Close

This page had been redirected to a new URL, please update any bookmarks.

Font Size: A A A

macroblog

July 20, 2011

Is consumer spending the problem?

In answer to the question posed in the title to this post, The New York Times's David Leonhardt says absolutely:

"There is no shortage of explanations for the economy's maddening inability to leave behind the Great Recession and start adding large numbers of jobs…

"But the real culprit—or at least the main one—has been hiding in plain sight. We are living through a tremendous bust. It isn't simply a housing bust. It's a fizzling of the great consumer bubble that was decades in the making…

"If you're looking for one overarching explanation for the still-terrible job market, it is this great consumer bust."

Tempting story, but is the explanation for "the still-terrible job market" that simple?

First, some perspective on the pace of the current recovery. Though we have grown used to thinking of the rebound from the most recent recession as being spectacularly substandard, that impression (which I share) is driven more by the depth of the downturn than the actual speed of the recovery. The following chart traces the path of real gross domestic product (GDP) from the trough of the last three recessions:


In the first two years following the 1990–91 and 2001 recessions, output grew by about 6 percent. Assuming that GDP grew at annual rate of 1.5 percent in the second quarter just ended—a not-unreasonable guess at this point—the economy will have expanded by about 5.3 percent since the end of the last recession in July 2009. That's not a difference that jumps off the page at me.

Directly to the point of consumption spending, it is certainly true that consumer spending has expanded at a slower pace in the expansion to this point than was the case at the same point in the recoveries following the previous two recessions. From the end of the recession in the second quarter of 2009 through the first quarter of this year (we won't have the first official look at this year's second quarter until next week), personal consumption expenditures grew in real terms by just under 4 percent. That growth compares to 4.8 percent in the first seven quarters following the end of the 2001 recession and 5.9 percent in the first seven quarters following the end of the 1990–91 recession.

That difference in the growth of consumption across the early quarters of recovery after the 1990–91 and 2001 recessions with little discernible difference in GDP growth across those episodes illustrates the pitfalls of mechanically focusing on specific categories of spending. In fact, the relatively slower pace of consumer spending in this expansion has in part been compensated by a relatively high pace of business spending on equipment and software:


If you throw consumer durables into the general notion of "investment" (investment in this case for home production) the story of this recovery is the relative boom in capital spending compared to recent recoveries:


And what about that "still-terrible job market"? You won't get much argument from me about that description, but here again the reality is complicated. Focusing once more on the period since the end of the recession, the pace of job creation is not out of sync in comparison to recent expansions (though job creation after the last two recessions was meager as well, and we are, of course, starting from a much bigger hole in terms of jobs lost):


So, relative to recent experience, at this point in the recovery GDP growth and employment growth are about average (if we ignore the size of the recession in both measures). The undeniable (and relevant) human toll aside, the current recovery seems so disappointing because we expect the pace of the recovery to bear some relationship to the depth of the downturn. That expectation, in turn, comes from a view of the world in which potential output proceeds in a more or less linear fashion, up and to the right. But what if that view is wrong and our potential is a sequence of more or less permanent "jumps" up and down, some of which are small and some of which are big?

In addition, investment growth to date has been strong relative to recent recoveries and, as Leonhardt suggests, consumption growth has been somewhat weak. So here's a question: Would we have had more job creation and stronger GDP growth had businesses been more inclined to add workers instead of capital? And if that had occurred, might the consumption numbers have been considerably stronger?

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

 

July 20, 2011 in Business Cycles, Economic Growth and Development, Employment, Forecasts, Saving, Capital, and Investment | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef015433dff249970c

Listed below are links to blogs that reference Is consumer spending the problem?:

Comments

This is an excellent contribution to elevating the quality of commentary on the current expansion. It is time to recognize the cycles experienced in the 60s, 70s, and early 80s were fundamentally different from those since. Because of this, the earlier cycles are not part of the relevant benchmark for making comparisons to current behavior. Three cheers for taking them out of the baseline used for comparisons.

Posted by: Douglas Lee | July 21, 2011 at 10:22 AM

David,
Let me ask a supplemental question. Following the '91 recession, the US created something like 20mm jobs. Following the '01 recession, perhaps 8.5mm jobs were created. How many jobs will be created in this decade?
Stewart

Posted by: stewart sprague | July 21, 2011 at 10:40 AM

The payroll employment chart suggests that just looking at the path for the level of employment from the end of a recession is not the relevant metric. How about looking at net jobs lost during the recession versus net jobs regained during the recovery? Then, the metric captures the essence of what the graph should indicate -- and what the blog offers in words. That the immense job loss of the recent recession is the big difference, and the recent sluggish job creation is akin to recoveries in 1991 and 2001. From this perspective, we have a problem that has been around for a few business cycles.

Posted by: ET_OC | July 21, 2011 at 02:44 PM

The obvious deficiencies in GDP this time have been net exports and government spending.

While the Fed has done its best to promote both, the politicians in Washington have done their best in the opposite direction by promoting an over-valued dollar and reduced federal spending, despite interest rates on the federal debt that are universally lower than during the years of the federal budget surplus.

Posted by: Paul | July 21, 2011 at 04:19 PM

I find it highly annoying that the the obvious is invisible to everyone.

http://research.stlouisfed.org/fred2/series/CMDEBT

Households were pulling $1.2T/yr of new mortgage debt during the boom 2004-2006. This was all cut off in 2007-2008.

Corporate debt take-on was another $800B/yr during this time, for a $2T/yr stimulus to the economy.

THAT IS TWENTY MILLION $100k/yr jobs!

Previous recessions in my life were all prompted by the Fed raising interest rates to throttle debt growth. What killed debt growth this time was the collapse of the ponzi lending structure and the bubble machine it was powering.

Posted by: Troy | July 22, 2011 at 01:58 AM

If you look at percent job losses since peak employment (not only since end of recession), then you can see how bad this recession is. At this point of the cycle after all prior recessions since WWII, the employment has recovered to pre-recession levels. In this recession, we are still 5% down.
http://cr4re.com/charts/charts.html

Posted by: Nino | July 22, 2011 at 05:29 PM

I look at PAYEMS (see below) and what do I see ? I see PAYEMS moving sideways since 2000/2001 so that after a decade of nonsense we find ourselves with 29,502.4 (Thousands (!)) less jobs than we would have had had the pre-2000/2001 trend continued to date.

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=PAYEMS&log_scales=Left

Posted by: In Hell's Kitchen (NYC) | July 23, 2011 at 09:04 AM

Of course the comparison matter. your comparison against the 1990-91 and 2001 make 2007 look average. When comparing against all post WWII recession/recoveries all three of those recoveries look below average (with all recoveries since 1990 looking very weak indeed). Even then the down-turn was the worst putting the starting point at a very, very low level.

Posted by: RangerHondo | July 26, 2011 at 08:48 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

July 13, 2011

One more sign of struggles on the job creation front

Hot on the heels of the bleak employment report for June, the U.S. Bureau of Labor Statistics yesterday released another important bit of labor market information: the May Job Openings and Labor Turnover Survey, commonly known as JOLTS. Calculated Risk accentuated the positive:

"In general job openings (yellow) has been trending up—and job openings increased slightly again in May—and are up about 7% year-over-year compared to May 2010.

"Overall turnover is increasing too, but remains low. Quits increased again and have been trending up—and quits are now up about 10% year-over-year (usually a sign of more confidence in the labor market)."

The hires and quits angle was noted at Modeled Behavior as well, but at Zero Hedge Tyler Durden isn't in the mood for even muted optimism:

"There was nothing to smile about in today's May JOLTS release from the BLS."

