The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
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July 18, 2016
Lockhart Casts a Line into the Murky Waters of Uncertainty
Is uncertainty weighing down business investment? This recent article makes the case.
Uncertainty as an obstacle to business decision making and perhaps even a "propagation mechanism" for business cycles is an idea that that has been generating a lot of support in economic research in recent years. Our friend Nick Bloom has a nice summary of that work here.
Last week, the boss here at the Atlanta Fed gave the trout in the Snake River a break and made some observations on the economy to the Rocky Mountain Economic Summit, casting a line in the direction of economic uncertainties. Among his remarks, he noted that:
The minutes of the June FOMC [Federal Open Market Committee] meeting clearly pointed to uncertainty about employment momentum and the outcome of the vote in Britain as factors in the Committee's decision to keep policy unchanged. I supported that decision and gave weight to those two uncertainties in my thinking.
At the same time, I viewed both the implications of the June jobs report and the outcome of the Brexit vote as uncertainties with some resolution over a short time horizon. We've seen, now, that the vote outcome may be followed by a long tail of uncertainty of quite a different character.
But he followed that with something of a caution…
If uncertainty is a real causative factor in economic slowdowns, it needs to be better understood. Policymaking would be aided by better measurement tools. For example, it would help me as a policymaker if we had a firmer grip on the various channels through which uncertainty affects decision-making of economic actors.
I have been thinking about the different kinds of uncertainty we face. Often we policymakers grapple with uncertainty associated with discrete events. The passage of the event to a great extent resolves the uncertainty. The outcome of the Brexit referendum would be known by June 24. The interpretation of the May employment report would come clear, or clearer, with the arrival of the June employment report on July 8. I would contrast these examples of short-term, self-resolving uncertainty with long-term, persistent, chronic uncertainty such as that brought on by the Brexit referendum outcome.
As President Lockhart indicated in his speech, the Federal Reserve Bank of Atlanta conducts business surveys that attempt to measure the uncertainties that businesses face. From July 4 through July 8, we had a survey in the field with a question on how the Brexit referendum was influencing business decisions.
We asked firms to indicate how the outcome of the Brexit vote affected their sales growth outlook. Respondents could select a range of sentiments from "much more certain" to "much more uncertain."
Responses came from 244 firms representing a broad range of sectors and firm sizes, with roughly one-third indicating their sales growth outlook was "somewhat" or "much" more uncertain as a result of the vote (see the chart). Those noting heightened uncertainty were not concentrated in any one sector or firm-size category but represented a rather diverse group.
As President Lockhart noted in his speech, "[w]e had a spirited internal discussion of whether one-third is a big number or not-so-big." Ultimately, we decided that uncovering how these firms planned to act in light of their elevated uncertainty was the important focus.
In an open-ended, follow-up question, we then asked those whose sales growth outlook was more uncertain how their plans might change. We found that the most prevalent changes in planning were a reduction in capital spending and hiring. Many firms mentioned these two topics in tandem, as this rather succinct quote illustrates: "Slower hiring and lower capital spending." Our survey data, then, provide some support for the idea that uncertainties associated with Brexit were, in fact, weighing on firm investment and labor decisions.
Elevated measures of financial market and economic policy uncertainty immediately after the Brexit vote have abated somewhat over subsequent days. Once the "waters clear," as our boss would say, perhaps this will be the case for firms as well.
May 19, 2016
Are People in Middle-Wage Jobs Getting Bigger Raises?
As observed in this Bloomberg article and elsewhere, the Atlanta Fed's Wage Growth Tracker (WGT) reached its highest postrecession level in April. This related piece from Yahoo Finance suggests that the uptick in the WGT represents good news for middle-wage workers. That might be so.
Technically, though, the WGT is the median change in the wages of all continuously employed workers, not the change in wages among middle-income earners. However, we can create versions of the WGT by occupation group that roughly correspond to low-, middle-, and high-wage jobs, which allows us to assess whether middle-wage workers really are experiencing better wage growth. Chart 1 shows median wage growth experienced by each group over time. (Note that the chart shows a 12-month moving average instead of a three-month average, as depicted in the overall WGT on our website.)
Wage growth for all three categories has risen during the past few years. However, the timing of the trough and the speed of recovery vary somewhat. For example, wage growth among low-wage earners stayed low for longer and then recovered relatively more quickly. Wage growth of those in high-wage jobs fell by less but also has recovered by relatively less. In fact, while the median wage growth of low-wage jobs is back to its 2003–07 average, wage growth for those in high-wage jobs sits at about 75 percent of its prerecession average.
