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March 02, 2017
Gauging Firm Optimism in a Time of Transition
Recent consumer sentiment index measures have hit postrecession highs, but there is evidence of significant differences in respondents' views on the new administration's economic policies. As Richard Curtin, chief economist for the Michigan Survey of Consumers, states:
When asked to describe any recent news that they had heard about the economy, 30% spontaneously mentioned some favorable aspect of Trump's policies, and 29% unfavorably referred to Trump's economic policies. Thus a total of nearly six-in-ten consumers made a positive or negative mention of government policies...never before have these spontaneous references to economic policies had such a large impact on the Sentiment Index: a difference of 37 Index points between those that referred to favorable and unfavorable policies.
It seems clear that government policies are holding sway over consumers' economic outlook. But what about firms? Are they being affected similarly? Are there any firm characteristics that might predict their view? And how might this view change over time?
To begin exploring these questions, we've adopted a series of "optimism" questions to be asked periodically as part of the Atlanta Fed's Business Inflation Expectations Survey's special question series. The optimism questions are based on those that have appeared in the Duke CFO Global Business Outlook survey since 2002, available quarterly. (The next set of results from the CFO survey will appear in March.)
We first put these questions to our business inflation expectations (BIE) panel in November 2016 . The survey period coincided with the week of the U.S. presidential election, allowing us to observe any pre- and post-election changes. We found that firms were more optimistic about their own firm's financial prospects than about the economy as a whole. This finding held for all sectors and firm size categories (chart 1).
In addition, we found no statistical difference in the pre- and post-election measures, as chart 2 shows. (For the stat aficionados among you, we mean that we found no statistical difference at the 95 percent level of confidence.)
We were curious how our firms' optimism might have evolved since the election, so we repeated the questions last month (February 6–10).
Among firms responding in both November and February (approximately 82 percent of respondents), the overall level of optimism increased, on average (chart 3). This increase in optimism is statistically significant and was seen across firms of all sizes and sector types (goods producers and service providers).
The question remains: what is the upshot of this increased optimism? Are firms adjusting their capital investment and employment plans to accommodate this more optimistic outlook? The data should answer these questions in the coming months, but in the meantime, we will continue to monitor the evolution of business optimism.
March 2, 2017 in Books, Business Inflation Expectations, Economic conditions, Economic Growth and Development, Forecasts, Inflation Expectations, Saving, Capital, and Investment, Small Business | Permalink
January 15, 2016
Are Long-Term Inflation Expectations Declining? Not So Fast, Says Atlanta Fed
"Convincing evidence that longer-term inflation expectations have moved lower would be a concern because declines in consumer and business expectations about inflation could put downward pressure on actual inflation, making the attainment of our 2 percent inflation goal more difficult."
—Fed Chair Janet Yellen, in a December 2, 2015, speech to the Economic Club of Washington
To be sure, Chair Yellen's claim is not controversial. Modern macroeconomics gives inflation expectations a central role in the evolution of actual inflation, and the stability of those expectations is crucial to the Fed's ability to achieve its price stability mandate.
The real question on everyone's mind is, of course, what might constitute "convincing evidence" of changes in inflation expectations. Recently, several economists, including former Treasury Secretary Larry Summers and St. Louis Fed President James Bullard, have weighed in on this issue. Yesterday, President Bullard cited downward movements in the five-year/five-year forward breakeven rates from the five- and 10-year nominal and inflation-protected Treasury bond yields. In November, Summers appealed to measures based on inflation swap contracts. The view that inflation expectations are declining has also been echoed by the New York Fed President William Dudley and former Minneapolis Fed President Narayana Kocherlakota.
Broadly speaking, there seems to be a growing view that market-based long-run inflation expectations are declining and drifting significantly away from the Fed's 2 percent target and that this decline is troublingly correlated with oil prices.
