The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.
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September 15, 2014
The Changing State of States' Economies
Timely data on the economic health of individual states recently came from the U.S. Bureau of Economic Analysis (BEA). The new quarterly state-level gross domestic product (GDP) series begins in 2005 and runs through the fourth quarter of 2013. The map below offers a look at how states have fared since 2005 relative to the economic performance of the nation as a whole.
It’s interesting to see the map depict an uneven expansion between the second quarter of 2005 and the peak of the cycle in the fourth quarter of 2007. By the fourth quarter of 2008, most parts of the country were experiencing declines in GDP.
The U.S. economy hit a trough during the second quarter of 2009, according to the National Bureau of Economic Research, but 20 states and the District of Columbia recovered more quickly than the rest. The continued progress is easy to see, as is the far-reaching impact of the tsunami that hit Japan on March 11, 2011, which disrupted economic activity in many U.S. states. By the fourth quarter of 2013, only two states—Mississippi and Minnesota—experienced negative GDP.
The map shows that not all states are growing even when overall GDP is growing, and not all states are shrinking even when overall GDP is shrinking. But if we want to know more about which states are driving the change in overall GDP growth, then the geographic size of the state might not be so important.
Depicting states scaled to the size of their respective economies provides another perspective, because it’s the relative size of a state’s economy that matters when considering the contribution of state-level GDP growth to the national economy. The following chart uses bubbles (sized by the size of the state’s economy) to depict changes in states’ real GDP from the second quarter of 2005 through the fourth quarter of 2013.
This chart shows how the economies of larger states such as California, New York, Texas, Florida, and Illinois have an outsize influence on the national economy, despite some having a smaller geographic footprint. (Conversely, changes in the relatively small economy of a geographically large state like Montana have a correspondingly small impact on changes in the national economy.)
Overall GDP is now well above its prerecession peak. But have all states also fully recovered their GDP losses? The chart below depicts the cumulative GDP growth in each state from the end of 2007 to the end of 2013. The size of the circle represents the magnitude of the change in the level of real GDP between the end of 2007 and 2013. Most states have fully recovered in terms of GDP. (North Dakota’s spectacular growth stands out, thanks to its boom in the oil and gas industry.) However, Florida, Nevada, Connecticut, Arizona, New Jersey, and Michigan had not returned to their prerecession spending levels as of the end of 2013. For Florida, Nevada, and Arizona, the depth of the collapse in those states’ booming housing sectors is almost certainly responsible for the relative shortfall in performance since 2007.
The next release of the state-level GDP data, scheduled for September 26, will provide insight into the relative performance of state economies during the first quarter of 2014 at a time when overall GDP shrank by more than 2 percent (annualized rate). Some analysts have suggested that weather disruptions were a leading cause for that decline. The state-level GDP data will help tell the story.
By Whitney Mancuso, a senior economic analyst in the the Atlanta Fed's research department
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August 21, 2014
Seeking the Source
As the early data on the third quarter begin to roll in, the (very tentative) conclusion is that nothing we know yet contradicts the consensus gross domestic product (GDP) forecast (from the Blue Chip panel, for example) of seasonally adjusted annualized Q3 growth in the neighborhood of 3 percent. The latest from our GDPNow model:
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2014 was 3.0 percent on August 19, up from 2.8 percent on August 13. The nowcast for inventory investment ticked up following the Federal Reserve's industrial production release on August 15 while the nowcast for residential investment growth increased following this morning's new residential construction release from the U.S. Census Bureau.
The contribution of residential investment is obviously welcome, but the inventory contribution in the industrial production release tilts in the direction of one of our concerns about growth performance in the second quarter. Specifically, too much inventory spending, too little "core" spending.
On the plus side, our projections for current-quarter investment spending have been increasing, outside of nonresidential structures. On the much less positive side, the nowcast for consumer spending has been falling off and currently looks to expand at a pace barely above 2 percent.
Weakness over the course of this recovery in the key GDP expenditure components of consumer spending and investment has been the subject of a lot of commentary, recent entries being provided by Jonathon McCarthy (on the former, at Liberty Street Economics) and Jim Hamilton (on the latter, at Econbrowser). McCarthy in particular points to less-than-robust consumption expenditure as a source of growth since the end of the recession that has been slower than hoped for:
One contributor to the subdued pace of economic growth in this expansion has been consumer spending. Even though consumption growth has been somewhat stronger in the past couple of quarters, it has still been weak in this expansion relative to previous expansions.
An earlier version of the McCarthy theme appeared in this post on Atif Mian and Amir Sufi's House of Debt blog:
...the primary culprit: consumption of services and non-durable goods. They are shockingly weak relative to other recoveries.