Durden focuses first on the job openings piece of JOLTS:

"Those expecting a pick up in job openings (traditionally the key requirement for an [sic] sustained increase in NFP) will have to wait some more, after the May number came at 3.0 million, the same as April."

Longtime readers of macroblog know that the job openings data are favorites of ours, which we like to view through the prism of the Beveridge curve. This curve plots the relationship between job openings and unemployment. In past posts—here and here, for example—I have noted that:

  • The Beveridge curve appears to have shifted out over time, meaning that the amount of unemployment relative to the number of job openings has increased over the past several years relative to the patterns of the decade or so prior to the beginning of this recovery.
  • This shift in the Beveridge curve is usually interpreted as representing a change in the efficiency with which workers looking for jobs are matched with employers looking to fill jobs (though the source of the inefficiency is not completely obvious).
  • There is a debate about whether the recent shift in the Beveridge curve is a normal cyclical feature of recoveries—in which case the pace at which the unemployed are placed in open jobs ought to pick up over time—or a symptom of deeper structural problems that are likely to persist for, forgive me, an extended period of time.


For most of this year, it did appear that the Beveridge curve was moving back in the direction of its 2000–9. That progress was interrupted in May:


I don't think that resolves the cyclical-versus-structural debate, but it certainly is not good news. And at this point it is awfully hard to believe that things are going to look better in the June version of JOLTS.

Update: Another way to view the problem, from Steve Davis.

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

July 13, 2011 in Business Cycles, Labor Markets | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef01538fde6e24970b

Listed below are links to blogs that reference One more sign of struggles on the job creation front:

Comments

"The Beveridge curve appears to have shifted out over time, meaning that the amount of unemployment relative to the number of job openings has increased over the past several years relative to the patterns of the decade or so prior to the beginning of this recovery. "

"This shift in the Beveridge curve is usually interpreted as representing a change in the efficiency with which workers looking for jobs are matched with employers looking to fill jobs "

what ????

we have a huge imbalance
a horrid B ratio
and its not effective demand driving it ???

its inefficiency ???
and or
poor job to skill match ups ??


what's in the water cooler down there hoss ???
--------------------

"There is a debate about whether the recent shift in the Beveridge curve is a normal cyclical feature of recoveries"

debate ???

why the sentence makes no sense

are you saying over the employment cycle
the ratio oughta stay constant ???

simply bob up and down along some line ???

what is it about thses numbers
you find worthy of debate ???


now one might look at employment cycles versus employment cycles
to see how the change in the ratios over the cycle compare

cycle versus cycle

but you ain't got a cycle here yet pard

the hot house agonizing over
is this huge jobless army structural ??

pure misdirection
plain and simple
and
its hard to imagine you take it seriously

Posted by: paine | July 14, 2011 at 08:39 PM

Post a comment

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

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

November 09, 2010

Entrepreneurs of necessity

On October 26–27, the Atlanta Fed's Community and Economic Development team, in partnership with the Bank's Center for Human Capital Studies, the Ewing Marion Kauffman Foundation, and the Federal Reserve Bank of Dallas, sponsored a conference titled "Small Business, Entrepreneurship, and Economic Recovery: A Focus on Job Creation and Economic Stabilization." The conference covered a large range of topics including employment, financing, and public policy issues, and material summarizing the findings from the conference and related information will be published in the coming weeks. (You can find the conference papers here.)

One of the things that struck me during the conference is the challenge of simply defining and measuring entrepreneurial activity. For instance, a paper presented by Leora Klapper from the World Bank described recent World Bank efforts to systematically collect country-level data on business formation using data on the number of new domestic corporations—private companies with limited liability each year.

Klapper presented a cross-country chart of this measure, by which countries are grouped into relative income buckets, with the United States being in the "high income" bucket. What chart 1 shows is that entrepreneurial activity declined in all categories of countries in 2009. For high-income countries (including the United States), entrepreneurial activity came to a standstill in 2008 and declined 10 percent in 2009.

This evidence is consistent with measures of job creation from opening employer firms (firms with a payroll) in the United States, such as those contained in the Business Employment Dynamics data. These data are from government administrative unemployment insurance records. On the first day of the conference, John Haltiwanger from the University of Maryland gave a fascinating presentation using the data on firms with a payroll and longitudinally linked versions of these data (the Business Dynamics Statistics) to illustrate a decline in job creation in recent years at businesses that have payrolls and, importantly, a decline in job creation at opening employer firms.

However, another paper at the conference by Robert Fairlie from UC-Santa Cruz showed a measure of entrepreneurial activity that has been on a rapid increase in recent years. Chart 2 shows a picture of Fairlie's measure, which is also published by the Kauffman Foundation as the Index of Entrepreneurial Activity.

This measure is based on the Current Population Statistics survey, which among other things asks respondents the question "Do you have a business?" Dr. Fairlie matches this response with the response in the previous month to identify the number of new businesses created (subject to meeting criteria, such as devoting at least 15 hours per week to this business, and restrictions, such as the exclusion of adults over age 65). Importantly, Fairlie's measure of new businesses picks up new nonemployer businesses, many of which are not incorporated.

What is particularly interesting about Fairlie's research is that he shows not only that this measure of entrepreneurial activity has surged, but that it is closely related to movements in local unemployment rates. That is, he has potentially uncovered an "entrepreneur of necessity" effect caused by high unemployment. For many unemployed workers, the benefits of starting a business during a weak economic environment outweigh the costs. It is noteworthy that the largest proportionate increase in this measure of entrepreneurial activity is by people with less than a high school diploma. This group has been especially hard hit by the recession and weak recovery, and it appears that many have responded by starting their own business.

If entrepreneurial activity is a source of economic growth generally, then a surge in entrepreneurial activity is good news for the economic outlook, right? Indeed, Fairlie cites a 2009 Kauffman Foundation study by Dane Stangler that finds over half of the current Fortune 500 firms started during recessions or bear markets. Also, a 2010 Kauffman study by Michael Horrell and Robert Litan find that, on average, start-ups are not affected in the long term if they start in a recession. However, Horrell and Litan also find negative impacts when the recession is prolonged. To the extent that historical patterns are repeated, one implication of the latter finding is that cohorts starting businesses right before or at the start of the 2007–09 recession may have worse outcomes relative to firms starting more recently.

More generally, this study raises questions about the current economic recovery. For example, if the number of new firms with payrolls is down but the number of nonemployer businesses is up, then what could be expected to happen over time? At what rate do new businesses with no employees become employers, and how fast do they tend to grow? This question is especially important because a new business with no employees generates fewer jobs than a new business with employees unless the nonemployer is purchasing labor services through some other means. As noted here, some researchers are skeptical of the economic importance of growth in nonemployer businesses without controlling for possibly important factors such as the industry they are in or their revenues. According to the U.S. Census Bureau, most nonemployers are self-employed individuals operating very small unincorporated businesses. It also seems reasonable to think that many of them are independent contractors providing labor services to other firms. Clearly, there is no shortage of need for more research on these topics.

By John Robertson, a vice president and senior economist in the Atlanta Fed's research department

 

November 9, 2010 in Business Cycles, Employment, Small Business | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef0133f5b554c7970b

Listed below are links to blogs that reference Entrepreneurs of necessity:

Comments

I am not an "Entrepreneur of Necessity" but an Entrepreneur of Opportunity. I recently started my own Consulting LLC company. Having worked 17 years as an Architect and for a national home builder. I refuse to stay home and collect an Unemployment Check from my layoff of over a year.

