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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November 29, 2012

Gazelles, and Why They Matter

A gazelle, as you may recall from your favorite wildlife show, is one of those antelope-like animals that run around in herds across the plains and are known for their speed. Sheltered by the herd at birth, their youth is short-lived. In no time flat, gazelles are expected to be up and running or they will be easily devoured by hungry lions.

Probably because of that imagery, the word gazelle is also used in the business literature to represent a young firm that grows very quickly in a relatively short period of time. According to Kauffman Foundation research, the fastest-growing 1 percent of firms typically account for about 40 percent of job creation in the United States. Of that 1 percent, three-quarters are less than six years old. Research also shows that these high-growth young firms are more likely to provide solutions to other businesses than directly to consumers, have some form of intellectual or technological property, and tend to be started by entrepreneurs with business startup experience.

To learn more about the role of gazelles and the challenges they face, the Federal Reserve Bank of Atlanta recently hosted Amy Wilkinson, a senior fellow at Harvard University and a policy scholar at the Woodrow Wilson Center. Wilkinson is a leading entrepreneurship scholar. Her current research focuses on entrepreneurs who scale their company to reach $100 million in revenue in less than five years. (You can see her discussing the topic here.) She has shown that these "founders" tend to drive innovation, and ultimately job creation, in the U.S. economy. These young, high-growth firms are typically driven forward by entrepreneurs with high aspirations, novel ideas, and a strong support system. This support system is analogous to the gazelle's herd—it is a network of financial and human capital providers that help the businesses grow to potential.

To get a perspective on the key drivers and impediments to growth for high-growth-potential firms in the current economic climate, the Atlanta Fed also hosted an entrepreneur roundtable in November. The roundtable included founders of Southeast-based businesses in various stages of development, along with representatives of "the herd."

Many participants indicated that attracting capital in the Southeast has always been challenging, but it has been even more difficult in recent years. Investors in general are more hesitant to take on risk, and the market available for early-stage financing has shrunk. But the biggest impediment to growth in recent years has been the recession and the halting nature of the recovery. The Atlanta Fed's poll of small businesses has noted that business startups today are much more reliant on personal capital versus external capital than was the case for businesses started prior to the recession. The word "uncertainty" was also mentioned a lot, prompting even this group of risk takers to take a bit more conservative stance in their growth expectations.

On the topic of labor, many of these firms cited the importance of having the right talent in place to make a business successful. Participants noted that the person who starts a business is often not the right person to propel the business forward. Recognition of the correct timing of a leadership change and the ability to make hard decisions generally were deciding factors on whether a firm would continue to grow rapidly or plateau. The Kauffman Foundation also cited the important role of talent in its poll of fast-growing firms conducted last year.

Another theme of our recent conversations with entrepreneurs and business experts is the crucial role of the supporting herd in nurturing and enabling a young business to succeed. In building a business from the ground up, a first-time entrepreneur confronts a significant learning curve—from figuring out the tax code to securing financing. The business information and support networks that exist are evolving, but matching ideas to money to people is still not a straightforward process. To complicate things further, "the herd" is not a one-size-fits-all concept; it differs geographically and across industry. As highlighted in a recent Kauffman Foundation study, high-growth firms are more prevalent in some areas of the country, and there are hot spots for certain industries. One group working to make these connections stronger and more efficient is Invest Atlanta, the city of Atlanta's economic development agency. The agency recently launched Start Up Atlanta. The stated aim of Start Up Atlanta is to "…bring together and build Atlanta's entrepreneur ecosystem." Similar efforts are under way across the region.

Considering the significant impact that high-growth firms play in innovation and job creation, researchers at the Atlanta Fed continue to explore the various issues facing young, high-growth potential firms. If you are a small firm and are interested in contributing to this research, we would love for you to sign up for our semiannual poll of small business financing by sending an email to smallbusinessresearch@atl.frb.org.

Whitney MancusoBy Whitney Mancuso and

Ellyn TerryEllyn Terry, senior economic analysts in the Atlanta Fed's research department


November 29, 2012 in Small Business | Permalink


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We have to do whatever creates jobs

Posted by: Travis | November 30, 2012 at 11:07 PM

Agreed with Travis, You have to do something which creates jobs otherwise we will all be lost...

