The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
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January 15, 2015
Contrasting the Financing Needs of Different Types of Firms: Evidence From a New Small Business Survey
The National Federation of Independent Business's (NFIB) small business optimism index surpassed 100 in December, a sign that small business' outlook on the economy has now reached "normal" long-run average levels. But that doesn't mean that everything is moonlight and roses for small firms. One question from the NFIB's survey (one that is not used in its overall optimism index) concerns a firm's ability to obtain credit. The survey asks, "During the last three months, was your firm able to satisfy its borrowing needs?" The chart below shows the net percent (those responding "yes" minus those saying "no") of firms reporting improving credit access.
The chart suggests that credit access has improved significantly since the end of the recession but that conditions still appear to be tougher than typical. Given the importance of small firms to employment growth, we at the Atlanta Fed have been particularly interested in monitoring financing conditions for small businesses. For this reason, we've conducted a regular survey of small businesses in the Southeast since 2010. In the fall of 2014, we joined forces with the New York, Philadelphia, and Cleveland Feds to expand and refine the small business data collection effort. The results of that survey are now available on our website and include downloadable data tabulations by different types of firms. Specifically, data are available by criteria including states, industries, firm size (in terms of revenue), and firm development stage.
Our previous small business surveys have focused on the experiences of young firms, so I found the new survey's tabulation by firm development stage of particular interest. For example, here's a summary of the experience of startups' ability to access financing markets versus that of mature firms.
First, what constitutes a startup? For comparison purposes, we draw the line (somewhat arbitrarily) at less than five years old. For mature firms, they not only have to be at least five years old, but they also must have at least 10 employees and hold some debt. When I picture a startup, I imagine a new restaurant owner purchasing tables and chairs, or a tech company manufacturing a prototype to market to potential investors. These types of firms are unproven and risky and tend to need relatively small amounts of money. Which begs the question: where are they going to get funds they need to grow? Before answering that question, let's examine the recent business performance of startups in the survey. About half of startups operated at a loss during the previous 12 months, but only about 20 percent had shrinking revenues. Most were either increasing the size of their workforce or had the same number of employees as a year ago. The top challenge reported by these young businesses was nearly tied between "difficulty attracting customers" (reported by 27 percent of firms) and "lack of credit availability" (reported by 26 percent of firms).
So how do those behind startups fund their businesses? In 2013, nearly half relied primarily on personal savings, whereas about 18 percent primarily used retained business earnings. Without a solid revenue history to prove their creditworthiness, financing was understandably difficult to come by. Only about 38 percent of startups received at least some financing, compared with 93 percent of mature firms. Many startups assumed it would be a fruitless endeavor—about one-fifth of them assumed they would be turned down, the cost would be too high, or the search would be too time consuming. The number of people who sought financing was about equal to those who were discouraged, and most were seeking less than $250,000.
Where did they apply? Their search was much broader than used by their counterparts at mature firms. Although both types of firms sought mostly loans and lines of credit, applications for products backed by the Small Business Administration, credit cards, and equity investments were notably higher for younger firms compared to mature firms. When it came to loans and lines of credit, there were large differences not only in what types of insitutions they submitted applications to, but also where they were most successful. Startups were mostly likely to apply at large regional and large national banks, but their approval rates were higher with smaller banks and online lenders (see the table).
The differences between young firms and mature ones is only one way to look at the data. The full report details variations by firm size, industry, and state. For more on general business and finance conditions of small firms, visit the small business trends dashboard.
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January 09, 2015
Gauging Inflation Expectations with Surveys, Part 3: Do Firms Know What They Don’t Know?
In the previous two macroblog posts, we introduced you to the inflation expectations of firms and argued that the question you ask matters a lot. In this week's final post, we examine another important dimension of our data: inflation uncertainty, a topic of some deliberation at the last Federal Open Market Committee meeting (according to the recently released minutes).
Survey data typically measure only the inflation expectation of a respondent, not the certainty surrounding that prediction. As a result, survey-based measures often use the disagreement among respondents as a proxy for uncertainty, but as Rob Rich, Joe Tracy, and Matt Ploenzke at the New York Fed caution in this recent blog post, you probably shouldn't do this.
Because we derive business inflation expectations from the probabilities that each firm assigns to various unit cost outcomes, we can measure the inflation uncertainty of a respondent directly. And that allows us to investigate whether uncertainty plays a role in the accuracy of firm inflation predictions. We wanted to know: Do firms know what they don't know?The following table, adapted from our recent working paper, reports the accuracy of a business inflation forecast relative to the firm's inflation uncertainty at the time the forecast was made. We first compare the prediction accuracy of firms who have a larger-than-average degree of prediction uncertainty against those with less-than-average uncertainty. We also compare the most uncertain firms with the least uncertain firms.
On average, firms provide relatively accurate, unbiased assessments of their future unit cost changes. But the results also clearly support the conclusion that more uncertain respondents tend to be significantly less accurate inflation forecasters.Maybe this result doesn't strike you as mind-blowing. Wouldn't you expect firms with the greatest inflation uncertainty to make the least accurate inflation predictions? We would, too. But isn't it refreshing to know that business decision-makers know when they are making decisions under uncertainty? And we also think that monitoring how certain respondents are about their inflation expectation, in addition to whether the average expectation for the group has changed, should prove useful when evaluating how well inflation expectations are anchored. If you think so too, you can monitor both on our website's Inflation Project page.
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January 07, 2015
Gauging Inflation Expectations with Surveys, Part 2: The Question You Ask Matters—A Lot
In our previous macroblog post, we discussed the inflation expectations of firms and observed that—while on average these expectations look similar to that of professional forecasters—they reveal considerably more variation of opinion. Further, the inflation expectations of firms look very different from what we see in the household survey of inflation expectations.
