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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
June 28, 2012
Young versus mature small firms seeking credit
The ongoing tug of war between credit supply and demand issues facing small businesses is captured in this piece in the American Prospect by Merrill Goozner. Goozner asks whether small businesses are facing a tougher borrowing environment than is warranted by current economic conditions. One of the potential factors identified in the article is the relative decline in the number of community banks—down some 1,124 (or 13 percent of all banks from 2007). Community banks have traditionally been viewed as an important source of local financing for businesses and are often thought to be better able to serve the needs of small businesses than large national banks because of their more intimate knowledge of the business and the local community.
The Atlanta Fed's poll of small business can shed some light on this issue. In April we reached out to small businesses across the Sixth Federal Reserve District to ask about financing applications, how satisfied firms were that their financing needs were being met, and general business conditions. About one third of the 419 survey participants applied for credit in the first quarter of 2012, submitting between two and three applications for credit on average. As we've seen in past surveys (the last survey was in October 2011), the most common place to apply for credit was at a bank.
For the April 2012 survey, the table below shows the average success of firms applying to various financing sources (on a scale of 1 to 4, with 1 meaning none of the amount requested in the application was obtained, and 4 meaning that the firm received the full amount applied for). The table also shows the median age of businesses applying for each type of financing.
The results in the table show that for credit applications, Small Business Administration loan requests and applications for loans/lines of credit from large national banks tended to be the least successful, whereas applications for vendor trade credit and commercial loans/line-of-credit from community banks had the highest average success rating.
Notably, firms applying for credit at large national banks were typically much younger than firms applying at regional or community banks. If younger firms generally have more difficulty in getting credit regardless of where they apply, it could explain why we saw less success, on average, among firms applying at larger banks.
To investigate this issue, we compared the average application success among young firms (less than six years old) that applied at both regional or community banks and at large national banks, pooling the responses from the last few years of our survey. The credit quality of borrowers is controlled for by looking only at firms that applied at both types of institutions. What we found was no significant difference in the average borrowing success of young firms applying for credit across bank type—it just does seem to be tougher to get your credit needs met at a bank if you're running a young business. Interestingly, we also found that more mature firms were significantly more successful when applying at regional or community banks than at large national banks—it seems to be relatively easier for an established small business to obtain requested credit from a small bank.
While this analysis did not control for other factors that could also affect the likelihood of borrowing success, the results do suggest that Goozner's question about the impact of declining community bank numbers on small business lending is relevant. If small businesses are generally more successful when seeking credit from a small bank, will an ongoing reduction in the number of community banks substantially affect the ability of (mature) small businesses to get credit? More detailed insights from the April 2012 Small Business Credit Survey will be available soon on our Small Business Focus website, and we will provide an update when they are posted.
Ellyn Terry, senior economic research analyst, both of the Atlanta Fed's research department
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August 26, 2011
Lots of ground to cover: An update
If you have to discuss a difficult circumstance, I guess Jackson Hole, Wyo., is as nice as place as any to do so. This morning, as most folks know by now, Federal Reserve Chairman Bernanke reiterated the reason that most Federal Open Market Committee (FOMC) members support the expectation that policy rates will remain low for the next couple of years:
"In light of its current outlook, the Committee recently decided to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, in the statement following our meeting earlier this month, we indicated that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years."
There are two pieces of information that emphasize the economy's recent weakness and potential slow growth going forward. The first is this week's revised forecasts and potential for gross domestic product (GDP) from the Congressional Budget Office (CBO), and the second is today's revision of second quarter GDP from the U.S. Bureau of Economic Analysis (BEA). Though estimates of potential GDP have not greatly changed, the CBO's downgrade in forecasts and BEA's report of much lower than potential growth in the second quarter have the current and prospective rates of resource utilization lower than when macroblog covered the issue just about a month ago.
Key to the CBO's estimates is a reasonably good outlook for GDP growth after we get past 2012:
"For the 2013–2016 period, CBO projects that real GDP will grow by an average of 3.6 percent a year, considerably faster than potential output. That growth will bring the economy to a high rate of resource use (that is, completely close the gap between the economy's actual and potential output) by 2017."
The margin for slippage, though, is not great. Assuming that GDP ends 2011 having grown by about 2.3 percent—as projected by the CBO—here's a look at gaps between actual and potential GDP for different, seemingly plausible growth rates:
Attaining 3.5 percent growth by next year moves the CBO's date for closing the output gap up by about a year. On the other hand, a fall in output growth to an average of 3 percent per year moves the date for eliminating resource slack back to 2020. If growth remains below that—well, let's hope it doesn't.
