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August 26, 2011

Lots of ground to cover: An update

If you have to discuss a difficult circumstance, I guess Jackson Hole, Wyo., is as nice as place as any to do so. This morning, as most folks know by now, Federal Reserve Chairman Bernanke reiterated the reason that most Federal Open Market Committee (FOMC) members support the expectation that policy rates will remain low for the next couple of years:

"In light of its current outlook, the Committee recently decided to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, in the statement following our meeting earlier this month, we indicated that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years."

There are two pieces of information that emphasize the economy's recent weakness and potential slow growth going forward. The first is this week's revised forecasts and potential for gross domestic product (GDP) from the Congressional Budget Office (CBO), and the second is today's revision of second quarter GDP from the U.S. Bureau of Economic Analysis (BEA). Though estimates of potential GDP have not greatly changed, the CBO's downgrade in forecasts and BEA's report of much lower than potential growth in the second quarter have the current and prospective rates of resource utilization lower than when macroblog covered the issue just about a month ago.

Key to the CBO's estimates is a reasonably good outlook for GDP growth after we get past 2012:

"For the 2013–2016 period, CBO projects that real GDP will grow by an average of 3.6 percent a year, considerably faster than potential output. That growth will bring the economy to a high rate of resource use (that is, completely close the gap between the economy's actual and potential output) by 2017."

The margin for slippage, though, is not great. Assuming that GDP ends 2011 having grown by about 2.3 percent—as projected by the CBO—here's a look at gaps between actual and potential GDP for different, seemingly plausible growth rates:


Attaining 3.5 percent growth by next year moves the CBO's date for closing the output gap up by about a year. On the other hand, a fall in output growth to an average of 3 percent per year moves the date for eliminating resource slack back to 2020. If growth remains below that—well, let's hope it doesn't.

David Altig By Dave Altig, senior vice president and research director at the Atlanta Fed

 

August 26, 2011 in Business Cycles, Economic Growth and Development, Employment, Forecasts, Saving, Capital, and Investment | Permalink

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«economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.»

The exceptionally low funding rates to financial intermediaries are not resulting in equally low rates for customers of those intermediaries, because the Fed has repeatedly hinted that they want to rebuild the balance sheet of the finance sector boosting their profits by granting them a huge spread (and hoping that at least half of those profits go into capital instead of bonuses).

Bernanke's statement then may be interpreted as saying that the Fed does expects the financial sector to need another several years of extra profits resulting from the Fed "subsidy" because the finance sector seem unlikely to be able to make any profit if market conditions prevailed, and indeed it seems that the capital position of many finance sector "national champions" is still weak considering the cosmetically hidden capital losses they have.

As to inflation, wage inflation is indeed well contained (wages are declining in real terms) even if cost of living inflation seems pretty rampant; in a similar country like the UK where indices are less "massaged" the RPI has been running at over 5% and on an increasing trend:

http://www.bbc.co.uk/news/uk-14538167

Posted by: Blissex | August 26, 2011 at 05:28 PM

Why can't the Federal Reserve tell the public the obvious: Growth will only come about by hiring people with livable wages.

If we don't raise incomes nationally we will be forced to liquidate on a massive scale. It doesn't matter who does the hiring, just that it is done.

It isn't the deficit. It isn't the debt. It's the incomes, stupid.

Posted by: beezer | August 27, 2011 at 06:10 AM

Ken Rogoff says 3-5 years of 1-2% GDP and Carmen Reinhart thinks 5-6 years of 2%. =(

Posted by: DarkLayers | August 27, 2011 at 11:19 PM

In terms of econometrics, annual increment of real GDP per capita is constant over time http://mechonomic.blogspot.com/2011/08/revised-gdp-estimates-support-model-of.html . Therefore, the rate of real GDP per capita growth has to decay as a reciprocal function of the attained level of GDP per capita. The exponential component in the overall GDP is fully related to population growth which has been around 1% per year in the U.S. Currently, the rate of population growth falls and the trajectory of the overall GDP lags behind the projection which includes 1% population growth. If to look at the per head estimates, there is no gap between "potential" and observed levels.
In no case should an economist mix the growth in population and real economic growth.

