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January 17, 2018
What Businesses Said about Tax Reform
Many folks are wondering what impact the Tax Cuts and Jobs Act—which was introduced in the House on November 2, 2017, and signed into law a few days before Christmas—will have on the U.S. economy. Well, in a recent speech, Atlanta Fed president Raphael Bostic had this to say: "I'm marking in a positive, but modest, boost to my near-term GDP [gross domestic product] growth profile for the coming year."
Why the measured approach? That might be our fault. As part of President Bostic's research team, we've been curious about the potential impact of this legislation for a while now, especially on how firms were responding to expected policy changes. Back in November 2016 (the week of the election, actually), we started asking firms in our Sixth District Business Inflation Expectations (BIE) survey how optimistic they were (on a 0–100 scale) about the prospects for the U.S. economy and their own firm's financial prospects. We've repeated this special question in three subsequent surveys. For a cleaner, apples-to-apples approach, the charts below show only the results for firms that responded in each survey (though the overall picture is very similar).
As the charts show, firms have become more optimistic about the prospects for the U.S. economy since November 2016, but not since February 2017, and we didn't detect much of a difference in December 2017, after the details of the tax plan became clearer. But optimism is a vague concept and may not necessarily translate into actions that firms could take that would boost overall GDP—namely, increasing capital investment and hiring.
In November, we had two surveys in the field—our BIE survey (undertaken at the beginning of the month) and a national survey conducted jointly by the Atlanta Fed, Nick Bloom of Stanford University, and Steven Davis of the University of Chicago. (That survey was in the field November 13–24.) In both of these surveys, we asked firms how the pending legislation would affect their capital expenditure plans for 2018. In the BIE survey, we also asked how tax reform would affect hiring plans.
The upshot? The typical firm isn't planning on a whole lot of additional capital spending or hiring.
In our national survey, roughly two-thirds of respondents indicated that the tax reform hasn't enticed them into changing their investment plans for 2018, as the following chart shows.
The chart below also makes apparent that small firms (fewer than 100 employees) are more likely to significantly ramp up capital investment in 2018 than midsize and larger firms.
For our regional BIE survey, the capital investment results were similar (you can see them here). And as for hiring, the typical firm doesn't appear to be changing its plans. Interestingly, here too, smaller firms were more likely to say they'd ramp up hiring. Among larger firms (more than 100 employees), nearly 70 percent indicated that they'd leave their hiring plans unchanged.
One interpretation of these survey results is that the potential for a sharp acceleration in GDP growth is limited. And that's also how President Bostic described things in his January 8 speech: "For now, I am treating a more substantial breakout of tax-reform-related growth as an upside risk to my outlook."
May 5, 2017
Slide into the Economic Driver's Seat with the Labor Market Sliders
The Atlanta Fed has just launched the Labor Market Sliders, a tool to help explore simple "what if" questions using actual data on employment, the unemployment rate, labor force participation, gross domestic product (GDP) growth, and labor productivity (GDP per worker).
We modeled the Labor Market Sliders after the popular Atlanta Fed Jobs Calculator. In particular, the sliders take the rate of labor productivity growth and the rate of labor force participation as given (not a function of GDP or employment growth) and then asks questions about GDP growth and labor market outcomes. Like the Jobs Calculator, the sliders require that things add up, a very useful feature for all those backyard economic prognosticators (we know you're out there).
Let's look at an example of using the sliders. The Congressional Budget Office (CBO) projects that the labor force participation rate (LFPR) will maintain roughly its current level of 62.9 percent during the next couple of years, as the downward pressure of retiring baby boomers and the upward pressure from robust hiring hold the rate stable. The CBO also projects that labor productivity growth will gradually increase to almost 1 percent over roughly the same period.
Suppose we want to know what GDP growth would be over the next couple of years (other things equal) if labor productivity, which has been sluggish lately, returned to 1 percent, as projected by the CBO. By moving the Labor Productivity slider in the tool to 1 percent and the Months slider to 24, you will see how productivity alone affects GDP growth: it increases to about 2 percent (see the image below). In this experiment, the unemployment rate, average job growth, and LFPR are constrained to current levels.
However, there's more than one way to achieve GDP growth of 2 percent over the next two years. Let's take a look.
Hit the reset button, and productivity, GDP growth, and months revert to their starting values. Then move the Months slider to 24 and the GDP Growth slider to 2 percent. You then see that—at current levels of labor force participation and labor productivity growth—achieving 2 percent GDP growth over the next two years would require the economy to create about 200,000 jobs per months (see the image below), which would push the unemployment rate down to 3.1 percent (a rate not seen since the early 1950s).
