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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
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Scientists? Engineers? How about Gardeners?
In the past few days Simon Wren-Lewis (at Mainly Macro) and Noah Smith (at Noahpinion) have revisited some past musings by Greg Mankiw on whether we should think of macroeconomists as scientists or engineers. The separation between the two in Mankiw's telling occurs at the point where macroeconomics meets policy—when macroeconomists leave the academic cloister and take up the causes of the real world. In Mankiw's original words:
God put macroeconomists on earth not to propose and test elegant theories but to solve practical problems.
Wren-Lewis and Smith each have their own issues with the scientist/engineer taxonomy, but both seem to more or less buy into the notion of macroeconomist cum policymaker as an engineer.
For my part, I'm not a fan of the engineer metaphor. It seems a little—well, immodest. Consider these comments, to take just a select few, from Federal Reserve officials following the decision of the most recent Federal Open Market Committee (FOMC) meeting. First, from Fed Chairman Ben Bernanke (via Econbrowser):
The policies that we have undertaken have had real benefits for the economy in that they have provided some support, that they have eased financial conditions and helped reduce unemployment. All that being said, monetary policy, as I've said many times, is not a panacea, it is not by itself able to solve these problems. We are looking for policymakers in other areas to do their part. We will do our part and we will try to make sure that unemployment moves in the right direction, but we can't solve this problem by ourselves.
And this, from a September 18 speech by Chicago Fed President Charles Evans:
Given the slow and fragile recovery, the large resource gaps that still exist, and the large risks we face, it remains clear that we needed a more resilient economy that can withstand the headwinds that might come its way. Last week the FOMC provided a more accommodative monetary policy that can help us achieve such resilience.
Or this, from a September 21 speech by Atlanta Fed President Dennis Lockhart:
The core rationale of my support [for the FOMC decision] was to better assure that the economy remains on a growth trajectory sufficient to steadily, if gradually, reduce the rate of national joblessness. I am not expecting miracles.
I think the action recently taken by the committee has improved the country's economic prospects by reducing the potential downside apparent in the incoming data. In this sense, the policy action was a preventative. But I expect policy will do more than just prevent backsliding.
To be sure, each of the three express confidence that the FOMC's actions will yield better outcomes than would otherwise occur. I guess you could say “engineer” better outcomes, if you like. But I am struck by some of the other ideas expressed in these comments, related to reducing downside potential, promoting resilience, and providing some support.
I credit my colleague Mike Bryan (who credits former Cleveland Fed President Jerry Jordan, our mutual former boss) for suggesting that these types of motivations are better associated with gardening than engineering science. The good gardener does not presume to create growth, but knows that he or she can play a part by ensuring that growing conditions are the best that they can be. The gardener cannot make the sun shine by applying scientific knowledge, but can take measures to promote resilience and support until it does.
Science and engineering are important, without doubt. But when it comes to policymakers, I'll take a green thumb any day.
By Dave Altig, executive vice president and research director at the Atlanta Fed
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September 20, 2012
Examining the Recession’s Effects on Labor Markets
Four years after the onset of the Great Recession, labor market outcomes in the U.S. remain depressed. The fraction of 16- to 64-year-old individuals who are employed fell from above 72 percent in 2007 to less than 67 percent in 2009 and remains stuck there. The unemployment rate rose from 4.5 percent to 10 percent and still hovers above 8 percent. And the fraction of unemployed workers who have been looking for a job for more than six months has increased to a share not seen in the United States in at least 60 years. The Atlanta Fed's Center for Human Capital Studies hosted a conference last weekend, organized by Richard Rogerson (Princeton University), Robert Shimer (University of Chicago) and the Atlanta Fed's Melinda Pitts that explored why the employment losses were so large and why the labor market recovery has been so weak. Examining these questions is important because different hypotheses about the nature of the recession suggest that different policy interventions may help to accelerate the recovery.
