The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.

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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November 10, 2011

Bank lending to finance a business start-up

On Wednesday and Thursday of this week I attended a conference titled "Small Business and Entrepreneurship during an Economic Recovery," presented by the Federal Reserve Board of Governors, the Federal Reserve Bank of Atlanta, and the Kauffman Foundation.

The conference agenda and papers are available here. Atlanta Fed President Dennis Lockhart gave one of the keynote addresses. His topic was business start-ups, job creation, and the role of banks.

Echoing the findings of research conducted by the Kauffman Foundation and others (for example, here and here), President Lockhart highlighted the vitally important role that business start-ups have played as job creators in the U.S. economy. He also made a distinction between true small business start-ups—those that intend to be small-scale operations (usually with single location and no more than a handful of employees), and growth-oriented start-ups. Both types of start-ups play a role in job creation, but the biggest impact over time comes from successful high-growth start-ups.

"Whether they're so-called 'mom-and-pops' or 'gazelles,' they create some jobs at inception. Inherently small enterprises either fail or sustain operations, but tend to level off in terms of employment. The growth businesses ramp up creating initial employment. They may fail in time, or they may grow to what is still small scale and level off, or they may break out and grow to large scale.

"A 2010 Kauffman Foundation study shows that just 1 percent of employer businesses—those growing the fastest—generate roughly 40 percent of new jobs in a given year. Three-quarters of those businesses are less than five years old."

So, if having a sufficient pipeline of new businesses is important to overall job creation, and especially enough start-ups with high growth potential, what is the role of banks as providers of financial capital to new business ventures? Because a new business is an inherently risky proposition, banks tend to provide a start-up loan only when it can be sufficiently collateralized. That collateralization often means using nonbusiness-related assets such as personal real estate. As President Lockhart's notes:

"The most prevalent form of hard collateral is real property. Start-up entrepreneurs often hear, 'If you'll put up your house, we'll lend to your new business.' Real estate related to the business—to the extent the entrepreneur needs such and actually owns it—can be problematic as collateral because its value may be a function of the business cash flow it helps generate."

The results of Atlanta Fed's most recent poll of small business credit conditions in the Southeast are consistent with the view that the combination of weak economic conditions and lower real estate values since 2006 has significantly reduced access to bank loans as a source of start-up capital. One of the questions in the poll asks: "When you started the business, what sources of financing did you use?" We are able to separate the answers from owners of mature businesses (those starting more than five years ago) and younger businesses (those starting in the last five years). The findings are summarized in the following chart.

Although the sample size is pretty small, I found the results to be quite striking. The younger businesses we talked to were much less likely to have used a business loan or line of credit from a bank when they started than their more mature counterparts. Instead, these younger businesses were more likely to have used personal savings or some other source. Almost certainly, these differences between older and younger firms are not simply because young entrepreneurs suddenly didn't want to get start-up financing from a bank.

There's obviously still a lot to learn about the business creation process, including the financing of new business ventures in today's economic and financial environment. I believe it's important that these topics are moving up in the list of national priorities and that the body of research dedicated to them, as evidenced at this conference, is growing.

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


November 10, 2011 in Economic Growth and Development, Employment, Labor Markets, Small Business | Permalink


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>what is the role of banks as providers of financial capital to new business ventures?

The answer is 'none'. That's risk capital's job. Banks have no business taking deposits for safe-keeping and leveraging it to buy debt or other instruments backed by dubious or zero collateral.

Sorry, I forgot--post-Glass-Stegall, that's exactly what happened. I guess you're right, if JPMorgan can put up its $900B in retail accounts as collateral to support its $99T derivatives positions, why can't they make uncollateralized loans to new businesses backed by "good ideas"?

Posted by: Dan Nile | November 19, 2011 at 09:03 AM

Banks have no business taking deposits for safe-keeping and leveraging it to buy debt or other instruments backed by dubious or zero collateral.

Posted by: Franchising Advice | December 28, 2011 at 02:23 PM

Banks are always accessible since they are used regularly for depositing savings or withdrawing them. After being bank customers for years, the bank becomes convenient and familiar, and personalized service makes it the first place to consider for a loan.

Posted by: Bank Lending Criteria | May 03, 2012 at 07:51 AM

Banks could be the back up of a business if they suffer from a financial issue for their business especially in business funding.

Posted by: Confidential Invoice Factoring | May 08, 2012 at 11:40 PM

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October 21, 2011

Is the growth tide turning?

