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.


« July 2013 | Main | September 2013 »

August 30, 2013


Still Waiting for Takeoff...

On Thursday, we got a revised look at the economy’s growth rate in the second quarter. While the 2.5 percent annualized rate was a significant upward revision from the preliminary estimate, it comes off a mere 1.1 percent growth rate in the first quarter. That combines for a subpar first-half growth rate of 1.8 percent. OK, it’s growth, but not as strong as one would expect for a U.S. expansion and clearly a disappointment to the many forecasters who had once (again) expected this to be the year the U.S. economy shakes itself out of the doldrums.

Now, we’re not blind optimists when it comes to the record of economic forecasts. We know well that the evidence says you shouldn’t get overly confident in your favorite economists’ prediction. Most visions of the economy’s future have proven to be blurry at best.

Still, we at the Atlanta Fed want to know how to best interpret this upward revision to the second-quarter growth estimate and how it affects our president’s baseline forecast “for a pickup in real GDP growth over the balance of 2013, with a further step-up in economic activity as we move into 2014.”

What we can say about the report is that the revised second-quarter growth estimate is a decided improvement from the first quarter and a modest bump up from the recent four-quarter growth trend (1.6 percent). And there are some positive indicators within the GDP components. For example, real exports posted a strong turnaround last quarter, presumably benefiting from Europe’s emerging from its recession. And the negative influence of government spending cuts, while still evident in the data, was much smaller than during the previous two quarters.  Oh, and business investment spending improved between the first and second quarters.

All good, but these data simply give us a better fix on where we were in the second quarter, not necessarily a good signal of where we are headed. To that we turn to our “nowcast” estimate for the third quarter based on the incoming monthly data (the evolution of which is shown in the table below).

A "nowcasting" exercise generates quarterly GDP estimates in real time. The technical details of this exercise are described here, but the idea is fairly simple. We use incoming data on 100-plus economic series to forecast 12 components of GDP for the current quarter. We then aggregate those forecasts of GDP components to get a current-quarter estimate of overall GDP growth.

We caution that unlike others, our nowcast involves no interpretation whatsoever of these data. In what is purely a statistical exercise, we let the data do all the speaking for themselves.

Given the first data point of July—the July jobs report—the nowcast for the third quarter was pretty bleak (1.1 percent). Things improved a few days later with the release of strong international trade data for June, and stepped up further with the June wholesale trade report. But the remainder of the recent data point to a third-quarter growth rate that is very close to the lackluster performance of the first half.


In his speech a few weeks ago, President Dennis Lockhart indicated what he was looking for as drivers for stronger growth in the second half of this year.

“I expect consumer activity to strengthen.”

Today’s read on real personal consumption expenditures (PCE) probably isn’t bolstering confidence in that view. Real PCE was virtually flat in July, undermining private forecasters’ expectation of a moderate gain. Our nowcast for real GDP slipped down 0.5 percentage points to 1.4 percent on the basis of this data, and pegged consumer spending at 1.7 percent for Q3—in line with Q2’s 1.8 percent gain.

“I expect business investment to accelerate somewhat.”

The July data were pretty disappointing on this score. The durable-goods numbers released a few days ago were quite weak, causing our nowcast, and those of the others we follow, to revise down the third-quarter growth estimate.

“I expect the rebound we have seen in the housing sector to continue.”

Check. Our nowcast wasn’t affected much by the housing starts data, but the existing sales numbers produced a positive boost to the estimate. Our nowcast’s estimate of residential investment growth in the third quarter is well under what we saw in the second quarter. But at 5.3 percent, the rebound looks to be continuing.

“I expect the recent improvement in exports to last.”

Unfortunately, the July trade numbers don’t get reported until next week. So we’re going to mark this one as missing in action.  But as we said earlier, that June trade number was strong enough to cause our third-quarter nowcast to be revised up a bit.

“And I expect to see an easing of the public-sector spending drag at the federal, state, and local levels.”

Again, check. The July Treasury data indicated growth in government spending overall.

So the July data are a mixed bag: some positives, some disappointments, and some missing-in-actions. But if President Lockhart were to ask us (and something tells us he just might), we’re likely to say that on the basis of the July indicators, the “pickup in real GDP growth over the balance of 2013” isn’t yet very evident in the data.