The paper "On the Importance of the Participation Margin for Labor Market Fluctuations" by Michael Elsby, Bart Hobijn, and Ayşegül Şahin offered some suggestions on how to think about the disparate behavior of the unemployment rate and labor force participation rate during the last couple of years. While the unemployment rate has steadily fallen back towards its historic levels, labor force participation has fallen, keeping the employment-population ratio constant. At some level, this movement suggests that the decline in labor force participation has acted as a relief valve for the unemployment rate. Using evidence on the gross flows of workers between employment, unemployment, and out-of-the-labor-force, Elsby and his coauthors question that interpretation. Instead, relatively few unemployed workers have dropped out of the labor force during the recovery, reflecting the high desire to work among the current stock of unemployed individuals.
A number of papers offered specific hypotheses about the reason for the large and persistent deterioration in labor market outcomes and tested those hypotheses using a variety of methodologies and datasets. For example, the paper "What Explains High Unemployment? The Aggregate Demand Channel" by Atif Mian and Amir Sufi explored the implications of the negative shock to household balance sheets that followed the collapse in house prices. They document that employment in the nonconstruction, nontraded sector declined most in U.S. counties that experienced the largest adverse shock to house prices, while the decline in the traded goods sector occurred equally nationwide. If wages and prices were flexible, we would expect the balance sheet shock to reduce the demand for nontraded goods and raise the supply of labor and hence employment in the traded good sector. The fact that this did not happen is evidence that wages and prices have not adjusted. They infer that roughly two-thirds of the total employment losses can be attributed to the balance sheet shock, in combination with wage and price rigidities.
A second hypothesis is that the recovery has been so weak because of underlying adverse trends in the U.S. labor market. "Manufacturing Busts, Housing Booms, and Declining Employment: A Structural Explanation" by Erik Hurst, Matt Notowidigdo, and Kerwin Charles shows how the ongoing decline in the demand for less educated men in manufacturing has generated a negative trend in labor market outcomes for these workers for three decades. This trend continued unabated during the years after the 2001 recession but was masked by the housing boom, which lifted employment for less-skilled workers for another five years. This observation is relevant for how one interprets the time series changes in labor market outcomes. If we view the housing boom as an aberration that is unlikely to resume, it is inappropriate to compare current labor market outcomes with those just preceding the onset of the Great Recession.
The paper "The Trend is the Cycle: Job Polarization and Jobless Recoveries" by Nir Jaimovich and Henry Siu focuses on a related but distinct long-term phenomenon in the U.S. labor market: job polarization. This refers to the fact that the U.S. labor market increasingly consists of low- and high-paying jobs with relatively few middle-income jobs. While this ongoing change has been noted by other researchers, Jaimovich and Siu show that this long-term evolution has not been occurring at a slow and steady rate but rather has been concentrated during aggregate downturns. They argue that the recent phenomenon of jobless recoveries is simply a reflection of the fact that these are the periods in which middle income jobs are disappearing, never to be brought back.
On the other hand, "The Labor Market Four Years Into the Crisis: Assessing Structural Explanations" by Jesse Rothstein explores and finds little direct evidence for a number of specific structural channels that might explain the weak recovery. For example, there are no identifiable sectors of the U.S. economy with strong wage growth, which suggests that the shortage of suitable workers is probably not a large constraint on employment growth.
A third hypothesis is that the weak recovery reflects an increase in economic uncertainty, which induces firms to wait rather than hire and invest. "Measuring Economic Policy Uncertainty" by Scott Baker, Nicholas Bloom, and Steve Davis proposes a novel methodology for quantifying the overall level of economic uncertainty and the portion of uncertainty that is induced by economic policy. They show that both measures of uncertainty have been elevated since the onset of the Great Recession and have scarcely recovered during recent years. "Uncertainty, Productivity and Unemployment in the Great Recession" by Edouard Schaal examines how an increase in uncertainty affects labor market outcomes in the context of a job search model. He focuses on one measure of uncertainty, the cross-sectional variability of sales growth rates across business establishments, which increased sharply in 2008 but has since subsided. Because of this finding, Schaal finds that the model can account for a large deterioration in labor market outcomes at the time of the shock but that it cannot explain why the deterioration has been so persistent.