It has been a tough year for forecasters, as the Atlanta Fed's President Dennis Lockhart explained in a speech delivered Tuesday evening:

"The basic story of the first half of this year was one of disappointment versus expectations. At the beginning of the year, the consensus forecast had gross domestic product (GDP) growth for 2011 in the range of 3 to 4 percent. Though the Atlanta Fed's forecast was at the lower end of that range, we generally shared the view that the recovery was firmly established…

"A pretty clear picture of just how bad the first quarter was became apparent toward the end of the second quarter, when the FOMC met in late June. At that point, notwithstanding weakness in the early months of the year, the widely held outlook was that growth would rebound in the second half. Many anticipated that the effects of the price and disaster shocks would quickly dissipate…

"As the summer progressed, the data surprises were unrelenting and on the negative side of expectations.

By the time of the early August FOMC meeting it was clear to my Atlanta Fed colleagues and me that we had to rethink our position. The momentum of the economy looked a lot weaker than was our assessment earlier in the summer."

That story is well-captured by a picture of the evolution of Blue Chip consensus forecasts over the course of the year:

As President Lockhart explains, what has been most worrisome is the cumulative nature of the forecast errors implied in the above chart:

"Let me mention parenthetically that, given the complexity and dynamism of the economy, forecasting is fraught with errors and misses. One of my colleagues says the only thing he can forecast with certainty is that his forecast will be wrong. It's when forecasts are persistently wrong in the same direction, and by a substantial measure, that you worry you've missed the real story."

That reality can, of course, work in a positive direction as well as a negative direction. The encouraging news is that the forecasting mistakes have been accumulating in the direction of excess pessimism:

"We at the Atlanta Fed regularly monitor the data series that directly enter into the GDP calculation, along with important other series, including employment… In the months leading up to July, the downside surprises in the data dominated. In August and September, upside and downside surprises were roughly equal. But in October, the surprises have generally been to the upside."

One aspect of this analysis is called a "nowcasting" exercise that 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 17 components of GDP for the current quarter. Those forecasts of GDP components are then aggregated to get a current-quarter estimate of overall GDP growth.

The outcomes of this exercise have been as positive in the third quarter as they were negative for the first two quarters of the year:

At this point, we'll interrupt this blog post to offer a few disclaimers. First, we wouldn't want to put too much weight on the specific number cranked out by this exercise. Also, beyond the usual warnings about the imprecision of statistical estimates, we'll add that much of the data being used in the estimates are subject to revision—and we don't yet have very much information on activity in October. Finally, even with the improvements in performance versus expectations, the view of the moment is still centered on near-term growth that is less than stellar, as President Lockhart described in his remarks:

"[M]ost private sector forecasters envision growth in 2012 approaching 2.5 percent. In the opinion of many economists, that 2.5 percent approximates the steady-state growth rate of the economy's potential. This rate would certainly be an improvement over 2011 as a whole. The problem is without growth measurably better than 2.5 percent, little progress will be made in absorbing slack in the economy—above all, labor market slack."

But after the long run of negative news that has characterized most of this year, we are for now at least moving in the right direction.

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



Patrick HigginsPatrick Higgins, economist at the Atlanta Fed



October 21, 2011 in Data Releases, Economic Growth and Development | Permalink


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Whether you’re in the ‘”ore optimistic” or the “less optimistic” camp, the latest improvements in the various forecasts reflect an assumption that there will be no major negative surprises this year. I’m not at all sure that such an assumption is a safe bet this year. There are still plenty of things that can go wrong in this delicate economy and slowly thawing credit environment.

Posted by: Stop Foreclosure | October 23, 2011 at 09:38 AM

I suspect there's been some inventory clearing that has pushed GDP up temporarily.

I also suspect that many people are like me and suffering from Thrift Fatigue. I've been splurging a bit on resaurants and also splurged on a excercise machine (which was marked down 60%) to get me through the winter without having to go to the gym. I also bought a plane ticket to visit family over christmas.

This is cutting into my saving, which are already inadequate, and I will need to really buckle-down this winter.

Posted by: aaron | October 24, 2011 at 07:18 AM

My clothes are also getting threadbare and will need to be replaced.

Posted by: aaron | October 24, 2011 at 07:19 AM

In a word, no. Consumption rose by 2.4% in Q3, hooray! The savings rate in September was 3.6%, compared to 5.3% in June. Sound sustainable to you? Friday's payroll number looks like another whopping 100K. Of course, we need to be vigilant about inflation, right? Let's see the employment cost index in q3 rose at a 2-year low of +0.3%. Core PCE "the Fed's preferred inflation measure" in September came in, uh, negative. Of course it could get better next year except unemployment benefit extensions will expire along with payroll tax breaks.

