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Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

Authors for Policy Hub: Macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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October 12, 2012

The (Maybe Not So) Simple Arithmetic of Unemployment and Labor Force Participation

I have precisely zero interest in jumping into any fray from the before and after of Wednesday's Wall Street Journal opinion piece by Jack Welch, wherein he defends his previous comments on the reliability of reported unemployment statistics. But there is one particular statement in that editorial that offers up what is sometimes called a teachable moment, to wit,

By definition, fewer people in the workforce leads to better unemployment numbers.

By definition, that's not really correct. Consider a really simple example. Suppose:

Population = 200

Number of Employed People = 92

Number of Unemployed People = 8

Labor Force (Employed + Unemployed) = 100

In this example the labor force participation rate is 0.50 (the labor force divided by the population) and the unemployment rate 0.08, or 8 percent (the number of unemployed divided by the labor force).

Now suppose that five people drop out of the labor force (which would mean that labor force participation would decline from 0.5 to 0.475). What happens to the unemployment rate? Well, it depends what those 5 people were doing before they left the labor force. If they were unemployed, then unemployment falls to 3, the labor force falls to 95, and the unemployment rate is about 3.2 percent (or 0.0316 times 100). But if the 5 people who dropped out the labor force had been previously employed, the unemployment rate would actually rise to about 8.4 percent (because the number of unemployed would still be 8, but it would now be divided by 95 instead of 100).

Hope that clears it up.

Note: You can take a look some actual data on flows into and out of employment, unemployment, and not in the labor force here.

David Altig By Dave Altig, executive vice president and research director at the Atlanta Fed

January 27, 2012

What do you expect? Surveying inflation expectations

At the National Bureau of Economic Research (NBER) summer institute in 2007, Federal Reserve Chairman Ben Bernanke challenged researchers with three questions:

  • How should the central bank best monitor the public's inflation expectations?
  • How do changes in various measures of inflation expectations feed through to actual pricing behavior?
  • What factors affect the level of inflation expectations and the degree to which they are anchored?

A broad interpretation of this challenge implies that policymakers would benefit from a better understanding of how inflation expectations are formed and influence prices. This is a tall order, to be sure, and investigations aimed at improving this understanding are well under way.

For example, the Federal Reserve Bank of New York has an initiative to better measure and understand the inflation expectations of households. And the Federal Reserve Bank of Cleveland has developed a measure of inflation expectations derived from a model of financial data and economic forecasts. There are certainly many other examples, and it seems fair to say that the chairman's call to action has been taken up by many researchers both inside and outside of the Federal Reserve System.

Among the more obvious gaps in our knowledge of inflation expectations is the inflationary sentiment of businesses. Taking from the chairman's NBER talk:

"Information on the price expectations of businesses—who are, after all, the price setters in the first instance—as well as information on nominal wage expectations is particularly scarce.

"…[Further,] how do changes in various measures of inflation expectations feed through to actual pricing behavior?"

The Federal Reserve Bank of Atlanta has decided to take up this mantle. Today, we are unveiling our first Business Inflation Expectations survey—a monthly, online survey of the pricing environment and sentiment of the businesses in the Sixth Federal Reserve District (those in Alabama, Florida, Georgia, and parts of Louisiana, Mississippi, and Tennessee). Approximately 300 business owners and top executives receive our survey each month. This panel represents a broad cross-section of business and roughly matches the industrial composition of the U.S. economy.

Information gathered from our panel allows us to measure the inflation expectations and inflation uncertainty of businesses—as measured by their expectations for unit costs over the coming 12-month period and the uncertainty surrounding those expectations. Panelists also weigh in on current business conditions and margins as well as potential sources of price pressure in the coming year. According to the January survey just released, our panel indicated that, on average, they expect unit costs to rise 1.8 percent over the next 12 months, down just slightly from 1.9 percent in December. In other words, the unit cost increases expected by the businesses in our panel are comparable to recent year-ahead inflation forecasts of private economists.

The firms in our panel indicate that they are still operating in an environment of below-normal sales and depressed margins, although both have been slowly improving since October. Looking forward, firms anticipate labor costs will put little or only moderate upward pressure on prices in the year ahead. Expectations for nonlabor costs are similar, though 14 percent of panelists predict a strong upward influence on prices coming from materials and other nonlabor inputs. Respondents also anticipate that their sales, productivity, and margin adjustments are likely to have a very small, though positive, influence on prices in the coming year.

In addition to gauging firms' price-setting environment and year-ahead unit cost expectations, we are using the survey to investigate issues of longer-term interest for research and policy. Often we will put to our panel a special question designed for this purpose.

This month, we asked firms to tell us how frequently they make small price adjustments. The results of this inquiry were mixed, but intriguing. A significant share of firms indicated that they do not make very small price adjustments. Specifically, 35 percent responded that they don't make price adjustments of less than 1 percent. Another 14 percent indicated that very small price adjustments are rather rare (about one or two per every 20 price changes). But for a small proportion of our panel, very small price adjustments were common. Fifteen percent indicated that at least half their price changes were very small changes.

We obviously have many more questions to ask of our panel—this is only the beginning of our survey. But we think we're headed in the right direction.

If you want to learn more about our survey or be alerted when new survey data become available, go to the Atlanta Fed's Business Inflation Expectations Survey page.

Mike Bryan Mike Bryan, vice president and senior economist,

Laurel Graefe Laurel Graefe, economic policy analysis specialist, and

Nicholas Parker Nicholas Parker, economic research analyst, all with the Atlanta Fed

June 6, 2007

Involuntary Vacation

I am out of the country without the means to blog (no internet). I'll be back on Saturday with a lot to talk about.

April 30, 2007

On 1st Quarter GDP, Hold That Thought

From SmartMoney.com, the basics of the March report on personal income and outlays:

The personal income of Americans rose strongly again in March but their spending didn't meet expectations, while a key gauge of core inflation grew at a slower rate.

Personal income increased at a seasonally adjusted rate of 0.7% a second straight month, the Commerce Department said Monday. Originally, February income was seen up 0.6%.

March personal consumption grew 0.3% compared to the month before. Spending increased a revised 0.7% in February. Originally, February spending was seen 0.6% higher...

Spending on durable goods, those designed to last three years or longer, was unchanged in March, after falling 0.4% the previous month. Non-durable goods spending rose 1.0%, after a 0.4% climb in February. Spending on services decreased 0.1%, following a 1.1% increase in February.

That figure on services consumption is a bit eyebrow-arching, but overall it's hard to get too excited about this report, coming as it does on the heels of last Friday's advance figures for 1st quarter GDP. In case you haven't heard, it was not great:  Macro Man said Blah, Claus Vistesen said "ouch", and it hurt Dave at VoluntaryXchange to give the economy a "D" (to name just a few who were underwhelmed at the 1.3 percent annualized pace revealed by the Bureau of Economic Analysis).  William Polley has a nice round-up of other blogger comments, but I am with him in thinking that King at SCSU Scholars called it about right:

When this number is revised (and there will be two such revisions) the trade figure is the one that changes the most. So I expect this GDP estimate to be rather volatile to trade revisions.

The record does indeed show that the trade figures are apt to change as the numbers are re-crunched:




I wouldn't argue that the 1st quarter is likely to look anything other than weak when all is said and done, but I wouldn't carve that 1.3% in stone just yet.