macroblog

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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


May 23, 2016


Can Two Wrongs Make a Right?

In a recent macroblog post, I showed that forecasts from the Atlanta Fed's real gross domestic product (GDP) nowcasting model—GDPNow—have been about as accurate a forecast of the U.S. Bureau of Economic Analysis's (BEA) first estimate of real GDP growth as the consensus from the Wall Street Journal Economic Forecasting Survey. Because GDPNow essentially uses a "bean-counting" approach that tallies the forecasts of the various main subcomponents of GDP, the total GDP forecast error can be broken up into the forecast errors coming from each piece of GDP. For most of the subcomponents of GDP, the contribution to total GDP growth is approximately its real growth rate multiplied by its expenditure share of nominal GDP (the exact formulas are in the working paper for GDPNow). The following chart shows the subcomponent contributions to the GDPNow forecast errors since the third quarter of 2011. (I want to note that the forecast errors are based on the final GDPNow forecasts formed before the BEA's first estimates of GDP are released.)

The forecast errors for the subcomponents can sometimes be quite large. For example, for the fourth quarter of 2013, GDPNow underestimated the combined contributions of net exports and inventory investment by nearly 2 percentage points. However, these misses were nearly offset by overestimates of the other contributions to growth (consumption, business and residential fixed investment, and government spending).

The pattern of large but largely offsetting GDP subcomponent errors has been attributed to the work of a fictional "Saint Offset," as former Fed Governor Laurence Meyer noted in a 1998 speech. Unfortunately, "Saint Offset" doesn't always come to the forecaster's aid. For example, in the fourth quarter of 2011, GDPNow predicted 5.2 percent growth—well above the BEA's first estimate of 2.8 percent—and the subcomponent errors were predominantly on the high side.

A closer look at the chart also reveals that GDPNow has had a tendency to overestimate the contribution of business fixed investment to growth and underestimate the growth contribution of inventory investment. Although these subcomponent biases have nearly offset one another on average, we really don't want to have to rely on "Saint Offset." We would like the subcomponent forecasts to be reasonably accurate because the subcomponents of GDP are of interest in their own right.

Have the subcomponent biases been a unique feature of GDPNow forecasts? It appears not. Both the Survey of Professional of Forecasters (SPF), conducted about 11 weeks prior to the first GDP release, and Blue Chip Economic Indicators, conducted as close as three weeks prior to the first release, provide consensus forecasts for some GDP subcomponents. The following table provides an average forecast error (as a measure of bias) and average absolute forecast error (as a measure of accuracy) of the subcomponent growth contributions for the two surveys and comparably timed GDPNow forecasts.

We see that the biases in GDPNow's subcomponents have been fairly similar to those in the two surveys. For example, all three sources have underestimated the average inventory investment contribution to growth by fairly similar magnitudes.

The relative accuracy of GDPNow's subcomponent and overall GDP forecasts has also been similar to the accuracy of the two surveys. "Saint Offset" has helped all three forecasters; the standard errors of the real GDP forecasts are 20 percent to 40 percent lower than they would be if the forecast errors of the subcomponents did not cancel each other out.

Finally, notice that some GDP subcomponents appear to be much more difficult to forecast than others. For instance, the bias and accuracy metrics for consumer spending are smaller than they are for inventory investment. This differential is not really that surprising, because more monthly source data are available prior to the first GDP release for consumer spending than for inventory investment.

Can we take any comfort in knowing that private forecasters have mirrored the biases in GDPNow's subcomponent forecasts? An optimistic interpretation is that the string of one-sided misses are the result of bad luck—an atypical sequence of shocks that neither GDPNow nor private forecasters could account for. A more troubling interpretation is that there have been structural changes in the economy that neither GDPNow nor the consensus of private forecasters have identified. Irrespective of the reason, though, optimal forecasts should be unbiased. If biases in some of the subcomponents continue, then forecasters will need to look for a robust way to eliminate them.

May 23, 2016 in Forecasts, GDP | Permalink

Comments

Two wrongs can make a right. But it is not always the same two wrongs.

Posted by: Robert F. Dieli | May 24, 2016 at 08:53 AM


since you're projecting the real change in GDP from one quarter to the next, the BLS price indexes that the BEA uses to compute the deflators for the various components of GDP are an integral part of that change, yet there's no indicaton that your model takes those prices indices into account...every month you'll adjust your estimate of the change in real PCE when the retail sale report comes out, but the retail sales report tells us very little about PCE until the CPI report is released several days later...

i also have a problem with your use of the ISM surveys, unweighted diffusion indexes derived from samplings of subjective executive opinion....any correspondence those survey results have with the output of goods and services for the same month is pure chance..

your forecasts could be improved if you hewed closer to the methods that the BEA uses to compute GDP that are described in the NIPA Handbook...