Posted by: Maz | December 05, 2012 at 12:51 AM

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November 20, 2012

Rose-Colored Glasses Make the Future Look Blurry: Sales Uncertainty as Seen by the November BIE

Uncertainty is widely cited as being a significant contributor to the economy's subpar growth. Reddy and Thurm report in yesterday's Wall Street Journal that "half of the nation's 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next," in large measure because of rising economic uncertainty. But how uncertain is the current economic outlook? A few economists have attempted to measure business uncertainty, often by using the degree of disagreement between various forecasts, the volatility of certain economic indicators, or some combination of the two. (Two such approaches can be found here and here.)

We thought we'd use our Business Inflation Expectations (BIE) survey to see if we could gauge the degree of business uncertainty directly. Last week, we asked our panel to assign probabilities to various sales outcomes for their businesses for the coming year. (This methodology is the same one we have been using to measure inflation uncertainty, except in this case our business panel was asked to reveal their expectations for unit sales growth over the year ahead.)

Specifically, we put to our panel the following statement:

Projecting ahead, to the best of your ability, please assign a percent likelihood to the following changes to unit sales over the next 12 months.

Panelists were given the following five unit sales outcomes:

  1. down (less than –1 percent)
  2. about unchanged (–1 percent to 1 percent)
  3. up somewhat (1.1 percent to 3 percent)
  4. up significantly (3.1 percent to 5 percent)
  5. up very significantly (greater than 5 percent)

One hundred and ninety-four businesses responded, and here's what they told us: On average, firms expect unit sales growth of about 1.2 percent in the coming year. That's more pessimistic than the real gross domestic product (GDP) forecast of the consensus of economists for the year (about 2 percent). But the range of possible outcomes seemed, to our eyes a least, to be large and unbalanced.

Consider the chart below, which shows the probabilities the panel, on average, assigned to the various sales outcomes. They assigned a 48 percent chance that their unit sales will grow 1 percent or less in the coming year, balanced against only 23 percent likelihood that unit sales will grow more than 3 percent over the next 12 months. In other words, in the minds of our BIE panel, the range of likely sales outcomes over the year ahead is pretty wide, with a fairly weighty chance that unit sales growth may not move in a positive range at all.


Perhaps we are making a bit too much of the size of the uncertainty businesses are attaching to the outlook. After all, we don't know what uncertainties firms face even in the best of times (since this is the first time we've asked this question). But when we dug into the data a little deeper, we found something else of interest. The degree of economic uncertainty varies widely by firm. Moreover, the greatest uncertainty about the future was held by the panelists who have the most optimistic sales outlook.

Check out the table below. It shows the degree of sales forecast uncertainty on the basis of whether a firm's sales projection is high or low.


Panelists with the most optimistic sales expectations (the 39 firms with the highest sales forecasts) predicted unit sales growth of a little more than 3.5 percent this year, compared with about a 0.5 percent decline in unit sales for the 39 most pessimistic panelists. But also note that those who are relatively optimistic about the coming year have much greater uncertainty about their future than those who are relatively pessimistic—in fact, they're almost twice as uncertain.

What the November BIE survey seems to be saying is that it isn't just that an uncertain business outlook is reining in our growth prospects, but that the outlook is especially uncertain for the firms that think they have the best opportunity for expansion. Apparently, those wearing rose-colored glasses are having trouble seeing through them.

Note: The regular November Business Inflation Expectations report will be released Wednesday morning.

Mike BryanBy Mike Bryan, vice president and senior economist,

Laurel GraefeLaurel Graefe, economic policy analysis specialist, and

Nicholas ParkerNicholas Parker, economic research analyst, all with the Atlanta Fed


November 20, 2012 in Business Inflation Expectations, Inflation, Inflation Expectations | Permalink


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But the coefficient of variation is far higher in the bottom quintile, right?

Posted by: Sebastien Turban (@PtitSeb) | November 21, 2012 at 02:21 PM

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November 13, 2012

(Fiscal) Cliff Notes

Since it is indisputably the policy question of the moment, here are a few of my own observations regarding the "fiscal cliff." Throughout, I will rely on the analysis of the Congressional Budget Office (CBO), as reported in the CBO reports titled An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022 and Economic Effects of Policies Contributing to Fiscal Tightening in 2013.

