macroblog

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

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


June 28, 2012


Young versus mature small firms seeking credit

The ongoing tug of war between credit supply and demand issues facing small businesses is captured in this piece in the American Prospect by Merrill Goozner. Goozner asks whether small businesses are facing a tougher borrowing environment than is warranted by current economic conditions. One of the potential factors identified in the article is the relative decline in the number of community banks—down some 1,124 (or 13 percent of all banks from 2007). Community banks have traditionally been viewed as an important source of local financing for businesses and are often thought to be better able to serve the needs of small businesses than large national banks because of their more intimate knowledge of the business and the local community.

The Atlanta Fed's poll of small business can shed some light on this issue. In April we reached out to small businesses across the Sixth Federal Reserve District to ask about financing applications, how satisfied firms were that their financing needs were being met, and general business conditions. About one third of the 419 survey participants applied for credit in the first quarter of 2012, submitting between two and three applications for credit on average. As we've seen in past surveys (the last survey was in October 2011), the most common place to apply for credit was at a bank.

For the April 2012 survey, the table below shows the average success of firms applying to various financing sources (on a scale of 1 to 4, with 1 meaning none of the amount requested in the application was obtained, and 4 meaning that the firm received the full amount applied for). The table also shows the median age of businesses applying for each type of financing.

120628_tbl

The results in the table show that for credit applications, Small Business Administration loan requests and applications for loans/lines of credit from large national banks tended to be the least successful, whereas applications for vendor trade credit and commercial loans/line-of-credit from community banks had the highest average success rating.

Notably, firms applying for credit at large national banks were typically much younger than firms applying at regional or community banks. If younger firms generally have more difficulty in getting credit regardless of where they apply, it could explain why we saw less success, on average, among firms applying at larger banks.

To investigate this issue, we compared the average application success among young firms (less than six years old) that applied at both regional or community banks and at large national banks, pooling the responses from the last few years of our survey. The credit quality of borrowers is controlled for by looking only at firms that applied at both types of institutions. What we found was no significant difference in the average borrowing success of young firms applying for credit across bank type—it just does seem to be tougher to get your credit needs met at a bank if you're running a young business. Interestingly, we also found that more mature firms were significantly more successful when applying at regional or community banks than at large national banks—it seems to be relatively easier for an established small business to obtain requested credit from a small bank.

While this analysis did not control for other factors that could also affect the likelihood of borrowing success, the results do suggest that Goozner's question about the impact of declining community bank numbers on small business lending is relevant. If small businesses are generally more successful when seeking credit from a small bank, will an ongoing reduction in the number of community banks substantially affect the ability of (mature) small businesses to get credit? More detailed insights from the April 2012 Small Business Credit Survey will be available soon on our Small Business Focus website, and we will provide an update when they are posted.

Photo of John RobertsonBy John Robertson, vice president and senior economist,

 

and

Photo of Ellyn TerryEllyn Terry, senior economic research analyst, both of the Atlanta Fed's research department



June 28, 2012 in Banking, Economic Growth and Development, Saving, Capital, and Investment | Permalink

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The table also reveals the average age of companies implementing for each kind of funding.

Posted by: factoring company | August 29, 2012 at 03:03 AM

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August 26, 2011


Lots of ground to cover: An update

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

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

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

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

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

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


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

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

 

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

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

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

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

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

http://www.bbc.co.uk/news/uk-14538167

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

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

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

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

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

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

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

In terms of econometrics, annual increment of real GDP per capita is constant over time http://mechonomic.blogspot.com/2011/08/revised-gdp-estimates-support-model-of.html . Therefore, the rate of real GDP per capita growth has to decay as a reciprocal function of the attained level of GDP per capita. The exponential component in the overall GDP is fully related to population growth which has been around 1% per year in the U.S. Currently, the rate of population growth falls and the trajectory of the overall GDP lags behind the projection which includes 1% population growth. If to look at the per head estimates, there is no gap between "potential" and observed levels.
In no case should an economist mix the growth in population and real economic growth.

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

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

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

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

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

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

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August 15, 2011


The GDP revisions: What changed?

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

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


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


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

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

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

Real GDP

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

Change in consumption expenditures

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

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


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

GDP revisions

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

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

Pattern of final demand

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

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


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


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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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July 28, 2011


Lots of ground to cover

In my last post I noted that the pace of the recovery, now two years old, is in broad terms similar to that of the first two years of the previous two recoveries. The set-up included this observation:

"Though we have grown used to thinking of the rebound from the most recent recession as being spectacularly substandard, that impression (which I share) is driven more by the depth of the downturn than the actual speed of the recovery."

The context of the depth of the downturn is not, of course, irrelevant. One way of quantifying that context is to look at measures of the "output gap," that is, the difference between the level of real gross domestic product (GDP) and the economy's "potential." An informal way to think about whether or not a recovery is complete is to mark the time when the output gap returns to zero, or when the level of GDP returns to its potential.

There are several ways to estimate potential GDP, but for my money the one constructed by the Congressional Budget Office (CBO) is as good as any. And it does not tell a pretty story:

Real GDP-Real Potential GDP

It is worth noting that the CBO's measure is not a just a simple extrapolation of a constant trend, but a calculation based on historical relationships among labor hours, productivity growth, unemployment, and inflation. Their trend in potential GDP growth rates implied by this methodology, described here, is anything but linear:

Real Potential GDP

Note that the output gaps in the first chart are at historical lows (by a lot) despite the fact that potential GDP growth is at historical lows as well.

These estimates provide one way to assess the pace of the recovery. For example, the midpoints of the Federal Open Market Committee's (FOMC) most recent consensus forecasts for GDP growth are 2.8 percent (2011), 3.5 percent (2012), and 3.85 percent (2013). If those forecasts come to pass, approximately 60 percent of the CBO-implied gap will be closed. This would still leave, in real terms, more resource slack than existed at the lowest point in the past two recessions.

Put another way, if the economy grows at 4 percent from 2012 forward, the output gap won't be closed until sometime in 2015. At a growth rate of 3.5 percent—the lower end of FOMC participants' projections for the next two years—the "full recovery" date gets pushed back to 2016. If, however, the FOMC projections are too optimistic and the economy can only manage to grow at an annual pace of 3 percent (which is currently the consensus view of private forecasters for 2012) output gaps persist until 2020.