There is something of a chicken-and-egg conundrum in all of this discussion. Has GDP growth disappointed because consumer and business spending has been lackluster? Or has consumer and business spending been weaker than we expected because GDP growth has lagged the pace of past recoveries?
In fact, the growth rates of consumption expenditure and business fixed investment—which excludes the residential housing piece—have not been particularly unusual over the course of this recovery once you account for the pace of GDP growth.
The following charts illustrate the average contributions of consumption and investment spending as a percent of average GDP growth for the 20 quarters following six of the last seven U.S. recessions. (I have excluded the period following the 1969–70 recession because 20 quarters after that downturn include the entirety of the 1973–75 recession.)
It is worth noting that these observations also apply to the components of consumption (across services, durables, and nondurables) and business fixed investment (across equipment and intellectual property and structures), as the following two charts show:
The conclusion is that if growth in consumption and investment has been particularly tepid over the course of the recovery, it merely reflects the historically tepid growth in GDP.
Or the other way around. These charts represent nothing more than arithmetic exercises, a mechanical decomposition of GDP growth into couple of the spending components that make up to the whole. They tell us nothing about causation.
What we have is the same too-full bag of possible explanations for why GDP has not yet returned to levels that—before the financial crisis—we would have associated with "potential": too much regulation, too little lending, excessive uncertainty, not enough government-driven demand, and so on. Maybe more investment spending would cause more growth. Maybe not.
In the language of the hot topic of the moment, this ultimately takes us to the debate over secular stagnation—what does it mean, does it exist, what is its cause if it does exist? Steve Williamson provides a useful summary of the debate, which is not yet at the point of providing actual answers. And unfortunately, the answers really matter.
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August 08, 2014
To say that last week was somewhat eventful on the macroeconomic data front is probably an exercise in understatement. Relevant numbers on GDP growth (past and present), employment and unemployment, and consumer price inflation came in quick succession.
These data provide some of the context for our local Federal Open Market Committee participant’s comments this week (for example, in the Wall Street Journal’s Real Time Economics blog, with similar remarks made in an interview on CNBC’s Closing Bell). From that Real Time Economics blog post:
Although the economy is clearly growing at a respectable rate, Federal Reserve Bank of Atlanta President Dennis Lockhart said Wednesday it is premature to start planning an early exit from the central bank’s ultra-easy policy stance.
“I’m not ruling out” the idea the Fed may need to raise short-term interest rates earlier than many now expect, Mr. Lockhart said in an interview with The Wall Street Journal. But, at the same time, “I’m a little bit cautious” about the policy outlook, and still expect that when the first interest rate hike comes, it will likely happen somewhere in the second half of next year.
“I remain one who is looking for further validation that we are on a track that is going to make the path to our mandate objectives pretty irreversible,” Mr. Lockhart said. “It’s premature, even with the good numbers that have come in...to draw the conclusion that we are clearly on that positive path,” he said.
Why so “cautious”? Here’s the Atlanta Fed staff’s take on the state of things, starting with GDP:
With the annual benchmark revision in hand, 2013 looks like the real deal, the year that the early bet on an acceleration of growth to the 3 percent range finally panned out. Notably, fiscal drag (following the late-2012 budget deal), which had been our go-to explanation of why GDP appeared to have fallen short of expectations once again, looks much less consequential on revision.
Is 2014 on track for a repeat (or, more specifically, comparable performance looking through the collection of special factors that weighed on the first quarter)? The second-quarter bounce of real GDP growth to near 4 percent seems encouraging, but we are not yet overly impressed. Final sales—a number that looks through the temporary contribution of changes in inventories—clocked in at a less-than-eye-popping 2.3 percent annual rate.
Furthermore, given the significant surprise in the first-quarter final GDP report when the medical-expenditure-soaked Quarterly Services Survey was finally folded in, we’re inclined to be pretty careful about over-interpreting the second quarter this early. It’s way too early for a victory dance.
Regarding labor markets, here is our favorite type of snapshot, courtesy of the Atlanta Fed’s Labor Market Spider Chart:
There is a lot to like in that picture. Leading indicators, payroll employment, vacancies posted by employers, and small business confidence are fully recovered relative to their levels at the end of the Great Recession.
On the less positive side, the numbers of people who are marginally attached or who are working part-time while desiring full-time hours remain elevated, and the overall job-finding rate is still well below prerecession levels. Even so, these indicators are noticeably better than they were at this time last year.
That year-over-year improvement is an important observation: the period from mid-2012 to mid-2013 showed little progress in the broader measures of labor-market performance that we place in the resource “utilization” category. During the past year, these broad measures have improved at the same relative pace as the standard unemployment statistic.