By Dave Altig, senior vice president and research director at the Atlanta Fed
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August 15, 2011
The GDP revisions: What changed?
Prior to the U.S. Bureau of Economic Analysis's (BEA) benchmark gross domestic product (GDP) revisions announced three Fridays ago, we were devoting a fair amount of space—here, in particular—to picking apart some of the patterns in the data over the course of the recovery. Ahh, the best-laid plans. As noted in a speech today from Atlanta Fed President Dennis Lockhart:
"It's been an eventful two weeks, to say the least. Let's now look ahead. The $64,000 question is what's the outlook from here?...
"Whether we're seeing a temporary soft patch in an otherwise gradually improving growth picture or a deeper and more persistent slowdown, most of the arriving economic data lately have caused forecasters to write down their projections. Also, and importantly, the Bureau of Economic Analysis in the Department of Commerce has revised earlier economic growth numbers. These revisions paint a different picture of the depth of the recession and the relative strength of the recovery."
Beyond keeping the record straight, revisiting the charts from our previous posts in light of the new GDP data is a key input into answering President Lockhart's $64,000 question. Here, then, is that story, at least in part.
1. Even ignoring the depth of the recession, the first two years of this recovery have been slow relative to the early phases of the past two recoveries.
I wasn't so sure this was the case to be made prior to the new statistics from the BEA, but the revisions made clear that, while still broadly similar to the slower growth pattern of the prior two recoveries, the GDP performance has been pretty easily the slowest of all.
2. Consumption growth has been especially weak in this recovery, and the pattern of consumer spending has been more concentrated in consumer durables than has been the case in prior business cycles.
The consumer spending piece of this puzzle has President Lockhart's attention:
"I'm most concerned about the effect of the wild stock market on consumer spending. Volatility alone could have a negative impact on consumer psychology at a time of already weakening spending. Last Friday, it was reported that the University of Michigan's Survey of Consumer Sentiment fell sharply in early August to its lowest level in more than 30 years. Furthermore, if the loss of stock market value persists, the effect from the loss of investment value could combine with the loss of value in home prices to discourage consumers more and longer."
On the bright side, the GDP revisions did not of themselves alter the household spending picture. Though the benchmark revisions contained significant changes in consumer spending, those changes were concentrated during the recession in 2008 and 2009. Personal consumption expenditures were actually revised upward from 2009 on, with the big negative changes coming in net exports and government spending:
Are there other rays of hope? I might add this:
3. The revisions show that the momentum that seemed to fade through 2010 was more apparent in total GDP than in final demand. In other words, the basic storyline—a good start to 2010 with a soft patch in the middle and a stronger finish—still emerges if you look through changes in inventories.
That observation does not, of course, help salve the pain of the very anemic first half of this year. Nonetheless (from Lockhart, again):
"At the Atlanta Fed, we have revised down our near and intermediate gross domestic product (GDP) growth forecast, but we are holding to the view that the economy will continue to grow at a very modest pace. In other words, we do not expect the onset of outright contraction—a recession—but I have to say the risk of recession is higher than we perceived a month or two ago...
"The rapid-fire developments of the last several days, along with some troubling data releases, have shaken confidence. People are worried. Investors, Main Street businessmen and women, and consumers are wondering which way things will tip. The public—and for that matter, policymakers—are operating in a fog of uncertainty that is thicker than normal."
That fog of uncertainty was made thicker by the GDP revisions, and thicker yet by the volatility that followed. But I would still pass along this advice from President Lockhart:
"At this juncture, we should not jump to conclusions. A clearer picture of economic reality will be revealed in time as immediate uncertainties dissipate. It's premature, in my view, to declare these important questions relating to our economic future settled."
By Dave Altig, senior vice president and research director at the Atlanta Fed
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July 28, 2011
Lots of ground to cover
In my last post I noted that the pace of the recovery, now two years old, is in broad terms similar to that of the first two years of the previous two recoveries. The set-up included this observation:
"Though we have grown used to thinking of the rebound from the most recent recession as being spectacularly substandard, that impression (which I share) is driven more by the depth of the downturn than the actual speed of the recovery."
