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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.


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March 30, 2011


A disturbing trend: No growth in total business establishments in U.S.

The last Atlanta Fed poll of small businesses in the Southeast suggested an uptick in confidence late last year. A similar upturn has been noted in the National Federation of Independent Business's survey of its members conducted in February of this year and released in March. This upturn is good news for the U.S. economic outlook, as small firms are one group that has lagged the economic recovery.

It's also good news, given the continuation of unimpressive readings from last week's release of the Quarterly Census of Employment and Wages (QCEW) for the second quarter of 2010. As we have noted previously and highlighted in this recent Wall Street Journal blog post,

"The recession caused a sharp decline in new business start-ups, intensifying job market losses and potentially putting future economic growth at risk."

The QCEW data also showed that the number of business establishments with payrolls in the United States has remained stuck at around 9 million since late 2007. By comparison, in the early 1990s there were about 6.5 million establishments, a number that rose to close to 8 million in 2000 before peaking at 9 million 2007.


The net creation of business establishments—that is, physical locations for conducting business such as manufacturing plants, retail stores and business offices—has in the past been a key ingredient in job growth in the United States. This growth is driven partly by demand from newly created businesses and by mature firms expanding their footprint by opening additional locations. The demand for physical space is also clearly important to the commercial real estate industry, which has been burdened by elevated vacancy rates in many markets and generally low demand for new space.

Another trend from the QCEW data is striking—the number of employees per establishment is much lower than it used to be. The average size of U.S. establishments was relatively stable during the 1990s, at around 16.5 employees per physical location. The 2001 recession was associated with a decline in the average size to about 16 workers per establishment, and the average size continued to track lower during the last decade, moving down to about 15 employees per establishment in 2007. The latest reading for the second quarter of 2010 was 14.3 workers per establishment, up from 14 workers in the first quarter.

Several possible explanations exist for these declines in average establishment size. First, there is a cyclical response to weak demand as firms cut their payrolls. Second, productivity gains over time allow a plant, store, or office to support the demand for its goods or services with fewer workers. Third, there is a secular trend away from industries that have a large average establishment size, such as manufacturing.

If one digs into the data, only one major sector has experienced a rise in average employment per location over time—health care. This growth is likely a result of increased demand for health care services, and those services are primarily embodied in the staff at doctors' offices and hospitals. Manufacturing, on the other hand, has witnessed dramatic declines in average plant size. During the 1990s, average plant size was relatively stable at around 43 workers. The average size then declined to about 38 workers following the 2001 recession and remained around that level through 2007 before declining again and reaching an average size of 33 workers per plant in the second quarter of 2010. This trend appears to primarily reflect a combination of secular shifts away from labor-intensive types of manufacturing where productivity gains have already played out—some apparel manufacturers, for instance—and sharp cyclical downturns.

Of course, something will have to give if there is employment growth—primarily more and/or larger establishments. Consider the following thought experiment: if the average size of establishments returns to the prerecession level of 15 workers per location, and private-sector jobs are added around a pace of 2.4 million a year pace (or 200,000 jobs a month), then we would see establishment growth return to the 1992–2007 average of about 160,000 per year. Clearly, we are currently far below that trend.


Photo of John Robertson By John Robertson
Vice president and senior economist in the Atlanta Fed's research department



March 30, 2011 in Employment, Real Estate, Small Business | Permalink

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I'm not sure we'll ever go back to what we were before. Our productivity has to be exploding, so fast now that it can't be captured for some time. When MS windows came out, it took many years to transform how we do business. But, transform it did. well, that same process is happening again but this time the number of years to transformation should be much shorter.

Posted by: FormerSSresident | April 01, 2011 at 12:54 AM

Hi John,

You can really can see the significance of the decline due to recession. At least it has bottomed out.

Posted by: Intrinsic Value | April 01, 2011 at 06:25 AM

"If one digs into the data, only one major sector has experienced a rise in average employment per location over time—health care. This growth is likely a result of increased demand for health care services"

Or, actually, the much more likely (and obvious - if not politically permissible) result of the vast, superficial "subsidizing" of health care - one that has resulted in a grotesque misallocation of capital, the warping of the macroeconomy, and a decades-long medical uber-inflation which (along with academic tuition inflation) is treated by government insiders as though it is some sort of inexplicable "mystery".

As opposed the political payola and bribery it so clearly is.

Posted by: csa721 | April 03, 2011 at 11:58 AM

Looking at that chart of business establishments makes me wonder even more about the point of the Birth Death model. If it's supposed to take into account the birth and death of new businesses, then why did it ever add all those jobs on a monthly basis. The data is clear that new business formation simply hasn't been happening for years.