Posted by: kio | August 28, 2011 at 04:03 AM

It's going to be a long time. Do you know how hard it will be for a person to live in the same town for 30 years?

Our money game will need new rules because 30 years at the same job/house/town is over.

But once that issue is fixed, watch out. Technologically America is so far ahead that earning a 100k(todays $$) salary can be done in 6 months.

To keep the NYC banks from leeching on it will be a task.

Posted by: FormerSSResident | August 31, 2011 at 07:00 PM

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August 18, 2011

The new firm employment puzzle

Last week, John Bussey of the Wall Street Journal identified some discouraging statistics from the U.S. Bureau of Labor Statistics "Business Employment Dynamics" (BED) program concerning the number of new establishments (a specific physical location like a store) and the number of jobs from new establishments. These data are replicated in the following chart, which shows both a steep decline in the number of establishments over the last few years but also a decade-long trend of a declining number of jobs coming from new establishments.

BED New Establishment Data Annual

Not only has the number of new establishments declined, but the average size of new establishments has also tended to decline over time.

BED New Establishment Data: Average Size Annual

If small businesses, or more specifically new small businesses, are an engine of job growth in the United States, that particular engine has been getting less powerful. Between March 2009 and March 2010, new establishments generated 1 million fewer jobs than over the period from 2005 to 2007. About 85 percent of that decline was related to a reduction in the number of new establishments. The other 15 percent was attributable to the smaller average size of those new establishments. In contrast, the 1 million fewer jobs per year coming from new establishments between the years 2000 and 2005 were all attributable to a decline in the size of the establishments—the number of new establishments per year actually rose slightly over that period.

The BED program also maintains a quarterly series on establishment births (the annual data are for the year ending in March). The quarterly data show that the number of new establishments rebounded over the latter half of 2010 to a pace comparable to the late 1990s. But the associated number of jobs did not increase proportionately.

BED New Establishment Data Quarterly

So while there appears to have been a healthy pick-up in the number of new establishments in late 2010, the gradual march toward ever-smaller new establishments seems to be continuing.

The changing industrial composition of the economy doesn't seem to be the explanation for the declining establishment size trend—the pictures look basically the same if sectors such as manufacturing and construction are excluded. Perhaps it is that new establishments are simply more able than older establishments to adopt new technologies and processes that reduce the demand for labor because they have no legacy employment or capital to deal with.

How robust are these findings? The BED data do have some drawbacks. For example, the BED data are extracted from the administrative unemployment insurance records for businesses that have payrolls (employees). This covers the vast majority of workers in the United States (about 98 percent of employees on nonfarm payrolls and 94 percent of total employment) but not the majority of businesses (U.S. Census Bureau figures for 2006 report that there were about 3.5 times as many firms without employees other than the owner(s) than firms with employees). Also, these data do not distinguish between a new location that is part of a new firm and a new location that is part of a larger multi-establishment firm (like a national chain).

The Census Bureau maintains a related, but different, data set—the Business Dynamics Statistics (BDS)—that allows distinguishing between new firms and new establishments. However, the latest publicly available data only go through the year ending March 2009. The BDS data for new establishments from new firms and the jobs from those new establishments are shown in the next chart. Like the BED data, the BDS new firm data show that the number of new establishments peaked in 2006 and has been trending lower since.

Number of New Establishments

However, the two data sources differ in terms of job creation: the BED new establishment employment data peaked in 1999 and has been declining steadily since, while the BDS new firm employment data peaked in 2006 and was relatively stable prior to that.

Number of Jobs at New Establishments

Compared to the BED data, the average size of new establishments from new firms in the BDS data has changed relatively little over time—the swings in the number of establishments and employment in the BDS data move about in proportion to each other.

