March 31, 2010
Employment (or lack thereof), unemployment (or surfeit thereof), and monetary policy
"Nonfarm private employment decreased 23,000 from February to March on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from January 2010 to February 2010 was revised down slightly, from a decline of 20,000 to a decline of 24,000…
"This is far below the consensus forecast of an increase of 40,000 private sector jobs in March.
"The BLS reports on Friday, and the consensus is for an increase of 200,000 payroll jobs in March, on a seasonally adjusted (SA) basis, because of Census 2010 hiring and a bounce back from the snow storms. The underlying trend will be much lower…"
It bears noting that the ADP report is not always a very good predictor of the official job statistic as released. But even if that 200,000 figure comes to pass, and even if it does portend a trend, a full recovery in labor markets would appear to be a ways off.
Dennis Lockhart, our leader here in Atlanta, spoke to this issue at a speech delivered today in Hartford, Connecticut:
"For perspective, let me recount the movement of the official unemployment rate reported by the BLS in my short tenure as a Fed policy maker. I became Atlanta Fed president in March, 2007, just over three years ago. When I started, the unemployment rate was 4.5 percent. Today, the rate stands at 9.7 percent, down from a high of more than 10 percent in October…
"Looking forward, the consensus forecast for March is that the economy will add 200,000 new jobs. That number includes a boost from temporary government hiring for the census.
"But, according to an Atlanta Fed estimate, we need to add about that number to payrolls each month for the next year to bring unemployment down a full percentage point. This assumes that the growth in the labor force stays in line with the growth in the population."
That calculation makes the important assumption that the labor force participation rate—which is currently the lowest it has been in 25 years—remains unchanged. If the number of people in the labor force were to increase back to prerecession levels, the employment growth required to reduce the unemployment rate would be even higher.
What does this imply for monetary policy? President Lockhart tells us what he thinks.
"As you know, monetary policy is highly accommodative. And I think this stance is appropriate at present. I continue to support the substance of the policy articulated by the FOMC in recent meetings. That is, economic conditions warrant a low federal funds rate target for an extended period. Markets are highly interested in the meaning of "extended period." I don't think it is appropriate to talk in terms of a specific timeframe or number of meetings. As long as inflation remains subdued and inflation expectations anchored, a key factor for me is improvement of employment markets."
What does "improvement" mean?
"All things considered, labor markets trends appear to be headed in the right direction. But it's quite possible the recovery could be well advanced before any significant reduction of unemployment materializes. It's also quite possible circumstances justifying the start of a cycle of policy tightening will develop well before the unemployment rate has found a satisfactory level.
"A realistic level may not be the level I saw when I joined the Fed [in March 2007]. I do believe the structural rate of unemployment has risen. Calibrating monetary stimulus to a goal of bringing unemployment to prerecession levels would be a mistake…
"Going forward, I will be looking for signs that employment gains are likely to repeat, accumulate and, once achieved, are likely to be durable.
"What might such signs be? One indication would be the process of job creation is improving. In January, we saw a sizable increase of job openings, according to the Bureau of Labor Statistics. I'm looking for that to become a trend. A second sign would a decline in the measured rate of underemployment. And the third sign would be a string of employment gains large enough to appreciably move the unemployment rate down over time."
And if, among whatever grimness you find in today's ADP report, you would like a hint of sunshine, President Lockhart closes with this:
"We have a long way to go, and for that reason I believe it is premature to assume an imminent reversal of the Fed's accommodative policy. But you can interpret the fact that I am here discussing the conditions under which such a reversal will be appropriate as an indication of my conviction that we are, finally, moving in the right direction."
NOTE: If you are hungering for a deeper dive into some of the underlying labor market data—on the Bureau of labor Statistics' Job Openings and Labor Turnover Survey, in particular—the latest edition of the Atlanta Fed's EconSouth has just the article for you.UPDATE: It seems Calculated Risk and I are on the same wavelength. Mark Thoma is encouraged by President Lockhart's comments. The Capital Spectator offers reasons to discount the ADP report.
By Dave Altig, senior vice president and research director at the Atlanta Fed
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March 24, 2010
More on small businesses and jobs
The signing of the health care bill yesterday puts me in mind of the saying on a ubiquitous poster from my youth: "Today is the first day of the rest of your life." Part of what that life looks like in terms of the political process is already quite clear:
"House Democrats are pivoting to a jobs agenda hours after sending President Barack Obama landmark healthcare legislation.