We have been contending for some time that part-time for economic reasons (PTER) is an important factor in understanding ongoing sluggishness in wage growth, and we are not yet seeing anything much in the way of meaningful wage pressures:
There was, to be sure, a second-quarter spike in the employment cost index (ECI) measure of labor compensation growth, but that increase followed a sharp dip in the first quarter. Maybe the most recent ECI reading is telling us something that hourly earnings are not, but that still seems like a big maybe. Outside of some specific sectors and occupations (in manufacturing, for example), there is not much evidence of accelerating wage pressure in either the data or in anecdotes we get from our District contacts. We continue to believe that wage growth is most consistent with the view that that labor market slack persists, and underlying inflationary pressures (from wage costs, at least) are at bay.
Clearly, it’s dubious to claim that wages help much in the way of making forward predictions on inflation (as shown, for example, in work from the Chicago Fed, confirming earlier research from our colleagues at the Cleveland Fed). And in any event, we are inclined to agree that the inflation outlook has, in fact, firmed up. At this time last year, it was hard to argue that the inflation trend was moving in the direction of the Committee’s objective (let alone that it was not actually declining).
But here again, a declaration that the risks have clearly shifted in the direction of overshooting the FOMC’s inflation goals seems wildly premature. Transitory factors have clearly elevated recent statistics. The year-over-year inflation rate is still only 1.5 percent, and by most cuts of the data, the trend still looks as close to that level as to 2 percent.
We do expect measured inflation trends to continue to move in the direction of 2 percent, but sustained performance toward that objective is still more conjecture than fact. (By the way, if you are bothered by the appeal to a measure of core personal consumption expenditures in that chart above, I direct you to this piece.)
All of this is by way of explaining why we here in Atlanta are “a little bit cautious” about joining any chorus singing from the we’re-moving-on-up songbook. Paraphrasing from President Lockhart’s comments this week, the first steps to policy normalization don’t have to wait until the year-over-year inflation rate is consistently at 2 percent, or until all of the slack in the labor market is eliminated. But it is probably prudent to be fairly convinced that progress to those ends is unlikely to be reversed.
We may be getting there. We’re just not quite there yet.
By Dave Altig, executive vice president and research director of the Atlanta Fed
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July 21, 2014
GDP Growth: Will We Find a Higher Gear?
We are still more than a week away from receiving the advance report for U.S. gross domestic product (GDP) from April through June. Based on what we know to date, second-quarter growth will be a large improvement over the dismal performance seen during the first three months of this year. As of today, our GDPNow model is reading an annualized second-quarter growth rate at 2.7 percent. Given that the economy declined by 2.9 percent in the first quarter, the prospects for the anticipated near-3 percent growth for 2014 as a whole look pretty dim.
The first-quarter performance was dominated, of course, by unusual circumstances that we don't expect to repeat: bad weather, a large inventory adjustment, a decline in real exports, and (especially) an unexpected decline in health services expenditures. Though those factors may mean a disappointing growth performance for the year as a whole, we will likely be willing to write the first quarter off as just one of those things if we can maintain the hoped-for 3 percent pace for the balance of the year.
Do the data support a case for optimism? We have been tracking the six-month trends in four key series that we believe to be especially important for assessing the underlying momentum in the economy: consumer spending (real personal consumption expenditures, or real PCE) excluding medical services, payroll employment, manufacturing production, and real nondefense capital goods shipments excluding aircraft.
The following charts give some sense of how things are stacking up. We will save the details for those who are interested, but the idea is to place the recent performance of each series, given its average growth rate and variability since 1990, in the context of GDP growth and its variability over that same period.
What do we learn from the foregoing charts? Three out of four of these series appear to be consistent with an underlying growth rate in the range of 3 percent. Payroll employment growth, in fact, is beginning to send signals of an even stronger pace.
Unfortunately, the series that looks the weakest relates to consumer spending. If we put any stock in some pretty basic economic theory, spending by households is likely the most forward-looking of the four measures charted above. That, to us, means a cautious attitude is the still the appropriate one. Or, to quote from a higher Atlanta Fed power:
... it will likely be hard to confirm a shift to a persistent above-trend pace of GDP growth even if the second-quarter numbers look relatively good.
This experience suggests to me that we can misread the vital signs of the economy in real time. Notwithstanding the mostly positive and encouraging character of recent data, we policymakers need to be circumspect when tempted to drop the gavel and declare the case closed. In the current situation, I feel it's advisable to accrue evidence and gain perspective. It will take some time to validate an outlook that assumes above-trend growth and associated solid gains in employment and price stability.
By Dave Altig, executive vice president and research director, and
Pat Higgins, a senior economist, both in the Atlanta Fed's research department
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July 10, 2014
Introducing the Atlanta Fed's GDPNow Forecasting Model
The June 18 statement from the Federal Open Market Committee opened with this (emphasis mine):
Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months.... Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.
