tag:blogger.com,1999:blog-46768400099387143682024-03-05T07:26:05.957-08:00MacroadvisersThe Blog of Macroeconomic Advisers LLCUnknownnoreply@blogger.comBlogger345125tag:blogger.com,1999:blog-4676840009938714368.post-82274365665271494292013-04-05T09:48:00.000-07:002013-04-05T09:48:07.615-07:00MA Blog moved to macroadvisers.comWe've finally moved our blog over to our primary domain.<br />
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We'll be updating the MA blog a lot more frequently now.<br />
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Please visit us at <a href="http://macroadvisers.com/">macroadvisers.com</a>.<br />
<br />Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-81049081896930745802013-03-14T11:05:00.003-07:002013-03-14T11:05:21.954-07:00MA's Monthly GDP Rose 0.3% in JanuaryMonthly GDP rose 0.3% in January on the heels of a sharp, 1.0% increase in December. The January increase was more than doubly accounted for by a large increase in nonfarm inventory investment. Final sales declined in January, primarily reflecting declines in net exports, capital goods, and construction; PCE rose in January. The level of GDP in January was 4.4% above the fourth-quarter average at an annual rate. Implicit in our latest tracking forecast of 2.7% GDP growth in the first quarter is a 0.8% (monthly rate) decline in February that mainly reflects our assumption that nonfarm inventory investment stalls then. <br />
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This is from a commentary that was published on March 14, 2013.<br />
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<span style="font-size: x-small;"><br /><b>Technical Note</b><br />Macroeconomic Advisers’ index of Monthly GDP (MGDP) is a monthly indicator of real aggregate output that is conceptually consistent with real Gross Domestic Product (GDP) in the NIPA’s. The consistency is derived from two sources. First, MGDP is calculated using much of the same underlying monthly source data that is used in the calculation of GDP. Second, the method of aggregation to arrive at MGDP is similar to that for official GDP. Growth of MGDP at the monthly frequency is determined primarily by movements in the underlying monthly source data, and growth of MGDP at the quarterly frequency is nearly identical to growth of real GDP.</span><br />
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<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-21530333837711679562013-03-08T12:13:00.001-08:002013-03-08T12:13:20.027-08:00A Solid Employment Report for February, but Let’s Not Get Carried Away<!--[if gte mso 9]><xml>
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<br />
<div class="MsoPlainText">
<b>There was a lot to like in this morning's report on the
employment situation in February.</b></div>
<br />
<ul>
<li>Nonfarm payroll employment rose 236 thousand, well
above expectations.</li>
<li>The unemployment rate declined two-tenths to 7.7%.</li>
<li>The hours index rose five-tenths, reflecting both a
solid increase in private employment (246 thousand) and an increase in the
workweek.</li>
<li>The breadth of the strength in employment was
encouraging.<span style="mso-spacerun: yes;"> </span>Of note was a 48 thousand
increase in construction employment, which was the largest one-month gain since
early 2007.</li>
</ul>
<br />
<div class="MsoPlainText">
<b>This morning's report is indicative of an improving trend
in payroll gains and a healthy dose of momentum early in the year.</b></div>
<br />
<ul>
<li>Over the last 4 months, payroll gains have averaged
205 thousand per month.</li>
<li>This is up from gains averaging 154 thousand per
month over the prior 4 months.</li>
<li>The large gain in employment in February suggests a
bit more positive momentum in the economy than was generally appreciated.</li>
</ul>
<br />
<div class="MsoPlainText">
<b>The implications for the near-term outlook were positive,
but modest.</b></div>
<br />
<ul>
<li>While employment and hours in February far exceeded
expectations, revisions to previous months were not favorable in terms of their
implications for Q1 growth -- growth of employee hours in December was revised
up and growth in January was revised down.</li>
<li>Combined with unexpected weakness in the hours of
the self-employed, this suggests an upward revision to our forecast for growth
of hours worked in the nonfarm business sector in the first quarter of only two
tenths (to 1.8%).</li>
<li>Average hourly earnings posted a trend-like, 0.2%
increase in February.<span style="mso-spacerun: yes;"> </span>Combined with the
unexpected strength in hours, this suggests a few tenths more growth of wage
and salary income in the first quarter than we previously expected.<span style="mso-spacerun: yes;"> </span></li>
<li>This, in turn, translates into modest upside risk to
our latest forecast of 1.6% PCE growth in the first quarter, but not enough to
warrant a tracking update.</li>
</ul>
<br />
<div class="MsoPlainText">
<b>There are other reasons not to get carried away.</b></div>
<br />
<ul>
<li>While this morning's employment report was
unexpected and encouraging, it's important to keep in mind that the effects of
this year's tax increase and sequester have yet to be felt fully.</li>
<li>To be sure, payroll gains in line with the recent
trend (about 200 thousand per month) would put the labor market on a healthy
trajectory.</li>
<li>However, we expect that fiscal drag now coming on
line should soften the trend in payroll employment over the next few months, so
we expect the pace of employment gains to slow relative to the trend of the
last few months.</li>
</ul>
<br />
This is from a commentary that was published on March 8, 2013.
<br />
<br />
<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-54594918980040240392013-03-08T05:27:00.003-08:002013-03-08T05:27:33.513-08:00MA's Meyer on Who Moves Markets on CNBC Squawk Box<object id="cnbcplayer" height="380" width="400" classid="clsid:D27CDB6E-AE6D-11cf-96B8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=9,0,0,0" > <param name="type" value="application/x-shockwave-flash"/> <param name="allowfullscreen" value="true"/> <param name="allowscriptaccess" value="always"/> <param name="quality" value="best"/> <param name="scale" value="noscale" /> <param name="wmode" value="transparent"/> <param name="bgcolor" value="#000000"/> <param name="salign" value="lt"/> <param name="flashVars" value="startTime=000"/> <param name="flashVars" value="endTime=000"/> <param name="movie" value="http://plus.cnbc.com/rssvideosearch/action/player/id/3000152820/code/cnbcplayershare" /> <embed name="cnbcplayer" PLUGINSPAGE="http://www.macromedia.com/go/getflashplayer" allowfullscreen="true" allowscriptaccess="always" bgcolor="#000000" height="380" width="400" quality="best" wmode="transparent" scale="noscale" salign="lt" src="http://plus.cnbc.com/rssvideosearch/action/player/id/3000152820/code/cnbcplayershare" type="application/x-shockwave-flash" /></object>
<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-5522879312644912122013-03-08T05:10:00.000-08:002013-03-08T05:10:00.336-08:00Who Moved Markets in 2012?<b>In this latest edition of our annual commentary, we look at how FOMC members moved markets last year.</b><br />
<ul>
<li>In a departure from previous years, we examine the impact of FOMC participants' speeches on the ten-year Treasury yield (instead of the two-year yield).</li>
<li>The two-year yield today is pinned down by the FOMC's very explicit funds rate guidance, which suggests no rate hikes over the next two years.</li>
<li>The combination of the funds rate guidance and very low yields has left very little room for the two-year yield to respond to FOMC speeches.</li>
</ul>
<b>The "I Moved Markets" award goes to the FOMC member who had the greatest total impact on the ten-year yield.</b><br />
<ul>
<li>And the winner is: Chairman Bernanke! On a cumulative basis, he moved the ten-year yield by 18 basis points.</li>
<li>The two runners-up were Presidents Lockhart and Fisher. President Bullard, last year's winner in a rare upset, virtually tied for fourth place with President Dudley.</li>
</ul>
<b>The "Power Player of the Year" award goes to the FOMC member with the largest market impact per speech. </b><br />
<ul>
<li>Some FOMC members speak more often than others and thus have more opportunities to move the market.</li>
<li>For instance, President Fisher had by far the largest number of speeches included in our analysis (22).</li>
<li>On a per-speech basis, the Chairman also came in first. President Lockhart was the runner-up, with President Lacker third. </li>
</ul>
<b>The "Market Neutrality" award goes to the member who managed to most consistently talk about monetary policy without affecting market prices. </b><br />
<ul>
<li>This award goes to the entire Board of Governors (other than the Chairman).</li>
<li>Governors spoke little compared to the rest of the Committee and had a net impact of only -1/2 basis point.</li>
</ul>
<b>For all the attention paid to speeches, official FOMC communications, such as FOMC meeting minutes and statements, were far more influential to the market than speeches (on a per-event basis).</b><br />
<ul>
<li>On a per-event basis the impact of speeches on the ten-year yield was less than one-third that of FOMC minutes and statements.</li>
<li>Minutes, statements, and the Chairman's press briefings were more influential on markets than speeches by the Chairman.</li>
</ul>
<br />
Every year we write a special issue of our Fixed Income Focus series devoted to gauging the market impact of Fed speeches and other forms of communications. We rank FOMC members according to the effects of their speeches on interest rates. This year, we used the same methodology as in previous years with one notable exception: We look at the ten-year Treasury yield rather than the two-year Treasury yield. The two-year yield has been pinned down by the FOMC's increasingly explicit funds-rate guidance that, we would argue, has made the two-year yield less responsive to Fed speeches. In contrast, one could argue that the ten-year yield has become more sensitive to Fed speeches given that QE tends to have a greater impact on the longer end of the curve.<br />
<br />
We examine the market effects not only of speeches, but also of television and radio broadcast interviews. For simplicity, however, unless otherwise noted, we refer to all individual communications by members as speeches-except the Chairman's semiannual monetary policy testimonies before Congress and his post-meeting press conferences.[1]<br />
<br />
We consider only those speeches that have at least some forward-looking content on monetary policy or the economic outlook. We measure the market impact of a speech as the change in the ten-year Treasury yield over a window that normally begins 15 minutes before and ends two hours after the speech. When economic data releases or Treasury auctions interfere with this 2-1/4-hour window, we either adjust the window or exclude the speech. This helps us better isolate the market impact of the speeches included in our analysis.[2] We generally exclude speeches with coinciding start times.<br />
<br />
We also look at the market impact of official FOMC communications, such as FOMC statements and minutes. We include the Chairman's semiannual monetary policy testimonies and press conferences in the FOMC communications category because these are events where the Chairman is effectively speaking on behalf of the Committee.<br />
<br />
<b>Market Reaction to Speeches by Individual FOMC Members</b><br />
Figure 1 shows the sum of the absolute value of the impact on the ten-year Treasury yield of each member's public speeches. Chairman Bernanke tops the list with a total impact of 18 basis points. President Lockhart came in second place with an impact of 17 basis points, and President Fisher was third with about 16 basis points. The previous year's winner, President Bullard, came in virtually tied for fourth place with President Dudley.<br />
<br />
