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Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

Authors for Policy Hub: Macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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March 22, 2021

Inflation Expectations Reflect Concerns over Supply Disruptions, Crimped Capacity

As the COVID-19 pandemic stretches into its second year, we've seen evidence of changes in how it, and attendant policy measures designed to support the economy, are affecting firms. Early in the pandemic, firms generally appeared more concerned with flagging demand and falling revenue than issues of having sufficient supplies (notwithstanding obvious acute issues at grocery storesOff-site link). Rather, at least through August 2020, firms saw the COVID-19 pandemic as disproportionately a concern of demand rather than supply Adobe PDF file format—so much so, in fact, that firms scaled back on wages, expected to lower near-term selling prices, and lowered their one-year-ahead inflation expectations to a series low (going back to 2011). These findings, based on our Business Inflation Expectations (BIE) survey, are consistent with other academic research based on quarterly earnings calls of public firmsOff-site link and research out of the Harvard Business SchoolOff-site link.

However, as the pandemic continued to unfold and as relief and support continued to flow into the economy via ongoing monetary and fiscal policy efforts, many firms have begun to indicate a shift in concerns—from flagging demand toward concerns about fulfilling demand. Although the recovery remains decidedly uneven across industries, strong shifts in consumer activity (toward durable goods purchasesOff-site link) amid crimped production due to COVID-19 restrictions appear to have disrupted supply chains, to the extent that shipping containers sit mired in ports amid "floating traffic jamsOff-site link." Along with these difficulties, firms continue to indicate issues with employee availabilityOff-site link, which hampers their operating capacity.

To investigate the breadth and intensity of these disruptions in supply chains and business operating capacity, we posed a few questions to our BIE panel during the first week of March. Specifically, we asked whether they'd recently experienced some form of supply chain disruption (anything from supplier delays to delays in shipping to their customers) as well as their experiences with crimped operating capacity (due to a variety of issues, ranging from employee availability to physical distancing issues). While we borrowed those two questions more or less directly from the U.S. Census Bureau's Small Business Pulse SurveyOff-site link, we also extended them by asking firms to gauge the intensity of these disruptions (on a scale ranging from "little to none" to "severe"). In addition, we posed these questions to medium-sized and larger firms in addition to those with fewer than 500 employees.

Chart 1 below shows the results. Regarding supply chain difficulties, we found that more than half of the firms in our panel felt some form of supplier delay, and the level of disruption is "moderate to severe" for 40 percent of them—a striking finding for a few reasons. First, our panel, like the nation, is disproportionately weighted toward service-providing firms (roughly 70 percent service firms to 30 percent goods producers). Second, just a few months ago (December 2020), firms ranked "supply chain concerns" as eighth out of their top 10 concerns for 2021. These results align with well-known diffusion indexes—the Institute for Supply Management Manufacturing and Business ServicesOff-site link surveys—that have shown that a greater share of firms are experiencing slower deliveries and lower inventories in recent months.

Chart 1 of 4: Intensity of Disruption to Supply Chains and Operating Capacity

In addition to issues receiving raw materials and intermediate goods from suppliers, a little more than one in three firms in the BIE panel also indicated that they themselves experienced delays in fulfillment, and the responses to the question on disruptions to operating capacity allow us some insight into the potential causes of these delays.

Here, a third of firms indicated that they were having difficulties with their employees' availability for work. Presumably, these issues stem from employees' concerns over contracting the virus, outbreaks causing production delays, or employees' inability to work due to familial issues such as childcare or the care of other dependents. One out of five respondents indicated that the intensity of disruption to operating capacity stemming from employee availability was moderate to severe. The same share of panel respondents—a fifth—indicated that a lack of adequate supplies and inputs on hand (likely due to supplier delays) caused a shortfall in production relative to capacity.

Comparing these responses to the Census Bureau's Small Business Pulse Survey, we find that the relative rankings of sources of disruption are quite similar—supplier delays far outweigh other supply chain disruptions, and the availability of employees for work are the most frequently cited sources of disrupted operations. Yet we find a greater incidence of disruption (even if we restrict our sample only to small firms). For example, 40 percent of firms surveyed by the Census Bureau indicated supplier delays, which slightly more than half of firms indicated to us. Such a discrepancy is unlike previous comparisons to other Census Bureau work (which match quite closely) and could be the result of a number of survey-specific factors. For instance, the types of respondents differ markedly—whereas the BIE elicits responses mainly from those in the C-suite and business owners, the census typically aims for someone in the accounting department. The number of response options also differs, and census respondents have seen these questions on disruption to supply chains and operating capacity numerous times over the pandemic.