The conventional view of the macroeconomy that motivates the CBO estimates of potential GDP (and hence output gaps) at least implicitly embeds the assumption that time heals all wound. But the healing won't necessarily be fast.

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

July 28, 2011 in Business Cycles, Economic Growth and Development, Employment, Forecasts, Saving, Capital, and Investment | Permalink

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July 20, 2011


Is consumer spending the problem?

In answer to the question posed in the title to this post, The New York Times's David Leonhardt says absolutely:

"There is no shortage of explanations for the economy's maddening inability to leave behind the Great Recession and start adding large numbers of jobs…

"But the real culprit—or at least the main one—has been hiding in plain sight. We are living through a tremendous bust. It isn't simply a housing bust. It's a fizzling of the great consumer bubble that was decades in the making…

"If you're looking for one overarching explanation for the still-terrible job market, it is this great consumer bust."

Tempting story, but is the explanation for "the still-terrible job market" that simple?

First, some perspective on the pace of the current recovery. Though we have grown used to thinking of the rebound from the most recent recession as being spectacularly substandard, that impression (which I share) is driven more by the depth of the downturn than the actual speed of the recovery. The following chart traces the path of real gross domestic product (GDP) from the trough of the last three recessions:


In the first two years following the 1990–91 and 2001 recessions, output grew by about 6 percent. Assuming that GDP grew at annual rate of 1.5 percent in the second quarter just ended—a not-unreasonable guess at this point—the economy will have expanded by about 5.3 percent since the end of the last recession in July 2009. That's not a difference that jumps off the page at me.

Directly to the point of consumption spending, it is certainly true that consumer spending has expanded at a slower pace in the expansion to this point than was the case at the same point in the recoveries following the previous two recessions. From the end of the recession in the second quarter of 2009 through the first quarter of this year (we won't have the first official look at this year's second quarter until next week), personal consumption expenditures grew in real terms by just under 4 percent. That growth compares to 4.8 percent in the first seven quarters following the end of the 2001 recession and 5.9 percent in the first seven quarters following the end of the 1990–91 recession.

That difference in the growth of consumption across the early quarters of recovery after the 1990–91 and 2001 recessions with little discernible difference in GDP growth across those episodes illustrates the pitfalls of mechanically focusing on specific categories of spending. In fact, the relatively slower pace of consumer spending in this expansion has in part been compensated by a relatively high pace of business spending on equipment and software:


If you throw consumer durables into the general notion of "investment" (investment in this case for home production) the story of this recovery is the relative boom in capital spending compared to recent recoveries:


And what about that "still-terrible job market"? You won't get much argument from me about that description, but here again the reality is complicated. Focusing once more on the period since the end of the recession, the pace of job creation is not out of sync in comparison to recent expansions (though job creation after the last two recessions was meager as well, and we are, of course, starting from a much bigger hole in terms of jobs lost):


So, relative to recent experience, at this point in the recovery GDP growth and employment growth are about average (if we ignore the size of the recession in both measures). The undeniable (and relevant) human toll aside, the current recovery seems so disappointing because we expect the pace of the recovery to bear some relationship to the depth of the downturn. That expectation, in turn, comes from a view of the world in which potential output proceeds in a more or less linear fashion, up and to the right. But what if that view is wrong and our potential is a sequence of more or less permanent "jumps" up and down, some of which are small and some of which are big?

In addition, investment growth to date has been strong relative to recent recoveries and, as Leonhardt suggests, consumption growth has been somewhat weak. So here's a question: Would we have had more job creation and stronger GDP growth had businesses been more inclined to add workers instead of capital? And if that had occurred, might the consumption numbers have been considerably stronger?

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

 

July 20, 2011 in Business Cycles, Economic Growth and Development, Employment, Forecasts, Saving, Capital, and Investment | Permalink

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This is an excellent contribution to elevating the quality of commentary on the current expansion. It is time to recognize the cycles experienced in the 60s, 70s, and early 80s were fundamentally different from those since. Because of this, the earlier cycles are not part of the relevant benchmark for making comparisons to current behavior. Three cheers for taking them out of the baseline used for comparisons.

Posted by: Douglas Lee | July 21, 2011 at 10:22 AM

David,
Let me ask a supplemental question. Following the '91 recession, the US created something like 20mm jobs. Following the '01 recession, perhaps 8.5mm jobs were created. How many jobs will be created in this decade?
Stewart

Posted by: stewart sprague | July 21, 2011 at 10:40 AM

The payroll employment chart suggests that just looking at the path for the level of employment from the end of a recession is not the relevant metric. How about looking at net jobs lost during the recession versus net jobs regained during the recovery? Then, the metric captures the essence of what the graph should indicate -- and what the blog offers in words. That the immense job loss of the recent recession is the big difference, and the recent sluggish job creation is akin to recoveries in 1991 and 2001. From this perspective, we have a problem that has been around for a few business cycles.

Posted by: ET_OC | July 21, 2011 at 02:44 PM

The obvious deficiencies in GDP this time have been net exports and government spending.

While the Fed has done its best to promote both, the politicians in Washington have done their best in the opposite direction by promoting an over-valued dollar and reduced federal spending, despite interest rates on the federal debt that are universally lower than during the years of the federal budget surplus.

Posted by: Paul | July 21, 2011 at 04:19 PM

I find it highly annoying that the the obvious is invisible to everyone.

http://research.stlouisfed.org/fred2/series/CMDEBT

Households were pulling $1.2T/yr of new mortgage debt during the boom 2004-2006. This was all cut off in 2007-2008.

Corporate debt take-on was another $800B/yr during this time, for a $2T/yr stimulus to the economy.

THAT IS TWENTY MILLION $100k/yr jobs!

Previous recessions in my life were all prompted by the Fed raising interest rates to throttle debt growth. What killed debt growth this time was the collapse of the ponzi lending structure and the bubble machine it was powering.