I created my own consulting service that can: work for less fee than my competition (I have little overhead), I have a quicker turn around than my competition (working long nights and weekends). Because of my education and experience I provide bundled/specialized services that would require several companies instead of just me. I don't want to rub it in the national homebuilder's face, but it's their loss and my family's gain.

Don't get me wrong, I have never hustled more in my entire life. I am opportunistic and entrepreneurial. I find that people are interested in working with me because as the saying goes "If you want to get something done, ask a busy person to do it".

I do wish there was help with reducing the taxes, cost for health care and insurance. These costs make it difficult for me to keep what I am struggling to earn. If the costs were not so onerous, I would hire one or two employees.

Joe from Jersey

Posted by: Joe from Jersey | November 10, 2010 at 11:37 AM

This is what Americans do- they can survive. I'm sure thousands of folks have their own company, and the trend has been sometime in the making. Many people simply do not want to buy into the game, which appears grossly unfair, as an employee.

I have to think a rational case could be made that many people are better off with three acres and some seeds than a vast majority of jobs.

I think some of these business ventures are also driven by a rejection of corporate America and the domination and exploitation that is perceived now by our population. Instead of rising up to a skillbase for IBM or GE, it's better to work part time at some job and do your own thing on the side. And they are likely right to do this in my estimation.

Posted by: FormerSSresident | November 11, 2010 at 09:51 PM

Post a comment

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

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

August 18, 2010

Just how curious is that Beveridge curve?

A few weeks back I made note of the following:

"Since the second quarter of last year, the unemployment rate has far exceeded the level that would be predicted by the average correlation between unemployment and job vacancies over the past decade."

The focal point of that comment was the so-called Beveridge curve described by the Cleveland Fed's Murat Tasci and John Lindner as follows:

"The Beveridge curve is an empirical relationship between job openings (vacancies) and unemployment. It serves as a simple representation of how efficient labor markets are in terms of matching unemployed workers to available job openings in the aggregate economy."

Since my last post, the U.S. Bureau of Labor Statistics (BLS) published the June edition of its Job Openings and Labor Turnover Survey (JOLTS). Just as not much changed in June relative to May, either with respect to job openings or the unemployment rate, not much changed with the Beveridge curve:

081810a
(enlarge)

(A monthly version of this picture can be found in the JOLTS graphs and highlights published on the BLS Web site.)

One of the observations made in my previous post was that the apparent shifting of the Beveridge curve—in other words, the observation that given recent experience the number of unemployed individuals seems high relative to the number of available jobs—might be explained by extended unemployment benefits, but only if you are willing to accept estimates of the policy's impact that are on the high end. I referenced a few Federal Reserve papers—here and here—but they only included estimates on the lower end. Several people have asked (in the comments section of my earlier post and in private e-mails) where the higher-end estimates come from. One of these is from an article titled "The Economic Effects of Unemployment Insurance" by Shigeru Fujita, which is forthcoming (but not yet published) in the Philadelphia Fed's Business Review. (Shigeru estimates that extended unemployment benefits raise the unemployment rate by 1.5 percentage points, enough to explain the lion's share of the Beveridge curve shift.)

Tasci and Lindner, in the article mentioned earlier, offer up a few other observations. First, in the last several months labor market statistics have in general been distorted by the entry and exit of significant numbers of temporary Census workers. Second, it does appear to be the case that the current rise in the unemployment relative to job openings is just a standard characteristic of the early phases of a recovery. On this point they provide this chart …

081810b
(enlarge)

… along with this explanation:

"One important observation is that a longer-term look at the Beveridge curve shows that the dynamics we have seen recently are not an exception, but are common during the recovery phase of business cycles. As the economy starts improving, it takes time to deplete unemployment, even though job openings are relatively quick to adjust.

"Hence, cyclical changes may not necessarily present themselves as… a neat movement along the curve. During and after recessions in the postwar period, the Beveridge curve has generally followed a pattern of shifting to the right during a recovery. One potential reason for this could be that even though some unemployed workers start filling the available job openings, workers who had left the labor force might get encouraged by the recovery and start looking for a job, thereby keeping the unemployment high. While the Census may have skewed the data for this recovery, the path of the curve going forward looks poised to follow in the footsteps of previous recessionary periods."

Those sentiments have been echoed more informally by Robert Waldmann, by Andy Harless, and at Free Exchange. And they may prove to be exactly right. But as Tasci and Lindner conclude:

"Firm conclusions will only be able to be drawn as more data are generated."

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

August 18, 2010 in Business Cycles, Labor Markets | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef0133f3278647970b

Listed below are links to blogs that reference Just how curious is that Beveridge curve?:

Comments

oh yes! "the economy starts improving, it takes time to deplete unemployment" however, no one know how much time it will take to overcome that.

Posted by: Crude John | August 18, 2010 at 11:11 PM

Does this have anything to do with structural unemployment?
Or the argument here is this seeming anomaly is entirely related to extended benefits ?
The latter seems a bit optimistic to me

Posted by: C Jones | August 19, 2010 at 09:20 AM

With all due respect your observation is pure BS. The idea that unemployment benefits lead to higher unemployment statistics is searching for an anomaly where none exist.

I've been unemployed for 2 years now, I owned my own business so I receive no unemployment benefits and am not counted in the unemployment surveys. Maybe I'm counted in the U6 numbers but not sure how they would capture my data or categorize me.

In plain English, the unemployment statistics, like most current government statistics, are woefully inadequate to capture the real employment picture in the USA.

Looking for a statistical anomaly in the unemployment data is like checking a sandbag next to the breach in the levee to see if it's adding to the problem.

Posted by: OrganicGeorge | August 19, 2010 at 10:59 AM

Mr. Altig, with all due respect, I am pretty sure all these observations by experts and highly intelectual people are a bit too narrow.

"It serves as a simple representation of how efficient labor markets are..."

Right there is the fallacy. There is no such a thing as "efficient labor markets". I know at least one case of job demand for a wind turbine producer who hasn't been able to cover his needs regarding his workforce because in the area there are no individuals with the right specialized skills. Similarly, I know of another individual who welds special steel pipes for x-ray machines and can't find a job in Miami, even when there are probably no more than 3 others that can do such job in all South Florida. Plenty of work for him in New York, though.

So the point is, jobs are localized in the vast majority of cases and that makes for an inefficient market. It is not like buyers and sellers are all in the same market and have all the information available. The mismatch is compounded now because a large number of jobs lost are of the lower skills type (say retail service) all the while the economy is moving towards a revival of manufacturing with strength in exports. Now, how long will it take to add new specialized skills to the unemployed before we may start to see a match between those have no jobs and those who are offering one?

In the long run, everything becomes efficient by force of nature. But we need to eat today and everyday.

Posted by: Boy Plunger | August 24, 2010 at 01:37 AM

Firms have also pared back on employees over the last 2 years and reorganized for efficiency. Those that are working find themselves doing the work of more than 1 person. Those with hiring authority are in no different a position. Sure, they may have job openings. But, they will only hire those that have done the exact same job recently, so as to add business value quickly. Managers today do not have adequate time to mentor a new employee. Skills that two years ago were close enough are now not enough. This may explain part of the Beveridge curve variation.

Posted by: CD | August 24, 2010 at 01:43 PM

It's hard to accept Economists refuse to tie inflation measurements to population samplings & will not explain how we are to continually grow GDP from a number reached only by years of leveraged gambling.

Posted by: bailey | August 25, 2010 at 10:58 AM

You say:

"Second, it does appear to be the case that the current rise in the unemployment relative to job openings is just a standard characteristic of the early phases of a recovery."