Although disrupted supply chains and crimped operating capacity are significant enough to warrant attention on their own merits, another aspect of these issues deserves attention. Concurrent with widespread supply chain disruption and hobbled operating capacity, firms have ratcheted up both their perceptions of current inflation and their expectations for unit costs going forward (see chart 2).

When we survey firms' expectations around inflation, we prefer to gauge their views on the nominal aspects of the economy through the lens of their own-firm unit costs, as other Atlanta Fed researchAdobe PDF file format shows. After falling to the lowest levels on record during the depths of the pandemic, firms' perceptions of unit cost growth over the past year have risen sharply. Interestingly, these perceptions correlate tightly with movements in official aggregate price indexes, such as the gross domestic product price index (also called the GDP deflator) and the personal consumption expenditures price index.

Firms also appear to anticipate higher unit-cost growth in the year ahead. Since hitting a low in April 2020, firms' unit-cost (basically, inflation) expectations for the year ahead have surged to all all-time high just 11 months later. Not only does that kind of volatility speak to the dramatic and disparate impact COVID-19 has had on business activity, but it also suggests that the underlying drivers of these expectations have shifted markedly. (Incidentally, chart 2 shows that this measure of firms' inflation expectations moves in lockstep with professional forecasters' views.)

Chart 2 of 4: Firms' Views on Current and Expected Inflation

Indeed, in sharp contrast to their views early in the crisis, firms' one-year inflation expectations appear to have risen sharply alongside their views on supply chain and operating capacity disruption. Chart 3 shows a simple scatterplot between firms' one-year-ahead inflation expectations and a summary measure of the intensity of their disruption. To create this measure, we first assigned a score from 0 to 4 to each special question response based on whether they responded "None," "Little to none," "Mild," "Moderate," or "Severe." We then add their scores to obtain their disruption index. The mean disruption index value for firms in goods-producing industries is 9.3 and 6.6 for service-providing firms. And consistent with anecdotes and news stories, the disruption is highest in manufacturing industries (9.75) and trade and transportation industries (9.1).

Chart 3 visualizes the relationship between inflation expectations and the index of supply chain disruption. Although supply chain disruption isn't the only factor influencing year-ahead unit cost expectations, we can see that firms with the largest levels of disruption tend to be those that hold higher expectations for inflation in the year ahead.

Chart 3 of 4: Disruption and Inflation Expectations

For another perspective, chart 4 shows that the relationship between inflation expectations and disruption depends on whether the responding firm belongs in the goods-producing sector or the service-providing one. While both have strong positive relationships, it's interesting to note that the relationship is even stronger among firms in the goods-producing sector. While perhaps an unsurprising result, it is a reassuring one given that the most-cited reason for supply chain disruptions—supplier delays—is more likely to affect goods-producing firms.

Chart 04 of 04: Disruption and Inflation Expectations by Sector

Overall, when one contrasts the early portion of the pandemic with the more recent period, significantly more firms indicate that they are experiencing disruptions in their supply chain and operating capacity. More than 50 percent of our survey panelists indicated delayed deliveries from suppliers (and for most of those respondents, the disruption is moderate to severe). Combined with crimped operating capacity due largely to uncertain employee availability and lack of inputs, firms are beginning to view these disruptions as factors that are driving up their unit costs and leading to higher inflation expectations. We can connect the dots from firms' year-ahead inflation expectations to the intensity of these supply and production disruptions. Firms experiencing the most intense disruption tend to be those with the highest expectation of future inflation. This explanation tamps down the speculation that the potential inflationary impact of recent fiscal stimulus on demand is behind heightened year-ahead inflation expectations.

April 17, 2020

Businesses Are in Uncharted Waters

Inflation expectations in our April Business Inflation Expectations (BIE) survey fell to an all-time low (going back to October 2011) of 1.4 percent, plunging far below its next lowest level of 1.7 percent (most recently observed in February 2020). Perhaps unsurprisingly, firms have bigger worries on their minds. And our boss, President Raphael Bostic, agreed, noting on WednesdayOff-site link that "inflation at this point is not something I'm particularly worried about."