A problem with this line of argument is that the breakeven and swap rates are not necessarily clean measures of inflation expectations. They are really better referred to as measures of inflation compensation because, in addition to inflation expectations, these measures also include factors related to liquidity conditions in the markets for these securities, technical features of the inflation protection in each security, and inflation risk premia. Here at the Atlanta Fed, we've built a model to separate these different components and isolate a better measure of true inflation expectations (IE).
In technical terms, we estimate an affine term structure model—similar to that of D'Amico, Kim and Wei (2014)—that incorporates information from the markets for U.S. Treasuries, Treasury Inflation-Protected Securities (TIPS), inflation swaps, and inflation options (caps and floors). Details are provided in "Forecasts of Inflation and Interest Rates in No-Arbitrage Affine Models," a forthcoming Atlanta Fed working paper by Nikolay Gospodinov and Bin Wei. (You can also see Gospodinov and Wei (2015) for further analysis.) Essentially, we ask: what level of inflation expectations is consistent with this entire set of financial market data? And we then follow this measure over time.
As chart 1 illustrates, we draw a very different conclusion about the behavior of long-term inflation expectations. The chart plots the five-year/five-year forward TIPS breakeven inflation (BEI) and the model-implied inflation expectations (IE) for the period January 1999–November 2015 at a weekly frequency. Unlike the raw BEI, our measure is quite smooth, suggesting that long-term inflation expectations have been, and still are, well anchored.
After making an adjustment for the inflation risk premium, we term the difference between BEI and IEs a "liquidity premium," but it really includes a variety of other factors. Our more careful look at the liquidity premium reveals that it is partly made up of factors specific to the structure of inflation-indexed TIPS bonds. For example, since TIPS are based on the non-seasonally adjusted consumer price index (CPI) of all items, TIPS yields incorporate a large positive seasonal carry yield in the first half of the year and a large negative seasonal carry yield in the second half. Chart 2 illustrates this point by plotting CPI seasonality (computed as the accumulated difference between non-seasonally adjusted and seasonally adjusted CPI) and the five-year breakeven inflation.
Redemptions, reallocations, and hedging in the TIPS market after oil price drops and global financial market turbulence can further exacerbate this seasonal pattern. Taken together, these factors are the source of correlation between the BEI measures and oil prices. To confirm this, chart 3 plots (the negative of) our liquidity premium estimate and the log oil price (proxied by the nearest futures price).
Our measure of long-term inflation expectations is also consistent with long-term measures from surveys. Chart 4 presents the median along with the 10th and 90th percentiles of the five-year/five-year forward CPI inflation expectations from the Philadelphia Fed's Survey of Professional Forecasters (SPF) at quarterly frequency. This measure can be compared directly with our IE measure. Both the level and the dynamics of the median SPF inflation expectation are remarkably close to that for our market-based IE. It is also interesting to observe that the level of inflation "disagreement" (measured as the difference between the 10th and 90th percentiles) is at a level similar to the level seen before the financial crisis.
Finally, we note that TIPS and SPF are based on CPI rather than the Fed's preferred personal consumption expenditure (PCE) measure. CPI inflation has historically run above PCE inflation by about 30 basis points. Accounting for this difference brings our measure of the level of long-term inflation expectations close to the Fed's 2 percent target.
To summarize, our analysis suggests that (1) long-run inflation expectations remain stable and anchored, (2) the seemingly large correlation of market-implied inflation compensation with oil prices arises mainly from the dynamics of the TIPS liquidity premium, and (3) long-run market- and survey-based inflation expectations are remarkably close in terms of level and dynamics over time. Of course, further softness in the global economy and commodity markets may eventually drag down long-term expectations. We will continue to monitor the pure measure of inflation expectations for such developments.
By Nikolay Gospodinov, financial economist and policy adviser; Paula Tkac, vice president and senior economist; and Bin Wei, financial economist and associate policy adviser, all of the Atlanta Fed's research department
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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August 18, 2014
Are You Sure We're Not There Yet?