This is true and is indeed fairly obvious when one thinks about it. But that doesn't mean that the BC hasn't shifted out more than in past recessions.

One way to measure this is by estimating a Cobb-Douglas matching function and then looking at the Solow residual to get the matching function's "productivity." Stephen Williamson provides a graph of this residual for 2001 - 2010:

http://newmonetarism.blogspot.com/2010/08/kocherlakota-redemption.html

He doesn't show earlier recessions, but the shift for the current recession certainly looks much larger than the 2001 recession.

Posted by: Jon | August 29, 2010 at 09:46 PM

Post a comment

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

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

August 03, 2010

What makes forecasting tough

Bloomberg's Caroline Baum recounts her recent conversation with the Atlanta Fed's own Mike Bryan under the headline For Good Economic Forecasts, Try Flipping a Coin:

"How do economists fare when it comes to real forecasting, to predicting [gross domestic product] GDP growth and inflation one year out? About as good as a coin toss, according to Bryan's research. Less than half the economists did better than the naive forecast, which is based on no understanding of the economy and merely assumes next year's outcome will be the same as this year's. It's what you'd expect if the results were purely random."

A case in point could be found yesterday on Bloomberg, which featured a "chart of the day" that looked something like the one below (though I've updated the data for manufacturing inventories, given today's factory orders report):

080310a
(enlarge)

The chart was accompanied by this commentary:

"U.S. business inventories are so low relative to demand that any increase may act as a catalyst for larger companies to add workers, according to Nicholas Colas, chief market strategist at BNY ConvergEx Group."

A few days back, in The Wall Street Journal, you could find this:

"Until recently, businesses had helped supercharge economic growth by restocking inventories. Now the oomph from inventories is waning.

"In the second quarter, the change in private inventories added slightly more than one percentage point to the 2.4% increase in gross domestic product from the first quarter, measured at a seasonally adjusted annual rate, the Commerce Department said Friday.

"That is a big change from the first quarter, when inventory-building contributed 2.6 percentage points to GDP growth of 3.7%, and the fourth quarter of last year, when it contributed 2.8 percentage points to GDP growth of 5%....

"But Friday's report suggests companies are nearly done restocking their shelves.

" 'Our sense is current inventories are about where they need to be globally, both in industrial distribution and with the large North American retailers,' John Lundgren, chief executive of Stanley Black & Decker Inc., said in a July 21 call with analysts discussing the tool and hardware maker's second-quarter results."

But, on the same topic, Seeking Alpha opined:

"Inventory increases added 1.05% to second quarter GDP. Based on the annual revision, they added 2.64% to first quarter GDP or 71% of the total increase. Inventories were also responsible for approximately two-thirds of the GDP increase in the fourth quarter of 2009. The entire economic 'recovery' has essentially been an inventory adjustment [emphasis theirs]. This does not bode well for the future."

So one analysis suggests that the latest readings on inventories portend a boost to GDP, one foresees a drag on GDP, and yet another divines that inventories are basically played out as an economic story for the balance of the year.

Again from the Baum piece:

"Bryan said it's not just about getting the number right. 'It's about the narrative.' "

Indeed.

For comparison, it's also useful to take a longer look at what effect inventories have on GDP growth coming out of a recession; see the graph below. It charts the percentage point contributions of various components to real GDP growth in the first four quarters following the end of a recession (the current recession is assumed to have ended in second quarter of 2009). I've shown on the graph the percentage contribution of inventories to the last seven recoveries, beginning with the one in 1971.

080310b
(enlarge)

Regarding the point made in Seeking Alpha, inventories have contributed around 70 percent to the economic recovery recently, but in the recovery that began in 2002 inventories contributed 75 percent in the first four quarters. So the last two recovery periods stand out for large inventory components. But looking across the data, it's hard to say what an ordinary inventory contribution would be. Regardless of whether inventories are an unusually large part of this recovery, in absolute levels the scale of the recent inventory cycle—the initial liquidation and the subsequent restocking—has been unprecedented.

By Andrew Flowers, senior economic research analyst in the Atlanta Fed's research department

August 3, 2010 in Business Cycles, Forecasts | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef013485f74a7c970c

Listed below are links to blogs that reference What makes forecasting tough:

Comments

I remember around December 2007, when economists gave something like a 20% chance of recession, there was a Bloomberg poll that showed the public felt we were already in one.

Interestingly, most people would say the recession has never ended, though economists confidently point to the turn to positive GDP one year ago. What if there is another downturn already starting, and the NBER committee decides it is really one large event?

Posted by: Bob_in_MA | August 03, 2010 at 05:14 PM

Regardless of whether inventories are an unusually large part of this recovery, in absolute levels the scale of the recent inventory cycle—the initial liquidation and the subsequent restocking—has been unprecedented.

Posted by: GHD Straighteners | August 04, 2010 at 02:39 AM

I remember around December 2007, when economists gave something like a 20% chance of recession, there was a Bloomberg poll that showed the public felt we were already in one.

Posted by: links of london | August 04, 2010 at 02:40 AM

If we can't forecast, surely this makes the case for analysis of effective design of automatic stabilisers into an interesting question?

Posted by: rjw | August 04, 2010 at 02:55 PM

My predcition for AAA corporate bond yields in 1981 was 15.48%. AAA corporate yields hit 15.49%. I was off by .01%.

It is a scientific fact that economic forecasts are mathematically infallible. All you need is the G.6 debit and deposit turnover release.

Posted by: flow5 | August 05, 2010 at 12:56 AM

The transactions concept of money velocity (Vt) has its roots in Irving Fischer’s equation of exchange (PT = MV), where (1) M equals the volume of means-of-payment money; (2) V, the transactions rate of turnover of this money; (3) T, the volume of transactions units; and (4) P, the average price of all transactions units.

The “econometric” people don’t like the equation because it is impossible to calculate P and T. Presumably therefore the equation lacks validity. Actually the equation is a truism – to sell 100 bushels of wheat (T) at $4 a bushel (P) requires the exchange of $400 (M) once (V), or $200 twice, etc.

The real impact of monetary demand on the prices of goods and serves requires the analysis of “monetary flows”, and the only valid velocity figure in calculating monetary flows is Vt. Income velocity (Vi) is a contrived figure (Vi = Nominal GDP/M).

The product of MVI is obviously nominal GDP. So where does that leave us? In an economic sea without a rudder or an anchor. A rise in nominal GDP can be the result of (1) an increased rate of monetary flows (MVt) (which by definition the Keynesians have excluded from their analysis), (2) an increase in real GDP, (3) an increasing number of housewives selling their labor in the marketplace, etc. The income velocity approach obviously provides no tool by which we can dissect and explain the inflation process.

To the Keynesians, aggregate demand is nominal GDP, the demand for services (human) and final goods. This concept excludes the common sense conclusion that the inflation process begins at the beginning (with raw material prices and processing costs at all stages of production) and continues through to the end.

The Fed first calculated deposit turnover in 1919. It reported weekly until 1941 (like M3, the series was also discontinued, in Sept. 1996). The figure “other banks’’ was used until 1996. Prior to this revision Vt included all banks located in 232 SMSA’s excluding N.Y. City. This was the best that could be done to eliminate the influence on prices of purely financial and speculative transactions. Obviously funds used for short selling do not contribute to a rise in prices.

The Fed calculates these velocity figures by dividing the aggregate volume of debits of these banks against their demand deposits.