Are middle-wage earners experiencing good wage growth? In a relative sense, yes. The 12-month WGT for high-wage earners was 3.1 percent in April compared with 3.2 percent and 3.0 percent for middle- and low-wage workers, respectively. So the typical wage growth of those in middle-wage jobs is trending slightly higher than for high-wage earners, a deviation from the historical picture.
Interestingly, this pattern of wage growth doesn't quite jibe with the relative tightness of the labor market for different types of jobs. As was shown here, the overall WGT appears to broadly reflect the tightness of the labor market (possibly with some lag).
In theory, as the pool of unemployed shrinks, employers will face pressure to increase wages to attract and retain talent. Chart 2 shows the 12-month average unemployment rates for people who were previously working in one of the three wage groups.
Like the relationship between overall WGT and the unemployment rate, wage growth and the unemployment rate within these wage groups are negatively correlated (in other words, when the unemployment rate is high, wage growth is sluggish). The correlation ranges from minus 0.81 for low-wage occupations to minus 0.88 for middle-wage occupations.
However, notice that although the current gap between unemployment rates across the wage spectrum is similar to prerecession averages, the current relative gap in median wage growth is different than in the past. In particular, the wage growth for those in higher-wage jobs has been sluggish compared to middle- and lower-wage occupations.
Nonetheless, it's clear that the labor market is getting tighter. Wage growth overall has moved higher over the past year, driven primarily by those working in low- and middle-wage jobs. Is firming wage growth starting to show up in price inflation? Perhaps.
The consumer price index inflation numbers moved higher again in April, and Atlanta Fed President Dennis Lockhart said on Tuesday that—from a monetary policy perspective—recent inflation readings and signs of better growth in economic activity during the second quarter (as indicated by the Atlanta Fed's GDPNow tracker) are encouraging signs.
April 04, 2016
Which Wage Growth Measure Best Indicates Slack in the Labor Market?
The unemployment rate is close to what most economists think is the level consistent with full employment over the longer run. According to the Federal Open Market Committee's latest Summary of Economic Projections, the unemployment rate is currently only 15 basis points above the natural rate. Yet, average hourly earnings (AHE) for production and nonsupervisory workers in the private sector increased a paltry 2.3 percent in March from a year earlier (as did the AHE of all private workers), and is barely above its average course of 2.1 percent since 2009.In contrast, the Atlanta Fed's Wage Growth Tracker (WGT) suggests that wage growth has been increasing. The February WGT reading was 3.2 percent (the March data will be available later in April), considerably higher than its post-2009 average of 2.3 percent.
Why is there such a large difference between these measures of wage growth? Besides differences in data sources, the primary reason is that they measure fundamentally different things. The WGT is an estimate of the wage growth of continuously employed workers—the same worker's wage is measured in the current month and a year earlier.
In contrast, the AHE measure is an estimate of the change in the typical wage of everyone employed this month relative to everyone employed a year earlier. Most of these workers are continuously employed, but some of those employed in the current month were not employed the prior year, and vice versa. These changes in the composition of employment can have a significant effect.
A recent study by Mary C. Daly, Bart Hobijn, and Benjamin Pyle at the San Francisco Fed shows that while growth in wages tends to be pushed higher by the wage gains of continuously employed workers, the net effect of entry and exit into employment tends to put a drag on the growth in wages. Moreover, the magnitude of the entry/exit drag can be relatively large, varies over time, and differs by the type of entry and exit.
For example, older workers who have retired and left the workforce tend to come from the higher end of the wage distribution, and their absence from the current period wage pool exerts downward pressure on the typical wage. The greater number of baby boomers starting to retire is having an even larger depressing effect on growth in wages than in the past. Because the WGT looks only at continuously employed workers, it is not influenced by these net entry/exit effects.
To the extent that firms adjust the pay for incumbent workers in response to labor market pressures to attract and retain workers, the WGT should reasonably capture changes in the tightness of the labor market.
Economists at the Conference Board modeled the relationship between different wage growth series and measures of labor market slack. One of the slack measures they use is the unemployment gap—the difference between an estimate of the natural rate of unemployment and the actual unemployment rate.To illustrate their findings, the following chart shows the WGT and AHE measures along with the unemployment gap lagged six months (using the Congressional Budget Office estimate of the natural rate).
The WGT appears to move more closely with the lagged unemployment gap than does the growth in AHE, and a comparison of the correlation coefficients confirms the stronger relationship with the WGT. The correlation between the lagged unemployment gap and the change in average hourly earnings is 0.75.