The drop in inflation expectations was not the only historical low that our survey results uncovered. Firms' assessments of current sales levels relative to what they consider "normal" levels fell precipitously. Recovering from the 2007–09 financial crisis and recession, this quantitative sales gap measure had slowly been moving toward zero (or "normal" sales levels) alongside solid gains in gross domestic product growth and previously strong job gains. However, that all changed in April. Our survey, which was in the field from April 6 to 10, showed an extraordinarily large decline in sales levels relative to normal—from 2.5 percent below normal in the first quarter to 32 percent below normal in April (see the charts). The decline in sales had an impact on firms of all sizes, but smaller firms reported a much larger hit to sales than did firms with more than 100 employees.

Our survey's special questions this month focused on the level of disruption the coronavirus outbreak was causing for southeastern firms. We asked participating firms to assess disruption to their business operations and sales activity, on a scale of "no disruption" to "severe disruption," and it's obvious that a majority of firms in our panel have experienced severe disruption to their sales activity (see chart 2). The table indicates how disrupted firms' operations and sales were. Among those firms experiencing severe disruption, current sales levels have been roughly halved relative to normal conditions. The results suggest that the disruption associated with the outbreak has not hit all firms equally. There is also some evidence of dispersion (reallocation) across firms, as a small share of firms that indicated they are experiencing low levels of disruption are seeing stronger-than-usual sales levels.

As firms continue to grapple with the unprecedented impact and uncertainty that the coronavirus outbreak has inflicted, we wanted to get a rough sense of how long they expect these unusual conditions to persist and how long they can weather the economic shutdown without seeking new sources of funding. The left-hand graph in chart 3 shows the cumulative distribution function (CDF) for how many months before business operations return to normal. The CDF on the right-hand side plots how long firms can continue to operate in the current environment without seeking additional funding to backstop operations.

The typical (median) response was an expectation that it will be about four more months for business operations to return to normal (though the tail is long, and about 10 percent thought a year or longer is in order). Perhaps the silver lining here is that the typical response was an expectation to be able to operate for another six months before needing to tap additional sources of funding. Assuming that much of the economic activity that has been shuttered begins to resume by the beginning of the fourth quarter and conditions do not deteriorate further, the "typical" firm in our panel should be able to continue to operate.

However, digging into the individual responses reveals some nuance in this relationship. The cross-sectional relationship between a business decision-maker's assessments of the length of time he or she can continue to operate without securing additional funding and the length of time before resuming normal activity carries a correlation coefficient of just 0.2. (This finding essentially means that survey respondents often had different notions of when they would be able to resume normal business operations and need to tap additional funding.) The typical firm expects to be able to resume normal operations about a week or so before they need to tap additional funding. And, perhaps more importantly, nearly 40 percent of firms in our sample expect they'll need to secure additional funding before their operations return to normal.

Finally, although inflation isn't the first thing on everyone's mind at the moment, we did ask firms about their price expectations (see chart 4). While roughly 60 percent expect to hold steady on prices over the next six months, roughly a quarter of the panel expect to lower prices, and just 15 percent expect to increase them. On average, firms expect to lower prices by 2.2 percent, and there appears to be a relationship between COVID-related disruption to sales activity and expected price declines.

Across many dimensions, the disruption caused by the current pandemic is without precedent. Many firms headquartered in the Southeast have indicated severely disrupted business operations and sales activity, disruptions that appear to have caused incredibly sharp declines in sales levels. The typical firm in the panel expects this disruption to persist at least through the summer months (which may foreshadow the likely shape of the recoveryOff-site link). And—though not a primary concern at the moment—inflation expectations are the lowest we've recorded in more than 100 consecutive months of conducting this survey. In many ways, we appear to be in uncharted waters.

March 23, 2018

What Are Businesses Saying about Tax Reform Now?

In a recent macroblog post, we shared some results of a joint national survey that is an ongoing collaboration between the Atlanta Fed, Nick Bloom of Stanford University, and Steve Davis of the University of Chicago, and Jose Barrero of Stanford University. (By the way, we're planning on calling this work the "Survey of Business Executives," or SBE.).

In mid-November, we posed this question to our panel of firms:

If passed in its current form, how would the Tax Cuts and Jobs Act affect your capital expenditures in 2018?

At the time, we (and perhaps others) were a little surprised to find that roughly two-thirds of respondents indicated that tax reform hasn't enticed them into changing their investment plans for 2018. Our initial interpretation was that the lack of an investment response by firms made it unlikely that we'd see a sharp acceleration in output growth in 2018.