Since the CBO analysis and definitions of the fiscal cliff are familiar to many, I will forgo a rehash of the details. However, in case you haven't been following the conversation closely or are in the mood for a refresher, you can go here first for a quick summary. This "appendix" also includes a description of the CBO's alternative scenario, which amounts to renewing most expiring tax provisions and rescinding the automatic budget cuts to be implemented under the provisions of last year's debt-ceiling extension.

On, then, to a few facts about the fiscal cliff scenario that have caught my attention.

1. Going over the cliff would put the federal budget on the path to sustainability.

If reducing the level of federal debt relative to gross domestic (GDP) is your goal, the fiscal cliff would indeed do the trick. According to the CBO:

Budget deficits are projected to continue to shrink for several years—to 2.4 percent of GDP in 2014 and 0.4 percent by 2018—before rising again to 0.9 percent by 2022. With deficits small relative to the size of the economy, debt held by the public is also projected to drop relative to GDP—from about 77 percent in 2014 to about 58 percent in 2022. Even with that decline, however, debt would represent a larger share of GDP in 2022 than in any year between 1955 and 2009.

Such would not be the case should the status quo of the CBO's alternative scenario prevail. Under (more or less) status quo policy, the debt-to-GDP ratio would rise to a hair under 90 percent by 2022:

The current debt-to-GDP ratio of 67 percent is already nearly double the 2007 level, which checked in at about 36 percent. However, though the increase in the debt-to-GDP ratio over the past five years is smaller in percentage terms, a jump to 90 percent from where we are today may be more problematic. There is some evidence of "threshold effects" that associate negative effects on growth with debt levels that exceed a critical upper bound relative to the size of the economy. At the Federal Reserve Bank of Kansas City's 2011 Economic Symposium, Steve Cecchetti offered the following observation, based on his research with M.S. Mohanty and Fabrizio Zampolli:

Using a new dataset on debt levels in 18 Organisation for Economic Co-operation and Development (OECD) countries from 1980 to 2010 (based primarily on flow of funds data), we examine the impact of debt on economic growth....

Our results support the view that, beyond a certain level, debt is bad for growth. For government debt, the number is about 85 percent of GDP.

Of course, causation is always a tricky thing to establish, and Cecchetti et al. are clear that their estimates are subject to considerable uncertainty. Still, it is clear that the fiscal cliff moves the level of debt in the right direction. The status quo does not.

2. The fiscal cliff moves in the direction of budget balance really fast.

By the CBO's estimates, over the next three years the fiscal cliff would reduce deficits relative to GDP by about 6 percentage points, from the current ratio of 7.3 percent to the projected 2015 level of 1.2 percent.

Deficit reduction of this magnitude is not unprecedented. A comparable decline occurred in the 1990s, when the federal budget moved from deficits that were 4.7 percent of GDP to a surplus equal to 1.4 percent of GDP. However, that 6 percentage point change in deficits relative to GDP happened over an eight-year span, from 1992 to 1999.

It is probably also worth noting that the average annual rate of GDP growth over the 1993–99 period was 4 percent. The CBO projects real growth rates over the next three years at 2.7 percent, which incorporates two years of growth in excess of 4 percent following negative growth in 2013.

The upshot is that, though the fiscal cliff would move the federal budget in the right direction vis à vis sustainability, it does so at an extremely rapid pace. I'm not sure speed kills in this case, but it sounds pretty risky.

3. The fiscal cliff heavily weights deficit reduction in the direction of higher taxation.

Over the first five years off the cliff, almost three-quarters of the deficit reduction relative to the CBO's no-cliff alternative would be accounted for by revenue increases. Only 28 percent would be a result of lower outlays:

The balance shifts only slightly over the full 10-year horizon of the CBO projections, with outlays increasing to 34 percent of the total and revenues falling to 66 percent.

Particularly for the nearer-term horizon, there is at least some evidence that this revenue/outlay mix may not be optimal. A few months back, Greg Mankiw highlighted this, from new research by Alberto Alesina, Carlo Favero, and Francesco Giavazzi:

This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions.

Of course, that in the end is a relatively short-run impact. It does not directly confront the growth aspects of the policy mix associated with fiscal reform. Controversy on the growth-maximizing size of government and the best growth-supporting mix of spending and tax policies is longstanding. The dustup on a Congressional Research Services report questioning the relationship between top marginal tax rates and growth is but a recent installment of this debate.