This news isn’t likely to come as a big surprise to him. Again, here’s what he said publicly two weeks ago:

When I weigh the balance of risks around the medium-term outlook I laid out, I have some concerns about the potential for ambiguous or disappointing data. I also think that it is important to be realistic about the degree to which we are likely to have clarity in the near term about the direction of the economy. Both the quantity of information and the strength of the signal conveyed by the data will likely be limited. As of September, the FOMC will have in hand one more employment report, two reports on inflation, a revision to the second-quarter GDP data, and preliminary incoming signals about growth in the third quarter. I don't expect to have enough data to be sure of my outlook.

It’s still a little early to say with any confidence we won’t eventually see a pickup this quarter, and we can hope that the incoming August numbers show a more marked improvement. All we can say at this point is that after seeing most of the July data, it still feels like we’re stuck on the tarmac.

Photo of Mike BryanBy Mike Bryan, vice president and senior economist,

Photo of Patrick HigginsPatrick Higgins, senior economist, and

Photo of Brent MeyerBrent Meyer, economist, all in the Atlanta Fed's research department


August 30, 2013 in Data Releases, Economic Growth and Development, Economics, Forecasts, GDP | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef019aff17e3fc970c

Listed below are links to blogs that reference Still Waiting for Takeoff...:

Comments

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

August 19, 2013


Does Forward Guidance Reach Main Street?

The Federal Open Market Committee (FOMC) has been operating with two tools (well described in a recent speech by our boss here in Atlanta). The first is our large-scale asset purchase program, or QE to everyone outside of the Federal Reserve. The second is our forward guidance on the federal funds rate. Here’s what the fed funds guidance was following the July FOMC meeting:

[T]he Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. 

The quarterly projections of the June FOMC meeting participants give more specific guidance on the fed funds rate assuming “appropriate” monetary policy. All but one FOMC participant expects the funds rate to be lifted off the floor in 2015, with the median projection that the fed funds rate will be 1 percent by the end of 2015.



But forward guidance isn’t worth much if the public has a very different view of how long the fed funds rate will be held near zero. The Federal Reserve Bank of New York has a good read on Wall Street’s expectation for the federal funds rate. Its June survey of primary dealers (a set of institutions the Fed trades with when conducting open market operations) saw a 52 percent chance that the fed funds rate will rise from zero in 2015, and the median forecast of the group saw the fed funds rate at 0.75 percent at the end of 2015. In other words, the bond market is broadly in agreement with the fed funds rate projections made by FOMC meeting participants.

But what do we know about Main Street’s perspective on the fed funds rate? Do they even have an opinion on the subject?

Our perspective on Main Street comes from our panel of businesses who participate in the monthly Business Inflation Expectations (BIE) Survey. And we used our special question to the panel this month to see if we could gauge how, indeed whether, businesses have opinions about the future of the federal funds rate. Here’s the specific question we put to the group:

Currently the fed funds rate is near 0%. [In June, the Federal Reserve projected the federal funds rate to be 1% by the end of 2015.] Please assign a percentage likelihood to the following possible ranges for the federal funds rate at the end of 2015 (values should sum to 100%).

In the chart below, we plot the distribution of panelists’ median-probability forecast (the green bars) compared to the distribution of the FOMC’s June projection (we’ve simply smushed the FOMC’s dots into the appropriately categorized blue bars).

Seventy-five percent of our respondents had a median-probability forecast for the fed funds rate somewhere between 0.5 percent and 1.5 percent by the end of 2015. That forecast compares very closely to the 73 percent of the June FOMC meeting participants.



You may have noticed in the above question a bracketed bit of information about the Federal Reserve’s forecast for the federal funds rate: “In June, the Federal Reserve projected the federal funds rate to be 1% by the end of 2015.” Actually, this bit of extra information was supplied only to half of our panel (selected at random). A comparison between these two panel subsets is shown in the chart below.


These two subsets are very similar. (If you squint, you might see that the green bars appear a little more diffuse, but this isn’t a statistically significant difference…we checked.) This result suggests that the extra bit of information we provided was largely extraneous. Our business panel seems to have already had enough information on which to make an informed prediction about the federal funds rate.