The context of the depth of the downturn is not, of course, irrelevant. One way of quantifying that context is to look at measures of the "output gap," that is, the difference between the level of real gross domestic product (GDP) and the economy's "potential." An informal way to think about whether or not a recovery is complete is to mark the time when the output gap returns to zero, or when the level of GDP returns to its potential.
There are several ways to estimate potential GDP, but for my money the one constructed by the Congressional Budget Office (CBO) is as good as any. And it does not tell a pretty story:
It is worth noting that the CBO's measure is not a just a simple extrapolation of a constant trend, but a calculation based on historical relationships among labor hours, productivity growth, unemployment, and inflation. Their trend in potential GDP growth rates implied by this methodology, described here, is anything but linear:
Note that the output gaps in the first chart are at historical lows (by a lot) despite the fact that potential GDP growth is at historical lows as well.
These estimates provide one way to assess the pace of the recovery. For example, the midpoints of the Federal Open Market Committee's (FOMC) most recent consensus forecasts for GDP growth are 2.8 percent (2011), 3.5 percent (2012), and 3.85 percent (2013). If those forecasts come to pass, approximately 60 percent of the CBO-implied gap will be closed. This would still leave, in real terms, more resource slack than existed at the lowest point in the past two recessions.
Put another way, if the economy grows at 4 percent from 2012 forward, the output gap won't be closed until sometime in 2015. At a growth rate of 3.5 percent—the lower end of FOMC participants' projections for the next two years—the "full recovery" date gets pushed back to 2016. If, however, the FOMC projections are too optimistic and the economy can only manage to grow at an annual pace of 3 percent (which is currently the consensus view of private forecasters for 2012) output gaps persist until 2020.
The conventional view of the macroeconomy that motivates the CBO estimates of potential GDP (and hence output gaps) at least implicitly embeds the assumption that time heals all wound. But the healing won't necessarily be fast.
By Dave Altig, senior vice president and research director at the Atlanta Fed
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July 20, 2011
Is consumer spending the problem?
In answer to the question posed in the title to this post, The New York Times's David Leonhardt says absolutely:
"There is no shortage of explanations for the economy's maddening inability to leave behind the Great Recession and start adding large numbers of jobs…
"But the real culprit—or at least the main one—has been hiding in plain sight. We are living through a tremendous bust. It isn't simply a housing bust. It's a fizzling of the great consumer bubble that was decades in the making…
"If you're looking for one overarching explanation for the still-terrible job market, it is this great consumer bust."
Tempting story, but is the explanation for "the still-terrible job market" that simple?
First, some perspective on the pace of the current recovery. Though we have grown used to thinking of the rebound from the most recent recession as being spectacularly substandard, that impression (which I share) is driven more by the depth of the downturn than the actual speed of the recovery. The following chart traces the path of real gross domestic product (GDP) from the trough of the last three recessions:
In the first two years following the 1990–91 and 2001 recessions, output grew by about 6 percent. Assuming that GDP grew at annual rate of 1.5 percent in the second quarter just ended—a not-unreasonable guess at this point—the economy will have expanded by about 5.3 percent since the end of the last recession in July 2009. That's not a difference that jumps off the page at me.
Directly to the point of consumption spending, it is certainly true that consumer spending has expanded at a slower pace in the expansion to this point than was the case at the same point in the recoveries following the previous two recessions. From the end of the recession in the second quarter of 2009 through the first quarter of this year (we won't have the first official look at this year's second quarter until next week), personal consumption expenditures grew in real terms by just under 4 percent. That growth compares to 4.8 percent in the first seven quarters following the end of the 2001 recession and 5.9 percent in the first seven quarters following the end of the 1990–91 recession.
That difference in the growth of consumption across the early quarters of recovery after the 1990–91 and 2001 recessions with little discernible difference in GDP growth across those episodes illustrates the pitfalls of mechanically focusing on specific categories of spending. In fact, the relatively slower pace of consumer spending in this expansion has in part been compensated by a relatively high pace of business spending on equipment and software:
If you throw consumer durables into the general notion of "investment" (investment in this case for home production) the story of this recovery is the relative boom in capital spending compared to recent recoveries:
And what about that "still-terrible job market"? You won't get much argument from me about that description, but here again the reality is complicated. Focusing once more on the period since the end of the recession, the pace of job creation is not out of sync in comparison to recent expansions (though job creation after the last two recessions was meager as well, and we are, of course, starting from a much bigger hole in terms of jobs lost):
So, relative to recent experience, at this point in the recovery GDP growth and employment growth are about average (if we ignore the size of the recession in both measures). The undeniable (and relevant) human toll aside, the current recovery seems so disappointing because we expect the pace of the recovery to bear some relationship to the depth of the downturn. That expectation, in turn, comes from a view of the world in which potential output proceeds in a more or less linear fashion, up and to the right. But what if that view is wrong and our potential is a sequence of more or less permanent "jumps" up and down, some of which are small and some of which are big?
