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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March 28, 2013

The Same-Old, Same-Old Labor Market

In his March 24 Wall Street Journal piece on declining government payrolls, Sudeep Reddy offers up a key observation:

The cuts in the public-sector workforce—at the federal, state and local levels—marked the deepest retrenchment in government employment of civilians since just after World War II... down by about 740,000 jobs since the recession ended in June 2009. At the same time, the private sector has added more than 5.2 million jobs over the course of the recovery.

As the Journal article notes, the story of shrinking government employment combining with private-sector payroll expansion has been remarkably consistent for much of the recovery.

About a year ago, we provided a graphical illustration of postrecession employment patterns using payroll-employment "bubble charts." These charts measure postrecession average monthly employment changes by sector relative to the changes in the prerecession period from December 2001 through October 2007. Not a lot in that chart has changed over the intervening year (just as not a lot had changed in 2012 compared with 2011):

The stability in the employment picture across private industries, both relative to one another and relative to the precrisis pace of job gains, is just as notable as the changing fortunes of private versus public employment. In fact, the charts offer some pretty clear impressions:

  • Virtually all private-sector industries have moved into positive employment-growth territory. That movement includes the construction and financial activities sectors, which have generally lagged the improvement in the rest of the economy. The only broad category still shedding jobs in the private sector has been the information industry—which includes publishing, motion picture production, telecommunications, data processing, and the like—an industry that was also shrinking in terms of employment over the decade leading up to the financial crisis.
  • All of the private-sector bubbles in the charts are now close to, on, or above the 45-degree line, meaning that the average pace of monthly job creation in each sector is near, equal to, or greater than what prevailed during the last recovery.
  • As the Reddy piece emphasizes, government employment has been in decline since early 2010, though the government sector as a whole retains its status as the sector with the largest employment share. (The size of the bubbles in the charts above represents the share of employment in each sector at the end of the period for which the graph is drawn.) But the chart also illustrates another key point of Reddy's article: To date, the decline in government employment has been concentrated in state and, especially, local government jobs. Until recently, job creation by the federal government, which is relatively small in the bigger scheme of things, has not deviated much from its prerecession pattern.

The last point brings us to this observation, from the WSJ article:

How the rest of the private sector responds to a shrinking of the federal government could play a bigger role in determining how the budget fight hits the workforce.
"The private sector in the U.S. is growing so much stronger than anyone had expected," said Bernard Baumohl of the Economic Outlook Group. "This organic growth is going to significantly offset the effect of the sequester in terms of economic output and employment."

It is worth pointing out that the monthly average of 17,000 state, local, and federal government jobs lost since March 2010 has been nearly matched by average monthly increases of better than 14,000 jobs in manufacturing, a sector that persistently shed jobs in the previous recovery. The replacement of private- for public-sector employment has generated 175,000 to 185,000 net jobs per month in both 2011 and 2012. To put one perspective on that figure, at current labor force participation rates (along with some other assumptions and caveats), that pace would be sufficient to reach the Federal Open Market Committee's 6.5 percent unemployment threshold by sometime in spring 2015 (as you can verify yourself with the Atlanta Fed's Jobs Calculator). That calculation raises the stake somewhat on the matter of how "the rest of the private sector responds."

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


March 28, 2013 in Employment, Labor Markets | Permalink


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I'm a little confused about the sectorial changes in government graphic....

Posted by: jay | March 30, 2013 at 01:44 AM

A little bit confusing... not?

Posted by: Economizar | April 01, 2013 at 12:51 PM

Not shure about the sectorial changes in government graphic....

Posted by: Poupar | January 29, 2014 at 05:02 AM

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March 19, 2013

Being Ahead of the Curve: Not Always a Good Thing

Our friends at the New York Fed have a nifty interactive graphic that compares the unemployment rate, labor force participation rate, and employment-to-population ratio over the last five business cycles. You can even break these indicators down by gender, by age, or by a particular business cycle. (For a deeper dive, check out this post at Liberty Street Economics by Jonathan McCarthy and Simon Potter.) And though it’s not exactly late-breaking news, no matter which of the three indicators you look at, you can’t help but conclude that the most recent recession is an outlier.

The Beveridge curve is a fourth and particularly useful graphical representation of a steady-state economy showing how, in theory, one might expect the vacancy rate to change, given an unemployment rate. It depicts the relationship between job openings and the unemployment rate. (The Atlanta Fed’s magazine, EconSouth, discussed the Beveridge curve.) It, too, has been standing out over the course of the most recent recovery, so much so that we think it warrants at least a second glance. There are a number of ways to estimate a Beveridge curve (see, for example, methods described by Gadi Barlevy of the Chicago Fed here and by the Richmond Fed’s Thomas Lubik here).