With the exception of the Chairman, the most impactful speakers last year were all Bank presidents. The greater market impact of presidents is not at all surprising. First, the Board acts as a team, and teams follow the leader.[3] As such, governors are more reluctant to take positions in public that differ from those of the Chairman. Governors more often clarify the view of the FOMC rather than question it. To us, this implies that governors' speeches are less likely to generate "news" than presidents' speeches. Second, only a few members of the Board, especially for the current Board, have a background that makes them comfortable talking about the outlook and monetary policy. So governors not only tend to make less news, they also tend to talk less often than presidents.<br />
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<br />
<b>Who Talked the Most</b><br />
Figure 2 shows, for each member, the total number of speeches that were included in our database for 2012. Overall, we examined 133 speeches by FOMC members: 116 speeches by presidents, 12 by the Chairman, and 5 by other Board members. President Fisher had the most speeches included in our analysis (22), close to his 2011 total of 21. President Bullard was second with 14, although he likely holds the record with 36 speeches in 2010. Chairman Bernanke came in tied for fourth. As we indicated above, other governors spoke relatively infrequently. Vice Chair Yellen, the most frequent speaker other than the Chairman, gave only two monetary policy-relevant speeches last year.[4]<br />
<br />
The new Board members, Governors Powell and Stein, followed Board tradition and stayed below the radar, speaking little publicly. Governor Stein did give some more-theoretical but still policy-relevant speeches on asset purchases toward the end of the year. We were able to include one of those speeches in our sample.<br />
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<b>Market Response Per Speech</b><br />
The results in Figure 1 do not account for the fact that some FOMC members speak more often than others and, thus, have more opportunities to affect market prices. Figure 3 presents the average absolute market response per speech for FOMC members. The average market impact per speech by presidents was about 0.9 basis point; the average market impact of governors, other than the Chairman, was a third as great, at 0.3 basis point. This is consistent with our observation above about presidents' greater propensity, relative to Governors other than the Chairman, to deliver market-impacting speeches.<br />
<br />
Chairman Bernanke had the largest impact per speech, 1.5 basis points, followed by President Lockhart at 1.3 basis points. President Lockhart is considered a centrist and perhaps his remarks are closely scrutinized by the market for signs of where the Committee's consensus might be headed. President Lacker, who dissented at every meeting in 2012 and consistently pushed back against the center-dove coalition, led the rest of the pack on an impact-per-speech basis. President Fisher, the most frequent FOMC speaker last year, was not very impactful on a per-speech basis.<br />
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<br />
<b>Directional Bias and “Market Neutrality”</b><br />
We also examined the net directional effect of each FOMC member on Treasury yields, measured as the sum of the market impact of his or her speeches. On net, FOMC speeches increased yields by about 11 basis points in 2012. This suggests that last year's speeches tended to be interpreted as more hawkish than expected. Of course, what matters for the market response is the extent to which each speech surprises relative to market expectations. So, even a hawkish speech by a hawk can drive yields lower if the speech is less hawkish than anticipated. A case in point is President Plosser, a solid hawk whose speeches apparently contributed to a 6-basis-point decline in the ten-year yield. Closer to the other end of the spectrum, President Dudley's speeches were apparently seen as less dovish than anticipated, adding 5 basis points to the ten-year yield last year, on net.<br />
<br />
The Chairman had the greatest negative cumulative impact on yields, -6 basis points. This is not surprising because the FOMC was easing in 2012. President Bullard had the greatest positive cumulative impact, 7-1/2 basis points. <br />
<br />
Some members on the Committee-typically governors other than the Chairman-pride themselves on having a very small impact on markets. In effect, they choose not to compete for the "I Moved Markets" award. In recognition of these members, we offer the "Market Neutrality" award, which of course goes to the FOMC member with the least net impact on the markets. But in 2012 a number of governors had zero net impact on the ten-year yield. So, in a departure from tradition, we give that award to "the governors" (excluding the Chairman). As a group, they had a net impact of only -1/2 basis point, though we should point out that the market neutrality of three of the governors (Duke, Powell, and Tarullo) simply reflects that we were able to include none of their speeches.<br />
<br />
<b>Impact of FOMC “Official” Communications on Yields in 2012</b><br />
Figure 5 compares the market impact in 2012 of official communications by the Committee-statements, minutes, press conferences, and the Chairman's monetary policy testimonies-to the market impact of speeches. The figure suggests that, for all the attention and press coverage devoted to speeches in general, on a per-event basis, official FOMC communications were far more market influential than speeches last year.<br />
<br />
Not even the Chairman's speeches were more influential than official communications. For instance, the average market impact of his speeches (see Figure 3) was around half that of FOMC statements.<br />
<br />
In 2012, FOMC statements had the largest impact per event, 3-1/2 basis points. Next came the FOMC meeting minutes and the Chairman's press briefings, at around 3 basis points, followed by the Chairman's monetary policy testimonies, at 2-3/4 basis points.[5] The substantial impact of the minutes and press briefings may reflect that these proved to be excellent guides to the evolving Committee consensus in 2012, often providing the first signals of an emerging consensus.<br />
<br />
<span style="font-size: x-small;">[1] By "members," we mean all Board Governors (including the Chairman) and all Federal Reserve Bank presidents, including those who did not vote last year.</span><br />
<span style="font-size: x-small;">[2] Of course, we are aware that many other factors, including noise, drive fluctuations in yields. Our assumption here is that they average out to zero during the measurement window, such that we attribute the full movement in the ten-year yield within the window to the news element in the speech.</span><br />
<span style="font-size: x-small;">[3] See our Policy Focus commentary, "Counting Heads: Does it Matter?" July 1, 2010, for a discussion of the voting behavior of governors.</span><br />
<span style="font-size: x-small;">[4] As noted previously, we had to exclude a large number of speeches from our analysis because they happened to be scheduled for roughly the same time as another speech or market-moving event.</span><br />
<span style="font-size: x-small;">[5] Note that the FOMC's projections are released in the Summary of Economic Projections just before the press conference, so it is hard to disentangle the effects of the two events. </span><br />
<br />
This is from a commentary that was published on March 8, 2013. <br />
<br />
<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-76402247348214670952013-02-25T20:00:00.000-08:002013-02-25T20:00:00.819-08:00Interest Rate Risk in the Fed's Portfolio (Part 2): What If Net Interest Income Turns Negative?The Fed has been posting outsized profits in recent years and remitting them to the U.S. Treasury.<br />
<br />
This is from a commentary that was published on February 22, 2013.<br />
<br />
<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-45626621554981714472013-02-19T13:00:00.001-08:002013-02-19T13:00:04.272-08:00MA's Alternative Scenario: March 1 Sequestration<span style="font-family: inherit;"><b>A sequestration of federal spending, scheduled to take effect on March 1, is now less than two weeks away. Little progress has been made in negotiating a bargain that avoids or delays the automatic spending cuts implied by the sequestration.<span style="font-size: xx-small;">[1] </span>Accordingly, we now put the odds of a sequestration at close to 50%, and rising.</b></span><br />
<ul>
<li><span style="font-family: inherit;">Our baseline forecast, which shows GDP growth of 2.6% in 2013 and 3.3% in 2014, does not include the sequestration.</span></li>
<li><span style="font-family: inherit;">The sequestration would reduce our forecast of growth during 2013 by 0.6 percentage point (to 2.0%) but then, assuming investors expect the Federal Open Market Committee (FOMC) to delay raising the federal funds rate, boost growth by 0.1 percentage point (to 3.4%) in 2014.</span></li>
<li><span style="font-family: inherit;">By the end of 2014, the sequestration would cost roughly 700,000 jobs (including reductions in armed forces), pushing the civilian unemployment rate up ¼ percentage point, to 7.4%. The higher unemployment would linger for several years.</span></li>
</ul>
<span style="font-family: inherit;">The macroeconomic impact of the sequestration is not catastrophic. Nevertheless, the indiscriminate fiscal restraint would come on the heels of tax increases in the first quarter that total nearly $200 billion, with the economy still struggling to overcome the legacy of the Great Recession, and when the FOMC is constrained in its ability to offset the additional fiscal drag with a more accommodative monetary policy. By far the preferable policy is a credible long-term plan to shrink the deficit more slowly through some combination of revenue increases within broad tax reform, more carefully considered cuts in discretionary spending, and fundamental reform of entitlement programs.<br /><br /><b>Background</b><br />The Budget Control Act of 2011 (BCA) established separate caps on defense and nondefense spending for fiscal years 2012-2021, while also creating the Joint Select Committee on Deficit Reduction charged with proposing an additional $1.2 trillion of deficit reduction relative to budget projections based on the cap that was to be enacted, by January 15, 2012.</span><span style="font-family: inherit;"><span style="font-family: inherit;"><b><span style="font-size: xx-small;">[<span style="font-size: xx-small;">2</span>] </span></b></span>Failure of the Committee was to trigger, effective January 1, 2013, “automatic” cuts in spending of roughly $110 billion per year relative <br /><br />to the caps, with the cuts split equally between defense and nondefense outlays. For 2013, the reductions were to be implemented by cancelling budget authority in a process called “sequestration.” For subsequent years, the cuts were to be achieved by adjusting downward the original caps. The Committee did in fact fail, starting a year-long countdown to the sequestration. The recently enacted American Tax Relief Act of 2012 (ATRA) made slight adjustments to the original spending caps enacted under BCA, reduced the size of the sequestration in 2013 by $24 billion (from $109 billion to $85 billion), and delayed its implementation until March 1. That day is now imminent.<br /><br /><b>Sizing the Sequestration</b><br />Table 1 and Chart 1, which are based on estimates prepared by the Congressional Budget Office, show the effect of the sequestration on both federal budget authority and federal outlays for fiscal years 2013-2023 relative to projections based on the spending caps.</span><span style="font-family: inherit;"><span style="font-family: inherit;"><b><span style="font-size: xx-small;">[<span style="font-size: xx-small;">3</span>] </span></b></span>For purposes of assessing the impact of the sequestration on the economic outlook, our focus is on outlays as opposed to authority. Note that the full impact of the sequestration on the level of outlays—roughly $110 billion—is not reached for several years, because the sequestration for 2013 was reduced and cuts in outlays lag behind cuts in budget authority. <br /><b> </b></span><br />