"Democrats are planning votes as soon as Tuesday on an $18 billion bill that funds infrastructure projects and provides small-business tax breaks, as well as a disaster-relief measure that includes $600 million for a summer youth jobs program. …
"The $18 billion jobs bill includes $2 billion to exempt small businesses from the capital gains tax through 2011, a move Obama had called for in the [State of the Union] address."
Anxiety about the state of small businesses has become a common theme. This report, from the Wall Street Journal, is typical:
"The U.S. Treasury Department is concerned the steady pace of bank failures could keep many small businesses from gaining access to new credit as the economy rebounds and companies seek to expand. …
" 'We've been concerned that small businesses, which are particularly dependent on bank financing because they typically don't access corporate bond markets, will face and have been facing difficulty getting credit,' Treasury's chief economist said."
I, myself, have expressed similar concerns. It bears noting, however, that the story about jobs and small business is still somewhat murky. It is true, as we have noted, that at least the first year of the recession was characterized by disproportionate net job losses in the small business sector relative to the 2001 recession. In light of this, we have previously looked into the credit access issue among small businesses in the six states represented by the Atlanta Fed—Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee—and to our surprise found little evidence of yet that financing problems represent a major constraining factor among most of these enterprises. In reporting the results of that research, we noted one problem with the information we collected:
"… the survey respondents represent established, relatively successful firms. We could not, with this effort, capture the experience of firms that have recently failed (perhaps for lack of credit). Nor can we ascertain the businesses that were never formed because they could not obtain start-up funding."
Those issues remain a problem, but an interesting bit of information about business start-ups has been lurking in the details of the U.S. Bureau of Labor Statistics' Business Employment Dynamics data on gross job flows. If you look at the share of jobs created by opening businesses—as opposed to jobs created from expansions of existing businesses—that share has actually risen through the middle of 2009 (these data come with an excruciatingly long lag).
These opening businesses are weighted heavily toward smaller firms, with somewhere around three-fourths of these businesses being represented by firms with fewer than 10 employees.
Of course, job creation has fallen a lot for both big and small businesses. As the Bureau of Labor Statistics' data from the Job Openings, Layoffs, and Turnover Survey (JOLTS) indicates, the story going forward is not going to be about layoffs and discharges—which have been falling steadily since last spring—but instead job creation, which has bottomed out (though remaining well below prerecession levels):
Perhaps, then, there is some hopeful news in the fact that, up to now, small businesses have not been disproportionately poor sources of gross job creation.
By Dave Altig, senior vice president and research director at the Atlanta Fed
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March 17, 2010
Bad by any measure
A few weeks back, The Economist published a story touting the well-known fact that the "American economy just had its worst decade since the 1930s." Whether looking at gross domestic product (GDP), consumption, income, or nonfarm payrolls, the decade from 2000 to 2010 generally looks bad from an economic perspective. During this decade, of course, the nation has experienced two recessions—the latter being the most severe since the Great Depression. (See the graphs below, reproduced from the February 25 article in The Economist titled "Back to The Crash.")
But given that decades are rather arbitrary economic demarcations, why not examine other time periods? So here's another approach: Using the yearly trough-to-trough periods according to National Bureau of Economic Research (NBER) recession dating, the charts below have replicated the ones shown above from The Economist. (Note: The NBER only designates troughs by quarter. So for a trough ending in first or second quarter, the calendar year in which the trough falls is designated as the "trough year." If the trough falls in third or fourth quarter, the following calendar year is the trough year. For these calculations, we use annual data instead of quarterly because pre-1947 quarterly data are unavailable.) This simple exercise sheds some interesting light on the recent experience of the U.S. economy—namely, that it was bad by any measure.
Looking at real GDP growth over these periods, the 2002–09 era looks very weak, with only 1946–49 having a lower average annual rate of growth (in these years, GDP averaged an annual decline of 2.01 percent). Average annual real GDP growth was 1.72 percent for the 2002–09 period, much lower than the average of 3.97 percent for the previous 10 trough-to-trough periods.
Similarly for real consumption and income growth, the 2002–09 period is also bleak. Average annual consumption and income growth had averaged 3.81 percent and 3.79 percent, respectively, going into 2002. But during this recent trough-to-trough period, income growth was very weak at 1 percent, with only the 1946–49 period doing worse (–1.09 percent). But consumption growth in 2002–09 was the lowest on record, averaging only 2.12 percent growth annually.
Another interesting observation is the spread between average annual consumption and income growth. The 1946–49 and 2002–09 periods are where it's the largest, at 5.9 percent and 1.1 percent, respectively. These large imbalances could possibly reflect growth in household debt and/or lower saving rates, as consumption growth far outstrips income growth. Indeed, debt grew and savings declined notably during 2002–09.
