The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
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August 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.
By Dave Altig, senior vice president and research director at the Atlanta Fed
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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.
Not only has the number of new establishments declined, but the average size of new establishments has also tended to decline over time.
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.
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.
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.
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.
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.
By John Robertson, vice president and senior economist in the Atlanta Fed's research department
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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.
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.
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:
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.
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."
By Dave Altig, senior vice president and research director at the Atlanta Fed
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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.
By Dave Altig, senior vice president and research director, and
Mike Bryan, vice president and senior economist, both of the Atlanta Fed
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