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August 2, 2022
Firms' Inflation Expectations: Not Unanchored, but Perhaps Unsettled?
Last week, the Federal Open Market Committee (FOMC) again decided to raise the federal funds rate target by 75 basis points in an effort to help curb inflation. While Chair Powell, in his press conference following the July FOMC meeting, noted the lag in monetary policy's influence on inflationary pressures, he also pointed out that "if you have a sustained period of supply shocks, those can actually start to undermine or to work on de-anchoring inflation expectations" (see the 16-minute mark of the video from the press conference).
We, too, share this worry. In fact, it's been something we've been concerned about here at the Atlanta Fed since last fall. In a speech at Peterson Institute speech in October 2021, Atlanta Fed president Raphael Bostic said: "I continue to believe currently elevated inflation is episodic, driven by pandemic conditions such as disruptions in supply chains and labor markets. A major caveat, though, is that the severe and pervasive supply chain issues will probably last longer than most of us initially expected. Up to now, indicators do not suggest that long-run inflation expectations are dangerously untethered. But the episodic pressures could grind on long enough to unanchor expectations."
After monitoring the evolution of our Business Inflation Expectations (BIE) survey data for the better part of a year, we're still concerned. While the BIE has only been around since 2011, and the current period of high inflation is the only shock we've picked up in our data, the speed and sharpness of the increase in our survey-based measure of inflation expectations have left us wondering: How unsettled are longer-run inflation expectations?
For those not familiar with the BIE survey and its unique perspective on firms' inflation expectations, it's a monthly regional survey that the Atlanta Fed conducts to measure firms' inflation expectations in the Sixth District. Rather than elicit firms' aggregate inflation expectations, we ask them about their own-firm unit cost expectations—an input that is directly related to their own-firm price formation strategies (see Meyer et al. 2021). Moreover, the expectations we elicit are probabilistic, meaning we can gauge not only an individual firm's average expectations but also the level of certainty with which firms are holding those views. What does the BIE tell us about how firms are reacting to the highest bout of inflation the United States has experienced in 40 years?
By now, the current inflationary environment should be apparent to just about everyone. It's affecting all areas of the consumer market basket and has become a recurring headline in the news. It's even become a popular search term on Google. In fact, inflationary pressures have risen to heights that we haven't seen since the early 1980s, during the period known as the Great Inflation. As the chart below shows, roughly three-quarters of prices in the consumers' market basket (by expenditure weight in the consumer price index, or CPI) have risen at rates equal to or exceeding 5 percent (see chart 1). In June, more than 90 percent of prices in the market basket outpaced the 3 percent mark.
This high-inflation environment is not lost on businesses. In fact, firms' perceptions (unit-cost realizations) have been highly correlated with the evolution of overall inflation over the course of the pandemic. Chart 2 plots firms' realized unit-cost growth over the past year and compares it to the year-over-year growth rate in overall inflation as measured by the GDP price index, which is the broadest measure of inflationary pressures as it goes beyond just consumer prices to gauge price pressures in the entire economy.
In the world of survey-based measures of inflation expectations, our BIE survey has one clear advantage: not only can it track the evolution of expectations but it can also provide clear insight into firms' perceptions of the current environment, which is very useful in gauging the external validity of those expectations. To us, this insight compellingly shows that firms in our BIE panel are clearly seeing the facts when it comes to inflation.When general prices increase, businesses' input costs also increase, and as higher costs squeeze margins, many firms will pass some or all of those costs on to their customers in the form of (you guessed it) higher prices. Survey evidence suggests a correlation between supply chain disruptions and higher year-ahead inflation expectations. We've previously noted that although supply chain disruption isn't the only factor influencing expectations, firms with the largest levels of disruption tend to hold higher expectations for inflation in the year ahead (see chart 3). So what are firms telling us about their expectations for the evolution of inflation over the year ahead and beyond?
Perhaps the easiest way to see how much both short-run and five-year-ahead (long-run) inflation expectations have moved over the past two years is to index them to their prepandemic growth rates. In chart 3, we depict these expectations, indexing each series to 100 in the fourth quarter of 2019. What we can see is that both short-run and longer-run expectations have increased dramatically.
While initially short-run expectations dipped at the start of the pandemic (amid widespread lockdowns and a substantial decline in economic activity), starting early in 2021, firms' short-run inflation expectations began to increase sharply. Later in 2021, firms' long-run expectations also started to show a meaningful pickup. Firms' short-run inflation expectations have roughly doubled relative to the prepandemic period. And firms' longer-run expectations are about 25 percent higher than the expectations we saw in late 2019.We can dig a bit deeper into firms' longer-run expectations by examining the average probability weights that firms assign to the potential outcomes for longer-run unit costs at different periods, as chart 4 shows. In this case, we look at the fourth quarter of 2019 and the second quarters of 2020, 2021, and 2022.
