experienced larger recession-induced falls in GDP."
The outsized negative employment effect in the United States relative to most other developed countries is a striking feature of the labor market data of the past two years. The following chart shows the trajectory of employment in the United States, the United Kingdom, Canada, Japan, and the Euro Area since December 2007 (the beginning of the U.S. recession).
The outsized drop in employment in the United States is the mirror image of another crucial feature of the last several years: outsized productivity growth in the United States.
What are we to make of the productivity gains in the United States relative to other countries? Does this difference merely reflect labor hoarding in other countries, implying that the productivity levels will become more consistent among advanced economies as employment recovers in the United States? Or is there something more fundamental at play, as Professor Becker seems to imply? Have businesses in the United States found ways to permanently enhance efficiency, locking relatively high productivity growth—and perhaps a slower recovery in employment levels—into the future?
Good questions, all.
By David Altig, senior vice president and research director of the Atlanta Fed
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February 01, 2010
Southeast businesses offer insights on capital spending plans
With last week's capital orders data giving signals of renewed growth in business fixed investment in equipment and software in the fourth quarter, the question turns to whether this growth will be sustained. In early January 2010, the Federal Reserve Bank of Atlanta reached out to our contacts in the Southeast through our Regional Economic Information Network as part of our monetary policy information-gathering efforts to inquire about businesses' capital spending plans. We received responses from 320 businesses across Alabama, Florida, Georgia, Mississippi, Louisiana, and Tennessee. (I want to note we were helped significantly in this effort by colleagues at the Kennesaw State University Econometric Center, who conduct a monthly PMI survey of manufacturers in the Southeast.)
As with our recent small business finance survey (discussed in this macroblog post), readers should be cautious about the results because of the tendency, for example, to sample established, relatively successful firms. That said, we still believe the results are instructive. Of note, 36 percent of respondents indicated that they planned to increase spending over the next 6–12 months relative to actual spending over the past 6–12 months. Another 42 percent said they would leave their spending at about the same level (unchanged), and 22 percent indicated that their spending would fall. The difference between those planning to increase spending and those planning to decrease spending equals a net positive of 14 percent. Across industries, construction firms were the group least likely to increase spending, while retailers were the most optimistic group. Our manufacturing contacts and the "other industries" group of firms (firms across a myriad of industries such as transportation, healthcare, and business services) expressed intentions similar to the overall response (see the chart).
For those who planned to increase spending on new plant and equipment, the most commonly given reasons (respondents could select more than one reason) were that they expected growth in sales to be high (37 percent of those respondents), or they needed to replace information technology equipment (37 percent of those respondents). Also, 61 percent of those planning to increase spending indicated that at least some of that spending reflects investment that had been postponed because of the recession. Not surprisingly, for those who did not plan to increase spending, the most commonly cited reasons were the expectation of low growth in sales (cited by 47 percent of those respondents) and heightened economic uncertainty (cited by 39 percent of those respondents).
Interestingly, cost and availability of external financing were among the least frequently cited reasons for either increasing or not increasing capital spending (cited by 9 percent and 15 percent of respondents, respectively). This theme is consistent with the findings of our recent small business survey, as well as the trend in the National Federation of Independent Business (NFIB) survey of small businesses. According to the NFIB, "finance" was reported as the number one small business problem by only 4 percent of respondents in December 2009. The number one single factor was poor sales.
The NFIB survey also found that while plans to increase capital spending by small firms rose modestly in December 2009 to a net 18 percent, they remained near historic low levels—in December 2007, the net percentage stood at 29 percent and 17 percent in December 2008. This performance suggests that our finding of a net 14 percent of firms planning to increase rather than decrease spending on plant and equipment should not be read too encouragingly.
So where does that leave things? Probably with more questions than answers. For instance, the fact that about two-thirds of the firms that are planning on increasing spending are doing so because they had postponed capital expenditures during the recession would be consistent with some bounce in capital spending by businesses following the most recent recession. But how sensitive are firms to changes in economic conditions? Currently, we hear a lot anecdotally that cash is a high priority on firms' balance sheets as a precaution against economic uncertainty. If sales were to increase more than expected, how fast would firms rethink their investment spending plans? The answers to these types of questions are important, and we are consequently planning to conduct a follow-up survey in due course. As always, we'll keep you posted.
By John Robertson, vice president in the Atlanta Fed's research department
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