A final hypothesis is that the weak recovery reflects disincentive effects of new tax and transfer programs that have been introduced since the onset of the recession. One aspect of this that has attracted particular attention is the extension of unemployment benefits. "The Effect of Unemployment Insurance Extensions on Reemployment Wages" by Johannes Schmieder, Till von Wachter, and Stefan Bender uses evidence from Germany to explore this hypothesis. They show that extending unemployment benefits by six months causes approximately a one-month increase in the amount of time it takes an individual to return to work. This extension has two effects on the wage of workers when they return to work. On the one hand, the additional time to look for a job allows workers to find better jobs. On the other hand, workers' skills tend to decline during an unemployment spell. On net, these effects roughly cancel so extended benefit programs do not have a large impact on average wages.
The framework that most economists use to study the behavior of unemployed workers is search theory. Robert Hall's paper "Viewing the Observed Acceptance Decisions of Job-Seekers through the Lens of Search Theory" analyzes detailed data on the job finding process for a sample of unemployed workers in New Jersey from 2009 in the context of this theory to assess how well the theory can provide a consistent explanation for observed behavior. Previous work had suggested that this framework has problems in accounting for observed job acceptance decisions, but Hall shows that with a few simple modifications, the framework offers a consistent explanation of how workers behave given labor market conditions.
The discussions at the conference questioned the usefulness of labels like deficient demand, structural unemployment, and cyclical unemployment. These terms mean different things in different contexts and do not clarify the key causal factors. Explanations such as "employment is slow because uncertainty is high" could easily fit under any of these banners. Instead, isolating the key changes that have taken place in the U.S. economy, and then scrutinizing the factors that have influenced how those changes have affected the labor market, would be more conducive to arriving at answers.
By Richard Rogerson of Princeton University and Robert Shimer of the University of Chicago, both advisers to the Atlanta Fed’s Center for Human Capital Studies, and Melinda Pitts, a research economist and associate policy adviser in the Atlanta Fed's research department
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September 17, 2012
Will the Housing Market Recovery Leave the Hardest-Hit Neighborhoods Behind?
The national news about residential real estate has been rosy. The latest figures from the U.S. Census Bureau and HUD find that sales of new single-family houses in July 2012 were up 3.6 percent over the June rate, and 25.3 percent above July 2011 numbers. The National Association of Realtors reported that existing-home sales grew 2.3 percent to a seasonally adjusted annual rate of 4.47 million in July from 4.37 million in June and are 10.4 percent above the July 2011 pace. The June S&P/Case-Shiller report on housing prices showed positive monthly gains across all markets in its 20-city composite for the second month in a row.
However, a large number of homes remain in the foreclosure pipeline and many of these properties are concentrated in certain neighborhoods, which is a particular challenge for recovery in these areas because research suggests that concentrated mortgage delinquency and foreclosure can depress housing prices (see discussions here, here, and here).
To examine this issue and the barriers to recovery in areas heavily affected by foreclosure, the Federal Reserve Bank of Atlanta's Community and Economic Development (CED) group conducted a poll to explore housing market conditions in the Southeast. We asked Neighborhood Stabilization Program administrators, HUD-approved housing counselors, and real estate brokers across the Sixth Federal Reserve District about price expectations and changes in supply and demand in the housing market. The poll was administered between August 7 and August 24. We received 224 responses to the poll and conducted an additional 23 interviews, all within the Sixth District, which includes all of Alabama, Florida, and Georgia, and parts of Louisiana, Mississippi, and Tennessee. The overall response rate to the poll was 30 percent (individual state response rates varied from 22 percent (Georgia) to 52 percent (Tennessee).