Lastly, a look at the nonfarm payroll growth confirms the most recent trough-to-trough period as one of extraordinary weakness. Given that data prior to 1939 are unavailable, the previous eight bottom-to-bottom periods saw average annual growth of 13.5 percent in payrolls. But for 2002–09, average annual payroll growth of 0.44 percent reaffirms the so-called "jobless recovery" from the 2001 recession and the large decline in payrolls during this current recession. No other previous period comes close.
By Andrew Flowers, economic research analyst, at the Atlanta Fed
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March 12, 2010
A look at the income-side estimates of growth
Last week, a post in the New York Times' Freakonomics blog on Okun's law made note of the statistical discrepancy between the two methods for calculating national output:
"…there are two measures of output growth—the usual measure, which adds up total spending in the economy, and the alternative, which adds up total income. In theory, the two should be exactly the same. In practice, they have been very different during this recession… These GDI [gross domestic income] numbers suggest that output growth actually declined much more sharply than had been widely understood."
Indeed, the recession looks deeper and the recovery seems much less pronounced, looking at the income-side data in this chart.
There has been a good deal of coverage about the discrepancy between the income and expenditure sides of gross domestic product (GDP) calculations in the past couple of years. Jeremy Nalewaik, at the Federal Reserve Board, is often cited for his work arguing that GDI may be a more reliable measure for delineating recessions than GDP (see 1, 2, 3). In fall 2008, Jim Hamilton noted the relatively weak behavior of GDI toward the beginning of the current recession: "It is interesting that while GDP indicates sluggish growth over the last three quarters, GDI looks much more like a recession, with 2007:Q4–2008:Q1 satisfying the traditional rule of thumb of two quarters of falling real output."
But apart from recession dating, how seriously should we take these income-side numbers?
One issue with using GDI data is that they lag the GDP data by a full quarter. That stated, a 2006 study by Fixler and Grimm at the Bureau of Economic Analysis (BEA) argues that GDI data contains valuable information.
"There is evidence that income-side measures contain information about revisions to estimates of GDP. National income is statistically significant in explaining revisions from the final current quarterly to the latest estimates of GDP. Conversely, there is no evidence that product-side measures contain information about revisions to GDI and national income."
In other words, history suggests that when these two measures of national output disagree, GDP tends to get revised in the direction of GDI and not the other way around. So, if this relationship holds, it would be prudent not to dismiss the latest divergence in the two measures because it suggests that the decline in national output has been more protracted, and the recovery (through the third quarter 2009) more modest, than what is being reflected in GDP.
If true, this pattern could raise questions about current levels of productivity and associated labor cost measures. The decline in unit labor costs over the recession has been remarkable by either measure. But the recent drop in unit labor costs by way of the expenditure-side estimate was roughly 1.5 percentage points larger than the labor cost estimate that would be computed from the income side of the accounts. If revisions going forward continue to favor the income-side estimates, then maybe downward wage pressure—while probably still large—may be less than many believe.
By Laurel Graefe, senior economic research analyst, and Jacob Smith, quantitative research analysis specialist, both at the Atlanta Fed
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March 10, 2010
Consumer credit, credit availability and The Credit CARD Act
Total consumer credit outstanding expanded by $5 billion in January after contracting 15 of the previous 17 months. Consumer credit outstanding includes revolving and nonrevolving credit. Revolving credit is mostly credit card debt, and nonrevolving credit includes loans for items such as vacations, autos, and boats. Even with the slight increase in January, total consumer credit (after adjusting for inflation) has contracted nearly 6 percent since the recession began in December 2007. This number might seem like a huge contraction but compared with three of the past four recessions, it actually looks rather typical. Consumer credit contracted 9 percent in the 1973–75 recession, 11 percent in the 1980 and 1981–82 recessions (treated as one recession here), and 8 percent in the 1990–91 recession.
However, once the current recession is separated into revolving and nonrevolving credit, the relationship to past recessions changes. Typically in a recession, nonrevolving credit shrinks considerably while revolving credit shrinks little if at all. The trend so far in this recession has been the exact opposite; nonrevolving credit essentially has remained unchanged while revolving credit has shrunk 11 percent.
Is the decline in consumer credit the result of supply- or demand-side forces? Perhaps the answer is both.