Dave, are you deliberately trying to foment social unrest and stoke the "occupy wall street" crowd with comments like this?

Posted by: Rich888 | October 29, 2011 at 12:19 PM

I really enjoyed reading this post, I always appreciate topics like this being discussed to us. Thanks for sharing.

Posted by: stenen tafelblad | April 10, 2015 at 10:44 AM

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October 17, 2011

State and local fiscal fortunes: Follow the money (collected)

Last week, we found ourselves in conversation with some colleagues discussing the issue of state and local fiscal conditions, which by pure coincidence coincided with the announcement that the city of Harrisburg, Pa., filed for bankruptcy. In the course of conversation, our attention was drawn to an interesting fact. Prior to 2000, according to U.S. Census Bureau data through 2008, annual growth of total revenues at the state and local level was closely aligned with direct expenditures at the same level. Since 2000, however, this pattern has decidedly changed. The main reason is the dramatic volatility of total revenue:

Revenues at the state and local level come from many sources. Taxes from income, sales, and property, of course, but also from various fees and charges associated from education, utilities, ports and airports, and so on. In addition, revenues come from transfers from the federal government and, importantly, asset income from trust fund portfolios.

In fact, the primary source of the increased volatility in state and local government revenues since 2000 is large swings in revenue going into insurance trust funds to finance compulsory or voluntary social insurance programs operated by the public sector.

Insurance trust revenue is derived from contributions, assessments, premiums, or payroll "taxes" required of employers and employees. It also includes any earnings on assets held or invested by such funds. Not surprisingly then, the volatility of insurance trust revenue is partly tied to volatility in financial markets, as the chart below clearly illustrates.

Though fluctuations in insurance fund revenues have been the largest source of fluctuations in overall state and local revenues over the past decade or so, volatility in general revenue is still an issue. Ups and downs in income tax revenues have been particularly sharp since 2000.

Interestingly, Census Bureau data for state government finances show tax revenue growth turned negative in 2009.

In research that focuses specifically on revenue variability at the state level, UCLA law professor Kirk Stark notes the possibility that state revenues have too much reliance on the same income-centric tax base that characterizes the federal revenue code:

"Perhaps the most obvious (yet little discussed) federal inducement for the design of state and local tax systems is the fact that Congress has established an elaborate and detailed legal framework for certain taxes—including, most notably, the individual and corporate income taxes—but not for others. The very existence of the Code, Treasury Regulations, IRS administrative guidance, and federal judicial case law creates an almost irresistible incentive for the states to adopt individual and corporate income taxes. The availability of the federal income tax base as a starting point in calculating state tax liability is an unqualified benefit. …

"At the same time, however, there are potentially significant costs associated with having states piggyback on the federal income tax. Taxes that might be suitable for use by a central level of government are not necessarily appropriate for use by state or local governments. Some of the most volatile state revenue sources are those upon which states rely by virtue of piggybacking on the federal income tax."

The theme of Professor Stark's article is the role that federal policy might play in generating revenue volatility at the state level:

"Through various inducements and limitations embedded in federal law, the federal government has stacked the deck in favor of state revenue volatility, unwittingly exacerbating the subnational fiscal crises that it is then called upon to mitigate through bailouts and general fiscal relief."

Some other examples of how federal tax policy can have an impact on state and local policy according to Stark include "differential treatment of alternative tax sources within the federal income tax deduction for state and local taxes" and "various specific provisions in federal law that limit state taxing authority."
Professor Stark is clear on the point that the research in this area has defied simple generic conclusions about how state and local tax codes can be constructed to minimize revenue volatility. And the work is largely silent on how the volatility question fits into the broader question of optimal tax-system design. But it is hard to argue with this conclusion:

"If the federal government is interested in reducing the likelihood and severity of future state fiscal crises, it should consider changes to federal law that would eliminate the current bias in favor of volatile state tax systems."

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


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

October 17, 2011 in Economic Growth and Development, Fiscal Policy, Taxes | Permalink


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Very good blog! Always an interesting read!

This article as well. It's title might be somewhat misleading, however.

To assess the fortunes of States and Cities, spending, or more precisely, what they *should* be spending, appears more relevant than the variance of income.