Finally, the data shown in the two figures above are for those panelists who opted to answer the question we posed. But, at our instruction, not every firm chose to make a prediction for the federal funds rate. With this month’s special question, we instructed our panelists to “Please feel free to leave this question blank if you have no opinion.” A significant number of our panelists exercised this option.

The typical nonresponse rate from the BIE survey special question is about 2 percent. This month, it was 22 percent—which suggests that an unusually high share of our panel had no opinion on the future of the fed funds rate. What does this mean? Well, it could mean that a significant share of Main Street businesses are confused by the FOMC’s communications and are therefore unable to form an opinion. But a high nonresponse rate could also mean that some segment of Main Street businesses don’t believe that forward guidance on the fed funds rate affects their businesses much.

Unfortunately, the data we have don’t put us in a very good position to distinguish between confusion and apathy. Besides, we’re optimistic sorts. We’re going to emphasize that 78 percent of those businesses we surveyed responded to the question, and that typical response lined up pretty well with the opinions of FOMC meeting participants and the expectations of Wall Street. So, while not everyone is dialed in to our forward guidance, Main Street seems to get it.

Photo of Mike BryanBy Mike Bryan, vice president and senior economist,

Photo of Brent MeyerBrent Meyer, economist, and

Photo of Nicholas ParkerNicholas Parker, senior economic research analyst, all in the Atlanta Fed's research department


August 19, 2013 in Business Inflation Expectations, Economics, Fed Funds Futures, Federal Reserve and Monetary Policy | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef0192ac9f9e5b970d

Listed below are links to blogs that reference Does Forward Guidance Reach Main Street?:

Comments

Forward guidance can prove to be an effective tool for monetary policy, especially, when it is first implemented, as it is unexpected as well. Later on, however, its impact is diminished as it is only the change in expected guidance that might have an impact.

Posted by: Javier | September 21, 2013 at 11:50 AM

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

August 16, 2013


GDP, Jobs, and Growth Accounting

The latest on productivity, from the Associated Press via USA Today:

U.S. worker productivity accelerated to a still-modest 0.9% annual pace between April and June after dropping the previous quarter.

The second-quarter gain...reversed a decline in the January-March quarter, when the Labor Department's revised numbers show productivity shrank at a 1.7% annual pace.

Labor costs rose at a 1.4% annual pace from April through June, reversing a revised 4.2% drop the previous quarter.

Productivity measures output per hour of work. Weak productivity suggests that companies may have to hire because they can't squeeze more work from their existing employees....

Productivity growth has been weaker recently, rising 1.5% in 2012 and 0.5% in 2011.

Annual productivity growth averaged 3.2% in 2009 and 3.3% in 2010. In records dating back to 1947, it's been about 2%.

Though not quite in the category of spectacular—and coming off revisions that if anything made things look weaker than previously thought—last quarter's uptick is a welcome development. Earlier this week, in a speech to the Atlanta Kiwanis club, Atlanta Fed President Dennis Lockhart laid out several scenarios with materially different implications for how the GDP and employment picture might play out over the next several years:

As a matter of arithmetic, healthy employment growth coupled with tepid GDP growth implies weak labor productivity growth. And in fact, productivity growth in recent quarters has been significantly below historical norms.

[I] believe that the recent low growth of productivity is probably just a temporary downdraft after the rather strong productivity growth when the economy emerged from recession.

If productivity growth rebounds to more typical levels, the coincidence of job gains at a pace of around 190,000 per month in recent months and GDP growth below 2 percent cannot persist. Again, it's a matter of arithmetic. Either GDP growth will rise to levels consistent with recent employment growth, or employment growth will fall to levels more consistent with the weak GDP data we've been witnessing.

I've got a working assumption on this question, and it is captured in the Atlanta Fed's baseline forecast for the second half of this year and 2014. This outlook calls for a pickup in real GDP growth over the balance of 2013, with a further step-up in economic activity as we move into 2014.

You can get a sense of this outlook by considering the output of one particular model that we use here at the Atlanta Fed. The model, which is purely statistical, gives us a view into how productivity, GDP, employment, and the unemployment rate might move together (along with other labor market variables like labor force participation and average hours worked). Here is the bottom line of an exercise that assumes GDP growth through 2015 comes in at about the central tendency of the projections from the Federal Reserve's June 2013 Summary of Economic Projections.

