June 25, 2013
Getting Back to Normal?
Central to any discussion about monetary policy is the degree to which the economy is underperforming relative to its potential, or in more ordinary language, how much slack exists. OK, so how much slack is there, and how long will it take to be absorbed? Well, if you ask the Congressional Budget Office (and a lot of people do), they would have told you last February (their latest estimate) that the economy was underperforming just a shade more than 4 percent relative to its potential last summer, and that slack was likely to increase a little by this summer (to around 4.7 percent). Go to the International Monetary Fund (IMF), and they tell a very similar story in their April World Economic Outlook. The IMF estimates that the amount of slack in the U.S. economy was about 4.2 percent last year, and they expected it would rise a little to about 4.4 percent this year.
As devotees of our Business Inflation Expectations survey know (and you know who you are), the Atlanta Fed has a quarterly, subjective measure of economic slack in the economy as seen by business leaders. This month, businesses told us something pretty interesting—the amount of slack they think they have narrowed pretty sharply between March and June.
Last March, the panel told us that their unit sales were 7.7 percent below "normal"—similar to their assessments in December and September. This month, however, the group cut their estimate of slack to 4.3 percent below normal, on average (see the table).
What we find most encouraging about this assessment (well, besides the speed at which the slack was being taken up) is that the improvement was most prominent among small and medium-sized firms. These are firms that, according to our survey and other reports (like this one from the National Federation of Independent Business), have been lagging behind in the recovery. Indeed, in June, mid-sized firms indicated that unit sales were only 1.5 percent below normal, a shade better than the big firms in our panel (see the table).
A look at the industry composition of our survey reveals that the pickup of slack was relatively broadly based too. Only the firms in the mining and utilities, and the professional and business services areas reported more slack relative to March (and the amounts were pretty small at that). Elsewhere, the amount of slack appears to have narrowed quite a bit.
OK, so slack is shrinking, and according to these estimates, it shrank quite a bit between March and June. Does that mean we should be anticipating growing price pressure? Well, we can turn to our panelists again for an answer, and they say no. Projecting over the year ahead, our panelists report little change in either their inflationary sentiment or their inflation uncertainty (see the table).
Last Wednesday, at the conclusion of its June meeting, the Federal Open Market Committee said that the recovery is proceeding and the labor market is improving, but inflation expectations remain stable. Our June poll of business leaders appears to have also endorsed this view of the economy.
By Mike Bryan, vice president and senior economist,
Brent Meyer, economist, and
Nicholas Parker, senior economic research analyst, all in the Atlanta Fed's research department
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June 10, 2013
Casting a Web over Jobs Data
Writing in the Wall Street Journal prior to the U.S. Bureau of Labor Statistics' Friday release of the May employment data, Ed Lazear (Stanford professor and former chair of George W. Bush's Council of Economic Advisers) made a plea for an expansive interpretation of labor market conditions:
...when Friday's jobs report is released, the unemployment rate and the number of new jobs will come in for close scrutiny. Then again, they always attract the most attention. Even the Federal Reserve focuses on the unemployment rate...
Yet the unemployment rate is not the best guide to the strength of the labor market, particularly during this recession and recovery. Instead, the Fed and the rest of us should be watching the employment rate. There are two reasons.
First, the better measure of a strong labor market is the proportion of the population that is working, not the proportion that isn't…
Second...There is another highly relevant measure that captures what is going on in the economy. "U6" counts those marginally attached to the workforce—including the unemployed who dropped out of the labor market and are not actively seeking work because they are discouraged, as well as those working part time because they cannot find full-time work...
The striking deficiency in jobs is borne out by the Bureau of Labor Statistics' Job Openings and Labor Turnover Survey. Despite declining unemployment rates, the number of hires during the most recent month (March 2013) is almost the same as it was in January 2009, the worst month for job losses during the entire recession (4.2 million then, 4.3 million now).
