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.


July 18, 2016


Lockhart Casts a Line into the Murky Waters of Uncertainty

Is uncertainty weighing down business investment? This recent article makes the case.

Uncertainty as an obstacle to business decision making and perhaps even a "propagation mechanism" for business cycles is an idea that that has been generating a lot of support in economic research in recent years. Our friend Nick Bloom has a nice summary of that work here.

Last week, the boss here at the Atlanta Fed gave the trout in the Snake River a break and made some observations on the economy to the Rocky Mountain Economic Summit, casting a line in the direction of economic uncertainties. Among his remarks, he noted that:

The minutes of the June FOMC [Federal Open Market Committee] meeting clearly pointed to uncertainty about employment momentum and the outcome of the vote in Britain as factors in the Committee's decision to keep policy unchanged. I supported that decision and gave weight to those two uncertainties in my thinking.

At the same time, I viewed both the implications of the June jobs report and the outcome of the Brexit vote as uncertainties with some resolution over a short time horizon. We've seen, now, that the vote outcome may be followed by a long tail of uncertainty of quite a different character.

But he followed that with something of a caution…

If uncertainty is a real causative factor in economic slowdowns, it needs to be better understood. Policymaking would be aided by better measurement tools. For example, it would help me as a policymaker if we had a firmer grip on the various channels through which uncertainty affects decision-making of economic actors.

I have been thinking about the different kinds of uncertainty we face. Often we policymakers grapple with uncertainty associated with discrete events. The passage of the event to a great extent resolves the uncertainty. The outcome of the Brexit referendum would be known by June 24. The interpretation of the May employment report would come clear, or clearer, with the arrival of the June employment report on July 8. I would contrast these examples of short-term, self-resolving uncertainty with long-term, persistent, chronic uncertainty such as that brought on by the Brexit referendum outcome.

As President Lockhart indicated in his speech, the Federal Reserve Bank of Atlanta conducts business surveys that attempt to measure the uncertainties that businesses face. From July 4 through July 8, we had a survey in the field with a question on how the Brexit referendum was influencing business decisions.

We asked firms to indicate how the outcome of the Brexit vote affected their sales growth outlook. Respondents could select a range of sentiments from "much more certain" to "much more uncertain."

Responses came from 244 firms representing a broad range of sectors and firm sizes, with roughly one-third indicating their sales growth outlook was "somewhat" or "much" more uncertain as a result of the vote (see the chart). Those noting heightened uncertainty were not concentrated in any one sector or firm-size category but represented a rather diverse group.

Chart: Which of the following best describes how the outcome of the recent referendum in Great Britain (so-called Brexit) has affected your sales growth outlook?

As President Lockhart noted in his speech, "[w]e had a spirited internal discussion of whether one-third is a big number or not-so-big." Ultimately, we decided that uncovering how these firms planned to act in light of their elevated uncertainty was the important focus.

In an open-ended, follow-up question, we then asked those whose sales growth outlook was more uncertain how their plans might change. We found that the most prevalent changes in planning were a reduction in capital spending and hiring. Many firms mentioned these two topics in tandem, as this rather succinct quote illustrates: "Slower hiring and lower capital spending." Our survey data, then, provide some support for the idea that uncertainties associated with Brexit were, in fact, weighing on firm investment and labor decisions.

Elevated measures of financial market and economic policy uncertainty immediately after the Brexit vote have abated somewhat over subsequent days. Once the "waters clear," as our boss would say, perhaps this will be the case for firms as well.




July 18, 2016 in Business Inflation Expectations, Economic conditions, Economic Growth and Development, Europe | Permalink | Comments (0)

July 15, 2016


How Will Employers Respond to New Overtime Regulations?

As of December 1, 2016, employers will face expanded coverage of overtime regulations. Most hourly workers are already, and will continue to be, eligible to receive overtime pay for work over 40 hours a week. However, under the new rules, most salaried workers making less than $47,476 ($22.83 per hour for a full-time, full-year worker) will be eligible for overtime pay. Currently, the maximum salary for qualifying for overtime pay is $23,660, or $11.38 per hour.