It is hard to make the numbers work when future pension obligations are included in the liabilities, volatility of earnings notwithstanding (e.g. Illinois).

Again, keep up with the good work!

Posted by: SamK | October 19, 2011 at 10:01 AM

But volatility of some of local revenues seems to me a good idea because it is anti-cyclical, just like for the Union budget: taxes go down when incomes go down. Since the USA includes a fiscal Union supposedly if a locality has a sudden drop in revenues the Union budget should support distressed localities (with safeguards).

The alternative would be for local taxes to rise sharply as a percentage of income when local economic activity is depressed, which sounds mad to me.

Unless the idea is to shift most of the local taxation burden to low income residents, via taxes on transactions that are largely independent of income and on expenditures that have very little elasticity to price; for example by replacing local taxes on income with local taxes on food sales, or rents, and with masses increases in fees on services like water supply and garbage collection and public transport.

Also, the "insurance fund" story is simply the old accounting strategy: to book "estimated" gigantic expected capital gains and impossibly high returns on the insurance fund, and cut income taxes on wealthy residents with the resulting "savings", and then when the insurance fund investments as expected fail to deliver during a recession, recommend a massive cut in services or a switch from income related to consumption related taxes to cover the shortfall.

Both strategies are not mad, just politics of a very specific sort.

Posted by: Blissex | October 20, 2011 at 05:45 PM

«Not surprisingly then, the volatility of insurance trust revenue is partly tied to volatility in financial markets, as the chart below clearly illustrates.»

There is another note as to this: why ever is there *any* volatility in these insurance funds? USA treasuries have not been that volatile.

Comparing insurance fund assets with stock market valuations seems crazy to me, as it seems to imply that local government insurance funds are invested speculatively instead of prudently, and from the graph it seems that they volatility is even greater than that of the S&P500, which means that they haven't even been invested in index funds, but in stock-picking speculative strategies.

The graph actually seems to suggest a massive breakdown in the fiduciary duties of local government investment managers, as if their goal was not just to book massive gains to justify cutting local taxes, but also to push up stock market prices via extremely leveraged speculation to pursue a further set of political goals. That would be madness.

Posted by: Blissex | October 20, 2011 at 05:57 PM

That the volatility of investment funds is much higher than that of the S&P seems to imply that the funds contain a significant amount of highly speculative leveraged instruments, for example stock derivatives.

I personally think that there is no reason whatever to invest local government funds in anything other than treasuries (like OASDI does) on both prudential and return grounds.

But it seems that politicians of many local governments instead thought that Orange County was a laudable model and Mr. Citron a hero prophet.

Posted by: Blissex | October 21, 2011 at 05:50 AM

I think the biggest inducement to states having income taxes is the federal deduction for state income taxes paid. The deduction causes part of the state's tax burden to be shifted to the federal government. If a small state like Hawaii can impose and administer a highly successful broad-based gross receipts tax, I don't think the mere existence of tax code is enough by itself to attract a state to the net income tax. After all, one state could also copy another's code. Just keeping up with changes in the federal income tax imposes a burden on tax administrators.

Posted by: don | October 27, 2011 at 06:30 PM

The U.S. Census Bureau released 2009 state and local government data on October 31:

Posted by: Jeff | November 01, 2011 at 10:34 AM

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September 01, 2011

The pull between spending and saving

In a speech on Wednesday, Atlanta Fed President Dennis Lockhart talked about how the economic outlook is being shaped by the process of deleveraging (reducing debt and increasing saving) that is occurring in the economy.

By way of background, President Lockhart emphasized the important role that some amount of debt plays in economic growth: while difficult to measure precisely, research suggests that debt levels that get high enough are associated with extended periods of subpar economic growth.

"Debt is not in and of itself a bad thing. Debt supports economic growth by allowing households, businesses, and governments to smooth their spending and investment over time. Borrowing and lending can help facilitate the allocation of capital to productive uses in the economy. But high debt levels can also result in lower economic growth, a point that Stephen Cecchetti, of the Bank for International Settlements, made in a paper presented at the Kansas City Fed's symposium in Jackson Hole, Wyo., last week."

Relative to the 1990s, the last decade witnessed a surge in borrowing by the nonfinancial sector (comprising households, nonfinancial businesses and governments). Indeed, as President Lockhart noted:

"Relative to the size of the U.S. economy measured in terms of GDP, the total domestic debt of nonfinancial sectors of the economy reached 248 percent in 2009, increasing by almost 75 percentage points over the previous decade alone."

