macroblog

Economists got it wrong, but why?

Economists definitely received some bad publicity this past week, most prominently in the New York Times, where Paul Krugman asked "How Did Economists Get It So Wrong?," a nonrhetorical question he goes on to answer this way:

"As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth… the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

"Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets—especially financial markets—that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don't believe in regulation."

For at least one part of the Krugman critique, I have some sympathy. On the occasion of a 2005 conference honoring the 25th anniversary of Chris Sims's pathbreaking article "Macroeconomics and Reality"—an article that was itself a critique of empirical practices then dominant in central banks—I had this to say about the dangers of groupthink and questions we might be missing as a consequence:

"We are close to falling dangerously in love with the basic New Keynesian framework, the sticky price aspects of it in particular. Here is a simple observation: In the [statistical models] that are identified in the usual ways, inflation wants to drop like a rock in response to a basic technology shock. Models that engineer significant price inertia don’t want to let that happen…

One final point. In my time at the Fed, I have come to appreciate that most of the really important policy choices have nothing to do with Taylor rules or the like. They have to do with those episodes of financial crisis in which Taylor-like rules are woefully inadequate. Think here October 1987, the period from summer 1997 through the end of 1998, and the aftermath of September 11, 2001."

Though Professor Krugman spends a lot of time attacking acolytes of the so-called "Chicago" school, the fact is that the New Keynesian framework (described here by Greg Mankiw) is the workhorse theory within policymaking circles. If economists were unable to see their way to the macroeconomic consequences of the unfolding crisis, criticism needs to start with that framework.

I think such criticism is warranted, but the thrall of the New Keynesian world view has little to do with how "beautiful" the model is or that it is built on a lot of "impressive-looking mathematics." Quite the opposite. As I said in my 2005 comments, "the dynamics of the policy briefing game seem to favor forecasting performance over theoretical integrity." The models that we use for policy analysis are constructed on the basis of what connects with the facts we see (or think we see) in the data. If these models fail to contemplate things that might happen, it is precisely because there is a bias toward frameworks that explain history.

Robert Lucas zeroed in on this point in his "defence of the dismal science":

"The Economist’s briefing [criticizing the foresight of mainstream economists] also cited as an example of macroeconomic failure the 'reassuring' simulations that Frederic Mishkin, then a governor of the Federal Reserve, presented in the summer of 2007. The charge is that the Fed’s FRB/US forecasting model failed to predict the events of September 2008. Yet the simulations were not presented as assurance that no crisis would occur, but as a forecast of what could be expected conditional on a crisis not occurring. Until the Lehman failure the recession was pretty typical of the modest downturns of the post-war period. There was a recession under way, led by the decline in housing construction. Mr Mishkin's forecast was a reasonable estimate of what would have followed if the housing decline had continued to be the only or the main factor involved in the economic downturn."

Some attempts have been made to exploit the information contained in data from the Great Depression. (If you have patience for technical analysis you can find an example here.) And there have been many attempts to jerry-rig existing models to capture the financial shocks and their aftermath, especially once we had seen what that sort of reality looks like. But, by and large, the last year has been a data point we haven’t seen before, and it is not so surprising that models designed to capture the average quarter in the economy’s life would not do so well when very unaverage events arise.

It is certainly clear that the dominant pre-2007 strain of New Keynesian models was inadequate to the task that would confront us post-2007. That this was the case was not unknown. If I may quote myself again:

"I have in the past agreed that it is useful to think of the policy choices [following financial market events like the stock market crash of 1987] as policy shocks. I would still argue that today. But it sure would be helpful if at least some of these events would appear as something more than completely random disturbances. In other words, it would be very useful to have usable measures of what we loosely call 'financial market fragility,' and more useful still to have a coherent [sophisticated] quantitative model that captures them."

The problem with that prescription was that the relative infrequency of such events would likely have required us to step outside of our existing data-driven policy models and apply more theory, not less.