In addition, investment growth to date has been strong relative to recent recoveries and, as Leonhardt suggests, consumption growth has been somewhat weak. So here's a question: Would we have had more job creation and stronger GDP growth had businesses been more inclined to add workers instead of capital? And if that had occurred, might the consumption numbers have been considerably stronger?
By Dave Altig, senior vice president and research director at the Atlanta Fed
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May 28, 2010
How "discouraged" are small businesses? Insights from an Atlanta Fed small business lending survey
Roughly half of U.S. workers are employed at firms with fewer than 500 employees, and about 90 percent of U.S. firms have fewer than 20 employees. While estimates vary, small businesses are also credited with creating the lion's share of net new jobs. Small businesses are, in total, a big deal. Thus, it is no surprise that there is congressional debate going on about how to best aid small businesses and promote job growth. Many people have noted the decline in small business lending during the recession, and some have suggested proposals to give incentives to banks to increase their small business portfolios. But is a lack of willingness to lend to small businesses really what's behind the decline in small business lending? Or is it the lack of creditworthy demand resulting from the effects of the recession and housing market distress?
Economists often face such identification dilemmas, situations in which we would like to know whether supply or demand is the driving factor behind changes within a market. Additional data can often help solve the problem. In this case we might want to know about all of the loans applied for by small businesses, whether the loans were granted and at what rates, and specific information on loan quality and collateral. Alas, such data are not available. In fact, the Congressional Oversight Panel in a recent report recommends that the U.S. Treasury and other regulators "establish a rigorous data collection system or survey that examines small business finance" and notes that "the lack of timely and consistent data has significantly hampered efforts to approach and address the crisis."
We at the Federal Reserve Bank of Atlanta have also noted the paucity of data in this area and have begun a series of small business credit surveys. Leveraging the contacts in our Regional Economic Information Network (REIN), we polled 311 small businesses in the states of the Sixth District (Alabama, Florida, Georgia, Louisiana, Mississippi and Tennessee) on their credit experiences and future plans. While the survey is not a stratified random sample and so should not be viewed as a statistical representation of small business firms in the Sixth District, we believe the results are informative.
Indeed, the results of our April 2010 survey suggest that demand-side factors may be the driving force behind lower levels of small business credit. To be sure, when asked about the recent obstacles to accessing credit, some firms (34 firms, or 11 percent of our sample) cited banks' unwillingness to lend, but many more firms cited factors that may reflect low credit quality on the part of prospective borrowers. For example, 32 percent of firms cited a decline in sales over the past two years as an obstacle, 19 percent cited a high level of outstanding business or personal debt, 10 percent cited a less than stellar credit score, and 112 firms (32 percent) report no recent obstacles to credit. Perhaps not surprisingly, outside of the troubled construction and real estate industries, close to half the firms polled (46 percent) do not believe there are any obstacles while only 9 percent report unwillingness on the part of banks.
These opinions are reinforced by responses detailing the firms' decisions to seek or not seek credit and the outcomes of submitted credit applications.
Of the 191 firms that did not seek credit in the past three months, 131 (69 percent) report that they either had sufficient cash on hand, did not have the sales/revenues to warrant additional debt, or did not need credit. (Note the percentages in the chart above reflect multiple responses by firms.) These responses likely reflect both the impact of the recession on the revenues of small firms as well as precautionary/prudent cash management.
The administration has recently sent draft legislation to Congress for a supply-side program—the Small Business Lending Fund (SBLF)—to address the funding needs of small businesses. The congressional oversight report raises a good question about the potential effectiveness of supply-side programs:
"A small business loan is, at its heart, a contract between two parties: a bank that is willing and able to lend, and a business that is creditworthy and in need of a loan. Due to the recession, relatively few small businesses now fit that description. To the extent that contraction in small business lending reflects a shortfall of demand rather than of supply, any supply-side solution will fail to gain traction."