The Labor Department estimates that the new rule would currently apply to about 4.2 million salaried workers who earn above the old threshold but below the new one. But how many workers are actually affected by the new rule and what happens to the overall demand for labor will depend a lot on how employers respond.

At this stage, it's not clear just how employers will respond. But based on our conversations with local businesses, employers seem to be considering several options for workers whom the new rule would cover. These include:

  • Keeping their salary the same but monitoring and paying for the overtime hours worked.
  • Increasing their salary to just above the threshold to avoid paying overtime.
  • Splitting the hours worked for the job across more people, possibly by hiring additional staff to work the overtime hours.
  • Converting salaried employees to hourly and reducing their base hourly rate so that their total pay will remain the same as under their current salary.
  • Curtailing certain business activities, such as networking and training activities, that might occur outside of the standard eight-hour day.
  • Reducing staff levels elsewhere in the business and/or cutting other employee expenses to offset the increased cost of overtime.

The first two responses outlined above will result in additional employee costs. But trying to avoid these higher costs could itself prove to be expensive. For example, hiring additional workers to cover the overtime comes with fixed staffing costs—including state and federal unemployment insurance tax on new workers, and perhaps benefits—not to mention any hiring and training costs involved in recruiting new workers. In addition, there is a risk that splitting a job between multiple workers or hiring less experienced workers to cover the extra hours will reduce productivity. Also, staff morale could suffer as a result of any actions perceived as infringing on employee rights or status.

These new rules have many dimensions and potential implications (see, for example, here, here, and here for some discussion), and getting a handle on the effects is complicated by the fact that employer responses will likely differ across industries and possibly even across jobs within a firm. Hopefully, a somewhat clearer picture of the ramifications of the new overtime rule will begin to emerge as the time of implementation gets nearer.

July 15, 2016 | Permalink | Comments (0)

How Good Is The Employment Trend? Decide for Yourself

The post-announcement commentary on last Friday's June employment report strikes us as about right: Not as spectacular as the 287,000 number the Bureau of Labor Statistics (BLS) reported for the month, but much better than the worst of our fears.

From the Wall Street Journal's wrap-up of economist reaction, here's Joseph Brusuelas:

The 147,000 three-month average is a fair representation what an economy at full employment looks like late in the U.S. business cycle. We anticipate that as the business cycle enters the final innings of the cyclical expansion that monthly job growth will slow towards 100,000, which represents the number necessary to stabilize the unemployment rate, which climbed to 4.9% in June due to an increase of 417,000 individuals that entered the workforce.

The consensus opinion is that observers should focus less on the monthly number and more on the three-month average, a vantage point we certainly endorse. We also think the reference point of the "number necessary to stabilize the unemployment rate" is the right way to decide whether a number like 147,000 net job gains is strong or not so strong.

The 100,000 unemployment-stabilizing job-gains statistic seems reasonable to us, but the average and median estimate from an April Wall Street Journal survey pegged the same statistic at 145,000. The three-month average job gain is comfortably above the former estimate but not the latter.

Where you stand on the number of job gains required to stabilize the unemployment rate is determined by your assumptions about the pace of civilian population growth (ages 16 and above), the labor force participation rate (LFPR), and the relationship between the payroll employment numbers and the comparable household survey statistic (from whence the unemployment rate is derived). Of course, you can always go to the Atlanta Fed's very own Jobs Calculator and input your assumptions yourself. But if you are like us, you may be more inclined to think in terms of a range of plausible numbers.

Here's our take on what some reasonable bounds on these assumptions might look like.

With respect to population growth, we assume a baseline growth rate equal to the same 1.0 percent annual rate that it has grown over the past year—after accounting for the artificially large population increase of 461,000 in January resulting from the BLS incorporating updated population estimates from the U.S. Census Bureau—with high and low growth alternatives of plus and minus one-tenth of a percentage point.