Posted by: Troy | July 22, 2011 at 01:58 AM

If you look at percent job losses since peak employment (not only since end of recession), then you can see how bad this recession is. At this point of the cycle after all prior recessions since WWII, the employment has recovered to pre-recession levels. In this recession, we are still 5% down.
http://cr4re.com/charts/charts.html

Posted by: Nino | July 22, 2011 at 05:29 PM

I look at PAYEMS (see below) and what do I see ? I see PAYEMS moving sideways since 2000/2001 so that after a decade of nonsense we find ourselves with 29,502.4 (Thousands (!)) less jobs than we would have had had the pre-2000/2001 trend continued to date.

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=PAYEMS&log_scales=Left

Posted by: In Hell's Kitchen (NYC) | July 23, 2011 at 09:04 AM

Of course the comparison matter. your comparison against the 1990-91 and 2001 make 2007 look average. When comparing against all post WWII recession/recoveries all three of those recoveries look below average (with all recoveries since 1990 looking very weak indeed). Even then the down-turn was the worst putting the starting point at a very, very low level.

Posted by: RangerHondo | July 26, 2011 at 08:48 AM

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May 28, 2010


How "discouraged" are small businesses? Insights from an Atlanta Fed small business lending survey

Roughly half of U.S. workers are employed at firms with fewer than 500 employees, and about 90 percent of U.S. firms have fewer than 20 employees. While estimates vary, small businesses are also credited with creating the lion's share of net new jobs. Small businesses are, in total, a big deal. Thus, it is no surprise that there is congressional debate going on about how to best aid small businesses and promote job growth. Many people have noted the decline in small business lending during the recession, and some have suggested proposals to give incentives to banks to increase their small business portfolios. But is a lack of willingness to lend to small businesses really what's behind the decline in small business lending? Or is it the lack of creditworthy demand resulting from the effects of the recession and housing market distress?

Economists often face such identification dilemmas, situations in which we would like to know whether supply or demand is the driving factor behind changes within a market. Additional data can often help solve the problem. In this case we might want to know about all of the loans applied for by small businesses, whether the loans were granted and at what rates, and specific information on loan quality and collateral. Alas, such data are not available. In fact, the Congressional Oversight Panel in a recent report recommends that the U.S. Treasury and other regulators "establish a rigorous data collection system or survey that examines small business finance" and notes that "the lack of timely and consistent data has significantly hampered efforts to approach and address the crisis."

We at the Federal Reserve Bank of Atlanta have also noted the paucity of data in this area and have begun a series of small business credit surveys. Leveraging the contacts in our Regional Economic Information Network (REIN), we polled 311 small businesses in the states of the Sixth District (Alabama, Florida, Georgia, Louisiana, Mississippi and Tennessee) on their credit experiences and future plans. While the survey is not a stratified random sample and so should not be viewed as a statistical representation of small business firms in the Sixth District, we believe the results are informative.

Indeed, the results of our April 2010 survey suggest that demand-side factors may be the driving force behind lower levels of small business credit. To be sure, when asked about the recent obstacles to accessing credit, some firms (34 firms, or 11 percent of our sample) cited banks' unwillingness to lend, but many more firms cited factors that may reflect low credit quality on the part of prospective borrowers. For example, 32 percent of firms cited a decline in sales over the past two years as an obstacle, 19 percent cited a high level of outstanding business or personal debt, 10 percent cited a less than stellar credit score, and 112 firms (32 percent) report no recent obstacles to credit. Perhaps not surprisingly, outside of the troubled construction and real estate industries, close to half the firms polled (46 percent) do not believe there are any obstacles while only 9 percent report unwillingness on the part of banks.

These opinions are reinforced by responses detailing the firms' decisions to seek or not seek credit and the outcomes of submitted credit applications.

052810a
(enlarge)

Of the 191 firms that did not seek credit in the past three months, 131 (69 percent) report that they either had sufficient cash on hand, did not have the sales/revenues to warrant additional debt, or did not need credit. (Note the percentages in the chart above reflect multiple responses by firms.) These responses likely reflect both the impact of the recession on the revenues of small firms as well as precautionary/prudent cash management.

The administration has recently sent draft legislation to Congress for a supply-side program—the Small Business Lending Fund (SBLF)—to address the funding needs of small businesses. The congressional oversight report raises a good question about the potential effectiveness of supply-side programs:

"A small business loan is, at its heart, a contract between two parties: a bank that is willing and able to lend, and a business that is creditworthy and in need of a loan. Due to the recession, relatively few small businesses now fit that description. To the extent that contraction in small business lending reflects a shortfall of demand rather than of supply, any supply-side solution will fail to gain traction."

That said, one way that a supply-side program like SBLF would make sense, even if low demand is the force driving lower lending rates, is if there are high-quality borrowers that are not applying for credit merely because they anticipate that they will be denied. We could term these firms "discouraged borrowers," to co-opt a term from labor markets (i.e., discouraged workers).

If a program increased the perceived probability of approval, either by increasing approval rates via a subsidization of small business lending or merely by changing borrower beliefs, more high-quality, productive loans would be made.

Just how many discouraged borrowers are out there? The chart above illustrates that, indeed, 16 percent of all of our responding firms and 21 percent of construction and real estate firms might fall into this category. I add "might" because the anticipation of a denial may well be accurate but based on a lack of creditworthiness and not the irrational or inefficient behavior of banks. Digging into our results, we find that 35 percent of the firms who did not seek credit because of the anticipation of a denial also cited "not enough sales," indicating that a denial would likely have reflected underlying loan quality.

In the labor market, so-called "discouraged workers" flow back into the labor force when they perceive that the probability of finding an acceptable job has increased enough to make searching for work, and working, attractive again. We should expect so-called "discouraged borrowers" to do the same. That's because if they don't, the likely alternatives for them, at some point, would be to sell the business or go out of business. It seems unlikely that, facing such alternatives, a "discouraged" firm would not attempt to access credit. The responses of firms in our sample are consistent with this logic; 55 percent of those who did not seek credit in the past three months because of the anticipation of a denial indicated that they plan to seek credit in the next six months.

Our results also provide some interesting data on an assumption underlying the policy debate: that those small businesses are credit constrained. Of the 117 firms in the survey that that sought credit during the previous three months, the following chart illustrates the extent to which these firms met their financing needs.

