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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 Wednesday 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 recovery). 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.
March 2, 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.
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