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 29, 2014
On Bogs and Dots
Consider this scenario. You travel out of town to meet up with an old friend. Your hotel is walking distance to the appointed meeting place, across a large grassy field with which you are unfamiliar.
With good conditions, the walk is about 30 minutes but, to you, the quality of the terrain is not so certain. Though nobody seems to be able to tell you for sure, you believe that there is a 50-50 chance that the field is a bog, intermittently dotted with somewhat treacherous swampy traps. Though you believe you can reach your destination in about 30 minutes, the better part of wisdom is to go it slow. You accordingly allot double the time for traversing the field to your destination.
During your travels, of course, you will learn something about the nature of the field, and this discovery may alter your calculation about your arrival time. If you discover that you are indeed crossing a bog, you will correspondingly slow your gait and increase the estimated time to the other side. Or you may find that you are in fact on quite solid ground and consequently move up your estimated arrival time. Knowing all of this, you tell your friend to keep his cellphone on, as your final meeting time is going to be data dependent.
Which brings us to the infamous “dots,” ably described by several of our colleagues writing on the New York Fed’s Liberty Street Economics blog:
In January 2012, the FOMC began reporting participants’ FFR [federal funds rate] projections in the Summary of Economic Projections (SEP). Market participants colloquially refer to these projections as “the dots” (see the second chart on page 3 of the September 2014 SEP for an example). In particular, the dispersion of the dots represents disagreement among FOMC [Federal Open Market Committee] members about the future path of the policy rate.
The Liberty Street discussion focuses on why the policy rate paths differ among FOMC participants and across a central tendency of the SEPs and market participants. Quite correctly, in my view, the blog post’s authors draw attention to differences of opinion about the likely course of future economic conditions:
The most apparent reason is that each participant can have a different assessment of economic conditions that might call for different prescriptions for current and future monetary policy.
The Liberty Street post is a good piece, and I endorse every word of it. But there is another type of dispersion in the dots that seems to be the source of some confusion. This question, for example, is from Howard Schneider of Reuters, posed at the press conference held by Chair Yellen following the last FOMC meeting:
So if you would help us, I mean, square the circle a little bit—because having kept the guidance the same, having referred to significant underutilization of labor, having actually pushed GDP projections down a little bit, yet the rate path gets steeper and seems to be consolidating higher—so if it’s data dependent, what accounts for the faster projections on rate increases if the data aren’t moving in that direction?
The Chair’s response emphasized the modest nature of the changes, and how they might reflect modest improvements in certain aspects of the data. That response is certainly correct, but there is another point worth emphasizing: It is completely possible, and completely coherent, for the same individual to submit a “dot” with an earlier (or later) liftoff date of the policy rate, or a steeper (or flatter) path of the rate after liftoff, even though their submitted forecasts for GDP growth, inflation, and the unemployment rate have not changed at all.
This claim goes beyond the mere possibility that GDP, inflation, and unemployment (as officially defined) may not be sufficiently complete summaries of the economic conditions a policymaker might be concerned with.
The explanation lies in the metaphor of the bog. The estimated time of arrival to a destination—policy liftoff, for example—depends critically on the certainty with which the policymaker can assess the economic landscape. An adjustment to policy can, and should, proceed more quickly if the ground underfoot feels relatively solid. But if the terrain remains unfamiliar, and the possibility of falling into the swamp can’t be ruled out with any degree of confidence...well, a wise person moves just a bit more slowly.
Of course, as noted, once you begin to travel across the field and gain confidence that you are actually on terra firma, you can pick up the pace and adjust the estimated time of arrival accordingly.
To put all of this a bit more formally, an individual FOMC participant’s “reaction function”—the implicit rule that connects policy decisions to economic conditions—may not depend on just the numbers that that individual writes down for inflation, unemployment, or whatever. It might well—and in the case of our thinking here at the Atlanta Fed, it does—depend on the confidence with which those numbers are held.