052810b
(enlarge)

Based on firm reports of the credit channel applications submitted in the previous three months, we created a financing index value for each firm. Firms that were denied on all of their credit applications have a financing index equal to 1, while firms that received all of the funding requested have an index level of 5. Index levels between 1 and 5 indicate, from lesser to greater, the extent to which their applications were successful. In the chart we plot data on the financing index levels of all firms in our sample and then split according to whether the firm is in construction and real estate. Among construction and real estate firms, 50 percent of firms had an index below 2.5, suggesting most did not get their financing requests meet. In contrast, the median index value of 4.7 for all other firms suggests that most of these firm were able to obtain all or most of the credit they requested. This difference between real estate–related firms and others is really not surprising given that the housing sector was at the heart of the financial crisis and recession. But it does suggest that more work needs to be done to analyze the industry-specific funding constraints among small businesses.

By Paula Tkac, assistant vice president and senior economist, of the Atlanta Fed

May 28, 2010 in Banking, Saving, Capital, and Investment, Small Business | Permalink

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Hi,

Excellent article; I have plugged it over at my own blog (and at Global Economy Matters). I don't know why the trackback has not shown up yet.

Anyway, it was very interesting get some real hard evidence (even if it is very specific sample) that deleveraging is NOT only driven by supply side constraints; to me this is one of the big untold stories of this financial crisis.

best

Claus

Posted by: claus vistesen | May 31, 2010 at 09:32 AM

We have to admit that cash flow is one of the most common challenges entrepreneurs face. A prudent cash management
strategy has been proven to be vital in preserving a business capital and return.

Posted by: insolvency advice | July 19, 2010 at 12:13 AM

Yes we have to admit about the cash flow is most common challenges entrepreneurs face.

Posted by: paid surveys | August 29, 2010 at 08:36 AM

Since small business drive the economy cash flow is the most important issue that they have. Buying inventory, making payroll and all the other financial obligations can easily put a company out of business without having access to immediate cash.

Posted by: Dan | March 23, 2011 at 11:28 AM

Great blog.

Posted by: John Byner | March 26, 2011 at 08:43 PM

A good option would be a Business Cash Advance. It is based on your average monthly sales, not credit, so bad credit is ok and approval rates are 98%. They are unsecured, there is no personal guarantees, require no collateral, and will fund within a few days of applying. Also there are no restrictions on how you can use the money.

Posted by: Mark Sanchez | November 15, 2011 at 02:47 AM

It is a good thing to create SBLF because it is appropriately for small business who can't afford the lending terms of the banks.

Posted by: crm software | February 10, 2012 at 07:30 AM

I couldn't agree with this post more. Our economy thrives on the hard work of small businesses, particularly online businesses such as international ecommerce trading firms and even sole proprietorships. Right now, international eCommerce is the only thing driving outside capital right into the heart of this country and keeping the economy afloat.

Posted by: small business loans | May 30, 2012 at 03:15 PM

There are reasons why small business start lending money from the banks and investors, one their reason is to fund money to finance expenses to expand their business.

Posted by: Factoring Service | June 27, 2012 at 09:16 AM

Small company business loans are similar with other economical services such as restaurant financing where economical institutions offer the cash to borrower at time of emergency and charge interest rate.

Posted by: kwik quid | July 13, 2012 at 05:41 AM

I can tell you, they are very discouraged. A lot of them aren't even trying for traditional small business loans anymore.

Posted by: John Walters | July 13, 2012 at 11:12 PM

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April 29, 2010


Consumer credit: More than meets the eye

A lot has been made (here, for a recent example) of the idea that banks have shown a surprising amount of reluctance to extend credit and to start making loans again. Indeed, the Fed's consumer credit report, which shows the aggregate amount of credit extended to individuals (excluding loans secured by real estate), has been on a steady downward trend since the fall of 2008.

Importantly, that report also provides a breakdown that shows how much credit the different types of institutions hold on their books. Commercial banks, which are the single largest category, accounted for about a third of the total stock in consumer credit in 2009. The two other largest categories—finance companies and securitized assets—accounted for a combined 45 percent. While commercial banks have been the biggest source of credit, they have not been the biggest direct source of the decline.

042910a
(enlarge)

The chart above highlights a somewhat divergent pattern among the big three credit holders. This pattern mainly indicates that credit from finance companies and securitized assets has been on a relatively steady decline since the fall of 2008 while credit from commercial banks has shown more of a leveling off. These details highlight a potential misconception that commercial banks are the primary driver behind the recent reduction in credit going to consumers (however, lending surveys certainly indicate that standards for credit have tightened).

To put a scale on these declines, the aggregate measure of consumer credit has declined by a total of 5.7 percent since its peak in December 2008 through February 2010. Over this same time period, credit from finance companies and securitizations declined by 16.2 percent and 12.4 percent, respectively, while commercial bank credit declined by 5.5 percent. Admittedly, securitization and off-balance sheet financing are a big part of banks' activity as they facilitate consumers' access to credit. The decline in securitized assets might not be that surprising given that the market started to freeze in 2007 and deteriorated further in 2008 as many investors fled the market. Including banks' securitized assets that are off the balance sheet would show a steeper decline in banks' holdings of consumer credit.

A significant factor in evaluating consumer credit is the pace of charge-offs, which can overstate the decline in underlying loan activity (charge-offs are loans that are not expected to be paid back and are removed from the books). Some (here and here) have made the point that the declines in credit card debt, for example, reflect increasing rates of charge-offs rather than consumers paying down their balances.

How much are charge-offs affecting the consumer credit data? Unfortunately, the Fed's consumer credit statistics don't include charge-offs. However, we can look at a different dataset that includes quarterly data on charge-offs for commercial banks to get an approximation. We can think of the change in consumer loan balances roughly as new loans minus loans repaid minus net loans charged off:

Change in Consumer Loans = [New Loans – Loan Repayments] – Net Charge-Offs

Adding net charge-offs to the change in consumer loans should give a cleaner estimate of underlying loan activity:

  042910c

If the adjusted series is negative, loan repayments should be greater than new loans extended, which would lend support to the idea that loans are declining because consumers are paying down their debt balances. If the adjusted series is positive, new loans extended should be greater than loan repayments and adds support to the hypothesis that part of the decline in the as-reported loans data is from banks removing the debt from their books because of doubtful collection. Both the as-reported and adjusted consumer loan series are plotted here:

042910b
enlarge

Notably, year-over-year growth in consumer loans adjusted for charge-offs has remained positive, which contrasts the negative growth in the as-reported series. That is, the net growth in new loans and loan repayments shows a positive (albeit slowing) growth rate once charge-offs are factored in. Over 2009, this estimate of charge-offs totaled about $27 billion while banks' average consumer loan balances declined by about $25 billion. Thus, a significant portion of the recent decline in consumer loan balances is the result of charge-offs.