Faithful readers of macroblog will recognize that, contrary to the narrow focus that Professor Lazear suggests preoccupies the Federal Reserve, one of the Fed's consistent themes has been to cast our intellectual nets over a broad swath of labor market indicators. In fact, one of our favorite blog topics over the past six months has been the construction of "spider charts" to visualize the status of the labor market beyond what can be gleaned from simply looking at the standard unemployment and employment statistics.
Internally, these spider charts have become one of our primary tools for evaluating the status of the labor market. Because we have also found this tool to be an effective means of communicating the overall labor market picture, we are pleased to announce that the labor market spider chart has been added to our portfolio of labor market tools available on the Atlanta Fed's Center for Human Capital Studies' web pages (a portfolio that includes the Jobs Calculator and the Human Capital Compendium, which is a repository of human capital-related products from throughout the Federal Reserve System). The spider chart is presented both in simple levels that were first introduced in macroblog on January 13, 2013, as well as in rates, which were discussed in macroblog last April.
As we have mentioned before, the spider chart contains four groups of labor market indicators:
- Employer behavior includes indicators related to the hiring activities of employers.
- Confidence includes indicators of employer and worker confidence in the labor market.
- Utilization includes measures related to available labor resources.
- Leading indicators shows data that typically provide insight into the future direction of overall labor market activity.
The inner circle of the chart represents the labor market conditions that existed when the unemployment rate peaked in the fourth quarter of 2009. The outer circle represents the labor market conditions that existed just before the recession began.
A section on the website titled Indicators explains the details behind each of the variables included in the groups noted above, and another section, Surveys, details the data sources. A Frequently Asked Questions section offers details on the construction of the indicators and the reference points, as well as the rationale for this approach and answers to other questions that have arisen.
The spider chart allows one to chart the progress on all these dimensions using the most recent three months of data, compared to that level (or rate) for the same time period over the last three years, while the reference points remain fixed. So one could have a spider chart that shows just the data for the three-month period ending in May 2013, or a chart that encompasses the data for May 2013, May 2012, and May 2011.
The increase in the unemployment rate in last Friday's jobs report, amid an otherwise strong report that included a 175,000 increase in payroll employment, supports this strategy of using a variety of indicators to monitor labor market conditions rather than to simply focus on the unemployment rate. The increase in the labor force participation rate this month worked to drive up the unemployment rate, but by all other accounts this was a solid report. In fact, all seven of the indicators from the employment situation report release increased from the April readings in both the "levels" and "rates" spider charts.
Our current focus is still on the recovery of the labor market, and as long as this is the case, we will use the information in these charts to help us determine if the labor market has achieved substantial improvement. When the labor market has turned a corner into expansion, we will reevaluate our tools and determine a more appropriate way to monitor the labor market. But, for now, rest assured that our policy deliberations are not stuck in a single-indicator rut.
By M. Melinda Pitts, director, Center for Human Capital Studies, and
Patrick Higgins, senior economist, both in the Atlanta Fed's research department
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June 07, 2013
The Hiring Forecasts of Small Firms: Will the Pace of Employment Growth Pick Up?
The U.S. Bureau of Labor Statistics (BLS) announced today that the U.S. labor market added 175,000 payroll jobs in May, continuing a trend of steady but disappointingly slow employment growth. The employment recovery has been even slower among small firms. Will it pick up in the coming 12 months? Results from the Atlanta Fed's latest survey of small businesses in the Southeast suggest that employment growth among small firms will continue but not necessarily at a faster pace.
Since the recession began, changes in employment have been asymmetric across firm size. In contrast to large firms, employment at small and medium sized businesses began decreasing earlier, declined more, and, by last March, was a little further from its prerecession level. As of the first quarter of 2012, employment at firms with fewer than 500 employees was 5 percent below prerecession levels, compared to just 2 percent for firms with more than 500 employees. So why is employment at small firms not recovering as quickly as employment at large firms? Is it poised to accelerate and perhaps catch up?
