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August 21, 2014

Seeking the Source

As the early data on the third quarter begin to roll in, the (very tentative) conclusion is that nothing we know yet contradicts the consensus gross domestic product (GDP) forecast (from the Blue Chip panel, for example) of seasonally adjusted annualized Q3 growth in the neighborhood of 3 percent. The latest from our GDPNow model:

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2014 was 3.0 percent on August 19, up from 2.8 percent on August 13. The nowcast for inventory investment ticked up following the Federal Reserve's industrial production release on August 15 while the nowcast for residential investment growth increased following this morning's new residential construction release from the U.S. Census Bureau.


The contribution of residential investment is obviously welcome, but the inventory contribution in the industrial production release tilts in the direction of one of our concerns about growth performance in the second quarter. Specifically, too much inventory spending, too little "core" spending.

On the plus side, our projections for current-quarter investment spending have been increasing, outside of nonresidential structures. On the much less positive side, the nowcast for consumer spending has been falling off and currently looks to expand at a pace barely above 2 percent.

Weakness over the course of this recovery in the key GDP expenditure components of consumer spending and investment has been the subject of a lot of commentary, recent entries being provided by Jonathon McCarthy (on the former, at Liberty Street Economics) and Jim Hamilton (on the latter, at Econbrowser). McCarthy in particular points to less-than-robust consumption expenditure as a source of growth since the end of the recession that has been slower than hoped for:

One contributor to the subdued pace of economic growth in this expansion has been consumer spending. Even though consumption growth has been somewhat stronger in the past couple of quarters, it has still been weak in this expansion relative to previous expansions.


An earlier version of the McCarthy theme appeared in this post on Atif Mian and Amir Sufi's House of Debt blog:

...the primary culprit: consumption of services and non-durable goods. They are shockingly weak relative to other recoveries.


There is something of a chicken-and-egg conundrum in all of this discussion. Has GDP growth disappointed because consumer and business spending has been lackluster? Or has consumer and business spending been weaker than we expected because GDP growth has lagged the pace of past recoveries?

In fact, the growth rates of consumption expenditure and business fixed investment—which excludes the residential housing piece—have not been particularly unusual over the course of this recovery once you account for the pace of GDP growth.

The following charts illustrate the average contributions of consumption and investment spending as a percent of average GDP growth for the 20 quarters following six of the last seven U.S. recessions. (I have excluded the period following the 1969–70 recession because 20 quarters after that downturn include the entirety of the 1973–75 recession.)

Consumption Share of GDP Growth Consumption Share of GDP Growth

It is worth noting that these observations also apply to the components of consumption (across services, durables, and nondurables) and business fixed investment (across equipment and intellectual property and structures), as the following two charts show:

Business Fixed Investment Share of GDP Growth Business Fixed Investment Share of GDP Growth

The conclusion is that if growth in consumption and investment has been particularly tepid over the course of the recovery, it merely reflects the historically tepid growth in GDP.

Or the other way around. These charts represent nothing more than arithmetic exercises, a mechanical decomposition of GDP growth into couple of the spending components that make up to the whole. They tell us nothing about causation.

What we have is the same too-full bag of possible explanations for why GDP has not yet returned to levels that—before the financial crisis—we would have associated with "potential": too much regulation, too little lending, excessive uncertainty, not enough government-driven demand, and so on. Maybe more investment spending would cause more growth. Maybe not.

In the language of the hot topic of the moment, this ultimately takes us to the debate over secular stagnation—what does it mean, does it exist, what is its cause if it does exist? Steve Williamson provides a useful summary of the debate, which is not yet at the point of providing actual answers. And unfortunately, the answers really matter.

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August 21, 2014 in Economic Growth and Development, GDP | Permalink


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July 21, 2014

GDP Growth: Will We Find a Higher Gear?

We are still more than a week away from receiving the advance report for U.S. gross domestic product (GDP) from April through June. Based on what we know to date, second-quarter growth will be a large improvement over the dismal performance seen during the first three months of this year. As of today, our GDPNow model is reading an annualized second-quarter growth rate at 2.7 percent. Given that the economy declined by 2.9 percent in the first quarter, the prospects for the anticipated near-3 percent growth for 2014 as a whole look pretty dim.

The first-quarter performance was dominated, of course, by unusual circumstances that we don't expect to repeat: bad weather, a large inventory adjustment, a decline in real exports, and (especially) an unexpected decline in health services expenditures. Though those factors may mean a disappointing growth performance for the year as a whole, we will likely be willing to write the first quarter off as just one of those things if we can maintain the hoped-for 3 percent pace for the balance of the year.

Do the data support a case for optimism? We have been tracking the six-month trends in four key series that we believe to be especially important for assessing the underlying momentum in the economy: consumer spending (real personal consumption expenditures, or real PCE) excluding medical services, payroll employment, manufacturing production, and real nondefense capital goods shipments excluding aircraft.

The following charts give some sense of how things are stacking up. We will save the details for those who are interested, but the idea is to place the recent performance of each series, given its average growth rate and variability since 1990, in the context of GDP growth and its variability over that same period.