Nevertheless, in an expanding economy, little or no credit growth implies a declining share of consumption financed through credit. Adjusting consumer loans for charge-offs suggests that the degree of consumer deleveraging across nonmortgage debt is somewhat less substantial than indicated by the headline numbers.

All in all, the consumer credit picture is a bit more complicated than it appears on the surface. A more detailed look suggests that banks haven't cut their consumer loan portfolios as drastically as sometimes assumed. The large run-up in charge-offs has also masked the underlying dynamics for loan creation and repayment. Factoring in charge-offs provides some evidence that a nontrivial part of consumer deleveraging is coming through charge-offs.

By Michael Hammill, economic policy analysis specialist in the Atlanta Fed's research department

April 29, 2010 in Banking, Capital Markets, Financial System, Saving, Capital, and Investment | Permalink

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Very nice.

One can get a slightly broader data set by using FDIC statistics on all insured institutions (http://www2.fdic.gov/SDI/SOB/). It doesn't seem the results are substantially different: For end 2009 vs end 2008, an unadjusted drop of $29bn, vs an adjusted rise of $34bn.

Paul Kasriel recently did the same analysis for bank lending overall (full disclaimer - he mentions my website). http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/1004/document/ec042910.pdf

Posted by: Jim Fickett | May 01, 2010 at 07:31 PM

you could have boiled off a lot of filler here and had quite a nice compact post
regardless well worth reading thanx

Posted by: paine | May 02, 2010 at 01:56 PM

A question: when there are charge-offs, do they include the late-payment penalties and other fees or only original principal?

Posted by: Daniil | May 03, 2010 at 10:21 AM

Two other general observations: First, although clearly implied by the post above, some readers commenting around the net have not noticed that we DON'T KNOW what the net growth in new consumer loans is, overall. Since charge-off data are available only for FDIC-insured institutions, we can't make the second graph above for the other categories of lending.

Second, and related, Felix Salmon did a post in March, linked to above, in which he concluded that consumers were not paying their cards down; in fact they were borrowing more. But the data he used, from CardHub, was mistaken -- it did not make the distinctions made in the post above, and applied the Fed charge-off rate, which is only for commercial banks, to the full revolving debt balance, from all sources. Many people are still under the impression of what Salmon wrote, but in fact we do not know whether it is true.

@Daniil: charge-offs are only principal. The accounting, in which the principal balance of loans outstanding is reduced by charge-offs, would not make sense otherwise.

Posted by: Jim FIckett | May 03, 2010 at 11:43 PM

@Jim My question is not about that. It's the following. There's a balance of $1000. I miss 3 payments and the bank assesses $200 worth of late charges and resets the interest rate after first missed payment so that after 3 months (let's say that's when the bank charges off the loan) my loan to the bank is $1300. So my total debt goes up. I don't know what's on banks books as a result of this. Do they discharge the 1000? 1300?
And even if 1300, then the total 'borrowing' might still be going up not because people are borrowing, but because they are falling behind.

Posted by: Daniil | May 05, 2010 at 04:54 PM

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February 01, 2010


Southeast businesses offer insights on capital spending plans

With last week's capital orders data giving signals of renewed growth in business fixed investment in equipment and software in the fourth quarter, the question turns to whether this growth will be sustained. In early January 2010, the Federal Reserve Bank of Atlanta reached out to our contacts in the Southeast through our Regional Economic Information Network as part of our monetary policy information-gathering efforts to inquire about businesses' capital spending plans. We received responses from 320 businesses across Alabama, Florida, Georgia, Mississippi, Louisiana, and Tennessee. (I want to note we were helped significantly in this effort by colleagues at the Kennesaw State University Econometric Center, who conduct a monthly PMI survey of manufacturers in the Southeast.)

As with our recent small business finance survey (discussed in this macroblog post), readers should be cautious about the results because of the tendency, for example, to sample established, relatively successful firms. That said, we still believe the results are instructive. Of note, 36 percent of respondents indicated that they planned to increase spending over the next 6–12 months relative to actual spending over the past 6–12 months. Another 42 percent said they would leave their spending at about the same level (unchanged), and 22 percent indicated that their spending would fall. The difference between those planning to increase spending and those planning to decrease spending equals a net positive of 14 percent. Across industries, construction firms were the group least likely to increase spending, while retailers were the most optimistic group. Our manufacturing contacts and the "other industries" group of firms (firms across a myriad of industries such as transportation, healthcare, and business services) expressed intentions similar to the overall response (see the chart).

020110
(Enlarge)

For those who planned to increase spending on new plant and equipment, the most commonly given reasons (respondents could select more than one reason) were that they expected growth in sales to be high (37 percent of those respondents), or they needed to replace information technology equipment (37 percent of those respondents). Also, 61 percent of those planning to increase spending indicated that at least some of that spending reflects investment that had been postponed because of the recession. Not surprisingly, for those who did not plan to increase spending, the most commonly cited reasons were the expectation of low growth in sales (cited by 47 percent of those respondents) and heightened economic uncertainty (cited by 39 percent of those respondents).

Interestingly, cost and availability of external financing were among the least frequently cited reasons for either increasing or not increasing capital spending (cited by 9 percent and 15 percent of respondents, respectively). This theme is consistent with the findings of our recent small business survey, as well as the trend in the National Federation of Independent Business (NFIB) survey of small businesses. According to the NFIB, "finance" was reported as the number one small business problem by only 4 percent of respondents in December 2009. The number one single factor was poor sales.

The NFIB survey also found that while plans to increase capital spending by small firms rose modestly in December 2009 to a net 18 percent, they remained near historic low levels—in December 2007, the net percentage stood at 29 percent and 17 percent in December 2008. This performance suggests that our finding of a net 14 percent of firms planning to increase rather than decrease spending on plant and equipment should not be read too encouragingly.