So does all this lead to the conclusion that we ought to ditch the presumptions of rationality and (largely) efficient markets, as Professor Krugman suggests? I have my doubts. Even some of the examples in the Krugman article seem to rely on the power of those ideas. In describing the problem of the lower bound of zero on nominal federal funds rates, he says this:

"During a normal recession, the Fed responds by buying Treasury bills—short-term government debt—from banks. This drives interest rates on government debt down; investors seeking a higher rate of return move into other assets, driving other interest rates down as well; and normally these lower interest rates eventually lead to an economic bounceback…

"But zero, it turned out, isn’t low enough to end this recession. And the Fed can't push rates below zero, since at near-zero rates investors simply hoard cash rather than lending it out. So by late 2008, with interest rates basically at what macroeconomists call the 'zero lower bound' even as the recession continued to deepen, conventional monetary policy had lost all traction."

That whole story relies on a conventional monetary transmission mechanism, one that fundamentally plays off of efficient markets thinking.

In another passage from the New York Times article, we have this:

"I like to explain the essence of Keynesian economics with a true story that also serves as a parable, a small-scale version of the messes that can afflict entire economies. Consider the travails of the Capitol Hill Baby-Sitting Co-op.

"This co-op, whose problems were recounted in a 1977 article in The Journal of Money, Credit and Banking, was an association of about 150 young couples who agreed to help one another by baby-sitting for one another’s children when parents wanted a night out. To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons made out of heavy pieces of paper, each entitling the bearer to one half-hour of sitting time…

"Unfortunately, it turned out that the co-op’s members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer…

"In short, the co-op fell into a recession."

That's a great example, but where is the irrationality? That tight monetary policy might cause a downturn in the economy may be absent from purely classical models, but it is dead center of the New Keynesian framework. The problem was that our mechanism for capturing monetary nonneutrality—essentially wage and price stickiness—was far too simplistic to capture the shocks that we were about to face (and that we arguably faced to lesser degrees during past financial market events).

In short, I accept the criticism that the dominant New Keynesian framework for forecasting and economic modeling needs some work (to say the least). I'm less convinced that we require a major paradigm shift. Despite suggestions to the contrary, I've yet to see the evidence that progress requires moving beyond the intellectual boundaries in which most economists already live.

By David Altig, senior vice president and research director at the Atlanta Fed

How fast can the economy grow?

The recession may be ending (and may, in fact, have ended, according to the majority of economists recently surveyed by the Wall Street Journal) but, as Friday's consumer confidence report suggests, the uncertainty about the course of future growth is far from resolved. The most recent consensus forecast from the panel assembled for the monthly Blue Chip Economic Indicators does suggest a nice bounce back into positive growth territory, bringing to an end a four-quarter run of gross domestic product (GDP) contraction.

What remains interesting, however, is the range of disagreement about just how fast the recovery will be. The upper and lower black lines in the chart above delineate the 10 most optimistic forecasts (the upper lines) and the least optimistic forecasts (the lower lines) among the Blue Chip panel's 51 economists. Most interesting is the fact that some collection of theses economists are, in any given quarter, guessing that growth will not break a 2 percent annual pace before we exit 2010.

That uncertainty is compounded by an even more consequential uncertainty, lucidly emphasized recently by Menzie Chinn (here, here, and here): How fast can we grow before straining the economy's capacity? In other words, is slow growth the best we can expect given the economy's current potential?

The output gap—the difference between the current level of GDP and estimated potential—has long been standard fare in policy analysis. Over at iMFdirect, the International Monetary Fund's blog, Ajai Chopra explains why we care:

"What would be merely a curiosity during better times—after all, potential output is a largely abstract concept measuring the level of output an economy can produce without undue strain on resources—has become a particular worry in the context of the global economic crisis…

"Right now, budget planners across Europe are scrambling to estimate the strength of the blow the crisis has dealt to public finances, and not knowing the growth potential of their economies greatly complicates their task. If they overestimate potential growth, they would underestimate the need for fiscal adjustment once the crisis has dissipated, raising thorny issues of fiscal sustainability in the longer run.

"Central bankers, too, are looking for guidance on the path of potential output. Their decision on when to start winding down current crisis policies depends on the difference between potential and actual output, the so-called output gap. If the output gap is closing faster because of a drop in potential, policymakers might decide to increase interest rates a little earlier and a little higher to prevent  inflation from rising."

Economists also do not lack methods for estimating the output gap and, just in case the field is not crowded enough, Atlanta Fed economist Jim Nason has done some investigating of his own. Jim looked at a variety of statistical estimates of the output gap and arrived at what is now a pretty familiar conclusion. To wit, there is substantial variation in output gap estimates across the different methods, and I do mean substantial: The gap estimates for the second quarter of 2009 range from –0.5 to nearly –11 percent depending on which method is used. In other words, some methods imply the gap is very large, others say the gap is rather small.