Posted by: rjs | May 24, 2016 at 10:30 PM

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May 16, 2016


GDPNow and Then

Real-time forecasts from the Atlanta Fed’s real gross domestic product (GDP) nowcasting model—GDPNow—have been regularly updated since August 2011 (the model was introduced online in July 2014). So we now have a nearly five-year history to allow us to evaluate the accuracy of the model’s forecasts. The chart below shows forecasts from GDPNow (red dots) alongside actual first estimates of real GDP growth (gray bars) from the U.S. Bureau of Economic Analysis (BEA). For comparison, the blue dots in the chart are the consensus (average) forecasts from the Wall Street Journal Economic Forecasting Survey (WSJ Survey).

chart-one

The initial estimate of real GDP growth for a particular quarter is usually published at the end of the subsequent month. The WSJ Survey consensus forecasts plotted above were released about two weeks before these estimates. To maintain comparable timing with the WSJ Survey, the GDPNow forecasts shown in the chart are those constructed on or before the 12th day of the same month.

Occasionally, there has been relatively large disagreement between GDPNow and the WSJ consensus. For example, GDPNow predicted that GDP growth would be below 0.5 percent for five out of 19 quarters between 2011 and 2016, and the lowest WSJ Survey consensus forecast for any of those quarters was 1.3 percent. Nonetheless, the average accuracy of the GDPNow and WSJ Survey consensus forecasts has been similar: the average absolute forecast error (average error without regard to sign) for GDPNow was 0.56 versus 0.60 for the WSJ Survey consensus.

Studies have shown that the average or median of a set of professional forecasts tends to be more accurate than an individual forecaster (see, for example, here and here). Therefore, it’s surprising that GDPNow has been about as accurate on average as the WSJ Survey consensus. To see just how surprising this result is, I used the fact that the WSJ Survey provides both the names and forecasts of its respondents. From these, I constructed a panel dataset with each respondent’s absolute forecast errors and their absolute disagreement (difference) from the consensus forecast. Using a standard econometric technique (a two-way fixed-effects regression), we can then calculate each panelist’s average absolute GDP forecast error and their average absolute disagreement with the WSJ Survey consensus. These points are shown in the scatterplot below.

chart-two

There is a clear inverse relationship between average forecast accuracy and average disagreement with the WSJ Survey consensus. However, GDPNow’s accuracy and disagreement statistics do not fit the general pattern. GDPNow (the orange diamond in the chart) was more accurate on average than all but six out of 49 WSJ panelists, though at the same time it differed from the consensus by more on average than all but four of the panelists.

What should one infer from all of this? Differences in forecasting method could be part of the explanation. GDPNow differs from many other approaches to nowcasting in that it is essentially a “bean counting” exercise. It doesn’t use historical correlations of GDP with other economic series in the way that commonly used dynamic factor models do, and it also doesn’t incorporate judgmental adjustments (see here for more discussion of these differences). During a period when the economy has been giving very mixed signals, perhaps it doesn’t come as a surprise that GDPNow’s forecasts occasionally deviate quite a bit from the WSJ Survey consensus. Time will tell if GDPNow continues to perform at least as well as the consensus.

May 16, 2016 in Forecasts, GDP | Permalink

Comments

It would be nice to know who are the three forecasters with average absolute error below the 0.5 line.

Posted by: Rafael | May 23, 2016 at 09:28 AM

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January 15, 2016


Are Long-Term Inflation Expectations Declining? Not So Fast, Says Atlanta Fed

"Convincing evidence that longer-term inflation expectations have moved lower would be a concern because declines in consumer and business expectations about inflation could put downward pressure on actual inflation, making the attainment of our 2 percent inflation goal more difficult."
—Fed Chair Janet Yellen, in a December 2, 2015, speech to the Economic Club of Washington

To be sure, Chair Yellen's claim is not controversial. Modern macroeconomics gives inflation expectations a central role in the evolution of actual inflation, and the stability of those expectations is crucial to the Fed's ability to achieve its price stability mandate.

The real question on everyone's mind is, of course, what might constitute "convincing evidence" of changes in inflation expectations. Recently, several economists, including former Treasury Secretary Larry Summers and St. Louis Fed President James Bullard, have weighed in on this issue. Yesterday, President Bullard cited downward movements in the five-year/five-year forward breakeven rates from the five- and 10-year nominal and inflation-protected Treasury bond yields. In November, Summers appealed to measures based on inflation swap contracts. The view that inflation expectations are declining has also been echoed by the New York Fed President William Dudley and former Minneapolis Fed President Narayana Kocherlakota.

Broadly speaking, there seems to be a growing view that market-based long-run inflation expectations are declining and drifting significantly away from the Fed's 2 percent target and that this decline is troublingly correlated with oil prices.

A problem with this line of argument is that the breakeven and swap rates are not necessarily clean measures of inflation expectations. They are really better referred to as measures of inflation compensation because, in addition to inflation expectations, these measures also include factors related to liquidity conditions in the markets for these securities, technical features of the inflation protection in each security, and inflation risk premia. Here at the Atlanta Fed, we've built a model to separate these different components and isolate a better measure of true inflation expectations (IE).