Posted by: apj | April 05, 2011 at 05:43 AM

The culture of fear and uncertainty, higher energy costs and open political/media hostility towards business doesn't help.

If you are a venture capitalist, angel investor or entrepreneur is this likely to cause you to think startup?

Why should you?

Posted by: Army of Davids | April 23, 2011 at 02:54 PM

I find it funny how these results contradict each other, companies are just finding new ways to cut costs, and that normally means cutting employees

Posted by: Best virtual office | November 02, 2011 at 01:50 AM

I'm with Best, these types of results are always contradictory. Businesses are boosting profits by cutting employees. That is not sustainable.

Posted by: Penny Stocks | November 03, 2011 at 06:02 PM

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March 25, 2011


Another step to enhance Fed transparency--and no better time than now

As most of you probably know, the Federal Reserve announced yesterday that:

"Chairman Ben S. Bernanke will hold press briefings four times per year to present the Federal Open Market Committee's current economic projections and to provide additional context for the FOMC's policy decisions."

The announcement, I think, makes the intent of these press conferences abundantly clear:

"The introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve's monetary policy communication. The Federal Reserve will continue to review its communications practices in the interest of ensuring accountability and increasing public understanding."

Communications, accountability, and credibility are being tested at the moment, as aptly described in a New York Times op-ed from former Fed Governor Larry Meyer (no registration required if you link via Real Time Economics):

"Any American who has shopped for groceries or pumped gasoline in the last few months knows that prices for food and energy have been soaring. Demand from fast-growing Asian economies is one major contributor to price increases; the turmoil in the Middle East is another.

"All of this has made some economists and lawmakers in the United States nervous. They fear that higher prices for commodities will translate into higher prices for all goods and services and that the Federal Reserve, by ignoring commodity prices, has become lax on inflation."

Furthermore, Meyer clearly indicates what can go wrong:

"… during the 1970s and early 1980s, an era of debilitating inflation, the markets had no confidence in the Fed's ability to keep prices stable. This meant that any increase in prices, including those for volatile items like food and energy, were almost immediately and fully translated into expectations of higher overall inflation in the future. Those expectations, in turn, gave rise to actual increases in other prices, not just food and energy. (If workers expect that inflation will be 2 percent in the coming year, they will demand a wage increase that is 2 percentage points higher than they otherwise would to keep improving their standard of living.)

"So in the '70s, increases in food and gas prices affected both core and overall inflation. Some believe this is still the case today. But it isn't."

You can gain an appreciation of this point by looking at a simple chart of energy prices along with average annual inflation, over three-year periods.

As Meyer notes, energy prices tended to feed through to overall inflation in the low-credibility pre-Volcker years. They have not shown this tendency in the high-credibility post-Volcker years:


Note that I did not follow Meyer in making comparisons relative to core, but rather to actual realizations of overall inflation over three-year windows. The rationale for that type of comparison was explained this morning in a speech by Atlanta Fed president Dennis Lockhart:

"… contrary to popular opinion, Federal Reserve officials do actually eat and fill up their gas tanks. The FOMC's mandate, as I see it, is to control the inflation rate we all experience—so-called headline inflation. In other words, I interpret the Fed's price stability mandate as requiring the FOMC to manage the growth rate in the average of all prices, including food and energy.

"… it's our job to control that headline inflation over the course of time. It's not feasible to exert such control day-to-day or month-to-month or even quarter-to-quarter. But monetary policy can control the rate of overall inflation over the medium term. In operational terms, I think growth in overall consumer prices around 2 percent per year through a period shorter than the proverbial 'long term,' say, a medium-term period of three or four years, is consistent with the Fed's price stability mandate."

Though I do not, in any measure, disagree with Meyer's assertion that core inflation measures are really our best indicators of the underlying inflation trend, President Lockhart acknowledges our understanding here that the proof is in the pudding:

"… like my colleagues on the FOMC, I continuously monitor performance against our price stability objective. This involves monitoring not just inflation today but importantly the course of inflation expectations, whether derived from simple surveys or pulled from financial market prices. I am prepared to support a change of policy if evidence accumulates that the low and stable inflation objective is at risk."

Hopefully, the ongoing effort for greater transparency and accountability—evidenced by the new press conferences and remarks like those from President Lockhart—will mitigate the risks to "the low and stable inflation objective" and make future editions of the chart above look more like the second half than the first half.


Photo of Dave Altig By Dave Altig
Senior vice president and research director at the Atlanta Fed



March 25, 2011 in Federal Reserve and Monetary Policy, Inflation | Permalink

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Very good information.
thanks!