What do we learn from the foregoing charts? Three out of four of these series appear to be consistent with an underlying growth rate in the range of 3 percent. Payroll employment growth, in fact, is beginning to send signals of an even stronger pace.

Unfortunately, the series that looks the weakest relates to consumer spending. If we put any stock in some pretty basic economic theory, spending by households is likely the most forward-looking of the four measures charted above. That, to us, means a cautious attitude is the still the appropriate one. Or, to quote from a higher Atlanta Fed power:

... it will likely be hard to confirm a shift to a persistent above-trend pace of GDP growth even if the second-quarter numbers look relatively good.

This experience suggests to me that we can misread the vital signs of the economy in real time. Notwithstanding the mostly positive and encouraging character of recent data, we policymakers need to be circumspect when tempted to drop the gavel and declare the case closed. In the current situation, I feel it's advisable to accrue evidence and gain perspective. It will take some time to validate an outlook that assumes above-trend growth and associated solid gains in employment and price stability.

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


Photo of Pat HigginsPat Higgins, a senior economist, both in the Atlanta Fed's research department


July 21, 2014 in Data Releases, Economic Growth and Development, Forecasts, GDP | Permalink


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July 10, 2014

Introducing the Atlanta Fed's GDPNow Forecasting Model

The June 18 statement from the Federal Open Market Committee opened with this (emphasis mine):

Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months.... Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.

I highlighted the business fixed investment (BFI) part of that passage because it contracted at an annual rate of 1.2 percent in the first quarter of 2014. Any substantial turnaround in growth in gross domestic product (GDP) from its dismal first-quarter pace would seem to require that BFI did in fact resume its advance through the second quarter.

We won't get an official read on BFI—or on real GDP growth and all of its other components—until July 30, when the U.S. Bureau of Economic Analysis (BEA) releases its advance (or first) GDP estimates for the second quarter of 2014. But that doesn't mean we are completely in the dark on what is happening in real time. We have enough data in hand to make an informed statistical guess on what that July 30 number might tell us.

The BEA's data-construction machinery for estimating GDP is laid out in considerable detail in its NIPA Handbook. Roughly 70 percent of the advance GDP release is based on source data from government agencies and other data providers that are available prior to the BEA official release. This information provides the basis for what have become known as "nowcasts" of GDP and its major subcomponents—essentially, real-time forecasts of the official numbers the BEA is likely to deliver.

Many nowcast variants are available to the public: the Wall Street Journal Economic Forecasting Survey, the Philadelphia Fed Survey of Professional Forecasters, and the CNBC Rapid Update, for example. In addition, a variety of proprietary nowcasts are available to subscribers, including Aspen Publishers' Blue Chip Publications, Macroeconomic Advisers GDP Tracking, and Moody's Analytics high-frequency model.

With this macroblog post, we introduce the Federal Reserve Bank of Atlanta's own nowcasting model, which we call GDPNow.

GDPNow will provide nowcasts of GDP and its subcomponents on a regularly updated basis. These nowcasts will be available on the pages of the Atlanta Fed's Center for Quantitative Economic Research (CQER).

A few important notes about GDPNow:

  • The GDPNow model forecasts are nonjudgmental, meaning that the forecasts are taken directly from the underlying statistical model. (These are not official forecasts of either the Atlanta Fed or its president, Dennis Lockhart.)
  • Because nowcasts are often based on both modeling and judgment, there is no reason to expect that GDPNow will agree with alternative forecasts. And we do not intend to present GDPNow as superior to those alternatives. Different approaches have their pluses and minuses. An advantage of our approach is that, because it is nonjudgmental, our methodology is easily replicable. But it is always wise to avoid reliance on a single model or source of information.
  • GDPNow forecasts are subject to error, sometimes substantial. Internally, we've regularly produced nowcasts from the GDPNow model since introducing an earlier version of it in an October 2011 macroblog post. A real-time track record for the model nowcasts just before the BEA's advance GDP release is available on the CQER GDPNow webpage, and will be updated on a regular basis to help users make informed decisions about the use of this tool.

So, with that in hand, does it appear that BFI in fact "resumed its advance" last quarter? The table below shows the current GDPNow forecasts:

We will update the nowcast five to six times each month following the releases of certain key economic indicators listed in the frequently asked questions. Look for the next GDPNow update on July 15, with the release of the retail trade and business inventory reports.

If you want to dig deeper, the GDPNow page includes downloadable charts and tables as well as numerical details including the model's nowcasts for GDP, its subcomponents, and how the subcomponent nowcasts are built up from both the underlying source data and the model parameters. This working paper supplies the model's technical documentation. We hope economy watchers find GDPNow to be a useful addition to their information sets.

Photo of Pat HigginsBy Pat Higgins, a senior economist in the Atlanta Fed's research department

July 10, 2014 in Data Releases, Economic Growth and Development, Forecasts, GDP | Permalink


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Is there a link or RSS find one could follow to see each update of the GDPnow data?