In technical terms, we estimate an affine term structure model—similar to that of D'Amico, Kim and Wei (2014)—that incorporates information from the markets for U.S. Treasuries, Treasury Inflation-Protected Securities (TIPS), inflation swaps, and inflation options (caps and floors). Details are provided in "Forecasts of Inflation and Interest Rates in No-Arbitrage Affine Models," a forthcoming Atlanta Fed working paper by Nikolay Gospodinov and Bin Wei. (You can also see Gospodinov and Wei (2015) for further analysis.) Essentially, we ask: what level of inflation expectations is consistent with this entire set of financial market data? And we then follow this measure over time.

As chart 1 illustrates, we draw a very different conclusion about the behavior of long-term inflation expectations. The chart plots the five-year/five-year forward TIPS breakeven inflation (BEI) and the model-implied inflation expectations (IE) for the period January 1999–November 2015 at a weekly frequency. Unlike the raw BEI, our measure is quite smooth, suggesting that long-term inflation expectations have been, and still are, well anchored.

160115a

After making an adjustment for the inflation risk premium, we term the difference between BEI and IEs a "liquidity premium," but it really includes a variety of other factors. Our more careful look at the liquidity premium reveals that it is partly made up of factors specific to the structure of inflation-indexed TIPS bonds. For example, since TIPS are based on the non-seasonally adjusted consumer price index (CPI) of all items, TIPS yields incorporate a large positive seasonal carry yield in the first half of the year and a large negative seasonal carry yield in the second half. Chart 2 illustrates this point by plotting CPI seasonality (computed as the accumulated difference between non-seasonally adjusted and seasonally adjusted CPI) and the five-year breakeven inflation.

160115b

Redemptions, reallocations, and hedging in the TIPS market after oil price drops and global financial market turbulence can further exacerbate this seasonal pattern. Taken together, these factors are the source of correlation between the BEI measures and oil prices. To confirm this, chart 3 plots (the negative of) our liquidity premium estimate and the log oil price (proxied by the nearest futures price).

160115c

Our measure of long-term inflation expectations is also consistent with long-term measures from surveys. Chart 4 presents the median along with the 10th and 90th percentiles of the five-year/five-year forward CPI inflation expectations from the Philadelphia Fed's Survey of Professional Forecasters (SPF) at quarterly frequency. This measure can be compared directly with our IE measure. Both the level and the dynamics of the median SPF inflation expectation are remarkably close to that for our market-based IE. It is also interesting to observe that the level of inflation "disagreement" (measured as the difference between the 10th and 90th percentiles) is at a level similar to the level seen before the financial crisis.

160115d

Finally, we note that TIPS and SPF are based on CPI rather than the Fed's preferred personal consumption expenditure (PCE) measure. CPI inflation has historically run above PCE inflation by about 30 basis points. Accounting for this difference brings our measure of the level of long-term inflation expectations close to the Fed's 2 percent target.

To summarize, our analysis suggests that (1) long-run inflation expectations remain stable and anchored, (2) the seemingly large correlation of market-implied inflation compensation with oil prices arises mainly from the dynamics of the TIPS liquidity premium, and (3) long-run market- and survey-based inflation expectations are remarkably close in terms of level and dynamics over time. Of course, further softness in the global economy and commodity markets may eventually drag down long-term expectations. We will continue to monitor the pure measure of inflation expectations for such developments.

By Nikolay Gospodinov, financial economist and policy adviser; Paula Tkac, vice president and senior economist; and Bin Wei, financial economist and associate policy adviser, all of the Atlanta Fed's research department


January 15, 2016 in Forecasts, Inflation, Inflation Expectations | Permalink

Comments

It seems a little strange that, to justify tighter policy now, you point to a model that show flat inflation expectations even through the 2008 crisis. If the Fed is claiming it's model can keep NGDP as stable as it did during the Great Recession, God help us!

Posted by: Joe Leider | January 17, 2016 at 11:02 AM

The short answer is “Yes”.

Just as the Phillips curve has proven inadequate to predict inflation due to the globalization of the labor force, inflation expectations are now influenced by the global marketplace. The risk and liquidity premia associated with inflation compensation in the bond market has been distorted by quantitative easing by the global central banks. What was once an efficient market reflecting future expectations of inflation is now influenced by central bank buying. For the central banks, keeping inflation under control was a challenge in the 20th century, when sovereign economies were more influenced by domestic forces. However in the 21st century, the challenge for the central banks is battling deflation coming from increased productivity and global competition for good jobs.

What economist are struggling to answer is the recent market reaction to the FOMC tightening and its influence on inflation expectations. The answer to the market behavior is simpler than one might expect. In the abstract, the impact of monetary policy can be quantified simply as basis point move divided by current interest rates (bp/ir). The result of this equation is nonlinear and it captures the multiplier effect of leverage on capital when interest rates are near-zero. It also demonstrates the near infinite amount of capital created by leverage at 0% evaporates very quickly as the central bank moves off of 0% - either positively or negatively. In short, the impact of a 5 basis point move near-zero is equivalent to a 25 basis point move when interest rates are at 1.25% and two times more impactful than when interest rates are at 3%. At near-zero interest rates, a small move in monetary policy has a large impact. Hence, the deflationary impact of deleveraging off of 0% has caused inflation expectations to lower.