The usual focal point when trying to explain measurement differences among surveys of inflation expectations is the respondent, or who is taking the survey. In the previous macroblog post, we noted that some researchers have indicated that not all households are equally informed about inflation trends and that their expectations are somehow biased by this ignorance. For example, Christopher Carroll over at Johns Hopkins suggests that households update their inflation expectations through the news, and some may only infrequently read the press. Another example comes from a group of researchers at the New York Fed and Carnegie Mellon They've suggested that less financially literate households tend to persistently have the highest inflation expectations.
But what these and related research assume is that whom you ask the question of is of primary significance. Could it be that it's the question being asked that accounts for such disagreement among the surveys?
We know, for example, that professional forecasters are asked to predict a particular inflation statistic, while households are simply asked about the behavior of "prices in general" and prices "on the average." To an economist, these amount to pretty much the same thing. But are they the same thing in the minds of non-economists?You may be surprised, but the answer is no (as a recent Atlanta Fed working paper discussed). When we asked our panel of firms to predict by how much "prices will change overall in the economy"—essentially the same question the University of Michigan asks households—business leaders make the same prediction we see in the survey of households: Their predictions seem high relative to the trend in the inflation data, and the range of opinion among businesses on where prices "overall in the economy" are headed is really, really wide (see the table).
But what if we ask businesses to predict a particular inflation statistic, as the Philly Fed asks professional forecasters to do? We did that, too. And you know what? Not only did a majority of our panelists (about two-thirds) say they were "familiar" with the inflation statistic, but their predictions looked remarkably similar to that of professional forecasters (see the table).
So when we ask firms to answer the same question asked of professional forecasters, we got back something that was very comparable to responses given by professional forecasters. But when you ask firms the same question typically asked of households, we got back responses that looked very much like what households report.
Moreover, we dug through the office file cabinets, remembering a related table adapted from a joint project between the Cleveland Fed and the Ohio State University that was highlighted in a 2001 Cleveland Fed Economic Commentary. In August 2001, a group of Ohio households were asked to provide their perception of how much the Consumer Price Index (CPI) had increased over the last 12 months, and we compared it with how much they thought "prices" had risen over the past 12 months.The households reported that the CPI had risen 3 percent—nearly identical to what the CPI actually rose over the period (2.7 percent). However, in responding to the vaguely worded notion of "prices," the average response was nearly 7 percent (see the table). So again, it seems that the loosely defined concept of "prices" is eliciting a response that looks nothing like what economists would call inflation.
So it turns out that the question you ask matters—a lot—more so, evidently, than to whom you ask the question. What's the right question to ask? We think it's the question most relevant to the decisions facing the person you are asking. In the case of firms (and others, we suspect), what's most relevant are the costs they think they are likely to face in the coming year. What is unlikely to be top-of-mind for business decision makers is the future behavior of an official inflation statistic or their thoughts on some ambiguous concept of general prices.
In the next macroblog post, we'll dig even deeper into the data.
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January 05, 2015
Gauging Inflation Expectations with Surveys, Part 1: The Perspective of Firms
Central bankers measure inflation expectations in more than a few ways, which is another way of saying no measure of inflation expectations is entirely persuasive.
Survey data on inflation expectations are especially hard to interpret. Surveys of professional economists, such as the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters, reveal inflation expectations that, over time, track fairly close to the trend in the officially reported inflation data. But the inflation predictions by professional forecasters are extraordinarily similar and call into question whether they represent the broader population.
The inflation surveys of households, however, reveal a remarkably wide range of opinion on future inflation compared to those of professional forecasters. Really, really wide. For example, in any particular month, 13 percent of the University of Michigan's survey of households predicts year-ahead inflation to be more than 10 percent, an annual inflation rate not seen since October 1981. Even in the aggregate, the inflation predictions of households persistently track much higher than the officially reported inflation data (see the chart). These and other curious patterns in the household survey data call into question whether these data really represent the inflation predictions on which households act.
Even if you're unfamiliar with the literature on this subject, the above observations may not strike you as particularly hard to believe. Economists are, presumably, expert on inflation, while households experience inflation from their own unique—some would suggest even uninformed—perspectives.
We have yet another survey of inflation expectations, one from the perspective of businesses leaders. We think this may be an especially useful perspective on future inflation since business leaders, after all, are the price setters. Our survey has been in the field for a little more than three years now—just long enough, we think, to step back and take stock of what business inflation expectations look like, especially in comparison to the other survey data.
Our initial impressions are reported in a recent Atlanta Fed working paper, and the next few macroblog posts will share some of our favorite observations from this research.
We have been asking firms to assign probabilities to possible changes in their unit costs over the year ahead. From these probabilities, we compute how much firms think their costs are going to change in the coming year and how certain they are of that change (see the table). What we find is that the inflation expectations of firms, on average, look something like the inflation predictions of professional forecasters, but not so much like the predictions of households.
But we also find that there is a significant range of opinion among firms, more so than the range of opinions that forecasting professionals express. Some of the variation among firms appears to be related to their particular industries and are broadly correlated with the uneven cost pressures shown in similar industrial breakdowns of the Producer Price Index from the U.S. Bureau of Labor Statistics (see the table).
So what we have now are three surveys of inflation expectations, each yielding very different inflation predictions. What accounts for the variation we see across the surveys? Our survey allows us to experiment a bit, which was one of the motivations for conducting it. We didn't just want to measure the inflation expectations of firms; we wanted to learn about those expectations. In the next few macroblog posts, we'll tell you a few of the things we've learned. And we think some of our initial findings will surprise you.
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