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

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

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December 30, 2008

Good news in income growth?

One of my New Year’s resolutions is to be more consistent in responding to questions and comments from the loyal readers of macroblog. Though it remains the case that time constraints prohibit a response to all worthy queries, we’re still listening. Next year we’ll endeavor to give a shout back just a little more often.

In that spirit, I received an interesting inquiry from reader Robert Schumacher:

A cursory examination of the monthly trends in real disposable income in light of the NBER official business cycles suggests to me that a sustained rise in disposable personal income (at least three if not four months) signals the end of the recession is at hand. In that real disposable income rose in October and November how are we to interpret this amidst the dire economic forecasts for the coming year?

It does seem, as Robert suggests, that a sustained rise in real disposable income is characteristic of a typical recession’s end. Using a graphical device from a few posts back, here’s a look at the trajectory of disposable income up to and after December 2007 (the start date of the current recession according to the NBER Business Cycle Dating Committee), compared with the average experience of the previous seven recessions dating from 1960:


As in the previous post, “time 0” represents the peak of a business cycle, or the month a recession begins. The average length of US recessions from 1960 through 2001 was 10.7 months, so the line indicating 10 months from the peak roughly coincides to the end of the average recession over this period.

On average, Robert’s conjecture looks right on track. In the typical case, growth in real disposable income stalls and then begins to pick up three or four months before recession’s end. If you smooth through the spike associated with the stimulus package of late spring, income growth was roughly flat through August but has increased since (and at a reasonably good clip). That would seem to portend well for all of us—and I assume it is all of us—hoping for a sooner rather than later end to the current contraction.

The picture is equally encouraging if we look at the income series preferred by the Business Cycle Dating Committee, which subtracts out transfers (that is, payments made to the public by the government):


That’s all encouraging, but there is a caveat: Individual results may vary. Here are the comparisons for the long-lived (16-month) recessions of 1973–75 and 1981–82:



In these two recessions—which are arguably better benchmarks than the average at this point—income measures were not such reliable harbingers of expansion.

Still, in current circumstances a glimmer of hope is better than nothing.

By David Altig, senior vice president and director of research at the Federal Reserve Bank of Atlanta

Because of the New Year holiday, today’s posting will be the only macroblog posting for this week.

December 30, 2008 in Business Cycles, Data Releases | Permalink


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Doesn't it bother you that a big chunk (at least) of this real disposable income growth is probably due to the decline in the CPI over the same period? Sticky wages in a deflationary period would be very worrisome.

Posted by: Aaron | December 31, 2008 at 09:09 AM

If you compare real income to real spending you find that during an expansion and a recession real income tends to be a concurrent indicator. But in recoveries real income( excluding transfers) tends to be a lagging indicator.

Posted by: spencer | December 31, 2008 at 11:48 AM

Aaron beats me to it...basically plummeting gas prices, but also hard to put a finger on any economic activity (other than bk filing) that might account for this income "surge". The stimulus package (a step function then as the checks went out all at once, yes?) of $600/adult appears to have lasted 3 months --longer than I would have imagined...and surprisingly more than the savings from cheaper gas prices --did consumers actually drive that much less?
Not to B even gloomier than Aaron, but I know of some who are working longer hours and/or for less...giving me the other impression that DPI is moving down, not up...in line with fewer jobs for more qualified applicants.

Posted by: calmo | December 31, 2008 at 11:48 AM

I have the feeling that the stimulus spike will be repeated and the future versions of the graph you show will come to resemble an electrocariogram after defibrillation treatments. Let's just hope the patient recovers.

Posted by: don | January 05, 2009 at 08:34 AM

This recession differs from 73-75 and 81-82 by virtue of price deflation, a phenomenon more associated with the Great Depression. A rise in real disposable income is hence a symptom of a deep causal problem, the lack of confidence in an impaired financial sector. However, effect can become cause. Or, put in slightly differently terms, when the price of gasoline drops dramatically, consumers are freed immediately to buy other goods. The price of gasoline works as a giant brake, or a drag on the American economy. The drag has been greatly ameliorated and thus a rise in real income can harbinger recovery, i.e. disposable income becomes a leading indicator.

The end of this recession is not at hand because of this data, but it is going to help end the recession, as effect morphs into cause.

Posted by: mme | January 05, 2009 at 08:35 AM

THE problem we face is that the principal cause of our GDP growth for five years was absurdly leveraged speculation. It's folly to propose reducing over-leveraged money center banks will in any way address the problems we face.