Second, our baseline for the LFPR is a decline of 0.226 percentage points per year, essentially the impact that we would attribute to age- and sex-related demographic changes over the past two years. Our low-side alternative assumption would be a larger 0.386 annual percentage decline in the LFPR, which adds in the average decline in the participation rate since February 2008 not due to demographic changes. Our high-side assumption is that the LFPR remains at its current level.

Finally, we note that the ratio of employment measured by the BLS payroll survey to employment measured by the household survey has been drifting up for several years. We have chosen a baseline assumption equal to the trend in this ratio since August 2005, and a high-side assumption chooses the steeper trajectory realized since February 2008. Since both August 2005 and February 2008, the unemployment rate has been unchanged, on balance.

The three scenarios for each assumption, in all combinations, yield 27 different implications for the number of payroll jobs required to maintain the unemployment rate at its current level (see the table).

These calculations generate a range of about 40,000 jobs per month to about 140,000 jobs per month. Our baseline assumptions suggest the unemployment rate would stabilize at payroll gains of about 80,000 per month, making the roughly 150,000 monthly average seen during the past quarter of a year look pretty good.

But we're not here to convince you of that today. You've got the numbers above. As we said at the outset, you can decide for yourself.

July 15, 2016 | Permalink | Comments (0)

July 07, 2016


Is the Labor Market Tossing a Fair Coin?

How important is tomorrow's June employment report? In isolation, the answer would surely be not much. The month-to-month swings in job gains can be quite large, and one month does not a trend make.

And yet, there seemed to be a pretty significant reaction to the May employment number, a reaction that did not escape the attention of MarketWatch's Caroline Baum:

So yes, the Fed does seem to be altering its macro view on potential growth (slower) and the neutral funds rate (close to zero) as a hangover from the Great Recession becomes an increasingly inadequate explanation for persistent 2% growth.

What comes across to the observer is a bad case of one-number-itis. The monthly jobs report does contain a lot of important information, including hiring, wages and a proxy for output (aggregate hours index). But the Fed talks out of both sides of its mouth, cautioning against putting too much weight on a single economic report, and then doing just that.

I get it. I don't speak for the Fed, of course—above my rank—but I am in fact one of those who regularly cautions against putting excessive weight on one number. And I am also one of those taken aback by the May employment report, so much so that my view of the economy changed materially as a result of that report.

Let me check that. My view of the risks to the economy, or more specifically the risks to my assessment of the strength of the economy, changed materially.

Here's an analogy that I find useful. Flip what you assume to be a fair coin. The probability of getting a heads, as we all know, is 50 percent. And if you weren't too traumatized by the statistics courses in your past, you will recall that the probability of two heads in a row is 25 percent, dropping to just about 13 percent of the coin coming up heads three times in a row.

Now, 13 percent is not zero, but it may be getting low enough for you to begin to wonder about your assumption that the coin is actually fair. If you have some stake in whether it is or isn't, you might want to take one more toss to get a little more evidence (since the odds of getting four heads in a row is, while not impossible, pretty improbable).

The point is that it wasn't just the May statistic that was striking in last month's report, but also the fact that the March and April numbers were revised downward to the tune of nearly 60,000 jobs. And if you step back a bit, you will see that the rolling three-month average of monthly job gains has been declining through the first half of the year (as the chart shows), even adjusting the May number for the Verizon strike:

Payroll Employment Changes

Strike-adjusted, the May job gains were the lowest since December 2013. The three-month average (again strike-adjusted) was the lowest since the middle of 2012. In other words, although the year-over-year pace of jobs gains has been holding up, momentum in the labor market is decidedly softer—at least when measured by payroll employment gains.

I have been assuming that the U.S. economy will, for a while yet, continue to create jobs at a pace greater than necessary to maintain the unemployment rate at a more or less constant level. That pace is generally believed to be about 80,000 to 140,000 jobs per month, depending on your assumptions about the labor force participation rate. Another jobs report (including revisions to past months) that counters that assumption would, I think, cause a reasonable person to reassess his or her position.