For further reading, unicornfunds.com/macro/whitepaper_nearzeromonetarypolicy.html

Posted by: Peter del Rio | March 01, 2016 at 11:02 AM

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May 07, 2015


All Eyes on the Consumer

It appears that the first quarter may have been even worse than we thought. The CNBC rapid update—consensus estimates from a panel of forecasters—registered a decline of 0.3 percent as of yesterday.

Clearly, the year didn't start out so well, but here at the Atlanta Fed we have not yet lost faith. We are sticking to the narrative that 2015 will be another solid year of recovery.

That said, our faith is not blind and, befitting data-dependent policymakers, we need to make some call about what it will take to shake our confidence. In a speech delivered yesterday (May 6) in Baton Rouge, Louisiana, Atlanta Fed President Dennis Lockhart pointed to our current lodestar:

As I assess the possible and necessary contributors to a rebound in the second quarter and thereafter, attention has to fall on consumer spending, in my view.

Is there a case for optimism? We think so, and it is based on the assumption that the fundamentals supporting consumer spending have been stronger than the actual recent pace of expenditures. President Lockhart continues:

What's up with the consumer? It's puzzling. The fundamentals supporting consumption growth seem strong. I consider consumer fundamentals to be real personal income growth, household wealth, access to credit, and consumer confidence. Consumer confidence is, in turn, highly influenced by the broad employment outlook.

To be more precise about that sentiment, the chart below illustrates an experiment based on a simple model that incorporates President Lockhart's description of "fundamentals." To be even more precise, we ask the following question: What would we have predicted for consumer spending growth during the past four months based on the history of actual consumer spending and its relationship to income, employment (and unemployment), confidence measures, and wealth (specifically, equity prices)? We also threw inflation and oil prices into the mix for good measure.

Here's what we got:

Real Personal Consumption Expenditures

In other words, the "fundamentals" suggest the four-month annualized growth of consumer spending should have been in excess of 4 percent, as opposed to the approximately 1.5 percent we actually saw. That is a story we don't expect to persist, and our current view of the year is that first-quarter consumer spending results are not indicative of future performance.

Consumers are, of course, a forward-looking bunch, and it is possible the recent weak spending reflects a looming reality not captured by the simple model described above. But our forecast for now is that consumers will move to the fundamentals, and not vice versa.

As President Lockhart said in Louisiana: "Stay tuned."


May 7, 2015 in Economic conditions, Forecasts | Permalink

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" What would we have predicted for consumer spending growth during the past four months based on the history of actual consumer spending and its relationship to income, employment (and unemployment), confidence measures, and wealth (specifically, equity prices)? We also threw inflation and oil prices into the mix for good measure."

Over what "history" was the model developed ? If it was over , say , the last five years it might be expected to provide a reasonable forecast , but aggregating over a longer period - one that precedes the crisis - would be problematic.

What about new credit and debt burdens and/or debt service of consumers ? Surely we've learned by now that these are crucial to understanding the evolution of consumer spending.

Posted by: Marko | May 07, 2015 at 06:00 PM

BTW , one only has to look at your recent graph of spending by type to see the effect of credit on spending :

https://www.frbatlanta.org/research/-/media/C7B00E5056E74D2CB7F7DD9399DD0BD6.ashx

The only category that is equaling or exceeding the growth rates of the early 2000s is durables , reflecting the healthy growth in auto sales since the crisis. This has been achieved only by permitting substandard lending practices - boosted by dealer kickback incentives for promoting higher-cost loans. In other words , subprime 2.0.

Is this how we grow nowadays - looser and looser lending at lower and lower rates ?

Maybe we should aim for an income-based consumption model , rather than one that requires ever-increasing household leverage.

Posted by: Marko | May 07, 2015 at 06:17 PM

The Fed as well as other analyst in the financial markets would be wise to anticipate the logical impact of consumer spending as it is bound to GDP growth, which is what is mainly is made up of. Logical in a sense that low energy prices would justify more cash for small businesses and consumers to spend more.

Posted by: omar alexander | May 10, 2015 at 09:00 AM

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April 20, 2015


What the Weather Wrought

At Seeking Alpha, Joseph Calhoun responds to Friday's macroblog post, which noted that, over the course of the recovery, first-quarter gross domestic product (GDP) growth has on average been slower than the quarterly performance over the balance of the year:

... the "between-the-lines" meaning of the Atlanta post is to ignore all of this since this weakness is being portrayed as "just like last year" a statistical problem in the one measure that economists think most represents the economy.

Rest assured, we try pretty hard to not place any messages "between the lines," and the penultimate sentence of Friday's piece was meant to strike the appropriately tentative tone: "As for the rest of the year, we'll have to wait and see."

We do believe, like others, that weather was at play in the subpar performance of 2015's debut. Severe weather, in February in particular, can explain some of the first-quarter weakness, but "some" is the operative qualifier. 

As the following chart illustrates, relative to a baseline forecast without weather effects—proxied with National Oceanic and Atmospheric Administration measures of heating and cooling days through March—we estimate that the severity of the winter subtracted about 0.6 percentage point from GDP growth:

150420

Two points: First, to the extent that weather is a culprit in subpar first-quarter growth, we should see some payback in the current quarter (as, dare we say, we saw last year).