In contrast, the correlation with the wage growth tracker is higher at 0.93. Moreover, the unemployment gap-AHE relationship appears to be particularly weak since the Great Recession. The correlation since 2009 falls to just 0.08 for the AHE, whereas the WGT correlation is still 0.93.
Our colleagues at the San Francisco Fed concluded their analysis of the effect of flows into and out of the employment on wage growth by suggesting that:
"... wage growth measures that focus on the continuously full-time employed are likely to do a better job of gauging labor market strength, since they are constructed to more clearly capture the wage dynamics associated with improving labor market conditions. The Federal Reserve Bank of Atlanta's Wage Growth Tracker is an example."
That assessment is consistent with the Conference Board study, and suggests that labor markets may be tighter than is commonly believed based on sluggish growth in measures of average wages such as AHE.
February 17, 2016
Are Paychecks Picking Up the Pace?
From the minutes of the January 26–27 meeting of the Federal Open Market Committee, it's clear that many participants saw tightening labor market conditions during 2015:
In their comments on labor market conditions, participants cited strong employment gains, low levels of unemployment in their Districts, reports of shortages of workers in various industries, or firming in wage increases.
Based on the Atlanta Fed's Wage Growth Tracker (WGT), the median annual growth in hourly wage and salary earnings of continuously employed workers in 2015 was 3.1 percent—up from 2.5 percent in 2014 and 2.2 percent in 2013. That is, the typical wage growth of workers employed for at least 12 months appears to be trending higher.
However, wage growth by job type varies considerably. For example, the WGT for part-time workers has been unusually low since 2010. The following chart displays the WGT for workers currently employed in part-time and full-time jobs. For those in part-time jobs, the WGT was 1.9 percent in 2015, versus 3.3 percent for those in full-time jobs. The part-time/full-time wage growth gap has closed somewhat in the last couple of years but is still large relative to its size before the Great Recession. Note that full-time WGT is similar to the overall WGT because most workers captured in the WGT data work full-time (81 percent in 2015).
In addition to hours worked, median wage growth also tends to vary across occupation. The following chart plots the WGT for workers in low-skill jobs, versus those in mid- and high-skill jobs. (We define low-skill jobs as those in occupations related to food preparation and serving; building and grounds cleaning; and maintenance, protection, and personal care services.)
Notably, after lagging during most of the recovery, median wage growth in low-skill occupations increased 2.8 percent in 2015, versus 2.0 percent in 2014 and compared to 3.2 and 2.7 percent for other occupations in 2015 and 2014, respectively.
The improvement in wage growth for low-skill occupations seems mostly attributable to full-time workers; wage growth for people in low-skill jobs working part-time was about half that (1.6 percent versus 3.0 percent) of those working full-time (see the chart).
This pickup in low-skill wage growth fits with some anecdotal reports we've been hearing. Some of our contacts in the Southeast have reported increasing wage pressure for workers in lower-skill occupations within their businesses. One can also see evidence of growing tightness in the market for low-skill jobs in the help-wanted data. As the following chart shows, the ratio of unemployed to online job postings for low-skill jobs is always higher than for middle- and high-skill occupations. But the ratio for low-skill jobs is now well below its prerecession level, and the tightness has increased during the last two years.
The take-away? Wage growth for continuously employed workers appears to have picked up some steam in 2015, and the recent trend in wage growth is positive across a variety of job characteristics. Wage growth for people in lower-skill jobs has increased during the last couple of years, consistent with evidence of increasing tightness in the market for those types of jobs. The largest discrepancy in wage growth appears to be among part-time workers, whose median gain in hourly wages in 2015 still fell well short of those in full-time jobs.
February 05, 2016
Introducing the Refined Labor Market Spider Chart
In January 2013, Atlanta Fed research director Dave Altig introduced the Atlanta Fed's labor market spider chart in a macroblog post.
In a follow-up post that June, Atlanta Fed colleague Melinda Pitts and I introduced a dedicated page for the spider chart located at the Center for Human Capital Studies (CHCS) webpage. It shows the distribution of 13 labor market indicators relative to their readings just before the 2007–09 recession (December 2007) and the trough of the labor market following that recession (December 2009). The substantial improvement in the labor market during the past three years is quite evident in the spider chart below.
As of December 2012, none of the indicators had yet reached their prerecession levels, and some had a long way to go. Now, many of these indicators are near their prerecession values—and some have blown by them.