Posted by: bailey | January 05, 2009 at 08:35 AM

David - a nice dissection and response. Thanks. I too feel/conclude that the recent upblip in income (& real wages) btw are somewhat misleading because of the sudden drop in inflation. Let's "see" what happens as unemployment worsens. My view is that consumer spending - the engine - is based on real wages, jobs and wealth. We've just taken the biggest hit in wealth in the post-war world so the asset ATM is gone. I've found that the sum of YoY changes in Employment and Real Wages (hattip Joseph Ellis) is powerfully indicative of future consumption spending and it's still headed down. Paul Kasriel at Northern Trust gets nearly identical results looking at (my recollection is bad on this) the product of employment and wage changes. His forecasts are well worth reviewing.

Posted by: dblwyo | January 05, 2009 at 08:35 AM

Aaron -- You are correct that the November increase in real disposable income was a result of the monthly decline in prices. Here is the data series showing nominal DPI:

July -- $10765 billion
August -- $10649 billion
September -- $10659 billion
October -- $10676 billion
November -- $10664 billion

It's not clear exactly what to make of the data -- it's still real income that matters. But your and calmo's skepticism in light of other data seems justified. As always, we will have to wait and see.

Posted by: David Altig | January 05, 2009 at 01:51 PM

Susan Woodward and Robert Hall also have a blog post related to my last comment at their blog "Financial Crisis and Recession": http://woodwardhall.wordpress.com/2009/01/02/consumption-surprise/.

Posted by: Dave Altig | January 06, 2009 at 09:38 AM

I wonder how the same series would look using "core" inflation, which seems to have fallen from grace these days?

Posted by: John G | January 09, 2009 at 12:04 PM

Excellent, practical posts. I’ve already “Twittered” it and forwarded your link to my clients to spread through their offices. I always gain from such posts. Thanks for sharing

Posted by: Boorchmen | June 22, 2009 at 02:52 AM

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December 23, 2008

Are modern recessions different?

In case you are hungering for something to while away the time as the holiday approaches—since apparently you are not out shopping—Barbara Kiviat provides some food for thought at The Curious Capitalist:

“Let me leave you with something to toss into the conversation when your family starts talking about the economy…

“Since WWII, recessions have lasted 10 months on average. We hear that a lot. Our current recession started in December 2007. Even though this go-around seems worse [than] usual, that's still a little cause for optimism.

“Or maybe not. This week Merrill Lynch economist David Rosenberg put out a report—thanks for the tip, John!—questioning why we'd only look at recessions over the past 60 years.”

She then quotes Rosenberg…

“This recession has more in common with the pre-WWII era. However, most of the data we have and most of the analysis still being conducted is done within the context of post-World War II cycles. That will not work, as this is a balance sheet recession and not just within the confines of the financial sector, but within the broad US household sector. This involves debt repayment and asset liquidation, and for the first time in recorded history, the entire $70 trillion household balance sheet is in the process of shrinking.”

… and goes on to provide the punchline:

“He then goes back to 1855 (a better timeframe for true historical context, he figures), and finds that recessions last an average 18 months. If his logic is right, then we're not due for sunnier skies until mid-2009.”

Interestingly enough, Berkeley’s Christina Romer—the next chair of the president’s Council of Economic Advisers—has in the past had a fair amount to say about comparing recessions past and present. First, the statement of an obvious problem:

“The obvious series to compare over time are standard macroeconomic indicators such as real GNP, industrial production, and unemployment. Such comparisons, however, are complicated by the fact that contemporaneous data on these quantities have only been collected for part of the 20th century. For example, the Federal Reserve Board index of industrial production begins in 1919, the Commerce Department GNP series begins in 1929, and the Bureau of Labor Statistics unemployment rate series begins in 1940. Furthermore, because World War II marked a radical change in the data collection efforts of the U.S. government, many of these series are only available on a truly consistent basis after 1947.”

In the paper Professor Romer goes on to recap her efforts to reconcile the older (pre-World War II) data with that of the modern era. The details reveal the considerable novelty for which she is duly admired among economists—part of the solution is to forgo the impossible task of making bad data good and instead induce comparability by making the good data bad—but I will leave those details to you and get right to the point:

“The first finding is that recessions have not become noticeably shorter over time. The average length of recessions is actually one month longer in the post-World War II era than in the pre-World War I era. There is also no obvious change in the distribution of the length of recessions between the prewar and postwar eras. Most recessions lasted from 6 to 12 months in both eras. Recessions were somewhat longer in the interwar era. However, an average for this period is virtually impossible to interpret since it includes the Great Depression, where 34 months elapsed between the peak and the trough. Probably the most sensible conclusion to draw for the interwar period echoes that from the previous section: the 1920s and 1930s were simply very peculiar.”