Second, we (the Atlanta Fed staff) did not begin the year projecting first-quarter growth at a mere 1.8 percent annualized (as the benchmark forecast in the experiment illustrated above implies). That rate of growth is a considerable step-down from our forecast at the beginning of the year, forced by the realities of the incoming data (as captured, for example, by GDPNow estimates). That gap leaves plenty of explaining left to do.

Observable developments can plausibly explain much of the forecast miss—mainly the initial, somewhat ambiguous, impact of energy price declines and the rapid, steep appreciation of the dollar, which has clearly been associated with a suppression of export activity. Our current view is that, as energy prices and the exchange rate stabilize, we will see a return to growth patterns that are closer to 3 percent than 1 percent.

We are not, however, selling the position that it is wise to be completely sanguine about the rest of the year. Here is the official word from Dennis Lockhart, president of the Atlanta Fed (subscription required for full citation):

I lean to a later lift-off date [for the federal funds rate target]. To the extent you want to simplify that debate to June versus September, I lean to September. I don't think, given the progress we have made, the state of the economy, and my confidence that the first quarter was an aberration, that it would be horribly damaging to go a little earlier versus later. But my preference would be to wait for more confirming evidence that we are on the track we think we are on and we expect to carry us back to inflation toward target.


photo of Dave Altig
By Dave Altig, executive vice president and research director of the Atlanta Fed

April 20, 2015 in Economic conditions, Forecasts, GDP | Permalink

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Dave,

Just so you know, the piece on Seeking Alpha was written by my colleague Jeff Snider. They republish our feed and for some reason all the posts over there have my name on them.

Jeff's view of the economy is quite a bit more negative than my own. My views aren't that different than yours. The current slowdown, which I started to notice in the 4th quarter, is about the shale industry primarily. I'm not a big fan of the weather excuse but it probably had some effect. As for the rest of the year, I am concerned about inventories and how companies will react if we don't see some kind of pick up fairly soon. Recession? I don't know but based on the yield curve and credit spreads I can't make that case right now. As you say, we'll see how it plays out.

However, despite our slight disagreement on the current short term trajectory of the economy, Jeff and I agree on a lot. Neither of us were fans of QE and think it has likely done more harm than good. I won't take up any more space but suffice it to say that we are skeptical of monetary solutions to what we see as structural problems.

Joe Calhoun

Posted by: Joseph Calhoun | April 20, 2015 at 06:38 PM

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April 02, 2015


What Seems to Be Holding Back Labor Productivity Growth, and Why It Matters

The Atlanta Fed recently released its online Annual Report. In his video introduction to the report, President Dennis Lockhart explained that the economic growth we have experienced in recent years has been driven much more by growth in hours worked (primarily due to employment growth) than by growth in the output produced per hour worked (so-called average labor productivity). For example, over the past three years, business sector output growth averaged close to 3 percent a year. Labor productivity growth accounted for only about 0.75 percentage point of these output gains. The rest was due primarily to growth in employment.

The recent performance of labor productivity stands in stark contrast to historical experience. Business sector labor productivity growth averaged 1.4 percent over the past 10 years. This is well below the labor productivity gains of 3 percent a year experienced during the information technology productivity boom from the mid-1990s through the mid-2000s.

John Fernald and collaborators at the San Francisco Fed have decomposed labor productivity growth into some economically relevant components. The decomposition can be used to provide some insight into why labor productivity growth has been so low recently. The four factors in the decomposition are:

  • Changes in the composition of the workforce (labor quality), weighted by labor's share of income
  • Changes in the amount and type of capital per hour that workers have to use (capital deepening), weighted by capital's share of income
  • Changes in the cyclical intensity of utilization of labor and capital resources (utilization)
  • Everything else—all the drivers of labor productivity growth that are not embodied in the other factors. This component is often called total factor productivity.

The chart below displays the decomposition of labor productivity for various time periods. The bar at the far right is for the last three years (the next bar is for the past 10 years). The colored segments in each bar sum to average annual labor productivity growth for each time period.

Decomposition of Business Sector Labor Productivity Growth

Taken at face value, the chart suggests that a primary reason for the sluggish average labor productivity growth we have seen over the past three years is that capital spending growth has not kept up with growth in hours worked—a reduction in capital deepening. Declining capital deepening is highly unusual.

Do we think this sluggishness will persist? No. In our medium-term outlook, we at the Atlanta Fed expect that factors that have held down labor productivity growth (particularly relatively weak capital spending) will dissipate as confidence in the economy improves further and firms increase the pace of investment spending, including on various types of equipment and intellectual capital. We currently anticipate that the trend in business sector labor productivity growth will improve to a level of about 2 percent a year, midway between the current pace and the pace experienced during the 1995–2004 period of strong productivity gains. That is, we are not productivity pessimists. Time will tell, of course.