For this exercise, we have adjusted the 2013 growth forecast down slightly due to the weaker-than-expected growth in the first half of the year. Additionally, we have plugged in assumptions for productivity growth—1.5 percent per quarter (SAAR), the average gain over the past eight years—and nonfarm business output growth. We then let the model forecast the remaining variables, all of which are for the labor market:

130816a

The model forecasts employment gains in the neighborhood of what the economy has been generating over the past several years, and a steadily declining unemployment rate.

Now consider two "stall" scenarios in which GDP growth fails to get beyond 2.3 percent. The first of these scenarios is the one noted in the Lockhart Kiwanis speech, with productivity recovering but job growth falling off the pace:

130816b

From a policy perspective, this one may not cause too much handwringing about the appropriate course of action. The weak GDP growth is accompanied by a failure to make the type of progress on the unemployment rate that the FOMC has clearly articulated as the necessary condition for adjustments in policy rates:

[T]he Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

Absent unforeseen issues with inflation, staying the course would seem to be in order.

But there is a second stall scenario in which productivity and GDP growth remain tepid, even as labor market indicators improve:

130816c

The difference in this experiment is that the expectations of those that President Lockhart referred to in his speech as the "innovation pessimists" are correct. Recent weakness in productivity growth reflects a fall in trend productivity growth. In this case, essentially identical labor market outcomes would nonetheless correspond to an economy that can't seem to hit "escape" velocity.

If it is clear that this configuration of outcomes is associated with a structural break in productivity growth, an argument against monetary policy stimulus would have some weight. After all, in most cases we don't expect the tools of monetary policy to fix structural efficiency problems.

But, alas, such clarity rarely arrives in real time. The experiments above give some sense of how difficult it can be to discover the right branch to follow on the policy decision tree.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed


August 16, 2013 in Data Releases, Employment, GDP, Labor Markets, Productivity, Unemployment | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef0192ac9423b1970d

Listed below are links to blogs that reference GDP, Jobs, and Growth Accounting:

Comments

The fundamental challenge with income statistics is that we are being confused by the terrible impact of a completely left tailed incomes distribution prior to the crisis with a job growth that is happening at the bottom of the pyramid, which effectively means that even though the job numbers look good, its impact on the GDP growth would be minuscule.

Posted by: Procyon Mukherjee | August 17, 2013 at 07:01 AM

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

August 09, 2013


Myth and Reality: The Low-Wage Job Machine

In the wake of the July employment report released last week, an interesting graphic appeared in a Wall Street Journal article with the somewhat distressing title "Low Pay Clouds Job Growth." The graphic juxtaposed average wages by sector (as of July 2013) with changes in the numbers of jobs created by sector (from July 2011 through July 2013). I've reproduced that chart below, with a few enhancements:


For the 17 sectors, the red circles represent the five sectors with the lowest average wage as of July. The green circles represent the five sectors with the highest average wages, and the blue circles represent those with average wages between the high and low groups. The size of each of the circles in the chart represents the share of employment in that sector during the July 2011 to July 2013 period.

The clear implication of the article is that things are even worse than you think:

Employers added a seasonally adjusted 162,000 jobs in July, the fewest since March, the Labor Department said Friday, and hiring was also weaker in May and June than initially reported. Moreover, more than half the job gains were in the restaurant and retail sectors, both of which pay well under $20 an hour on average.

That situation may indeed be something worth worrying about, but if so it is nothing new. The following chart shows the percentages of job gains sorted by low-wage, middle-wage, and high-wage sectors for each of the U.S. expansion periods dating back to 1970:


I've dated the current recovery from March 2010: the month that employment gains turned positive. It should also be noted that the cross-recovery comparisons are not quite apples-to-apples given changes in the way sectoral employment is reported by the U.S. Bureau of Labor Statistics. (There are only 11 sectors, for example, in the recovery periods prior to 1991.)

But I don't think this materially alters the basic picture: The lowest-wage sectors have consistently produced 40 percent to 50 percent of the job gains in recent recoveries. Though the percentage was slightly higher in July, it was not materially so. And this recovery does not look at all unusual when taken as a whole.