While no longer growing, the overall debt position of the nonfinancial sector has barely declined since peaking in 2009.

How did we get to this point? Much of the increase in total debt during the 2000s was in the form of real estate debt, and most of that was by households and unincorporated businesses (mostly sole proprietorships and partnerships). During the 1990s the mortgage debt of households was relatively stable at around 45 percent of GDP, but it increased to a peak of 76 percent of GDP in 2009. Over the same period, mortgage debt for unincorporated businesses increased from around 12 percent of GDP to almost 20 percent.

Because real estate is relatively expensive, it is not surprising that mortgage debt heavily influences the overall debt burden of individuals. Rapidly rising home values from the late 1990s to 2006 supported the notion that housing was a good asset to purchase…until it wasn't. According to the S&P Case-Shiller national home price index, home values have declined by more than 30 percent from their peak in 2006, after having increased by more than 150 percent compared with the previous decade.

From their peak in 2009, debt levels for households and unincorporated businesses have declined relative to GDP notably by a combined 15 percentage points. Reduced mortgage debt accounted for three quarters of that decline. As President Lockhart notes, repairing the balance sheet of the household sector, just as it does for businesses, can occur through some combination of debt reduction and increased savings.

"Household deleveraging has occurred mostly through a combination of increased savings, debt repayment, and also debt forgiveness. At the same time, there has generally been less access to credit for households as a result of stricter underwriting standards. The inability to qualify for home equity loans and other forms of credit has slowed the pace at which new debt is taken on by households replacing paid-down debt. The effect is to reduce their debt burden over time."

In contrast to households and unincorporated businesses, the amount of debt owed by the nonfinancial corporate sector has not declined very much since 2009. Nonfinancial corporations increased borrowing during the second half of the 2000s. But most of the debt growth was from increased issuance of corporate bonds. Since its historical peak in 2009, the total debt of the nonfinancial corporate sector has remained at around 50 percent of GDP, as continued bond issuance has largely offset declines in other types of corporate borrowing.

If individuals are aggressively reducing their debt burden, and corporations haven't increased their overall borrowing, why hasn't the overall debt burden of the nonfinancial sector of the economy declined since 2009? The primary reason is that the amount of federal government debt has increased sharply in recent years—from 35 percent of GDP in 2007 to about 65 percent of GDP in early 2011.

As President Lockhart observes:

"While the private sector—households and businesses—has made notable progress in lowering its debt burden, discussions of how to reduce public debt have only just begun. The government still needs to introduce major policy changes to put public debt on a sustainable path. Demographic trends, which I referenced earlier, will make public debt reduction even more challenging."

How long will the deleveraging process take to play out? I'm pretty confident that nobody really knows precisely, but President Lockhart suggests that we may be closer to the beginning of the process than the end:

"Rebalancing simply takes time. A 2010 report by McKinsey surveyed 32 international periods of deleveraging following financial crises and found that, on average, the duration of these episodes was about six and a half years. U.S. debt to GDP peaked in the first quarter of 2009. So, by that standard we are much closer to the beginning than the end of our deleveraging process."

Lockhart also makes the point that this necessary structural adjustment has consequences for the medium-term outlook:

"When economies are deleveraging they cannot grow as rapidly as they might otherwise. It is obvious as consumers reduce spending they divert more of their incomes to paying off debt. This shift in consumer behavior increases the amount of capital available for financing investment. But higher rates of business investment are not likely to fully offset weakness in consumer spending for some time, as businesses continue to grapple with uncertainties about the future."

From a monetary policy perspective, slower growth as a result of deleveraging raises important challenges:

"To my mind, it's becoming increasingly clear the challenge we policymakers face is balancing appropriate policy responses for the near to medium term with what's needed for the longer term. In other words, we must continue to help the economy achieve a healthy enough cyclical recovery, especially with unemployment high and consumer spending lackluster. At the same time, we must recognize the longer-term need for directionally opposite structural adjustments, including deleveraging."

How does President Lockhart size up the role of monetary policy in this context?

"Given the weak data we've seen recently and considering the rising concern about chronic slow growth or worse, I don't think any policy option can be ruled out at the moment. However, it is important that monetary policy not be seen as a panacea. The kinds of structural adjustments I've been discussing today take time, and I am acutely aware that pushing beyond what monetary policy can plausibly deliver runs the risk of creating new distortions and imbalances.