Based on today's ADP report, the odds look good for some decent news tomorrow. On the other hand, if the June employment number does tick up, some observers will no doubt note that it is a pre-Brexit statistic. It may take a few more flips of the coin to determine if that consideration matters.

July 7, 2016 in Economics, Employment, Labor Markets | Permalink | Comments (0)

July 06, 2016


When It Rains, It Pours

Seasonally adjusted nonfarm payroll employment increased by only 38,000 jobs in May, according to the initial reading by the U.S. Bureau of Labor Statistics (BLS), and the total increase for the prior two months was revised down by a cumulative 59,000. Although the May increase was depressed by 35,100 striking workers at Verizon Communications, observers widely anticipated this distortion (the strike started April 13). Nonetheless, the median forecast of the May payroll gain from a Bloomberg survey of economists was 160,000, still well above the official estimate. The disappointing employment gain in May, I believe, is statistically related to the downward revisions to the seasonally adjusted gains made over the prior two months.

In contrast to the revision to the seasonally adjusted data, the nonseasonally adjusted level of payroll employment in April was only revised down by 3,000 in the May report. So most of the downward revision to the seasonally adjusted March and April employment gains was the result of revised seasonal factors (the difference between 59,000 and 3,000). In the chart below, the green diamond (toward the left) is the downward revision of 56,000 that resulted from the revised seasonal factors plotted against the Bloomberg survey forecast error for May (the difference between the actual estimate of 38,000 and the forecast of 160,000). The other diamonds represent corresponding points for reports from January 2006 through April 2016. The data points indicate a clear positive relationship and—based on the May Bloomberg forecast error—a simple linear regression would have almost exactly predicted the total downward revision to the March and April employment gains coming from revised seasonal factors.

To gain some insight into the positive relationship in the above chart, I used a model to seasonally adjust the last 10 years of nonfarm payroll employment data (excluding decennial census workers). Note that although I followed the BLS's procedure of accounting for whether there are four or five weeks between consecutive payroll surveys, I did not seasonally adjust the detailed industry employment data and sum them up, as the BLS does.

According to my seasonal adjustment model, the seasonally adjusted April employment level using data from the May employment report is 60,000 below the seasonally adjusted April employment level estimated with data from the April report. My seasonal adjustment model only using data through April from the May report predicts a nonseasonally adjusted increase of 789,000 jobs in May instead of the BLS's estimated increase of 651,000 jobs. The difference between these two estimates is similar to the Bloomberg survey forecast error noted above.

Further, when I replace the BLS's nonseasonally adjusted estimate for May with the model's forecast, the estimate of seasonally adjusted April employment is only 2,000 less than the model estimated with data from the April employment report. Hence, almost all of the model's downward revision to seasonally adjusted April employment appears to be the result of adding fewer jobs in May than the model expected.

The above analysis illustrates that, when it comes to looking at seasonally adjusted employment data, the number of jobs next month will affect the estimate of the number of jobs this month. This is not a very appealing notion, but when using seasonally adjusted data, it comes with the territory. Fortunately, analyzing the nonseasonally adjusted data allows us to gauge the impact of a surprise in the current estimate of seasonally adjusted employment growth on revisions to the prior two months. So when the June report is released on Friday, we will be paying close attention to both the seasonally adjusted headline numbers as well as the revisions to the nonadjusted data.

July 6, 2016 in Economics, Employment, Labor Markets | Permalink | Comments (0)

June 29, 2016


Pay As You Go: Yes or No?

The Atlanta Fed's 2015 Annual Report focused on the graying of the U.S. economy. Part of the report and a follow-up webcast discussed how aging is driving the depletion of the U.S. Social Security and Medicare trust funds.

Based on current projections from the Congressional Budget Office, the Social Security trust fund is forecast to run dry around 2030 (see the chart); the Medicare trust fund in 2025. Barring a change in legislation, once the trust funds are depleted, benefits will be cut so that outlays match revenues. In the case of Social Security, this reduction will mean a 31 percent decline in benefits. To balance the Medicare budget, certain Medicare benefits will also face significant reduction.