We do know that to ignore the aggregate effect of money flows on prices is to ignore the inflation process. And to dismiss the concept of Vt by saying it is meaningless (that people can only spend their income once) is to ignore the fact that Vt is a function of three factors: (1) the number of transactions; (2) the prices of goods and services; (3) the volume of M.
Inflation analysis cannot be limited to the volume of wages and salaries spent.

To do so is to overlook the principal "engine" of inflation - which is of course, the volume of credit (new money) created by the Reserve and the commercial banks, plus the expenditure rate (velocity) of these funds. Also overlooked is the effect of the expenditure of the savings of the non-bank public on prices.

The (MVt) figure encompasses the total effect of all these monetary flows (MVt).

Posted by: flow5 | August 05, 2010 at 01:02 AM

Economist still try to conjure up learned interpretations. Now its the yield curve and its associated long term contractions and expansions of business activity, prices, etc.

“Double-Dippers Are All Wet Ignoring Yield Curve” Caroline Baum - Bloomberg – July 12 2010:

“It’s just that the yield curve, or what it represents, is possibly the best leading indicator of the business cycle”

Everyone on the FED's technical staff that thinks the money supply can be managed by using interest rates should lose their job and their pension.

Posted by: flow5 | August 05, 2010 at 11:43 AM

yes forecasting is tought. But that is why we are willing to pay lots of money for them. Trouble is, we (ie everyone) pays lots of money for those which are wrong.

Posted by: chris | August 11, 2010 at 08:27 AM

People are just people. Sometimes they are right in their forecasts, sometimes not. The most important point is to be able to acknowledge mistakes that we make. Perfection comes with practice.

Posted by: Monklet | August 16, 2010 at 08:09 AM

there are two papers one has to mention when discussing inflation forecasts.
The naive approach was first tested by Atkeson and Ohanian.
Stock and Watson published results of a comprehensive quantitative comparison of existing models.


Atkeson, A., Ohanian, L.E., (2001). “Are Phillips curves useful for forecasting inflation?”, Federal Reserve Bank of Minneapolis Quarterly Review 25, 2-11.
Bureau of Labor Statistics, (2003). “Revisions in the CPS effective January 2003”, http://www.bls.gov/cps/rvcps03.pdf


Stock, J., Watson, M. (2007). Why Has Inflation Become Harder to Forecast? Journal of Money, Credit and Banking, 39(3), 3-33.

Posted by: kio | August 19, 2010 at 02:41 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

June 25, 2010

Increasing hours worked versus increasing hiring

The current recovery has been characterized by increasing production and sales without an associated expansion in employment. Part of the explanation for the lack of hiring has to do with increased productivity of workers (output per hour worked)—either by improved production methods or simply requiring more effort from staff per hour worked. Another reason why firms have been relatively slow to hire is that, in addition to slashing payrolls during the recession, many firms also cut the work hours of the remaining staff to levels well below prerecessionary norms. As a result, these firms have some scope to increase the hours worked by their current staff before hiring additional workers. This fact is evident in the often-cited increase during the recession in the number of people working part time for economic reasons (see here and here, for example). That number has remained relatively stable at around nine million people over the last year, but it is still more than twice its prerecessionary average.

Another perspective on the part-time issue can be gleaned from data on average work week obtained from the U.S. Bureau of Labor Statistics (BLS) Current Population Survey. Chart 1 shows the pattern of average weekly hours (not seasonally adjusted) for all nonfarm wage and salary workers during the period of January 2008 through May 2010. For ease of comparison, the chart is scaled to be relative to the 2002–07 average. Compared with prerecession levels, average hours worked declined during the recession although they really didn't begin falling until the second half of 2008. As of May 2010, average hours worked were still about 1.5 percent below the prerecession average but have been trending higher in recent months. (Note that the sharp drop in September 2009 is a quirk of Labor Day falling during the survey week and hence cutting the work week one day shorter than usual.) The fact that average hours worked has moved higher is an encouraging sign for employment growth going forward if the historical norm is any guide. Of course, a firm may need to hire new workers even when hours per worker are below average. For example, the decision to start an additional manufacturing production line will probably require hiring new staff even if existing staff on other lines are working fewer hours than usual.

062510a
(enlarge)

The aggregate picture in Chart 1 masks considerable variation across industries. For example, Chart 2 shows the normalized average weekly hours reported by workers in the education and health services industries and in the financial industry. For these workers, although average hours worked per week declined mildly during the second half of 2009 weekly hours worked have since returned to prerecessionary levels. This performance suggests that, other things equal, additional demand for hours of work in these industries is likely to be met by additional hiring.

062510b
(enlarge)

Chart 3 shows the evolution of average weekly hours reported by workers in the manufacturing and transportation/warehouse industries. In these industries, average hours worked began to decline in the fall of 2008, but they have recovered much of the decline in recent months and are now about 1 percent below their prerecession averages. As with the aggregate picture, the fact that average hours worked has been trending higher recently is encouraging news for future employment growth in these industries.

062510c
(enlarge)

In contrast, Chart 4 shows the pattern of average hours reported by workers in the construction industry, the wholesale and retail trade industry, and the leisure and hospitality industry. For these workers, average weekly hours started to decline in the fall of 2008 and have shown no clear signs of recovery—still sitting some 3 percent to 4 percent below their prerecession averages and not trending higher. Thus, there appears to be more scope for firms in these industries to increase hours without necessarily having to hire additional workers.

062510d
(enlarge)

This analysis does have some caveats. For one thing, it is based on worker-reported data about hours worked drawn from the BLS's Current Population Survey. An alternative would be the employer-reported measurements in the BLS's Establishment Survey.

Probably more importantly, this analysis uses the prerecession history as a guide to what is "normal." If, for example, firms decide to keep average weekly hours lower by increasing the use of part-time workers, then the fact that average hours are below prerecession levels does not imply that firms won't hire when demand increases. Some industries already make heavy use of part-time employment. For example, in May 2010 the reported average weekly hours by workers in the leisure and hospitality industry was 33.3 hours compared to 42 hours in manufacturing. Absent an offsetting increase in wage rates, a permanent shift toward increased part-time employment would lower a worker's income relative to full-time employment and probably result in an increased propensity for multiple job-holding by individuals and households.

By Amy Ellingson, economic analyst at the Atlanta Fed

June 25, 2010 in Business Cycles, Employment, Labor Markets | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef0133f1c5e0d9970b

Listed below are links to blogs that reference Increasing hours worked versus increasing hiring:

Comments

great post. informative-interesting that corporate spending has been made in the software areas. New software will make existing workers more productive, leading to more slack in the job market.

the question should be "what do you do to incent hiring?". My answer would be change tax policy to incent entrepreneurial activity-which would cause workers to form small companies to try and make profits.

Posted by: Jeff | June 30, 2010 at 11:26 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

June 11, 2010

Another view of the structural versus cyclical unemployment question

One of the key functions of labor markets is matching firms looking for workers who have particular attributes (or skills) with individuals looking for work who have those attributes. What economists have been worrying a lot about recently is the potential for a substantive mismatch between the skills of those looking for work and the skills that firms want. This type of labor reallocation friction is one of many potential structural problems affecting the U.S. labor market at present (see, for example, here, here, and here).

A 2003 New York Fed article by economists Erica Groshen and Simon Potter examined the issue of structural rigidities in labor markets during the recovery from the 2001 recession. Their idea was to identify the share of employment in industries that had either continued to lose or gain jobs on net after the recession versus the share of employment in industries that had responded cyclically (gaining jobs after having lost them during the recession or losing jobs after gaining them during the recession) to the recession. The New York Fed researchers used industry of employment as a proxy for industry-specific skills, though it's not a perfect measure. For example, the skills of construction workers are generally different from the skills of health care workers. The more often that employment is accounted for by industries that are continuing to gain or lose employees, the more the potential exists for skill mismatch going forward.

