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June 23, 2015
Approaching the Promised Land? Yes and No
Last Friday, we released our June installment of the Business Inflation Expectations (BIE) survey. Among the questions we put to our panel of businesses was a quarterly question on slack, asking firms to consider how their current sales levels compare to what they would consider normal.
The good news is, on average, the gap between firms' current unit sales levels and what they would consider normal sales levels continues to close (see the chart).
By our measure, firm sales, in the aggregate, are 1.9 percentage points below normal, a bit better than when we polled them in March (when they were 2.1 percent below normal) and much improved from this time last year (3.7 percent below normal). For comparison, the Congressional Budget Office's (CBO) estimate of slack on a real gross domestic product (GDP) basis was 2.6 percent in the first quarter (though this estimate will almost certainly be revised to something closer to 2.4 percent when the revised GDP estimates are reported later today). And if GDP growth this quarter comes in around 2.5 percent as economists generally expect, the CBO's GDP-based slack estimate will be 2.2 percent this quarter, just a shade larger than what our June survey data are saying.
Now, as we have emphasized frequently (for example, in macroblog posts in May 2015, February 2015, and June 2013), performance in the aggregate and performance within select firm groups can differ widely. For example, while small firms continue to have greater slack than larger firms, their pace of improvement has been much more rapid (see the table).
Likewise, some industries (such as transportation and finance) see current sales as better than normal. But others, like manufacturers, are currently reporting considerable slack—and findings from this group appear to show a marginal worsening in sales levels over the past 12 months.
Another item that caught our attention this month was the differing pace of narrowing in the sales gap among those firms with significant export exposure (greater than 20 percent of sales) relative to those with no direct export exposure. We connected these dots using responses to this month's special question, in which responding firms specified their share of customers by geographic area: local, regional (the Southeast, in our case), national, and international (see the table).
So things are still getting better for the economy overall, and the small firms in our panel have displayed particularly rapid improvement during the last year. But if you've got exposure to the "soft" export markets, as mentioned in the June 17 FOMC statement, you've likely experienced a slower pace of improvement.
June 19, 2015
Will the Elevated Share of Part-Time Workers Last?
There seems to be mounting evidence that at least part of the elevated share of part-time employment in the economy is here to stay. We have some insights to offer based on a recent survey of our business contacts.
Why are we interested? A higher part-time share of employment isn't necessarily a bad thing, if people are doing so voluntarily. Unfortunately, the elevated share is concentrated among people who would prefer to be working full-time. Using the average rate of decline over the past five years, the part-time for economic reasons (PTER) share of employment is projected to reach its prerecession average in about 10 years.
This is significantly slower than the decline in the unemployment rate, whose trajectory suggests a much sooner arrival—in around a year. The deviation raises an important policy question for measuring the amount of slack there is beyond what the unemployment rate suggests, and ultimately the extent to which policy can effectively reduce it.
What are the drivers? Data versus anecdotes
Researchers (here, here, and here) have pointed to factors such as industry shifts in the economy, changing workforce demographics, rising health care costs, and the Affordable Care Act as potentially important drivers of this shift. But we can glean only so much information from data. When a gap develops, we generally turn to our business contacts who are participating members in our Regional Economic Information Network (REIN) to fill in the missing information.
According to our contacts, the relative cost of full-time employees remains the most important reason for having a higher share of part-time employees than before the recession, which is the same response we received in last summer's survey on the same topic. Lack of strong enough sales growth to justify conversion of part-time to full-time workers came in as a close second.
The importance rating for each of the factors was notably similar to last year's survey, with one exception. Technology was rated as somewhat important, reflecting an uptick from the average response we received last year. We've certainly heard anecdotally that scheduling software has enabled firms to better manage their part-time staff, and it seems that this factor has gained in importance over the past year.
The chart below summarizes the reasons our business contacts gave in the July 2014 and the May 2015 surveys. The question was asked only of those who currently have a higher share of part-time workers than they did before the recession. The chart shows the results for all respondents, whether they responded to one or both surveys. When we limited our analysis to only those who responded to both surveys, the results were the same.
Will the elevated share persist?
The results suggest that a return to prerecession levels is unlikely to occur in the near term.
The chart below shows employers' predictions for part-time employment at their firms, relative to before the recession. About 27 percent of respondents believe that in two years, their firms will be more reliant on part-time work compared to before the recession. About 7 percent do not currently have an elevated share of part-time employees but believe they will in two years. About two-thirds believe their share of part-time will be roughly the same as before, while only 8 percent believe they will have less reliance on part-time workers compared to before the recession.
The majority of our contacts believe their share of part-time employment will normalize over the next two years, but some believe it will stay elevated. Still, 2017 does not mean the shift will be permanent. In fact, firms cited a balance of cyclical and structural factors for the higher reliance on part-time. Low sales growth and an ample supply of workers willing to take part-time jobs could both be viewed as cyclical factors that will dissipate as the economy further improves.
Meanwhile, higher compensation costs of full-time relative to part-time employees and the role of technology that enables companies to more easily manage their workforce can be considered structural factors influencing the behavior of firms. Firms that currently have a higher share of part-time employees gave about equal weight to these forces, suggesting that, as other research has found, both cyclical and structural factors are important explanations for the slow decline in the part-time share of employment.
May 18, 2015
Sales Flexing Muscle at More Firms
The news in this month's Business Inflation Expectations (BIE) report is that, in the aggregate, firms' unit sales levels continue to strengthen: Specifically, the survey question measures firms' perceptions of current unit sales levels relative to "normal times."