Clearly, this optimistic labor productivity outlook is not without risk. For one thing, we have been somewhat surprised that labor productivity has remained so low for so long during the economic recovery. Moreover, the first quarter data don't suggest that a turning point has occurred. Gross domestic product (GDP) in the first quarter is likely to come in on the weak side (the latest GDPNow tracking estimate here is currently signaling essentially no GDP growth in the first quarter), whereas employment growth is likely to be quite robust (for example, the ADP employment report suggested solid employment gains). As a result, we anticipate another weak reading for labor productivity in the first quarter. We are not taking this as refutation of our medium-term outlook.

Continued weakness in labor productivity would raise many important questions about the outlook for both economic growth and wage and price inflation. For example, our forecast of stronger productivity gains also implies a similarly sized pickup in hourly wage growth. To see this, note that unit labor cost (the wage bill per unit of output) is thought to be an important factor in business pricing decisions. The following chart shows a decomposition of average growth in business sector unit labor costs into the part due to nominal hourly wage growth and the part offset by labor productivity growth:

Decomposition of Unit Labor Cost Growth

The 1975–84 period experienced high unit labor costs because labor productivity growth didn't keep up with wage growth. In contrast, the relatively low and stable average unit labor cost growth we have experienced since the 1980s has been due to wage growth largely offset by gains in labor productivity. Our forecast of stronger labor productivity growth implies faster wage growth as well. That said, a rise in wage growth absent a pickup in labor productivity growth poses an upside risk to our inflation outlook.

Of course, the data on productivity and its components are estimates. It is possible that the data are not accurately reflecting reality in real time. For example, colleagues at the Board of Governors suggest that measurement issues associated with the price of high-tech equipment may be causing business investment to be somewhat understated. That is, capital deepening may not be as weak as the current data indicate. In a follow-up blog to this one, my Atlanta Fed colleague Patrick Higgins will explore the possibility that the weak labor productivity we have recently experienced is likely to be revised away with subsequent revisions to GDP and hours data.


April 2, 2015 in Employment, Forecasts, GDP, Productivity, Unemployment | Permalink

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" It is possible that the data are not accurately reflecting reality in real time."

Thanks for the link. Reading the article you'd have to say that this could be a gross understatment. They are still struggling to cope with "tablets". They don't even mention "smartphones"!

Posted by: jamesxinxlondon | May 19, 2015 at 04:25 PM

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March 05, 2015


Could Reduced Drilling Also Reduce GDP Growth?

Five or six times each month, the Atlanta Fed posts a "nowcast" of real gross domestic product (GDP) growth from the Atlanta Fed's GDPNow model. The most recent model nowcast for first-quarter real GDP growth is provided in table 1 below alongside alternative forecasts from the Philadelphia Fed's quarterly Survey of Professional Forecasters (SPF) and the CNBC/Moody's Analytics Rapid Update survey. The Atlanta Fed's nowcast of 1.2 percent growth is considerably lower than both the SPF forecast (2.7 percent) and the Rapid Update forecast (2.6 percent).

Table 1: Nowcasts of 2015:Q1 real GDP growth

Why the discrepancy? The less frequently updated SPF forecast (now nearly a month old) has the advantage of including forecasts of major subcomponents of GDP. Comparing the subcomponent forecasts from the SPF with those from the GDPNow model reveals that no single factor explains the difference between the two GDP forecasts. The GDPNow model forecasts of the real growth rates of consumer spending, residential investment, and government spending are all somewhat weaker than the SPF forecasts. Together these subcomponents account for just under 1.0 percentage point of the 1.5 percentage point difference between the GDP growth forecasts.

Most of the remaining difference in the GDP forecasts is the result of the different forecasts for real business fixed investment (BFI) growth. The GDPNow model projects a sharp 13.5 percent falloff in nonresidential structures investment that largely offsets the reasonably strong increases in the other two subcomponents of BFI. Much of this decline is due to petroleum and natural gas well exploration; a component which accounts for almost 30 percent of nonresidential structures investment and looks like it will fall sharply this quarter. The remainder of this blog entry "drills" down into this portion of the nonresidential structures forecast (pun intended). (A related recent analysis using the GDPNow model has been done here).

A December macroblog post I coauthored with Atlanta Fed research director Dave Altig presented some statistical evidence that in the past, large declines in oil prices have had a pronounced negative effect on oil and mining investment. Chart 1 below shows that history appears to be repeating itself.

Chart 1: Indicators of drilling activity and oil prices

The Baker Hughes weekly series on active rotary rigs for oil and natural gas wells has plummeted from 1,929 for the week ending November 21 to 1,267 for the week ending February 27. The Baker Hughes data are the monthly source series for drilling oil and gas wells industrial production (IP) and one of the two quarterly source series for the U.S. Bureau of Economic Analysis's (BEA) estimate of drilling investment (for example, petroleum and natural gas exploration and wells). The other source series for drilling investment is footage drilled completions from the American Petroleum Institute, released about a week before the BEA publishes its initial estimate of GDP.