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<br />
<span style="font-family: inherit;"><b>Designing the Alternative Scenario</b><br />MA’s current baseline forecast does not include the sequestration.</span><span style="font-family: inherit;"><span style="font-family: inherit;"><b><span style="font-size: xx-small;">[<span style="font-size: xx-small;">4</span>] </span></b></span> Rather, it assumes the sequestration is avoided and replaced with a long and gradual squeeze on spending that is less damaging to near-term economic growth and delays a significant part of the fiscal contraction until later in the decade when the FOMC is better positioned to offset the fiscal drag with accommodative monetary policy. <br /><br />To use our macro model (MA/US) to simulate the potential effects of the sequestration on our forecast, it is first necessary to convert and interpolate the spending cuts shown in Table 1 from fiscal years to calendar quarters and then allocate those spending cuts across the components of federal expenditures in the National Income and Product Accounts (NIPAs) that are the basis for the government sector in MA/US. <br /><br />This allocation does affect the results because cuts in different components of the federal budget affect the economy differently. For example, a reduction in federal purchases of goods reduces GDP directly but (private) employment only indirectly, while a cut in federal employment reduces GDP and public employment directly and then private employment indirectly. In addition, the fiscal “multiplier” is higher for direct purchases than it is for payments such as subsidies or foreign aid. <br /><br />The results of this allocation through 2015 are shown in Table 2. Cuts in NIPA consumption and gross investment account for roughly two-thirds of the savings, with transfers and grants comprising the rest. About one-third of the cuts in transfers and grants are in Medicare benefits.</span><span style="font-family: inherit;"><span style="font-family: inherit;"><b><span style="font-size: xx-small;">[<span style="font-size: xx-small;">5</span>] </span></b></span> </span><br />
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<span style="font-family: inherit;"><br /><b>Simulation Results</b><br />We layered these spending cuts on top of our baseline assumptions and re-simulated MA/US allowing the model’s endogenous response of monetary policy. The results for growth and unemployment are summarized in Charts 2 and 3; details of the baseline and alternative simulations are shown in the tables at the back of the report. </span><br />
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<span style="font-family: inherit;"><br /><br />The effect of the sequestration is to slow real GDP growth over 2013 from 2.6% to 2.0%. The largest impact occurs in the second quarter, when growth is reduced by roughly 1¼ percentage points. By the end of the year, the civilian unemployment rate is ¼ percentage point higher than in the baseline. As early as the first quarter of 2014, GDP growth exceeds the baseline path, albeit slightly. The reason growth rebounds so quickly is that while, relative to the baseline, spending does continue falling modestly in 2014 and 2015, slower economic growth and higher unemployment lead financial markets to expect a later (2016:Q1 instead of 2015:H2) tightening of monetary policy. This lowers long-term yields roughly enough to just offset additional fiscal drag in 2014. However, because GDP growth does not exceed the baseline by much in 2014, the increase in unemployment lingers for several years. <br /><br /><b>Concluding Remarks</b><br />The impact of the sequestration would not be a macroeconomic catastrophe. Nevertheless, the indiscriminate fiscal restraint would occur on the heels of tax increases that total nearly $200 billion in the first quarter, with the economy still struggling to overcome the legacy of the Great Recession, and when the FOMC is constrained in its ability to offset the additional fiscal restraint. Furthermore, spending cuts that are so arbitrary in their allocation and timing can’t possibly be optimal from a public policy perspective. The preferable policy is a credible long-term plan to shrink the deficit more slowly through some combination of tax increases within broad tax reform, more carefully considered cuts in discretionary spending, and fundamental reform of entitlement programs.</span><br />
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<span style="font-size: x-small;"><span style="font-family: inherit;">[1] Democrats have proposed replacing the first 10 months of the sequestration with a combination of tax increases and spending cuts that would accumulate to roughly $110 billion over ten years. The proposal would raise revenue by imposing the so-called “Buffet rule,” limiting tax breaks for oil companies, and penalizing companies that outsource jobs. It would cut both defense spending and nondefense domestic outlays by $27.5 billion over 10 years. Republicans appear unimpressed by the proposal and, at least for now, many in the GOP seem content to let the sequestration play out.<br />[2] The caps applied to spending other than outlays related to operations, both military (defense) and diplomatic (nondefense), in Afghanistan and also allowed “carve-outs” for spending on emergencies and disaster relief. In addition, cuts to Medicare benefits were limited to 2%. <br />[3] Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2013 to 2023 (February 2013).<br />[4] Please see Macroeconomic Advisers’ Outlook Commentary (Volume 31, Number 1; February 15, 2013).</span></span><br />
<span style="font-family: inherit;"><span style="font-size: x-small;">[5] The sequester does not apply to the benefits of either the Social Security or the Medicaid programs, and cuts in Medicare benefits are capped at 2% of the baseline level. We allocated the defense sequester proportionately across all components of NIPA defense expenditures and the nondefense sequester proportionately across all components of NIPA nondefense expenditures except Social Security benefits and Medicaid transfers to states, while observing the limit on cuts to Medicare benefits. In addition, we assumed that reductions in grants to states are matched by reductions in state and local expenditures on goods and services other than compensation. </span></span><br />
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<span style="font-family: inherit;">This is from a commentary that was published on February 19, 2013.</span><br />
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<span style="font-family: inherit;"><a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a></span>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-35427859272229186892013-02-14T14:21:00.003-08:002013-02-14T14:21:53.528-08:00MA's Monthly GDP rose 1.0% in DecemberMonthly GDP rose 1.0% in December following a 0.2% increase in November that was revised up by two-tenths. Three-fourths of the December increase was accounted for by a sharp narrowing of the trade deficit in December; a solid contribution from domestic final sales accounted for most of the rest. The level of GDP in December was 2.8% above the fourth-quarter average at an annual rate, indicating some upside risk to our Consensus Panel’s (mean) forecast of first-quarter GDP growth of 1.9% (as of last Friday). Our latest tracking forecast of 2.4% GDP growth in the first quarter assumes little change in monthly GDP over the three months of the first quarter. <br />
<br />This is from a commentary that was published on February 14, 2013.<br />
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<span style="font-size: x-small;"><b>Technical Note</b><br />Macroeconomic Advisers’ index of Monthly GDP (MGDP) is a monthly indicator of real aggregate output that is conceptually consistent with real Gross Domestic Product (GDP) in the NIPA’s. The consistency is derived from two sources. First, MGDP is calculated using much of the same underlying monthly source data that is used in the calculation of GDP. Second, the method of aggregation to arrive at MGDP is similar to that for official GDP. Growth of MGDP at the monthly frequency is determined primarily by movements in the underlying monthly source data, and growth of MGDP at the quarterly frequency is nearly identical to growth of real GDP.</span><br />
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<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-80820419634243293982013-02-11T12:30:00.000-08:002013-02-11T12:30:02.551-08:00Governor Stein's Speech: What Does It Mean for QE3?<br />
Yesterday Governor Stein provided a thought-provoking assessment of the credit market as a potential source of financial instability.<br />
<br />
We see Governor Stein's remarks as consistent with the themes we developed in our most recent <i>Rates Outlook</i> commentary, published earlier this week.<br />
<br />
This is from a commentary that was published on February 8, 2013. <br />
<br />
<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-66624704031504630922013-02-11T06:47:00.000-08:002013-02-11T06:47:25.162-08:00MA's Meyer Speaks about Fed's Exit Strategy on CNBC<object id="cnbcplayer" height="380" width="400" classid="clsid:D27CDB6E-AE6D-11cf-96B8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=9,0,0,0" > <param name="type" value="application/x-shockwave-flash"/> <param name="allowfullscreen" value="true"/> <param name="allowscriptaccess" value="always"/> <param name="quality" value="best"/> <param name="scale" value="noscale" /> <param name="wmode" value="transparent"/> <param name="bgcolor" value="#000000"/> <param name="salign" value="lt"/> <param name="flashVars" value="startTime=000"/> <param name="flashVars" value="endTime=000"/> <param name="movie" value="http://plus.cnbc.com/rssvideosearch/action/player/id/3000146558/code/cnbcplayershare" /> <embed name="cnbcplayer" PLUGINSPAGE="http://www.macromedia.com/go/getflashplayer" allowfullscreen="true" allowscriptaccess="always" bgcolor="#000000" height="380" width="400" quality="best" wmode="transparent" scale="noscale" salign="lt" src="http://plus.cnbc.com/rssvideosearch/action/player/id/3000146558/code/cnbcplayershare" type="application/x-shockwave-flash" /></object><br />
<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-68096226341596663312013-01-29T07:00:00.000-08:002013-01-29T07:00:12.633-08:00FOMC Chatter Ahead of the January 2013 MeetingPolicymakers generally used their public appearances to discuss their recent QE3 and funds rate guidance decisions. <br />
<br />
This is from a commentary that was published on January 28, 2013. <br />
<br />
<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-37229048089564153792013-01-29T06:30:00.000-08:002013-01-29T06:31:48.817-08:00FOMC on Hold; FOMC in Play<b>The FOMC is on hold with respect to the funds rate guidance but very much in play with respect to its future plans for QE3. <br /></b><br />
<b>There are many points of view on how QE3 will evolve and when it will end.</b><br />
<ul>
<li>Some observers think that the FOMC does not really believe there are costs of expanding the balance sheet. As a result, they expect the FOMC to purchase potentially unlimited quantities of assets until the labor market outlook improves substantially. </li>
<li>Others believe that, while the FOMC does weigh the costs and benefits of more QE, the costs are small enough that the labor market outlook will improve substantially before the cost-benefit tradeoff becomes unfavorable.</li>
</ul>
This is from a commentary that was published on January 24, 2013. <br />
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<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-76338432325912110342013-01-22T10:30:00.000-08:002013-01-22T10:30:30.856-08:00Fiscal Risks: Debt Ceiling, Sequester, Shutdown!