For us, anyway, that confidence is growing. Don’t take that from me. Take it from Atlanta Fed President Lockhart, who said in a recent speech:
I'll close with this thought: there are always risks around a projection of any path forward. There is always considerable uncertainty. Given what I see today, I'm pretty confident in a medium-term outlook of continued moderate growth around 3 percent per annum accompanied by a substantial closing of the employment and inflation gaps. In general, I'm more confident today than a year ago.
Viewed in this light, the puzzle of moving dots without moving point estimates for economic conditions really shouldn’t be much of a puzzle at all.
By Dave Altig, executive vice president and research director of the Atlanta Fed
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
August 25, 2014
What Kind of Job for Part-Time Pat?
As anyone who follows macroblog knows, we have been devoting a lot of attention recently to the issue of people working part-time for economic reasons (PTER), which means people who want full-time work but have not yet been able to find it. As of July 2014, the number of people working PTER stood at around 7.5 million. This level is down from a peak of almost 9 million in 2011 but is still more than 3 million higher than before the Great Recession. That doesn’t mean they won’t ever find full-time work in the future, but their chances are a lot lower than in the past.
Consider Pat, for example. Pat was working PTER at some point during a given year and was also employed 12 months later. At the later date, Pat is either working full-time, still working PTER, or is working part-time but is OK with it (which means Pat is part-time for noneconomic reasons). How much luck has Pat had in finding full-time work?
As the chart below shows, there is a reasonable chance that after a year, Pat is happily working full-time. But it has become much less likely than it was before the recession. In 2007, an average of 61 percent of the 2006 Pats transitioned into full-time work. The situation got a lot worse during the recession, and has not improved. In 2013, only 49 percent of the 2012 cohort of Pats had found a full-time job. The decline in finding full-time work is largely accounted for by the rise in the share of Pats who are stuck working PTER. In 2007, 18 percent of the Pats were still PTER after a year, rising to around 30 percent by 2011, where it has essentially remained.
Now, our hypothetical Pats are a pretty heterogeneous bunch. For example, they are different ages, different genders, different educational backgrounds, and in different industries. Do such differences matter when it comes to the chances of Pat finding a full-time job? For example, let’s look at Pats working in goods-producing industries versus services-producing ones. In goods-producing industries, the chance is greater that Pat will find full-time work (more jobs in goods-producing industries are full-time), and there is a bit more of a recovery in full-time job finding for goods-producing industries than for services-producing ones. But overall, the dynamics are similar across the broad industry types, as the charts below show:
As another example, the next four charts show the average 12-month full-time and PTER job-finding rates for all of our hypothetical Pats by gender and education. The full-time/PTER finding rates display broadly similar patterns across gender and education, albeit at different levels. (The same holds true across age groups but is not shown.)
People who find themselves working part-time involuntarily are having more difficulty getting full-time work than in the past, even if they stay employed. But it doesn’t seem that much of this can be attributed to any particular demographic or industry characteristic of the worker. The phenomenon is pretty widespread, suggesting that the problem is a general shortage of full-time jobs rather than a change in the characteristics of workers looking for full-time jobs.
By John Robertson, a vice president and senior economist, and
Ellyn Terry, an economic policy analysis specialist, both of the Atlanta Fed's research department
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.
August 18, 2014
Are You Sure We're Not There Yet?
In recent macroblog posts, our colleagues Dave Altig and John Robertson have posed the questions Getting There? and Are We There Yet?, respectively. "There" in these posts refers to "full employment." Dave and John conclude that while we may be getting there, we're not there yet.
Not everyone agrees with that assessment, of course. Among the recent evidence some observers cite in defense of an approaching full-employment and growing wage pressures is the following chart. It shows a rather strong correlation between survey data from the National Federation of Independent Business (NFIB) on the proportion of firms planning to raise worker compensation over the next three months and lagged wage and salary growth (see the chart). (This recent post from the Dismal Scientist blog and this short article from the Dallas Fed also discuss this assessment.)