Posted by: Bryan Willman | July 12, 2014 at 01:28 PM

Thanks for your question about GDPNow. To receive updates, please sign up for our e-mail notifications and select the Center for Quantitative Research. The e-mail subscription page link is at If you have any additional questions, please contact us at

For more information about GDPNow, visit

Posted by: macroblog | July 15, 2014 at 12:25 PM

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August 30, 2013

Still Waiting for Takeoff...

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

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

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

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

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

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

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

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

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

“I expect consumer activity to strengthen.”

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

“I expect business investment to accelerate somewhat.”

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

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

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

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

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

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

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

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

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

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

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

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

Photo of Patrick HigginsPatrick Higgins, senior economist, and

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

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


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June 28, 2012

Young versus mature small firms seeking credit

The ongoing tug of war between credit supply and demand issues facing small businesses is captured in this piece in the American Prospect by Merrill Goozner. Goozner asks whether small businesses are facing a tougher borrowing environment than is warranted by current economic conditions. One of the potential factors identified in the article is the relative decline in the number of community banks—down some 1,124 (or 13 percent of all banks from 2007). Community banks have traditionally been viewed as an important source of local financing for businesses and are often thought to be better able to serve the needs of small businesses than large national banks because of their more intimate knowledge of the business and the local community.

The Atlanta Fed's poll of small business can shed some light on this issue. In April we reached out to small businesses across the Sixth Federal Reserve District to ask about financing applications, how satisfied firms were that their financing needs were being met, and general business conditions. About one third of the 419 survey participants applied for credit in the first quarter of 2012, submitting between two and three applications for credit on average. As we've seen in past surveys (the last survey was in October 2011), the most common place to apply for credit was at a bank.

For the April 2012 survey, the table below shows the average success of firms applying to various financing sources (on a scale of 1 to 4, with 1 meaning none of the amount requested in the application was obtained, and 4 meaning that the firm received the full amount applied for). The table also shows the median age of businesses applying for each type of financing.


The results in the table show that for credit applications, Small Business Administration loan requests and applications for loans/lines of credit from large national banks tended to be the least successful, whereas applications for vendor trade credit and commercial loans/line-of-credit from community banks had the highest average success rating.

Notably, firms applying for credit at large national banks were typically much younger than firms applying at regional or community banks. If younger firms generally have more difficulty in getting credit regardless of where they apply, it could explain why we saw less success, on average, among firms applying at larger banks.

To investigate this issue, we compared the average application success among young firms (less than six years old) that applied at both regional or community banks and at large national banks, pooling the responses from the last few years of our survey. The credit quality of borrowers is controlled for by looking only at firms that applied at both types of institutions. What we found was no significant difference in the average borrowing success of young firms applying for credit across bank type—it just does seem to be tougher to get your credit needs met at a bank if you're running a young business. Interestingly, we also found that more mature firms were significantly more successful when applying at regional or community banks than at large national banks—it seems to be relatively easier for an established small business to obtain requested credit from a small bank.

While this analysis did not control for other factors that could also affect the likelihood of borrowing success, the results do suggest that Goozner's question about the impact of declining community bank numbers on small business lending is relevant. If small businesses are generally more successful when seeking credit from a small bank, will an ongoing reduction in the number of community banks substantially affect the ability of (mature) small businesses to get credit? More detailed insights from the April 2012 Small Business Credit Survey will be available soon on our Small Business Focus website, and we will provide an update when they are posted.

Photo of John RobertsonBy John Robertson, vice president and senior economist,



Photo of Ellyn TerryEllyn Terry, senior economic research analyst, both of the Atlanta Fed's research department

June 28, 2012 in Banking, Economic Growth and Development, Saving, Capital, and Investment | Permalink


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The table also reveals the average age of companies implementing for each kind of funding.

Posted by: factoring company | August 29, 2012 at 03:03 AM

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May 17, 2012

Is inflation targeting really dead?

Harvard's Jeffrey Frankel (hat tip, Mark Thoma) is the latest econ-blogger to cast an admiring gaze in the direction of nominal gross domestic product (GDP) targeting. Frankel's post is titled "The Death of Inflation Targeting," and the demise apparently includes the notion of "flexible targeting." The obituary is somewhat ironic in that at least some of us believe that the U.S. central bank has recently taken a big step in the direction of institutionalizing flexible inflation targeting. Frankel, nonetheless, makes a case for nominal GDP targeting:

"One candidate to succeed IT [inflation targeting] as the preferred nominal monetary-policy anchor has lately received some enthusiastic support in the economic blogosphere: nominal GDP targeting. The idea is not new. It had been a candidate to succeed money-supply targeting in the 1980's, since it did not share the latter's vulnerability to so-called velocity shocks.

"Nominal GDP targeting was not adopted then, but now it is back. Its fans point out that, unlike IT, it would not cause excessive tightening in response to adverse supply shocks. Nominal GDP targeting stabilizes demand—the most that can be asked of monetary policy. An adverse supply shock is automatically divided equally between inflation and real GDP, which is pretty much what a central bank with discretion would do anyway."