Chart 2: Indicators of oil drilling and natural gas exploration

Chart 2 displays three of these indicators of drilling activity. The data are plotted in logarithms so that one-quarter changes approximate quarterly growth rates. The chart makes clear that the changes in each of the three series are highly correlated, suggesting that the Baker Hughes rig count can be used to forecast the other series. The Baker Hughes data end on February 27, and we can (perhaps conservatively) extrapolate it forward by assuming it remains at its last reading of 1,267 active rigs through the end of the quarter. We can then use a simple regression to forecast the February and March readings of drilling oil and gas wells IP. Another simple regression with the IP drilling series and its first-quarter forecast allows us to project first-quarter real drilling investment. The forecasts, shown as dashed lines in chart 2, imply real drilling investment will decline at an annual rate of 52 percent in the first quarter. This decline is steeper than the current GDPNow model forecast of a 36 percent decline as the latter does not account for the decline in active rotary rigs in February.

A 52 percent decline in real nonresidential investment in drilling would likely subtract about 0.5 percentage point off of first-quarter real GDP growth. However, it's important to keep in mind that a lot of first quarter source data for GDP are not yet available. In particular, almost none of the source data for the volatile net exports and inventory investment GDP subcomponents have been released. So considerable uncertainty still surrounds real GDP growth this quarter.


March 5, 2015 in Energy, Forecasts, GDP | Permalink

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January 09, 2015


Gauging Inflation Expectations with Surveys, Part 3: Do Firms Know What They Don’t Know?

In the previous two macroblog posts, we introduced you to the inflation expectations of firms and argued that the question you ask matters a lot. In this week's final post, we examine another important dimension of our data: inflation uncertainty, a topic of some deliberation at the last Federal Open Market Committee meeting (according to the recently released minutes).

Survey data typically measure only the inflation expectation of a respondent, not the certainty surrounding that prediction. As a result, survey-based measures often use the disagreement among respondents as a proxy for uncertainty, but as Rob Rich, Joe Tracy, and Matt Ploenzke at the New York Fed caution in this recent blog post, you probably shouldn't do this.

Because we derive business inflation expectations from the probabilities that each firm assigns to various unit cost outcomes, we can measure the inflation uncertainty of a respondent directly. And that allows us to investigate whether uncertainty plays a role in the accuracy of firm inflation predictions. We wanted to know: Do firms know what they don't know?

The following table, adapted from our recent working paper, reports the accuracy of a business inflation forecast relative to the firm's inflation uncertainty at the time the forecast was made. We first compare the prediction accuracy of firms who have a larger-than-average degree of prediction uncertainty against those with less-than-average uncertainty. We also compare the most uncertain firms with the least uncertain firms.

On average, firms provide relatively accurate, unbiased assessments of their future unit cost changes. But the results also clearly support the conclusion that more uncertain respondents tend to be significantly less accurate inflation forecasters.

Maybe this result doesn't strike you as mind-blowing. Wouldn't you expect firms with the greatest inflation uncertainty to make the least accurate inflation predictions? We would, too. But isn't it refreshing to know that business decision-makers know when they are making decisions under uncertainty? And we also think that monitoring how certain respondents are about their inflation expectation, in addition to whether the average expectation for the group has changed, should prove useful when evaluating how well inflation expectations are anchored. If you think so too, you can monitor both on our website's Inflation Project page.

January 9, 2015 in Business Inflation Expectations, Forecasts, Inflation, Inflation Expectations | Permalink

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January 07, 2015


Gauging Inflation Expectations with Surveys, Part 2: The Question You Ask Matters—A Lot

In our previous macroblog post, we discussed the inflation expectations of firms and observed that—while on average these expectations look similar to that of professional forecasters—they reveal considerably more variation of opinion. Further, the inflation expectations of firms look very different from what we see in the household survey of inflation expectations.

The usual focal point when trying to explain measurement differences among surveys of inflation expectations is the respondent, or who is taking the survey. In the previous macroblog post, we noted that some researchers have indicated that not all households are equally informed about inflation trends and that their expectations are somehow biased by this ignorance. For example, Christopher Carroll over at Johns Hopkins suggests that households update their inflation expectations through the news, and some may only infrequently read the press. Another example comes from a group of researchers at the New York Fed and Carnegie Mellon They've suggested that less financially literate households tend to persistently have the highest inflation expectations.

But what these and related research assume is that whom you ask the question of is of primary significance. Could it be that it's the question being asked that accounts for such disagreement among the surveys?

We know, for example, that professional forecasters are asked to predict a particular inflation statistic, while households are simply asked about the behavior of "prices in general" and prices "on the average." To an economist, these amount to pretty much the same thing. But are they the same thing in the minds of non-economists?

You may be surprised, but the answer is no (as a recent Atlanta Fed working paper discussed). When we asked our panel of firms to predict by how much "prices will change overall in the economy"—essentially the same question the University of Michigan asks households—business leaders make the same prediction we see in the survey of households: Their predictions seem high relative to the trend in the inflation data, and the range of opinion among businesses on where prices "overall in the economy" are headed is really, really wide (see the table).