Average New Establishment Size

Interestingly, the BDS data on the average size of new establishments at firms of all ages (new firms as well as older firms) appears to be more cyclically sensitive than the new firm data, suggesting that older firms respond more to prevailing economic conditions than new firms do. Neither of the two BDS series displays the secular trend apparent in the BED data over the last decade.

Why do inferences about new establishments from the BED and BDS data differ? I don't know. This 2009 paper by U.S. Bureau of Labor Statistics economists Akbar Sadeghi, James Spletzer and David Talan tries to reconcile the differences but concludes that a definitive answer would require linking the data series together to compare the measures for matched establishments.

There is plenty of scope for investigating the dynamics of new business formation using data at a U.S. Census Bureau Research Data Center (RDC). The newest RDC will be located at the Atlanta Fed, which has partnered with six other research institutions to apply for and be approved to operate the 13th RDC location in the United States. The Atlanta Census Research Data Center will be a secure location where approved researchers will have access to restricted microdata in order to investigate questions like these. The Atlanta RDC is scheduled to open in September. For researchers in the Southeast interested in exploring research opportunities at the Atlanta Census Research Data Center, contact Melissa Banzhaf. For more information about U.S. Census Bureau Research Data Centers, and the Atlanta Census Research Data Center in particular, see here.

Update: Hat tip to Jim Spletzer at the Bureau of Labor Statistics, who pointed me to this paper by E.J. Reedy and Bob Litan, which was published by the Kauffman Foundation in July. Reedy and Litan show similar patterns in the aggregate BLS and BDS data, as I do, and also demonstrate that the shrinking size of new establishments is not made up for in later life. New firms are getting smaller on average and tend to stay smaller over their life. They posit as explanations increased firm-level productivity and shifting occupational needs related to increased use of information technology and increased globalization.

John Robertson By John Robertson, vice president and senior economist in the Atlanta Fed's research department

August 18, 2011 in Employment, Small Business | Permalink

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You are a senior economist and don't understand the long term trend from skilled labor to automation? Or the capital required in today's business landscape small or large?
Try starting a consumer driven business that requires access to store shelves? or B to B calling on any major corporation that requires extensive ISO documentation along with bidding against better capitalized competitors. Internet driven E-bay style companies are mostly what is happening in small business otherwise the capital requirements far exceeds what most Americans can risk.
I am retired from a career in manufacturing that started in the early 70's and have experienced first hand the country's changing business and labor market.

Posted by: Ron Caldwell | August 19, 2011 at 11:09 AM

I would like to comment on this previous post. I think one must consider all of the so called independent contractors working as freelancers that are paid by the job not by the hour this situation is ripe for abuse. This could be destorting the jobs picture.

Posted by: dennis the menace | September 06, 2011 at 02:55 PM

I think you have hit the nail on the head here. Newer small establishments are able to stay more focused on a particular sector and make decisions quicker without all the redtape of a larger organization.

Posted by: Recruitment Agencies Auckland | December 20, 2011 at 03:05 PM

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August 15, 2011

The GDP revisions: What changed?

Prior to the U.S. Bureau of Economic Analysis's (BEA) benchmark gross domestic product (GDP) revisions announced three Fridays ago, we were devoting a fair amount of space—here, in particular—to picking apart some of the patterns in the data over the course of the recovery. Ahh, the best-laid plans. As noted in a speech today from Atlanta Fed President Dennis Lockhart:

"It's been an eventful two weeks, to say the least. Let's now look ahead. The $64,000 question is what's the outlook from here?...


"Whether we're seeing a temporary soft patch in an otherwise gradually improving growth picture or a deeper and more persistent slowdown, most of the arriving economic data lately have caused forecasters to write down their projections. Also, and importantly, the Bureau of Economic Analysis in the Department of Commerce has revised earlier economic growth numbers. These revisions paint a different picture of the depth of the recession and the relative strength of the recovery."