When we asked about their house price expectations over the next year (see the chart), we saw signs of bifurcation, with more than half (54 percent) expecting the overall jurisdiction to experience gains, but nearly half (48 percent) expecting the hardest-hit areas in those jurisdictions to continue to see price declines. (For our purposes, "hardest-hit areas" are defined as the top 10 neighborhoods in the area that had the most foreclosures. Also the differences across all parameters—price, inventory of homes for sale, and interest in home buying—between overall jurisdiction and the hard-hit areas are statistically significant.)
The differences between the overall jurisdiction and the hard-hit areas are less pronounced, though still present, when we asked respondents about changes in home buying interest and the number of homes for sale in the last six months (see the chart). Reflecting on the overall jurisdiction, 67 percent said that interest in home buying increased, and of those only 14 percent said it was a significant increase. Another 17 percent experienced decreased home-buying interest.
The "home-buying enthusiasm" found in overall jurisdictions is not as robust when respondents talked about hardest-hit neighborhoods. Although 46 percent mention that the interest in home buying in these areas has increased, it was offset by the 29 percent who noted a decrease in interest in home buying in these areas.
On the other hand, the inventory of homes for sale in the overall jurisdiction has increased in the last six months, according to 57 percent of the respondents (see the chart). (Of these respondents, 45 percent said the inventory increased modestly.) When referring to hardest-hit areas, almost half said that the number of homes for sale had increased in the last six months, 26 percent said it had remained the same, and 27 percent said the number had decreased. And while the trends in the overall jurisdiction and the hard-hit areas may not be wildly divergent in terms of the for-sale inventory, the causes may be different. In the overall jurisdiction, homeowners may be putting their homes on the market because they feel better about the potential returns, whereas it seems reasonable to suggest that in hard-hit areas the increase in inventory of homes for sale may reflect a continued foreclosure pipeline.
We then asked about the top barriers to house-price stabilization and recovery in the areas hardest hit by foreclosure. According to our respondents, the most significant barrier is the poor credit scores and financial history of people wanting to purchase homes in these areas (see the table). With tightened lending standards, fewer people are able to secure financing to buy homes. The next two barriers concern the continued flow of foreclosure starts in these areas. In these cases, the respondents suggest that foreclosures are initiated either because people owe more on their homes than they are worth or because of recent unemployment or underemployment of borrowers decreasing the ability to repay. Respondents also noted that low appraisals in hard-hit areas have undermined sales. Finally, the high concentration of vacant properties, likely perpetuated by the higher-ranked barriers identified in the poll, presents an image of disinvestment in the areas, making it difficult to attract new buyers.
It's important to recognize that even among hard-hit areas there are notable variations and expectations for the future. For example, responses to house price expectations in Florida's hard-hit areas were much more optimistic, with 36 percent expecting increases in the next year, compared to Georgia's hard-hit areas, where only 3 percent anticipated prices going up. Of course, there are metro areas where this "micro-recovery thesis," as Nick Timiraos of the Wall Street Journal puts it, is not at play. "Denver and Phoenix are experiencing price increases in almost every ZIP code," he notes. (A previous macroblog post provides another look at ZIP code–level house price analysis.)
By Karen Leone de Nie, research manager in the Atlanta Fed's Community and Economic Development (CED) department,
Myriam Quispe-Agnoli, an Atlanta Fed research economist and adviser to the CED research and policy team
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September 11, 2012
The Decline in Unemployment: Any Silver Lining?
Among the somewhat dreary jobs report released last Friday, there was one potential bright spot—the unemployment rate declined from 8.25 percent in July to 8.11 percent in August. Of course, determining whether this is a true bright spot requires delving further into the numbers, and the determination depends on what happened to those people once they were no longer counted among the jobless. Did they get jobs? Some did, but an unusually large number of them simply left the labor force—the labor force participation rate hit a new post-1980 low, leaving some doubt about whether the cloudy employment report had any silver lining at all.
To detail the situation, the unemployment rate dropped from 8.25 percent in July to 8.11 percent in August, driven by a 250,000-person drop in the number of unemployed between July and August (a 1.95 percent drop). This is the largest decline in the number of unemployed since January 2011 and almost 2.5 times larger than the average monthly decline seen from July 2011 to July 2012 (103,500).