So, if you are inclined to buy the argument that comparisons of the current downturn to pre-WWII era contractions is a legitimate exercise, there’s some comfort for these cold winter nights. Happy holidays.

By David Altig, senior vice president and research director of the Federal Reserve Bank of Atlanta

Because of the Christmas holiday, today’s posting will be the only macroblog posting for this week.

December 23, 2008 in Business Cycles | Permalink


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By trying to look for comparisons with past recessions, people are just trying to predict the future.

Unfortunately, every recession occurs under a specific set of circumstances that are mostly not comparable with one another.

However, the one factor that seems to be present in most of the recent recessions is the price of oil and energy in general. That commodity has such a multiplier effect that it can break almost any growth economy.

Posted by: Alan | December 29, 2008 at 09:56 AM

One thing one never should forget: Averages as just that, they are _not_ maximums.

And judging from the graph i suspect that the length of the average recession with a "below average" length is 10 months, while the average length of the 7 longest recessions is about 35 months.

Posted by: Uwe Ohse | December 29, 2008 at 09:56 AM

So, if we are in as bad of shape as some of the statistics suggest this downturn could last until at least October of 2010. Add the fact that our FED and Treasury are throwing everything, and the kitchen sink at the problem, which is only slowing down the proccess and this contraction could last much, much longer. We are going to come out a different people on the other end of this period of adjustment.

Posted by: ConcernedCitizen | December 29, 2008 at 09:56 AM

I read an IMF study that said that recessions based on monetary problems compared to inventory and stock aberrations last four times as long and is twice as deep. I believe the logic is that distortions in the monetary area are much more damaging than distortions in inventory and stock prices. The loss of capital is so great and so diffused in this downturn that it will take much longer to adjust and come back to equilibrium

Posted by: Michael A. Cuttler | December 29, 2008 at 09:57 AM

The comfort from comparisons to pre-WWII era contractions may be colder than the current weather. By 1884, the beginning date for Professor Romer's data set, the U.S. was the largest national economy in the world and its future prospects were not subject to question. While the U.S. is still the largest sovereign economy, its national credit and the status of the dollar as a reserve currency are now genuinely in doubt. Therefore, it may be more instructive for economists to look to the last time that the U.S. had to restore its national credit, the period following what is called The Panic of 1873. Those five plus years were - by conventional measure - the longest recession in our history.

Posted by: LetUsHavePeace | December 29, 2008 at 09:57 AM

Since the list of recessions is short, can you provide the length of each recession acording to Prof. Romer?

Posted by: tyaresun | December 29, 2008 at 09:57 AM

A primer on "quantitative easing" in layman's terms:


Posted by: dl | December 29, 2008 at 09:57 AM

Are these recessions as defined by the NBER or as defined by two consecutive quarters of negative economic growth?

Posted by: MW | December 29, 2008 at 09:57 AM

First, the length of pre-World War II recessions is inapposite to the current recession because of the activities of central banks. The Federal Reserve system and the vigorous application of monetary policy to recessions is a modern phenomena that makes comparison to recessions of nineteeth century perilous at best. In effect, the Fed itself is a "new" exogenous factor and hence comparisons are not genuinely possible to recessions of a pre-central bank era.

Second, the lack of reliable 19th century data also makes comparison perilous. The paucity of data is somewhat analogous to the climate change debate because of the lack of information available about not only the 19th Century, but also earlier eras.

Last, this recession differs chiefly because of the interrelated, world-wide economies that are driven by an increasing ease of doing business across national lines and oceans. In short, the electronic transfer of funds and the spread of market economies, combined with the availability of information through the web, have made this genuinely a "new era." Hence, analogies to prior periods will be weak.

The good news is economics itself, which posits policies and provides tools. The kind of mistakes the Exchequer made to deal with the recession in Ireland in 1845 are quite unlikely to be repeated anywhere.

Posted by: Mike Egan | December 29, 2008 at 09:58 AM

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December 19, 2008

Higher unemployment: Labor force effects versus job loss effects

The November jobs numbers were expected to be pretty bad, but the magnitude of the decline—the largest monthly drop in nonfarm payrolls since December 1974—surprised most. Moreover, as was noted in the last macroblog post, there is little to single out in the industry distribution of job change since the job losses were pretty much across the board.