I am tempted to invoke the ancient economists' chant, "noh-bah-de-noz," but real-life policymakers don't have that luxury. So we delve in the details and try to sort out what seems like the best approach. (If you have a technical bent, you can do the same with Jim's estimates by following this link.) As we sort it out, though, Ajai Chopra gives some sound advice:

"As for central bankers, they should also act on the information they have, although researchers such as Athanasios Orphanides (now Governor of the Central Bank of Cyprus and member of the ECB's Governing Council) have sensibly suggested that central banks should tread carefully by reducing the importance of the output gap in their decision making.

"More generally, policymakers—be they in the central bank or in the ministry of finance—would do well by communicating their assumptions about potential output growth to the public."

With that in mind, I will leave you with the recent communication on the subject offered by Federal Reserve Bank of Atlanta President Dennis Lockhart:

"Many observers see substantial slack in the economy that could persist for some years. Economists' more formal term for slack is "output gap." We at the Atlanta Fed see a meaningful output gap developing, but in our view it is smaller than would normally be associated with the weak pace of growth we expect over the next couple of years because all the obstacles to the natural pace of growth already mentioned have brought down the economy's potential for the medium term."

So, as President Lockhart indicates, mark us down, for now, on the low end of output gap scale.

Update: The San Francisco Fed's John Fernald and Kyle Matoba offer some related thoughts in the newest edition of the Bank's Economic Letter (hat tip to Econbrowser).

By David Altig, senior vice president and research director at the Federal Reserve Bank of Atlanta

What's really different about this recession?

The short answer to the question posed in the title of this blog post is, of course, "lots of things." One of those things is featured in the latest edition of Economic Highlights, the Atlanta Fed's weekly digest of newly released economic statistics. Here, specifically, is a chart reflecting the trajectories of individuals working part-time for economic reasons in the current and past recessions.

As the chart clearly shows, the increase in people reporting that they are involuntarily working part-time rather than full-time is considerably higher in this recession than in past recessions. Although the increase in these workers has moderated some since the spring of this year, the number of people in the category of working part-time for economic reasons remains at 8.8 million, well above the level of past contractions in both absolute and relative terms.

This recession has given us many puzzles to mull over. Now we can add the unusual pattern of part-time work to the list.

Side note: We invite you to check out SouthPoint, the Atlanta Fed's new weekly blog on regional economic conditions in the Southeast.

By Menbere Shiferaw, senior economic research analyst at the Atlanta Fed

Every recovery is the same; each recovery is different

Two weeks ago, macroblog looked at the rather pessimistic expectations for what the economic recovery might look like this time around. Included was part of the narrative noting that structural adjustments are likely to impede a quick snapback in gross domestic product (GDP) over the coming quarters.

Macroblog reader Bryan Lassiter asked, "Do economists typically predict a weaker recovery than history suggests?" Good question. To state the question in a slightly different way, "Has the United States ever been in a situation where it experienced a deep recession and forecasters subsequently predicted a slow recovery that ultimately proved to be incorrectly pessimistic?"

To get at these questions, we can look at real-time real GDP data and the Survey of Professional Forecasters (SPF) available from the Federal Reserve Bank of Philadelphia (while the SPF started in 1968, forecasts of real GDP began in 1981).

The chart plots the depth of the recession on the x axis and strength of recovery on the y axis (updated from the 7/24 post to include last Friday's GDP release). The blue diamonds were constructed using forecasts that were made in the quarter the recession officially ended; the red squares are what actually happened.

To illustrate the exercise, pretend we're back in the fourth quarter of 2001 and the recession is over (although we didn't know it). Given what we thought we knew about the economy at the time, we can look at what forecasters were expecting in terms of GDP and compare it with what was ultimately reported by the U.S. Bureau of Economic Analysis. Looking at the 2001 recession, we can see that the expectations for recovery were not that far off, but the severity of the recession was lessened—partly because of data revisions and partly because of forecast error. The 1990–91 recession showed a similar pattern, but in reverse. That is, the recovery forecasts were close to the actual experience, but the depth of the recession ended up being more severe than initially thought.