Here's what I think we know, in theory anyway: Government spending can be growth-enhancing. Tax increases can be growth-retarding. It's all about the tradeoffs, the details matter, and unqualified statements about the "right" thing to do should be treated with suspicion. (If you are an advanced student of economics or otherwise tolerant of a bit of a math slog, you can find an excellent summary of the whole issue here.)

In other words, there are lots of decisions to be made—and it would probably be better if those decisions are not made by default.

Dave AltigBy Dave Altig, executive vice president and research director at the Atlanta Fed


November 13, 2012 in Federal Debt and Deficits, Fiscal Policy, Taxes | Permalink


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"Tax increases can be growth-retarding." That has yet to be demonstrated. On the other hand, we do know that tax increases can be growth-enhancing. This has been demonstrated repeatedly.

Posted by: Kaleberg | November 14, 2012 at 10:46 PM

We could make it sustainable by moving revenue to 20% of GDP and reducing spending to 18% GDP. That would leave a 2% surplus as far as the eye could see and pay off the national debt in 45 years.

Fiscal Cliff is half of the solution that we need. Entitlement reform is the other half.

Posted by: John | November 15, 2012 at 09:10 AM

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November 09, 2012

Getting the Questions Right

Among the plethora of post-election exit-poll results, the CNBC website highlights a particularly interesting response, linked from the mega-blog Instapundit with the title "Voters Worry More About Inflation Than You Think." The CNBC article itself, written by Allison Linn, describes the poll results in more detail:

It's no surprise that voters in Tuesday's presidential election identified the economy as the No. 1 issue in the campaign, far ahead of health care and the federal budget deficit.
But it was a surprise that so many voters identified rising prices as the biggest economic problem they face.

Linn notes something of a disconnect between this view and the facts on the ground:

...inflation has generally been running well under 2 percent, and Federal Reserve bankers repeatedly have said they feel comfortable that low inflation allows them to keep interest rates at rock-bottom levels.

Yet in an exit poll of more than 25,000 voters conducted by NBC News, 37 percent identified rising prices as the biggest problem facing people like them.

Unemployment was cited by 38 percent, only slightly more than the number who said inflation was their top economic concern. Taxes were named by 14 percent and the housing market was the top concern of 8 percent.

The policy stakes on understanding these responses are pretty high. In the end, the cost of inflation comes in the form of how it may distort behavior and the allocation of resources. So the expectation or perception of significant inflation is at least as pernicious as the measurement itself.

But what, exactly, does this concern about "inflation" actually reflect? Probably not what we think. Some time ago, my colleagues Mike Bryan and Guhan Venkatu (from the Cleveland Fed) made note of "The Curiously Different Inflation Perspectives of Men and Women." Their findings are pretty informative:

Over the past few years, the Federal Reserve Bank of Cleveland, with assistance from the Ohio State University, has studied household inflation perceptions and expectations using a monthly survey of approximately 500 Ohioans (the FRBC/OSU Inflation Psychology Survey). This survey, which records respondents' perceptions of price changes over the past 12 months as well as their expectations for price changes over the next 12 months, has uncovered a surprising result. The data indicate that the public's estimates and predictions of inflation are significantly and systematically related to the demographic characteristics of the respondents. People with high incomes perceive and anticipate much less inflation than people with low incomes, married people less than singles, whites less than nonwhites, and middle-aged people less than young people. This Commentary describes what is perhaps the most curious observation of all: Even after we hold constant income, age, education, race, and marital status, men and women hold very different views on the rate at which prices are changing.

...[S]tatistical tests reveal that even after we adjust for the respondents' age, race, education, and income, women in our survey tended to think inflation was 1.9 percentage points higher than men. A similar examination of respondents' predictions of future inflation yields the same basic result: After we account for other major demographic factors, on average, women expected prices to rise 2.1 percentage points more than men.

It is important to note that this result was not unique to the Cleveland Fed study:

An examination of survey data collected by the University of Michigan (which has recorded the inflation forecasts of U.S. households on a monthly basis since 1978) reveals that women consistently hold higher inflation expectations than men, even after we hold constant other important demographic characteristics of the respondent.

Most intriguing of all, the systematic overstatement of inflation by all consumers, relative to official statistics, and the difference in responses between men and women are not a result of ignorance about the facts, according to those official statistics:

In the August 2001 FRBC/OSU survey, we sought an answer to this question by asking, "Have you heard of the Consumer Price Index (CPI) before?" and "By about what percentage do you think the CPI went up (or down), on average, over the last 12 months?"