The unemployment rate rose two-tenths of a percent to 6.7 percent, and the labor force participation rate declined from 66.1 percent to 65.8 percent. The decline in participation was concentrated in adult males and teenagers, perhaps reflecting limited job prospects in the current environment, while adult female participation was stable—suggesting the need for an additional wage earner in many households to help offset the dismal job market.

Several of my colleagues have asked me about the implications of the economic downturn for the labor force participation rate and, in turn, what would be the implications of an expected decline in the labor force participation rate on the unemployment rate calculation.

Here is a chart of cyclical patterns of labor force participation rates (LFPRs) for the last four recessions. I have added a Q4 estimate of the LFPR for 2008 (using the November number, which basically assumes that the decline from October to November will be repeated from November to December).


My take on comparing the movement of the LFPR since the beginning of this recession compared to the three most recent earlier recessions is that so far nothing looks out of line compared with historical patterns.

I think that a more appropriate question to ask is what is expected to happen to the overall labor force—this is what is in the denominator of the unemployment rate. The following chart plots the labor force indexed to the peak of the business cycle.


As you can see in this chart, the labor force continues to grow throughout the recessions, and the current labor force growth doesn't look at all atypical.

While changes in participation rates tell us something about changes in the behavior of individuals with regard to the labor market, it turns out that movement in the labor force participation rate, or labor force growth, plays only a very small role in projecting the job loss associated with any given change in the unemployment rate.

One hypothetical question to ask is how many lost jobs would be implied by a rise in the "official" unemployment rate from its November level of 6.7 percent to 7.5 percent (roughly the November Blue Chip consensus forecast of the unemployment rate for the middle of 2009). With the assumption that the labor force stays the same (flows only from employed to unemployed but none out of the labor market), this implies an additional loss of 1.2 million lost jobs from now. At November's rate of a half-million jobs lost a month, reaching this number won't take long.

But if instead we project the current rate of labor force growth out to June 2009, an unemployment rate of 7.5 percent would imply a total of 11,653,000 unemployed people. This is 1.3 million more people unemployed than reported for November—again, at the current rate of job loss, this is easily attainable by June (and some suggest we will lose twice this number of jobs by June). But the point is, accounting for ongoing labor force growth, a 7.5 percent unemployment rate means only a slightly greater amount of job loss than when labor force growth is not taken into account.

There is some debate about what measure of unemployment we should focus on in measuring the degree of misery in the labor market. However, even if one adds back into the unemployment numbers (and, necessarily, back into the labor force count) those who have dropped out of the labor force because they were discouraged, the conclusion about the relative roles of labor supply decisions and actual job losses play in the construction of the unemployment rate does not change—job losses always dominate.

By Julie Hotchkiss, research economist and policy adviser in the Atlanta Fed research department

December 19, 2008 in Labor Markets | Permalink


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A data point on the unemployment measure:

For the fourth quarter of 2004, according to OECD, (source Employment Outlook 2005 ISBN 92-64-01045-9), normalized unemployment for men aged 25 to 54 was 4.6% in the USA and 7.4% in France. At the same time and for the same population the employment rate (number of workers divided by population) was 86.3% in the U.S. and 86.7% in France.

This example shows that the unemployment rate is 60% higher in France than in the USA, yet more people in this demographic are working in France than in the USA.

Do you know of anyone working on this "discrepancy"?

Thanks in advance,


Posted by: Laurent GUERBY | December 22, 2008 at 08:50 AM

France hasn't been changing its definition of "unemployment"--each time in the same direction--for the past twenty years?

(I'll ignore for the moment the question of whether 25-54-year-old men should be used as a baseline, since it's the FRB Atlanta's blog, save to note that that measure seems the most optimistic one to use, and therefore least representative of how a society functions.)

Posted by: KenHoughton | December 29, 2008 at 09:56 AM

KenHoughton, these are "normalized" OECD numbers, which means that they should be comparable.
And this was at the same point in time so no change of definition anyway.

Also men 25-54 is the only time and country comparable and objective measure we have, since men of this age have to work in most(all) cultures (no school, no retirement limit).

Why do we see a 60% discrepancy?

Why while the unemployment number is the most used by economist not one economist worldwide is able to point out even a beginning of study on this gap?