Beyond keeping the record straight, revisiting the charts from our previous posts in light of the new GDP data is a key input into answering President Lockhart's $64,000 question. Here, then, is that story, at least in part.

1. Even ignoring the depth of the recession, the first two years of this recovery have been slow relative to the early phases of the past two recoveries.

I wasn't so sure this was the case to be made prior to the new statistics from the BEA, but the revisions made clear that, while still broadly similar to the slower growth pattern of the prior two recoveries, the GDP performance has been pretty easily the slowest of all.

Real GDP

2. Consumption growth has been especially weak in this recovery, and the pattern of consumer spending has been more concentrated in consumer durables than has been the case in prior business cycles.

Change in consumption expenditures

The consumer spending piece of this puzzle has President Lockhart's attention:

"I'm most concerned about the effect of the wild stock market on consumer spending. Volatility alone could have a negative impact on consumer psychology at a time of already weakening spending. Last Friday, it was reported that the University of Michigan's Survey of Consumer Sentiment fell sharply in early August to its lowest level in more than 30 years. Furthermore, if the loss of stock market value persists, the effect from the loss of investment value could combine with the loss of value in home prices to discourage consumers more and longer."


On the bright side, the GDP revisions did not of themselves alter the household spending picture. Though the benchmark revisions contained significant changes in consumer spending, those changes were concentrated during the recession in 2008 and 2009. Personal consumption expenditures were actually revised upward from 2009 on, with the big negative changes coming in net exports and government spending:

GDP revisions

Are there other rays of hope? I might add this:

3. The revisions show that the momentum that seemed to fade through 2010 was more apparent in total GDP than in final demand. In other words, the basic storyline—a good start to 2010 with a soft patch in the middle and a stronger finish—still emerges if you look through changes in inventories.

Pattern of final demand

That observation does not, of course, help salve the pain of the very anemic first half of this year. Nonetheless (from Lockhart, again):

"At the Atlanta Fed, we have revised down our near and intermediate gross domestic product (GDP) growth forecast, but we are holding to the view that the economy will continue to grow at a very modest pace. In other words, we do not expect the onset of outright contraction—a recession—but I have to say the risk of recession is higher than we perceived a month or two ago...


"The rapid-fire developments of the last several days, along with some troubling data releases, have shaken confidence. People are worried. Investors, Main Street businessmen and women, and consumers are wondering which way things will tip. The public—and for that matter, policymakers—are operating in a fog of uncertainty that is thicker than normal."


That fog of uncertainty was made thicker by the GDP revisions, and thicker yet by the volatility that followed. But I would still pass along this advice from President Lockhart:

"At this juncture, we should not jump to conclusions. A clearer picture of economic reality will be revealed in time as immediate uncertainties dissipate. It's premature, in my view, to declare these important questions relating to our economic future settled."


David Altig By Dave Altig, senior vice president and research director at the Atlanta Fed

August 15, 2011 in Business Cycles, Economic Growth and Development, Forecasts, Saving, Capital, and Investment | Permalink

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I think it is important to remember that the BEA only has comprehensive data on income and consumer spending in 2009 and earlier. With this annual revision they folded in mandatory census like surveys on retail trade and services. On the income side they incorporated IRS tax return data which led to substantially lower estimates of asset income. Data from the Michigan survey suggests that the current estimates of personal income in 2010 and later might be overstated. The BEA does a very important job as best they can, but the source data is slow to roll in. We probably have a good picture of the recession now, but the recovery is still a work in progress in the NIPAs. In my opinion, if you want to understand the slow recovery in consumer spending...look at the income expectations (or lack thereof) in the Michigan survey.

Posted by: Claudia Sahm | August 16, 2011 at 04:48 AM

Interesting, as always. I'd like to see point 2 done for fixed investment, too.