In recent macroblog posts, our colleagues Dave Altig and John Robertson have posed the questions Getting There? and Are We There Yet?, respectively. "There" in these posts refers to "full employment." Dave and John conclude that while we may be getting there, we're not there yet.
Not everyone agrees with that assessment, of course. Among the recent evidence some observers cite in defense of an approaching full-employment and growing wage pressures is the following chart. It shows a rather strong correlation between survey data from the National Federation of Independent Business (NFIB) on the proportion of firms planning to raise worker compensation over the next three months and lagged wage and salary growth (see the chart). (This recent post from the Dismal Scientist blog and this short article from the Dallas Fed also discuss this assessment.)
OK, no people brave enough to weigh in on this issue are actually saying they know for certain where the line is that separates rising wage pressures from just more of the same. But if you are looking for a sign of impending wage pressure, the chart above certainly looks compelling. Well, except that a pretty large gap has opened up between the behavior of the NFIB survey data and the actual growth trend in compensation since 2011. We'll have more on that in a moment.
The Federal Reserve Bank of Atlanta also conducts a survey of businesses, and among the things we occasionally ask our panel is how much they expect to adjust their compensation of workers (including benefits) in the year ahead. But our survey data aren't showing the same rise in compensation expectations that we see in the NFIB survey data (see the tables).
Of the 210 business respondents who answered the compensation question in our August survey, 81 percent expect to increase compensation over the next 12 months, compared with 4 percent who expect to reduce compensation for the next 12 months. In other words, on net, 77 percent of the businesses in our panel expect to raise compensation during the next 12 months. This share is a shade less than the proportion of firms that expected to increase compensation in May 2013.
Our survey data are not directly comparable to the NFIB since the NFIB survey asks firms about their plans during the next three months, and we ask about plans during the coming 12 months. Moreover, the NFIB surveys small businesses—roughly 75 percent of the businesses in the NFIB survey employ fewer than 20 workers, and about 60 percent employ fewer than 10.
So we cut our survey to isolate the smaller firms. The first observation we note is that as the size of the firm shrinks, so does the proportion of small firms planning to increase wages. This result isn't especially surprising since the small firms in our panel report considerably worse prevailing business conditions than do the large firms. But more to the point, we still fail to pick up a rise in expected wage pressure. On net in August, 53 percent of the firms in our panel that employ fewer than 20 workers expect to raise worker compensation during the next 12 months. That percent is down from 69 percent of similarly sized firms in May 2013.
Further, the average amount that firms expect to increase wages (2.7 percent) is also about unchanged from 15 months ago (2.8 percent), and this result is rather consistent by firm size and industry. If anything, our panel of businesses reports less expected compensation pressure in the year ahead than when we last asked them in May 2013. So no matter how we cut our panel data, we have trouble confirming the story that firms are anticipating significantly more wage pressure today than a year or so ago.
But maybe this is missing the big point of the figure that kicked off this post. Since about 2011, there appears to be a growing discrepancy between the recent trend in the NFIB survey on compensation increases and actual compensation increases. One could interpret that observation in two very different ways. The first is that the growing gap between the NFIB survey data and actual wage growth suggests pressure on compensation that will soon break loose. Perhaps. But another interpretation is that the relationship between the NFIB survey and actual wage increases has broken down recently. Correlation is different than causation, and many correlations coming from the labor market in recent years appear to be deviating from their historical norms. Isn't that the takeaway of the two earlier macroblog posts?
We're not brave enough to say that we know for certain that the economy isn't on the verge of an accelerated pace of compensation growth. But, if we were brave enough, we'd say our survey data indicate that such acceleration is unlikely.
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June 25, 2013
Getting Back to Normal?
Central to any discussion about monetary policy is the degree to which the economy is underperforming relative to its potential, or in more ordinary language, how much slack exists. OK, so how much slack is there, and how long will it take to be absorbed? Well, if you ask the Congressional Budget Office (and a lot of people do), they would have told you last February (their latest estimate) that the economy was underperforming just a shade more than 4 percent relative to its potential last summer, and that slack was likely to increase a little by this summer (to around 4.7 percent). Go to the International Monetary Fund (IMF), and they tell a very similar story in their April World Economic Outlook. The IMF estimates that the amount of slack in the U.S. economy was about 4.2 percent last year, and they expected it would rise a little to about 4.4 percent this year.