What is more striking—at least relative to the earlier recoveries in the chart—is the growing disparity between the average wages across sectors, as this animation clearly illustrates:


Importantly, the animation also clearly illustrates that the growing wage disparity is a trend, not a unique feature of the postcrisis period. There are lots of interesting things being written about the reasons for this trend, and it is a vitally important topic. But I'm pretty sure the answers to the important policy questions lie well beyond the current business cycle.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed


August 9, 2013 in Employment, Labor Markets | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef019104abf56e970c

Listed below are links to blogs that reference Myth and Reality: The Low-Wage Job Machine:

Comments

Can you remake your animated gif adjusted for inflation? I think it's hard to see the distribution changes from the initial data that are all compressed at the low end of the scale. Using a percentage scale relative to the max would also do it.

Posted by: Tom in MN | August 10, 2013 at 11:28 AM

We have 11M workers completely unaccounted for, since they are forced into the underground economy by tax codes and work visa necessities. Also, many folks, even legal residents, are independent contractors, perhaps with income off the books, another way of avoiding things such as the 12.5% payroll tax and now the health care issues. 12.5% is $1.25 at $10 an hour, a quite substantial amount to many at that level. Adding these in would likely raise the actual wages in the lower end. Many skilled construction workers and landscapers are making far abover $10 an hour off the books.

Posted by: pete | August 14, 2013 at 05:00 AM

I was think the same as Tom: I think an inflation-adjusted scale would be more useful. Another option is showing percentage pay-increase in each sector.

Posted by: BTN | August 30, 2013 at 10:00 AM

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

August 02, 2013


What a Difference a Month Makes? Maybe Not Much

By most accounts, the July employment report released this morning was something of a disappointment, perhaps more because it fell short of expectations than for any absolute signal it sends about the state of the economy. To be sure, the 162,000 net jobs created in July were below June’s 12-month average, which itself ticked down a bit as a result of negative revisions to the May and June statistics.

“Ticked down a bit” is the operative phrase, as the average monthly jobs gain from May 2012 through June 2013 now registers at 189,000 as opposed to the 191,000 reported last month. With this month’s new data, the 12-month average gains (from June 2012 to July 2013) clock in at 190,000 jobs per month, still right on the trend that has prevailed over the past couple of years. In other words, not much has changed in the longer view of things.

Our interests here at macroblog run to the policy implications, of course. Not too surprisingly, focal points are 1) the 7 percent unemployment rate neighborhood that Chairman Bernanke has associated with Federal Open Market Committee forecasts of what will prevail around the time that the Fed’s current asset purchase program might be ending and 2) the benchmark 6 1/2 percent unemployment that the statement following this week’s FOMC meeting continued to identify as the earliest possible point at which adjustments to the Committee’s interest rate target will be considered.

Following last month’s employment report I offered up calculations from the Atlanta Fed’s Jobs Calculator™ regarding the dates at which these unemployment thresholds might be reached, under the assumptions that jobs gains average 191,000 per month going forward, the participation rate remains constant at the reported June level, and there will be no change in the relationship between employment statistics from the payroll (or establishment) survey (whence comes the headline jobs number) and the employment statistics from the household survey (statistics used to calculate the unemployment rate). All of these figures change month to month, so it may be useful to update that exercise with current statistics (with last month’s calculations noted parenthetically):

Job growth and unemployment rates as of July 2013 (June 2013) employment reports


Not much change there. In fact, the unemployment rates in these calculations fall a little faster than last month’s calculations suggested, in part due to the ancillary assumptions on participation rates and the payroll-employment /household-employment ratio.

In the spirit of pessimism—an economist’s university-given right—I’ll ask: what if the latest 162,000-job-gain number is closer than the trailing 12-month average to what we will experience going forward? Easiest enough to explore:

Unemployment rates under the assumption of 162,000 jobs created per month going forward


I will leave it to you to decide whether the differences imply important policy distinctions.

Side note: For a broader look at labor market conditions, take a look at the Atlanta Fed’s spider chart, updated as of today’s employment report.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed


August 2, 2013 in Data Releases, Employment, Labor Markets, Monetary Policy | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef01901e95deb8970b

Listed below are links to blogs that reference What a Difference a Month Makes? Maybe Not Much:

Comments

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


November 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            

Archives


Categories


Powered by TypePad