Posted by: Laurent GUERBY | January 05, 2009 at 08:34 AM

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December 17, 2008

Thinking about averages

In a recent macroblog post [http://macroblog.typepad.com/macroblog/2008/12/the-recession-i.html], Dave Altig described the employment patterns in the current U.S. recession relative to the average recessionary experience. Dave made some observations from the data supported, in part, by a similar chart to the one produced below:

Before the November job report, the overall employment picture had been fairly unexceptional compared with the average recessionary experience. That comparison changed, as I guess will happen when a half-million job loss statistic arrives. As of today, a milder-than-average recession has turned into a somewhat deeper-than-average recession, at least in terms of employment. Assuming that we remained in recession through November—and I don’t think that conjecture will draw much debate—the current episode is already a year in duration. A more apt comparison might therefore be the “bad” recessions of recent memory, the 1973–75 and 1981–82 episodes, both of which lasted 16 months.


Dave’s comparison addresses two important dimensions of the data—the magnitude of the recession and the duration of the recession. Another important dimension is the “breadth” of the recession. Here, perhaps, the distinction between this recession and historical average could be equally insightful.

We can gauge the breadth of the employment decline by way of the employment diffusion index, which simply calculates the proportion of the industries (a total of 274, according to the U.S. Bureau of Labor Statistics) reporting an employment gain relative to the proportion experiencing a decline. Recall that in a diffusion index, if a greater number of the measured series are rising than are declining, the index will be above 50; if fewer are rising than declining, it will be below 50. In the figure below, we see that the employment diffusion index during the three months ending in November was a mere 27 percent. Compare this number to the three-month employment diffusion index of the previous two recessions for which there are data. In the 2001–02 recession, the diffusion index bottomed out at 31.4 percent. In the 1990–91 episode, it hit a low of 30.1 percent.


Another diffusion index (for which there is a longer data history) comes from the industrial production data (shown below). A total of 255 component industries are measured in this index. Here, the three-month diffusion measure hit 23.7 percent in November. This “breadth” of production decline is greater than what we saw in the previous two recessions and is more on par with the “bad” recessions of 1973–75 and 1981–82. These indicators of the scope of the economic downturn would seem to confirm a point Dave made in his earlier post, that “the [more severe] recessions of 1973–75 and 1981–82 are almost certainly more sensible comparisons [to the current recessionary experience] at this point.”


So, while the magnitudes of the employment and production declines are near their postwar averages, the recent data appear to show a clear acceleration in the pace of the decline. Given the length of the recession to date, the current recession experience is approaching the more extreme postwar recessions in terms of its length. To this we would add the following—that the breadth of the current downturn, at least in terms of employment and production, would also seem to be on par with those more virulent episodes.

By Michael Chriszt, assistant vice president in the Atlanta Fed research department

December 17, 2008 in Data Releases, Economic Growth and Development, Federal Reserve and Monetary Policy, Labor Markets | Permalink


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December 12, 2008

December 5 macroblog Q&As

Dave Altig’s December 5 blog entry, “The recession in pictorial context,” elicited an array of interesting commentary. In this recessionary period, the questions that arose are relevant to today’s current economic state and it is worthwhile taking a blog to explore these issues in greater depth.


I might suggest that considering the 1981–82 recession by itself, rather than in combination with its 1980 little brother, somewhat understates the "badness" of that period.

The 81–82 recession graphs include data from 12 months before the first day of the recession to 12 months after the last day of the recession, therefore the dates range from 7/1/1980 to 11/1/1983. The 1980 recession ended in July of 1980, so these time periods overlap each other by one month. Including this month does not “understate the ‘badness’ of the period” because the calculations are based solely on the recessionary period being examined. In other words, the time span has no effect in this case. The first day of the recession is set to one. The months before and after are normalized to the first day of the recession. If we were to remove the 1980 recession date and run the time span 10 months before the 1981 recession to 10 months after, the graph does not change in anyway apart from a shorter time span. This is because the data is scaled to 7/1/1981, the beginning of the recession. You can see this by looking at the 12-month and 10-month graphs, below.



Are the unemployment rate comparisons U-3 across the various recessions? If so, I would be keen to see a U-6 comparison as well, I suspect it would be...illuminating.

The graphs used were U-3 comparisons. To clarify, the U-3 employment rate is the official employment rate used by the Bureau of Labor Statistics and is the most commonly used measure. The employment measures range from U-1 to U-6, U-1 being the most restrictive and U-6, the most broad. The U-3 rate is defined as: “Total unemployed as a percentage of the civilian labor force” (BLS), while the U-6 is defined as “Total unemployed plus all marginally attached workers, plus total employed part time for economic reasons as a percentage of the civilian labor force plus all marginally attached workers” (BLS). U-6 data only ranges back to 1994, therefore only the 2001 recessionary period can be examined.

