macroblog

About


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.


« Scientists? Engineers? How about Gardeners? | Main | Trends in Small Business Lending »

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.

120927_tbl

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.

Mike BryanBy Mike Bryan, vice president and senior economist,

Laurel GraefeLaurel Graefe, economic policy analysis specialist, and

Nicholas ParkerNicholas Parker, economic research analyst, all with the Atlanta Fed

 


September 27, 2012 in Business Inflation Expectations, Inflation, Inflation Expectations | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef017d3c5c55ef970c

Listed below are links to blogs that reference How Big Is the Output Gap? More Perspectives from Our Business Inflation Expectations Survey:

Comments

Normal relative to what? To levels at the height of the bubble? Is that really a measurement of the output gap?

Posted by: Dave Schuler | September 28, 2012 at 10:04 AM

"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?"

maybe a fair question, but one unlikely to be addressed by a survey. One can make the same point about inflation: At any one time, some prices are rising and some are falling, so how meaningful is an aggregate measure of the overall price level? That's the macro question for the ages. Also, you ignore the fact that the rate of growth (or rebound) and ability to add capacity is different for each industry. It could be, for example, that some industries will rebound faster or slower than the overall economy and have the ability to add capacity faster (so the measured degree of slack is essentially a function of the degree of fixed or sticky cost structure).

Overall it sounds to me that while the estimate is different than the CBO, the results are still broadly consistent subject to small sample error.


Posted by: dwb | October 01, 2012 at 08:35 PM

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.

Posted by: escort pigerne | October 22, 2012 at 03:26 AM

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.

Posted by: sexpiger | February 16, 2014 at 04:27 PM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

Google Search



Recent Posts


December 2014


Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      

Archives


Categories


Powered by TypePad