10/21/2011
Some growth is better than none
As a lifelong Cleveland Browns fan, I'm prone to pessimism. A win on Sunday only brings expectations of a loss next Sunday. I wait for good news, then don't believe it when it comes. It's a tough way to go through a football season, but I can't help it.
Tracking the economy over the last few years is a perfect fit for a Browns fan—good news followed shortly by bad. When positive economic reports come out, skepticism creeps in. In September, several pieces of economic data came in better than expected and, when combined with what our business contacts in the region were telling us, paint a picture of an economy that appears to be doing better than what we experienced over the summer. Let's look closer.
The lead from the October 19 Beige Book summary reads:
"Reports from the twelve Federal Reserve Districts indicate that overall economic activity continued to expand in September, although many Districts described the pace of growth as modest or slight."
The opening sentence from the Sixth District's section of the Beige Book struck a similar note:
"Business contacts in the Sixth District indicated that economic activity continued to expand at a modest pace in September."
The message here is an important one. Businesses here in the Southeast and in most other regions are telling us that the economy does not appear to be contracting. True, the overall pace of activity may be modest or slight, but we were told that it is still positive. Recent data support what our contacts were telling us. As Atlanta Fed President Dennis Lockhart said in his October 18 speech to the CFA Society of East Tennessee in Chattanooga:
"The somewhat overlooked story of the period since the end of August is that much of the incoming data have exceeded most forecasters' low expectations. For the third quarter at least, it appears that downgrades of growth forecasts have been too pessimistic."
Of course, we're not going to proclaim that the economy is clearly on a path to significantly better outcomes based on a month of data and anecdotal information. After all, three weeks ago the Browns were 2-1 and tied for first place. Today we are 2-3 and in the cellar.
Along those lines, it is important to recognize that modest economic growth does not help address the high rate of unemployment. As President Lockhart noted in Chattanooga:
"[M]ost private sector forecasters envision growth in 2012 approaching 2.5 percent. In the opinion of many economists, that 2.5 percent approximates the steady-state growth rate of the economy's potential. This rate would certainly be an improvement over 2011 as a whole. The problem is without growth measurably better than 2.5 percent, little progress will be made in absorbing slack in the economy—above all, labor market slack."
The Atlanta Fed's Beige Book recorded little improvement in regional labor markets in September:
"Employers continued to manage their labor supply very tightly. Most contacts indicated that the outlook for hiring remained restrained by modest expectations regarding future sales. Several reports suggested that permanent employees were primarily being used to maintain a firm's core business, while specific projects were being assigned to contractors and temporary hires. Firms continued to seek efficiency gains through investment in technology and other cost-saving applications."
Although not mentioned in our Beige Book, we should also note that while we did not pick up on significant plans to increase employment in our discussions with business contacts, we also did not hear much in the way of plans to reduce current levels of employment. The economy may not be improving enough to help cut into unemployment much, but it appears to be doing well enough to prevent further job declines.
Back to the Browns. They are playing better and we may be looking at a .500 season. After two straight years of going 5-11, 8-8 looks pretty good. But, like the Browns, a steady-state rate of growth and not experiencing further reductions in employment is not the best outcome, but it is better than where we were a few years ago.
President Lockhart concluded in Chattanooga that
"[A]s the numbers over the last couple of months demonstrate, outcomes better than consensus expectations can happen. Let's not talk ourselves into believing that enduring weakness or recession is inevitable."
By Mike Chriszt, an assistant vice president in the Atlanta Fed's research
department
October 21, 2011 in Beige Book, Economic Growth and Development, Forecasting, Labor Markets, Outlook, Southeast | Permalink
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07/07/2011
What a difference a year makes
The region's tourism sector continues to improve—nowhere more so than along the Alabama Gulf Coast, especially when we consider where we were last year on Independence Day:
The Mobile Press-Register's report from the Alabama coast on July 4, 2010, contained this passage:
"The sun shone, the sand glistened and the water was pleasant Sunday at Dauphin Island's public beach. There was only one thing missing from this otherwise perfect 4th of July: People.
"On the 76th day of the ongoing oil spill disaster, only a couple dozen visitors were at the beach at 1:30 p.m. on what is usually one of the busiest days of the summer."
The Associated Press coverage from the Alabama coast on July 4, 2011, contained this report:
"State officials are expecting a big week for tourism along Alabama's coast. … Promoters say almost all of the 17,000 condominiums and hotels in southern Baldwin County are full through the Fourth of July.