MSocial Security Trust Fund Balance

As my coauthors and I explain in a recent Oxford University Press blog post, our research has found that pay-as-you-go programs for retirees such as Social Security and Medicare, on average, make people worse off, whereas means-tested social insurance programs for retirees, such as Medicaid and Supplemental Security Income (SSI), improve welfare.

These findings are based on comparing the welfare of individuals born into economies with different types of social insurance programs available. We find that, given the hypothetical choice between having or not having Social Security, the average individual would choose to be born into an economy without Social Security. However, when we ask if an average individual would prefer to be born into an economy with or without means-tested retiree programs, we find that he or she would strongly prefer the economy with these programs.

The preference for an economy without universal pay-as-you-go programs like Social Security is consistent with findings in the literature more generally. These programs are large (Social Security was 4.9 percent of U.S. gross domestic product [GDP] in 2013) and have distortionary effects. In standard economic models, the distortions lead to such large reductions in savings and labor supply that they tend to outweigh the programs' insurance benefits.

In contrast, means-tested social insurance programs for retirees, such as Medicaid and SSI, are much smaller. Together, outlays from these programs for the elderly were only 1 percent of GDP in 2013. These programs provide transfers only to individuals with limited income and assets or with impoverishing medical expenses. However, it is in these states of world, when one is poor and/or sick, that such transfers are most valuable, which is why we find that these programs improve welfare.

Researchers have found that means-tested transfer programs for working-age individuals are highly distortionary because they implicitly tax income and assets. However, we find that such distortions are less severe for means-tested transfer programs for retirees, since individuals cannot use these programs to finance working-age consumption and medical care.

Our findings suggest that one potential solution to the sustainability problems plaguing Social Security and Medicare may be to make these programs means-tested as well. Under such a system, the government would still provide protection against the risks of ending up old, sick, alone or poor, but with programs that are significantly less costly.

Of course, saying that individuals would prefer to be born into a hypothetical economy A instead of economy B is not the same thing as saying that current U.S. citizens want to make such a transition. Moving from the current system to one in which Social Security and Medicare benefits are means-tested would not be attractive to wealthier individuals who are already retired or on the verge of it. A compensation scheme would likely have to be devised and financed through taxes or government debt.

Once the cost of compensation is taken into account, we may find that such a transition is too costly to undertake. And as the population ages and the ratio of retirees to working-age individuals increases, the fraction of individuals in the economy who need to be compensated will increase further. This reality adds impetus to dealing with the Social Security sustainability issue sooner rather than later.

June 29, 2016 in Social Security | Permalink | Comments (0)

June 22, 2016


Was May's Drop in Labor Force Participation All Bad News?

The unemployment rate declined 0.3 percentage points from April to May, and this was accompanied by a similar drop in the labor force participation rate. It is tempting to interpret this as a “bad” outcome reflecting a weakening labor market. In particular, discouraged about their job-finding prospects, more unemployed workers left the labor force. However, a closer look at the ins and outs of the labor force suggests a possibly less troubling interpretation of the outflow from unemployment.

To get a handle on what is going on, it is useful to look at the number of people that transition among employment, unemployment, and out of the labor force. It is not that unusual for an individual to search for a job in one month and then enroll in school or assume family responsibilities the next. In fact, each month millions of individuals go from searching for work to landing a job or leaving the labor force, and vice versa.

The U.S. Bureau of Labor Statistics (BLS) publishes estimates of these gross flows. Analyzing these data shows that there was indeed an unusually large number of unemployed persons leaving the labor force in May. Curiously, the outflow was concentrated among people who had only been unemployed only a few weeks. It wasn't among the long-term unemployed. Therefore, it seems unlikely that discouragement over job-finding prospects was the main factor. Although it is plausible that people who say they are now doing something else outside the labor market feel disheartened, the number of unemployed who said they gave up looking because they were discouraged was largely unchanged in May.