Where did those formerly unemployed people go? To get at this issue, I went to the Current Population Survey (or CPS, from where the unemployment statistics come) to examine the flows of people into and out of the labor force, and into and out of employment and unemployment. From July to August, the CPS data in the chart below reveal that approximately 60 percent of the unemployed remained in unemployment (blue line). Of the remaining 40 percent, over half (54 percent) of the unemployed flowed out of the labor force in August (red line) while the other 46 percent (green line) flowed into employment.
It is interesting to note that the share of exits to employment fell below the exits out of the labor force for the first time in the last few months of 2008 and has remained so throughout the recovery.
Although the share exiting the labor force from unemployment has not increased, the number of individuals leaving unemployment because they leave the labor force has been on the rise since May, as the chart below shows:
This increase in the number of individuals exiting the labor force from unemployment, of course, leads to obvious concerns that lower unemployment may be a result of a rise in the number of workers who have simply become too discouraged to continue seeking employment. As financial writer Mark Gongloff points out:
The majority's reaction to these numbers on Friday was that they were an awful sign, that the job market is so bad that hundreds of thousands of people every month are simply giving up in despair. We have growing numbers of people sitting around doing nothing, losing their job skills and their ability to buy stuff.
Perhaps that's a bit too pessimistic. The U.S. Bureau of Labor Statistics (BLS) does track people who have dropped out of the labor force but who have looked for work sometime in the last 12 months and report that they are available to work. The BLS also asks these individuals—referred to as the "marginally attached"—if they consider themselves as having left the job-search process because they are discouraged.
To begin with, it is important to realize the scale of the problem: the number of discouraged, marginally attached people corresponds to less than 7 percent of the unemployed and approximately 1 percent of those not in the labor force. More importantly, we can see from the reported data in the chart below that the share has been on a downward trend and is now close to prerecession levels.
If the share of nonparticipants who indicate they want to work but are discouraged is declining and relatively small, what about other nonparticipants? It's a good question, and in a previous macroblog post my coauthor Julie Hotchkiss discussed research presented in an Atlanta Fed FRBA working paper (coauthored with Fernando Rios-Avila) that attempts to get to this question.
First, we found that approximately 70 percent of those under age 25 indicate that the reason they are not in the labor force is because they are in school, a rate that has not changed with the rather dramatic decline in participation seen in the last decade and during the recession and recovery.
In prime working age—the cohort 25 to 54 years old—household care is the dominant reason individuals indicate they are out of the labor force. But in terms of changes in the numbers of people out of the labor force in this age group, we found significant increases only for the shares who indicated they were out of the labor force for schooling and for "other," or unspecified, reasons.
As Julie concluded in her earlier post, for those in school, the expectation is that they are accumulating skills and they will enter/reenter the labor force with higher levels of human capital. While there could be some concern over atrophy of skill for those individuals in the "other" category, the evidence suggests that for a large share of these individuals, the nonparticipation is not permanent, as roughly 45 percent of individuals in that category transition back into the labor force within a year—a rate that is increasing during the recovery.
A small ray of hope, perhaps, but hope nonetheless.
By Melinda Pitts, a research economist and associate policy adviser in the Atlanta Fed's research department
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- Contrasting the Financing Needs of Different Types of Firms: Evidence From a New Small Business Survey
- Gauging Inflation Expectations with Surveys, Part 3: Do Firms Know What They Don’t Know?
- Gauging Inflation Expectations with Surveys, Part 2: The Question You Ask MattersA Lot
- Gauging Inflation Expectations with Surveys, Part 1: The Perspective of Firms
- Chances of Finding Full-Time Employment Have Improved
- Exploring the Increasingly Widespread Decline in Involuntary Part-Time Work
- The Long and Short of Falling Energy Prices
- And the Winner Is...Full-Time Jobs!
- For Middle-Skill Occupations, Where Have All the Workers Gone?
- A Closer Look at Employment and Social Insurance
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