"The area's 2,500 camp sites also are occupied, and many guests are staying through next weekend."
More broadly, our contacts in the leisure and hospitality sector throughout the region continue to convey positive reports. From Miami Beach to Dollywood, tourist activity is up. As noted above, beachgoers are visiting the coasts. Attendance at festivals in Tennessee and New Orleans is well up from year-ago levels. The Federal Reserve's last Beige Book report from the Atlanta District noted that:
"Tourism activity improved further throughout the District. Occupancy and room rates were boosted by increases in both business and leisure travel. Convention and cruise bookings have increased as well. Overall, contacts in the travel industry remained optimistic."
The bottom line? People are taking vacations and spending at healthy levels.
By Mike Chriszt, an assistant vice president in the Atlanta Fed's research department
July 7, 2011 in Alabama, Beige Book, Gulf Coast, Oil Spill, Southeast, Tourism | Permalink
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06/15/2011
Beige Book: Only part of the story
The Federal Reserve released its latest Beige Book on June 8. The Beige Book is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by district and sector. An overall summary is prepared as well. Much attention is paid to the first sentence of the summary and the first sentence of each Bank's report because they give an overall take on conditions as reported.
The first sentence of the summary for the June 8 report reads:
"Reports from the twelve Federal Reserve Districts indicated that economic activity generally continued to expand since the last report, though a few Districts indicated some deceleration."
The following recounts the first sentence of each Reserve Bank's submission:
- Boston: Many business contacts in the First District report improving economic conditions.
- New York: The Second District's economy has continued to expand since the last report, though at a somewhat diminished pace.
- Philadelphia: Business activity in the Third District has improved overall since the last Beige Book, although the pace has softened.
- Cleveland: Business activity in the Fourth District continued to expand at a modest pace since our last report.
- Richmond: Economic activity has been sending increasingly mixed signals since our last report.
- Atlanta: Sixth District business contacts reported that economic activity moderated somewhat in April and May.
- Chicago: Economic activity in the Seventh District expanded more slowly in April and May.
- St. Louis: The economy of the Eighth District has continued to expand at a moderate pace since our previous report. Minneapolis: Economic activity in the Ninth District grew steadily since the last report.
- Kansas City: Growth in the Tenth District economy remained solid in May.
- Dallas: The Eleventh District economy expanded at an accelerated pace over the past six weeks.
- San Francisco: Twelfth District economic activity continued to expand at a moderate pace during the reporting period of late April through the end of May.
While the Beige Book is an important instrument in reviewing recent economic developments across Reserve Banks, it's important to understand the context of the individual Bank reports. (By context, I mean the broader picture of economic performance across regions.)
One way to do that is to look at overall economic activity in each region, and the Philadelphia Fed's State coincident indexes is a useful tool to do just that. The Philadelphia Fed produces monthly coincident indexes for each of the 50 states that combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state's index is set to the trend of its gross domestic product (GDP), so long-term growth in the state's index matches long-term growth in its GDP.
In the chart below I use the state indexes to ascertain the depth of the downturn and the extent of recovery experienced by each Federal Reserve District. I weighed each state's coincident index by average state GDP from 2006–10 to develop a coincident index for each Reserve Bank. (A technical note: Most Federal Reserve Districts cut across state boundaries. In these instances I estimate the portion of state GDP that falls within Reserve Bank Districts that share the state in question. It's a back-of-the-envelope calculation. I could look at metro area GDP to be more precise, but for the purposes of this exercise I'm comfortable with this more basic approach. In other words, I didn't have time to do it, but I'm pretty confident that the results would be similar).
In chart 1, I calculate the percent change from peak-to-trough and trough-to-present for each Reserve Bank's coincident indicator. The red bar represents that peak-to-trough percent change—another way to look at it is that the red bars represent the depth of the recession experienced by each Reserve District. The blue bar is the percent change since the trough—or the extent of recovery.
The Atlanta Federal Reserve District experienced at 10.8 percent decline in its coincident indicator during the downturn and has seen a 1.9 percent increase since the trough. The Chicago Fed's measure fell by more than Atlanta's but has come back handsomely since the trough. (Bill Testa of the Chicago Fed wrote about the Seventh District's resurgence in a recent blog post.) You can see the other Reserve Banks' measures in the chart as well.