That's certainly true, but a nominal GDP target is consistent with a stable inflation or price-level objective only if potential GDP growth is itself stable. Perhaps the argument is that plausible variations in potential GDP are not large enough or persistent enough to be of much concern. But that notion just begs the core question of whether the current output gap is big or small. At least for me, uncertainty about where GDP is relative to its potential remains the key to whether policy should be more or less aggressive.

In another recent blog item (also with a pointer from Mark Thoma), Simon Wren-Lewis offers the opinion that acknowledging uncertainty about size of the output gap actually argues in favor of being "less cautious" about taking an aggressive policy course. The basic idea is familiar. It is a simple matter to raise rates should the Fed overestimate the magnitude of the output gap. But with the short-term policy rates already at zero, it is not so easy to go in the opposite direction should we underestimate the gap.

No argument there. As I pointed out in a May 3 macroblog item, Atlanta Fed President Dennis Lockhart has said the same thing. But, as I argued in that post, this point of view is only half the story. Though I agree that the costs are asymmetric to the downside with respect to the FOMC's employment and growth mandate, they look to me to be asymmetric to the upside with respect to the price stability mandate. And I view with some suspicion the claim that we know how to easily manage policy that turns out to be too aggressive after the fact.

My issues are not merely academic. In an important paper published a decade ago, Anasthsios Orphanides made this assertion:

"Despite the best of intentions, the activist management of the economy during the 1960s and 1970s did not deliver the desired macroeconomic outcomes. Following a brief period of success in achieving reasonable price stability with full employment, starting with the end of 1965 and continuing through the 1970s, the small upward drift in prices that so concerned Burns several years earlier gave way to the Great Inflation. Amazingly, during much of this period, specifically from February 1970 to January 1977, Arthur Burns, who so opposed policies fostering inflation, served as Chairman of the Federal Reserve. How then is this macroeconomic policy failure to be explained? And how can such failures be avoided in the future?...

"The likely policy lapse leading to the Great Inflation …can be simply identified. It was due to the overconfidence with which policymakers believed they could ascertain in real-time the current state of the economy relative to its potential. The willingness to recognize the limitations of our knowledge and lower our stabilization objectives accordingly would be essential if we are to avert such policy disasters in the future."

With this historical observation in hand, it seems a short leap to turn Wren-Lewis's thought experiment on its head. Arguably, the last several years have demonstrated that nonconventional policy actions have been quite successful at short-circuiting the disinflationary spirals that pose the central downside risk when interest rates are near zero. (If you can tolerate a little math, a good exposition of both theory and evidence is provided by Roger Farmer.)

On the opposite side of the ledger, we know little about the conditions that would cause the Fed to lose credibility with respect to its commitment to its inflation goals, and very little about the triggers that would cause inflation expectations to become unanchored. Thus, I think it not difficult to construct a plausible argument about the risks of being wrong about the output gap that is exact opposite of the Wren-Lewis conclusion.

I end up about where I did in my previous post. Flexible inflation targeting, implemented in such a way that the 2 percent long-run inflation target rate exerts an observable gravitational pull over the medium term, feels about right to me. Despite what Frankel seems to believe, I think that idea is far from dead.

David AltigBy Dave Altig, executive vice president and research director at the Atlanta Fed

May 17, 2012 in Deflation, Economic Growth and Development, Federal Reserve and Monetary Policy, Inflation, Monetary Policy | Permalink


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"The obituary is somewhat ironic in that at least some of us believe that the U.S. central bank has recently taken a big step in the direction of institutionalizing flexible inflation targeting."

Well, sort of. First of all, the Fed's forecasts certainly look like 2% PCE is an upper limit not an average, most commentators rightly called foul after the last quarterly set of forecasts. There is no de-facto difference right now between strict inflation targeting with a 2% ceiling and what the fed is doing. ther is no "flexible" in the target, and the range of full employment forecasts is 5-7%, we are still well above that yet there is no tolerance for higher inflation. So no I would not say "we took a big step forward."

In fact, nominal expectations have collapsed (see beckworth and the Evans new paper) so i would say the Fed has zero credibility on the unemployment side of the mandate. unsurprisingly, confidence and planned expenditures have collapsed. Its not a structural thing.

TIPS markets are screaming: epic fail.

Second, the fed cannot promise to control import prices (and indeed, tightening in response to a supply shock is textbook bad macro). The Fed should only focus on the price of domestically produced goods (gdp deflator). The Fed should have payed more attention to the gdp deflator and less to the PCE during the 2003-2008 period. Cheap imports depressed the PCE early, then expensive oil pushed it up in 2008. Policy would have been tighter, earlier.

At Sept 16th 2008 meeting, despite declining employment, tight credit, high mortgage delinquencies, housing market is recession since 2006, and declining GDP deflator, the Fed was concerned about inflation - not the clearly weakening economy (because oil and commodities prices were high). 3 days later Lehman collapsed and 3 weeks later they eased.

If you think the Fed follows a "balanced Taylor Rule" using output and inflation (use the GDP deflator as i said above) thats just ngdp targeting, except that the Fed promises to correct its own errors over a 5 year period so that the average works out.

