The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
- BLS Handbook of Methods
- Bureau of Economic Analysis
- Bureau of Labor Statistics
- Congressional Budget Office
- Economic Data - FRED® II, St. Louis Fed
- Office of Management and Budget
- Statistics: Releases and Historical Data, Board of Governors
- U.S. Census Bureau Economic Programs
- White House Economic Statistics Briefing Room
September 27, 2012
How Big Is the Output Gap? More Perspectives from Our Business Inflation Expectations Survey
Opinions vary widely about how much slack there is in the economy these days. Some say a lot—some say not so much.
Last month, we reached out to members of our Business Inflation Expectations (BIE) panel for their take on the issue. The panel indicated they had more pricing power in August than they did last October. OK, that doesn't exactly gauge the amount of slack businesses think they have, but it does suggest that, however much slack there is, it's been shrinking.
Another detail revealed by our August inquiry was that retailers think they have more pricing power compared with manufacturers—a pretty good sign the latter is experiencing more slack than the former.
In this month's BIE survey we went fishing in the same murky waters, but this time we took a more direct approach. We asked our panel to provide a percentage estimate of how far their sales levels are above/below "normal." Here's what we found: On a gross domestic product (GDP)–weighted basis, the panel estimates that current sales are about 7.5 percent below normal. That's more slack than the conventional estimates, like the Congressional Budget Office's (CBO) measure of the GDP gap, which puts the economy about 6 percent under its potential.
But perhaps a more interesting observation from our September survey is how widely current performance varies by sector and size within our panel. Retailers, for example, say their current sales are a little less than 2 percent below normal. And firms in the leisure/hospitality and the transportation/warehousing sectors—sectors where growth has been particularly robust in recent years—say they are operating at, or just a shade above, normal levels.
Compare these estimates with those from durable goods manufacturers, which report that their current sales levels are nearly 12 percent below normal, and finance and insurance companies, which say they are almost 17 percent below normal. And construction firms? Well, best not even ask them.
And the amount of slack firms are reporting isn't just a reflection of their sector of the economy—size also matters. Firms with more than 500 employees say their current sales levels are a little less than 5 percent below normal—half as much as the amount of slack being reported by small firms.
So we're led back to the question that kicked this blog post off. How big is the output gap? Some say a lot—some say not so much. And this difference in perspective is not just among policymakers. Within the economy, experience varies at least as widely; some firms' sales are still well below normal, while others are telling us that they are very nearly back to normal, and some are already there.
But here's the rub. If the economy represents a constellation of firms operating at widely varying levels of capacity, from what viewpoint should we consider the economy relative to its potential? Are aggregate measures, like the one provided by the CBO or by our "GDP-weighted" approach, appropriate perspectives? Indeed, given widely varying measures of economic performance across firms and industries, how meaningful is an aggregate assessment of economic slack?
Ah, we'll leave these questions for the November survey.
By Mike Bryan, vice president and senior economist,
Laurel Graefe, economic policy analysis specialist, and
Nicholas Parker, economic research analyst, all with the Atlanta Fed
TrackBack URL for this entry:
Listed below are links to blogs that reference How Big Is the Output Gap? More Perspectives from Our Business Inflation Expectations Survey:
- Following the Overseas Money
- The Impact of Extraordinary Policy on Interest and Foreign Exchange Rates
- Using Judgment in Forecasting: Does It Matter?
- Does Lower Pay Mean Smaller Raises?
- Outside Looking In: Why Has Labor Force Participation Increased?
- Wages Climb Higher, Faster
- Is There a Gender Wage Growth Gap?
- The Price Isn't Right: On GDPNow's Third Quarter Miss
- Is Wage Growth Accelerating?
- Unemployment Risk and Unions
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- April 2016
- Business Cycles
- Business Inflation Expectations
- Capital and Investment
- Capital Markets
- Data Releases
- Economic conditions
- Economic Growth and Development
- Exchange Rates and the Dollar
- Fed Funds Futures
- Federal Debt and Deficits
- Federal Reserve and Monetary Policy
- Financial System
- Fiscal Policy
- Health Care
- Inflation Expectations
- Interest Rates
- Labor Markets
- Latin America/South America
- Monetary Policy
- Money Markets
- Real Estate
- Saving, Capital, and Investment
- Small Business
- Social Security
- This, That, and the Other
- Trade Deficit
- Wage Growth