To make the spider chart more relevant in an environment with considerably less labor market slack than three years ago, we are introducing a modified version, which you can see here. Below is an example of a chart I created using the menu-bars on the spider chart's web page:
In this chart, I plot the May 2004 and November 2015 percentile ranks of labor market indicators relative to their distributions since March 1994. As with the previous spider chart, indicators such as the unemployment rate, where larger values indicate more labor market slack, have been multiplied by –1. The innermost and outermost rings represent the minimum and maximum values of the variables from March 1994 to January 2016. The three dashed gray rings in between are the 25th, 50th, and 75th percentiles of the distributions. For example, the November 2015 value of 12-month average hourly earnings growth (2.26 percent) is the 23rd percentile of its distribution. This means that 23 percent of the other monthly observations on hourly earnings growth since March 1994 are lower than it is.
I chose May 2004 and November 2015 because they had the last employment situation reports before "liftoffs" of the federal funds rate. November 2015 appears to be stronger than May 2004 for some indicators (job openings, unemployment rate, and initial claims) and weaker for others (hires rate, work part-time for economic reasons, and the 12-month growth rate of the Employment Cost Index).
The average percentile ranks of the variables for these two months are similar, as the chart below depicts:
Also shown in the chart is the Kansas City Fed's Level of Activity Labor Market Conditions Indicator. It is a sum of 24 not equally weighted labor market indicators, standardized over the period from 1992 to the present. In spite of its methodological and source-data differences with the average percentile rank measure plotted above, it tracks quite closely, especially since 2004. However, as shown in the spider chart that I referred to above, there is quite a bit of variation within the indicators that may provide additional information to our analysis of the average trends.
We made a number of other changes to the spider chart to ensure it reflects current labor market issues. These changes are documented in the FAQs and "Indicators" sections of the new spider chart page. Of particular note, users can choose not only the years for which they wish to track information, but also the period of reference that provides the basis of the spider chart. The payroll employment variable is now the three-month average change rather than a level. Temporary help services employment has been dropped, and two measures of 12-month compensation growth and the employment-population ratio (EPOP) for "prime-age workers" (25 to 54 years) have been added.
Some care should be taken when comparing recent labor market data values with those 10 or more years ago as structural changes in the labor market might imply that a "normal" value today is different than a "normal" value in, say, 2004. The variable choices for the refined spider chart were made to mitigate this problem to some extent. For example, we use the prime-age EPOP as a crude adjustment for population aging, putting downward pressure on the labor force participation rate and EPOP over the past 10 years (roughly 2 percentage points). This doesn't entirely resolve the comparability issue since, within the prime-age population, the self-reporting rate of illness or disability as a reason for not wanting a job has increased about 1.5 percentage points since 1998 (see the macroblog posts here and here and the CHCS Labor Force Participation Dynamics webpage). If this increase in disability reporting is partly structural—and a Brookings study by Fed economist Stephanie Aaronson and others concludes it is—some of the decline in the prime-age EPOP since the late 1990s may not be a result of a weaker labor market per se.
Other variables in the spider chart may have had structural changes as well. For example, a study by San Francisco Fed economists Rob Valleta and Catherine van der List concludes that structural factors explain just under half of the rise in the share of workers employed part-time for economic reasons over the 2006 to 2013 period.
To partially account for structural changes in trends, we allow the user to select one of 11 time periods over which the distributions are calculated. The default period is March 1994 to present, which is what was used in the example above, but users can choose a window as short as five years where, presumably, structural changes are less important. A trade-off with using a short window is that a "normal" value may not produce a result close to the median. For example, the median unemployment rate is 5.6 percent since March 1994 and 7.3 percent since February 2011. The latter value is much farther away from the most recent estimates of the natural rate of unemployment from the Congressional Budget Office and the Survey of Professional Forecasters (both 5.0 percent).
In our June 2013 macroblog post introducing the spider chart, we wrote that we would reevaluate our tools and determine a more appropriate way to monitor the labor market when "the labor market has turned a corner into expansion." The new spider chart is our response to the stronger labor market. We hope users find the tool useful.
June 29, 2015
New Atlanta Fed Series Shows Wage Growth Held Steady in May
According to the Atlanta Fed's Wage Growth Tracker, a new series constructed using data from the Current Population Survey, the median increase in wages for individuals working in May 2014 and May 2015 was 3.3 percent (reported as a three-month average).