I highlighted the business fixed investment (BFI) part of that passage because it contracted at an annual rate of 1.2 percent in the first quarter of 2014. Any substantial turnaround in growth in gross domestic product (GDP) from its dismal first-quarter pace would seem to require that BFI did in fact resume its advance through the second quarter.
We won't get an official read on BFI—or on real GDP growth and all of its other components—until July 30, when the U.S. Bureau of Economic Analysis (BEA) releases its advance (or first) GDP estimates for the second quarter of 2014. But that doesn't mean we are completely in the dark on what is happening in real time. We have enough data in hand to make an informed statistical guess on what that July 30 number might tell us.
The BEA's data-construction machinery for estimating GDP is laid out in considerable detail in its NIPA Handbook. Roughly 70 percent of the advance GDP release is based on source data from government agencies and other data providers that are available prior to the BEA official release. This information provides the basis for what have become known as "nowcasts" of GDP and its major subcomponents—essentially, real-time forecasts of the official numbers the BEA is likely to deliver.
Many nowcast variants are available to the public: the Wall Street Journal Economic Forecasting Survey, the Philadelphia Fed Survey of Professional Forecasters, and the CNBC Rapid Update, for example. In addition, a variety of proprietary nowcasts are available to subscribers, including Aspen Publishers' Blue Chip Publications, Macroeconomic Advisers GDP Tracking, and Moody's Analytics high-frequency model.
With this macroblog post, we introduce the Federal Reserve Bank of Atlanta's own nowcasting model, which we call GDPNow.
GDPNow will provide nowcasts of GDP and its subcomponents on a regularly updated basis. These nowcasts will be available on the pages of the Atlanta Fed's Center for Quantitative Economic Research (CQER).
A few important notes about GDPNow:
- The GDPNow model forecasts are nonjudgmental, meaning that the forecasts are taken directly from the underlying statistical model. (These are not official forecasts of either the Atlanta Fed or its president, Dennis Lockhart.)
- Because nowcasts are often based on both modeling and judgment, there is no reason to expect that GDPNow will agree with alternative forecasts. And we do not intend to present GDPNow as superior to those alternatives. Different approaches have their pluses and minuses. An advantage of our approach is that, because it is nonjudgmental, our methodology is easily replicable. But it is always wise to avoid reliance on a single model or source of information.
- GDPNow forecasts are subject to error, sometimes substantial. Internally, we've regularly produced nowcasts from the GDPNow model since introducing an earlier version of it in an October 2011 macroblog post. A real-time track record for the model nowcasts just before the BEA's advance GDP release is available on the CQER GDPNow webpage, and will be updated on a regular basis to help users make informed decisions about the use of this tool.
So, with that in hand, does it appear that BFI in fact "resumed its advance" last quarter? The table below shows the current GDPNow forecasts:
We will update the nowcast five to six times each month following the releases of certain key economic indicators listed in the frequently asked questions. Look for the next GDPNow update on July 15, with the release of the retail trade and business inventory reports.
If you want to dig deeper, the GDPNow page includes downloadable charts and tables as well as numerical details including the model's nowcasts for GDP, its subcomponents, and how the subcomponent nowcasts are built up from both the underlying source data and the model parameters. This working paper supplies the model's technical documentation. We hope economy watchers find GDPNow to be a useful addition to their information sets.
By Pat Higgins, a senior economist in the Atlanta Fed's research department
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October 03, 2013
Why No Taper? One Man's View
One possibility is that Bernanke and the other FOMC leaders… never intended to start tapering…
A second possible explanation is that Bernanke and other Fed leaders were indeed anticipating that they would begin tapering QE in September but were startled at how rapidly long-term rates had risen in response to their earlier statements…
The third scenario is that economic activity was clearly slowing, with the future pace of activity therefore vulnerable to even higher interest rates.
Speaking only for myself, I choose Feldstein's third option. He goes a good way to making the case himself:
The annualized GDP growth rate in the first half of 2013 was just 1.8%, and final sales were up by only 1.2%. Although there are no official GDP estimates for the third quarter, private-sector assessments anticipate no acceleration in growth, putting the economy on a path that will keep this year's output gain at well under 2%.
That unfortunate story was pretty clear on the eve of the FOMC meeting—in particular, the lack of evidence that growth in the second half of the year would be an improvement on the already disappointing pace of the first half. Our own internal "nowcast" tracking model was suggesting third-quarter GDP growth in the neighborhood of the sub-2 percent growth that Feldstein cites. And as this table shows, things have not improved since:
These facts, of course, were reflected in the downgrade of the 2013 growth forecasts published in FOMC participants' Summary of Economic Projections. But that is not all, as Professor Feldstein reports:
In addition, the Fed's preferred measure of inflation was much lower than its 2% target. The annual price index for personal consumer expenditure, excluding food and energy, has been rising for several months at a rate of just 1.2%, increasing the possibility of a slide into deflation.