The following graphs are U-6 comparisons—the first graph compares the two unemployment measures, and the second is comparing the 2001 recession and the current levels (normalized to 3/1/2001, the first day of the recession).




Are these apples to apples comparisons? Are the numbers from the prior recessions the numbers that were reported in "real time" or are they "final/revised" numbers?

The unemployment rate does not go through revisions. It is, however, benchmarked annually in March. Payroll employment is revised as additional information becomes available. All of the payroll employment graphs in the December 5 posting contained revised data with the exception of November. To see how these numbers are revised over time, here’s a comparison of these same graphs with real time (unrevised) data and the revised numbers (from December 5 blog).







By Courtney Nosal, economic research analyst in the Atlanta Fed’s research department

December 12, 2008 in Data Releases, Economic Growth and Development, Labor Markets | Permalink


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Thanks for responding to my point regarding the "double dip" 1980/81-82 recessions. You are correct, but I think you miss the point of what I was trying to say. What I meant was: the two recessions, together, represent a very long period of elevated unemployment. There wasn't much "recovery" from the 1980 recession before the 1981-82 recession began. The unemployment rate was 6.0% in December 1979; it peaked at 7.8% in July 1980, before falling to 7.2% at the end of that year. In mid-1981 it began a new climb all the way to 10.8% at the end of 1982. The unemployment rate fell to 7.2% in 1984, but didn't make it all the way back down to 6% until August 1987!

Posted by: Bill C | December 13, 2008 at 07:09 PM

What about inflation?

Posted by: flow5 | December 22, 2008 at 08:51 AM

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December 10, 2008

Credit storm hitting the high seas?

Now that the mystery has been solved concerning whether we are in recession or not, our attention can turn to monitoring the conditions that might signal the contraction’s end. A nice assist in this endeavor comes from the “Credit Crisis Watch” at The Big Picture, which includes an extensive list of graphs summarizing ongoing conditions in credit markets.

In case that list is not extensive enough for you, allow us to add one more item to the list: the condition of trade finance. International trade amounts to about $14 trillion and, according to the World Trade Organization (WTO), 90 percent of these transactions involve trade financing. Trade-related credit is issued primarily by banks via “letters of credit,” the purpose of which is to secure payment for the exporter. Letters of credit prove that a business is able to pay and allow exporters to load cargo for shipments with the assurance of being paid. Though routine in normal times, the letter of credit of process is yet another example of how transactions between multiple financial intermediaries introduce counterparty risk and the potential for trouble when confidence flags.

This is how it works: Company A located in the Republic of A wants to buy goods from Company B located in B-land. Company A and B draw up a sales contract for the agreed sales price of $100,000. Company A would then go to its bank, A Plus Bank, and apply for a letter of credit for $100,000 with Company B as the beneficiary. (The letter of credit is done either through a standard loan underwriting process or funded with a deposit and an associated fee). A Plus Bank sends a copy of the letter of credit to B Bank, which notifies Company B that its payment is available when the terms and conditions of the letter of credit have been met (normally upon receipt of shipping documents). Once the documents have been confirmed, A Plus Bank transfers the $100,000 to Bank B to be credited to Company B.

Letter of Credit Process

In general, exporters and importers in emerging economies may be particularly vulnerable since they rely more heavily on trade finance, and in recent weeks, the price of credit has risen significantly, especially for emerging economies. According to Bloomberg, the cost of a letter of credit has tripled for importers in China, Brazil, and Turkey and doubled for Pakistan, Argentina, and Bangladesh. Banks are now charging 1.5 percent of the value of the transaction for credit guarantees for some Chinese transactions. There have been reports of banks refusing to honor letters of credit from other banks and cargo ships being stranded at ports, according to Dismal Scientist.

These financial market woes are clearly spilling over to “global Main Street.” The Baltic Dry Index, an indirect gauge of international trade flows, has dropped by more than 90 percent since its peak in June as a result not only of decreased global demand but also availability of financing that demand, according to Dismal Scientist.

Baltic Dry Index

In the words of the WTO’s Director-General Pascal Lamy, “The world economy is slowing and we are seeing trade decrease. If trade finance is not tackled, we run the risk of further exacerbating this downward spiral.” Since about 40 percent of U.S. exports are shipped to developing countries, the inability of the importers in those countries to finance their purchases of U.S.-made goods can’t help the U.S. exports sector, which is already suffering from falling foreign demand as the global economy slows.