Chart 2 combines the two percent changes presented in chart 1:
The Atlanta Fed's measure is by far the weakest. Dallas and Boston are close to zero, indicating that their respective coincident indicators are close to where they were before the downturn began. So when you read that the Atlanta Fed reported in its Beige Book that "business contacts reported that economic activity moderated somewhat," it is particularly troubling. We have a long way to go, and any pause simply makes the time it will take to get back to where we were even longer.
By Mike Chriszt, an assistant vice president in the Atlanta Fed's research
department
June 15, 2011 in Beige Book, Growth, Recovery | Permalink
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04/26/2011
Beige Book: Southeast economy improved through March; but what about April?
On April 13, the Sixth District's most recent Beige Book was released. The opening paragraph, which summarizes the entire report, said, "Sixth District business contacts described economic activity as advancing modestly from mid-February through March. Retailers cited that consumer spending improved while auto dealers reported strong sales growth. Tourism activity remained positive as occupancy rates and air travel mostly increased. Residential brokers and builders indicated that sales growth of new and existing homes were mixed, but generally remained weak, while commercial contractors mentioned improving conditions as development increased slightly. District manufacturers experienced increasing levels of new orders and production. Transportation firms noted modest advances in shipments and tonnage. Banking contacts reported soft but improving loan demand. Labor markets continued to recover at a gradual pace. Cost pressures grew for most District firms, but the ability to pass through price increases continued to vary by industry."
The report discusses economic activity that took place from mid-February through March, but the official release date lagged by a couple of weeks. In a time when data and information are so easily available, this type of lag can make the information seem dated. The Atlanta Fed is continuously gathering information via meetings with our Regional Economic Information Network contacts. Recently, we held two advisory council meetings, which gave us more insight into their particular sectors. On April 12 our Trade and Transportation Advisory Council met in Atlanta, and on April 14 our Travel and Tourism Advisory Council met in Miami. What follows is some of the anecdotal information collected from these meetings.
Trade and transportation
Demand is up for almost all industries in the transportation sector, especially for those involved in export activity. The trucking industry is seeing a return to pricing power but is challenged with finding qualified drivers and mechanics and faces a shortage of drivers amid new regulations. Increases in the cost of fuel are challenging all modes of transportation, but fuel surcharges remain intact. Intermodal volume is benefiting from increased fuel costs as customers move certain types of goods from truck to rail. Inventories remain very low and inventory turns are high; slow steaming in maritime shipments is creating floating inventories. All industries reported increases in capital expenditures for replacement and new equipment, information technology, and infrastructure and buildings. Hiring is taking place at some level in most industries, and wage pressures are just beginning to surface in parts of the sector. Events in Japan have not caused major disruptions but lags in shipments of certain goods and equipment have been reported.
Travel and tourism
Activity is up in almost all industries of the sector. Occupancy, room rates, and cruise and convention bookings are increasing. A modest level of pricing power has returned; however, increasing fuel and commodity costs are challenging all segments of the sector. Restaurant activity is mixed, and price increases are being passed through. Capital expenditure is increasing in most of the sector, and the overall tone was one of optimism with a cautious eye toward rising commodity costs. The areas and locations adversely affected by last year's BP oil spill have regained business, and many are back to normal levels.
Based on these meetings, it appears that the Sixth District's economy is still moving in a positive direction.
By Shalini Patel, a senior economic analyst in the research department, Sarah Arteaga, a senior REIN analyst, and Lon Lazzeri, a REIN director
April 26, 2011 in Beige Book, Tourism, Trade, Transportation, Travel | Permalink
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03/08/2011
Southeastern economic update: Economic conditions improve modestly in early 2011
Eight times a year, the Federal Reserve puts together a report known as the Beige Book. Each of the 12 Reserve Banks gathers anecdotal information through reports from Bank and branch directors and interviews with key business contacts, economists, market experts, and other sources and summarizes its findings to create its Beige Book. The report is then released to the public approximately two weeks prior to each Federal Open Market Committee meeting.
The Atlanta Fed wrote the following summary of economic conditions for its most recent Beige Book, which was released on March 2, 2011.