So why was there an increase in the number of short-term unemployed who left the labor force in May? One clue is provided by the fact that the short-term unemployed tend to be relatively younger than other unemployed. Moreover, the single most common reason that unemployed young people leave the labor force is to go to school. Hence, there is a very distinct seasonal pattern in the outflow. It tends to be relatively low around May when school is ending and high around August when school is starting. Seasonal adjustment techniques correct for these patterns by lowering the unadjusted data in the fall and raising it in late spring.

The following chart shows the seasonally adjusted and unadjusted flow from unemployment to departure from the labor force. Although the trend has been declining during the last few years, a relatively large increase in the seasonally adjusted outflow took place in May of this year.

Monthly Exit from Unemployment Leaving the Labor Force

When I looked at the unadjusted microdata from the Current Population Survey (CPS), I found that the number of people who were unemployed in April 2016 but in May said that they were not in the labor force because they were in school did not exhibit the usual large seasonal decline. Therefore, when the seasonal adjustment is applied, the result is an increase in the estimated flow from unemployment to out of the labor force.

Taking the seasonally adjusted data at face value, it's not obvious that this is bad news. We know that people who leave unemployment to undertake further education tend to rejoin the labor force later. Moreover, they tend to rejoin with better job-finding prospects than when they left. Alternatively, it could be just a statistical quirk of the May survey. After all, the CPS has a relatively small sample, so the estimated flows have a large amount of sampling error. Either way, I don't think it is wise to conclude that the decline in the labor force participation in May reflected a marked deterioration in job-finding prospects. In fact, the job-finding rate among unemployed workers improved in May from 22 to 24 percent, contributing to the decline in the unemployment rate.

June 22, 2016 in Employment, Labor Markets | Permalink | Comments (2)

June 21, 2016


Wage Growth for Job Stayers and Switchers Added to the Atlanta Fed's Wage Growth Tracker

The Atlanta Fed's Wage Growth Tracker (WGT) moved higher again in May—the third increase in a row and consistent with a labor market that is continuing to tighten. At 3.5 percent, the WGT is at a level last seen in early 2009.

As was noted in an early macroblog post, when the labor market is tightening, people changing jobs experience higher median wage growth than those who remain in the same job. Median wage growth for job switchers has significantly outpaced that of job stayers in recent months. For job stayers, the May WGT was 3.0 percent, the same as in April, whereas for people switching jobs the median WGT increased from 4.1 percent to 4.3 percent in May (the highest reading since December 2007; see the chart).

Wage Growth Tracker

Because these patterns over time can help shed light on the relative strength of the labor market, we have added downloadable job stayer and job switcher WGT series to the Atlanta Fed's Wage Growth Tracker web page.

I should note that it is not possible to completely identify people who are in the same job as a year ago according to data from the Current Population Survey. Instead, we define a "job stayer" as someone whom we observe in the same occupation and industry as a year earlier, and with the same employer in each of the last three months. A "job switcher" includes everyone else (a different occupation or industry or employer). We'll be monitoring these data in coming months to see if discernable trends begin to emerge, and we'll discuss any findings here.

June 21, 2016 in Employment, Labor Markets, Wage Growth | Permalink | Comments (0)

June 16, 2016


Experts Debate Policy Options for China's Transition

After nearly three decades of rapid economic growth, China today faces the challenge of economic rebalancing against the backdrop of slow and uncertain global growth. Although investment and exports have been a motor for growth, China is increasingly experiencing structural issues: widening inequality, overcapacity as a consequence of policy distortions, unsustainable environmental costs, volatile financial markets, and rising systemic risk.

On April 28–29, I attended the First Research Workshop on China's Economy, organized jointly by the International Monetary Fund (IMF) and the Atlanta Fed. The workshop, held at the IMF's headquarters in Washington DC, explored a series of questions that have emerged as China shifts toward a new growth model. Is this the end of the growth miracle? Will the Chinese renminbi one day be as important as the U.S. dollar? Should the rapidly increasing shadow banking activity in China be a source of concern? How worrisome is the rapid rise in China's housing prices?