While the Business Employment Dynamics data series from the BLS only go through first-quarter 2012 (chart 1), we can use our semi-annual survey of small business in the Southeast to find out a little more about the experiences of small firms through first-quarter 2013 as well look at their forecasts through the first quarter of 2014. Four-hundred-seventy-eight firms across the industry and age spectrum participated in the first-quarter 2013 survey, which was conducted during the first three weeks in April. Although the survey is not a random sample, the results are weighted to make them more representative of a national distribution.
When asked about changes in employment over the period Q1 2012 to Q1 2013, employer firms on net said there was almost no change. Slightly more than 40 percent of firms said they had not altered employment levels. The remainder of the responses were distributed pretty evenly between "expansion" and "contraction". As you can see in chart 2, the distribution of firms creating jobs was almost a mirror image of the distribution of firms shedding jobs in terms of the magnitude of change.
In addition to asking about changes during the past 12 months, the survey probed small firms about their expectations for the coming 12 months. Using the power of our panel data set, we can compare the expectations of firms that took the survey exactly one year ago with their actual hiring activity during that time period to determine how accurately firms predict what the future holds and whether these hiring plans are indeed good forecasts of future activity.
As it turns out, the 184 firms participating in both surveys came pretty close to meeting their hiring expectations. However, they did tend to overestimate the extent to which employment would increase (or underestimate the extent to which it would decrease), regardless of how well firms were performing at the time they made their forecast (see chart 3). For example, firms that had recently experienced reductions in their workforce expected the greatest positive change in the pace of hiring, and in fact went on to report the highest actual change during this period. Firms that had not changed their employment levels recently or had changed them by up to 10 percent expected very little growth—on average, they achieved just slightly less than expected. Regardless of how well the firm had recently performed (in terms of employment growth in the previous period), the degree to which hiring increased or downsizing decreased was less pronounced than anticipated.
Small firms are reasonably good at predicting the direction and relative magnitude of their employment growth, but on average tend to overestimate. For this reason, it might be useful to examine changes in the hiring expectations index (as opposed to changes in the pace of employment growth) when trying to understand how the forecast of firms participating in the survey might translate into actual employment growth of small firms in the Southeast.
Chart 4 shows the hiring index of firms across four broad industry groups. In the first quarter of 2013, the index for hiring in the coming 12 months was essentially unchanged from the Q3 2012 survey, and significantly below that of the Q1 2012 survey. The only industry whose employment forecast was notably positive was the construction and real estate industry. Firms in that category have been steadily increasing their hiring forecasts since the third quarter of 2011.
The fact that hiring expectations did not improve in the first-quarter survey leads to another, perhaps more important question: Why didn't they?
One contributing factor that could be having a particularly large impact on hiring expectations is rocky sales. Firms may be less willing to hire if they are uncertain about the future or if they do not expect consistent sales growth. Indeed, by looking at the experiences of firms in the past 12 months, we can tell that there is a clear correlation between rising sales and rising employment. As chart 5 shows, half of employer firms reported a recent rise in sales, and the more sales had risen, the more likely firms were to have increased their workforce.
A couple of questions that arise from chart 5 are: What about the firms that recently experienced sales growth but didn't hire? Are they planning to hire in the coming 12 months? About one-third of firms say "yes". One driving factor in that decision appears to be sustained sales growth; another is reduced uncertainty. As chart 6 makes apparent, the sales expectations of firms in this group is higher on average for the one-third of firms that say they do plan to hire in the coming 12 months than for the two-thirds who do not. All the firms in the hiring group also expect sales growth to continue, with the most common response being greater than 10 percent growth. In contrast, while 77 percent of firms in the not-hiring group anticipate sustained sales growth, the group’s most common response was lower than that of the hiring group: 1 percent to 5 percent.