And even if you don't go in for inflation measures that exclude food and energy, it doesn't much matter, because all-in inflation was, and still is, also running well below that 2 percent target:
Though the August personal consumption expenditures price report finally provided a slight uptick in year-over-year core inflation, there was not even that scant hint of a return to the 2 percent inflation target by FOMC meeting time.
And that was looking a lot like strike number two to me. As Fed Chairman Ben Bernanke explained at the post-meeting press conference, repeating the criteria for adjustments to the FOMC asset purchase program that he laid out in June:
We have a three-part baseline projection which involves increasing growth…, continuing gains in the labor market, and inflation moving back towards objective… we'll be looking to see if the data confirm that basic outlook.
Of the remaining element of the three-part baseline, it is true that 12-month average monthly job gains looked pretty much like they did in June, when the talk of taper got serious:
But the momentum—which I measure here as the ratio of three-month average monthly job gains to the 12-month average—was clearly in the downward direction:
What's more, the revisions in prior months' employment statistics were running in the wrong direction:
As a rule, forecasters don't sweat being wrong. That comes with the territory. But when you are persistently wrong in the same direction, it is time to worry at least a bit.
So, what do we have, then?
- Inflation is low relative to the FOMC's objective—and has not moved in the direction of that objective with any conviction.
- GDP growth has disappointed, with the anticipated pickup in second-half growth nowhere in sight.
- "Continuing gains in the labor market" at the pace seen earlier in the year are looking a little shaky.
I find it pretty easy to see how this fails to add up to satisfaction of the three-part economic conditionality laid out in June by the Chairman (on behalf of the FOMC).
One could argue, I suppose, that the FOMC's explicit tying of asset purchases to improvement in the labor market makes it first among equals in the three-part test (as long as inflation is relatively stable), that similar downward momentum on the job front arose and disappeared in the summer of 2012, and that with a little patience things will appear on track.
Maybe. But I would point out that the reversal of negative momentum in the labor market the summer before was accompanied by the initiation of "QE3" (or at least the MBS part of QE3). You can draw your own conclusions about causality, but there is a fairly convincing case to be made for the proposition that, with the data in hand at the time, a wait-and-see decision was what patience dictated.
That, of course, begs the main question posed in Feldstein's article: When will it be time to taper? On that, and in the spirit of baseball playoff season, get your scorecard here.
By Dave Altig, executive vice president and research director at the Atlanta Fed
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August 30, 2013
Still Waiting for Takeoff...
On Thursday, we got a revised look at the economy’s growth rate in the second quarter. While the 2.5 percent annualized rate was a significant upward revision from the preliminary estimate, it comes off a mere 1.1 percent growth rate in the first quarter. That combines for a subpar first-half growth rate of 1.8 percent. OK, it’s growth, but not as strong as one would expect for a U.S. expansion and clearly a disappointment to the many forecasters who had once (again) expected this to be the year the U.S. economy shakes itself out of the doldrums.
Now, we’re not blind optimists when it comes to the record of economic forecasts. We know well that the evidence says you shouldn’t get overly confident in your favorite economists’ prediction. Most visions of the economy’s future have proven to be blurry at best.
Still, we at the Atlanta Fed want to know how to best interpret this upward revision to the second-quarter growth estimate and how it affects our president’s baseline forecast “for a pickup in real GDP growth over the balance of 2013, with a further step-up in economic activity as we move into 2014.”
What we can say about the report is that the revised second-quarter growth estimate is a decided improvement from the first quarter and a modest bump up from the recent four-quarter growth trend (1.6 percent). And there are some positive indicators within the GDP components. For example, real exports posted a strong turnaround last quarter, presumably benefiting from Europe’s emerging from its recession. And the negative influence of government spending cuts, while still evident in the data, was much smaller than during the previous two quarters. Oh, and business investment spending improved between the first and second quarters.
All good, but these data simply give us a better fix on where we were in the second quarter, not necessarily a good signal of where we are headed. To that we turn to our “nowcast” estimate for the third quarter based on the incoming monthly data (the evolution of which is shown in the table below).
A "nowcasting" exercise generates quarterly GDP estimates in real time. The technical details of this exercise are described here, but the idea is fairly simple. We use incoming data on 100-plus economic series to forecast 12 components of GDP for the current quarter. We then aggregate those forecasts of GDP components to get a current-quarter estimate of overall GDP growth.