Posted by: welton martins | March 25, 2011 at 05:52 PM

Dave,
Better late than never right.

Posted by: Portfolio Allocation | March 25, 2011 at 10:04 PM

David,
What do you think would happen if Bernanke described the rise in equity prices as "transitory"?

Posted by: Craig | April 06, 2011 at 07:55 AM

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March 22, 2011


The unemployment puzzle--or at least one of them

Brad DeLong (hat tip Mark Thoma) looks at the frustratingly slow progress in U.S. labor markets and offers an intriguing hypothesis about the changing nature of American recessions and recovery cycles. First, some relevant framing facts:

Between 1950 and 1990—back in the old days of Federal Reserve inflation-fighting recessions—the unemployment rate in the United States would on average close 32.4% of the gap between its initial value and its natural rate over the course of a year. If the United States unemployment rate had started to follow such a path after its fall 2009 peak, we would now have an unemployment rate of 8.3% instead of 8.9%.

"But there is the unfortunate fact that none of the United States net reduction in the unemployment rate over the past year comes from increases in the employment-to-population ratio, and all of it comes from decreases in labor force participation…

"…[W]e note that between 1950 and 1990—back in the old days of Federal Reserve inflation-fighting recessions—the employment to population rate in the United States would on average rise an extra 0.227 in a year for each year that the unemployment rate was above its natural rate. If the United States employment-to-population ratio had started to follow such a path after its fall 2009 peak, we would now have an employment-to-population ratio of 59.7% instead of 58.4%. It would indeed be morning in America, instead of the current economic state."

The reference to "the old days of Federal Reserve inflation-fighting" is the key to DeLong’s story of how recent recessions, and their aftermath, differ from most of our postwar experience:

"The obvious hypothesis for why this current recovery—and the last two recoveries—in the United States have proceeded at a sub-par pace is that the speed of recovery is linked to the causes of the downturn. A pre-1990 recession was triggered by a Federal Reserve decision that it was time to switch policy from business-as-usual to inflation-fighting. The Federal Reserve would then cause a liquidity squeeze and so distort the constellation of asset prices to make much construction, sizable amounts of other investment, and some consumption goods unaffordable to demand and hence unprofitable to produce. The resulting excess supply of goods, services, and labor would lead inflation to fall.

"After the Federal Reserve had achieved its inflation-fighting goal, however, it would end the liquidity squeeze. Asset prices and incomes would return to normal. And all the lines of business that had been profitable before the downturn would be profitable once again. From an entrepreneurial standpoint, therefore, the problems of recovery were straightforward: simply pick up where you left off and do what you had used to do.

"After the most recent downturn, however—and to a lesser extent after its two predecessors—things have been different. The downturn was not caused by a liquidity squeeze. The Federal Reserve cannot wave is [its] wand and return asset prices to their pre-downturn configuration. The entrepreneurial problems of recovery are much more complex: not to recall what it used to be profitable to produce but rather to figure out what new things it will be profitable to produce in the future."

I am sympathetic to this view as the dynamics of employment recoveries do seem much different in the post-1990 era than in the pre-1990 era. To provide yet another example, on average it took 10 months to recover all the jobs lost during the recessions of the period between 1950 and 1989. In contrast, it took 23 months to recover the jobs lost following the 1990–91 recession and 38 months following the 2001 recession. Right now we are 20 months from the official end of our most recent contraction and still almost 5.5 percent below the pre-recession employment peak. (A stark graphical reminder from Calculated Risk is featured at Economics Roundtable.)

What's more, the mechanism DeLong appeals to rings true. That is, prior to the 1980s, downturns in the economy were dominated by intentional tightening by the Federal Reserve to contain inflation. In the post-Volcker era, however, structural shocks appear to be the dominant story.

But the deeper one digs into the labor market facts, the deeper the questions become. Let me offer up an old macroblog favorite, the Beveridge curve. We have noted in the past that the Beveridge curve—which measures the relationship between the unemployment rate and job openings created by businesses (or vacancies)—seems to have shifted outward over the course of this recovery. In words, relative to the jobs available, unemployment is higher than we would have predicted based on the vacancy/unemployment relationship that prevailed in the 10 years prior to last year.

My view has been that this shifting of the Beveridge curve relationship represents structural issues in the U.S. labor market. A counterargument has been that such shifting is typical of the early phases of a recovery. And if the 1990-91 and 2001 recessions are the best analogs to the current cycle, we might well expect the relationship between job availability and unemployment to return to the prerecession norm as the efficiency of the job-matching process recovers along with other aspects of the economy. In fact, we might even expect the job-matching pace to improve over time as illustrated by the following chart that plots the time path of job openings and the unemployment rate (with the 1990–2001 and 2001–07 periods highlighted in green and red respectively):


The fact that all the points highlighted in green lie to the left of the points highlighted in red means that, for a given number of job openings, unemployment rates were lower during most of the past decade than they were in the 1990s. And there is certainly no evidence that outward shifts in the Beveridge curve are permanent.