These histograms illustrate the degree to which firms' inflation expectations have shifted over the course of the pandemic. Here, two aspects of this shift stand out to us. First, through the middle of 2021, even as inflation metrics were beginning to heat up, the distribution of firms' longer-run expectations hadn't moved much. Second, during the past year, the average probability distribution shifted starkly. The typical firm in our panel is now assigning nearly a 60 percent probability to longer-run unit cost increases of at least 3 percent per year. Moreover, their modal expectation is for longer-run unit costs to increase by 5 percent or more annually—which means that more firms anticipate the need to adjust their unit costs by more than 5 percent per year in the long run. To put this bluntly, we haven't witnessed anything like this in the decade-long existence of this survey.
A couple of caveats are worth mentioning here. First, although this is the first sizable "inflation shock" we've been able to examine in the BIE survey, we do not have a long enough time series to compare the current era to the aforementioned Great Inflation. At best, we can suggest that—given the high correlation between firms' unit-cost expectations and professional forecasters' expectations—our measures would have performed similarly in the '70s and '80s. Also, as the extensive literature on consumer expectations documents, the possibility exists for business executives to base their projections for future unit costs solely on current conditions (a phenomenon economists call adaptive expectations). Still, that last point cuts two ways. First, it's possible that, should inflation ebb meaningfully in the coming months, these longer-term expectations might follow suit. Conversely, persistently high inflation could further cement such expectations for the longer run, making it more challenging for policymakers to bring inflation back to their price-stability goals.
Said another way, the current bout of high inflation is unusual in many different ways, and how it will play out remains fraught with uncertainty. Firms' short- and long-run expectations have risen sharply, and longer-run expectations show a clear rise in the average firm's probability distribution, to the extent that nearly one-third of the weight is being assigned to anticipated cost increases greater than 5 percent. So as we continue to delve further into these expectations and monitor upcoming developments, we're left pondering the question: is this how "unanchoring" begins?
January 12, 2022
Hybrid Working Arrangements: Who Decides?
Even after—or should we say "if"?—working from home eventually becomes less of a necessity, it's likely to stick around in a hybrid form, with some working days performed at home and some in the office. (This recent study , coauthored by three of this post's authors, also makes this case.) Still, much remains undetermined about how that hybrid arrangement will work and who at the firm decides how many and which days employers will require workers to be onsite.
To shed some light on how hybrid working arrangements are working, we posed a few special questions to executives in our Survey of Business Uncertainty (SBU) last July and again last month (December 2021). Specifically, we asked, "Does your firm currently have employees who work remotely?" If they said yes, we followed that up with the question, "Who decides which days and how many days employees work remotely?" Respondents selected options ranging from fully decentralized to company-determined schedules. (The results between the July and December surveys were nearly identical, so we've combined them here to simplify this discussion.) Among firms in our panel, 53 percent have employees who work remotely, and their survey responses are interesting (see chart 1).
As you can see, respondent firms are roughly split, with about 30 percent leaving the decisions up to their employees, 30 percent giving teams (or team leads) decision rights, and nearly 40 percent indicating the decision on how many and which days employees will be remote resides at the company (management) level.To dig into these results a bit further, we looked at who makes these decisions over working arrangements by industry and firm size. Given the differences across the industrial sector's ability to work from home (see research by Jonathan Dingel and Brent Neiman), we find it somewhat surprising that little difference exists across industries about whether the decision to work remotely is fully decentralized, made at the team level, or determined by the company (see chart 2).
However, we see a stark difference when comparing these decision rights by firm size. More than half of the smallest firms in our panel (those with fewer than 25 employees) allow the employees to decide how and when to come into the office, compared to just 10 percent of larger firms (with 250 employees or more). Instead, these larger firms have left decisions about remote work with the team. Although that's certainly far from a rigid, top-down approach, it can suggest a need for coordination among teams, and this variation highlights remote work's big trade-off: balancing employee choice with the coordination that work life sometimes requires.
Allowing employees to choose their teleworking days has the benefit of flexibility, letting them to plan their work schedules around some nonwork commitments. But it has the cost of limiting face-to-face meetings, as on any given day of the week larger teams will likely find one or more members working remotely, which forces meetings partly or completely online. In our discussions with larger firms, they highlight the importance of face-to-face interactions and so have been promoting team- or company-level coordination. Interestingly, smaller firms appear to be walking another path: providing greater individual choice. Which one of these approaches becomes prevalent should become clear by the summer, when employees can (hopefully) return to the office. Though the future of office work appears to be a hybrid one, the form of decision making that will dominate that future has yet to be determined.
July 15, 2021
Onboarding Remote Workers: A Hassle? Maybe. A Barrier? No.
As the need for social distancing recedes and government restrictions ease, most people look to regain some notion of normalcy in their day-to-day lives. At the same time, many workers have come to like their office away from the office. And the COVID work-from-home experiment has gone well enough for it to stick around, possibly in a hybrid form. Those are key conclusions in a recent study (by three of this post's authors) titled "Why Working from Home Will Stick."
One frequent concern we hear about remote work is the challenge of hiring and onboarding new employees who rarely—or even never—set foot on the employer's worksite. Yet our evidence suggests that these challenges are modest and aren't a big barrier to finding, onboarding, and integrating new employees.