We use the method described by Barnichon et al. (2012) to estimate the solid curve used in the first chart below. The square plots represent actual vacancy rate (y-axis) and unemployment rate (x-axis) combinations by month from December 2000, when the Job Openings and Labor Turnover Statistics (JOLTS) data series from the U.S. Bureau of Labor Statistics (BLS) series begins, to January 2013, the most recent month of data available for both series.

Blue squares represent data from December 2000 to December 2009, when the “errors” between actual plots and the curve estimation were below 2 percentage points, and red squares represent data since January 2010, where data suddenly seem to jump higher than the predicted Beveridge curve to the tune of 2 percentage points or greater (see the chart below).

But why?

In June 2012, Regis Barnichon and his coauthors concluded that the unemployment rate’s lackluster performance so far in the recovery was attributable to a shortfall in hires per vacancy. Since then, the vacancy rate has climbed its way back to its June 2008 level of 2.7 percent. However, the unemployment rate has clearly not returned to either its June 2008 level (5.6 percent) or where the Beveridge curve says it should be given this vacancy rate, which one might predict to be 5.5 percent using the methodology of Barnichon et al.

This “ahead of the curve” phenomenon has not gone unnoticed and has prompted some explanations. In a March 6, 2013, article in The New York Times (which also has some cool charts), Catherine Rampell posits that available positions are staying unfilled longer, while interview processes have become lengthier.

The next day, Rampell went into more detail about why we’re going “off the curve” in a New York Times Economix post. She cites skills mismatch and a skills atrophy effect of the long-term unemployed affecting the ability of employers to fill positions (which she explains aren’t full explanations, yet we would expect to see wages for highly coveted positions rise significantly).

Rampell goes back to the explanation many of us continue to hear from business contacts: employers are unwilling to fill vacant positions because of economic and fiscal policy uncertainty. She quotes Stephen Davis of Chicago’s Booth School: “They’re taking longer to fill vacancies because they just feel less need to fill jobs now,” Davis said. “They recognize that in a slack labor market, there is an abundance of viable candidates. If something happens, and if they need to hire quickly, they know they can do that. That’s harder in a tight labor market.”

So maybe as labor markets “tighten up,” or perhaps if the speed by which they tighten up quickens, we’ll get back on the Beveridge curve. Only time, and several BLS releases, will tell.

Photo of Patrick HigginsBy Patrick Higgins, an economist at the Atlanta Fed, and

Photo of Mark CarterMark Carter, a senior economic analyst at the Atlanta Fed

March 19, 2013 in Economics, Employment, Labor Markets | Permalink


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This post de-emphasizes Rampell's point that vacancies remain open longer because of economic uncertainty and growth expectations. Instead, it stresses the effect of the labor market supply.

Firms' hiring decisions likely are impacted by the number of qualified candidates available. However, most firms probably also hire because of the amount of work on hand, and the amount of work anticipated. The latter point is obscured by the quote by Stephen Davis, which is unfortunate, since it is probably quite important. In fact, macroblog referenced this relationship in a previous post, but unfortunately, decided to ignore it here.

Posted by: Carl | March 21, 2013 at 10:49 AM

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March 11, 2013

You Say You’re a Homeowner and Not a Renter? Think Again.

As we’ve said before, we’re suckers for cool charts. The latest that caught our eye is the following one, originally created by the U.S. Bureau of Labor Statistics (BLS). It highlights the relative importance assigned to the various components of the consumer price index (CPI) and shows where increases in the index have come from over the past 12 months.

Consumer Price Index Components

It probably won’t surprise anyone that the drop in gasoline prices (found in the transportation component) exerted downward pressure on the CPI last year, while the cost of medical care pushed the price index higher. What might surprise you is the size of that big, blue square labeled “housing.” Housing accounts for a little more than 40 percent of the CPI market basket and, given its weight, any change in this component significantly affects the overall index.

This begs the question: In light of the recent strength seen in the housing market—and notably the nearly 10 percent rise in home prices over the past 12 months—are housing costs likely to exert more upward pressure on the CPI?