What stands out in the chart is the recovery following the 1981–82 recession. In real time, four-quarter GDP growth was expected to be about 3.5 percent but wound up being much stronger at nearly 8 percent. In this instance, the response is yes to the initial question of whether economists typically predict a weaker recovery. With the 1981–82 episode, we saw a recession where economists had forecast a recovery that ultimately turned out to be much stronger than anticipated. However, the 1981–82 blue diamond was still relatively close to the cluster of other recessions on the chart, meaning the recovery forecast was not exceptionally weak. Thus, the current recession still seems to be an outlier. Given the almost 4 percent decline experienced in GDP, the hope would be to see something stronger than the 2.5 percent growth expected over the next year.

Whatever the impediments to a sharp recovery, forecasts are certainly telling us that economists are treating this recession as being different from previous ones.

To help track the economy going forward, check out our weekly Economic Highlights and Financial Highlights.

By Mike Hammill, economic policy analyst at the Atlanta Fed

GDP benchmark revisions: Count me very surprised

Last Friday morning, the Bureau of Economic Analysis released its advanced estimate for second quarter gross domestic product (GDP) as well as its benchmark data revisions. These revised data tell us a slightly different story with a rather negative twist in looking at the last two recessions. The new GDP numbers show that the 2001 recession was not as severe as originally thought while the 2007 recession is worse than first reported. Below are the comparisons of the pre- and post-2005 benchmark data:

As a follow up to David Altig’s blog posting, "Unemployment Rate: Count Me Surprised," I took the graphs he used measuring cumulative percentage change loss for GDP against the peak unemployment rate during the recession. The GDP numbers below are updated with the new benchmark revision data:

Note: Macroeconomic Advisors data were used in the original post from July 23. However, since Macroeconomic Advisors has not yet updated their forecasts, I am assuming for the purposes of this blog post that the recession ended with the second quarter of 2009.

After these revisions it’s clear to see that the current recession is even more of a dramatic Okun’s Law outlier than was originally thought when observing the pre-revised data. As background, Brad DeLong described Okun’s Law thus in a recent blog post:

"If GDP (production and incomes, that is) rises or falls two percent due to the business cycle, the unemployment rate will rise or fall by one percent. The magnitude of swings in unemployment will always be half or nearly half the magnitude of swings in GDP."

Although the revised GDP data show more negative growth rates for the current recession, which should make the current recession less of an outlier using Okun’s Law, GDP growth during the 2001 recession was higher than the first observations, which changed the trend line and outweighed the effects of the revision to the data of the current recession.

By Courtney Nosal, economic research analyst at the Atlanta Fed

A look at the recovery

Earlier this week my boss, Atlanta Fed President Dennis Lockhart, weighed in with his views about the shape of the economic recovery to come while speaking at a meeting of the Nashville, Tenn., Rotary Club:

"The economy is stabilizing and recovery will begin in the second half. The recovery will be weak compared with historic recoveries from recession. The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved."

This quote was noted by Rebecca Wilder at News N Economics, along with similar sentiments from Nouriel Roubini and Mary Daly at the Federal Reserve Bank of San Francisco. You might add to the list Tim Duy's comments at Wall Street Pit and this assumption from Moody's Investor Services, reported at Seeking Alpha:

"Moody's predicts a 'hook-shaped' recovery path for banks, 'characterized by an upward tilt that lies somewhere in between a U- and an L-shaped economic recovery, implying a painful journey.' "

Says Dr. Wilder of the prospective recovery: "pathetic."

More colorful language than I would use, but if current forecasts come true, the early stages of the recovery will be as unusual as the recession itself.

How unusual? See for yourself:

The chart plots the four-quarter growth rate of gross domestic product (GDP) from the trough of a recession against the depth of the corresponding contraction, as measured by the cumulative loss of GDP over the course of the downturn. The points within the red circle represent all previous postwar recessions, and they form a nice, neat, easily discernible pattern. That is, the pace of growth in the first year after a recession has, in our history, been reliably related to how bad the recession was. The deeper the recession, the faster the recovery.

The points within the blue circle are based on forecasts of GDP growth from the third quarter of this year through the third quarter of 2010, obtained from the latest issue of Blue Chip Economic Indicators (which reports survey results from "America's leading business economists"). From top left of the circle to bottom right, the points represent the 10 lowest forecasts of the most optimistic members of the 50 Blue Chip forecasting panel, the panel's consensus (or average) forecast, and the 10 highest forecasts of the most pessimistic panel participants.