Here, though, is where the search for unified business cycle theories gets a little tough. The return of the Beveridge curve to its prerecession norm is a distinctly post-1980 phenomenon. Excepting the 1960–61 episode, the recessions in the 1950–80 era are consistently associated with seemingly permanent rightward shifts in the Beveridge curve:


On the other hand, the aftermath of the inflation-fighting 1981–82 recession represented a clear shift, as the vacancy/unemployment relationship improved dramatically (albeit slowly):


How can we explain, then, that the supposedly demand-driven recessions of the pre-1990 era were associated with seemingly structural changes in the Beveridge curve relationship (in the "wrong" direction prior to 1980 episodes, in the "right" direction after the inflation-wringing contraction of 1981–82).

And what about this time around? Here's where we stand:


Is the recent shift in the Beveridge curve here to stay, or transitory as appears to have been the case in the last two recessions?

Can I get back to you on that?

Photo of Dave Altig By Dave Altig
Senior vice president and research director at the Atlanta Fed



An aside: A warm welcome to our new blogging brethren at the New York Fed's Liberty Street Economics.

Update: If you prefer your Beveridge curve history in movie form, Roger Farmer's your man.

March 22, 2011 in Employment, Federal Reserve and Monetary Policy, Labor Markets | Permalink

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I have no idea how a Beveridge curve is calculated. But I believe recessions pre 1990 were basically inventory related, so they were centered in the manufacturing sector. Since then, the recessions have been mainly in the service sector. Offshoring has also played a part.
Given the above, I'm surprised that the Beveridge curves in the earl '50's are simlar to the most recent curves.....

Posted by: stewart sprague | March 22, 2011 at 11:31 PM

you state the observables but dont seem to have any explanation as to what is driving them... there doesnt appear to be a hidden secret meaning... one possible answer seems to be quite straight forward and staring everyone right in the face.

if the yuan peg goes there will be 1) more jobs, 2) higher inflation, 3) probably more labor participation. if it does not there will be 1) fewer jobs, 2) accelerating inflation (but gradually so.. in line with reduced productivity of asia as their wages rise), 3) lower participation rates (aging population and baby boomers dropping out of the employment basket)

the 60s was a period of low inflation and excess capicity driven by an emerging japan... the 70s was when the world discovered that japan also wanted to consume western style, and the 80s was to adjust the global imbalances... which lead to higher inflation, blah blah blah...

so the beveridge curve went in one direction from the late 50s to 1980, then the other direction from 1980 to 1990... seems to me that in periods of low inflation the curve is to the lower left of the graph, and during periouds of higher inflation it is to the upper right. The inflation of the late 70s and early 80s was driven by commodities and bretton woods ( In February 1973 the Bretton Woods currency exchange markets closed, after a last-gasp devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime). The fact that his curve took a sharp shift to the upper right starting late last year gives me even more conviction that what we are seeing is the start of another inflationary push... a la 1970s... sadly the FED are still fighting the ghost of Japan past.... much of the timing behind this depends on the degree to which the yuan is allowed to adjust... will it be through internal inflation or will it be via a revaluation of the currency... either way it will result in inflation, and that inflation will make it more difficult to make things for local consumption half a planet away... so in the longer term i guess you will eventually see manufacturing moving back closer to consumption... but that will be very inflationary as it implies a normalisation of current imbalances... what we definately dont want is to let global imbalances continue any longer as they are massively destabilising... Geithner do your job and stop talking about it.

Posted by: Macroboy | March 23, 2011 at 08:24 AM

well, my view is that its the shifting nature of the US economy. As the US economy shifted from manufacturing-centric to service based, the inventory restocking phase of the business cycle has had less and less impact. Compare world industrial production and commodities prices ... definitely up since 2008. But this has had little impact on the US employment situation. In the 80s, as auto manufacturers brough people back to work, this would have a much larger impact.

service workers - especially skilled ones -are more like a fixed cost than a variable cost.

Posted by: dwb | March 23, 2011 at 09:55 AM

At some point my hope is a smart Grad student goes back to Alan Blinder's work on outsourcing. Specifically, the analysis I would to see performed is an update to Blinder's review of the job catergories identified at high risk of outsourcing.

My guess is that much of the sluggishness in labor demand is the result of offshoring.