"We may find, as economic circumstances evolve, that policy adjustments are required. In more adverse scenarios, further policy accommodation might be called for. But as of today, I am comfortable with the current stance of policy, especially considering the tensions policy must navigate between the short and long term and between recovery and the need for longer-term structural adjustments."

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


September 1, 2011 in Economic Growth and Development, Federal Debt and Deficits, Monetary Policy, Real Estate | Permalink


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This post clearly shows that movements in household leverage (a rise in the last expansion and a fall that began in the recession) are a signature of the latest economic cycle. However, there are a number of important 'why' questions that the aggregate time series cannot answer. It is unlikely that a change in the 'taste for debt' alone can explain the changes in leverage. Moreover, different explanations for the levering up have very different policy prescriptions and forecasts for deleveraging going forward. Just to name two examples, Atif Mian and Amir Sufi have several papers that suggest the loosening of the supply of credit led to the levering up. In contrast, Tyler Cowen in the The Great Stagnation points to the over-confidence of households and other agents about income prospects. There are other possible explanations and the truth may be a combination. So while the post raises some interesting questions with aggregate time series, there is a lot of empirical work that can and should be done with micro data, like the Survey of Consumer Finances and the American Life Panel.

Posted by: Claudia Sahm | September 01, 2011 at 07:10 PM

Sumner writes a lot of crap, but let's face it, he's right on at least two counts:

1. There's no such thing as neutral monetary policy. Before 'waiting to act' for fear of causing "new distortions", consider the distortions you may presently be causing.

2. Monetary policy should target the forecast. Why, for example, are you doing this to inflation expectations
with one-off programs of limited duration announced in advance?! I could come up with a better monetary policy in my basement.

Once you stabilize inflation expectations, consider raising them to 4% for a while, to ease the burden of the above household debt, help correct our foreign trade imbalances (Sumner is also right that international trade is not a zero-sum game), and spur corporate investment.

Then tell Barney Frank to cut the crap and stop letting people like me buy houses at 30:1 margin, as I just did in June. The greater the portion of a loan that is secured by the asset it purchases, the stronger the feedback loop between willingness to lend and prices (about the only thing Soros gets right), which is the only way you got those curves above.

Sure, there are political problems around creating inflation. That's where Bernanke needs to start eating his oysters and stop standing around blinking his eyes like a toad lickin' lightning. I'll tell you a secret: Bernanke is smarter than Rick Perry. Why let such facts go unnoticed? But as is obvious from the above speech, he can't even defeat his critics in his own organization (not that Lockhart is one, but it seems to me he's addressing some of them).

Posted by: Carl Lumma | September 01, 2011 at 10:33 PM

I think the problem with society today is the inability to defer gratifcation that is until recently. Get a collage degree borrow to pay for it' buy a new car borrow to pay for it' need a bigger house borrow to pay for it' why save to pay when you can play now would be a good way to decribe things up until about five years ago.

Posted by: dennis the menace | September 06, 2011 at 02:48 PM

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August 26, 2011

Lots of ground to cover: An update

If you have to discuss a difficult circumstance, I guess Jackson Hole, Wyo., is as nice as place as any to do so. This morning, as most folks know by now, Federal Reserve Chairman Bernanke reiterated the reason that most Federal Open Market Committee (FOMC) members support the expectation that policy rates will remain low for the next couple of years:

"In light of its current outlook, the Committee recently decided to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, in the statement following our meeting earlier this month, we indicated that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years."

There are two pieces of information that emphasize the economy's recent weakness and potential slow growth going forward. The first is this week's revised forecasts and potential for gross domestic product (GDP) from the Congressional Budget Office (CBO), and the second is today's revision of second quarter GDP from the U.S. Bureau of Economic Analysis (BEA). Though estimates of potential GDP have not greatly changed, the CBO's downgrade in forecasts and BEA's report of much lower than potential growth in the second quarter have the current and prospective rates of resource utilization lower than when macroblog covered the issue just about a month ago.

Key to the CBO's estimates is a reasonably good outlook for GDP growth after we get past 2012:

"For the 2013–2016 period, CBO projects that real GDP will grow by an average of 3.6 percent a year, considerably faster than potential output. That growth will bring the economy to a high rate of resource use (that is, completely close the gap between the economy's actual and potential output) by 2017."