As devotees of our Business Inflation Expectations survey know (and you know who you are), the Atlanta Fed has a quarterly, subjective measure of economic slack in the economy as seen by business leaders. This month, businesses told us something pretty interesting—the amount of slack they think they have narrowed pretty sharply between March and June.
Last March, the panel told us that their unit sales were 7.7 percent below "normal"—similar to their assessments in December and September. This month, however, the group cut their estimate of slack to 4.3 percent below normal, on average (see the table).
What we find most encouraging about this assessment (well, besides the speed at which the slack was being taken up) is that the improvement was most prominent among small and medium-sized firms. These are firms that, according to our survey and other reports (like this one from the National Federation of Independent Business), have been lagging behind in the recovery. Indeed, in June, mid-sized firms indicated that unit sales were only 1.5 percent below normal, a shade better than the big firms in our panel (see the table).
A look at the industry composition of our survey reveals that the pickup of slack was relatively broadly based too. Only the firms in the mining and utilities, and the professional and business services areas reported more slack relative to March (and the amounts were pretty small at that). Elsewhere, the amount of slack appears to have narrowed quite a bit.
OK, so slack is shrinking, and according to these estimates, it shrank quite a bit between March and June. Does that mean we should be anticipating growing price pressure? Well, we can turn to our panelists again for an answer, and they say no. Projecting over the year ahead, our panelists report little change in either their inflationary sentiment or their inflation uncertainty (see the table).
Last Wednesday, at the conclusion of its June meeting, the Federal Open Market Committee said that the recovery is proceeding and the labor market is improving, but inflation expectations remain stable. Our June poll of business leaders appears to have also endorsed this view of the economy.
By Mike Bryan, vice president and senior economist,
Brent Meyer, economist, and
Nicholas Parker, senior economic research analyst, all in the Atlanta Fed's research department
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May 16, 2013
Labor Costs, Inflation Expectations, and the Affordable Care Act: What Businesses Are Telling Us
The Atlanta Fed’s May survey of businesses showed little overall concern about near-term inflation. Year-ahead unit cost expectations averaged 2 percent, down a tenth from April and on par with business inflation expectations at this time last year.
OK, we’re going to guess this observation doesn’t exactly knock you off your chair. But here’s something we’ve been keeping an eye on that you might find interesting. When we ask firms about what role, if any, labor costs are likely to play in their prices over the next 12 months, an increasing proportion have been telling us they see a potential for upward price pressure coming from labor costs (see the chart).
To investigate further, we posed a special question to our Business Inflation Expectations (BIE) panel regarding their expectations for compensation growth over the next 12 months: “Projecting ahead over the next 12 months, by roughly what percentage do you expect your firm’s average compensation per worker (including benefits) to change?”
We got a pretty large range of responses, but on average, firms told us they expect average compensation growth—including benefits—of 2.8 percent. That’s about a percent higher than the average over the past year (as estimated by either the index of compensation per hour or the employment cost index). But a 2.8 percent rise is also about a percentage point below average compensation growth before the recession. We’re included to read the survey as a confirmation that labor markets are improving and expected to improve further over the coming year. But we’re not inclined to interpret the survey data as an indication that the labor market is nearing full employment.
We’ve also been hearing more lately about the potential for the Affordable Care Act (ACA) to have a significant influence on labor costs and, presumably, to provide some upward price pressure. Indeed, several of our panelists commented on their concern about the influence of the ACA when they completed their May BIE survey. So can we tie any of this expected compensation growth to the ACA, a significant share of which is scheduled to go into effect eight months from now?