So where does that leave things? Probably with more questions than answers. For instance, the fact that about two-thirds of the firms that are planning on increasing spending are doing so because they had postponed capital expenditures during the recession would be consistent with some bounce in capital spending by businesses following the most recent recession. But how sensitive are firms to changes in economic conditions? Currently, we hear a lot anecdotally that cash is a high priority on firms' balance sheets as a precaution against economic uncertainty. If sales were to increase more than expected, how fast would firms rethink their investment spending plans? The answers to these types of questions are important, and we are consequently planning to conduct a follow-up survey in due course. As always, we'll keep you posted.

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

February 1, 2010 in Business Cycles, Saving, Capital, and Investment | Permalink

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November 24, 2009


Interest rates at center stage

In case you were just yesterday wondering if interest rates could get any lower, the answer was "yes":

"The Treasury sold $44 billion of two-year notes at a yield of 0.802 percent, the lowest on record, as demand for the safety of U.S. government securities surges going into year-end."

"Demand for safety" is not the most bullish sounding phrase, and it is not intended to be. It does, in fact, reflect an important but oft-neglected interest rate fundamental: Adjusting for inflation and risk, interest rates are low when times are tough. A bit more precisely, the levels of real interest rates are tied to the growth rate of the economy. When growth is slow, rates are low.

The intuition behind this point really is pretty simple. When the economy is struggling along—when consumer spending is muted and businesses' taste for acquiring investment goods is restrained—the demand for loans sags. All else equal, interest rates fall. In the current environment, of course, that "all else equal" bit is tricky, but the latest from the Federal Reserve's Senior Loan Officer Opinion Survey is informative:

"In the October survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households. However, the net percentages of banks that tightened standards and terms for most loan categories continued to decline from the peaks reached late last year."

Demand also appears to be quite weak:

"Demand for most major categories of loans at domestic banks reportedly continued to weaken, on balance, over the past three months."

This economic fundamental is, in my opinion, a good way to make sense of the FOMC's most recent statement:

"The Committee… continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Not everyone is buying my story, of course, and there is a growing global chorus of folk who see a policy mistake at hand:

"Germany's new finance minister has echoed Chinese warnings about the growing threat of fresh global asset price bubbles, fuelled by low US interest rates and a weak dollar.

"Wolfgang Schäuble's comments highlight official concern in Europe that the risk of further financial market turbulence has been exacerbated by the exceptional steps taken by central banks and governments to combat the crisis.

"Last weekend, Liu Mingkang, China's banking regulator, criticised the US Federal Reserve for fuelling the 'dollar carry-trade', in which investors borrow dollars at ultra-low interest rates and invest in higher-yielding assets abroad."

The fact that there is a lot of available liquidity is undeniable—the quantity of bank reserves remain on the rise:

112409a

But the quantity of bank lending is decidedly not on the rise:

112409b

There are policy options at the central bank's disposal, including raising short-term interest rates, which in current circumstances implies raising the interest paid on bank reserves. That approach would solve the problem of… what? Banks taking excess reserves and converting them into loans? That process provides the channel through which monetary policy works, and it hardly seems to be the problem. In raising interest rates paid on reserves the Fed, in my view, would risk a further slowdown in loan credit expansion and a further weakening of the economy. I suppose this slowdown would ultimately manifest itself in further downward pressure on yields across the financial asset landscape, but is this really what people want to do at this point in time?

If you ask me, it's time to get "real," pun intended—that is to ask questions about the fundamental sources of persistent low inflation and risk-adjusted interest rates (a phrase for which you may as well substitute U.S. Treasury yields). To be sure, the causes behind low Treasury rates are complex, and no responsible monetary policymaker would avoid examining the role of central bank rate decisions. But the road is going to eventually wind around to the point where we are confronted with the very basic issue that remains unresolved: Why is the global demand for real physical investment apparently out of line with patterns of global saving?

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

November 24, 2009 in Federal Reserve and Monetary Policy, Interest Rates, Monetary Policy, Saving, Capital, and Investment | Permalink

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Can you say what you mean? (when you work as a public servant)

Bankers make more money investing in totally risk free, highly liquid earning assets, mis-named excess reserves @.25% rather than zero percent t-bills. Not too complex.

Banks are unencumbered in their lending operations(except the venerated, & capricious, 10% bank capital ratios).

Again, whether it's dis-intermedition (contraction or outflow of funds), from the non-banks, or financial intermediaries (e.g., hedge funds, investment banks, finance companies, insurance companies, mortgage companies, pension funds, etc.),

c. 80% of the lending market,

or IMPOUNDING savings within the commercial banking system, both are contractionary (the source of savings deposits within the monetary system is other bank deposits, directly or indirectly via currency, or the bank's undivided profits accounts).

Lower the remuneration rate on excess reserves. Then get the member banks out of the savings business. I.e., money flowing “to” the intermediaries never leaves the monetary system as anyone who has applied double-entry bookkeeping on a national scale should know. And why should the member banks pay for something they already own (interest). The member banks would be smaller, and more profitable, if they did not (1966 proved that, Dr. Alton Gilbert wasn't an expert: "Requiem for Regulation Q: What It Did and Why It Passed Away").

Monetary savings are LOST TO INVESTMENT (bottled up), within the banking and monetary system. I.e., savings held within the monetary system have a transactions velocity of zero, and are a leakage in the Keynesian national income concept of savings.

IOR's are not offsetting when the system's expansion coefficient varies widely

On IORs: Banks create new loans-deposits. The bankers are getting paid twice, for new, free, and additional earning assets (regardless of the expansion coefficient). Interest on reserves is a fraud and deceit upon the American people.

Posted by: Spencer Bradley Hall | November 26, 2009 at 07:59 PM

Thanks for doing this blog. I'll try to keep my comments to a technical nature.

On one hand, I agree that there has been some flight to safety in recent weeks, which I think reflects concerns about the economy's dependence on monetary stimulus, and the sustainability of the stimulus.

On the other hand, I also see indications that the recent retreat in Treasury rates is due also to an increase in the scale of monetary stimulus. The federal funds rate has fallen in recent weeks to around 12 bips, after hovering around 20 bips for most of the year.

This decline roughly coincided with the recent redemption of $185 billion from Treasury's supplementary financing account, which boosted the pace of the increase in excess reserves.