Using the first 12 months of the recovery as a basis, Groshen and Potter found that in the 1974–75 recession and the recessions of the early 1980s the share of employment in industries continuing recession employment trends was around 50 percent. That share increased to 57 percent for the 1990–91 recession and rose sharply to 79 percent for the 2001 recession. The researchers took these findings as evidence of structural change playing a more significant role in influencing the labor market recovery from the 2001 recession than earlier recessions saw.

Visually, this observation can be presented as a four-quadrant "bubble chart" that measures job growth during the recession on the horizontal axis and job growth in the first 12 months of recovery on the vertical axis (the size of the each bubble reflects the relative employment size of the industry). We replicated Groshen and Potter's work with minor data definitional changes and find that for the first 12 months of recovery from the 2001 recession 81 percent of employment was in industries continuing recession employment trends (the top right and bottom left quadrants in the chart).

061110a
(enlarge)

Using the same approach as Groshen and Potter, how does the 2001 recession compare with the most recent recession? To make that determination, we used data available from the 11 months of recovery coming out of the most recent recession (assuming the recession ended in June 2009). We calculate that 65 percent of employment is in industries either still losing or gaining jobs. This share is less dramatic than the 2001 experience but a bit more than the 1990–91 experience.

061110b
(enlarge)

The positioning of certain industries within the four quadrants is not too surprising given the nature of the most recent recession. For instance, construction and related industries are deep in the continued job-loss quadrant. In contrast, the temporary help sector has behaved procyclically. Jobs in federal government and health care have continued to grow, with the former boosted by temporary hiring of census workers. Of the 79 industries examined, about a third of them have landed in a different quadrant compared with the 2001 recession.

Of particular interest is the share of employment in industries that are continuing to lose jobs. For unemployed workers from those industries, there is less prospect of being reemployed in that industry and hence a greater chance that skill mismatch will be an issue for those workers. Interestingly, the share of employment in industries experiencing continued net losses is similar to that seen during the 2001 recession (45 percent versus 41 percent).

This most recent recession was especially deep, and the large share of unemployed workers reporting they were permanently separated from their employers suggests that many of those jobs in all likelihood will not come back. If new jobs come with different skill requirements, then skill mismatch could become a significant factor once labor demand increases. However, the relatively disappointing May private-sector payroll jobs numbers released last Friday and the improving but low level of job openings reported in the JOLTS data for April are reminders that weak labor demand is still the dominant factor inhibiting the overall employment recovery.

By Menbere Shiferaw, senior economic research analyst, and John Robertson, vice president and senior economist, both in the Atlanta Fed's research department

June 11, 2010 in Business Cycles, Employment, Labor Markets | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef0133f0caf525970b

Listed below are links to blogs that reference Another view of the structural versus cyclical unemployment question:

Comments

Comparing earlier recessions with recent recessions, the results seem to run counter to what labor market theory would lead one to expect: recent recessions have involved a larger structural component, and yet the NAIRU appears to have fallen rather than risen (at least through the 2001 recession). This suggests that skill mismatch is not as important a determinant of aggregate labor market outcomes as we used to think. Or else that skill mismatch is operating in a way very different from what we would expect.

What's also interesting is that data suggest a downward trend in labor turnover since the 1980's -- which might explain the decline in the NAIRU, since aggressive hiring (i.e. high net demand plus high turnover) is what tends to drive up wages. I wonder if skill mismatches are having the opposite of the expected effect: firms, fearful of future mismatches, are more likely to retain current employees (for any given fall in product demand) and therefore have less need to hire (and drive up wages) when product demand returns. Or to look at it a little differently, the reason that the industries losing employment are more likely to continue losing employment is that the ones with potential re-hire needs were afraid to lay off employees in the first place.

Another possible explanation for the anomaly is that mismatched workers are more "desperate" and therefore exert greater downward pressure on wages. Arguably, the greater expectation of possible rehire during the 70's and 80's gave workers more reason to pass up unattractive job offers and hold out for higher wages.

Posted by: Andy Harless | June 12, 2010 at 12:41 PM

Post a comment

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

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

June 03, 2010

The recovery: Job rich or job poor?

Gross domestic product (GDP) is growing, supported by strong labor productivity numbers and modest employment growth. Even after today's downward revision to first quarter labor productivity measures, growth in labor productivity in the business sector has averaged 5.6 percent over the last three quarters—more than twice the long-run average. Okun's law has underpredicted the rise in unemployment, and some commentators call for a jobless recovery. Today, Federal Reserve Bank of Atlanta President Dennis Lockhart gave a speech on the prospects for the future of employment and labor productivity that posed the question:

"… how long can firms ride this productivity growth before having to yield to new hiring to support greater activity?"

To provide some context, below is a chart that shows a decomposition of GDP growth during post-WWII recessions. This decomposition does not explain growth, but it does show the relative contribution of various factors such as average labor productivity, average hours worked, the unemployment rate, and other labor market variables.

060310a
(enlarge)

Note: The decomposition is based on the identity.

060310c

Where Y is GDP, H is total hours worked from nonfarm payrolls, E* is employment from the nonfarm payroll survey, E is employment based on the household survey, L is labor force, and N is working age population.

As this chart shows, relatively high labor productivity growth during a recession is not a phenomenon isolated to the 2007–09 and 2001 recessions (for present purposes, the end of the most recent recession is identified with the trough in GDP in the second quarter of 2009). All recessions from WWII through 1970 also featured sizable growth in labor productivity. Notice also that these recessions experienced large declines in the employment rate (rise in the unemployment rate). Hence, the productivity gains were attributable to outsized reductions in hours rather than gains in output. The same also holds true of the 2007–09 recession. As President Lockhart noted:

"Many employers reacted to the downturn by aggressively cutting their workforces, reorganizing remaining workers, and cutting other costs."

Of course, the big question centers on the recovery. Specifically, does the outsized contribution from labor productivity during the last recession portend continued outsized gains (and hence subdued employment prospects) during the recovery and expansion as well?

Perhaps history can provide a guide. The next chart provides the same GDP decomposition, but this time for the first three quarters of the recovery (we chose three quarters to allow a common comparison across recoveries). This chart reflects at least two salient features. First, the fastest way to employment growth is faster GDP growth—recessions that are immediately followed by very strong GDP growth also tend to have strong employment growth. Second, productivity remains an important contributor to growth, and that contribution has been especially large during the early phases of the past three recessions.

060310b
(enlarge)

President Lockhart's interpretation of these observations is that many employers:

"… have reacted to the upswing by holding employment at or near recession levels, seeking efficiencies in supply chains, investing in labor-saving automation, and generally tweaking their business models to operate more efficiently than before the recession. We've heard this story frequently in anecdotal accounts of our directors and business contacts across the Southeast.

"As long as efficiency and productivity gains can be achieved in this way, employers may remain hesitant to hire."

Going forward, President Lockhart concludes that:

"I do not expect the recent outsized productivity growth to continue indefinitely and become a new, permanently higher trend rate. Some degree of 'wait and see' behavior is at work and is no doubt reflected in the productivity numbers. With growing economic momentum, deferral of hiring will become riskier.