Wage growth by this measure was essentially unchanged from April and 1 percentage point higher than the year-ago reading. The current pace of nominal hourly wage growth is similar to that seen during the labor market recovery of 2003–04 and about a percentage point below the pace experienced during 2006–07, which was the peak of the last business cycle. You can download the data going back to March 1997 from our website by clicking "export," shown in the upper right of the chart below.
Wage growth differs by job and worker characteristics. For prime-age individuals and full-time employees, for example, the Wage Growth Tracker recorded slightly higher readings than the group overall. The median wage growth of these individuals was 3.5 percent compared to 3.3 percent for all individuals. To see more cuts of the data, check out our website.
June 23, 2015
Approaching the Promised Land? Yes and No
Last Friday, we released our June installment of the Business Inflation Expectations (BIE) survey. Among the questions we put to our panel of businesses was a quarterly question on slack, asking firms to consider how their current sales levels compare to what they would consider normal.
The good news is, on average, the gap between firms' current unit sales levels and what they would consider normal sales levels continues to close (see the chart).
By our measure, firm sales, in the aggregate, are 1.9 percentage points below normal, a bit better than when we polled them in March (when they were 2.1 percent below normal) and much improved from this time last year (3.7 percent below normal). For comparison, the Congressional Budget Office's (CBO) estimate of slack on a real gross domestic product (GDP) basis was 2.6 percent in the first quarter (though this estimate will almost certainly be revised to something closer to 2.4 percent when the revised GDP estimates are reported later today). And if GDP growth this quarter comes in around 2.5 percent as economists generally expect, the CBO's GDP-based slack estimate will be 2.2 percent this quarter, just a shade larger than what our June survey data are saying.
Now, as we have emphasized frequently (for example, in macroblog posts in May 2015, February 2015, and June 2013), performance in the aggregate and performance within select firm groups can differ widely. For example, while small firms continue to have greater slack than larger firms, their pace of improvement has been much more rapid (see the table).
Likewise, some industries (such as transportation and finance) see current sales as better than normal. But others, like manufacturers, are currently reporting considerable slack—and findings from this group appear to show a marginal worsening in sales levels over the past 12 months.
Another item that caught our attention this month was the differing pace of narrowing in the sales gap among those firms with significant export exposure (greater than 20 percent of sales) relative to those with no direct export exposure. We connected these dots using responses to this month's special question, in which responding firms specified their share of customers by geographic area: local, regional (the Southeast, in our case), national, and international (see the table).
So things are still getting better for the economy overall, and the small firms in our panel have displayed particularly rapid improvement during the last year. But if you've got exposure to the "soft" export markets, as mentioned in the June 17 FOMC statement, you've likely experienced a slower pace of improvement.
May 18, 2015
Sales Flexing Muscle at More Firms
The news in this month's Business Inflation Expectations (BIE) report is that, in the aggregate, firms' unit sales levels continue to strengthen: Specifically, the survey question measures firms' perceptions of current unit sales levels relative to "normal times."
This month, 70 percent of firms indicated their sales levels are at or above what they consider normal. Last November, that share was 61 percent, and one year ago, it was only 54 percent. We typically report the aggregate results in a diffusion index (see the chart), which also shows the overall progression toward "normal times" (a value of 0).
But, typical of aggregate statistics, these results obscure the diversity of experience among sectors. Digging deeper, we found that most (but not all) of the sectors represented in our panel have shown further improvement in their sales performance relative to last November (see the chart).
Retailers and those in the real estate and rental leasing/construction sectors reported the most significant improvement since November, with retailers approaching what they consider normal sales levels. This news is likely to be most welcome to Dennis Lockhart, our boss here in Atlanta, who has put the performance of the consumer on his "must watch" list. Two industries—finance and insurance, and transportation and warehousing—reported above-normal sales levels in our recent survey.
Only the manufacturers in our panel indicated that their sales performance has deteriorated since November, and they are now reporting sales well below normal. Of course, this news shouldn't be terribly surprising given the recent softness in the manufacturing indexes from both the Institute for Supply Management and industrial production data. This information was also on the boss's watch list, as he made clear in his speech:
Well, judging from our May BIE report, manufacturers aren't seeing improvement quite yet.
The stronger dollar was likely reflected in a drag on net exports...[and] looking ahead, I expect net exports to be a modest drag on economic activity over much of the year.... It should be noted, however, that in recent weeks the dollar has stabilized and oil prices have begun to move up a little. These developments, if they stick, could dilute somewhat what would otherwise be drags on the economy in the near term. We shall see.