According to the Federal Reserve's Senior Loan Officer Survey, demand for all types of consumer loans (revolving and nonrevolving combined) has fallen since the first quarter of 2009. A decrease in demand for consumer loans is plausible because consumers tend to delay big purchases such as cars and vacations when uncertainty about future income increases. Because future income is affected by job prospects, consumer credit demand lags the recession much like employment does.
The chart below shows banks reporting an increase in willingness to make consumer loans. In fact, the fourth quarter of 2009 marked the first time in nearly three years that more banks reported increased willingness to supply consumer installment loans than have reported decreased willingness.
Even if banks are more willing to make consumer loans, their lending standards have gotten tougher. Increased credit standards have moderated in recent months, but on average banks are still reporting tightening rather than easing based on the January Senior Loan Officer Survey. This tightening is particularly evident for consumers seeking revolving credit. In fact in the fourth quarter of 2009 banks on average reported increased tightening for credit limits of revolving credit compared with the previous three months. This development came as little surprise since a special question on the Senior Loan Officer Survey in October revealed that banks would tighten a wide range of their credit card policies following the enactment of the Credit CARD Act.
Looking ahead, it will be interesting to see to what extent the tightening of standards for revolving credit impacts overall lending and to see if the Credit CARD Act ends up impacting revolving credit availability in the long run.
By Ellyn Terry, senior economic research analyst at the Atlanta Fed
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March 05, 2010
In the beginning, there was a lender of last resort
Steven Pearlstein, business columnist for the Washington Post, asks and answers the question "should the Fed stay out of the bank supervision business?"
"As the Senate begins to focus on how to fix financial regulation, one of the remaining unresolved issues is what role the Federal Reserve should have in supervising banks.
"The correct answer? None at all."
One of the centerpieces of the Pearlstein argument is this:
"The reality is that the Fed's primary focus is and will always be on monetary policy. Bank supervision will continue, as it has been, as a secondary activity that not only receives less attention from the top but will be sacrificed at those rare but crucial moments when the two missions might conflict. Indeed, by arguing that the Fed needs the insights gleaned from bank supervision to be more effective in making monetary policy, the Fed essentially acknowledges this hierarchy in its priorities. Bank supervision is important enough that it ought to be somebody else's top priority."
If you might allow me a moment of personal indulgence, there was a time when I had some sympathy with the sentiment that the "Fed's primary focus is and always will be on monetary policy." I, of course, knew the story of the creation of the Fed, motivated by the need to provide an elastic currency to avoid disruptive fluctuations in prices and a lender of last resort to stop liquidity stress from becoming a full-blown financial crisis. But that was a story from the past. The modern world began in 1935 with the statutory creation of the Federal Open Market Committee, which would eventually evolve, with its central bank brethren in the rest of the world, into the institution described by Pearlstein as being primarily focused on monetary policy.
I felt that way until Sept. 11, 2001. On an average day in the week ending Sept. 5 of that year, the Federal Reserve extended $21 million in discount loans to banks, a reasonably representative volume. On Sept. 12, discount loans amounted to over $45 billion. As a result, the U.S. financial system did not collapse.
The horrible circumstances of 9/11 have been thankfully unique, but there is a case to be made for the proposition that the most important role of the central bank in the recent financial crisis was not in the realm of traditional monetary policy but in the exercise of variations on the lender-of-last-resort function. In fact, in times of acute financial stress, this role must always be so. Witness this remark by Alan Greenspan on Oct. 20, 1987:
"… in a crisis environment, I suspect we shouldn't really focus on longer-term policy questions until we get beyond this immediate period of chaos."
Which brings us to the question of the Fed's role in bank supervision. More precisely, it brings us to comments from Atlanta Fed President Dennis Lockhart, who delivered remarks on Wednesday to the New York Association for Business Economics:
"… the Fed must play a central role in a defense structure designed to prevent or manage future crises. My key argument is the indivisibility of monetary authority, the lender-of-last-resort role, and a substantial direct role in bank supervision. Only the Fed can act as lender of last resort because only the monetary authority can print money in an emergency. To make sound decisions, the lender of last resort needs intimate hard and qualitative knowledge of individual financial institutions, their connectedness to counterparties, and the capacity of management.
"There is sentiment in Washington that would separate these tightly linked functions that are so critical in responding to a financial crisis. Removing the central bank from a supervision role designed to provide totally current, firsthand knowledge and information will weaken defenses against recurrence of financial instability. Flawed defenses could be calamitous in a future we cannot see."
If this advice goes unheeded, I fear we might discover its wisdom in the worst possible circumstances.By Dave Altig, senior vice president and research director at the Atlanta Fed
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