Also, another aspect of ngdp targeting is that it prevents a debt-deflation spiral that happened in 2008 (and i think this is what prevented the 1990 real estate bubble from becoming worse in 1990s).

So, yes, IT is dead. RIP and good riddance.

Posted by: dwb | May 17, 2012 at 11:34 PM

thanks for reading comments, this is an interesting debate. Just a couple points as I forced myself to go back and reread Orphanides paper.

1) He used the GDP deflator. I view the conclusions as applied to the Fed framework with suspicion there since the Fed targets PCE and we know they sent very different signals during 2008;

2)The Taylor rule performs worse under imperfect information about the output gap (see figure 9); in fact ngdp targeting still is better under perfect information than strict inflation targeting. This is consistent with McCallum's 1998 results as well as i recall.

3)His ngdp rule is a *growth rule* not a path rule; Sumner and Beckworth propose a path rule (i.e. the Fed promises to correct errors so that the 5 year average (say) is on a target path. Important difference.

4)The chief criticism is that we do not know what potential output is, therefore do not know what to set the path to. But we can observe the trend GDP deflator and adjust the path as needed to be consistent.

I think that if you were to compare Sumner/Beckworth ngdp path level targeting to gdp deflator path level targeting, or inflation targeting using the GDP deflator, then there would only be a very mild difference.

The crucial differences are: the response to supply shocks (the Fed can only control domestic goods prices); and all the theory and evidence that ngdp targeting avoids debt-deflationary spirals like we saw in 2008. Again, compare the response to the housing real estate in the early 90s (yes, we had a housing crisis then too!).

Posted by: dwb | May 19, 2012 at 02:31 PM

Another reason NGDP level targeting trumps inflation targeting: it would not allow expectations of nominal income growth to collapse.

Posted by: Anon1 | May 19, 2012 at 10:00 PM

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February 10, 2012

Reading the bump in inventories

Yesterday's wholesale trade report, with its positive surprise in December inventory accumulation, has estimates of fourth quarter gross domestic product (GDP) on the rise again. For the advance GDP release, the U.S. Bureau of Economic Analysis assumed that the book value of merchant wholesale inventories rose by $17 billion (at a seasonally adjusted annual rate, or SAAR) in December. The wholesale trade report suggests the book value instead may have risen by $56 billion SAAR. Our own calculations suggest fourth quarter GDP may be revised up from 2.8 percent to around 3.1 percent. A piece of that revision comes from positive sales activity, which would appear to be an unambiguous plus.

The inventory piece is trickier. Forecasters have a tendency—because the statistics have a tendency—to take a larger-than-expected inventory buildup in one quarter out of growth estimates for the next quarter. The implication in present tense is, of course, that 2012 may start out on the slow side as the fourth quarter inventory swell is run off.

That's not how we see it. Our current read is that it is better to think of the fourth quarter inventory buildup as a payback from a decumulation in the third quarter. Here's a look at overall inventory changes over the recent past, broken down into their various industrial components:

If you look hard, you will see that, though the fourth quarter inventory rise was broad-based, the third to fourth quarter change in wholesale inventories was particularly notable. In fact, the wholesale inventory picture in the back half of 2011 was dominated by a fairly large decumulation of nondurable goods inventories in the third quarter, a decline that was reversed in the last three months of the year:

In the background of those details are some pretty nonthreatening-looking inventory-sales ratios:

So, consider two stories that might frame thinking about the role of inventories in GDP growth in the first quarter or first half of this year. One story is inventory-inflated growth in the fourth quarter of 2011, to be followed by payback in the form of a drag on production in the first quarter (or so) of 2012. Another story is that the drag actually emerged in the third quarter of last year, providing a little extra juice in the fourth quarter, with no particular consequences for the current-year growth trajectory.

Right now, it looks to us like the latter story might be the right one. Of course, that doesn't mean there aren't significant risks to the outlook for domestic production, and hence inventories. For instance, although today's report on international trade in December was relatively benign in terms of fourth quarter GDP revisions, it did show a substantial further weakening in exports to the euro zone. Weaker demand from Europe will weigh on U.S. export growth. The big unknown is how weak that demand will get.

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


February 10, 2012 in Data Releases, Economic Growth and Development, Forecasts | Permalink


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February 06, 2012

Employment: Some good news, some bad news

Comparisons can be useful in determining where the economy is at any given point in time, and today's Employment Situation report from the U.S. Bureau of Labor Statistics provides another opportunity to do just that. According to that report, the U.S. economy added 243,000 nonfarm payroll jobs in January 2012. But total nonfarm employment is still 5.6 million lower than at the start of the last recession (December 2007).

For additional comparisons, more than 1 million fewer people filed initial unemployment insurance claims during the last week of January 2012 than during the last week of January 2009 (at the height of the recession). However, 55,000 more people filed initial claims during the last week of January 2012 than during the last week of January 2007 (before the recession started).

When examining layoffs, more than 400,000 fewer workers were laid off or discharged during November 2011 (according to the most recent data) than during the height of the recession in November 2008. Nonetheless, there were roughly a million fewer job openings and hires than during November 2007 (before the recession started).