"Some employment gains should result as labor productivity levels out and falls back over time to something resembling the historic trend rate. But the pace of hiring is likely to be gradual. Current data on the use of part-time workers suggest that businesses have some scope to increase hours without hiring new full-time employees. And there are other, more structural obstacles to the rapid reemployment of the jobless. Some jobs in the construction sector and certain manufacturing industries are likely permanently lost, requiring some amount of migration of workers to other sectors. And, for a time, skill and geographic mismatches may frustrate employers willing to hire.

"Also, the weight of uncertainty about the future business environment makes a gradual pace of employment progress a reasonable assumption. I hear often from members of the business community that uncertainty regarding federal, state and local fiscal fundamentals and regulatory rules-of-the-game are feeding reticence to pull the trigger on new ventures, new hires and new investments. The recent European sovereign debt and banking pressures have added to uncertainty in financial markets.

"Sizing all this up, I expect recovery in the medium term to be neither jobless nor job rich."

The current Blue Chip consensus for second quarter GDP is about a 3.2 percent annual rate. Payroll employment expanded by an estimated 290,000 in April, and with an employment report out Friday that will likely feature very sizable gains (some forecasts calling for an addition of more than 500,000 jobs), the relative contribution of labor productivity to GDP growth in the second quarter is almost certain to decline sharply. However, most of the surge in May's number will be temporary U.S. Census workers, and this increase will reverse itself in pretty short order. Hence, it will probably take awhile to see how President Lockhart's forecast of continued modest employment growth pans out.

By John Robertson, vice president, and Pedro Silos, research economist and assistant policy adviser, at the Atlanta Fed

June 3, 2010 in Business Cycles, Employment, Labor Markets, Productivity | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef013482f5cbce970c

Listed below are links to blogs that reference The recovery: Job rich or job poor?:

Comments

He's probably right- companies want to do more with less. I wonder though, that we are entering a phase where "work" for most of us is going to mean something much different than our past. If and when these companies hire folks back many of those workers could end up in reality being independent contractors under the guise of a full time employee.

That means they could be in constant job flux their entire career. Economic dynamics like a 30 year mortgage and company paid health-care and retirement go right out the window in that case.

Posted by: FormerSSResident | June 05, 2010 at 09:17 AM

In my point of view, no job rich and No job poor. you can be rich with any job... any way, thanks for the new research! :)

Posted by: John | June 07, 2010 at 12:28 AM

Current data on the use of part-time workers suggest that businesses have some scope to increase hours without hiring new full-time employees.
http://www.laptop-battery-chargers.com/compaq-presario-c500-ac-adapter.html

Posted by: charger | June 07, 2010 at 04:28 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

April 14, 2010

The inventory question

Mark Thoma asks a very good question:

"I hadn't looked at this for awhile—should I interpret the return of the inventory-sales ratio to near normal levels as good news?"

Here's the picture Thoma was looking at, updated to incorporate today's U.S. Census Bureau release on February manufacturing and trade inventory and sales:

041410a
(enlarge)

Tim Duy has taken a look at these data and comes to this conclusion:

"Increasingly, the recovery looks sustainable—sustainable in the sense that a double dip recession looks unlikely. As Bloomberg reports, this is the message of the inventory cycle, which appears to have largely run its course. Inventories surged as the recession intensified, leaving firms scrambling to bring output in line with the new level of sales. Now, firms have inventories under control."

I have been pondering those data as well, ever since the advance fourth quarter gross domestic product report indicated that 3.4 percentage points of the then-reported 5.9 percent annualized growth rate was accounted for by a slowing in the pace of inventory decumulation. (The numbers have subsequently been revised to 3.8 percentage points of a 5.6 percent growth rate.) It certainly appears that inventory-sales ratios have reverted to the prerecession norm, justifying Duy's sense that inventories will not be a big part of the economic story as we move through 2010.

That conclusion does rest, of course, on the likelihood that a downward trend in the ratio truly did break in the middle part of the decade. As the chart shows, the same pause in the trend occurred in the mid-1990s, only to commence its southward trek on the other side of the 2001 recession.

But the situation is even more curious than that. If you dig a little deeper, you find that not all inventory-sales ratios tell the same story. In particular, inventory-to-sales ratios at the retail level look very lean relative to prerecession levels while manufacturer's inventories still appear to be relatively bloated.

041410b
(enlarge)

What, exactly, is that chart trying to tell us? Does it represent some shift in supply-chain management, with inventory holdings being pushed down from the retail level to manufacturers? If not, can we expect some resurgence in retail inventories (as the Duy-cited Bloomberg article suggests), coupled with continued decumulation at the manufacturing level? And what would be the net effect of such developments on aggregate inventory levels?

Those are good questions, too. If you have any insights, I'd love to hear them.

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

April 14, 2010 in Business Cycles, Data Releases | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef0133ecafe425970b

Listed below are links to blogs that reference The inventory question:

Comments

maybe its deflationary expectations...

Posted by: rjs | April 15, 2010 at 06:55 AM

I think there has been a shift. If you look at the i/s ratio for durable goods it looks like a return to normal. If you exclude IT, it looks like the durable i/s ratio has returned to a rising trend that began in 2006.

Posted by: Douglas Lee | April 15, 2010 at 09:35 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

March 17, 2010

Bad by any measure

A few weeks back, The Economist published a story touting the well-known fact that the "American economy just had its worst decade since the 1930s." Whether looking at gross domestic product (GDP), consumption, income, or nonfarm payrolls, the decade from 2000 to 2010 generally looks bad from an economic perspective. During this decade, of course, the nation has experienced two recessions—the latter being the most severe since the Great Depression. (See the graphs below, reproduced from the February 25 article in The Economist titled "Back to The Crash.")

031710a
(enlarge)

But given that decades are rather arbitrary economic demarcations, why not examine other time periods? So here's another approach: Using the yearly trough-to-trough periods according to National Bureau of Economic Research (NBER) recession dating, the charts below have replicated the ones shown above from The Economist. (Note: The NBER only designates troughs by quarter. So for a trough ending in first or second quarter, the calendar year in which the trough falls is designated as the "trough year." If the trough falls in third or fourth quarter, the following calendar year is the trough year. For these calculations, we use annual data instead of quarterly because pre-1947 quarterly data are unavailable.) This simple exercise sheds some interesting light on the recent experience of the U.S. economy—namely, that it was bad by any measure.

Looking at real GDP growth over these periods, the 2002–09 era looks very weak, with only 1946–49 having a lower average annual rate of growth (in these years, GDP averaged an annual decline of 2.01 percent). Average annual real GDP growth was 1.72 percent for the 2002–09 period, much lower than the average of 3.97 percent for the previous 10 trough-to-trough periods.

031710b
(enlarge)

Similarly for real consumption and income growth, the 2002–09 period is also bleak. Average annual consumption and income growth had averaged 3.81 percent and 3.79 percent, respectively, going into 2002. But during this recent trough-to-trough period, income growth was very weak at 1 percent, with only the 1946–49 period doing worse (–1.09 percent). But consumption growth in 2002–09 was the lowest on record, averaging only 2.12 percent growth annually.

Another interesting observation is the spread between average annual consumption and income growth. The 1946–49 and 2002–09 periods are where it's the largest, at 5.9 percent and 1.1 percent, respectively. These large imbalances could possibly reflect growth in household debt and/or lower saving rates, as consumption growth far outstrips income growth. Indeed, debt grew and savings declined notably during 2002–09.

031710c
(enlarge)

Lastly, a look at the nonfarm payroll growth confirms the most recent trough-to-trough period as one of extraordinary weakness. Given that data prior to 1939 are unavailable, the previous eight bottom-to-bottom periods saw average annual growth of 13.5 percent in payrolls. But for 2002–09, average annual payroll growth of 0.44 percent reaffirms the so-called "jobless recovery" from the 2001 recession and the large decline in payrolls during this current recession. No other previous period comes close.