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<br />
<div class="MsoNormal" style="margin-top: 6.0pt; text-align: justify;">
<b><span style="font-size: 11pt;"><span style="font-family: inherit;">Enactment of the American Tax Relief Act of 2012 (ATRA) eliminated
the near-term uncertainty surrounding tax policy, shifting attention to three
other downside fiscal risks to our forecast.</span></span></b></div>
<div class="MsoNormal" style="margin-top: 6.0pt; text-align: justify;">
</div>
<ul>
<li><span style="font-family: inherit; font-size: 11pt; text-indent: -0.25in;">A brief encounter with the debt
ceiling this winter might not be calamitous, but a prolonged one would cause
the deepest recession since the Great Depression.</span></li>
<li><span style="font-family: inherit; font-size: 11pt; text-indent: -0.25in;">Just the possibility of hitting
the debt ceiling could create enough uncertainty to reduce GDP by roughly ½
percentage point this year, even if the ceiling is raised before it is
reached. </span></li>
<li><span style="font-family: inherit; font-size: 11pt; text-indent: -0.25in;">Imposition of the full sequester
on March 1 would reduce GDP growth by roughly ¾ percentage point in 2013 relative
to our forecast.</span></li>
<li><span style="font-family: inherit; font-size: 11pt; text-indent: -0.25in;">A brief shutdown in April of the
federal government would cut GDP growth in the second quarter by about ¼
percentage point for each week it lasted.
However, the longer the shutdown, the worse and more chaotic the outcome.</span></li>
</ul>
<br />
<div class="MsoNormal" style="mso-pagination: widow-orphan lines-together; page-break-after: avoid; text-align: justify;">
<b><span style="font-size: 11pt; font-variant: small-caps;"><span style="font-family: inherit;">Three Looming
Deadlines<o:p></o:p></span></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 11pt;"><span style="font-family: inherit;">ATRA may have clarified near-term tax policy but three
looming fiscal deadlines pose downside risks to our forecast. First, unless the debt ceiling is raised, the
Treasury will be unable to pay all its bills by late February or early
March. Second, ATRA delayed until March
1 the sequester originally enacted under the Budget Control Act of 2011 (BCA). Our forecast presumes the full sequester is
avoided, replaced instead with smaller spending cuts, but we could be
wrong. Finally, the federal government
is operating under a continuing resolution that expires March 27. Unless new spending authority is legislated
by then, non-essential government functions could be shut down at the end of
the first quarter. <o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="mso-pagination: widow-orphan lines-together; page-break-after: avoid; text-align: justify;">
<b><span style="font-size: 11pt; font-variant: small-caps;"><span style="font-family: inherit;">Debt
Ceiling<o:p></o:p></span></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 11pt;"><span style="font-family: inherit;">The United States hit its debt ceiling on December 31,
2012. The Treasury will use temporary
financial maneuvers to continue paying its bills through late February or early
March.<span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 11pt;">[1]</span></span><!--[endif]--></span> Thereafter, unless the debt ceiling is raised
— or some other strategy is adopted to circumvent it<span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 11pt;">[2]</span></span><!--[endif]--></span>
— the federal government will be unable to meet all of its current financial
commitments in a full or timely manner.
In that event, the Treasury likely would manage its cash flow to meet
interest payments on the national debt, thereby avoiding a sovereign default.<span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 11pt;">[3]</span></span><!--[endif]--></span> However, the government could fall into
default on contracts with private vendors, and be perceived as having broken
long-standing social compacts with the beneficiaries of entitlement programs. <o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<i><span style="font-size: 11pt;"><span style="font-family: inherit;">A De Facto Balanced
Budget Amendment<o:p></o:p></span></span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 11pt;"><span style="font-family: inherit;">In terms of expenditure flows, hitting the debt ceiling
is like enforcing a Balanced Budget Amendment (BBA) daily and from the spending
side of the ledger only. While the
Treasury could meet all its interest obligations, the budget would have to be
brought into balance immediately and kept there by varying other outlays. The result would be a reduction in the level
of spending that, on average, would be not only very large, but also, given the
seasonal “lumpiness” of tax receipts, very volatile. <o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 11pt;"><span style="font-family: inherit;">Some have suggested that if the Treasury avoids sovereign
default, damage from enforcing the debt ceiling for even a lengthy period could
be limited by prioritizing and juggling other payments. To appreciate the folly of this view,
suppose the debt ceiling became binding in March and remained so through 2014. For the rest of 2013, the “static” reduction
in spending would average roughly $825 billion at an annual rate, or roughly 5%
of GDP.<span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 11pt;">[4]</span></span><!--[endif]--></span> This is a huge fiscal contraction to occur
abruptly. For example, we recently
estimated that the contraction associated with the “fiscal cliff,” which was a
smaller 4¼% of GDP, would have thrown the economy into recession. Furthermore, most of the contraction
associated with the fiscal cliff was from tax increases, which have smaller
multipliers than the spending cuts necessary to enforce the debt limit. And, were such cuts implemented for a
sustained period, as the economy fell into recession and tax revenues declined,
additional cuts would be required to keep the budget balanced and avoid
additional debt issuance. This, in turn,
would further steepen the economic downturn.<span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 11pt;">[5]</span></span><!--[endif]--></span><o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 11pt;"><span style="font-family: inherit;">Just how dire might be the outcome? To see, we ran a simulation in which the debt
ceiling becomes binding in March and remains in force through the end of
2014. The Treasury is assumed to meet
all interest payments on the national debt but cut other spending
proportionately to bring the budget into continuous balance through the fourth
quarter.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 11pt;"><span style="font-family: inherit;">For example, our baseline forecast shows a unified budget
deficit in the first quarter of $1.095 trillion at an annual rate (not
seasonally adjusted). However, in three
of the last four years, roughly 40% of first-quarter deficits have accumulated
during March. If that same pattern were
to repeat this year, it would take a static spending cut of $1.314 trillion
against our baseline to balance the budget in March, thereby reducing first-quarter
spending by $438 billion (= 1/3 of $1.314 trillion), all at annual rates. For the second quarter, our forecast shows a relatively
small deficit of $533 billion because April sees strong revenues. This requires a sequential cut in spending
from the first to the second quarter of $95 billion (= $533 billion less $438
billion, but implying a huge $800 billion rebound in spending from the March
level). In the third quarter, our
baseline deficit rises to $745 billion, requiring a sequential cut in spending
of $213 billion (= $745 billion less $532 billion), and the respective numbers
for the fourth quarter are $809 billion and $64 billion (= $809 billion less
$745 billion). In the simulation, even
larger “dynamic” cuts in spending are required to offset the loss in revenue
associated with the weakening economy. <o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
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<span style="font-size: 11pt;"><span style="font-family: inherit;">This pattern of expenditure cuts is repeated in 2014, but
that can’t be the whole story. Appetite
for risk would also decline in this scenario, although it is hard to know by how
much, and for how long. However, <i>some</i> allowance must be made for the
uncertainty that would accompany 30% <i>absolute</i>
(that is, not relative to a rising baseline) across-the-board cuts in
non-interest outlays against the backdrop of abrogated legal contracts and
social compacts. In our model, the VIX
is used as a general marker for risk that influences the prices of risky assets
which, in turn, affect aggregate demand.