A significantly higher proportion of men had heard of the CPI compared to women (75 percent versus 61 percent, respectively). For those who had heard of the CPI, the average perception about how much it had risen over the past 12 months was surprisingly accurate—a perceived increase of 2.9 percent compared to an actual increase of 2.7 percent. It is also very interesting that men and women perceived the CPI's growth rate nearly identically (2.8 percent versus 3.1 percent, respectively.) However, of those who knew of the CPI, the average perception of price increases was 6.7 percent. And even within the subgroup of respondents who knew of the CPI, men had a significantly lower perception of price increases than did women (6.0 percent vs. 7.4 percent). In other words, the public believes that prices are rising more than the CPI reports, and women more so than men.

There are a couple of hypotheses that could be advanced to explain results like this. One is that the conspiracy crowd is correct and the official statistics are rigged and vastly understate true inflation. But that wouldn't get us anywhere near an understanding of why survey responses about inflation would be systematically different across men and women, higher- and low- income individuals, and just about any other demographic cuts we might make.

A second possibility it is that individuals' responses reflect price changes in their own personal market basket, which may differ from that of the average urban wage earner whose habits are reflected in the Consumer Price Index (CPI).That might explain why any demographic sub group could arrive at different inflation perceptions, but it doesn't explain why respondents as a whole systematically overstate inflation relative to the CPI.

I think the most likely explanation is that the survey respondents are expressing a much different concern than whether they believe food, gas, autos, banking services, or whatever are increasing or are likely to increase faster than the official statistics indicate. My guess is that they are telling us that they are concerned that their real—or inflation-adjusted—incomes are not rising fast enough to comfortably sustain their desired spending:

As I noted, the policy stakes are high. In the current environment, the policy prescription for fighting an incipient rise in inflation expectations would be much different than one deployed to address the reality of the chart above. All the more reason to make sure we understand the questions we are asking and the responses we get back.

Just to be sure, we monitor inflation trends and inflation expectations from a number of perspectives: Treasury Inflation Protected Securities (TIPS), forecasts, and the Business Inflation Expectations (BIE) survey, to name just three. And all are available on the Atlanta Fed's Inflation Project for the terminally curious to monitor with us.

Dave AltigBy Dave Altig, executive vice president and research director at the Atlanta Fed


November 9, 2012 in Inflation | Permalink


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The question of inflation perceptions is indeed the right question, and some recent work has been done on this. See "'Real-Feel' Inflation: Quantitative Estimation of Inflation Perceptions," Business Economics, Vol. 47, No. 1, National Association for Business Economics, pp. 14-26, which tries to quantify some of the known cognitive biases that operate on inflation perceptions (or at least, to provide the first pieces of a model to do so, were it calibrated properly).

You can find a copy of the paper, although not the BE version, here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1661941

Posted by: Michael Ashton | November 09, 2012 at 11:42 AM

You are looking at the personal income data that because of the massive inequality in the US significantly overstates the income of the bulk of the population.

If you look at the average hourly and weekly earnings published by the BLS you get a very different picture of real income growth.

Average hourly earnings growth is at the record low of 0.8% and with 2% that leaves real income growth much, much weaker than your chart implies. Moreover, the higher inflation stems from food and oil that is a necessity for
the 80% of the population this measure covers.

Posted by: Spencer | November 09, 2012 at 12:24 PM

I would think an analysis of gender perception differences should take into account the % of purchasing decisions by gender.

Women make (according to studies) 70% of the purchasing decisions and by that metric, it shouldn't be a surprise that women are more tuned into household budget.

Good points by Spencer - the 80% (and all, except the disposable income for the top 20% obviously doesn't receivce the same incemental impact as the bottom 80%)... face inflationary costs 3X the rate of headline CPI when faced with health care, higher ed and energy costs.

Posted by: Barclay | November 10, 2012 at 09:53 AM

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November 05, 2012

Reading Labor Markets

When the September employment report was released on October 5, the top-line payroll employment gain for the month, as reported in the U.S. Bureau of Labor Statistics' (BLS) establishment survey, logged in at 114,000. Under standard assumptions, a number of this magnitude would be barely enough to absorb the growth of the labor force and keep the unemployment rate constant. In contrast, in that same October 5 report we learned from the BLS household survey that the measured unemployment rate fell from 8.1 percent in August to 7.8 percent in September.