OK, no people brave enough to weigh in on this issue are actually saying they know for certain where the line is that separates rising wage pressures from just more of the same. But if you are looking for a sign of impending wage pressure, the chart above certainly looks compelling. Well, except that a pretty large gap has opened up between the behavior of the NFIB survey data and the actual growth trend in compensation since 2011. We'll have more on that in a moment.
The Federal Reserve Bank of Atlanta also conducts a survey of businesses, and among the things we occasionally ask our panel is how much they expect to adjust their compensation of workers (including benefits) in the year ahead. But our survey data aren't showing the same rise in compensation expectations that we see in the NFIB survey data (see the tables).
Of the 210 business respondents who answered the compensation question in our August survey, 81 percent expect to increase compensation over the next 12 months, compared with 4 percent who expect to reduce compensation for the next 12 months. In other words, on net, 77 percent of the businesses in our panel expect to raise compensation during the next 12 months. This share is a shade less than the proportion of firms that expected to increase compensation in May 2013.
Our survey data are not directly comparable to the NFIB since the NFIB survey asks firms about their plans during the next three months, and we ask about plans during the coming 12 months. Moreover, the NFIB surveys small businesses—roughly 75 percent of the businesses in the NFIB survey employ fewer than 20 workers, and about 60 percent employ fewer than 10.
So we cut our survey to isolate the smaller firms. The first observation we note is that as the size of the firm shrinks, so does the proportion of small firms planning to increase wages. This result isn't especially surprising since the small firms in our panel report considerably worse prevailing business conditions than do the large firms. But more to the point, we still fail to pick up a rise in expected wage pressure. On net in August, 53 percent of the firms in our panel that employ fewer than 20 workers expect to raise worker compensation during the next 12 months. That percent is down from 69 percent of similarly sized firms in May 2013.
Further, the average amount that firms expect to increase wages (2.7 percent) is also about unchanged from 15 months ago (2.8 percent), and this result is rather consistent by firm size and industry. If anything, our panel of businesses reports less expected compensation pressure in the year ahead than when we last asked them in May 2013. So no matter how we cut our panel data, we have trouble confirming the story that firms are anticipating significantly more wage pressure today than a year or so ago.
But maybe this is missing the big point of the figure that kicked off this post. Since about 2011, there appears to be a growing discrepancy between the recent trend in the NFIB survey on compensation increases and actual compensation increases. One could interpret that observation in two very different ways. The first is that the growing gap between the NFIB survey data and actual wage growth suggests pressure on compensation that will soon break loose. Perhaps. But another interpretation is that the relationship between the NFIB survey and actual wage increases has broken down recently. Correlation is different than causation, and many correlations coming from the labor market in recent years appear to be deviating from their historical norms. Isn't that the takeaway of the two earlier macroblog posts?
We're not brave enough to say that we know for certain that the economy isn't on the verge of an accelerated pace of compensation growth. But, if we were brave enough, we'd say our survey data indicate that such acceleration is unlikely.
August 12, 2014
Are We There Yet?
Editor’s note: This macroblog post was published yesterday with some content inadvertently omitted. Below is the complete post. We apologize for the error.
Anyone who has undertaken a long road trip with children will be familiar with the frequent “are we there yet?” chorus from the back seat. So, too, it might seem on the long post-2007 monetary policy road trip. When will the economy finally look like it is satisfying the Federal Open Market Committee’s (FOMC) dual mandate of price stability and full employment? The answer varies somewhat across the FOMC participants. The difference in perspectives on the distance still to travel is implicit in the range of implied liftoff dates for the FOMC’s short-term interest-rate tool in the Summary of Economic Projections (SEP).
So how might we go about assessing how close the economy truly is to meeting the FOMC’s objectives of price stability and full employment? In a speech on July 17, President James Bullard of the St. Louis Fed laid out a straightforward approach, as outlined in a press release accompanying the speech:
To measure the distance of the economy from the FOMC’s goals, Bullard used a simple function that depends on the distance of inflation from the FOMC’s long-run target and on the distance of the unemployment rate from its long-run average. This version puts equal weight on inflation and unemployment and is sometimes used to evaluate various policy options, Bullard explained.