For this experiment, we introduced a spike in the VIX two-thirds the
size, but of the same duration, as the spike that occurred during the financial
crisis in 2008 and 2009. <o:p></o:p></span></span></div>
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<br /></div>
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<![endif]><![endif]--><!--[if !vml]--><!--[endif]--><span style="font-size: 11pt;"><span style="font-family: inherit;">The results of a model simulation involving both
the required spending cuts and the spike in the VIX are shown in Charts 1 and
2. </span></span></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;"><br /></span></span></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">The unified budget deficit falls into
balance after the first quarter of this year.
GDP growth, shown here as the percent change from four quarters earlier,
turns sharply negative, hitting -8% in the fourth quarter of this year before
then rising to 0 by the end of 2014. This would be the worst recession since
World War II by a wide margin, sending the unemployment rate soaring above 14%
by the middle of next year. We don’t
want to make too much of this simulation, since even in today’s rancorous
political climate such a disastrous scenario seems improbable. The results are more relevant for a
discussion about the impact of a strict balanced budget amendment. Nevertheless, they do emphasize that if the
Treasury is constrained by the debt ceiling for any meaningful period of time,
economic performance could worsen quickly and quite dramatically. <o:p></o:p></span></span></div>
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<i><span style="font-size: 11pt;"><span style="font-family: inherit;">Uncertainty is Bad
Enough<o:p></o:p></span></span></i></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">Perhaps the most likely scenario is that during the
exercise of partisan brinkmanship, the US approaches or even briefly hits the
debt ceiling and that, given its daily cash flows, the Treasury has
insufficient balances to meet a contractual obligation or pay promised benefits
on time, thereby “defaulting” on those commitments before a resolution to the
political impasse is reached. This
scenario is not as dire as a sovereign default, but it is bad enough since it
would heighten uncertainty about federal financial flows, call into question
the meaning of “full faith and credit” of the U.S. government, undermine the
credibility of our political institutions, reduce our standing with the rest of
the world, and encourage rating agencies to downgrade U.S. debt further. <o:p></o:p></span></span></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">The events of the summer of 2011 suggest that the
political brinkmanship preceding the eventual resolution of the debt-ceiling
crisis in August created uncertainty that slowed GDP growth in the third
quarter of that year. We could be in for
a repeat of those events during the first quarter of 2013. How much might such uncertainty slow growth
in 2013?<o:p></o:p></span></span></div>
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<![endif]><![endif]--><!--[if !vml]--><!--[endif]--><span style="font-size: 11pt;"><span style="font-family: inherit;">To answer this question we began by examining the
Index of Policy Uncertainty (IPU) developed by <a href="http://policyuncertainty.com/" target="_blank">Baker, Bloom, and Davis</a>.<span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 11pt;">[6]</span></span><!--[endif]--></span> The IPU reflects mentions by the media of
policy uncertainty, forecasters’ disagreement about federal purchases of goods
and services, forecasters’ disagreement about inflation, and scheduled
expirations of taxes. The index spiked
in the summer of 2011 during the dispute over the debt ceiling. (See Chart
3). Intuitively, such uncertainty could
slow economic growth by encouraging households and businesses to delay
decisions and by reducing the price of risk assets.<o:p></o:p></span></span></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">The IPU does not appear in our macro model, but Baker et.
al. emphasize that their index is correlated with the VIX, which, as already
noted, functions in our model as a general marker for uncertainty. Hence, we developed a simple model relating
the VIX to the IPU, and, using that equation, we estimated that the spike in
the IPU during the last debt-ceiling crisis raised the VIX by about 4½ points
during the three months centered on August of 2011.<span class="MsoFootnoteReference"> <!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 11pt;">[7]</span></span><!--[endif]-->,<!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 11pt;">[8]</span></span><!--[endif]--></span> Our published forecast does not show a VIX
shock in the first quarter related to the uncertainty over the debt ceiling. However, by introducing an uncertainty shock
similar to the one associated with the debt-ceiling debacle of 2011, we can
simulate the potential impact on GDP growth of a similar stand-off in 2013.<o:p></o:p></span></span></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">We ran such a simulation assuming that a 3-month shock is
centered on February, when the debt ceiling could first become binding. The results of this experiment are shown in
Chart 4. They suggest that a temporary
rise in uncertainty surrounding the approach to the debt ceiling could trim 0.4
percentage point from GDP growth over the course of 2013. <o:p></o:p></span></span></div>
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<b><span style="font-size: 11pt; font-variant: small-caps;"><span style="font-family: inherit;">Sequester<o:p></o:p></span></span></b></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">ATRA delayed the BCA sequester by two months (to March 1)
and paid for the delay by reducing in 2013 and 2014 the caps on discretionary
spending implemented under the Budget Control Act of 2011. While our forecast shows a path for
discretionary spending that is lower than
implied by these modified BCA spending caps, it is above the path
implied by the now-delayed sequester.
(See Chart 5.) </span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4a4ErmUigSSEcI9OwyBBPIAUJCyMeNIcC9K0eZhLXCLcd1kpbHaxoCMlWKiuK3cgiv6uLoX0WUfqt-aZ5RcBirfCXCDvSKFihvVg-Zt5SQUf_KK840EnmjygohWymRCJPRH4b08wYWs9a/s1600/Chart5.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: inherit;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4a4ErmUigSSEcI9OwyBBPIAUJCyMeNIcC9K0eZhLXCLcd1kpbHaxoCMlWKiuK3cgiv6uLoX0WUfqt-aZ5RcBirfCXCDvSKFihvVg-Zt5SQUf_KK840EnmjygohWymRCJPRH4b08wYWs9a/s640/Chart5.jpg" width="640" /></span></a></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">Suppose our
assumption that the full sequester is avoided proves wrong, and on March 1
discretionary spending drops from our baseline to the lower path consistent
with ATRA. How would that affect our
projections for growth this year and next?
<o:p></o:p></span></span></div>
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<![endif]><![endif]--><!--[if !vml]--><!--[endif]--><span style="font-size: 11pt;"><span style="font-family: inherit;">We simulated this as a reduction in the level of
federal consumption and gross investment (relative to our forecast) that builds
from $4 billion in the first quarter of this year to $65 billion by the fourth
quarter, and then is maintained through 2014.
In addition, the sequester would reduce the level of spending on
healthcare entitlements by an amount that grows to roughly $10 billion per
year. The results of this simulation for
GDP growth are shown in Chart 6, and the effects are sizable. </span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8wTJ4TwnHOO7FUm1XD7RPocOdMTZaH7d3-oR5I6-WWkSl625wyTLwqdcpl_m0-kgXJDn3kyllWhkCjOaxjFN0GaVnykov7bkbLc3xmuna5mTUZrZAWasML867B0RGmTM48OrpUqlDOB87/s1600/chart6.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: inherit;"><img border="0" height="462" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8wTJ4TwnHOO7FUm1XD7RPocOdMTZaH7d3-oR5I6-WWkSl625wyTLwqdcpl_m0-kgXJDn3kyllWhkCjOaxjFN0GaVnykov7bkbLc3xmuna5mTUZrZAWasML867B0RGmTM48OrpUqlDOB87/s640/chart6.jpg" width="640" /></span></a></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">GDP growth is reduced by 0.7 percentage point
over the four quarters of 2013 (from 2.6 to 1.9) and by nearly a full
percentage point over the second half of the year as the cuts build
cumulatively. The static drag ends in
2014, but, given lags and multiplier effects, GDP growth in 2014 is only
marginally higher than in our forecast. <o:p></o:p></span></span></div>
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<b><span style="font-size: 11pt; font-variant: small-caps;"><span style="font-family: inherit;">Shutdown<o:p></o:p></span></span></b></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">The continuing resolution under which the federal
government is now operating expires on March 27. Unless that authority is extended,
non-essential functions of government will shut down, as was threatened in 2011
and as occurred twice during the budget wars between President Clinton and then
Speaker of the House Newt Gingrich. A
federal shutdown seems a real possibility.
High-ranking Republicans are regularly quoted threatening such action. <o:p></o:p></span></span></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">In early 2011 we published a detailed analysis of how a
brief shutdown of the federal government would be treated in the National
Income and Product Accounts and hence how it would affect GDP growth.<span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 11pt;">[9]</span></span><!--[endif]--></span> It was a quick exercise to update that
analysis.<span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 11pt;">[10]</span></span><!--[endif]--></span> If, starting on April 1, a shutdown began
affecting 36% of federal civilian workers, the static effect would be to reduce GDP growth in the second
quarter by roughly ¼ percentage point for each week the shutdown lasted, and
raise it a similar amount in the third quarter.<span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 11pt;">[11]</span></span><!--[endif]--></span> The effect would arise mostly from the
furloughing of non-essential federal workers whose production is valued at
labor costs in the National Income and Product Accounts. If the shutdown was (expected to be) brief,
the knock-on effects would be small.
However, the longer the shutdown lasts, the broader its impact becomes
and the more one must factor into the analysis multiplier effects as well as
the escalation of uncertainty that would accompany a sustained disruption in
government services and payments to federal contractors.<span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 11pt;">[12]</span></span><!--[endif]--></span> Of course, if the shutdown persisted long
enough it could become quite severe because, unlike the de-facto BBA — which
merely reduced spending to the level of taxes — a prolonged shutdown of the
federal government could eventually <i>zero
out</i> many categories of expenditures.<o:p></o:p></span></span></div>
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<b><span style="font-size: 11pt; font-variant: small-caps;"><span style="font-family: inherit;">Summary
Remarks<o:p></o:p></span></span></b></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">Fiscal policy is a mess.