This month, 70 percent of firms indicated their sales levels are at or above what they consider normal. Last November, that share was 61 percent, and one year ago, it was only 54 percent. We typically report the aggregate results in a diffusion index (see the chart), which also shows the overall progression toward "normal times" (a value of 0).
But, typical of aggregate statistics, these results obscure the diversity of experience among sectors. Digging deeper, we found that most (but not all) of the sectors represented in our panel have shown further improvement in their sales performance relative to last November (see the chart).
Retailers and those in the real estate and rental leasing/construction sectors reported the most significant improvement since November, with retailers approaching what they consider normal sales levels. This news is likely to be most welcome to Dennis Lockhart, our boss here in Atlanta, who has put the performance of the consumer on his "must watch" list. Two industries—finance and insurance, and transportation and warehousing—reported above-normal sales levels in our recent survey.
Only the manufacturers in our panel indicated that their sales performance has deteriorated since November, and they are now reporting sales well below normal. Of course, this news shouldn't be terribly surprising given the recent softness in the manufacturing indexes from both the Institute for Supply Management and industrial production data. This information was also on the boss's watch list, as he made clear in his speech:
Well, judging from our May BIE report, manufacturers aren't seeing improvement quite yet.
The stronger dollar was likely reflected in a drag on net exports...[and] looking ahead, I expect net exports to be a modest drag on economic activity over much of the year.... It should be noted, however, that in recent weeks the dollar has stabilized and oil prices have begun to move up a little. These developments, if they stick, could dilute somewhat what would otherwise be drags on the economy in the near term. We shall see.
June 26, 2014
Torturing CPI Data until They Confess: Observations on Alternative Measures of Inflation (Part 3)
On May 30, the Federal Reserve Bank of Cleveland generously allowed me some time to speak at their conference on Inflation, Monetary Policy, and the Public. The purpose of my remarks was to describe the motivations and methods behind some of the alternative measures of the inflation experience that my coauthors and I have produced in support of monetary policy.
This is the last of three posts on that talk. The first post reviewed alternative inflation measures; the second looked at ways to work with the Consumer Price Index to get a clear view of inflation. The full text of the speech is available on the Atlanta Fed's events web page.
The challenge of communicating price stability
Let me close this blog series with a few observations on the criticism that measures of core inflation, and specifically the CPI excluding food and energy, disconnect the Federal Reserve from households and businesses "who know price changes when they see them." After all, don't the members of the Federal Open Market Committee (FOMC) eat food and use gas in their cars? Of course they do, and if it is the cost of living the central bank intends to control, the prices of these goods should necessarily be part of the conversation, notwithstanding their observed volatility.
In fact, in the popularly reported all-items CPI, the Bureau of Labor Statistics has already removed about 40 percent of the monthly volatility in the cost-of-living measure through its seasonal adjustment procedures. I think communicating in terms of a seasonally adjusted price index makes a lot of sense, even if nobody actually buys things at seasonally adjusted prices.
Referencing alternative measures of inflation presents some communications challenges for the central bank to be sure. It certainly would be easier if progress toward either of the Federal Reserve's mandates could be described in terms of a single, easily understood statistic. But I don't think this is feasible for price stability, or for full employment.
And with regard to our price stability mandate, I suspect the problem of public communication runs deeper than the particular statistics we cite. In 1996, Robert Shiller polled people—real people, not economists—about their perceptions of inflation. What he found was a stark difference between how economists think about the word "inflation" and how folks outside a relatively small band of academics and policymakers define inflation. Consider this question:
And here is how people responded:
Seventy-seven percent of the households in Shiller's poll picked number 2—"Inflation hurts my real buying power"—as their biggest gripe about inflation. This is a cost-of-living description. It isn't the same concept that most economists are thinking about when they consider inflation. Only 12 percent of the economists Shiller polled indicated that inflation hurt real buying power.
I wonder if, in the minds of most people, the Federal Reserve's price-stability mandate is heard as a promise to prevent things from becoming more expensive, and especially the staples of life like, well, food and gasoline. This is not what the central bank is promising to do.
What is the Federal Reserve promising to do? To the best of my knowledge, the first "workable" definition of price stability by the Federal Reserve was Paul Volcker's 1983 description that it was a condition where "decision-making should be able to proceed on the basis that 'real' and 'nominal' values are substantially the same over the planning horizon—and that planning horizons should be suitably long."
Thirty years later, the Fed gave price stability a more explicit definition when it laid down a numerical target. The FOMC describes that target thusly:
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.
Whether one goes back to the qualitative description of Volcker or the quantitative description in the FOMC's recent statement of principles, the thrust of the price-stability objective is broadly the same. The central bank is intent on managing the persistent, nominal trend in the price level that is determined by monetary policy. It is not intent on managing the short-run, real fluctuations that reflect changes in the cost of living.
Effectively achieving price stability in the sense of the FOMC's declaration requires that the central bank hears what it needs to from the public, and that the public in turn hears what they need to know from the central bank. And this isn't likely unless the central bank and the public engage in a dialog in a language that both can understand.
Prices are volatile, and the cost of living the public experiences ought to reflect that. But what the central bank can control over time—inflation—is obscured within these fluctuations. What my colleagues and I have attempted to do is to rearrange the price data at our disposal, and so reveal a richer perspective on the inflation experience.
We are trying to take the torture out of the inflation discussion by accurately measuring the things that the Fed needs to worry about and by seeking greater clarity in our communications about what those things mean and where we are headed. Hard conversations indeed, but necessary ones.
By Mike Bryan, vice president and senior economist in the Atlanta Fed's research department
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