Nominal average hourly earnings of wage and salary workers were about two dollars (9.6 percent) higher in January 2012 than around the start of the recession (January 2008). Nonetheless, real average hourly earnings (controlling for inflation) were only eight cents (0.8 percent) higher over the same time period.

Considering everything, there is both good news and bad news in the labor market today.

The median three-digit NAICS (North American Industry Classification System) industry lost 7 percent of its jobs during the most recent recession. In other words, half of the industries lost less than 7 percent of their jobs and half of the industries lost more than 7 percent of their jobs. Industries faring the worst (those in the 75th percentile of job losses) shed 13 percent of their jobs. And what might be considered "fortunate" industries (those in the 25th percentile of job losses) saw only 3 percent of their jobs disappear over this time period.

Chart 1 compares the year-over-year employment growth among industries that experienced below-median and above-median job loss, as well as those industries in the 75th and 25th percentiles of job loss. That chart also shows another potential bit of good news—that is, in spite of the dramatic differences in job losses, all four categories of industries are currently adding jobs at about the same rate. And that overall job growth, at about 0.24 percent per month, is roughly the same as the average monthly job growth seen between 1993 and 2000 and exceeds the average monthly growth before the recession, from 2004 through 2007.

Still, there is more bad news. At the current rate of growth, those industries that experienced above-median job loss during the recession will not regain prerecession employment levels until the end of 2015.

Chart 2 illustrates the employment level for those industries with above median job losses along with projections of employment based on three assumptions of monthly employment growth. To even recover before the end of 2013 the jobs that they lost during the recession, these industries as a group would need to experience extraordinary employment growth.

Does the projected labored employment recovery among these particularly hard-hit industries suggest there are more serious structural impediments to the efficient operation of the labor market today than there were after the previous two recessions? Several posts on this blog (here and here, for example) have addressed this question of structural change without coming to a definitive answer. Returning to chart 1 gives us yet another opportunity to speculate on this point.

Note that the category in chart 1 into which each three-digit industry is placed (above-median or below-median job loss, etc.) is based on job losses between January 2008 and June 2009. Plotting the annual growth rates back to 1990 illustrates that the industries that were hardest hit during the most recent recession were also those with the greatest job losses during the previous two recessions. So there appears to be nothing special about these industries that led to their suffering during the most recent recession.

Additionally, the pattern of recovery of these hardest-hit industries is similar to that experienced after the previous two recessions. Like before, the worst performing industries (those with job losses in the 75th percentile) are adding jobs at a faster rate than industries that did not suffer as much. Industries in the 75th percentile of job losses added jobs in 2011 at an average monthly rate of 0.22 percent; industries with below-median losses added jobs at an average monthly rate of 0.12 percent. This analysis does not suggest to me that unique structural features of this recession or recovery are holding employment growth back—it appears that the culprit is simply the extraordinarily deep hole the economy, and thus the job market, fell into this time around. The bad news, then, is that time may be the only answer for those industries to fully recover.

Julie Hotchkiss By Julie Hotchkiss, a research economist and policy adviser in the Atlanta Fed's research department


February 6, 2012 in Data Releases, Economic Growth and Development, Employment, Labor Markets | Permalink


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what do you make of the spin on the numbers. some are saying that the labor participation rate is understated, and with a traditional number we would be looking at close to 11% unemployment.

Posted by: Jeff Carter | February 05, 2012 at 02:26 PM

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December 21, 2011

In search of an agenda for job creation

In a macroblog post yesterday, Dave Altig, research director at the Atlanta Fed, discussed some recent research from the Federal Reserve Bank of Cleveland focused on the relationship between uncertainty and job creation by small businesses. That research, which is based on survey responses from members of the National Federation of Independent Businesses (NFIB), found that a high degree of uncertainty was correlated with a scaling back in hiring plans.

Yesterday's macroblog post also delved into the connection between small business hiring plans and actual job creation, pointing out that this connection requires further examination because job creation has not, contrary to popular conversation, been a broad characteristic of the population of small businesses. Instead, it has tended to be young businesses (and especially businesses less than seven years old) that account for most of the job creation. Most young businesses are small, but relatively few small businesses are young.

I believe that understanding the job creation challenges we currently confront may require that we increasingly turn our attention to the factors restraining the high growth sectors of the economy. Some evidence from this segment of the business universe came from a recent poll of fast-growing firms that the Kauffman Foundation conducted at the Inc. 500/5000 conference in September. This table summarizes the results of that poll, which are juxtaposed with roughly comparable responses from the NFIB survey.

The interesting thing about the Kauffman survey is that the overwhelming problem reported by those companies that are in growth mode is the inability to find qualified workers. That observation is important because it bears on such questions as: To what degree is our elevated unemployment rate structural? How do we explain the observation that the number of unemployed workers appears to be elevated relative to the number of reported job vacancies? and so on.

