EconSouth (Second Quarter 2005)
Research Notes and News
Research Notes and News highlights recently published research as well as other news from the Federal Reserve Bank of Atlanta.
How many jobs does the market
need to create?
Public concerns about the “jobless” recovery following the 2001 recession have centered on whether enough jobs will be created for those who want to work. A more pressing question, however, may be how many jobs are needed to sustain desired growth in overall economic output.
In a recent article, Julie Hotchkiss provides an analysis of just how many jobs are needed to keep unemployment in check and considers whether the current rate of job creation is enough to fuel optimal gross domestic product growth. She examines the decline in the labor force participation rate that has occurred since the late 1990s. Part of the decline in the rate is likely a response to fewer job opportunities as a result of the recession. But she also notes that the decline suggests other, noncyclical factors may be at play and are likely to be compounded by baby boomers entering retirement age. Hotchkiss discusses the pros and cons of some options for increasing the flow of workers into the labor force, including raising the retirement age, increasing immigration, and offshore outsourcing.
While the current rate of job creation should be able to sustain the expected labor force growth for the near term, she concludes, it is not clear that this rate can sustain a desirable rate of economic growth in the long run. Any of the options policymakers have for affecting this trend of slower labor force growth will take time to implement and adjust to, suggesting that serious discussions of these options’ respective merits should begin now.
First Quarter 2005
New technology makes small
business credit more available
Although small businesses account for nearly half of all private-sector employment in the United States, historically these firms have faced significant hurdles in gaining access to credit. Financial institutions’ reluctance to grant loans to small businesses stems in part from small firms’ greater informational opacity compared to larger, publicly traded firms.
To address this opacity problem, many U.S. financial institutions have begun using small business credit scoring (SBCS), a lending technology that allows the evaluation of micro credits, or loans of less than $250,000. While credit scoring has been widely used for many years in consumer credit markets, its application to the small business market spread rapidly only in the last decade, when analysts discovered that the performance of these loans is correlated with the business owner’s personal financial history. Today the SBCS lending technology relies on “hard” quantitative information such as the owner’s personal credit history as well as business information collected either by the financial institution or, occasionally, by commercial credit bureaus.
In a recent working paper, authors Allen N. Berger and W. Scott Frame review several studies that use data from a 1998 Federal Reserve Bank of Atlanta survey to test SBCS’s effects. These studies strongly suggest that SBCS has increased small business credit availability in a number of ways, including the quantity of credit extended; lending to relatively opaque, riskier borrowers; lending in low-income areas; lending over greater distances; and increasing loan maturity.
The authors also explore the implications of these findings for a number of research and public policy issues concerning bank size and industry consolidation, bank competition and appropriate antitrust market definitions, the development of secondary markets for small business credits, and the proliferation of SBCS technology.
Future research, the authors note, may be hampered by the lack of new publicly available data. They urge that new surveys be conducted to document the proliferation and the effects of SBCS technology in the United States and abroad.
Working Paper 2005-10
Atlanta Fed president discusses
economic growth, inflation
Gross domestic product growth should remain solid, with continued growth in consumer spending and strong business investment, according to Jack Guynn, president and chief executive officer of the Federal Reserve Bank of Atlanta, addressing a gathering of home building executives in Atlanta on May 25. Guynn attributed softness reported earlier this year to general skittishness about the springtime run-up of energy prices, but he believes that the pace of economic activity should be sufficient to sustain job growth and push down the unemployment rate.
Guynn noted that some price measures have been trending higher, signaling moderately rising inflation. He cited higher prices for a range of commodities, including oil. “How businesses and individuals react to this energy price outlook—both short- and long-term—is a key economic uncertainty,” he said. But expanding world trade could help mute inflationary pressures, and he sees “no signs of an imminent and substantial pickup in inflation.”
Discussing the strong growth in residential spending and the rapid appreciation of housing prices in certain markets, Guynn said job and income growth should support continued residential investment. But he is uncomfortable with reports of increasing real estate speculation in select markets. “Real estate is ultimately driven by fundamental factors such as general economic growth, demographics and household income,” he noted.
Guynn said he has strongly supported the Fed’s recent increases in the federal funds rate target to remove accommodative monetary policy while noting that these actions “reduce the chances that the Fed will later need to take a more painful path of steep hikes. The Fed is not raising rates to stifle economic growth, but to ensure an environment of stable prices and sustainable growth over the long term.”
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