We caution that unlike others, our nowcast involves no interpretation whatsoever of these data. In what is purely a statistical exercise, we let the data do all the speaking for themselves.
Given the first data point of July—the July jobs report—the nowcast for the third quarter was pretty bleak (1.1 percent). Things improved a few days later with the release of strong international trade data for June, and stepped up further with the June wholesale trade report. But the remainder of the recent data point to a third-quarter growth rate that is very close to the lackluster performance of the first half.
In his speech a few weeks ago, President Dennis Lockhart indicated what he was looking for as drivers for stronger growth in the second half of this year.
“I expect consumer activity to strengthen.”
Today’s read on real personal consumption expenditures (PCE) probably isn’t bolstering confidence in that view. Real PCE was virtually flat in July, undermining private forecasters’ expectation of a moderate gain. Our nowcast for real GDP slipped down 0.5 percentage points to 1.4 percent on the basis of this data, and pegged consumer spending at 1.7 percent for Q3—in line with Q2’s 1.8 percent gain.
“I expect business investment to accelerate somewhat.”
The July data were pretty disappointing on this score. The durable-goods numbers released a few days ago were quite weak, causing our nowcast, and those of the others we follow, to revise down the third-quarter growth estimate.
“I expect the rebound we have seen in the housing sector to continue.”
Check. Our nowcast wasn’t affected much by the housing starts data, but the existing sales numbers produced a positive boost to the estimate. Our nowcast’s estimate of residential investment growth in the third quarter is well under what we saw in the second quarter. But at 5.3 percent, the rebound looks to be continuing.
“I expect the recent improvement in exports to last.”
Unfortunately, the July trade numbers don’t get reported until next week. So we’re going to mark this one as missing in action. But as we said earlier, that June trade number was strong enough to cause our third-quarter nowcast to be revised up a bit.
“And I expect to see an easing of the public-sector spending drag at the federal, state, and local levels.”
Again, check. The July Treasury data indicated growth in government spending overall.
So the July data are a mixed bag: some positives, some disappointments, and some missing-in-actions. But if President Lockhart were to ask us (and something tells us he just might), we’re likely to say that on the basis of the July indicators, the “pickup in real GDP growth over the balance of 2013” isn’t yet very evident in the data.
This news isn’t likely to come as a big surprise to him. Again, here’s what he said publicly two weeks ago:
When I weigh the balance of risks around the medium-term outlook I laid out, I have some concerns about the potential for ambiguous or disappointing data. I also think that it is important to be realistic about the degree to which we are likely to have clarity in the near term about the direction of the economy. Both the quantity of information and the strength of the signal conveyed by the data will likely be limited. As of September, the FOMC will have in hand one more employment report, two reports on inflation, a revision to the second-quarter GDP data, and preliminary incoming signals about growth in the third quarter. I don't expect to have enough data to be sure of my outlook.
It’s still a little early to say with any confidence we won’t eventually see a pickup this quarter, and we can hope that the incoming August numbers show a more marked improvement. All we can say at this point is that after seeing most of the July data, it still feels like we’re stuck on the tarmac.
By Mike Bryan, vice president and senior economist,
Patrick Higgins, senior economist, and
Brent Meyer, economist, all in the Atlanta Fed's research department
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August 16, 2013
GDP, Jobs, and Growth Accounting
The latest on productivity, from the Associated Press via USA Today:
U.S. worker productivity accelerated to a still-modest 0.9% annual pace between April and June after dropping the previous quarter.
The second-quarter gain...reversed a decline in the January-March quarter, when the Labor Department's revised numbers show productivity shrank at a 1.7% annual pace.
Labor costs rose at a 1.4% annual pace from April through June, reversing a revised 4.2% drop the previous quarter.
Productivity measures output per hour of work. Weak productivity suggests that companies may have to hire because they can't squeeze more work from their existing employees....
Productivity growth has been weaker recently, rising 1.5% in 2012 and 0.5% in 2011.
Annual productivity growth averaged 3.2% in 2009 and 3.3% in 2010. In records dating back to 1947, it's been about 2%.
Though not quite in the category of spectacular—and coming off revisions that if anything made things look weaker than previously thought—last quarter's uptick is a welcome development. Earlier this week, in a speech to the Atlanta Kiwanis club, Atlanta Fed President Dennis Lockhart laid out several scenarios with materially different implications for how the GDP and employment picture might play out over the next several years:
As a matter of arithmetic, healthy employment growth coupled with tepid GDP growth implies weak labor productivity growth. And in fact, productivity growth in recent quarters has been significantly below historical norms.
[I] believe that the recent low growth of productivity is probably just a temporary downdraft after the rather strong productivity growth when the economy emerged from recession.