It is obviously not appropriate to extrapolate from a single snapshot of a sample of fast-growing firms to the U.S. economy as a whole—and that is not the message here. But it is increasingly clear that the search for a single smoking gun that will clarify what is happening in labor markets is likely to be a hopeless quest. The answer to the question asking what a jobs agenda would look like is like your Christmas wish list: one size probably does not fit all.

Note: Today's macroblog post is the last for 2011. Look for macroblog's return in early January.

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


December 21, 2011 in Data Releases, Economic Growth and Development, Employment, Labor Markets | Permalink


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This is why Alex Tabarrok's assertions about immigration reform are so important right now and why we need to pair that with some serious job training programs for the unemployed and ultimately reform our education system.

Posted by: Daniel | December 21, 2011 at 04:14 PM

About a year before the firm I used to work for outsourced several hundred IT jobs to India they fired all their internal IT trainers and cancelled their decades-long IT talent development program.

Why train US workers when you can simply import the workers you need. It's only a little harder now when the "real unemployment rate" (the U6 rate) is at 20%.

To bring in more cheap labor today you also need to hire a PR firm to plant stories about "Structural Unemployment" and phony schemes like these;

As Dean Baker is fond of saying, when firms complain of not being able to "find qualified employees" they leave off the "who are willing to work for the wage we are offering."

There is no STEM worker shortage in the US. The salaries of US-based STEM workers have been stagnant for the past 12 years.

Posted by: The OutSourced One | December 23, 2011 at 02:59 AM

Presumably small businesses that are not well known and have small HR departments find it difficult to find qualified people all the time. The question at issue is: what is different about the present situation, as against before the financial crisis or during previous recoveries?

The best piece of analysis I have seen on this (I forget where) simply charted the NFIB survey responses through time. The response that jumps sharply after 2007 is the state of the economy. That supports the idea that what is unusual about the present situation is the sluggish economy.

It would be interesting to see some analysis on the components of the index in the previous post. It appears to be highly correlated with recessions.

Posted by: John Butters | December 28, 2011 at 09:30 AM

Was being rather lazy -- I had a look at the components. It strikes me that the "policy uncertainty" that the index captures likely arises from events that have a negative or uncertain impact on the economy -- hence the spikes during wars and the upward trend during recessions. If this is the case, then it is not possible to infer that the situation would be better if Republicans and Democrats would just get along.

On the same topic, you reminded me of a piece I wrote a while ago:

I have been thinking a bit more about "confidence," which I talked about yesterday. In the 1980's TV series "The A Team," when a member of the team or the team as a whole was in the mood for intelligent risk-taking it was said that they were "on the jazz." Why is it "confidence" that is lacking in the economy, and not "the jazz?" When one is on the jazz, one enjoys taking calculated risks in the pursuit of an objective, and it strikes me that this is just the kind of attitude that the economy needs -- a bit of entrepreneurial spirit. What is more, unlike the "confidence" analysis, there is empirical support for my jazz theory, inasmuch as growth in the US was stronger in the three decades of macroeconomic volatility before 1980 than in the three decades of stability that followed that year. The jazz, you see, requires real danger, and less danger means less jazz. As B.A. Baracus says to John "Hannibal" Smith on one occasion: "Hannibal, when you're on the jazz, you're dangerous". In the present environment the problem is that, to be on the jazz, one needs to see a reasonable prospect of success in a dangerous situation. Deleveraging, austerity and weak economy have robbed people of this prospect. Thus the prescriptions of the jazz analysis are just those policies that will create enough macroeconomic volatility to bring some success to people (and thus to give everyone the prospect of success and promote a general restoration of the jazz). This means debt- or money-financed fiscal stimulus and further unconventional monetary easing measures.

Of course, neither the "jazz" analysis nor the "confidence" analysis is a good one. My point is that the former is just as compelling as, and has more empirical support than, the latter. But neither is a proper model of how the economy works. I think that the popularity highlights the fact that the most common mode of human reasoning is not deduction or induction, but analogy. The "confidence" theory is appealing because, when a person loses his confidence, he looks depressed -- and the economy looks depressed. What this means is that we have to be careful with the analogies we use. There are reasons to think that we cannot understand the economy intuitively like we understand a person: empirically, this method does not seem to allow people to make good predictions, and other successful theories about the world (such as quantum physics) are not intuitive; and theoretically, mathematicians have given us the theory of complex systems that tells us that the outputs of such systems can be highly counterintuitive. 

Posted by: John Butters | December 28, 2011 at 09:44 AM

It really strikes me that the kind of business matters a good deal more than the age of the business for the macroeconomic growth, though I understand that the age of businesses makes for easy-to-come-by data. Jobs programs ought to be aimed at the best growth-contributing businesses.

For example, the age of a dentist's office doesn't matter too much, as there should be a more or less slowly increasing number of offices with the increasing number of teeth, and not a big net growth contributor. Drywall contractors would seem to cycle up and down with booms, but employment-wise not contribute a great deal on average, with productivity possibly even balancing population gains.

My own high-tech widget and gadget firm, on the other hand, ought to be able to grow not only the number of number of our own employees, but the qualitatively new products should help grow other new businesses that otherwise cannot be built without our devices.