Posted by: fladem | March 23, 2011 at 11:02 AM

"The entrepreneurial problems of recovery are much more complex: not to recall what it used to be profitable to produce but rather to figure out what new things it will be profitable to produce in the future."


The term for that is "structural unemployment", however much it may be denied.

Posted by: wally | March 24, 2011 at 09:10 AM

Great post, i've already subscribed to your feed. thanks

Posted by: Ganhar Dinheiro | March 28, 2011 at 08:24 PM

It's like these graphs are TRYING so hard to clarify, but ultimately just generating more confusion.

Surely there are better graphical ways to view slack labor supply and slack labor demand? Sure, each recession is idiosyncratic, but I don't think that needs to conclude it's all just a wash: I think that the graphs are holding you back

Posted by: fischer | April 01, 2011 at 07:20 PM

Good comments above that relate to my thesis -- the US is due for liquidation.

MANEMP/PAYEMS shows mfg falling from 30% in 1950 to under 10% today.

American labor can't compete with $15/day labor so something is going to have to give here eventually.

We tried to get through the previous decade by blowing a $7T+ debt bubble (CMDEBT), but that eventually failed since the housing sector is really consumption and not actual productive enterprise that can indefinitely support debt burdens on its own.

Since 2008 we've replaced the the home ATM with deficit spending: Total Public Debt, but this too is just a delaying tactic.

I don't know where things are going from here but I really think we passed a singularity with NAFTA and Chinese MFN, and to understand the next 20 years you need to understand what has been happening over the past 20.


Posted by: Troy | April 01, 2011 at 07:48 PM

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March 18, 2011


Survey: Small business optimism improving, especially among young firms

Through our quarterly Small Business Lending Survey, we heard from our small business contacts that economic or sales uncertainty acts as a considerable influence in their hiring and capital expenditure decisions. In the third quarter, half of business contacts not planning to increase capital expenditures indicated economic or financial uncertainty was affecting their decisions. Likewise in the fourth quarter, economic or financial uncertainty was noted among those planning to hire as an influential factor. (Below are charts of our survey's special questions on this topic.)


Since uncertainty can act to inhibit investment and hiring, a reduction of uncertainty and a more positive outlook for the economy might be early signs of future growth for small firms. Recent data suggest both optimism and demand for credit from small firms are on the rise. The net percent of banks reporting stronger demand from small firms has been steadily improving since the first quarter of 2009 and was positive (that is, more banks reported increased demand versus decreased demand) for the first time since the second quarter of 2006, according to the January Senior Loan Officer Survey. Also, of the banks that eased standards, many reported a more favorable or less uncertain economic outlook. In another report, Capital One Bank's fourth quarter Small Business Barometer survey, suggested that "many U.S. small businesses are more optimistic about the strength of the economy and their own financial position relative to the third quarter." The National Federation of Independent Business' (NFIB) Index of Small Business Optimism has also been steadily rising since March 2009. Last week, the NFIB released results from its most recent survey:

"The Index of Small Business Optimism gained 0.4 points in February, rising to 94.5, not the hoped-for surge that would signal a shift into "second gear" for economic growth…

" 'This is not a reading that characterizes a strongly rebounding economy,' said NFIB chief economist Bill Dunkelberg. 'But it is the third best reading since the fourth quarter of 2009 when the economy was expanding rapidly. So, it gives us cause for some real optimism. Apparently the future is looking brighter for a few more small-business owners, although much will depend on what Congress does this year.' "

As the NFIB notes, much in line with gross domestic product growth, optimism at small firms has been improving, albeit at a slow pace. Here at the Atlanta Fed, we have seen the same gradual improvement in optimism in our Small Business Lending Survey.

While we don't create an overall optimism index, we ask firms how they expect the number of employees in their firm to change over the next six to 12 months—increase, no change, or decrease. Similarly, we ask them about their expected changes to capital expenditures and level of sales. From the third to the fourth quarter of last year, the outlook in all three categories improved among the 163 participants that took both the Q3 and Q4 surveys. The percent of those anticipating increases (net of those anticipating decreases) are plotted on the chart below. Any dot appearing to the left of the 45-degree line indicates a greater net percent indicated "increase" in the fourth quarter. A few other survey questions are also plotted on the graph and explained in detail underneath.

031811c
(enlarge)

One of the more interesting findings in our survey was that young firms (which we define as any firm less than seven years old) in the Q4 survey were found to be far more optimistic about future business conditions than their mature (seven years or older) counterparts. Young firms were more likely to indicate they were seeking credit to expand their business. Also, significantly larger net percents of young firms anticipate increases to employees, sales, and capital expenditures over the next six to 12 months. In fact, none of the young firms indicated they anticipated decreases to the number of employees in their firm over the next six to 12 months. The differences are outlined in the table below.