Another factor that may be related to hiring is reduced uncertainty. Employer firms experiencing sales growth in the past 12 months are more likely to anticipate hiring if they perceive a decrease in uncertainty compared to six months ago. Seventy percent of firms that had a recent increase in sales and decreased uncertainty concerns relative to six months ago anticipate hiring in the coming year. In contrast, 46 percent of those who had experienced a recent increase in sales but also perceived heightened uncertainty anticipate hiring.
For now, the results suggest that uncertainty and rocky sales growth are negatively affecting the hiring plans of small firms and, unfortunately, that small firms are not likely to increase their rate of hiring in the next 12 months. However, if uncertainty eases and sales growth continues, small firms will likely revisit their hiring plans and the pace of hiring just might improve.
By Ellyn Terry, a senior economic analyst in the Atlanta Fed's research department
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June 05, 2013
The Semantics of Monetary Policy
Tim Duy has some questions for the head man at the Atlanta Fed:
...Atlanta Federal Reserve President Dennis Lockhart...was on the speaking circuit today. Via the Wall Street Journal...
If the Fed does slow the pace of its bond buying, "this is not a decisive removal of accommodation. This is a calibration to the state of the economy and the outlook. It is not a big policy shift, and I would hope the markets understand that," Mr. Lockhart said.
I know that the Fed does not want market participants to associate a slowing of asset purchases with tighter policy. I am not sure, however, that it will be easy to persuade Wall Street otherwise. After all, if the Fed wanted looser policy, they would increase the pace of asset purchases. If more is "looser," then why isn't less "tighter?" Alternatively, is "less accommodative" really different from "tighter"?
I'm reminded of one of my favorite exchanges from the Greenspan years, with the Chairman responding to Senator Jim Bunning about the motivation for rate increases in 1999:
We did raise interest rates in 1999, and the reason is real long-term interest rates were beginning to accelerate. Had we not raised the federal funds rate during that particular period, we could have held it in check only by expanding the money supply at an inordinately rapid rate.
My interpretation has always been that Mr. Greenspan was saying something like the following: A set federal funds rate target means that the Fed stands ready to supply as much money as demanded at that rate. (More precisely, the Fed stands ready to supply the quantity of bank reserves demanded at that rate.)
If the structure of market interest rates changes and the demand for bank reserves accelerates—say, because economic growth picks up—maintaining a set target means that monetary policy will become increasingly expansionary. In other words, in such circumstances, standing pat on a federal funds rate target does not mean that the stance of monetary policy stays the same. Quite the opposite.
Jerry Jordan, my former boss at the Federal Reserve Bank of Cleveland and an avid sailor, used to explain it this way: When a person sets out to sail across a body of water, you will notice that he will often adjust the position of the sails, the orientation of the boat, and so on. If you know something of sailing, you will realize that he is very likely reacting to changes in the currents, the winds, and other environmental factors. And if that is indeed what he's doing, you would not infer that he has changed anything about where he's headed and why he's heading there. In fact, you would infer that without such adjustments he must have fundamentally changed his intentions.
Of course, we are in the current context referring not to federal funds rate adjustments but to the pace and ultimate quantity of asset purchases. But I think the principle is the same: A given pace or total quantity of purchases does not mean the same thing in all economic circumstances. If circumstances change, so does the degree of "accommodation" associated with any particular course of asset purchases.
Semantics? I don't think so, and perhaps this is instructive: In the April survey of primary dealers conducted by the New York Fed, the median response to question of when asset purchases will end was the first quarter of next year. At the same time, the median view on what the unemployment rate would be at that time was 7.1 percent. That view would not be out of line with what you might guess on the basis of the Summary of Economic Projections that the Federal Open Market Committee published following its March meeting.
But, as we noted here following the April employment report, the facts on the ground seem to be shifting. We will, as you know, get an update on the employment situation on Friday, and perhaps today's ADP report (for what it's worth) wasn't encouraging. In any event, in our shop we will process these reports by considering exactly what it means to keep policy about where it is.
By Dave Altig, executive vice president and research director of the Atlanta Fed
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