If productivity growth rebounds to more typical levels, the coincidence of job gains at a pace of around 190,000 per month in recent months and GDP growth below 2 percent cannot persist. Again, it's a matter of arithmetic. Either GDP growth will rise to levels consistent with recent employment growth, or employment growth will fall to levels more consistent with the weak GDP data we've been witnessing.
I've got a working assumption on this question, and it is captured in the Atlanta Fed's baseline forecast for the second half of this year and 2014. This outlook calls for a pickup in real GDP growth over the balance of 2013, with a further step-up in economic activity as we move into 2014.
You can get a sense of this outlook by considering the output of one particular model that we use here at the Atlanta Fed. The model, which is purely statistical, gives us a view into how productivity, GDP, employment, and the unemployment rate might move together (along with other labor market variables like labor force participation and average hours worked). Here is the bottom line of an exercise that assumes GDP growth through 2015 comes in at about the central tendency of the projections from the Federal Reserve's June 2013 Summary of Economic Projections.
For this exercise, we have adjusted the 2013 growth forecast down slightly due to the weaker-than-expected growth in the first half of the year. Additionally, we have plugged in assumptions for productivity growth—1.5 percent per quarter (SAAR), the average gain over the past eight years—and nonfarm business output growth. We then let the model forecast the remaining variables, all of which are for the labor market:
The model forecasts employment gains in the neighborhood of what the economy has been generating over the past several years, and a steadily declining unemployment rate.
Now consider two "stall" scenarios in which GDP growth fails to get beyond 2.3 percent. The first of these scenarios is the one noted in the Lockhart Kiwanis speech, with productivity recovering but job growth falling off the pace:
From a policy perspective, this one may not cause too much handwringing about the appropriate course of action. The weak GDP growth is accompanied by a failure to make the type of progress on the unemployment rate that the FOMC has clearly articulated as the necessary condition for adjustments in policy rates:
[T]he Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
Absent unforeseen issues with inflation, staying the course would seem to be in order.
But there is a second stall scenario in which productivity and GDP growth remain tepid, even as labor market indicators improve:
The difference in this experiment is that the expectations of those that President Lockhart referred to in his speech as the "innovation pessimists" are correct. Recent weakness in productivity growth reflects a fall in trend productivity growth. In this case, essentially identical labor market outcomes would nonetheless correspond to an economy that can't seem to hit "escape" velocity.
If it is clear that this configuration of outcomes is associated with a structural break in productivity growth, an argument against monetary policy stimulus would have some weight. After all, in most cases we don't expect the tools of monetary policy to fix structural efficiency problems.
But, alas, such clarity rarely arrives in real time. The experiments above give some sense of how difficult it can be to discover the right branch to follow on the policy decision tree.
By Dave Altig, executive vice president and research director of the Atlanta Fed
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June 25, 2013
Getting Back to Normal?
Central to any discussion about monetary policy is the degree to which the economy is underperforming relative to its potential, or in more ordinary language, how much slack exists. OK, so how much slack is there, and how long will it take to be absorbed? Well, if you ask the Congressional Budget Office (and a lot of people do), they would have told you last February (their latest estimate) that the economy was underperforming just a shade more than 4 percent relative to its potential last summer, and that slack was likely to increase a little by this summer (to around 4.7 percent). Go to the International Monetary Fund (IMF), and they tell a very similar story in their April World Economic Outlook. The IMF estimates that the amount of slack in the U.S. economy was about 4.2 percent last year, and they expected it would rise a little to about 4.4 percent this year.
As devotees of our Business Inflation Expectations survey know (and you know who you are), the Atlanta Fed has a quarterly, subjective measure of economic slack in the economy as seen by business leaders. This month, businesses told us something pretty interesting—the amount of slack they think they have narrowed pretty sharply between March and June.
Last March, the panel told us that their unit sales were 7.7 percent below "normal"—similar to their assessments in December and September. This month, however, the group cut their estimate of slack to 4.3 percent below normal, on average (see the table).
What we find most encouraging about this assessment (well, besides the speed at which the slack was being taken up) is that the improvement was most prominent among small and medium-sized firms. These are firms that, according to our survey and other reports (like this one from the National Federation of Independent Business), have been lagging behind in the recovery. Indeed, in June, mid-sized firms indicated that unit sales were only 1.5 percent below normal, a shade better than the big firms in our panel (see the table).
A look at the industry composition of our survey reveals that the pickup of slack was relatively broadly based too. Only the firms in the mining and utilities, and the professional and business services areas reported more slack relative to March (and the amounts were pretty small at that). Elsewhere, the amount of slack appears to have narrowed quite a bit.