According to Friday's BLS report on the employment situation for October, the top-line payroll employment gain for the month from the establishment survey was 171,000. At that pace—which is also the current average gain for the past three months—the Atlanta Fed jobs calculator suggests the unemployment rate should fall another one-half of a percentage point over the next year. At the same time, according to the BLS household survey, the unemployment rate rose from 7.8 percent in September to 7.9 percent in October.

This is as good an illustration as any to explain why, on November 1, Atlanta Fed President Dennis Lockhart said the following in a speech to the Chattanooga Tennessee Downtown Rotary Club:

In its post-meeting statement on September 13, the FOMC said, "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."...

For policy purposes, I think it's appropriate to be cautious about relying on a single indicator of labor market trends—for example, the unemployment rate—to determine whether the condition of "substantial improvement" has been met.

As the FOMC went into its September meeting, the official BLS statistics indicated that net U.S. job creation in August was a mere 92,000. That number is below the “all else equal” threshold of about 100,000 jobs required to keep the unemployment rate from rising, and that information is what Fed policymakers had in hand when they met on September 12–13 and decided on the policy action described by President Lockhart.

On Friday, after two revisions, the BLS told us jobs expanded by 192,000 in August, well above the average for the jobs recovery that started in early 2010, 100,000 jobs (more than double) above the initial estimate.

Looking through month-to-month variations is not a lot of help in real-time tea-leaf reading. Here is the 12-month moving average of employment gains, the blue line indicating the way things looked in September, the red line showing the way they look today:

Over time, it remains the case that monthly employment gains are pretty consistently coming in at 150,000 to 160,000 jobs created per month, and that rate has been enough to generate relatively steady declines in the unemployment rate:

That could change, of course, and the last four months of data have generally shown an acceleration in the job-growth trend. But the data definitely were not indicating that trend as it was happening, an unfortunate reality that isn't likely to change. One way to soften the blow of that problem, emphasized in the Lockhart speech, is to keep an eye on as a broad a set of signals as possible:

... let me share a qualitative framework for defining "substantial improvement."

The starting point certainly should be the headline unemployment rate and the payroll jobs number. The interpretation of movements in these two statistics would be enriched and reinforced by a review of additional data elements.

I added the emphasis there, as I think the point bears highlighting. President Lockhart goes on to give examples of what he would look for in determining whether the substantial improvement threshold has been met. Things like reductions in the numbers of marginally attached and discouraged workers, growing labor force participation rates, declining numbers of people who want full-time work but have to settle for part-time, and positive forward indicators like falling initial claims for unemployment insurance.

The Calculated Risk blog continues to be a one-stop shop for a lot of this information—here and here, for example—and overall nothing much overturns the picture of steady, but slow, progress. That would suggest the acceleration of the past several months is probably not a new trend, but a continuation of the same-old same-old. But then again, the track record painfully demonstrates how hard that is to know in real time.

Dave AltigBy Dave Altig, executive vice president and research director at the Atlanta Fed


November 5, 2012 in Employment, Labor Markets | Permalink


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Should not the "starting point" be % of population employed? This number has been dropping since 2008 and at its lowest in 30 years - a better metric of the labor market than a headline seasonally adjusted number.

The 2nd point should be the quality vs quantity of jobs. Adding minimum wage jobs versus higher paying skilled jobs should be recognized.

Who's gaining jobs & why?
The 55-64 year old age group has had the highest employment gains - while the 20-30 somethings have lost 2 mil jobs in the past 4 years.
ZIRP policies have reduced fixed income returns to near zero. The 55+ups HAVE to get jobs as their incomes from interest have evaporated. 55+ups have the experience to gain (any paying level) jobs over the 20/30 somethings.

New household formation will continue to suffer as the (many) younger gen is unable to earn and save for a downpayment on a house.

Posted by: Barclay | November 10, 2012 at 10:02 AM

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November 02, 2012

Has Fed Behavior Changed?

To the titular question, Steve Williamson thinks the answer is "yes":

… the behavior of the FOMC has changed. Either it cares about some things it did not care about before (and in a particular way), or it cares about the same things in different ways—in particular it is less concerned about its price stability mandate.