Both Republicans and Democrats involved in budget negotiations maintain
positions hardened by ideological differences over the role of government in
society, differing views about the trade-off between the short-run costs of a
fiscal contraction and the long-run benefits, and political positioning. <o:p></o:p></span></span></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">In our view, a sharp fiscal contraction — or even the
threat of one — imposed when the economy is still struggling to recover from
the great recession and when the Federal Open Market Committee has limited
options to offset any new fiscal drag, is bad policy. It is made worse if implemented outside the
normal budget process in a series of stop-gap actions that, by using calendar
considerations as points of leverage, create attendant uncertainty. <o:p></o:p></span></span></div>
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<span style="font-size: 11pt;"><span style="font-family: inherit;">The debt ceiling, the sequester, and the expiring budget
resolution comprise a three-pack of uncertainties that in the near term is bad
for the economy. Because we assume a
benign and sensible resolution to the current fiscal dispute in relatively
short order, at least the fiscal risks around our forecast appear asymmetric to
the downside. <o:p></o:p></span></span></div>
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<div>
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<span style="font-family: inherit;"><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt;">[1]</span></span><!--[endif]--></span>
These maneuvers, which include delaying payments to federal pension funds,
create about $200 billion of headroom for the Treasury to operate early in the
year. <o:p></o:p></span></div>
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<div id="ftn2">
<div class="MsoFootnoteText" style="text-align: justify;">
<span style="font-family: inherit;"><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt;">[2]</span></span><!--[endif]--></span>
Three such strategies have been discussed in the media. In the first, the President, citing Section 4
of the 14<sup>th</sup> Amendment to the Constitution which reads “the validity
of the Public Debt of the United States, authorized by law…shall not be
questioned,” simply ignores the debt limit and instructs the Treasury to
continue issuing debt. In the second,
the Treasury uses an obscure legal authority to mint a platinum coin with a $1
trillion denomination, deposits the coin in the Treasury’s account at the Fed,
and draws on the account to keep paying its bills. In the third, the Treasury issues IOUs —
sometimes referred to as <i>scrips</i> —
that, while technically not debt, serve the same purpose. A secondary market for the <i>scrips</i> could even be encouraged in the
private sector, allowing holders to sell their IOUs at a discount rather than
waiting for the Treasury to honor the pledge later when a deal on the debt
ceiling is finalized. These schemes are certainly inventive, but an attempt to
implement any one of them would almost certainly trigger legal challenges if
not a constitutional crisis. We see all
of them as unlikely and, indeed, the Obama Administration already has ruled out
the first two.<o:p></o:p></span></div>
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<div id="ftn3">
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<span style="font-family: inherit;"><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt;">[3]</span></span><!--[endif]--></span>
There has been considerable speculation about how the Treasury might, in the
event of a cash shortfall, prioritize the roughly 80 million payments it makes
every month. Interest payments on the
debt are made over the Fed wire system and could be handled separately with
relative ease. Regarding other payments:
in 2011 the Treasury leaned towards a strategy of simply delaying payments and
then, upon receiving revenues, making what payments possible in the order
due. <o:p></o:p></span></div>
</div>
<div id="ftn4">
<div class="MsoFootnoteText" style="text-align: justify;">
<span style="font-family: inherit;"><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt;">[4]</span></span><!--[endif]--></span>
Our current forecast shows NIPA federal net borrowing at $843 billion in
calendar year 2013, relative to nominal GDP of $16,299 billion.<o:p></o:p></span></div>
</div>
<div id="ftn5">
<div class="MsoFootnoteText" style="text-align: justify;">
<span style="font-family: inherit;"><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt;">[5]</span></span><!--[endif]--></span>
“Balanced Budget Amendment: A Poor Idea,” Macroeconomic Advisers’ <i>Macro Musing</i> (Volume 4, Number 15; July
29, 2011).<o:p></o:p></span></div>
</div>
<div id="ftn6">
<div class="MsoFootnoteText" style="text-align: justify;">
<span style="font-family: inherit;"><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt;">[6]</span></span><!--[endif]--></span>
Scott R. Baker, Nicholas Bloom, and Steven J. Davis, “Measuring Economic Policy
Uncertainty;” www.policyuncertainty.com.<o:p></o:p></span></div>
</div>
<div id="ftn7">
<div class="MsoFootnoteText" style="text-align: justify;">
<span style="font-family: inherit;"><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt;">[7]</span></span><!--[endif]--></span>
Not all of the spike in either the IPU or the VIX during the summer of 2011 can
or should be attributed to the policy uncertainty surrounding the dispute over
the debt ceiling. A significant increase
in the perceived risks surrounding the Eurozone crisis also occurred at that
time. <o:p></o:p></span></div>
</div>
<div id="ftn8">
<div class="MsoFootnoteText" style="text-align: justify;">
<span style="font-family: inherit;"><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt;">[8]</span></span><!--[endif]--></span>
The equation regressed the change in the monthly average VIX on the current and
lagged change in the Index of Policy Uncertainty (t-statistics in parentheses):<o:p></o:p></span></div>
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<div id="ftn9">
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<span style="font-family: inherit;"><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt;">[9]</span></span><!--[endif]--></span>
“From Showdown to Shutdown? The GDP Effects of a (Brief) Federal Government
Shutdown,” Macroeconomic Advisers’ <i>Macro Focus</i>
(Volume 6, Number 2; February 25, 2011)<o:p></o:p></span></div>
</div>
<div id="ftn10">
<div class="MsoFootnoteText" style="text-align: justify;">
<span style="font-family: inherit;"><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt;">[10]</span></span><!--[endif]--></span>
Our updated “Shutdown Calculator” is available upon request.<o:p></o:p></span></div>
</div>
<div id="ftn11">
<div class="MsoFootnoteText" style="text-align: justify;">
<span style="font-family: inherit;"><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt;">[11]</span></span><!--[endif]--></span>
The first of the two shutdowns during the Clinton-Gingrich standoffs lasted
five days (November 14 to November 19, 1995) and affected roughly 747,000
civilian workers, or one-third the total.
The second shutdown lasted twenty one days (December 16, 1995 to January
6, 1996) but affected only 284,00 civilian workers (or 14% percent of the
total) because by then a defense bill had been enacted covering the civilian
defense employees. The latter
circumstance could be relevant today as both the House and the Senate have
passed defense appropriation bills for 2013.
Hence, it seems likely the Department of Defense will be funded by March
27, limiting the effect of the shutdown to non-defense functions. <o:p></o:p></span></div>
</div>
<div id="ftn12">
<div class="MsoFootnoteText" style="text-align: justify;">
<span style="font-family: inherit;"><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt;">[12]</span></span><!--[endif]--></span>
Because they originate from trust funds, Social Security and Medicare benefits
likely would not be threatened.</span></div>
</div>
</div>
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;"><br /></span>
<a href="http://www.macroadvisers.com/browser/contactus.html"><span style="font-family: inherit;">Contact Macroeconomic Advisers</span></a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-56508405089365589492013-01-15T11:00:00.000-08:002013-01-15T11:00:06.047-08:00Rates and GrowthMarket participants often view economic growth as a guide to where interest rates should and will be. <br />
<br />
We relied on our previous work on monetary policy rules to assess the closeness of the empirical relationship between long-run equilibrium real interest rates (r*) and the rate of growth of potential output (g*). <br />
<br />
This is from a commentary that was published on January 14, 2013. <br />
<br />
<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-61229156541616177912013-01-14T12:30:00.000-08:002013-01-14T12:30:01.802-08:00The End of Unlimited FDIC Insurance: The Dog That Didn't Bark?<br />
We see the market (non-)reaction to the end of unlimited FDIC insurance as consistent with the notion that conditions in the financial market are gradually normalizing, which should help support the pace of economic recovery this year. <br /><br />This is from a commentary that was published on January 11, 2013. <br />
<br />
<br />
<br />
<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a><br />
Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-70746572762535853622013-01-02T13:15:00.000-08:002013-01-02T13:15:00.719-08:00(No Big) Deal!<span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;"><b>In the early hours of January 1, the House passed The American Taxpayer Relief Act of 2012 (ATRA), partly clarifying the view over the fiscal cliff. <br /> </b></span><br />
<span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;"><b>The particulars of ATRA are close to our previous assumptions, and so suggest only the slightest revisions to our forecasts for GDP growth, unemployment, and inflation. </b></span><br />
<ul>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">Our forecast published December 28 showed GDP growing 2.6% over the four quarters of 2013 and 3.2% over 2014, with the unemployment rate ending 2014 at 7.2%.</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">After incorporation of ATRA, our projections for GDP growth are barely changed: 2.7% over 2013 and 3.2% over 2014, with the unemployment rate ending 2014 at 7.1%. </span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">These trivial differences have little implication for our monetary policy call.</span></li>
</ul>