Another interpretation of those results might be that firms were unwilling to speculate on how they'd respond to legislation that was not yet set in stone. Now that the ink has been dry on the bill for a while, we decided to ask again.

In our February survey—which was in the field from February 12 through February 23—we asked firms, "How has the recently enacted Tax Cuts and Jobs Act (TCJA) led you to revise your plans for capital expenditures in 2018?" The results shown below—restricted to the 218 firms that responded in both November 2017 and February 2018—suggest that, if anything, these firms have revised down their expectations for this year:

You may be thinking that perhaps firms had already set their capital expenditure plans for 2018, so asking about changes in firms' 2018 plans isn't too revealing—which is why we asked them about their 2019 plans as well. The results (showing all 272 responses in February) are not statistically different from their 2018 response. Roughly three-quarters of firms don't plan to change their capital expenditure plans in 2019 as a result of the TCJA:

These results contain some nuance. It seems that larger firms (those with more than 500 employees) responded more favorably to the tax reform. But it is still the case that the typical (or median) large firm has not revised its 2019 capex plans in response to tax changes.

Why the disparity between smaller and larger firms? We're not sure yet—but we have an inkling. In a separate survey we had in the field in February—the Business Inflation Expectations (BIE) survey—we asked Sixth District firms to identify their tax reporting structure and whether or not they expected to see a reduction in their tax bill as a result of the TCJA. Larger firms—which are more likely to be organized as C corporations—appear to be more sure of the TCJA's impact on their bottom lines. Conversely, smaller "pass-through" entities appear to be less certain of its impact, as shown here:

For now, we're sticking with our initial assessment that the potential for a sharp acceleration in near-term output growth is limited. However, there is some upside risk to that view if more pass-through entities start to see significantly smaller tax bills as a result of the TCJA.

April 19, 2017

The Fed’s Inflation Goal: What Does the Public Know?

The Federal Open Market Committee (FOMC) has had an explicit inflation target of 2 percent since January 25, 2012. In its statement announcing the target, the FOMC said, "Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances."

If communicating this goal to the public enhances the effectiveness of monetary policy, one natural question is whether the public is aware of this 2 percent target. We've posed this question a few times to our Business Inflation Expectations Panel, which is a set of roughly 450 private, nonfarm firms in the Southeast. These firms range in size from large corporations to owner operators.

Last week, we asked them again. Specifically, the question is:

What annual rate of inflation do you think the Federal Reserve is aiming for over the long run?

Unsurprisingly, to us at least—and maybe to you if you're a regular macroblog reader—the typical respondent answered 2 percent (the same answer our panel gave us in 2015 and back in 2011). At a minimum, southeastern firms appear to have gotten and retained the message.

So, why the blog post? Careful Fed watchers noticed the inclusion of a modifier to describe the 2 percent objective in the March 2017 FOMC statement (emphasis added): "The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal." And especially eagle-eyed Fed watchers will remember that the Committee amended  its statement of longer-run goals in January 2016, clarifying that its inflation objective is indeed symmetric.

The idea behind a symmetric inflation target is that the central bank views both overshooting and falling short of the 2 percent target as equally bad. As then Minneapolis Fed President Kocherlakota stated in 2014, "Without symmetry, inflation might spend considerably more time below 2 percent than above 2 percent. Inflation persistently below the 2 percent target could create doubts in households and businesses about whether the FOMC is truly aiming for 2 percent inflation, or some lower number."

Do such doubts actually exist? In a follow-up to our question about the numerical target, in the latest survey we asked our panel whether they thought the Fed was more, less, or equally likely to tolerate inflation below or above its targe. The following chart depicts the responses.

One in five respondents believes the Federal Reserve is more likely to accept inflation above its target, while nearly 40 percent believe it is more likely to accept inflation below its target. Twenty-five percent of firms believe the Federal Reserve is equally likely to accept inflation above or below its target. The remainder of respondents were unsure. This pattern was similar across firm sizes and industries.

In other words, more firms see the inflation target as a threshold (or ceiling) that the Fed is averse to crossing than see it as a symmetric target.

Lately, various Committee members (here, here, and in Chair Yellen's latest press conference at the 42-minute mark) have discussed the symmetry about the Committee's inflation target. Our evidence suggests that the message may not have quite sunk in yet.