The small business innovative research program (SBIR/STTR, supports exactly this sort of business development, currently employing about 25k people in small firms on 1-to-3 person development projects. Ramp this up by a factor of 100 for 2 to 4 years, which would prime the macroeconomic demand pump while also developing new services and products and while investing in the broader human technical and business capital needed for such efforts. The federal infrastructure to ramp these programs essentially overnight and supervise them already exists.

(And, FWIW, Alex Tabarrok's immigration assertions are nuts. Pay a little more, and I have found you can hardly swing a stick without knocking over a couple of domestic Ph.D. engineers and skilled technical staff.)

Posted by: MSM | December 29, 2011 at 07:39 PM

i think is also good to know that what makes a business to stand the test of time is not its level of age or size but the good and grounded knowledge of the business, the market field and analsyis of final consumers. Then the sustainability of the business through several means

Posted by: binary options brokers | January 07, 2012 at 08:15 PM

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December 20, 2011

Uncertainty about uncertainty

One of the hotly debated issues among those debating policy in the pages of various Fed publications (virtual and otherwise) is why job creation in the United States cannot seem to break out of its sluggish mode. One potential source is an elevated level of uncertainty about the political and economic future that is damping business enthusiasm for risk and, consequently, holding back the expansion.

Heightened uncertainty as an impediment to growth has intuitive appeal to many and, in our Reserve Bank's experience, considerable anecdotal support from business contacts. Unfortunately, intuition and anecdote don't quite rise to the level of evidence. Fortunately, the work of uncovering the evidence (one way or the other) is under way. One example is a recent entry by Mark Schweitzer and Scott Shane in the Federal Reserve Bank of Cleveland's Economic Commentary series:

"In this Commentary, we empirically examine the hypothesis that 'policy uncertainty' adversely impacts small business owners' expansion plans. To do this, we looked at the statistical association between data on small business plans to hire and make capital expenditures and a measure of 'policy uncertainty.' The data on small business plans cover January 1986 through July 2011 and were collected by the National Federation of Independent Business (NFIB)."

The picture relating the claims of respondents to the NFIB survey and the uncertainty measure employed by the authors is pretty compelling:

The correlation that can clearly be seen in this chart survives more formal statistical analysis:

"We find statistically significant negative effects of policy uncertainty on small business owners' plans to hire and make capital expenditures over the 1986 to 2011 period. We also find a large effect of the economic downturn on small business plans, but the two effects do appear to be independent. The negative effects of policy uncertainty show up even when we weight the components of policy uncertainty in several different ways. The results also stand up when consumer confidence is controlled for, suggesting that the effects are distinct from consumer sentiment."

The authors note the appropriate caveats but are pretty clear about how they read the results of the analysis:

"While this statistical analysis is informative about the relationship between policy uncertainty and small business expansion plans, we cannot say that 'policy uncertainty' causes small business hiring and capital expenditure plans to decline. That is because a purely statistical model cannot identify fundamental causes. But whatever the fundamental cause, our analysis indicates that adding information about policy uncertainty improves our ability to explain the survey responses provided by the NFIB's survey respondents.

"In that sense, we can say that the correlations between the two are strong enough to reject the argument that policy uncertainty is irrelevant for currently weak small business expansion plans. In our view, policymakers should take seriously the widespread anecdotal reports that policy uncertainty is adversely affecting small business owners' expansion plans."

I think this study is really intriguing, but I would add another caveat to the results, emphasized not too many posts back here at macroblog:

"Talking about the role of the average or typical small business in job creation is problematic. Discussing it is challenging because job creation is highly skewed along the age dimension of small firms."

Smallness per se is not the defining characteristic of the businesses that are responsible for driving job creation. In fact, research shows that once firm age is controlled for, no systematic relationship exists between net growth and firm size. The distinction between young and mature firms—which our own regular poll of small businesses verifies is important—is absent in the NFIB data that Schweitzer and Shane exploit.

Although the Schweitzer-Shane study is a good start to turning anecdotal reports into evidence, the results would be more compelling if they pertained to the actual universe of companies that we would expect to be creating jobs—that is, firms that are young, not just small.

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


December 20, 2011 in Data Releases, Economic Growth and Development, Employment, Labor Markets | Permalink


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In a historical study like this, why are we calculating a correlation with "planning to hire"? Who cares whether a someone told a pollster 2 years ago that they were planning to hire someone? Why not look at whether they actually did hire or not? Similarly, why are we counting number of business owners rather than number of jobs?

Posted by: DirkKS | December 20, 2011 at 05:29 PM

I am of the opinion that the number of small business owners is significant, because they represent the largest number and basic core of our economy.
Unfortunately, the sector is being ignored. Any significant recovery must begin from modest growth of business in this area, that will lead to new hirings.

Posted by: Hugo A. Castro | December 27, 2011 at 02:39 PM

I believe the focus should be on hoe to provide sufficient jobs and not just count the number of successful businesses.

Posted by: ultrasonic cleaner | January 03, 2012 at 08:33 AM

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