<span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;"><br /><b>While our fiscal assumptions remain similar to those incorporated in our forecast published on December 28, there are three areas of difference worth noting that arise from ATRA. </b><br /><br /><i>Personal Taxes</i><br />Our forecast published December 28 assumed the tax increase on upper-income taxpayers would raise $709 billion in revenues over 10 years. We estimate the increase under ATRA is a smaller $620 billion over 10 years. This difference arose mainly because the President relented on his pledge to raise tax rates on taxpayers with income over $200,000 (single filers) / $250,000 (joint filers), instead accepting the higher thresholds of $400,000 (single filers) / $450,000 (joint filers). While this smaller tax hike does imply some additional stimulus in 2013 relative to our published forecast, the effect is small. The tax increase assumed for 2013 in our published forecast is $55 billion; under ATRA, it is a smaller $48 billion.<br /><br /><i>Business Taxes</i><br />Our forecast published December 28 assumed a variety of business tax extenders, including 50% bonus expensing for business purchases of equipment and software, would expire on December 31. Instead, ATRA extends them for another year. This will re-arrange our projected path of investment spending, raising it slightly in 2013 and lowering it back down later on by an equivalent amount. <br /><br /><i>The Sequester</i><br />Our forecast published December 28 assumed the sequester would be avoided and be replaced with a more gradual pace of spending restraint. ATRA takes the first step in this direction by delaying the sequester, albeit briefly, and then paying for the delay over a decade. Two months is not nearly enough time to settle on fundamental tax and entitlement reform, so we still expect another delay or perhaps the kinds of spending cuts (consistent with our forecast) that were being discussed in the run-up to January 1. For now, then, we are making no changes to our spending assumptions.<br /><br /><b>Including the details of the American Tax Relief Act of 2012, here are our revised fiscal assumptions.</b></span><br />
<ul>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">The new Affordable Care Act taxes are effective as scheduled on January 1, 2013.</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">Payroll tax holiday expired as scheduled on December 31, 2012.</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">Under ATRA, emergency unemployment benefits are extended through December 31, 2013.</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">ATRA includes a personal tax increase effective January 1, 2013:</span></li>
<ul>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">a 39.6% rate on ordinary income for taxpayers with incomes >$400,000 (single filers) / $450,000 (joint filers), up from 35%;</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">a 20% rate in capital gains and dividend for taxpayers with incomes >$400,000 (single filers) / $450,000 (joint filers), up from 15%;</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">re-instates PEP and Pease limitations for taxpayers with incomes > $250,000 (single filers) / $300,000 (joint filers);</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">increases estate tax rate from 35% to 40%; and</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">extends refundable tax credits for five years.</span></li>
</ul>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">ATRA makes permanent the rest of the “Bush tax cuts.” </span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">ATRA makes permanent the fix to the Alternative Minimum Tax.</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">ATRA extends the R&D credit and bonus depreciation through 2013.</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">ATRA extends the farm bill for 1 year, thus avoiding a huge increase in dairy prices; we continue to assume a way will be found to avoid that price increase in 2014.</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">ATRA extends the “doc fix” for 1 year and pays for it over 10 years with cuts in medical spending; we continue to assume the “doc fix” will be extended beyond 2013.</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">ATRA delays spending sequester for two months, and pays for it over 10 years by:</span></li>
<ul>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">reducing Budget Control Act of 2011 discretionary caps for 2013-2014 and</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">allowing conversions to Roth Retirement Plans.</span></li>
</ul>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">However, we continue to assume that the sequester ultimately will be replaced with a more gradual squeeze on spending.</span></li>
</ul>
<span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;"><br /><b>Fiscal Risks</b><br />The near-term outlook for taxes has been clarified. The principal fiscal uncertainties surrounding our short-run forecast are now on the spending side. These are intertwined with three important dates.</span><br />
<ol>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">The full sequester is now scheduled to take effect March 1.</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">Technically, the U.S. hit the debt ceiling in late December; the Treasury temporarily can employ unusual means to avoid default, but only until late February or early March.</span></li>
<li><span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">The continuing resolution under which the federal government is now operating expires at the end of March. Without a new resolution, the federal government will shut down in April.</span></li>
</ol>
<span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">We intend to monitor developments closely through the quarter and make changes to our forecast as warranted.<br /><br /><br /><b>The Longer View: So Much More Work to Be Done</b><br />While it may be a relief to have avoided plunging off the fiscal cliff, it is disconcerting how little progress has been achieved towards longer-term deficit reduction since the passage of the Budget Control Act of 2011. Estimates are that, relative to 2012 policy, ATRA 2012 will reduce deficits by only about $650 billion through 2022, with essentially none of that on the spending side of the ledger. There is a lot more work to be done!</span><br />
<br />
<br />
<span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;">This is from a commentary that was published on January 2, 2013. <br /> </span><br />
<br />
<span style="font-family: "Helvetica Neue",Arial,Helvetica,sans-serif;"><a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a></span>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-16452338578063731842012-11-29T07:42:00.003-08:002012-11-29T07:42:56.968-08:00MA Analysis: Effects of the Fiscal Cliff in 2013 and BeyondOn January 1, unless preventive legislation is enacted beforehand, the U.S. economy will be gripped by a fiscal contraction equal to 41/4% of GDP. Some fiscal drag is inevitable in 2013, and a little more than ⅓ of the potential fiscal contraction already is reflected in MA’s forecast that GDP will grow at a modest 2.3% rate during the first half of next year. However, unless averted by a budget deal, the U.S. faces a spending “sequester”, the “sunset” of the “Bush tax cuts”, and a sharp widening in the reach of the Alternative Minimum Tax (AMT), none of which are assumed in our forecast. <div>
<div>
<br />Failure in Washington to reach an accord that avoids these additional elements of the “fiscal cliff” would compel us to mark down sharply our forecast for GDP growth in 2013. <b>Absent an accord, and despite offsetting declines in interest rates and commodity prices, GDP would contract in the first half of 2013 and grow just 1.1% over the four quarters of the year. The unemployment rate, rather than trending down towards 7.5% by the end of 2013, would rise to 8.5%.</b> </div>
<div>
<br />Following a fall off the cliff, GDP would, as early as 2014, grow faster than under a “grand bargain” and with less debt. That, however, doesn’t make the cliff a bargain. <b>Our simulations suggest that under a “cliff” scenario, the federal primary budget would move into surplus by 2018, and the ratio of debt to GDP could fall below 60% by 2021. However, GDP would be lower and unemployment higher for a decade.</b> This is partly the result of the extra fiscal drag and partly the result of higher marginal tax rates. The lost output would amount to 10% of this year’s GDP, a high price to pay for the inability to manage fiscal policy effectively. The distributional outcome would be different — and likely less desirable — than that associated with a negotiated, balanced approach to deficit reduction.<br /><h2>
Parsing the Effects of the Fiscal Cliff</h2>
</div>
<div>
We’re often asked how much of a drag on growth is associated with each of the provisions of current law that usually are described as comprising the fiscal cliff. The table below presents such results for the four quarters of 2013 and the year as a whole in descending order of importance. These simulations were generated with MA/US, our recently updated macro model, assuming the model’s endogenous monetary offset but holding oil prices along the baseline path and making no judgmental adjustments in the model to other financial conditions. Each provision was simulated separately, so the total reported in the table excludes interaction effects between the provisions. The largest two items are — not surprisingly — the expiration of the Bush tax cuts (-1.15 percentage points of GDP growth over the year) and the spending sequester (-0.76 percentage point of GDP growth). At the bottom of the list, the new taxes enacted as part of the Affordable Care Act will subtract less than one-tenth of a percentage point from growth over 2013. In total, the maximum potential hit to growth from the fiscal contraction is 3.4 percentage points over the entire year, but more than 5 percentage points in the first half of the year. Our baseline forecast includes roughly 11/4 percentage points of the total possible hit to growth.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRgHOQZrH8jxqnpM7oA_sLyx_ckoerzNQVYh63BxlJZftWgqAj-k5gFrpooOdTEgBxM24bisTW0WAPktgWrA0_SNlkhBbTswdH6Aw3NNNJZ3aXHRywruyeR8EzSfTbMMmxsdAp_YphyphenhyphenOde/s1600/Fiscal+Cliff+Table+4.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="393" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRgHOQZrH8jxqnpM7oA_sLyx_ckoerzNQVYh63BxlJZftWgqAj-k5gFrpooOdTEgBxM24bisTW0WAPktgWrA0_SNlkhBbTswdH6Aw3NNNJZ3aXHRywruyeR8EzSfTbMMmxsdAp_YphyphenhyphenOde/s640/Fiscal+Cliff+Table+4.jpg" width="640" /></a></div>
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<a href="https://macroadvisers.box.com/shared/static/0kw29gd88hkjj0ty0xjc.pdf" target="_blank">Click here</a> to download the complete report.</div>
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Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-46536765562181634332012-11-26T05:30:00.000-08:002012-11-26T05:30:02.084-08:00QE3? Show Me the Money!<span style="font-family: inherit;">The size of the Fed's balance sheet hardly changed between mid-September-when QE3 started-and the end of October. What happened to QE3?<br /><br />Rest assured, the Fed has been implementing QE3 as advertised. There are two reasons why the balance sheet was little changed last month.<br /><br />This is from a commentary that was published on November 20, 2012. </span><br />
<br />
<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-22090115114422529752012-11-26T05:00:00.000-08:002012-11-26T05:00:15.260-08:00The Fiscal Cliff and the Fed: Do Nothing, Say Nothing!As we approach the fiscal cliff, attention is focused on what the FOMC will do and say on the way to and possibly over the cliff. <br /><br />The macro effects of the cliff would be far too large for the FOMC to offset over any reasonable period. The Chairman has said so repeatedly. <br /><br />This is from a commentary that was published on November 16, 2012. <br />
<br />
<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-62504282775198046792012-10-29T14:27:00.000-07:002012-10-29T14:27:12.399-07:00Sandy: Terrible for Individuals, but no Impact on Q4 GDP Growth<br />
<h2>
General Points </h2>