Before we dive into this question, it’s important to understand that home prices do not directly enter into the computation of the CPI (or the personal consumption expenditures [PCE] price index, for that matter). This is because a home is an asset, and an increase in its value does not impose a “cost” on the homeowner. But there is a cost that homeowners face in addition to home maintenance and utilities, and that’s the implied rent they incur by living in their home rather than renting it out. In effect, every homeowner is his or her own tenant, and the rent they forgo each month is called the “owners’ equivalent rent” (or OER) in the CPI. OER represents about 24 percent of the CPI (and about 11 percent of the PCE price index). The CPI captures this OER cost (sensibly, in our view) by measuring the cost of home rentals (details here). So whether the robust rise in home prices will influence the behavior of the CPI this year depends on whether rising home prices influence home rents.

So what is likely to happen to OER given the continued increase in home prices? Well, higher home prices, in time, ought to cause home rents to rise, putting upward pressure on the CPI. Homes are assets to landlords, after all, and landlords (like all investors) require an adequate return on their investments. Let’s call this the “asset market influence” of home prices on home rents. But the rents that landlords charge also compete with homeownership. If renters decide to become homeowners, the rental market loses customers, which should push home rents in the opposite direction of home prices for a time. Let’s call this the “substitution influence” on rent prices.

Consider the following charts, which show three-month home prices and home rents (measured by the CPI’s OER measure). It’s a little hard to see a clear correlation between these two measures.

Home Prices and Owners' Equivalent Rent

So we’ve separated these data into their trend and cycle components (using Hodrick-Prescott procedures, if you must know) shown in the following two charts. Now, if one takes the trend view, there is a clear positive relationship between home prices and home rents. This is consistent with the asset market influence described above. But also consider the detrended perspective. Here, home prices and home rents are pretty clearly negatively correlated. This, to us, looks like the substitution influence described above.

Trends in Home Prices and Owners' Equivalent Rent
Detrended Home Prices and Owners' Equivalent Rent

So let’s get back to the question at hand. What do rising home prices mean for OER and, ultimately, the behavior of the CPI? Well, it’s rather hard to say because the link between home prices and OER isn’t particularly strong.

Not definitive enough for you? OK, how about this: We think the recent rise in home prices will more likely lean against the rise in OER for the near term as the growing demand for home ownership provides some competition to the rental market. But, in time, these influences will give way to the asset market fundamentals, and rents are likely to accelerate as returns on real estate investments are reaffirmed.

Photo of Mike BryanBy Mike Bryan, vice president and senior economist, and

Photo of Nick ParkerNick Parker, economic research analyst, both in the Atlanta Fed’s research department

March 11, 2013 in Economics, Housing, Real Estate | Permalink


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So, how do the OER and house rental prices line up?

Posted by: stewart sprague | March 11, 2013 at 10:55 PM

When comparing house prices to OER, it's worthwhile to separate out the influence of interest rates. So instead of comparing house prices directly, it is useful to compare the P+I payment on that loan ammount at the going rate for 30 year mortgages.

Posted by: Jim A | March 12, 2013 at 07:54 AM

Can't you tell just by eyeballing the data that OER lags by about 18 months behind home prices? Shift the red line back, and see what that does to your correlation!

Posted by: Matchoo | March 12, 2013 at 12:51 PM

So, let me see if I get this right: the inflation rate is calculated in part from a mathematical construct representing a cost that no one actually pays, based on surveys asking people what they think their house is worth in rent. (And of course we know that homeowners are not biased in their view of the worth of their house!) I live in Cambridge, which has high rents and low vacancy rates. I'm giving me a pretty good deal on my rent--I should be charging me a lot more! As a practical matter I do regard the difference between my mortgage and what it would cost to rent around here as a kind of savings (thanks, super-low interest rates!). But then, you can also see how, since my mortgage is fixed, I am more concerned with inflation of costs that come directly out of my pocket, such as maintenance and food. Sadly, plumbers don't want to get paid in nontransferable theoretical constructs.

Posted by: MacCruiskeen | March 12, 2013 at 01:14 PM

The "correlation" chart is not persuasive.

A simpler hypothesis is that the CPI determination of OER is flawed. One might then be concerned that this bad OER measurement distorts the CPI and could lead to serious macro consequences due to the widespread use of a bad CPI.

And indeed, if one takes time to read how OER is actually determined, one is not heartened. The quote is below. The bottom line is that some owners are SURVEYED and asked their OPINION about what their house WOULD rent for, if they rented it! I am flabbergasted by this, because in my experience owner's responses are horribly biased and not at all reflective of actual rental market conditions. Many owners haven't even looked at renting for years, decades, etc. THERE HAS TO BE A BETTER WAY TO MEASURE 24% of the CPI! (The fact that this isn't being done, despite the weight and importance of this part of CPI, is a significant "tell" that no one actually cares about getting anything factually right in economics...)