That said, one way that a supply-side program like SBLF would make sense, even if low demand is the force driving lower lending rates, is if there are high-quality borrowers that are not applying for credit merely because they anticipate that they will be denied. We could term these firms "discouraged borrowers," to co-opt a term from labor markets (i.e., discouraged workers).
If a program increased the perceived probability of approval, either by increasing approval rates via a subsidization of small business lending or merely by changing borrower beliefs, more high-quality, productive loans would be made.
Just how many discouraged borrowers are out there? The chart above illustrates that, indeed, 16 percent of all of our responding firms and 21 percent of construction and real estate firms might fall into this category. I add "might" because the anticipation of a denial may well be accurate but based on a lack of creditworthiness and not the irrational or inefficient behavior of banks. Digging into our results, we find that 35 percent of the firms who did not seek credit because of the anticipation of a denial also cited "not enough sales," indicating that a denial would likely have reflected underlying loan quality.
In the labor market, so-called "discouraged workers" flow back into the labor force when they perceive that the probability of finding an acceptable job has increased enough to make searching for work, and working, attractive again. We should expect so-called "discouraged borrowers" to do the same. That's because if they don't, the likely alternatives for them, at some point, would be to sell the business or go out of business. It seems unlikely that, facing such alternatives, a "discouraged" firm would not attempt to access credit. The responses of firms in our sample are consistent with this logic; 55 percent of those who did not seek credit in the past three months because of the anticipation of a denial indicated that they plan to seek credit in the next six months.
Our results also provide some interesting data on an assumption underlying the policy debate: that those small businesses are credit constrained. Of the 117 firms in the survey that that sought credit during the previous three months, the following chart illustrates the extent to which these firms met their financing needs.
Based on firm reports of the credit channel applications submitted in the previous three months, we created a financing index value for each firm. Firms that were denied on all of their credit applications have a financing index equal to 1, while firms that received all of the funding requested have an index level of 5. Index levels between 1 and 5 indicate, from lesser to greater, the extent to which their applications were successful. In the chart we plot data on the financing index levels of all firms in our sample and then split according to whether the firm is in construction and real estate. Among construction and real estate firms, 50 percent of firms had an index below 2.5, suggesting most did not get their financing requests meet. In contrast, the median index value of 4.7 for all other firms suggests that most of these firm were able to obtain all or most of the credit they requested. This difference between real estate–related firms and others is really not surprising given that the housing sector was at the heart of the financial crisis and recession. But it does suggest that more work needs to be done to analyze the industry-specific funding constraints among small businesses.
By Paula Tkac, assistant vice president and senior economist, of the Atlanta Fed
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April 29, 2010
Consumer credit: More than meets the eye
A lot has been made (here, for a recent example) of the idea that banks have shown a surprising amount of reluctance to extend credit and to start making loans again. Indeed, the Fed's consumer credit report, which shows the aggregate amount of credit extended to individuals (excluding loans secured by real estate), has been on a steady downward trend since the fall of 2008.
Importantly, that report also provides a breakdown that shows how much credit the different types of institutions hold on their books. Commercial banks, which are the single largest category, accounted for about a third of the total stock in consumer credit in 2009. The two other largest categories—finance companies and securitized assets—accounted for a combined 45 percent. While commercial banks have been the biggest source of credit, they have not been the biggest direct source of the decline.
The chart above highlights a somewhat divergent pattern among the big three credit holders. This pattern mainly indicates that credit from finance companies and securitized assets has been on a relatively steady decline since the fall of 2008 while credit from commercial banks has shown more of a leveling off. These details highlight a potential misconception that commercial banks are the primary driver behind the recent reduction in credit going to consumers (however, lending surveys certainly indicate that standards for credit have tightened).
To put a scale on these declines, the aggregate measure of consumer credit has declined by a total of 5.7 percent since its peak in December 2008 through February 2010. Over this same time period, credit from finance companies and securitizations declined by 16.2 percent and 12.4 percent, respectively, while commercial bank credit declined by 5.5 percent. Admittedly, securitization and off-balance sheet financing are a big part of banks' activity as they facilitate consumers' access to credit. The decline in securitized assets might not be that surprising given that the market started to freeze in 2007 and deteriorated further in 2008 as many investors fled the market. Including banks' securitized assets that are off the balance sheet would show a steeper decline in banks' holdings of consumer credit.
A significant factor in evaluating consumer credit is the pace of charge-offs, which can overstate the decline in underlying loan activity (charge-offs are loans that are not expected to be paid back and are removed from the books). Some (here and here) have made the point that the declines in credit card debt, for example, reflect increasing rates of charge-offs rather than consumers paying down their balances.