We think that President Bullard’s quadratic-loss-function approach is a reasonable one. Chart 1 shows what you get using this approach, assuming a goal of year-over-year personal consumption expenditure inflation at 2 percent, and the headline U-3 measure of the unemployment rate at 5.4 percent. (As the U.S. Bureau of Labor Statistics defines unemployment, U-3 measures the total unemployed as a percent of the labor force.) This rate is about the midpoint of the central tendency of the FOMC’s longer-run estimate for unemployment from the June SEP.
Notice that the policy objective gap increased dramatically during the recession, but is currently at a low value that’s close to precrisis levels. On this basis, the economy has been on a long, uncomfortable trip but is getting pretty close to home. But other drivers of the monetary policy minivan may be assessing how far there is still to travel using an alternate road map to chart 1. For example, Atlanta Fed President Dennis Lockhart has highlighted the role of involuntary part-time work as a signal of slack that is not captured in the U-3 unemployment rate measure. Indeed, the last FOMC statement noted that
Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.
So, although acknowledging the decline in U-3, the Committee is also suggesting that other labor market indicators may suggest somewhat greater residual slack in the labor market. For example, suppose we used the broader U-6 measure to compute the distance left to travel based on President Bullard’s formula. The U-6 unemployment measure counts individuals who are marginally attached to the labor force as unemployed and, importantly, also counts involuntarily part-time workers as unemployed. One simple way to incorporate the U-6 gap is to compute the average difference between U-6 and U-3 prior to 2007 (excluding the 2001 recession), which was 3.9 percent, and add that to the U-3 longer-run estimate of 5.4 percent, to give an estimate of the longer-run U-6 rate of 9.3 percent. Chart 2 shows what you get if you run the numbers through President Bullard’s formula using this U-6 adjustment (scaling the U-6 gap by the ratio of the U-3 and U-6 steady-state estimates to put it on a U-3 basis).
What the chart says is that, up until about four years ago, it didn’t really matter at all what your preferred measure of labor market slack was; they told a similar story because they tracked each other pretty closely. But currently, your view of how close monetary policy is to its goals depends quite a bit on whether you are a fan of U-3 or of U-6—or of something in between. I think you can put the Atlanta Fed’s current position as being in that “in-between” camp, or at least not yet willing to tell the kids that home is just around the corner.
In an interview last week with the Wall Street Journal, President Lockhart effectively put some distance between his own view and those who see the economy as being close to full employment. The Journal’s Real Time Economics blog quoted Lockhart:
“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.
Mr. Lockhart said the current unemployment rate of 6.2% will likely continue to decline and tick under 6% by the end of the year. But, he said, there remains evidence of underlying softness in the job sector, and, he also said, while inflation shows signs of firming, it remains under the Fed’s official 2% target.
Our view is that the current monetary policy journey has made considerable progress toward its objectives. But the trip is not yet complete, and the road ahead remains potentially bumpy. In the meantime, I recommend these road-trip sing-along selections.
By John Robertson, a vice president and senior economist in the Atlanta Fed’s research department
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
August 05, 2014
What’s Driving the Part-Time Labor Market? Results from an Atlanta Fed Survey
A subtle shift appears to be emerging in the public discussion of part-time employment in the United States. In monetary policy circles, elevated levels of part-time employment have generally been taken as a signal of lingering weakness in the labor market. (See, for example, here and here.) In this view, the rise in the use of part-time workers is a response to weak economic conditions, and the rate of part-time utilization will return to something approaching the prerecession average as firms respond to strengthening demand by increasing the hours of some of part-time staff who want more hours (thus reducing the number and share of part-time workers who would like full-time work) and by creating more full time jobs for those who want them (thus reducing the share of involuntary part-time workers).