I chose the third quarter as the reference point because nearly two-thirds of the Blue Chip respondents indicate that, in their view, the recession will indeed end in the third quarter of this year. Assuming this occurs, this recovery would appear to be a big outlier. Either we are about to continue making history—and not in a good way—or current guesses about the medium-term economy are way too pessimistic.

On another note, if you would like to do a little prognosticating of your own, I commend to you our new weekly editions of Economic Highlights and Financial Highlights.

By David Altig, senior vice president and research director at the Atlanta Fed

Unemployment rate: Count me surprised

Brad DeLong has taken a look at the job market and is counting himself among the economists who admit that, "Well, I just got it wrong." According to DeLong:

"… the rise in the unemployment rate during a recession should be a fraction of the decline we see in GDP relative to trend. According to Okun's Law, the unexpected extra 1.2 percent decline in real GDP in 2009 should have been accompanied by a 0.5 or 0.6 percentage-point rise in the unemployment rate. Instead, we experienced a 1.5 percentage point rise in the unemployment rate. I confess this comes as a surprise to me, but it shouldn't. Because evidence has been mounting that Okun's Law is broken—especially with regard to the retention of workers in a downturn."

I share Professor DeLong's surprise at the unemployment rate's response to this recession. Though I have never had a lot of faith in Okun's Law as a predictive device, I believe DeLong may be just a little too harsh on himself (and by extension, I guess, me) for not hitting the mark on unemployment prognostications. From what we know at the moment, the unemployment/GDP correlation is going to deviate from any other postwar experience by a fair margin. As noted in today's Wall Street Journal:

"Breaking from historical patterns, the unemployment rate—currently at 9.5%— is one to 1.5 percentage points higher than would be expected under one economic rule of thumb, says Lawrence Summers, President Barack Obama's top economic adviser. Since the recession began in December 2007, the economy has lost 6.5 million jobs, 4.7% of total employment. The unemployment rate has jumped five percentage points, while the economy has contracted by roughly 2.5%."

Below is a chart that illustrates the point. It plots the peak change in the unemployment rate during recessions (which has always been the unemployment rate change from the beginning to the end of the end of the recession) against the cumulative percent loss in GDP in those recessions. (In the chart, the blue dots represent the experience in each postwar recession. The red square represents the current downturn, making the assumption that GDP growth in the second quarter will be –0.5 percent and the recession will end sometime in the third quarter. For the sake of the exercise, I pulled these figures from Macroeconomic Advisers, the forecasting group run by former Federal Reserve Gov. Larry Meyer.)

The line in the graph above represent the simple statistical estimate of the relationship between changes in the unemployment rate and the cumulative GDP loss during each recession. Using this estimated Okun's Law, you would have guessed that the unemployment rate would have risen by about 2 percentage points. In other words, the best guess for the unemployment rate would be in the neighborhood of 7 percent, not 9.5 percent.

There are a couple of caveats to this analysis, of course. One is that, as is often noted, unemployment is a lagging indicator, so the peak in the unemployment rate can come after the recession ends. This caveat changes the picture somewhat (and misaligns the unemployment and GDP data), but not by a lot.

The second caveat is that there may eventually be revisions to GDP that make the recession look deeper than it appears at the moment, which would move the current episode closer to historic norms. On the other hand, the charts above assume that the unemployment rate will peak at 9.5 percent, which is not a certainty at the moment. (The "central tendency" projections published by the Federal Open Market Committee suggest that the rate will peak in the 9.9 to 10 percent range.)

Setting aside the possibility of any substantial revision in the data, perhaps one of the questions in the end will be whether the National Bureau of Economic Research Business Cycle Dating Committee was somewhat overaggressive in choosing December 2007 as the beginning of the recession. Though currently measured GDP growth was negative (barely) in the fourth quarter of 2007, GDP did not turn persistently negative until the third quarter of 2008. If we were to assume that the business cycle peak was actually in the second quarter of 2008, the picture would look like this:

With this alternative timing for the recession, the Okun's Law miss on the unemployment rate projection would have still been to the downside, but the error is quite a bit less dramatic than you get with the official recession dating.