031811d

The optimism among this group of young firms was present despite the group having a relatively difficult time obtaining credit. (The difference in the average amount of financing received between mature and young firms was statistically significant at the 98 percent level.) When comparing applications for credit, 42 percent of young firms seeking credit received the full amount or most of the amount requested compared to 64 percent of mature firms. The lack of credit fulfillment by young firms was not the result of not trying, as a greater portion of young firms applied for credit—on average, young firms applied through a larger variety of credit channels.

As research by John Haltiwanger, Ron Jarmin, and Javier Miranda has demonstrated, credit availability for young firms and their outlook for the future is particularly important since young firms play a large role in net job creation. (This topic was discussed in a past macroblog as well.)

While the movements are small and gradual, it's nice to see that things appear to be improving and that we're seeing the trend across many measures.


Photo of Ellyn Terry By Ellyn Terry
senior economic research analyst at the Atlanta Fed


March 18, 2011 in Economic Growth and Development, Employment, Labor Markets, Small Business | Permalink

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A few things:

First, there's an obvious correlation between firm age and firm size. Is the real relationship between the age of firms, or the size of firms? The former suggests some difference in outlook; the later, some difference in the constraints faced by firms given their scale.

Secondly, the disaggregation in your small business survey makes it difficult to interpret the chart. As far as I can tell, the metrics are presented separately for employers that are planning to hire and employers that are planning not to spend more on capital expenses. What percent of all employers do these two groups comprise? Are these employer sets overlapping, or distinct? And, why not just present a single chart of "which factors affect your decisions on hiring?" and "Which factors affect your decisions regarding capital expenses?"

Not to try to tell you how to present your data...I'm just seeing if I've missed something.

Thanks,
fischer

Posted by: fischer | March 23, 2011 at 08:16 PM

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March 07, 2011


One chasm that really isn't one

Floyd Norris, writing last Friday in the The New York Times, fretted about "The Chasm Between Consumers and the Fed." We here at the Atlanta Fed share some of that concern, and indeed the Times article quotes from a speech by our president Dennis Lockhart on just that subject from last month. But then Norris takes a turn I didn't expect. Norris's Times article includes the following chart…


…and the article proceeds:

"The Fed's goal is to keep the inflation rate at or near 2 percent, and it does not expect a significant increase for at least a few years. … The stock market is generally thought to do better when inflation is falling, but Martin Fridson, the global credit strategist for BNP Paribas Investment Partners, points out that is not always the case. There is, he says, a time when inflation is too low.

"The accompanying chart, based on a report by Mr. Fridson, shows that from the 1940s through the 1990s, there generally was a relationship. The more inflation declined in a decade from inflation in the previous decade, the better the stock market did.

"But in two decades, the 1930s and the first decade of this century, inflation fell from already low levels and the stock market suffered. 'Below a certain level of inflation,' Mr. Fridson said, 'a further decline reflects economic weakness more than it reflects a salutary reining in of excessive monetary creation.'

"If that is correct, then it could be that both investors and those simply concerned with promoting economic growth should, as Mr. Fridson wrote, hope that Mr. Bernanke 'fails in his stated goal of holding inflation to 2 percent or less.' "

It was all good, up to that last paragraph. As President Lockhart reiterated in a speech today (emphasis added):

"I'll explain the technical rationale of my Reserve Bank in supporting the scope of LSAP2 [the second round of large-scale asset purchases] last November.

"Through the summer and into the fall of last year, our internal forecasts at the Atlanta Fed were calling into question whether the policy stance at the time assured progress toward the committee's growth and price stability objectives. In more normal times, these circumstances would have prompted a cut in the FOMC's [Federal Open Market Committee] target for the federal funds rate. This approach would be (would have been) the prescription of the so-called Taylor rule which relates policy rate moves to forecast 'misses' on the Fed's sustainable growth and stable inflation objectives."

As we've argued in macroblog before, keeping inflation from falling below that "certain level of inflation" reflecting "economic weakness more than it reflects a salutary reining in of excessive monetary creation" was exactly what President Lockhart has offered in defense of implementing LSAP2, and in support of claims to its success.

There remain plenty of policy questions on which intelligent well-intentioned folk can disagree, but on the assertion that it is wise to guard against too much disinflation, we are in agreement. No need to find disagreements that aren't really there.