At VoxEU, Helmut Reisen sums up the situation thus:

“As a mid-term consequence of the global credit crisis, private debt will be financed only reluctantly and capital costs are bound to rise to incorporate higher risk. Instead, solvent governments and public institutions will become the lenders of last resort.”

That process has begun. In the last 12 months, according to the WTO, export credit agencies have increased their business by more than 30 percent, with an acceleration since the summer. The increase in this activity, the WTO reports, is being backed by governments of some of the world’s largest exporters, such as Germany and Japan.

Most recently, to support exports of products from the United States and China to emerging economies, both countries decided on December 5 to provide a total of $20 billion through their export-import banks. The program will be implemented in the form of direct loans, guarantees, or insurance to creditworthy banks. Together, the United  States and China expect that these efforts will generate total trade financing for up to $38 billion in exports over the next year.

The sense one gets from The Big Picture charts is that at least some hopeful signs have emerged in developed-economy credit markets. Going forward, progress in markets directly related to trade flows between developed and emerging economies may well be an equally key indicator of how quickly we turn the bend toward recovery.

By Galina Alexeenko and Sandra Kollen, senior economic research analysts at the Federal Reserve Bank of Atlanta

December 10, 2008 in Capital Markets, Trade | Permalink


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Very good post. Glad that you explained the international trade credit situation. This needed to be addressed.

Posted by: Movie Guy | December 10, 2008 at 12:54 PM

The real problem is trade between "developing" countries.

There, neither party has the capacity to finance it through state sponsored agencies like Exim Banks.

Even the large, and relatively healthy large developing countries like India are struggling.

Posted by: D | December 10, 2008 at 03:38 PM

I would think that companies with monstrous cash positions like MSFT would be in good shape as well.

Posted by: K T Cat | December 12, 2008 at 07:07 PM

I have no doubt to say that the data presented here in this report is not only interesting but useful as well. Thanks for this update

Posted by: immo woning | March 19, 2009 at 12:00 AM

this is so true. Well i think this market is coming back. Wells fargo came out with a big profit. i hope this helps the credit market.

Posted by: forex forum | April 09, 2009 at 11:33 PM

Well this is hitting the economy of the whole world. All things have gone back to the 80s.

Posted by: Web design karachi | October 12, 2009 at 03:09 AM

I wonder what people reading this article would say now, 4 years later? Our economy was in fact a lie, built upon the consumer debt that came with an ever rising real estate market, with no real way of sustaining the growth. Four years later and people still have a hard time understanding credit and their own personal finances. Being one of the worlds largest economies means that when the USA crashes, so goes the rest of the world markets.

Posted by: C McCormick | January 30, 2013 at 04:49 PM

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December 05, 2008

The recession in pictorial context

If your head had not yet been turned by economic events, today’s startlingly weak employment report probably did the trick. Rather than repeat all the negative superlatives you are likely to hear, I’ll take the opportunity to step back and take in the current recession in a somewhat broader context. One way to look at this is to examine the trajectory of employment relative to December 2007 levels (when this recession began) and compare it with the average trajectory of relative employment in other recessions:

Non Farm Employment

In the graph above “time 0” represents the peak of a business cycle, or the month before a recession begins (December 2008 for the current recession). “Average” refers to the average experience in the seven previous recessions since 1960 (1960-61, 1969-70, 1973-75, 1980, 1981-82, 1990-91, and 2001). To facilitate comparison across recessions, I have normalized the level of employment at the peak of the business cycle to one. As noted, then, each point represents the level of employment relative to the peak: numbers below one indicate that the number of nonfarm jobs was below the number that existed as the economy entered recession.

Before the November job report, the overall employment picture had been fairly unexceptional compared to the average recessionary experience. That changed, as I guess will happen when a half-million job loss statistic arrives. As of today, a milder than average recession has turned into a somewhat deeper than average recession, at least in terms of employment.

Does this mean we are heading off the map in terms of past experience? It is hard to tell by just focusing on the average experience of the previous seven downturns. The previous two recessions—1990–91 and 2001—lasted only eight months. Assuming that we remained in recession through November—and I don’t think that conjecture will draw much debate—the current episode is already a year in duration. A more apt comparison might therefore be the “bad” recessions of recent memory, the 1973–75 and 1981–82 episodes, which both lasted sixteen months.

Here, for your viewing displeasure, are those comparisons:

Non farm Employment

Non Farm Employment

Not surprisingly, in the last two recessions, which were relatively short-lived, the employment situation had already stabilized twelve months after the onset of the downturn. So there may not be much comfort in noting that the employment losses are not yet out of line with experiences of those episodes (especially the 1990-91 version). The trajectories suggested by the relatively long-lived, more severe recessions of 1973-75 and 1981-82 are almost certainly more sensible comparisons at this point. And, as bad as it is right now, we are still a fair distance from the pace of relative employment losses in those episodes.