"According to reports from Sixth District business contacts, economic conditions continued to improve at a modest pace in January and early February. Most retailers contacted stated that adverse weather had affected the positive sales trend seen at the end of last year. The hospitality industry experienced moderate growth as hotel occupancy and bookings increased, most notably in Florida. Weakness persisted throughout the District in both residential and commercial real estate. Manufacturers cited growth in new orders along with plans to increase production in the near term. Transportation firms remarked that freight shipments remained stable. Credit conditions improved for segments not related to residential construction and real estate. Labor markets continued to recover at a slow rate, with most businesses maintaining a preference for hiring temporary rather than permanent employees. Some businesses indicated limited plans to pass costs through to consumers in an effort to increase their margins from unusually low levels, recognizing that they may have to reverse course if there is significant buyer push-back."
Part of the way the Atlanta Fed gathers anecdotal information is through surveys. Our surveys are conducted monthly and use our Regional Economic Information Network (REIN), composed of business contacts who gather firsthand information about trends and developments in the economy. A few examples of how some of that anecdotal information makes it into our Beige Book can be seen in the opening summary above. For instance, when we mention that "retailers contacted stated that adverse weather had affected the positive sales trend seen at the end of last year," we are basing this observation on our analysis of our recent retail survey results. When we report that "manufacturers cited growth in new orders along with plans to increase production in the near term," this information comes from of our analysis of the most recent purchasing managers' index report from our friends at Kennesaw State University.
The regional executives in each of our branches (including the Atlanta Fed) have established relationships with leading businesspeople and community groups from all sectors of the economy for REIN. It is these contacts who, either through meetings or surveys, provide us with much of the content we need to construct our Beige Book.
By Shalini Patel
a senior economic analyst in the research department
March 8, 2011 in Beige Book | Permalink
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04/14/2010
Measuring regional economic performance
I spent the first two days of this week in Washington, D.C., at the 2010 National Association for Business Economics (NABE) Professional Development Seminar. Now in its seventh year, the NABE Professional Development Seminar (PDS) is a program designed to strengthen participants' knowledge of economic statistics and analytical techniques. I've been honored to present the Atlanta Fed's approach to regional economic analysis at several PDS events over the years.
This year I had the privilege of presenting with Dr. Charles Stiendel, a senior vice president at the New York Fed, and Dr. Keith Phillips, a senior economist and policy advisor at the Dallas Fed.
Dr. Stiendel discussed the Beige Book process in detail—a very well-timed presentation since today is when the Fed releases the latest report. He pointed out that while the Beige Book is driven by anecdotal reports from contacts in the business and labor community, one study has found that a quantitative classification of the Beige Book can be used to enhance near-term GDP forecasts. The Dallas Fed published a study in 1998 by Balke and Petersen that found that both in-sample and out-sample, the quantitative Beige Book indices, do have significant predictive content for current and next-quarter real GDP growth. Furthermore, the Beige Book has information about current-quarter real GDP growth not present in other indicators such as the Blue Chip Consensus Forecast or time series models that use real-time data.
The Atlanta Fed published a study in January 2003 by Ginther and Zavodny that examined whether the descriptive content of the Beige Book affects asset prices. The results indicate that more positive Beige Book reports on economic growth are associated with increases in interest rates, particularly long-term rates, even after controlling for other macroeconomic data releases. Stronger Beige Book reports are positively associated with changes in equity prices during expansions but negatively during recessions.
In his presentation, Dr. Philips presented some of the novel methods the Dallas Fed uses in measuring economic performance in Texas. Among them are several measures of state and metro area business cycles. In 2004, the Dallas Fed published Phillips' work on a New Monthly Index of the Texas Business Cycle and followed that up in 2005 by extending coverage to include major metro areas in the state.
In 2007, we at the Atlanta Fed developed our own measure of regional economic activity called the "D6 Factor." The paper that developed the D6 factor by Silos and Vilan outlines and estimates a model of the Sixth Federal Reserve District economy that provides a single economic indicator. The model assumes that the region's economic activity—measured by a large set of time series of employment, construction, earnings, and sales tax revenues—is driven by an unobserved common factor. The model incorporates disaggregated information for each state into a large model to derive a common component. Having a single economic indicator for the region allows for simpler and faster interpretation of various (sometimes contradictory) economic signals and makes comparisons with the nation's and other region's economies easier.
Whether it's the Beige Book or data-driven measures of economic activity, the Fed's regional banks provide a wealth of information to gauge regional economic performance.
By Michael Chriszt, assistant vice president in the Atlanta Fed's research department
April 14, 2010 in Beige Book, Forecasting | Permalink
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