Photo of Dave Altig By Dave Altig
Senior vice president and research director at the Atlanta Fed


March 7, 2011 in Deflation, Federal Reserve and Monetary Policy, Inflation, Monetary Policy | Permalink

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David, your colleagues' assertion that "wrongful foreclosures can only happen if the borrower is delinquent" is simply mendacious. Wrongful foreclosures happen to millions of Americans every year. Here's how it happens:

ONE
The institution that forecloses doesn't actually own the paper. They submit a robosigned or otherwise fraudulent set of documents to cover for the fact that they are not actually holders of the debt they claim to have. That is, the bank foreclosed but legally the American in question doesn't owe them the money.

TWO
The institution that forecloses caused the foreclosure through its own wrongful acts. They force-placed insurance on a house that had insurance (or an available policy which they failed to pay from escrow, thereby causing the cancellation) and that began the spiral. They placed a payment off by a couple of cents into a suspense account, refused further payments and foreclosed. They told homeowners to stop paying to qualify for a modification but never intended to actually provide one, or the owner didn't qualify. They were offering a modification but "lost" documents repeatedly and then foreclosed. Or anyone of a number of other wrongful acts - all of their hand, not the homeowners.


This is egregious. Do something about it.

Posted by: Unsympathetic | March 11, 2011 at 04:27 PM

As a non-economist I hate to be the one to point this out, but the stock market isn't the economy. Remind me again why I should be concerned about a casino?

Posted by: cahuenga | March 13, 2011 at 07:55 AM

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March 04, 2011


Gaining perspective on the employment picture

The employment report released today indicated a moderate increase of 192,000 in nonfarm payrolls and a slight decline in the unemployment rate from 9 percent in January to 8.9 percent. While certainly an improvement over recent months, employment growth still has not reached a level needed to produce significant drops in the unemployment rate.

In a speech given yesterday, Atlanta Fed President Dennis Lockhart addressed some of the underlying issues that have potentially been holding back job growth. On the supply side, President Lockhart addressed three structural issues, including skill mismatch, house lock, and extended unemployment insurance.

"Skill mismatch exists when work skills of job seekers do not match the requirements of jobs that are available. For example, a construction worker is unlikely to have the particular skills needed in the healthcare industry."

This comment is motivated by the research of Federal Reserve economists (Valetta and Kuang and Barnichon and Figura, among others) that suggests while there is likely some evidence of skill mismatch, it's not materially different than what's been seen during past recessions.

Another possible explanation mentioned by President Lockhart for persistently high unemployment is the existence of  what is sometimes referred to as "house lock."

"Currently many people owe more on their homes than their homes are worth. It's claimed that job seekers don't accept jobs available in other geographic locations because of the difficulty or cost of selling their homes."

Here too, President Lockhart says there is evidence indicating house lock is not a large contributor to the current high level of unemployment (For example, see Schulhofer-Wohl, Kaplan and Schulhofer-Wohl, and Molloy et al.)

More convincing is the argument pointing to the impact of extended unemployment insurance benefits. Research from the most recent recession and recovery—for example, see Valetta and Kuang and Aaronson et al.—suggests extended benefits have added to the unemployment rates, with estimates ranging from 0.4 percentage points to 1.7 percentage points. If that's the case, then President Lockhart says these extended benefits may be acting "as a disincentive to accept an offered job, especially if the job pays less than the one lost."

As President Lockhart indicates, however, standard skill mismatch, house lock, and unemployment insurance disincentives do not provide the full answer. So, he offers some additional factors:

"On the demand side, it's been argued that credit constraints affecting small businesses are holding back hiring. Banks are blamed for this situation and so are regulators. Getting credit at an affordable cost was a challenge during the recession. But credit conditions for established small businesses have been steadily improving for some time now. Recent surveys suggest that most small businesses are cautious about hiring more because of slow sales growth rather than lack of access to credit.

"Furthermore, a recent National Bureau of Economic Research study showed that job creation is more correlated to young businesses than the broad class of small businesses. Start-ups and young businesses are often financed in ways other than direct business loans. Difficulties getting home equity loans and other personal credit appear to have reduced formation of new businesses.

"Strong productivity growth is another much-discussed potential impediment to hiring. Stated simply, increases in productivity allow businesses to support a given level of sales with fewer people. In the longer term, rising productivity expands the economy's output, which in turn generates jobs. But in the short run, productivity investment can be the enemy of employment growth.

"Productivity growth was unusually high during the recession and in the early stages of the recovery, limiting the need for additional workers. Recently, however, productivity growth has slowed below the pace of business sales. If this trend continues, the need to hire additional workers will increase.

"Finally, in recent months, reluctance to hire has been attributed to heightened uncertainty, a common theme among my business contacts. A few weeks ago I argued that uncertainty has abated somewhat with the improving economy, the resolution of the November elections, the extension of tax cuts, and the apparent containment of the European sovereign debt crisis. I said that before Tunisia and before the fiscal struggle in Congress gathered steam. The restraining influence of uncertainty persists, to some extent."