The story is similar if we adopt the vantage point of the unemployment rate:

Unemployment Rate


Unemployment Rate

Unemployment Rate

It is not yet clear whether the acceleration in job loss is a new trend or the lingering impact of a very bad few months, of which the worst is passing. It's always important to monitor new data and anecdotal reports to determine which way the wind is truly blowing. But today's report raised the stakes on that activity by a considerable amount.

By David Altig, senior vice president and director of research at the Federal Reserve Bank of Atlanta

December 5, 2008 in Data Releases, Economic Growth and Development, Labor Markets | Permalink


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Thanks. That provides some useful perspective. I might suggest that considering the 1981-82 recession by itself, rather than in combination with its 1980 little brother, somewhat understates the "badness" of that period.

Posted by: Bill C | December 05, 2008 at 10:58 PM

Are the unemployment rate comparisons U-3 across the various recessions? If so, I would be keen to see a U-6 comparison as well, I suspect it would be...illuminating.

Posted by: energyecon | December 06, 2008 at 10:52 AM

Are these apples to apples comparisions? Are the numbers from the prior recessions the numbers that were reported in "real time" or are they "final/revised" numbers?

Posted by: tyaresun | December 06, 2008 at 07:22 PM

"It is not yet clear whether the acceleration in job loss is a new trend or the lingering impact of a very bad few months."
It seems pretty silly to think Congress, the Bush Administration and your Boss would have signed on to a $2.1 trillion rescue package for our financial sector if they didn't wholeheartedly disagree with you.

Posted by: bailey | December 07, 2008 at 06:56 AM

Looks like it could get worse before it gets better.
I think the unemployment data is interesting when you compare it to 1973.

My fear is that the government spending packages will contain an inordinate amount of spending to help autos, spend on green tech, and other pet projects that are not economically viable without subsidies. They should spend on roads and bridges, sewers and infrastructure. Infrastructure investment can cause positive externalities which will help long term growth.

Posted by: Jeff | December 07, 2008 at 09:53 AM

What concerns me is the gradient of the current curves--steeper than average in most instances. Does this concern anyone else?

Posted by: Tito Titus | February 18, 2009 at 11:47 PM

These are some very interesting graphs. The unemployment is what worries me. I just got layed off, so add 1 more to your graph on that.

Posted by: Recession 2009 Victim | February 19, 2009 at 01:46 PM

I'm writing this just as the April 09 stats come out. Could you update the chart? Your way of looking at this is the best I've found.

Posted by: David in AZ | May 08, 2009 at 02:01 PM

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Do you see what they see?

It is now official: On Monday the National Bureau of Economic Research (NBER) Business Cycle Dating Committee declared—or, perhaps more accurately, confirmed—that the U.S. economy began to contract in December of last year. Not that you probably missed it, as the announcement was ably covered at Businomics Blog, at Calculated Risk, at The Curious Capitalist, at Econbrowser, at Economist’s View, at Greg Mankiw’s Blog, at The Skeptical Speculator, at William Polley, among many other fine blogging locations.

As always, the NBER Committee was forthright about what helped them decide the time had come. Here’s what they said:

“Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.

“The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment.”

In the graph below (which does not include the 12/5/08 employment report), I’ve included gray bars to indicate past NBER recession periods, and a yellow shaded area to indicate the current recession (assuming, not so heroically, that the contraction has persisted at least through October):

Private Non-farm Employment

The statement continues:

“The committee uses real personal income less transfer payments from the Bureau of Economic Analysis as a monthly measure of output. …

“Real manufacturing and wholesale-retail trade sales from the Census Department is another monthly indicator of output. …

“The last monthly measure of production is the Federal Reserve Board’s index of industrial production.”

The rest of the story, then, in pictures:

Personal Income Less Transfers

Total Business Sales

Industrial Production

To the extent that contractions are judged on the basis of past episodes that bore the label “recession,” one can understand why the committee came to the decision it did.

That does raise the interesting question as to how similar to past episodes this particular period is shaping up to be. More on that to follow.

By David Altig, senior vice president and director of research at the Federal Reserve Bank of Atlanta

December 5, 2008 in Economic Growth and Development | Permalink


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I can see dead banks.

Posted by: DNE | December 07, 2008 at 08:19 AM

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