Hit the reset button again. Achieving 2 percent GDP growth over the next two years is also realistic with a higher LFPR, some other things equal. First, move the Months slider to 24, then move the Labor Force Participation Rate slider to 63.7 percent. The higher LFPR is consistent with about 2 percent growth in GDP and roughly 200,000 additional jobs added each month (see the image below). (This scenario constrains the unemployment rate and labor productivity growth rate to their current levels.) Of course, we haven't seen the LFPR at 63.7 percent since 2012, but that's another discussion.
What if we wanted something a bit more ambitious, such as averaging 3 percent GDP growth over the next couple of years? Hit the reset button again, and try this scenario. Keep Labor Force Participation Rate at its current level (consistent with the CBO's projection), set Labor Productivity growth to 1 percent (also using the CBO projection as a guide), move the Months slider to 24, and the GDP Growth slider to 3 percent. The Labor Market Sliders allow us to see that the economy would need to add an average of about 240,000 jobs each month for those two years. This scenario, the tight-labor-market method of achieving 3 percent GDP growth, would bring the unemployment rate down to 2.6 percent.
However, suppose the United States were somehow able to recapture productivity growth of around 2 percent, which we experienced in the late 1990s and early 2000s. In that case, 3 percent GDP could be achieved at the current employment growth and unemployment rate.
I encourage you to play around and devise your own "what if" scenarios—and use the Labor Market Sliders to make sure they add up.
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.
July 18, 2016
Lockhart Casts a Line into the Murky Waters of Uncertainty
Is uncertainty weighing down business investment? This recent article makes the case.
Uncertainty as an obstacle to business decision making and perhaps even a "propagation mechanism" for business cycles is an idea that that has been generating a lot of support in economic research in recent years. Our friend Nick Bloom has a nice summary of that work here.
Last week, the boss here at the Atlanta Fed gave the trout in the Snake River a break and made some observations on the economy to the Rocky Mountain Economic Summit, casting a line in the direction of economic uncertainties. Among his remarks, he noted that:
The minutes of the June FOMC [Federal Open Market Committee] meeting clearly pointed to uncertainty about employment momentum and the outcome of the vote in Britain as factors in the Committee's decision to keep policy unchanged. I supported that decision and gave weight to those two uncertainties in my thinking.
At the same time, I viewed both the implications of the June jobs report and the outcome of the Brexit vote as uncertainties with some resolution over a short time horizon. We've seen, now, that the vote outcome may be followed by a long tail of uncertainty of quite a different character.
But he followed that with something of a caution…
If uncertainty is a real causative factor in economic slowdowns, it needs to be better understood. Policymaking would be aided by better measurement tools. For example, it would help me as a policymaker if we had a firmer grip on the various channels through which uncertainty affects decision-making of economic actors.
I have been thinking about the different kinds of uncertainty we face. Often we policymakers grapple with uncertainty associated with discrete events. The passage of the event to a great extent resolves the uncertainty. The outcome of the Brexit referendum would be known by June 24. The interpretation of the May employment report would come clear, or clearer, with the arrival of the June employment report on July 8. I would contrast these examples of short-term, self-resolving uncertainty with long-term, persistent, chronic uncertainty such as that brought on by the Brexit referendum outcome.
As President Lockhart indicated in his speech, the Federal Reserve Bank of Atlanta conducts business surveys that attempt to measure the uncertainties that businesses face. From July 4 through July 8, we had a survey in the field with a question on how the Brexit referendum was influencing business decisions.
We asked firms to indicate how the outcome of the Brexit vote affected their sales growth outlook. Respondents could select a range of sentiments from "much more certain" to "much more uncertain."
Responses came from 244 firms representing a broad range of sectors and firm sizes, with roughly one-third indicating their sales growth outlook was "somewhat" or "much" more uncertain as a result of the vote (see the chart). Those noting heightened uncertainty were not concentrated in any one sector or firm-size category but represented a rather diverse group.
As President Lockhart noted in his speech, "[w]e had a spirited internal discussion of whether one-third is a big number or not-so-big." Ultimately, we decided that uncovering how these firms planned to act in light of their elevated uncertainty was the important focus.
In an open-ended, follow-up question, we then asked those whose sales growth outlook was more uncertain how their plans might change. We found that the most prevalent changes in planning were a reduction in capital spending and hiring. Many firms mentioned these two topics in tandem, as this rather succinct quote illustrates: "Slower hiring and lower capital spending." Our survey data, then, provide some support for the idea that uncertainties associated with Brexit were, in fact, weighing on firm investment and labor decisions.
Elevated measures of financial market and economic policy uncertainty immediately after the Brexit vote have abated somewhat over subsequent days. Once the "waters clear," as our boss would say, perhaps this will be the case for firms as well.
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