Posted by: Dave Backus | August 16, 2011 at 05:37 PM

I think we should not begin to accept the pace of recovery in the last two recessions as a "new normal." The last two recessions have featured very little fiscal stimulus, and increasing emphasis on monetary means. Also, what fiscal stimulus there has been is of dubious value, particularly some of the tax policy measures.

These observations reflect a transition from a political economic theory that government spending should fill the gap created by falling consumer and business spending during times of recession to a political economic theory based accounting (i.e., that spending should not exceed revenues). The latter is leading to larger and larger output gaps, and will eventually lead to permanent recession.

This is why it should not be accepted as the "new normal."

Posted by: Charles | August 17, 2011 at 11:02 AM

Looks like the market is now firmly the master. Everybody has become an economist, we elect an Economist for Governors and Presidents, because we have lost control. The Tea Party is a reaction to this, a desperate one.

If the Fed/America can't re-gain control, someone else will.

Posted by: FormerSSresident | August 17, 2011 at 01:43 PM

Inventories are no longer helping and government will be a drag. It is difficult to see where growth comes from in this environment.
We should measure private sector GDP (without Government) as it is the engine that must support the economy and the government.
The economy has been off track for some 15 years as consumer debt has been the engine and that source is over. Debt is a burden and it should not be used for basic consumption or stimulus. All it does is remove future growth. We are in for a sustained period of slow growth.

Posted by: GASinclair | August 19, 2011 at 06:25 PM

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August 01, 2011

Is the economy hitting stall speed?

The news that the U.S. economy is not only growing slowly but has grown more slowly than anyone even knew has justifiably rattled some nerves. The sentiment is captured well enough by this article from Bloomberg:

"The world's largest economy has yet to regain the ground it lost during the recession and may be vulnerable to a relapse.


"Gross domestic product [GDP] expanded at a 1.3 percent annual rate in the second quarter, after a 0.4 percent pace in the prior period, the worst six months since the recovery began in June 2009, Commerce Department figures showed yesterday. Economists said the slowdown leaves the recovery susceptible to being knocked off course by shocks at home or abroad."


At Reuters, James Pethokoukis makes those concerns quantitative:

"...we're in the danger zone for another recession. Research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.")


The research being referred to is work done by the Federal Reserve Board's Jeremy Nalewaik, a careful researcher who is clear that the results should be read with, well, care.

"The dynamics at play in the early part of the 1990s and 2000s expansions may have been different than the dynamics at play in the more-mature part of those and other expansions, and our stall speed models may have omitted an additional phase of the business cycle that has appeared in recent decades, namely the sluggish, jobless recovery phase. If so, the applicability of these stall speed models may be somewhat limited at certain times, such as in the middle of 2010 when the economy evidently slowed while still in the early stages of recovery from the 2007-9 recession."


With caveats like that in mind, Dennis Lockhart, the president of the Atlanta Fed, counseled patience in a speech he delivered on Friday:

"My staff and I have recently been pondering the following questions: Are we experiencing a temporary slowdown—a soft patch—on a recovery path that should return to a rate of 3 to 4 percent GDP growth? Or, instead, are we dealing with an inherently slower pace of economic growth that, because of some combination of persistent economic headwinds and deeper structural adjustment requirements, has the potential to be of much longer duration and more intractable?"


Lockhart said his base case forecast is in line with the greater-strength view.

"I am expecting greater strength in the second half of 2011 and into 2012, accompanied by inflation numbers that converge to around 2 percent. But, as I said, I don't dismiss the possibility that we're in the alternative, more problematic world I described of low and slow growth improving only very gradually. At this juncture, I think we have to wait and see what the incoming data indicate...


"But to try to put some time limit on indecision, I think a continuing flow of weak numbers through the third quarter and into the fourth will call for a serious reconsideration of the situation. The weight of cumulative data could point to a different order of problem—that is, different than just a passing slowdown—if indicators show continued weakness much past year's end."