Because a disproportionate impact from the ACA will fall on firms that employ 50 or more workers, we separated our panel into firms with 50 or more employees, and those employing fewer than 50 workers. What we see is that average expected compensation growth is the same for the bigger employers and smaller employers. Moreover, the big firms in our sample report the same inflation expectation as the smaller firms.
But the data reveal that the bigger firms are a little more uncertain about their unit cost projections for the year ahead. OK, it’s not a big difference, but it is statistically significant. So while their cost and compensation expectations are not yet being affected by the prospect of the ACA, the act might be influencing their uncertainty about those potential costs.
By Mike Bryan, vice president and senior economist,
Brent Meyer, economist, and
Nicholas Parker, senior economic research analyst, all in the Atlanta Fed’s research department
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April 16, 2013
Improvement in the Outlook? The BIE Panel Thinks So
Earlier this month, Dennis Lockhart, the Atlanta Fed’s top guy, gave his assessment of the economy and monetary policy to the Kiwanis Club of Birmingham, Alabama. Here’s the essential takeaway:
There are encouraging developments in the economy, to be sure, but the evidence of sustainable momentum that will deliver “substantial improvement in the outlook for the labor market” is not yet conclusive. ... How will I, as one policymaker, determine that the balance has shifted and the time for a policy change has come? Well, one key consideration is the array of risks to the economic outlook and my degree of confidence in the outlook.
To help the boss assess the risks to the outlook, we reached out to our Business Inflation Expectations (BIE) panel to get a sense of how they view the outlook for their businesses and, notably, how they assess the risks to that outlook. Specifically, we asked:
Projecting ahead, to the best of your ability, please assign a percent likelihood to the following changes to UNIT SALES LEVELS over the next 12 months.
The table below summarizes the answers and compares them to the responses we got to this statement last November.
First, the business outlook of our panel has improved decidedly since last November. On average, our panel sees unit sales growth averaging 1.8 percent. OK, not a spectacular number, but, to our eyes at least, much improved from the 1.2 percent the group was expecting when we queried five months ago.
And how about the assessment of the risks President Lockhart indicated was also a key consideration? Here again, the sentiment in our panel appears to have shifted favorably. Last November, our panel put the likelihood that their year-ahead unit sales growth would be 1 percent or less at 50 percent. The group now puts the chances of a downshift in business activity at 37 percent. Meanwhile, the upside potential for their sales has grown. Last November, the panel put the chances of a “significant” improvement in unit sales at about 20 percent; this month, the group thinks the likelihood is 30 percent.
And this improved sentiment isn’t centered in just a few industries—it’s spread across a wide swath of the economy. Firms in construction and real estate, which were, on average, projecting 12-month unit sales growth of 1.1 percent last November, now put that growth number at 1.8 percent. The average sales outlook of general-services firms has risen from 1 percent to 2.2 percent; finance and insurance companies went from 0.5 percent to 1.3 percent; and retailers/wholesalers’ unit sales projections rose from 1.5 percent to 2 percent. And manufacturers, who posted relatively strong expectations last November, reported about the same sales outlook this month as they did five months ago.
To be clear, President Lockhart’s recent comments—and the Federal Open Market Committee statement on which they are based—indicate he is looking for a substantial improvement in the outlook for the labor market, not sales. But we’re going to assume that it’s unlikely to have one without the having the other. And is our panel’s unit sales forecast “substantially” improved? Well, what constitutes “substantial” is in the eye of the beholder, but if this isn’t a substantial improvement in the outlook, it’s certainly a move in that direction.
By Mike Bryan, vice president and senior economist, and
Nick Parker, economic research analyst, both in the Atlanta Fed’s research department
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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:
- down (less than –1 percent)
- about unchanged (–1 percent to 1 percent)
- up somewhat (1.1 percent to 3 percent)
- up significantly (3.1 percent to 5 percent)
- 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.
By Mike Bryan, vice president and senior economist,
Laurel Graefe, economic policy analysis specialist, and
Nicholas Parker, economic research analyst, all with the Atlanta Fed
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