But some labor market observers interpret the recent rise in the share of part-time jobs as more structural in nature—and hence less likely to be remedied by demand-inducing strategies such as monetary stimulus. If the arithmetic of having full-time or part-time workers has changed (for example, we frequently hear about increased compensation costs resulting from health care changes associated with the Affordable Care Act), then employers might lean more on part-time workers, at least while they can. Employers might be more able to do so while there is an ample supply of unemployed people and fewer full-time job opportunities, or if technology has made it sufficiently easy to manage workers’ hours. Virginia Postrel at BloombergView recently wrote an essay about how technology is helping firms better manage part-time employees. From that essay:
For many part-time workers in the post-crash economy, life has become like endless jury duty. Scheduling software now lets employers constantly optimize who’s working, better balancing labor costs and likely demand.
Perhaps the “demand” aspect of that passage refers to the level of overall spending in the economy (a point made in another BloombergView piece that Postrel’s column cites). But there is an undeniable technological slant to this story—one that is not so obviously about the condition of the economy. And based on recent legislative proposals out of Congress, some lawmakers seem to see an issue that is likely to persist beyond the current business cycle.
So is our issue insufficient demand, about which monetary policy can arguably do something, or is it a change in the nature of work in the United States, which is arguably impervious to the effects of changes in monetary policy?
Both of these questions seem valid, and reasonable perspectives support both of them (see, for example, here and here). So as we try to sort this out, we turned to the Atlanta Fed’s Regional Economic Information Network of business contacts and went to the source: employers themselves.
First, though, let’s review a few facts. During the recession, full-time employment fell substantially while the number working part-time actually increased. Today, there are about 12 percent more people working part-time than before the recession and about 2 percent fewer people working full-time hours. As the chart below shows, this slow rebound in full-time employment—and the sustained level of part-time employment—has resulted in a greater share of employed working part-time: 19 percent of employed people are working fewer than 35 hours compared with 17 percent of all employed before the recession began.
To delve more deeply into these facts, we collected the responses of 339 firms with at least 20 employees to two questions: “Compared to before the recession, is your current mixture of part-time and full-time employees different? Do you think your current mixture will change over the next couple of years?” The responses (presented in the chart below) are weighted by national firm size and industry distributions.
About two-thirds of firms indicated their mixture of full-time and part-time employees was not currently different than before the recession began. One quarter of firms said they currently have a higher share of part-time employees, and 8 percent have a smaller share. Looking forward, 31 percent believe their workforce will possess a greater share of part-time workers in two years than it does now.
What did employers cite as the reason for the increase in part-time employment? Firms that currently have a higher share of part-time employees gave about equal weighting to cyclical and structural factors, as the chart below indicates. Most chose the options “Full-time employee compensation costs have increased relative to those of part time employees” and “Business conditions (sales) are not yet strong enough to justify converting part-time jobs to full-time” as either somewhat important or very important. These firms saw the other options—“Technology has made it easier to manage part-time employees” and “More job candidates are willing to take part-time jobs”—as less important.
The next chart shows that structural factors are on the minds of employers, especially among firms who haven’t yet increased their share of part-time employees. Expectations of increases in the compensation cost of full-time employees relative to part-time workers were cited as the most important factor for all firms, but the difference in the relative importance among expected compensation costs and other factors was greater among firms that have not yet increased their part-time share of employment. Expected weak sales and future ample supply of people willing to work part-time were also seen as somewhat important factors for many firms.
Do firms anticipate a return to their prerecession mix of part-time and full-time employment? Although we didn’t ask this question directly, the next chart constructs an answer based on their responses to our other two questions.
Compared with prerecession levels, 34 percent of firms indicated they expect the share of part-time employees in their firm to be higher in two years. This segment includes the vast majority (90 percent) of the 25 percent of firms who already have a higher share now than before the recession and 12 percent of other firms who currently have the same share but anticipate increases during the next two years. Surprisingly, only about 2 percent of firms currently have a higher share of part-time workers and anticipate decreases over the next two years (they are represented in the above chart in the “no change” category).