In any event, I'm quite sympathetic to DeLong's theme that the dynamics of U.S. labor markets coming out of recessions appear to have changed starting with the 1990–91 economic contraction. And it might be hard for many people to argue with DeLong's point that the U.S. economy is likely headed toward another so-called "jobless recovery." But until more facts are in and we're able to look back on what transpired, I think we still, at this point, must reasonably count the current run-up in the unemployment rate as a puzzle.

Update: Casey Mulligan (University of Chicago) writes:

There are a host of public policies that discourage the earning of income, and do so more than they did before the recession. IMO, theat's why Okun's law is broken.

More at his blog.

By David Altig, senior vice president and research director at the Atlanta Fed

When cycles collide

Yesterday we saw that initial claims for unemployment insurance declined rather sharply again last week, another hint that U.S. labor markets may be beginning to mend. But the improvement came with a word of caution from the folks at the Department of Labor, who note that these numbers are being affected by seasonal adjustments to the data that may present a misleading picture.

Virtually all of the economic information that gets reported by the data agencies has been seasonally adjusted. That is, the data are being reported after the agency has adjusted them for their usual variation for that time of year. The unemployment insurance claims data are a useful example. On an unadjusted basis, the initial claims data showed a fairly large increase last week—up 86,000 workers. But claims for unemployment compensation typically rise in early July as auto plants shut down to retool for the new model year. The jump in claims this July hasn't been as large as in years past since many of the auto plants were waylaid earlier in the year. So on a "seasonally adjusted" basis, the data showed a drop in claims of 47,000 workers.

Here we have that statistician's equivalent of an old existential puzzle: Do seasonal layoffs in the auto industry make a sound if there is no one there to lay off? We invite you to write up your own answer to that one. There is a long literature, perhaps most notably the work of Jeffrey Miron, that documents the interplay between the business cycle and the seasonal cycle. The thrust of this research is to help us better understand the general nature of economic cycles. But there are also more mundane issues we need to wrestle with. For instance, how accurate are seasonal adjustments to the data during times of severe cyclical disruption?

To provide some perspective, let's take a deeper look at the recently released June consumer price index (CPI) report. Last month, prices, as measured by the core CPI, were up 2.4 percent (annualized) from a 1.7 percent rise in May. There are a few bits of data that might cause you to scratch your head a little, given what we've been hearing about the economy lately. For instance, apparel prices jumped an annualized 8.8 percent last month. And new car prices were up 8.2 percent. So are department stores and car dealers having a better time of it than they are letting on? I don't think so. I believe the seasonal adjustments in the data offer a more reasonable explanation.

Apparel prices rose 8.8 percent on a seasonally adjusted basis but fell a whopping 25.5 percent (annualized) on an unadjusted basis. And new car prices? Well, they rose on an unadjusted basis, but not nearly as much as the seasonally adjusted data indicated (5.1 percent versus 8.2 percent). Indeed, this pattern seems to be consistent across many of the core components of the CPI in June. On a seasonally adjusted basis, the core inflation measure rose 2.4 percent. But on an unadjusted basis, the core CPI was largely unchanged for the second month in a row (up a slight 0.9 percent, annualized).

Here's a conjecture on my part. Many of the price declines that ordinarily occur in June didn't occur this year. Why? Perhaps it's because the sharp decline in business activity has resulted in such severe production and price cuts already that usual seasonal price discounts have been disrupted. In other words, in the current economic environment, there may not be much "season" to adjust for.

This isn't a criticism of seasonal adjustment. In fact, seasonal adjustment is an entirely appropriate—and necessary—transformation of the data if you are trying to see emerging trends. But it's certainly important to exercise caution when interpreting seasonally adjusted data during a period of strong cyclical movements. If the business cycle alters the usual behavior of the seasonal cycle in the data, seasonal adjustment could produce a misleading snapshot of the data. And I suspect we saw a bit of that in the June CPI report.

In closing, I want to put in a plug that the second weekly postings of the Atlanta Fed's Economic Highlights and Financial Highlights are now available on the Bank's Web site. These summaries of national economic and financial statistics complement our monthly REIN reports on the Southeastern economy.

By Mike Bryan, vice president and senior economist in the Atlanta Fed's research department

Is the investment trend in the current recession “run of the mill”?

In the last macroblog post, David Altig examined personal consumption expenditures during recessionary periods. Reader Dave Backus, the Heinz Riehl Professor of International Economics and Finance at New York University's Stern School of Business, sent us a follow-up email asking about other components of gross domestic product, and investment in particular. Good question, so let's take a look at investment during the current and past recessions.