How much are charge-offs affecting the consumer credit data? Unfortunately, the Fed's consumer credit statistics don't include charge-offs. However, we can look at a different dataset that includes quarterly data on charge-offs for commercial banks to get an approximation. We can think of the change in consumer loan balances roughly as new loans minus loans repaid minus net loans charged off:
Change in Consumer Loans = [New Loans – Loan Repayments] – Net Charge-Offs
Adding net charge-offs to the change in consumer loans should give a cleaner estimate of underlying loan activity:
If the adjusted series is negative, loan repayments should be greater than new loans extended, which would lend support to the idea that loans are declining because consumers are paying down their debt balances. If the adjusted series is positive, new loans extended should be greater than loan repayments and adds support to the hypothesis that part of the decline in the as-reported loans data is from banks removing the debt from their books because of doubtful collection. Both the as-reported and adjusted consumer loan series are plotted here:
Notably, year-over-year growth in consumer loans adjusted for charge-offs has remained positive, which contrasts the negative growth in the as-reported series. That is, the net growth in new loans and loan repayments shows a positive (albeit slowing) growth rate once charge-offs are factored in. Over 2009, this estimate of charge-offs totaled about $27 billion while banks' average consumer loan balances declined by about $25 billion. Thus, a significant portion of the recent decline in consumer loan balances is the result of charge-offs.
Nevertheless, in an expanding economy, little or no credit growth implies a declining share of consumption financed through credit. Adjusting consumer loans for charge-offs suggests that the degree of consumer deleveraging across nonmortgage debt is somewhat less substantial than indicated by the headline numbers.
All in all, the consumer credit picture is a bit more complicated than it appears on the surface. A more detailed look suggests that banks haven't cut their consumer loan portfolios as drastically as sometimes assumed. The large run-up in charge-offs has also masked the underlying dynamics for loan creation and repayment. Factoring in charge-offs provides some evidence that a nontrivial part of consumer deleveraging is coming through charge-offs.
By Michael Hammill, economic policy analysis specialist in the Atlanta Fed's research department
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February 01, 2010
Southeast businesses offer insights on capital spending plans
With last week's capital orders data giving signals of renewed growth in business fixed investment in equipment and software in the fourth quarter, the question turns to whether this growth will be sustained. In early January 2010, the Federal Reserve Bank of Atlanta reached out to our contacts in the Southeast through our Regional Economic Information Network as part of our monetary policy information-gathering efforts to inquire about businesses' capital spending plans. We received responses from 320 businesses across Alabama, Florida, Georgia, Mississippi, Louisiana, and Tennessee. (I want to note we were helped significantly in this effort by colleagues at the Kennesaw State University Econometric Center, who conduct a monthly PMI survey of manufacturers in the Southeast.)
As with our recent small business finance survey (discussed in this macroblog post), readers should be cautious about the results because of the tendency, for example, to sample established, relatively successful firms. That said, we still believe the results are instructive. Of note, 36 percent of respondents indicated that they planned to increase spending over the next 6–12 months relative to actual spending over the past 6–12 months. Another 42 percent said they would leave their spending at about the same level (unchanged), and 22 percent indicated that their spending would fall. The difference between those planning to increase spending and those planning to decrease spending equals a net positive of 14 percent. Across industries, construction firms were the group least likely to increase spending, while retailers were the most optimistic group. Our manufacturing contacts and the "other industries" group of firms (firms across a myriad of industries such as transportation, healthcare, and business services) expressed intentions similar to the overall response (see the chart).
For those who planned to increase spending on new plant and equipment, the most commonly given reasons (respondents could select more than one reason) were that they expected growth in sales to be high (37 percent of those respondents), or they needed to replace information technology equipment (37 percent of those respondents). Also, 61 percent of those planning to increase spending indicated that at least some of that spending reflects investment that had been postponed because of the recession. Not surprisingly, for those who did not plan to increase spending, the most commonly cited reasons were the expectation of low growth in sales (cited by 47 percent of those respondents) and heightened economic uncertainty (cited by 39 percent of those respondents).
Interestingly, cost and availability of external financing were among the least frequently cited reasons for either increasing or not increasing capital spending (cited by 9 percent and 15 percent of respondents, respectively). This theme is consistent with the findings of our recent small business survey, as well as the trend in the National Federation of Independent Business (NFIB) survey of small businesses. According to the NFIB, "finance" was reported as the number one small business problem by only 4 percent of respondents in December 2009. The number one single factor was poor sales.