150107a

But what if we ask businesses to predict a particular inflation statistic, as the Philly Fed asks professional forecasters to do? We did that, too. And you know what? Not only did a majority of our panelists (about two-thirds) say they were "familiar" with the inflation statistic, but their predictions looked remarkably similar to that of professional forecasters (see the table).

150107b

So when we ask firms to answer the same question asked of professional forecasters, we got back something that was very comparable to responses given by professional forecasters. But when you ask firms the same question typically asked of households, we got back responses that looked very much like what households report.

Moreover, we dug through the office file cabinets, remembering a related table adapted from a joint project between the Cleveland Fed and the Ohio State University that was highlighted in a 2001 Cleveland Fed Economic Commentary. In August 2001, a group of Ohio households were asked to provide their perception of how much the Consumer Price Index (CPI) had increased over the last 12 months, and we compared it with how much they thought "prices" had risen over the past 12 months.

The households reported that the CPI had risen 3 percent—nearly identical to what the CPI actually rose over the period (2.7 percent). However, in responding to the vaguely worded notion of "prices," the average response was nearly 7 percent (see the table). So again, it seems that the loosely defined concept of "prices" is eliciting a response that looks nothing like what economists would call inflation.

150107c

So it turns out that the question you ask matters—a lot—more so, evidently, than to whom you ask the question. What's the right question to ask? We think it's the question most relevant to the decisions facing the person you are asking. In the case of firms (and others, we suspect), what's most relevant are the costs they think they are likely to face in the coming year. What is unlikely to be top-of-mind for business decision makers is the future behavior of an official inflation statistic or their thoughts on some ambiguous concept of general prices.

In the next macroblog post, we'll dig even deeper into the data.

photo of Mike Bryan
By Mike Bryan, vice president and senior economist,
photo of Brent Meyer
Brent Meyer, economist, and
photo of Nicholas Parker
Nicholas Parker, economic policy specialist, all in the Atlanta Fed's research department

January 7, 2015 in Business Inflation Expectations, Forecasts, Inflation, Inflation Expectations | Permalink

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January 05, 2015


Gauging Inflation Expectations with Surveys, Part 1: The Perspective of Firms

Inflation expectations matter. Just ask any central banker (such as the Federal Reserve, the European Central Bank, the Bank of England, or the Bank of Japan).

Central bankers measure inflation expectations in more than a few ways, which is another way of saying no measure of inflation expectations is entirely persuasive.

Survey data on inflation expectations are especially hard to interpret. Surveys of professional economists, such as the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters, reveal inflation expectations that, over time, track fairly close to the trend in the officially reported inflation data. But the inflation predictions by professional forecasters are extraordinarily similar and call into question whether they represent the broader population.

The inflation surveys of households, however, reveal a remarkably wide range of opinion on future inflation compared to those of professional forecasters. Really, really wide. For example, in any particular month, 13 percent of the University of Michigan's survey of households predicts year-ahead inflation to be more than 10 percent, an annual inflation rate not seen since October 1981. Even in the aggregate, the inflation predictions of households persistently track much higher than the officially reported inflation data (see the chart). These and other curious patterns in the household survey data call into question whether these data really represent the inflation predictions on which households act.

Household Expectations Overshoot Inflation Measures

Even if you're unfamiliar with the literature on this subject, the above observations may not strike you as particularly hard to believe. Economists are, presumably, expert on inflation, while households experience inflation from their own unique—some would suggest even uninformed—perspectives.

We have yet another survey of inflation expectations, one from the perspective of businesses leaders. We think this may be an especially useful perspective on future inflation since business leaders, after all, are the price setters. Our survey has been in the field for a little more than three years now—just long enough, we think, to step back and take stock of what business inflation expectations look like, especially in comparison to the other survey data.

Our initial impressions are reported in a recent Atlanta Fed working paper, and the next few macroblog posts will share some of our favorite observations from this research.

We have been asking firms to assign probabilities to possible changes in their unit costs over the year ahead. From these probabilities, we compute how much firms think their costs are going to change in the coming year and how certain they are of that change (see the table). What we find is that the inflation expectations of firms, on average, look something like the inflation predictions of professional forecasters, but not so much like the predictions of households.

Summary Descriptive Statistics: Inflation Expectations (Oct. 2011 - Dec. 2014)

But we also find that there is a significant range of opinion among firms, more so than the range of opinions that forecasting professionals express. Some of the variation among firms appears to be related to their particular industries and are broadly correlated with the uneven cost pressures shown in similar industrial breakdowns of the Producer Price Index from the U.S. Bureau of Labor Statistics (see the table).

Own Unit Cost Expectations by Industry and Firm Size (Oct. 2011 - Dec. 2014)
(enlarge)

So what we have now are three surveys of inflation expectations, each yielding very different inflation predictions. What accounts for the variation we see across the surveys? Our survey allows us to experiment a bit, which was one of the motivations for conducting it. We didn't just want to measure the inflation expectations of firms; we wanted to learn about those expectations. In the next few macroblog posts, we'll tell you a few of the things we've learned. And we think some of our initial findings will surprise you.


January 5, 2015 in Business Inflation Expectations, Forecasts, Inflation, Inflation Expectations | Permalink

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