Also, for most of this year the Fed had been able to restrain the stimulus effect of its asset purchase programs by reducing borrowing from the Fed - in essence, replacing the large borrowed reserves built up in 2008 with non-borrowed reserves. But there seems to be little borrowed reserves left that the Fed can reduce, and so its asset purchases seem recently to be translated practically 1:1 into additional excess reserves.

Or this could perhaps be a case of steady monetary stimulus having partly delayed, and thus accelerating effects.

In a different time in a different country, a central banker once explained to me how he would know when monetary stimulus had surpassed its usefulness. He said it's like trying to pour coffee while blindfolded: the only way you know the cup is full is when you can feel the coffee spilling across the table. By that he meant when CPI accelerates.

But this is a novel situation, in which the scale of monetary stimulus is very large and yet the deflationary forces from deleveraging are very powerful. So perhaps the coffee is spilling out, but the table is tilted enough that the Fed isn't feeling any where it has its hand.

Posted by: Tom | November 27, 2009 at 01:23 AM

The Fed is in a box. Raising short term rates now would be bad policy. Perhaps being more stringent on the type of collateral that they take would be a step toward signaling to the market that they are ever vigilant, and are not encouraging bubbles.

Saving is up because people are scared (in the US). Bankers have told me they cannot find good credit risks to lend to. Plus, their existing loans are being paid off as quickly as possible. They are forced to buy treasuries to put their money to work.

The propensity to save in Asia is high. There seems to be a cultural bias toward saving versus spending. The Chinese populace has become richer, but they have not spent those riches and are saving them.

It would be interesting to look at the savings rate of the US from the late 1880's to 1920 to see how it compares. Maybe there is a correlation with saving and development?

Secondly, the economic environment is so uncertain. Business is terrified of the coming actions of the Obama administration. Cap and trade, higher taxes, health care regulations and taxes, pro union actions, and more regulation in general are troubling to any business. The costs of all these actions are not easily quantified into any model-so it's hard to make a decision. The result, is no action. Cash piles up.

Posted by: Jeff | November 27, 2009 at 08:58 AM

In regard to the final question, why is the demand to borrow seemingly lower than the supply of capital, I wonder if it is some combination of:

A. Demographic changes - if young people generally borrow and take risks, and older people generally save (lend), perhaps the baby boom retirement is causing too much savings to chase too few risk takers?

B. Business changes - in the past, the hottest areas of the economy (say railroads) required large amounts of capital investment. Increasingly, the hottest areas (the internet/google) use relatively little capital, and are largely self-financing. Perhaps this shift implies that the same amount of savings is now chasing fewer opportunities for capital investment.

C. Changes in retirement expectations - in the early 1900s, I think many people never expected to retire, and consequently never saved. Now, most expect to retire and most save to attempt to fund that retirement. That increases the number of people looking to save/lend.


I wonder if A, B and C are large enough to cause macroeconomic impacts. I think they could amplify each other, in the sense that there are both fewer risk-taking borrowers per retiree/lender, and each risk-taker needs less capital investment than before.

Posted by: Chris | November 30, 2009 at 06:50 PM

I'd like to play devils' advocate with regard to the fear of rampant inflation that is expected.

True, the money supply has expanded enormously in the credit crisis. It is mind boggling to think about. How could it not lead to rampant inflation?

First, the money isn't in the economy. It is on bank balance sheets.
They are reinvesting it in government treasuries. They are not lending it. As a matter of fact, their credit standards are so high they won't lend it. Furthermore, their outstanding loans are being repaid-so this cash is being reinvested in treasuries as well.

Once the Fed sees that money is being lent out-and the velocity of money picks up-they undertake open market operations aggressively to sop up cash. They raise discount rates by a little-and change the collateral that they take to make it tougher for prime brokers to get cash from the Fed.

If they are fast enough, we will have limited inflation in the overall economy.

Posted by: jeff | December 04, 2009 at 01:14 PM

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January 26, 2009


The piggybank effect

During the 2002–2007 economic expansion, the personal savings rate fell to below 1 percent of disposable income. The savings rate had declined steadily from over 12 percent in the 1980s' recession. What changed the way people allocated their budgets?

U.S. household wealth grew considerably as home prices and the stock market soared. According to the Wall Street Journal, "Starting in the late 1990s, soaring stocks made Americans feel richer…. Savings jumped for a bit following the 2001 recession, but plummeted afterwards as housing prices rose, again making Americans feel that it wasn't especially important to save."

Behavioral changes across generations may have also affected the attitude toward savings and debt. A study by McKinsey Global Institute shows that baby boomers' reduced savings is what accounts for most of the collapse in the U.S. household savings rate.

Some have been saying that over the past several years Americans had been "living beyond their means," saving little and shopping conspicuously. According to Merrill Lynch economists, the average household owns nearly $40,000 of nonhousing durable goods assets, a number that has tripled since the mid-1980s.

Since the economy slowed last year, consumers have become more cautious with their income. This fact is not surprising given record lows of consumer confidence, declining house prices, a sharply lower and still volatile stock market, and mounting job losses. Consumers now appear to be shifting toward saving. By November 2008, the personal savings rate rose to 2.8 percent. Many expect it to increase further. According to several forecasters, the savings rate is likely to reach nearly 5 percent by 2011, reducing spending relative to what it had been before the recession.

012609

But what will happen when the economy starts growing again? Will consumers behave the same as in the past, returning to lower savings and higher spending? Or will a more frugal mentality continue?

Some Merrill Lynch economists believe this time the rising savings rate is a secular trend. According to them, attitudes toward spending and debt have changed semi-permanently, and the United States is facing what they term a frugal future. However, Macroeconomic Advisers and Oxford Economics estimate the savings rate will begin to decline somewhat as the economy gathers steam in 2011, although it will still remain higher than in 2005–2007. The forecasters think Americans will save between 2.5 percent to 4.5 percent of their disposable income after this recession runs its course—hardly frugal, but perhaps not "beyond their means."

By Sandra Kollen and Galina Alexeenko, senior economic research analysts at the Atlanta Fed

January 26, 2009 in Business Cycles, Saving, Capital, and Investment | Permalink

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My fear is that this summer, should the cost of gas remain near 2.00, that essential symbol of the American, the SUV, will be back in vogue.