During the past two months, we asked executives participating in our Survey of Business Uncertainty (SBU) about their experiences hiring remote workers and integrating them into their organizations (see the three charts below). The share of new hires who work almost entirely from home (rarely or never stepping onto business premises) was 15.8 percent, a figure nearly identical to the share of all paid workdays performed at home in earlier pandemic-era snapshots from the SBU. Moreover, the share of new hires varies across industries, just as we'd expect based on research by Jonathan Dingel and Brent Neiman that flags which jobs can be performed remotely. The Survey of Working Arrangements and Attitudes (whose data underpin our aforementioned recent study, "Why Working from Home Will Stick") also suggests that new hires are at least as likely to work from home as the general population.
So as we see, new hires are working remotely to the same extent, and in the same proportion across industries, as incumbent staff. These findings suggest that integrating and training new remote workers isn't a big barrier to hiring. But it must be a pain, right? Otherwise, why all the fuss?
And here, the unanimity dissipates. Of firms with new remote workers, 60 percent say the integration process is more challenging. On average, SBU respondents say it takes about a month or so longer to fully integrate remote-only employees, though the spread about that average is pretty wide—ranging from six weeks less to six months longer.
If you're at a firm that finds it challenging to onboard remote employees, perhaps you'll find some solace in the fact that most of your new staff appear not to notice. In the The Survey of Working Arrangements and Attitudes, 42 percent of workers hired into fully remote positions during the pandemic say that adapting to their new jobs has been neither easier nor harder than adapting to in-office jobs before the pandemic. The other 58 percent are distributed similarly over "easier" and "harder" (see the chart).
Stepping back and taking a broader look, many observers wonder why aggregate U.S. employment remains 6.8 million below its prepandemic peak, despite record numbers of job openings. On the list of potential reasons for this shortfall—such as lingering concerns about the virus, generous unemployment benefits, inadequate childcare options, and more—it appears you can cross off the difficulty of onboarding and integrating remote workers.
July 14, 2021
Are Labor Shortages Slowing the Recovery? A View from the CFO Survey
The economic recovery from the pandemic-induced downturn of 2020 has been swift in terms of overall spending. It took about one year for real gross domestic product to return to its pre-COVID level. Firms in the latest CFO Survey expect the pattern of strong sales to continue for 2021 and 2022. At the same time, firms report—by a large margin—that their top concern is a shortage of available labor. In this post, we investigate the extent to which labor-availability problems are restraining sales revenue growth. Said another way, could the recovery in spending be even stronger if labor shortages could be resolved?
In this quarter's CFO Survey, we asked firms' financial executives a series of questions designed to uncover just how much a labor shortage has crimped their revenues. We estimate that the labor shortages have reduced economywide sales revenue by 2.1 percent, which suggests that the lack of available labor has reduced nominal private-sector gross output by roughly $738 billion, on an annualized basis (or $184 billion per quarter; see the note below).
Difficulty finding new employees for open positions is widespread, as indicated by three-quarters of the respondents to the July 2021 CFO Survey (see chart 1), a finding consistent with the record levels of unfilled job openings in the Job Openings and Labor Turnover Survey from the U.S. Bureau of Labor Statistics.
Among firms that struggled to find workers (nearly 40 percent of our overall panel), slightly more than half reported that their inability to find employees cost their firm revenues. It also appears, as chart 2 indicates, that smaller firms have been disproportionately affected by labor shortages. Of the small firms (fewer than 500 employees) that struggled to hire employees, nearly 60 percent indicated that labor shortages caused their revenue to suffer, compared to 40 percent of large firms.
Digging even deeper, we posed the following question to the firms indicating that their inability to find employees has reduced revenue: "By roughly what percentage would you say your firm's revenue has been reduced due solely to your inability to find new employees?" The response was a fairly consistent 10 percent across industry groupings for this subset of panelists Aggregated across the full panel (thereby also accounting for firms that have not been affected by hiring difficulties or revenue effects), this decline indicates that labor shortages cost the economy 2.1 percent in nominal sales revenue (or private-sector gross output). Nationally, this impact translates into an annual reduction in gross output of $738 billion.
There does not seem to be just one reason for why workforce participation has remained lower than it was before COVID despite the record number of job openings. For instance, households have had ongoing virus concerns, and many have struggled to find childcare. Also, the share of older workers choosing to retire has risen, and government support payments have made not working relatively less costly than in the past. Nonetheless, the CFO Survey results suggest that labor shortages have burdened firms significantly and could further restrain aggregate economic growth if not resolved.
Note: The figure given in this post earlier was erroneous. The correct estimate of the reduction is $738 billion (or $184 billion per quarter). Nominal gross output for all private industries was $35.18 trillion in the first quarter of 2021 (at seasonally adjusted annualized rates). Multiplying that by 0.021 results in $738 billion (and dividing that by four yields $184 billion per quarter). The U.S. Bureau of Economic Analysis defines nominal gross output for private industries this way: "Principally, a measure of an industry's sales or receipts. These statistics capture an industry's sales to consumers and other final users (found in GDP), as well as sales to other industries (intermediate inputs not counted in GDP). They reflect the full value of the supply chain by including the business-to-business spending necessary to produce goods and services and deliver them to final consumers."
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