Part of the Williamson case relies on an earlier post, where Williamson illustrates deviations of the actual path of the federal funds rate paths from his own estimated version of the Taylor rule:

New Keynesians like to think about monetary policy in terms of a Taylor rule, which specifies a target for the federal funds rate as a function of the "output gap" and the deviation of the actual inflation rate from its target value. According to standard Taylor rules, the fed funds target should go down when the output gap rises and up when the inflation rate rises. You can even fit Taylor rules to the data. I fit one to quarterly data for 1987-2007, and obtained the following:

R = 2.02 - 1.48(U-U*) + 1.17P,

where R is the fed funds rate, U is the unemployment rate, U* is the CBO natural rate of unemployment (so U-U* is my measure of the output gap) and P is the year-over-year percentage increase in the PCE deflator. You can see how it fits the historical data in the next chart.

So that's how the Fed behaved in the past. If it were behaving in the same way today, what would it be doing? Given that U = 7.8, U* = 6.0, and P = 1.5, my Taylor rule predicts R = 1.1%....

So, the Fed's behavior seems to have changed.

An obvious point: It is clear from Williamson's chart above that the predictive power of his version of the Taylor rule is far from perfect. In fact, through 2007 the standard deviation of the estimated rule's prediction error is 1.3 percentage points. From that perspective, the difference between a Williamson-Taylor rule funds-rate prediction of 1.1 percent and the actual current value of 0.14 percent doesn't seem so dramatic. I don't really see an obvious deviation from previous behavior.

More to the point, unless the metric is an absolutely slavish devotion to a particular form of the Taylor rule, I'm not exactly sure what evidence supports a conclusion that the Federal Open Market Committee (FOMC) is now "less concerned about its price stability mandate." As I argued a few weeks back, I think it is not too much of a stretch to construct a justification of post-crisis Fed actions up to the September decision entirely in terms of support for the FOMC's price stability mandate.

I don't take any great exception to Williamson's claim that, with respect to the FOMC's stated inflation objective, things look pretty much on target:

If we look at a longer horizon, as I did here, from the beginning of 2007 or the beginning of 2009, you'll get something a little higher than 2.0% (I didn't have the most recent observation in the chart in the previous post). Too low? I don't think so.

Furthermore, in my previous post I noted that while there is a plausible case that previous asset purchase programs were required to maintain this salutary record on the inflation front, the case is arguably less plausible for "QE3." But, to my mind, that just isn't enough evidence to conclude that the FOMC has downgraded its price stability goals.

Consider a homeowner with the dual mandate of keeping both the roof of the house and the driveway in good repair. If the roof isn't leaking but there are cracks in the driveway, I think you would expect to see the owner out on the weekend patching the concrete. I don't think you would conclude as a result that he or she had ceased caring as much about the condition of the roof. I do think you would conclude that attention is being focused where the problem exists.

I suppose the argument is that the Fed is raining so much liquidity down on the world that the roof is, sooner or later, bound to leak. The FOMC has expressed confidence that, if this happens, it has the tools to patch things up and will deploy those tools as aggressively as required to meet its mandate. I guess Steve Williamson feels differently. But that, then, is a difference of opinion about things to come, not about the facts on the ground.

Update: Here's Steve Williamson's response.

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

November 2, 2012 in Federal Reserve and Monetary Policy, Inflation, Monetary Policy | Permalink


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I think Williamson's problem is that his U*=6 is wrong. There's been plenty of discussion in the econosphere about how the CBO's estimates of output and employment potential have been downwardly biased in recent years. Part of this reflects uncertainty about the extent to which the downturn was structural, but a lot of it is also just a matter of the data being truncated--as more data comes in, the trend estimates will be revised back up due to smoothing processes.

The results on Williamson's Taylor rule are dramatic. First, update the current unemployment to 7.9 instead of the previous 7.9 and it drops from R=1.1% to just 0.98%. Then lower the natural rate of unemployment down to a more realistic long run rate of 5.5% and the predicted interest rate drops to 0.22%, which is within the window prescribed by the fed.

Now, 5.5% is much closer to the natural rate normally used in Taylor rule calculations. Williamson did not find evidence that the Fed was behaving differently, but rather advocating that it should behave differently by being more pessimistic than normal about the economy's potential.

Posted by: Matthew | November 04, 2012 at 07:32 AM

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