Outside of productivity, it is difficult to measure the impact of these issues. (For example, it is difficult to survey people who did not start up a firm to determine if credit was an issue.) However, the theme of uncertainty has been a consistent factor in discussions on employment with our contacts here at the Atlanta Fed. If a simple explanation for persistent weakness in labor markets has proven elusive, there is little argument with President Lockhart's observation that "the recovery has brought little relief to the labor market."

Should today's employment release change any opinions about the strength of the labor market? In my mind, not really. There are still 7.5 million fewer jobs than at the start of the recession. There are also still over 8 million workers employed part time for economic reasons, and almost 6 million of the unemployed have been so for more than 26 weeks.

But the numbers released today did provide some additional evidence that the labor market is moving in the right direction with a level of growth consistent with at least a modest decline in unemployment. Furthermore, as consumer expenditures continue to rise, profitability increases, and the amount of uncertainty diminishes, hiring should increase. However, as President Lockhart alluded to in his speech, it will likely take time before the labor market recovery catches up to the overall economic recovery.


Photo of Melinda Pitts By Melinda Pitts
Research economist and associate policy adviser at the Atlanta Fed


March 4, 2011 in Data Releases, Employment, Labor Markets, Productivity | Permalink

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"Furthermore, a recent National Bureau of Economic Research study showed that job creation is more correlated to young businesses than the broad class of small businesses."

Correlation and causation? I wouldn't be surprised if the phase of the business cycle is an omitted variable, as that is correlated with young businesses launching, and thus hiring...

Can't find the paper though, so I'm not sure whether the authors did due diligence.

-fischer

Posted by: fischer | March 04, 2011 at 08:58 PM

Of course outsourcing has nothing, nothing to do with the lack of jobs. Move right along folks, nothing to see there. The trade deficit - American demand satisfied by overseas production - is not even worth mentioning.

And of course people are staying unemployed because ... of unemployment insurance. Sure! The fact that there are 5 bodies for every opening? Move right along folks, nothing to see there.

You researchers should really get out more.

Posted by: lark | March 04, 2011 at 11:34 PM

sounds like from your inference and analysis we ought to end the length of jobless benefits.

But what are we doing to engender growth? I don't see tax policy or any other things out there changing.

It's going to be a slow crawl out.

Posted by: Jeff Carter | March 06, 2011 at 09:37 AM

Productivity is exploding, just like it did after Bill Gates gave us Windows. But, there are more complicated structures in place which could mean the benefits are kept only by a select few.

The hard truth is many people's lives are better in unemployment than pawns in the game of professional management at the local corporation.

Posted by: FormerSandySpringsResident | March 06, 2011 at 11:42 PM

Hello,
I'm wondering, with all this talk of unemployment, which "rate" do fed officials "actually" focus on. Given workforce changes, underemployed, etc., it seems silly to discuss one surface level number, and not the details. Please expand when convenient.
Thank you.

Posted by: Friend | March 07, 2011 at 12:57 PM

I really don't buy the UE benefits are causing unemployment line. While there is a bit of state by state variation, generally speaking UE benefits replace about 60% of pre-unemployment earnings, up to a maximum benefit of $400 a week. The average benefit is more like $300 per week. Just how many people with previous productive lives are going to want to sit around and see their long term employment prospects deteriorate sharply so they can get an average of $15,600 per year, with very little security attached to that after 26 weeks? Do the authors of such studies have any clue what it would be like to try to raise a family on $15.6K per year? Don't they realize that according to the most recent JOLTS data, there are 4.7 unemployed for each job opening?

Not much reason to suspect that skills mismatch has increased greatly in the last few years. Housing lock is likely a much more serious problem than Lockhart thinks. Still, the vast majority of the higher UE is due to cyclical factors and the massive incompetence of those running the biggest banks and financial institutions.

Posted by: Dirk van Dijk | March 07, 2011 at 02:52 PM

SHAME on you.

The dip in unemployment has 2% more to do with workers leaving the work force then it does with us turning the corner.

If you examine the following numbers:
Total people employed
Total people looking for work
Total people not looking for work

You see that the change was not from the second group to the first, but from the first group to the third. Discouraged workers is not a good sign.

Posted by: Mark Wusinich | March 09, 2011 at 11:40 AM

If people are not working because of insurance benefits, imagine how many people are working because of the insurance benefits. How does this play into the healthcare debate?

Posted by: Philip | March 11, 2011 at 09:45 AM

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