The NFIB survey also found that while plans to increase capital spending by small firms rose modestly in December 2009 to a net 18 percent, they remained near historic low levels—in December 2007, the net percentage stood at 29 percent and 17 percent in December 2008. This performance suggests that our finding of a net 14 percent of firms planning to increase rather than decrease spending on plant and equipment should not be read too encouragingly.
So where does that leave things? Probably with more questions than answers. For instance, the fact that about two-thirds of the firms that are planning on increasing spending are doing so because they had postponed capital expenditures during the recession would be consistent with some bounce in capital spending by businesses following the most recent recession. But how sensitive are firms to changes in economic conditions? Currently, we hear a lot anecdotally that cash is a high priority on firms' balance sheets as a precaution against economic uncertainty. If sales were to increase more than expected, how fast would firms rethink their investment spending plans? The answers to these types of questions are important, and we are consequently planning to conduct a follow-up survey in due course. As always, we'll keep you posted.
By John Robertson, vice president in the Atlanta Fed's research department
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November 24, 2009
Interest rates at center stage
In case you were just yesterday wondering if interest rates could get any lower, the answer was "yes":
"The Treasury sold $44 billion of two-year notes at a yield of 0.802 percent, the lowest on record, as demand for the safety of U.S. government securities surges going into year-end."
"Demand for safety" is not the most bullish sounding phrase, and it is not intended to be. It does, in fact, reflect an important but oft-neglected interest rate fundamental: Adjusting for inflation and risk, interest rates are low when times are tough. A bit more precisely, the levels of real interest rates are tied to the growth rate of the economy. When growth is slow, rates are low.
The intuition behind this point really is pretty simple. When the economy is struggling along—when consumer spending is muted and businesses' taste for acquiring investment goods is restrained—the demand for loans sags. All else equal, interest rates fall. In the current environment, of course, that "all else equal" bit is tricky, but the latest from the Federal Reserve's Senior Loan Officer Opinion Survey is informative:
"In the October survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households. However, the net percentages of banks that tightened standards and terms for most loan categories continued to decline from the peaks reached late last year."
Demand also appears to be quite weak:
This economic fundamental is, in my opinion, a good way to make sense of the FOMC's most recent statement:
"Demand for most major categories of loans at domestic banks reportedly continued to weaken, on balance, over the past three months."
"The Committee… continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
Not everyone is buying my story, of course, and there is a growing global chorus of folk who see a policy mistake at hand:
"Germany's new finance minister has echoed Chinese warnings about the growing threat of fresh global asset price bubbles, fuelled by low US interest rates and a weak dollar.
"Wolfgang Schäuble's comments highlight official concern in Europe that the risk of further financial market turbulence has been exacerbated by the exceptional steps taken by central banks and governments to combat the crisis.
"Last weekend, Liu Mingkang, China's banking regulator, criticised the US Federal Reserve for fuelling the 'dollar carry-trade', in which investors borrow dollars at ultra-low interest rates and invest in higher-yielding assets abroad."
The fact that there is a lot of available liquidity is undeniable—the quantity of bank reserves remain on the rise:
But the quantity of bank lending is decidedly not on the rise:
There are policy options at the central bank's disposal, including raising short-term interest rates, which in current circumstances implies raising the interest paid on bank reserves. That approach would solve the problem of… what? Banks taking excess reserves and converting them into loans? That process provides the channel through which monetary policy works, and it hardly seems to be the problem. In raising interest rates paid on reserves the Fed, in my view, would risk a further slowdown in loan credit expansion and a further weakening of the economy. I suppose this slowdown would ultimately manifest itself in further downward pressure on yields across the financial asset landscape, but is this really what people want to do at this point in time?
If you ask me, it's time to get "real," pun intended—that is to ask questions about the fundamental sources of persistent low inflation and risk-adjusted interest rates (a phrase for which you may as well substitute U.S. Treasury yields). To be sure, the causes behind low Treasury rates are complex, and no responsible monetary policymaker would avoid examining the role of central bank rate decisions. But the road is going to eventually wind around to the point where we are confronted with the very basic issue that remains unresolved: Why is the global demand for real physical investment apparently out of line with patterns of global saving?
By David Altig, senior vice president and research director at the Atlanta Fed
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