Actually, that is my prediction.

Posted by: esb | January 26, 2009 at 10:01 PM

The Fed's data on consumer purchases of durable goods shows a different picture than the comment implies. The net purchases were around $100 billion in the mid 80s, fell to about $50 after the 90 recession, then rose to about $200 prior to the 01 recession. The interesting part is that it peaked prior to the 01 recession and was very stable until the recent decline. Of course, this only relates to what consumers were spending, it says nothing about their means.

Posted by: Douglas Lee | January 27, 2009 at 11:14 AM

I guess the recession is my fault. My wife and I save about 30% of our income, we have no debt, we rent, and we don't own anywhere close to 40K worth of stuff, durable or otherwise. I'm sorry. Clearly we're failures as American consumers. So we obviously deserve to be punished by having the value of our savings (our work) be destroyed by the Fed's inflationary policies. It's only right that asset prices be propped up by government action. Since the prosperity of the past decade or so was an illusion propped up by debt, the best course of action is to make sure the debt bubble continues to grow. That's the road back to real wealth.

Posted by: Moopheus | January 27, 2009 at 01:30 PM

Why stop at 5%? The Baby Boomers are not going to be able to retire unless they save about the same as people saved in the 70s and 80s which is more like 10%. In fact, one would think that they need to save more like 20% to make up for their lack of savings over the past 10 years.

Posted by: David | January 27, 2009 at 10:43 PM

Does this savings rate include 401Ks? It is only logical for boomers to save to a tax deferred 401k before putting money into taxed time deposits.

Posted by: DR | January 28, 2009 at 10:25 AM

Nice piece, but I'd add two things. First, a lot of US saving shows up as savings by firms, since the tax system discourages distributions of earnings. Since firms are (on the whole) owned by people, it's somewhat misleading to look at personal saving on its own. Second, none of the standard saving rates include capital gains. You hint at this in your piece, but don't explain why, if saving is so low, we have so much net worth. (Less now, of course.) It would be nice to add, for example, a graph of the ratio of household net worth to GDP, or something like that. All of this and more is laid out nicely in a 1999 Brookings article by Gale and Sabelhaus.

Posted by: Dave Backus, NYU | January 29, 2009 at 08:43 AM

In order to compare: What are the saving rates in other countries?
thx

Posted by: martin gale | January 29, 2009 at 09:34 AM

I'd love to see that chart back to fifties, and overlay real (un-Boskinized unhedonized) interest rates against it. Maybe people are more clever than believed.

From a different angle, meaningful modern measures of "savings" should perhaps include some measure home equity, mutual funds, directly-held shares, annuity and insurance-wrapped products, PV of defined benefit plans, and as DR points out 401k and defined contributions plans. Cash in the bank isn't what it used to be in any event.

Posted by: Cassandra | January 29, 2009 at 03:02 PM

"My fear is that this summer, should the cost of gas remain near 2.00, that essential symbol of the American, the SUV, will be back in vogue."

Only for the people who can get loans and still have secure jobs, who are also short-sighted schmucks.

Posted by: Jon H | January 29, 2009 at 06:18 PM

"Does this savings rate include 401Ks? It is only logical for boomers to save to a tax deferred 401k before putting money into taxed time deposits."

Lots of my friends are transferring cash from 401K to savings/checking for ready access. I wonder if this is a contributor to why the savings rate has increased suddenly.

Posted by: Mark Summers | January 29, 2009 at 06:30 PM

I agree with Cassandra, and others.

The baby boom often started their careers late (or switched careers) and put heavy demand into home ownership, plus had to fund their own pensions (a mixed blend, starting out with defined benefit, that went away, and transitioning into defined contribution). These are responsibilities that previous generations did not have as explicitly.

This has been a generation transitioning through all kinds of structural changes in an economy with declining marginal rates of growth. Plus during boomer lifetimes (OK, I am one), we have monetized a lot of labor (parenting, caregiving, meal preparation, etc.).

Ergo, we really do need to think carefully about how we are measuring 'savings,' and what it means since the structures and personal responsibilities of people's lives have changed dramatically.

Posted by: Laocoon | January 30, 2009 at 10:57 AM

Countries differ in the way household disposable income is reported (in particular whether private pension benefits less pension contributions are included in disposable income or not), therefore the comparison between savings rates in the United States and other countries could be difficult to make. However, the OECD adjusts for this difference when reporting savings rates in the member countries. In 2007, the savings rate in the OECD countries ranged from 13.1% in France to a negative 3.6% in Finland. Australia’s savings rate was reported at 0.3%, and the United States had the third lowest at 0.7%. Savings rates in Austria, Germany, Sweden, Switzerland, Belgium, and Spain were around 10%. Japan’s savings rate was reported at 3.2% and Korea’s at 3.9%.

Employee contributions to 401(k)-type plans are part of wages and salaries (a gross concept before deductions) in the period of the contribution. They are not part of outlays, and therefore are included in personal saving in the period of the contribution. Employer contributions to 401(k)-type plans are part of employer contributions for employee pension and insurance funds in the period of the contribution. Therefore, these contributions are included in personal income, they are not part of outlays, and are therefore included in personal saving in the period of the contribution.

Posted by: Sandra and Galina | February 05, 2009 at 10:58 AM

Common sense would indicate that a diversion from consumption to savings would represent a drag on economic growth. Indeed, the UST estimate that a move to 5% personal savings would sap $500bn from global demand (including multiplier effects). So, in the short-term, higher personal savings = bad for growth. The degree to which this personal saving is off-set by govt dis-saving will, I suppose, depend on the degree to which Ricardian equivalence holds, and the different multipliers that might attach themselves to household vs govt spending.

However, both neoclassical and endogenous growth theory appear to indicate that a shift to a higher savings rate leads to an increase in the level of GDP (in the case of neoclassical gt), or indeed the pace (for endogenous gt). So higher saving = good for growth (at the very least by moving steady state to a higher level assuming no technology).

Keynesian national accounting identities equate saving with investment. So doesn't have much to say about the impact on growth I guess.

And at a global level NET debt must always be zero, so there can be neither leveraging or deleveraging at the system level (although there could be among different sectors).

Please disentangle my confusion.

Posted by: Confused about saving | February 05, 2009 at 11:49 AM

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