To sum up, the results have something for people on either side of the cyclical-versus-structural debate. Weak business conditions and the increase in the relative cost of full-time employees have been about equally important drivers of the increase in the use of part-time employees thus far. Thinking about the future, firms mostly cite an expected rise in the relative cost of full-time workers as the reason for shifting toward more part-time employees. So while there are some clear structural forces at work, a large amount of uncertainty around the future cost of health care and the future pace of economic growth also exists. The extent to which these factors will ultimately affect the share working part-time remains to be seen.
By Ellyn Terry, an economic policy analysis specialist in the Atlanta Fed’s research department
August 01, 2014
What's behind Housing's June Swoon?
The housing market appears to have endured a particularly cruel month in June. Fairly good numbers on existing home sales provided some antidote to a second consecutive monthly decline in housing starts and a sharp decline in new home sales. But that palliative is less comforting than it might otherwise be given the fact that existing sales were still 2.3 percent below the June 2013 rate, and budding optimism diminished further with this week's unexpected drop off in the pace of pending home sales.
In her recent remarks before the Senate Committee on Banking, Housing, and Urban Affairs and before the House Committee on Financial Services, Federal Reserve Chair Janet Yellen took particular note of ongoing weakness in residential real estate:
The housing sector, however, has shown little recent progress. While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year's increase in mortgage rates, and readings this year have, overall, continued to be disappointing.
The statement following the conclusion of this week's meeting of the Federal Open Market Committee provided an exclamation point to Chair Yellen's commentary:
Information received since the Federal Open Market Committee met in June indicates that ... recovery in the housing sector remains slow.
The housing market was a bright spot in the economy from early 2012 to mid-2013, and there's no shortage of conjecture on why it has morphed into a source of concern. Reasonable hypotheses include reduced affordability brought on by higher mortgage rates and real estate prices, tighter lending conditions and ongoing balance sheet issues for households (think student debt), and supply constraints associated with rising construction costs and lot availability (at least in the most desirable locations, as examples here and here discuss).
In a March post in the Atlanta Fed's SouthPoint, affordability issues—specifically, interest rates and prices—constituted two of the top three explanations given by our broker and builder contacts in the Southeast for recent slower growth in the housing market. Earlier, we had examined the affordability issue in an Atlanta Fed Real Estate Research post. In it, we decomposed the affordability index that the National Association of Realtors (NAR) produces each month. We used our decomposition to show that the rebound in housing prices in 2012 served as a huge drag on affordability and, after six years of contributing to affordability, mortgage interest rates became a drag in mid-2013.
How—and why—has the affordability index changed since we last checked? The chart below provides an update through May 2014 (the latest date for which we have the data necessary for our decomposition):
On a year-over-year basis, affordability has fallen as a result of rising prices and last summer's uptick in interest rates. Still, affordability remains high by precrisis standards. And given that we have recently passed the anniversary of the first "taper talk," the impact of the interest rate component should fade if rates remain stable and thus become similar to, if not below, year-ago levels. Likewise, house price growth has decelerated and will continue to be less of a drag on affordability as measured by NAR.
It may be fair to attribute some of the recent softness in housing to affordability. But in light of the still relatively high readings of our index, it seems likely that the main culprits are one or more of the other factors discussed above.
By Carl Hudson, director of the Atlanta Fed's Center for Real Estate Analytics, and
Jessica Dill, senior economic research analyst in the Atlanta Fed's research department
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
- Contrasting the Financing Needs of Different Types of Firms: Evidence From a New Small Business Survey
- Gauging Inflation Expectations with Surveys, Part 3: Do Firms Know What They Don’t Know?
- Gauging Inflation Expectations with Surveys, Part 2: The Question You Ask MattersA Lot
- Gauging Inflation Expectations with Surveys, Part 1: The Perspective of Firms
- Chances of Finding Full-Time Employment Have Improved
- Exploring the Increasingly Widespread Decline in Involuntary Part-Time Work
- The Long and Short of Falling Energy Prices
- And the Winner Is...Full-Time Jobs!
- For Middle-Skill Occupations, Where Have All the Workers Gone?
- A Closer Look at Employment and Social Insurance
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