Earlier this year, the University of Chicago's Casey Mulligan, writing in the New York Times' Economix blog, examined real investment trends for the past four recessions and called the current investment trend in this recession "run of the mill." Employing the same basic idea from our previous macroblog post, below is a chart showing the percentage change from the first quarter to the trough of the last eight recessions, along with the percentage change from the current recession's first quarter to the first quarter of this year.

Prof. Mulligan's point emerges pretty clearly. Matched up against previous recessions, there is nothing spectacularly unusual about the declines in overall investment expenditure—not yet, at any rate. But that picture may be a bit deceiving. Here's the same sort of graph for fixed investment—that is, all investment expenditures other than changes in inventories.

The current recession—which is not yet over as far as we know—does not stack up so favorably when it comes to fixed investment spending. In fact it leads the pack in terms of investment decline among the eight recessions since 1960. This fact is not too surprising given the the relative impact of residential private investment in the current recession. This impact can be seen by comparing gross domestic private investment with gross domestic private investment excluding residential private investment. In all previous recessions apart from 1990, the percentage change in gross domestic private investment excluding residential private investment significantly exceeds the drop in gross private investment, and in the 1990 recession they were roughly comparable. In the current recession, gross domestic private investment excluding residential investment is significantly less than the gross domestic private investment.

In addition to that difference, the comparison of gross investment patterns is significantly affected by the behavior of inventory changes across recessions. The modest decline in overall inventories in the current downturn is the reason for the relatively benign view of investment highlighted in Casey Mulligan's Economix piece.

So, let's consider again whether the current investment trend in this recession is "run of the mill." Perhaps at first glance it is, but when we break down the components of gross domestic private investment, these charts inform us that the relative declines in the various components of gross domestic private investment are quite different in this recession. And just how benign that picture is depends, in part, on whether the slow pace of inventory decumulation thus far proves a lasting feature of this recession. On that, we will just have to wait and see.

By Courtney Nosal, economic research analyst at the Atlanta Fed

Abnormal consumer spending—not quite

I was struck by this headline which led a Tuesday post in Economix, the economics blog of the New York Times—"Consumer Spending Declines: A Historical Oddity."

Sometimes these sorts of teasers are not great indicators of a more nuanced analysis that follows, but in this case the headline synopsis pretty well captured the plot.

"That the American consumer is cutting back spending is blindingly obvious these days, but it is still hard to overemphasize this central feature of the current recession. Americans borrowed like crazy for years against their home values, which have now fallen and are dragging consumption down with them.

"The sustained decline in consumer spending is also—as the European Central Bank points out in a tight piece of work synthesizing features of past recessions—a historical oddity of the first order."

That analysis is not, I think, quite so tight. Here's a chart that measures the cumulative percent change in real personal consumption expenditures from the beginning of each U.S. recession since 1960 to the lowest point of those expenditures over the recession's course:

The first very obvious feature of this picture is that there is nothing like a typical recession pattern when it comes to consumer spending. The second obvious feature is that the fall in household consumption in the current downturn looks entirely unremarkable when stacked up against past episodes.

For those of you still reading, it would be fair of you to remind me that the current recession is not over, so the record is yet incomplete. Though personal consumption expenditures actually increased in January and February, the most recent retail sales report might warrant caution. In fact, Economix has followed up with a cross-recession comparison of retail sales that definitely puts the current recession in a relatively bad light. That's fine, though I would note that retail sales are only a piece of overall personal consumption expenditures, a piece that does not really capture the increasing share of spending on services that has occurred over the postwar period.

But even if the turnaround in overall consumer spending proves durable, it is not entirely clear that there is much solace to be taken from such a development. If you are inclined to look to the darker side of things, the fact is that a turnaround in consumption generally comes well before a recession ends. In the long and relatively severe recessions of 1973–75 and 1981–82, consumer spending bottomed out a full year before the economy turned around in general. (The bottom was eight months before the end of the recession in the 1969–70 and 2001 recessions and two months before the end in the 1960–61, 1980, and 1990–91 recessions.)

For lots of reasons, then, I wouldn't want to overweight good (or even benign) news from the consumer spending front. But historical oddity? I don't believe so—yet.

By David Altig, senior vice president and research director at the Atlanta Fed