The margin for slippage, though, is not great. Assuming that GDP ends 2011 having grown by about 2.3 percent—as projected by the CBO—here's a look at gaps between actual and potential GDP for different, seemingly plausible growth rates:

Attaining 3.5 percent growth by next year moves the CBO's date for closing the output gap up by about a year. On the other hand, a fall in output growth to an average of 3 percent per year moves the date for eliminating resource slack back to 2020. If growth remains below that—well, let's hope it doesn't.

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


August 26, 2011 in Business Cycles, Economic Growth and Development, Employment, Forecasts, Saving, Capital, and Investment | Permalink


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«economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.»

The exceptionally low funding rates to financial intermediaries are not resulting in equally low rates for customers of those intermediaries, because the Fed has repeatedly hinted that they want to rebuild the balance sheet of the finance sector boosting their profits by granting them a huge spread (and hoping that at least half of those profits go into capital instead of bonuses).

Bernanke's statement then may be interpreted as saying that the Fed does expects the financial sector to need another several years of extra profits resulting from the Fed "subsidy" because the finance sector seem unlikely to be able to make any profit if market conditions prevailed, and indeed it seems that the capital position of many finance sector "national champions" is still weak considering the cosmetically hidden capital losses they have.

As to inflation, wage inflation is indeed well contained (wages are declining in real terms) even if cost of living inflation seems pretty rampant; in a similar country like the UK where indices are less "massaged" the RPI has been running at over 5% and on an increasing trend:

Posted by: Blissex | August 26, 2011 at 05:28 PM

Why can't the Federal Reserve tell the public the obvious: Growth will only come about by hiring people with livable wages.

If we don't raise incomes nationally we will be forced to liquidate on a massive scale. It doesn't matter who does the hiring, just that it is done.

It isn't the deficit. It isn't the debt. It's the incomes, stupid.

Posted by: beezer | August 27, 2011 at 06:10 AM

Ken Rogoff says 3-5 years of 1-2% GDP and Carmen Reinhart thinks 5-6 years of 2%. =(

Posted by: DarkLayers | August 27, 2011 at 11:19 PM

In terms of econometrics, annual increment of real GDP per capita is constant over time . Therefore, the rate of real GDP per capita growth has to decay as a reciprocal function of the attained level of GDP per capita. The exponential component in the overall GDP is fully related to population growth which has been around 1% per year in the U.S. Currently, the rate of population growth falls and the trajectory of the overall GDP lags behind the projection which includes 1% population growth. If to look at the per head estimates, there is no gap between "potential" and observed levels.
In no case should an economist mix the growth in population and real economic growth.

Posted by: kio | August 28, 2011 at 04:03 AM

It's going to be a long time. Do you know how hard it will be for a person to live in the same town for 30 years?

Our money game will need new rules because 30 years at the same job/house/town is over.

But once that issue is fixed, watch out. Technologically America is so far ahead that earning a 100k(todays $$) salary can be done in 6 months.

To keep the NYC banks from leeching on it will be a task.

Posted by: FormerSSResident | August 31, 2011 at 07:00 PM

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August 15, 2011

The GDP revisions: What changed?

Prior to the U.S. Bureau of Economic Analysis's (BEA) benchmark gross domestic product (GDP) revisions announced three Fridays ago, we were devoting a fair amount of space—here, in particular—to picking apart some of the patterns in the data over the course of the recovery. Ahh, the best-laid plans. As noted in a speech today from Atlanta Fed President Dennis Lockhart:

"It's been an eventful two weeks, to say the least. Let's now look ahead. The $64,000 question is what's the outlook from here?...

"Whether we're seeing a temporary soft patch in an otherwise gradually improving growth picture or a deeper and more persistent slowdown, most of the arriving economic data lately have caused forecasters to write down their projections. Also, and importantly, the Bureau of Economic Analysis in the Department of Commerce has revised earlier economic growth numbers. These revisions paint a different picture of the depth of the recession and the relative strength of the recovery."

Beyond keeping the record straight, revisiting the charts from our previous posts in light of the new GDP data is a key input into answering President Lockhart's $64,000 question. Here, then, is that story, at least in part.

1. Even ignoring the depth of the recession, the first two years of this recovery have been slow relative to the early phases of the past two recoveries.

I wasn't so sure this was the case to be made prior to the new statistics from the BEA, but the revisions made clear that, while still broadly similar to the slower growth pattern of the prior two recoveries, the GDP performance has been pretty easily the slowest of all.

Real GDP

2. Consumption growth has been especially weak in this recovery, and the pattern of consumer spending has been more concentrated in consumer durables than has been the case in prior business cycles.