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May 07, 2015
All Eyes on the Consumer
It appears that the first quarter may have been even worse than we thought. The CNBC rapid update—consensus estimates from a panel of forecasters—registered a decline of 0.3 percent as of yesterday.
Clearly, the year didn't start out so well, but here at the Atlanta Fed we have not yet lost faith. We are sticking to the narrative that 2015 will be another solid year of recovery.
That said, our faith is not blind and, befitting data-dependent policymakers, we need to make some call about what it will take to shake our confidence. In a speech delivered yesterday (May 6) in Baton Rouge, Louisiana, Atlanta Fed President Dennis Lockhart pointed to our current lodestar:
As I assess the possible and necessary contributors to a rebound in the second quarter and thereafter, attention has to fall on consumer spending, in my view.
Is there a case for optimism? We think so, and it is based on the assumption that the fundamentals supporting consumer spending have been stronger than the actual recent pace of expenditures. President Lockhart continues:
What's up with the consumer? It's puzzling. The fundamentals supporting consumption growth seem strong. I consider consumer fundamentals to be real personal income growth, household wealth, access to credit, and consumer confidence. Consumer confidence is, in turn, highly influenced by the broad employment outlook.
To be more precise about that sentiment, the chart below illustrates an experiment based on a simple model that incorporates President Lockhart's description of "fundamentals." To be even more precise, we ask the following question: What would we have predicted for consumer spending growth during the past four months based on the history of actual consumer spending and its relationship to income, employment (and unemployment), confidence measures, and wealth (specifically, equity prices)? We also threw inflation and oil prices into the mix for good measure.
Here's what we got:
In other words, the "fundamentals" suggest the four-month annualized growth of consumer spending should have been in excess of 4 percent, as opposed to the approximately 1.5 percent we actually saw. That is a story we don't expect to persist, and our current view of the year is that first-quarter consumer spending results are not indicative of future performance.
Consumers are, of course, a forward-looking bunch, and it is possible the recent weak spending reflects a looming reality not captured by the simple model described above. But our forecast for now is that consumers will move to the fundamentals, and not vice versa.
As President Lockhart said in Louisiana: "Stay tuned."
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April 20, 2015
What the Weather Wrought
At Seeking Alpha, Joseph Calhoun responds to Friday's macroblog post, which noted that, over the course of the recovery, first-quarter gross domestic product (GDP) growth has on average been slower than the quarterly performance over the balance of the year:
... the "between-the-lines" meaning of the Atlanta post is to ignore all of this since this weakness is being portrayed as "just like last year" a statistical problem in the one measure that economists think most represents the economy.
Rest assured, we try pretty hard to not place any messages "between the lines," and the penultimate sentence of Friday's piece was meant to strike the appropriately tentative tone: "As for the rest of the year, we'll have to wait and see."
We do believe, like others, that weather was at play in the subpar performance of 2015's debut. Severe weather, in February in particular, can explain some of the first-quarter weakness, but "some" is the operative qualifier.
As the following chart illustrates, relative to a baseline forecast without weather effects—proxied with National Oceanic and Atmospheric Administration measures of heating and cooling days through March—we estimate that the severity of the winter subtracted about 0.6 percentage point from GDP growth:
Two points: First, to the extent that weather is a culprit in subpar first-quarter growth, we should see some payback in the current quarter (as, dare we say, we saw last year).
Second, we (the Atlanta Fed staff) did not begin the year projecting first-quarter growth at a mere 1.8 percent annualized (as the benchmark forecast in the experiment illustrated above implies). That rate of growth is a considerable step-down from our forecast at the beginning of the year, forced by the realities of the incoming data (as captured, for example, by GDPNow estimates). That gap leaves plenty of explaining left to do.
Observable developments can plausibly explain much of the forecast miss—mainly the initial, somewhat ambiguous, impact of energy price declines and the rapid, steep appreciation of the dollar, which has clearly been associated with a suppression of export activity. Our current view is that, as energy prices and the exchange rate stabilize, we will see a return to growth patterns that are closer to 3 percent than 1 percent.
We are not, however, selling the position that it is wise to be completely sanguine about the rest of the year. Here is the official word from Dennis Lockhart, president of the Atlanta Fed (subscription required for full citation):
I lean to a later lift-off date [for the federal funds rate target]. To the extent you want to simplify that debate to June versus September, I lean to September. I don't think, given the progress we have made, the state of the economy, and my confidence that the first quarter was an aberration, that it would be horribly damaging to go a little earlier versus later. But my preference would be to wait for more confirming evidence that we are on the track we think we are on and we expect to carry us back to inflation toward target.
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