Panelists shared their views on these and other issues facing the world's second-largest economy (or largest, if measured on a purchasing-power-parity basis). Plans are under way for a second workshop to be held in 2017.

The following is a nice summary of the research discussed at the workshop. It was originally published in the IMF Survey Magazine, and was written by Hui He, IMF Institute for Capacity Development, and Nan Li, IMF Research Department. Thanks to the IMF for allowing me to repost it here.

Is China's economic growth sustainable?
Understanding the source of China's tremendous growth was a recurring theme at the workshop. "China's economy combines enormous dynamism with huge distortions," observed Loren Brandt (University of Toronto). Brandt described his research based on China's firm-level data and emphasized that firm dynamics (entry and exit), especially firm entry, have been the main source of the productivity growth in the manufacturing sector.

Echoing Brandt's message, Kjetil Storesletten (University of Oslo) discussed regional growth disparities and showed that barriers preventing firms from entering an industry account for most of the disparities. Such barriers are more severe for privately owned firms in regions in which state-owned enterprises (SOE) dominate, he said.

In his keynote speech, Nicholas Lardy (Peterson Institute for International Economics) offered an upbeat view on China's transition to a new growth model, one in which the service sector plays a larger role than manufacturing. The bright side of the service sector, he noted, is its continued strong productivity growth. The development of financial deepening and the stronger social safety net are contributing to increased consumption, which helps to rebalance the economy.

However, he emphasized, SOE reforms remain critical as the service sector cannot provide a silver bullet for a successful transition.

Central bank's policy decisions
Several participants tried to discern how the People's Bank of China (PBC) conducts monetary policy. Tao Zha (of the Atlanta Fed's Center for Quantitative Economic Research and Emory University) found that the PBC reacts sharply when the gross domestic product's growth rate falls below its target, increasing the money supply by 11.5 percentage points for every 1 percentage point shortfall.

Mark Spiegel (Center for Pacific Basin Studies) discussed the trade-offs involved in Chinese monetary policy—for example, controlling the exchange rate versus maintaining inflation stability. He also argued that the heavy use of reserve requirements on banks as a monetary policy tool might have an unintentional consequence to reallocate capital from SOEs to more efficient privately owned firms and could therefore offset the resource misallocation caused by the easy credit to SOEs that banks granted in the high growth years.

Renminbi versus the dollar
Eswar Prasad (Cornell University and Brookings Institution) argued that China's capital account will become more open and the renminbi will be used more widely to denominate and settle cross-border transactions. But he also noted that legal and institutional constraints in China were likely to prevent the renminbi from serving as a safe-haven currency as the U.S. dollar does today.

Moreover, he said, the current sequencing of liberalization initiatives—that is, removal of capital account restrictions before appropriate financial market supervision and regulation and exchange rate reform—poses financial stability risks.

Shadow banking and the housing market
Recently, volatile Chinese financial markets and continued housing price appreciation have raised serious financial stability concerns.

Michael Song (Chinese University of Hong Kong) argued that rapidly rising shadow banking activity is an unintended consequence of financial regulation. Restrictions on deposit rates and loan-to-deposit ratios have led to the issuance by banks of "wealth management products" to attract savers with higher returns. Because these restrictions had a greater impact on small banks, the big state banks had more room to undercut the smaller banks by offering wealth management products with higher returns and then restricting liquidity to them in interbank markets, ultimately making the banking system more prone to liquidity distress and runs.

Hanming Fang (University of Pennsylvania) found that, except in big cities such as Beijing and Shanghai, housing prices in China's urban areas between 2003 and 2013 more or less tracked rising household incomes. In his view, the Chinese housing boom is thus unlikely to trigger an imminent financial crisis. He warned, however, that housing prices may fall rapidly if economic growth slows dramatically, and that such a development could, in turn, amplify the economic downturn.

Rising wage inequality
China's rapid growth over the past two decades has been accompanied by rising wage inequality, an issue highlighted by two conference participants. Dennis Yang (University of Virginia) explored the distributional effects of trade openness in China and found a significant impact on wage inequality of China's accession to the World Trade Organization in 2001.