Change in consumption expenditures

The consumer spending piece of this puzzle has President Lockhart's attention:

"I'm most concerned about the effect of the wild stock market on consumer spending. Volatility alone could have a negative impact on consumer psychology at a time of already weakening spending. Last Friday, it was reported that the University of Michigan's Survey of Consumer Sentiment fell sharply in early August to its lowest level in more than 30 years. Furthermore, if the loss of stock market value persists, the effect from the loss of investment value could combine with the loss of value in home prices to discourage consumers more and longer."

On the bright side, the GDP revisions did not of themselves alter the household spending picture. Though the benchmark revisions contained significant changes in consumer spending, those changes were concentrated during the recession in 2008 and 2009. Personal consumption expenditures were actually revised upward from 2009 on, with the big negative changes coming in net exports and government spending:

GDP revisions

Are there other rays of hope? I might add this:

3. The revisions show that the momentum that seemed to fade through 2010 was more apparent in total GDP than in final demand. In other words, the basic storyline—a good start to 2010 with a soft patch in the middle and a stronger finish—still emerges if you look through changes in inventories.

Pattern of final demand

That observation does not, of course, help salve the pain of the very anemic first half of this year. Nonetheless (from Lockhart, again):

"At the Atlanta Fed, we have revised down our near and intermediate gross domestic product (GDP) growth forecast, but we are holding to the view that the economy will continue to grow at a very modest pace. In other words, we do not expect the onset of outright contraction—a recession—but I have to say the risk of recession is higher than we perceived a month or two ago...

"The rapid-fire developments of the last several days, along with some troubling data releases, have shaken confidence. People are worried. Investors, Main Street businessmen and women, and consumers are wondering which way things will tip. The public—and for that matter, policymakers—are operating in a fog of uncertainty that is thicker than normal."

That fog of uncertainty was made thicker by the GDP revisions, and thicker yet by the volatility that followed. But I would still pass along this advice from President Lockhart:

"At this juncture, we should not jump to conclusions. A clearer picture of economic reality will be revealed in time as immediate uncertainties dissipate. It's premature, in my view, to declare these important questions relating to our economic future settled."

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

August 15, 2011 in Business Cycles, Economic Growth and Development, Forecasts, Saving, Capital, and Investment | Permalink


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I think it is important to remember that the BEA only has comprehensive data on income and consumer spending in 2009 and earlier. With this annual revision they folded in mandatory census like surveys on retail trade and services. On the income side they incorporated IRS tax return data which led to substantially lower estimates of asset income. Data from the Michigan survey suggests that the current estimates of personal income in 2010 and later might be overstated. The BEA does a very important job as best they can, but the source data is slow to roll in. We probably have a good picture of the recession now, but the recovery is still a work in progress in the NIPAs. In my opinion, if you want to understand the slow recovery in consumer spending...look at the income expectations (or lack thereof) in the Michigan survey.

Posted by: Claudia Sahm | August 16, 2011 at 04:48 AM

Interesting, as always. I'd like to see point 2 done for fixed investment, too.

Posted by: Dave Backus | August 16, 2011 at 05:37 PM

I think we should not begin to accept the pace of recovery in the last two recessions as a "new normal." The last two recessions have featured very little fiscal stimulus, and increasing emphasis on monetary means. Also, what fiscal stimulus there has been is of dubious value, particularly some of the tax policy measures.

These observations reflect a transition from a political economic theory that government spending should fill the gap created by falling consumer and business spending during times of recession to a political economic theory based accounting (i.e., that spending should not exceed revenues). The latter is leading to larger and larger output gaps, and will eventually lead to permanent recession.

This is why it should not be accepted as the "new normal."

Posted by: Charles | August 17, 2011 at 11:02 AM

Looks like the market is now firmly the master. Everybody has become an economist, we elect an Economist for Governors and Presidents, because we have lost control. The Tea Party is a reaction to this, a desperate one.

If the Fed/America can't re-gain control, someone else will.

Posted by: FormerSSresident | August 17, 2011 at 01:43 PM

Inventories are no longer helping and government will be a drag. It is difficult to see where growth comes from in this environment.
We should measure private sector GDP (without Government) as it is the engine that must support the economy and the government.
The economy has been off track for some 15 years as consumer debt has been the engine and that source is over. Debt is a burden and it should not be used for basic consumption or stimulus. All it does is remove future growth. We are in for a sustained period of slow growth.

Posted by: GASinclair | August 19, 2011 at 06:25 PM

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