031710d
(enlarge)

By Andrew Flowers, economic research analyst, at the Atlanta Fed

March 17, 2010 in Business Cycles, Data Releases | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef01310fb17aa6970c

Listed below are links to blogs that reference Bad by any measure:

Comments

I would prefer to see the average annual growth over these expansions rather than the total growth you show. it makes for a more meaningful comparison.

Posted by: spencer | March 17, 2010 at 06:15 PM

The 1946-49 comparison mentioned twice is problematic. In some ways, this was an extremely successful period. The real measures were hammered by extremely high inflation attending the lifting of price controls, some commodity speculation, and mostly pent-up demand chasing consumer goods. Incomes, of course, dropped from the everybody-employed war years because women left the labor force. Eight million men and women were cashiered out of the armed forces and into a transitioning industrial base without the long-lasting high unemployment we have today.

Many if not most economists expected a return to the Great Depression after the war, or at least the dysfunction of the period following the First World War. Did not happen.

In some ways that period was the inverse of the 00s, a time when the worst was predicted and a transition to stability and prosperity happened. The most recent decade was a time when big things were promised and a crash was delivered.

Naked data points absent history does not tell a very good story or give a very good understanding.

Posted by: Alan Harvey | March 18, 2010 at 01:08 AM

I am betting on mean reversion!

Posted by: silly things | March 18, 2010 at 01:23 AM

Great article. Sometimes analyses like this one done by the Economist can be misleading as in this case it is based on data broken up arbitrarily into decades. But, as you clearly point out, this is not one of those times. Interesting stuff, thanks.

Posted by: der Tillman | March 18, 2010 at 09:51 AM

I think you will find that the domestic production of oil and demographic trends in the "baby boom" will reflect US performance for nearly a century in the post WW2 era. The 40' 50's 60's reflect increasing oil production and relative self sufficiency. The dwindling production results in trade deficits which over time reduce economic performance as can be seen in the 70s 80s 90s. In addition govt grew into more and more a share of the economy from 1940's-late 60's. The 00's are just the start of the new very low real growth trend around 1.5-2.5%--Japan like. >10% of GDP deficits with anemic growth are not a promising start. The debt growth to GDP growth numbers are appalingly bad; apparently, rather than finding ways of improving this we will just try to leverage up again (and lever a little more) until it seems the system breaks down again. Insourcing and outsourcing has hurt domestic workers so emplyment growth collapses as the trade defict and public deficit rises. As the baby boomers enter retirement age they will not retire due to a lack of meaningful pensions and savings. These boomers will become a drag as a 60+ year old is generally not as productive as a younger worker and their health care consumption will grow much higher and be a severe drag on the economy. There is a day of reckoning coming that each political party is trying to pawn off on the other but both have their fingerprints all over the failure.

Finally, the economics discipline has not come to grips with exponential growth in finite systems; there seems to be an assumption that a technofix or subsitution will just pick up when we hit the wall. On many fronts there are "limits to growth" and economists are just not as savy as they think they are about these real issues that cannot be "modeled" away.

Posted by: MK Hubbart | March 20, 2010 at 10:47 PM

The dwindling production results in trade deficits which over time reduce economic performance as can be seen in the 70s 80s 90s. In addition govt grew into more and more a share of the economy from 1940's-late 60's. The 00's are just the start of the new very low real growth trend around 1.5-2.5%--Japan like. >10% of GDP deficits with anemic growth are not a promising start. The debt growth to GDP growth numbers are appalingly bad; apparently, rather than finding ways of improving this we will just try to leverage up again (and lever a little more) until it seems the system breaks down again. Insourcing and outsourcing has hurt domestic workers so emplyment growth collapses as the trade defict and public deficit rises. As the baby boomers enter retirement age they will not retire due to a lack of meaningful pensions and savings. These boomers will become a drag as a 60+ year old is generally not as productive as a younger worker and their health care consumption will grow much higher and be a severe drag on the economy. There is a day of reckoning coming that each political party is trying to pawn off on the other but both have their fingerprints all over the failure.

Posted by: sesli sohbet | April 05, 2010 at 12:56 PM

The 1946-49 comparison mentioned twice is problematic. In some ways, this was an extremely successful period. The real measures were hammered by extremely high inflation attending the lifting of price controls, some commodity speculation, and mostly pent-up demand chasing consumer goods. Incomes, of course, dropped from the everybody-employed war years because women left the labor force. Eight million men and women were cashiered out of the armed forces and into a transitioning industrial base without the long-lasting high unemployment we have today.

Many if not most economists expected a return to the Great Depression after the war, or at least the dysfunction of the period following the First World War. Did not happen.

In some ways that period was the inverse of the 00s, a time when the worst was predicted and a transition to stability and prosperity happened. The most recent decade was a time when big things were promised and a crash was delivered.

Naked data points absent history does not tell a very good story or give a very good understanding.

Posted by: Sesli | July 05, 2010 at 04:29 PM

The dwindling production results in trade deficits which over time reduce economic performance as can be seen in the 70s 80s 90s. In addition govt grew into more and more a share of the economy from 1940's-late 60's. The 00's are just the start of the new very low real growth trend around 1.5-2.5%--Japan like. >10% of GDP deficits with anemic growth are not a promising start. The debt growth to GDP growth numbers are appalingly bad; apparently, rather than finding ways of improving this we will just try to leverage up again (and lever a little more) until it seems the system breaks down again. Insourcing and outsourcing has hurt domestic workers so emplyment growth collapses as the trade defict and public deficit rises. As the baby boomers enter retirement age they will not retire due to a lack of meaningful pensions and savings. These boomers will become a drag as a 60+ year old is generally not as productive as a younger worker and their health care consumption will grow much higher and be a severe drag on the economy. There is a day of reckoning coming that each political party is trying to pawn off on the other but both have their

Posted by: Power ixir | February 18, 2011 at 10:15 AM

Sometimes analyses like this one done by the Economist can be misleading as in this case it is based on data broken up arbitrarily into decades. But, as you clearly point out, this is not one of those times.

Posted by: Just Information | November 22, 2011 at 11:21 PM

The dwindling production results in trade deficits which over time reduce economic performance as can be seen in the 70s 80s 90s. In addition govt grew into more and more a share of the economy from 1940's-late 60's. The 00's are just the start of the new very low real growth trend around 1.5-2.5%--Japan like. >10% of GDP deficits with anemic growth are not a promising start. The debt growth to GDP growth numbers are appalingly bad; apparently, rather than finding ways of improving this we will just try to leverage up again

Posted by: porno izle | August 17, 2012 at 06:09 PM

I would prefer to see the average annual growth over these expansions rather than the total growth you show. it makes for a more meaningful comparison.

Posted by: Sesli Sohbet | October 31, 2012 at 08:27 AM

he 1946-49 comparison mentioned twice is problematic. In some ways, this was an extremely successful period. The real measures were hammered by extremely high inflation attending the lifting of price controls, some commodity speculation, and mostly pent-up demand chasing consumer goods. Incomes, of course, dropped from the everybody-employed war years because women left the labor force. Eight million men and women were cashiered out of the armed forces and into a transitioning industrial base without the long-lasting high unemployment we have today.

Many if not most economists expected a return to the Great Depression after the war, or at least the dysfunction of the period following the First World War. Did not happen.

Posted by: Sesli Sohbet | November 04, 2012 at 07:39 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