Chong-En Bai (Tsinghua University) argued that the decline after 2008 of the skill premium—that is, the ratio of the skilled labor wage to the unskilled labor wage—can be explained by the Chinese government's targeted credit extension to unskilled labor-intensive infrastructure sector (as part of the fiscal stimulus following the global financial crisis). Such distortionary policies might have short-run growth benefits but could lead to long-run welfare losses, he said, especially when rural-to-urban migration has run its course.

June 16, 2016 in Asia, Economic Growth and Development, Labor Markets, Monetary Policy, Real Estate | Permalink | Comments (0)

June 09, 2016


It’s Not Just Millennials Who Aren't Buying Homes

In recent years, much attention has been focused on the growing tendency of millennials to rent. Theories for the decrease in homeownership among young adults abound. They include rising student debt levels that crowd out additional borrowing, a tendency to live in more urban areas where the cost to buy is relatively high, a generally tougher credit environment, and even shifts in the perception of homeownership in the wake of the housing bust. The ideas have been widely debated, and yet no single factor seems to neatly explain the declining share of the millennial population opting to buy a house. (See this webcast by the Atlanta Fed's Center for Real Estate Analytics for a discussion of these issues.)

To the extent that these factors are true, they may be affecting the decisions of other generations as well. Chart 1 below shows the overall average homeownership rate and homeownership rates by age group from 1982 to 2015. It's clear that homeownership rates have declined for everyone during the past 10 years, not just for millennials.

In fact, homeownership among young Generation Xers has fallen by a bit more than the millennial generation since the housing peak—declining 11 percentage points since 2005 compared with a decline of 9 percentage points for those under 35 years old.

Another interesting point of comparison is the mid-1980s to mid-1990s, a period in which the United States had a relatively stable share of owner-occupied housing of around 64.0 percent. During the subsequent housing boom, the homeownership rate climbed to a peak of 69 percent in 2004, only to fall back down to 63.7 percent in 2015, a level similar to that prevailing before 1995. However, each age group under age 65 has a somewhat lower homeownership rate than their same-aged peers had during the 1986–94 period.

Chart 1: Homeownership Rates by Age

The fact that the average U.S. homeownership rate is close to rates seen in the mid-1980s and mid-1990s while homeownership rates within age groups (under 65) are currently lower than their respective averages in the mid-1980s to mid-1990s suggests that factors other than age may be affecting the average person's decision to buy or rent.

To investigate what else may be going on, charts 2 and 3 show homeownership rates by family type and race. Between 2005 and 2015, the trend mirrors what's happening by age group. The tendency to own a home has been falling for all family types and races over the past decade. In general, economic incentives (or cultural attitudes) appear to have shifted the population toward renting and away from buying.

However, the picture is quite different when you compare homeownership rates by family type and race to the pre-1995 period. While homeownership rates within age groups are generally lower today, married couples, one-person households, and nonmarried, multiperson households were all more likely to own their home in 2015. Homeownership rates across race (except for blacks) were also higher in 2015 than in 1994.

Chart 2: Homeownership Rates by Type of Family

Chart 3: Homeownership Rates by Race or Ethnicity

So how do we interpret the fact that the overall homeownership rate is close to its average in the 1986 to 1994 period? Are millennials to blame? Yes. But so is everyone else under the age of 65. The data suggest that whatever is affecting millennials' homeownership decisions is applicable to older individuals as well. Further, it seems there are other, possibly larger, factors affecting homeownership, such as the changing face of America. Although homeownership rates by family types and racial groups are a bit above the level seen in 1994, the average person in 2015 was about as likely to live in a home that is owned or being bought. Thus, the shift in the distribution of the population toward racial groups and family types (and likely other factors) that tend to have lower homeownership rates is likely exerting an important influence on the overall homeownership rate.

June 9, 2016 in Housing, Real Estate | Permalink | Comments (3)

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