From the link given in the article above:

" ' ... Owners’ equivalent rent of primary residence (OER) is based on the following question that the Consumer Expenditure Survey asks of consumers who own their primary residence:
“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

... From the responses to these questions, the CPI estimates the total shelter cost to all consumers living in each index area of the urban United States. ' "

Posted by: Wisdom Seeker | March 14, 2013 at 05:07 PM

What about Energy Prices (esp. NatGas) and OER. I recall that the relationship was the opposite of what one would expect, that as NatGas prices rose OER actually fell, although I can't recall why.

Posted by: Rab | February 05, 2015 at 10:33 AM

Got it. Estimated cost of Landlord provided utilities is SUBTRACTED from estimated rental costs to generate OER. So if Electricity (Energy) Costs rise that will put downward pressure on OER.

Posted by: Rab | February 05, 2015 at 10:39 AM

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March 08, 2013

Will the Next Exit from Monetary Stimulus Really Be Different from the Last?

Suppose you run a manufacturing business—let's say, for example, widgets. Your customers are loyal and steady, but you are never completely certain when they are going to show up asking you to satisfy their widget desires.

Given this uncertainty, you consider two different strategies to meet the needs of your customers. One option is to produce a large quantity of widgets at once, store the product in your warehouse, and when a customer calls, pull the widgets out of inventory as required.

A second option is to simply wait until buyers arrive at your door and produce widgets on demand, which you can do instantaneously and in as large a quantity as you like.

Thinking only about whether you can meet customer demand when it presents itself, these two options are basically identical. In the first case you have a large inventory to support your sales. In the second case you have a large—in fact, infinitely large—"shadow" inventory that you can bring into existence in lockstep with demand.

I invite you to think about this example as you contemplate this familiar graph of the Federal Reserve's balance sheet:


I gather that a good measure of concern about the size of the Fed's (still growing) balance sheet comes from the notion that there is more inherent inflation risk with bank reserves that exceed $1.5 trillion than there would be with reserves somewhere in the neighborhood of $10 billion (which would be the ballpark value for the pre-crisis level of reserves).

I understand this concern, but I don't believe that it is entirely warranted. My argument is as follows: The policy strategy for tightening policy (or exiting stimulus) when the banking system is flush with reserves is equivalent to the strategy when the banking system has low (or even zero) reserves in the same way that the two strategies for meeting customer demand that I offered at the outset of this post are equivalent.

Here's why. Suppose, just for example, that bank reserves are literally zero and the Federal Open Market Committee (FOMC) has set a federal funds rate target of, say, 3 percent. Despite the fact that bank reserves are zero there is a real sense in which the potential size of the balance sheet—the shadow balance sheet, if you will—is very large.

The reason is that when the FOMC sets a target for the federal funds rate, it is sending very specific instructions to the folks from the Open Market Desk at the New York Fed, who run monetary policy operations on behalf of the FOMC. Those instructions are really pretty simple: If you have to inject more bank reserves (and hence expand the size of the Fed's balance sheet) to maintain the FOMC's funds rate target, do it.

To make sense of that statement, it is helpful to remember that the federal funds rate is an overnight interest rate that is determined by the supply and demand for bank reserves. Simplifying just a bit, the demand for reserves comes from the banking system, and the supply comes from the Fed. As in any supply and demand story, if demand goes up, so does the "price"—in this case, the federal funds rate.

In our hypothetical example, the Open Market Desk has been instructed not to let the federal funds rate deviate from 3 percent—at least not for very long. With such instructions, there is really only one thing to do in the case that demand from the banking system increases—create more reserves.

To put it in the terms of the business example I started out with, in setting a funds rate target the FOMC is giving the Open Market Desk the following marching orders: If customers show up, step up the production and meet the demand. The Fed's balance sheet in this case will automatically expand to meet bank reserve demand, just as the businessperson's inventory would expand to support the demand for widgets. As with the businessperson in my example, there is little difference between holding a large tangible inventory and standing ready to supply on demand from a shadow inventory.

Though the analogy is not completely perfect—in the case of the Fed's balance sheet, for example it is the banks and not the business (i.e., the Fed) that hold the inventory—I think the story provides an intuitive way to process the following comments (courtesy of Bloomberg) from Fed Chairman Ben Bernanke, from last week's congressional testimony:

"Raising interest rate on reserves" when the balance sheet is large is the functional equivalent to raising the federal funds rate when the actual balance sheet is not so large, but the potential or shadow balance sheet is. In both cases, the strategy is to induce banks to resist deploying available reserves to expand deposit liabilities and credit. The only difference is that, in the former case, the available reserves are explicit, and in the latter case they are implicit.