OK, so slack is shrinking, and according to these estimates, it shrank quite a bit between March and June. Does that mean we should be anticipating growing price pressure? Well, we can turn to our panelists again for an answer, and they say no. Projecting over the year ahead, our panelists report little change in either their inflationary sentiment or their inflation uncertainty (see the table).
Last Wednesday, at the conclusion of its June meeting, the Federal Open Market Committee said that the recovery is proceeding and the labor market is improving, but inflation expectations remain stable. Our June poll of business leaders appears to have also endorsed this view of the economy.
By Mike Bryan, vice president and senior economist,
Brent Meyer, economist, and
Nicholas Parker, senior economic research analyst, all in the Atlanta Fed's research department
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February 22, 2013
Nature Abhors an Output Gap
In The Washington Post, Neil Irwin highlights a shortcoming that I know all too well:
Throughout the halting economic recovery that began in 2009, the formal economic projections released by the Congressional Budget Office, White House Council of Economic Advisers, and Federal Reserve have displayed quite a consistent pattern: This year may be one of sluggish growth, they acknowledge. But stronger growth, of perhaps 3.5 percent, is just around the corner, and will arrive next year.
Consider, for example, the Fed's projections in November of 2009. Sure, growth would be slow in 2010, they held. But 2011 growth, they expected, would be 3.4 to 4.5 percent, and 2012 would 3.5 to 4.8 percent growth. The actual levels of growth were 2 percent in 2011 and 1.5 percent in 2012.
What's amazing is that the Fed's newest projections, released in December of 2012, look like they could have been copy and pasted from 2009, just with the years changed: They forecast sluggish growth in 2013, 2.3 to 3 percent, followed by a pickup to 3 to 3.5 percent in 2014 and 3 to 3.7 percent in 2015.
I, for one, am guilty as charged, and feel pretty fortunate that the offense is not a hanging one. In fact I don't think Irwin's indictment is overly harsh, and he is on the right track when he offers up this explanation for the last several years' persistently overly rosy projections:
Economic forecasters tend to look at past experience and extrapolate; in the past, when there has been a recession, the very forces that caused the recession become unwound, sowing the seeds for expansion...
Here is a basic fact about macroeconomic forecasting. The truly powerful driver of forecasts is mean reversion, which is the tendency of models to predict that gross domestic product (GDP) will move toward an average trend over time. This fact holds true whether we are talking about formal statistical analysis or the intuitive judgmental adjustments that all forecasters apply to their formal statistical models.
Forecasters are not completely robotic, of course. Irwin is correct when he says "forecasters tend to look at past experience and extrapolate, but forecasters do leaven past experience with incoming details that alter judgments about what is the mean—the "normal state," if you will—to which the economy will converge. But whatever is that normal state, our models insist that we will converge to it.
Nothing illustrates this property of forecasting reality better than this chart, which supplements the latest economic projections from the Congressional Budget Office:
The potential GDP line in that chart is the level of production that represents the structural path of the economy. Forecasters, no matter where they think that potential GDP line might be, all believe actual GDP will eventually move back to it. "Output gaps"—the shaded area representing the cumulative miss of actual GDP relative to its potential—simply won't last forever. And if that means GDP growth has to accelerate in the future (as it does when GDP today is below its potential)—well, that's just the way it is.
Unfortunately, potential GDP is not so simple to divine. We have to guess (or, more generously, estimate) what it is. That guessing game has been harder than usual over the past several years. Here is the record of the CBO's potential GDP since 2009:
I think this picture is a fairly representative record of how views about the potential level of U.S. GDP has evolved over the past several years. What has not been resolved is the debate over what conclusions should be drawn from persistent overestimates of potential and serial misses to the high side on GDP projections.
Irwin seems to be of two minds. On the one hand he offers very structural-sounding reasons for poor forecasting experience:
... the financial-crisis-induced recession of 2008–2009 was so deep that it had deep-seated effects that go beyond those explained by those traditional relationships. It messed up the workings of the financial system, and banks are still trying to figure out what the new one looks like.
On the other hand, he makes appeals to very traditional explanations tied to deficient spending and insufficient policy stimulus (though even here structural change may be one reason that stimulus has been insufficient):
Breakdowns in the financial system mean that low-interest rate policies from the Fed don't have their usual punch. An overhang of household debt means that consumers hold their wallets more than usual. Federal fiscal stimulus to offset those effects is now long-over...
This much, in any event, is clear: Given any starting point where the level of GDP is below its potential level—that is, given an output gap—forecasts will include a bounce back in GDP growth above its long-run average, at least for a while. That's just the way it works.
If, contrary to conventional wisdom, you believe that the true output gaps are much smaller than suggested in the CBO picture above, you might want to take the under on a bet to whether GDP forecasts will prove too optimistic once again.
By Dave Altig, executive vice president and research director of the Atlanta Fed
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