Of course, Nalewaik's research shows that things could become considerably less comfortable if the 2 percent threshold persists, or the yield curve flattens, or the housing market tanks again. At that point, history is on the side of the recessionists. While Lockhart and our Reserve Bank don't believe we're there yet, it's fair to say we'd feel more comfortable if the incoming third quarter data were a little more positive. And on that count, this morning's Institute for Supply Management report for manufacturing isn't a very promising first step.

David Altig By Dave Altig, senior vice president and research director, and



Mike Bryan Mike Bryan, vice president and senior economist, both of the Atlanta Fed

August 1, 2011 in Business Cycles, Data Releases, Economic Growth and Development, Employment | Permalink

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I think a problem with the US economy these days is the amount of debt and leverage involved in all markets. Even if you're not highly leveraged yourself, you can bet most of the other market participants will be, and that makes for an unstable investment (through no fault of your own) when the global economy has another dip and all asset classes get the jitters.

My biggest fear as an investor right now would be China. A drop in Chinese asset values would not only shake confidence in China's economic vitality, but it would also open debate about whether or not the global economy is over-leveraged and over-reliant on the success of China (it is).

Excessive leverage is partly what made the property bubble aftermath so devastating for Japan, America and Ireland. There's a lot of talk about the Chinese economic bubble and it's potential impact on the global economy. Several months ago, so-called Chinese 'expert' Nick Lardy dismissed worries about what he called the "so-called property bubble" - this was during a conference held at Peterson Institute in DC. However, he now concedes that says a real estate downturn may cause a significant in China, and this is an opinion shared by many other mainstream economic analysts.......

So what changed his opinion? I would suggest a dawning realisation that most of the massive Chinese stimulus, lending and spending during 2009/10 just ended up in property purchases, which drove real estate prices in an alarming and totally unsustainable manner. Also, a realisation that China's economic system frequently produces bubbles, and that's not very likely to change in the near future!!

To understand why excessive debt and leverage is going to have a hugely negative impact on all asset classes going forward, read up on some of the work by Professor Steve Keen (see http://australianpropertyforum.com/blog/main/3567572 ). He's the Australian guy who predicted the GFC, and he has also shown that unsustainable debt to GDP ratios in a country (which you definitely have in the USA, and we have in Australia too) will always result in deflation or depression.

Charles B.

Posted by: Charles Bandridge | August 02, 2011 at 08:26 PM

Hi Dave & Mike, I pop in occasionally but haven't felt the need to kibitz, but I'm lost over what the FED has left in its bag. But first, the working world, at least those in the private sector are way beyond needing to know why "excessive debt & leverage is going to have a hugely negative impact on them". They've been living it for five years, since their spiggots were closed.
My question is, has the FED been largely rendered helpless to turn the mess around that it was so much involved in creating? I'll be the first to admit, I don't know a lot (although I spent many months barking warnings of the impending mortgage implosion), but my guesses are: a QE3 will be toothless & the housing bear market has years to go. So, what's left to encourage Banks to lend & buyers to borrow?

Posted by: bailey | August 10, 2011 at 10:30 PM

Let me toss out what the FED can do to encourage Banks to lend - make it more costly for them NOT to lend. Unfortunately, that raises a better question - if the FED works for the Banks, is it really in its best interest to act to constrain Banks profit?
So, maybe the question is best left to Congress? Oops, isn't that what got us here.

Posted by: bailey | August 14, 2011 at 08:42 AM

Understanding that when all you have is a hammer, everything looks like a nail, I still find it mystifying how monetary policy can be expected to alter business fundamentals by anyone with an ounce of sense, except in illusory ways such as via inflation.

I've never seen an answer to the question whether the US economy can grow at what is considered "reasonable" rates without the aid of a housing bubble, an internet bubble, a finance bubble, or some new kind of bubble, when US wages are being driven down by globalization and costs of production are being driven up by global growth in oil consumption. Unless we can accelerate conversion to natural gas and ultimately renewable energy, this contraction seems likely to last for a long time.

Posted by: George McKee | August 14, 2011 at 07:21 PM

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