The Monetary Policy Report that accompanied the Chairman's testimony contained a fairly thorough summary of costs that might be associated with continued monetary stimulus. Some of these in fact pertain to the size of the Fed's balance sheet. But, as the Chairman notes in the video clip above, when it comes to the mechanics of exiting from policy stimulus, the real challenge is the familiar one of knowing when it is time to alter course.

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


March 8, 2013 in Banking, Fed Funds Futures, Federal Reserve and Monetary Policy, Monetary Policy | Permalink


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One potential risk this time is that the Fed has been buying lots of assets that aren't treasuries, and some of the riskier assets can no longer be sold for the same price at which it was bought. In theory that situation could leave the Fed unable to recall all the money it put into circulation.

That said, you are right that interest on reserves could still be raised to have the same effects.

Posted by: Matthew Martin | March 08, 2013 at 03:30 PM

"In both cases, the strategy is to induce banks to resist deploying available reserves to expand deposit liabilities and credit."

Banks cannot lend their reserves. In fact, there is no balance sheet transaction that will allow a central bank liability to be loaned to a "non-bank" entity. Banks make loans by issuing a demand deposit and not by issuing reserves. Bank lending is never constrained by a reserve position.

The IoER policy implemented in 2008 moved the Federal Reserve out of a "corridor system" and into a "floor system". Under a floor system the level of reserves and the overnight interest rate are divorced. The IoER or "floor level" also becomes the deposit level. This disconnect works as long as there are sufficient excess reserves within the system, which in the case of the US, there are adequate excess reserves.

It should also be noted that future increases in the overnight rate are simply announced with the lending and deposit rates changing in tandem. Traditional models of draining reserves via FOMO are no longer required. Reserves are not the dual of overnight interest rates. Thus, when the Fed would like to "tighten" policy it will not be required to reduce the size of it's balance sheet as draining operations are no longer required to hit the overnight target.

Posted by: JJTV | March 08, 2013 at 05:58 PM

How about changing how monetary policy is conducted? Instead of using the blocked and saturated credit markets for monetary policy just bypass them and modify the fed so it deals directly with the public.


Posted by: Daniel | March 09, 2013 at 12:55 AM

If the fed marks up its long position and passes the gain to the treasury wont it have to pass the loss when it hikes the fed rate? and what will be the impact to treasurys when it hikes the fed rate? wont it raise the cost to the government budget when rates go up and it has to finance the debt at 110% debt to gdp and a duration of less than 5 thanks to the fed? Aren't we underestimating the potential damage to hiking rates?

Posted by: Emilio Lamar | May 01, 2013 at 02:33 PM

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March 01, 2013

What the Dual Mandate Looks Like

Sometimes simple, direct points are the most powerful. For me, the simplest and most direct points in Chairman Bernanke’s Senate testimony this week were contained in the following one minute and 49 seconds of video (courtesy of Bloomberg):

At about the 1:26 mark, the Chairman says:

So, our accommodative monetary policy has not really traded off one of [the FOMC’s mandated goals] against the other, and it has supported both real growth and employment and kept inflation close to our target.

To that point, here is a straightforward picture:

Inflation and Unemployment

I concede that past results are no guarantee of future performance. And in his testimony, the Chairman was very clear that prudence dictates vigilance with respect to potential unintended consequences:

Highly accommodative monetary policy also has several potential costs and risks, which the committee is monitoring closely. For example, if further expansion of the Federal Reserve's balance sheet were to undermine public confidence in our ability to exit smoothly from our accommodative policies at the appropriate time, inflation expectations could rise, putting the FOMC's price stability objective at risk...

Another potential cost that the committee takes very seriously is the possibility that very low interest rates, if maintained for a considerable time, could impair financial stability. For example, portfolio managers dissatisfied with low returns may reach for yield by taking on more credit risk, duration risk, or leverage.

Concerns about such developments are fair and, as Mr. Bernanke makes clear, shared by the FOMC. Furthermore, the language around the Fed’s ultimate decision to end or alter the pace of its current open-ended asset-purchase program is explicitly cast in terms of an ongoing cost-benefit analysis. But anyone who wants to convince me that monetary policy actions have been contrary to our dual mandate is going to have to explain to me why that conclusion isn’t contradicted by the chart above.

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

March 1, 2013 in Employment, Federal Reserve and Monetary Policy, Inflation, Monetary Policy | Permalink


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