We expect that some economic activity will be delayed several days or even weeks, but this is an intra-quarter story with no impact on Q4 GDP growth. <br /> <br />The value of property destruction itself is not a negative in GDP. For example, if a factory with a market value of $1 billion is destroyed, GDP does not go down by $1 billion – although insurance company profits could! <br /> <br />The destruction of that factory does reduce GDP by the value of the goods that otherwise would be produced in that factory (per year), but this is usually much smaller than the property loss itself. <br /> <br />The rebuilding of the destroyed property is a positive in GDP, probably /spread over a year or two, but starting almost immediately. <br /><h2>
Historical Comparison </h2>
Katrina is the grand-daddy of all US storms.<br /><ul>
<li>BEA: losses were about $110 billion ($90 bil private, $20 bil govt) in private and public capital; Insured losses of around $80 billion. </li>
<li>CBO: Reduced GDP growth by about half a point in 3rd and 4th qtrs of 2005.</li>
<li>Rebuilding was spread over several years.</li>
<li>But the initial disruption was centered in the gulf energy industry and there were upwards of ½ million laborers displaced for a considerable period of time. </li>
</ul>
For Sandy, we're seeing initial estimates of $5-10 bil in damages. <br /> <br />This is far less than Katrina and with no real hit on energy industry or longer-term displacement of workers.<br /><h2>
Bottom Line </h2>
Sandy might reduce GDP growth by 0.1 - 0.2 percentage points, with a lot of that reduction being made up starting as early as within Q4 of 2012 and Q1 of 2013.<br />
<br />The storm is terrible news for individuals directly affected, but not a big macroeconomic story.<br />
<br />
Our thoughts and prayers are with everyone in the storm's path.<br /><br /><br /><a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-35697823308672427712012-10-15T06:38:00.001-07:002012-10-15T06:38:19.712-07:00Monetary Policy under Obama and Romney<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;">The outcome of this election will almost certainly affect the conduct of monetary policy.</span></span><br />
<ul>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;">We assume that, if President Obama is re-elected and Ben Bernanke does not seek or is not offered another term, Janet Yellen will be nominated to be Chair of the Federal Reserve Board (and thus also of the FOMC). </span></span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;">If Governor Romney is elected, he will most likely nominate one of his two principal economic advisers: Glenn Hubbard or Greg Mankiw. John Taylor, another adviser, would surely also be on the short list.</span></span></li>
</ul>
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;"><br />In three of the four cases, the prospective Chairs have written down a simple policy rule that would inform their policy decisions.</span></span><br />
<ul>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;">We have previously distinguished between dovish and hawkish rules. </span></span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;">Dovish rules portray recent and current policy as restrictive, notwithstanding the prevailing near-zero funds rate. Hawkish rules portray policy today as too stimulative.</span></span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;">Dovish rules embed a much more aggressive response to departures from full employment than do hawkish rules.</span></span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;">Dovish rules prescribe a later first rate hike than do hawkish rules.</span></span></li>
</ul>
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;"><br />Using these rules as proxies for policy preferences, we can place three of the prospective Chairs along the dove-hawk continuum.</span></span><br />
<ul>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;">Taylor is unquestionably the most hawkish. His rule embeds a modest response to departures from full employment. The FOMC would already have raised rates under his rule.</span></span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;">Yellen is the most dovish. Based on her rule, policy should respond aggressively to departures from full employment, and the first rate hike would still be two years away.</span></span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;">Mankiw is somewhere in between. While his rule, like Taylor's, allows for only a modest response to departures from full employment, it nevertheless prescribes a later first rate hike that is still one year away.</span></span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;">While Glenn Hubbard has not written down a rule, his recent comments reveal that he is not as hawkish as Taylor, not as dovish as Yellen, but likely somewhat more hawkish than Mankiw. </span></span></li>
</ul>
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;">This is from a commentary that was published on October 10, 2012. </span></span><br />
<span style="font-family: Arial,Helvetica,sans-serif;"><br /></span>
<span style="font-family: Arial,Helvetica,sans-serif;"><a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a></span>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-3598968919634759192012-10-04T12:08:00.000-07:002012-10-04T12:08:04.722-07:00MA's Prakken Discusses ADP Employment Report on CNBC<object id="cnbcplayer" height="380" width="400" classid="clsid:D27CDB6E-AE6D-11cf-96B8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=9,0,0,0" > <param name="type" value="application/x-shockwave-flash"/> <param name="allowfullscreen" value="true"/> <param name="allowscriptaccess" value="always"/> <param name="quality" value="best"/> <param name="scale" value="noscale" /> <param name="wmode" value="transparent"/> <param name="bgcolor" value="#000000"/> <param name="salign" value="lt"/> <param name="flashVars" value="startTime=000"/> <param name="flashVars" value="endTime=000"/> <param name="movie" value="http://plus.cnbc.com/rssvideosearch/action/player/id/3000120022/code/cnbcplayershare" /> <embed name="cnbcplayer" PLUGINSPAGE="http://www.macromedia.com/go/getflashplayer" allowfullscreen="true" allowscriptaccess="always" bgcolor="#000000" height="380" width="400" quality="best" wmode="transparent" scale="noscale" salign="lt" src="http://plus.cnbc.com/rssvideosearch/action/player/id/3000120022/code/cnbcplayershare" type="application/x-shockwave-flash" /></object><a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-57750868505138488682012-09-20T17:17:00.000-07:002012-09-20T17:17:40.899-07:00Kocherlakota: Switching teams and advancing the ball!In what must be one of the most dramatic shifts in policy positions in the history of the FOMC, President Kocherlakota changed teams today, moving from virtual “captain” of the “hawk team” to perhaps the new captain of the “dove team.”<br />
<ul>
<li>President Kocherlakota said in a speech in May 2011 that, under his baseline forecast, “it would be desirable for the FOMC to raise the fed funds target by a modest amount toward the end of 2011." </li>
<li>He used the Taylor rule to defend his earlier view, noting that the unemployment rate had fallen and inflation had risen over the previous year. Nothing that has happened since contradicts this logic, however faulty it may be. </li>
<li>In contrast, today, President Kocherlakota offered a “liftoff plan” that calls for the Committee to indicate that, provided longer-term inflation expectations remain stable, it “will not raise the fed funds rate unless the medium-term outlook for the inflation rate exceeds a threshold value of 2-1/4 percent or the unemployment rate falls below a threshold value of 5.5 percent.” He said that the first rate hike “may not take place for four or more years.” </li>
<li>The forecast of FOMC members (midpoint of the central tendency range) is that the inflation rate should remain stable at or just below 2% through 2015. Our own forecast is that inflation will not surpass 21⁄4% even as the unemployment rate falls toward 51⁄2%, which might not happen until 2016 or 2017! </li>
<li>So President Kocherlakota’s proposal is very dovish. It could actually work, if longer- term inflation expectations remained stable. But that’s a very big if. </li>
</ul>
President Kocherlakota’s liftoff plan reflects a remarkable transformation because he had been one of the most aggressive members of the Committee in arguing that the economy might already be at or near capacity. <br /> <ul>
<li>His earlier view was based on the prospect that structural factors had raised the NAIRU, perhaps to the point where there was no unemployment or output gap. </li>
<li>Indeed, he said in August 2010 that much of the current unemployment rate is due to “mismatch that is not readily amenable to monetary policy.” In that case, further monetary stimulus could only raise inflation. </li>
</ul>
President Kocherlakota’s transformation apparently reflects the gravitational pull of President Evans, next to whom he sits around the FOMC table, or so Kocherlakota quipped. <br /> <ul>
<li>Larry is surprised by this comment since sitting next to Bob McTeer at the FOMC table for several years never made Larry any funnier! </li>
<li>In any case, President Kocherlakota says he has moved toward the spirit of the Evans 7/3 proposal. Both the Evans and Kocherlakota proposals set a numerical trigger for the unemployment rate and a tolerance zone for short-run departures of inflation from its medium-term target. </li>
<li>Both the Evans and Kocherlakota proposals are forms of “outcome-based” forward rate guidance, as distinguished from “calendar-based” rate guidance. That is, the timing of the first rate hike is determined not by a publicly announced calendar date but by well defined economic outcomes. </li>
<li>Kocherlakota says the unemployment rate is a threshold, not a trigger, because the Committee always retains the option of keeping rates exceptionally low or raising the funds rate. Threshold, trigger, pick your poison. Trust us, it is a trigger! </li>
</ul>
President Kocherlakota advanced the ball with his talk today, even if his proposal is (deservedly) dead on arrival, deader than a doornail! <br /> <ul>
<li>He has come out firmly for outcome-based guidance. We expect this is a direction that the Committee more generally is moving toward. </li>
<li>However, President Williams said it best: “That's harder to do than to say.” The Evans and Kocherlakota proposals are examples that prove that point! </li>
</ul>
Both have a “no-tolerance” policy with respect to the stability of longer-term inflation expectations. Or do they? <br /> <ul>
<li>Measuring longer-term inflation expectations is very difficult. There are many measures—survey-based and market-based—each with its own problems. </li>
<li>So there is a gray area here, and neither has actually said whether or not there is a tolerance zone with respect to measures of longer-term inflation expectations. If there is one, we suspect that it is narrower than the one for medium-term projected inflation. </li>
</ul>
The two proposals have different numerical triggers for the unemployment rate. <br /> <ul>
<li>The numerical trigger in the Evans proposal is 7%. That seems to us a very reasonable judgment, given that the FOMC’s consensus on the NAIRU is about 51⁄2%. </li>
<li>The Kocherlakota trigger is 51⁄2%, the same as FOMC participants’ median forecast of the unemployment rate over the long run. Even assuming he believes that the NAIRU is 51⁄2% (rather than, say, 4%), his choice of an unemployment rate trigger seems odd: Stay exceptionally accommodative until the economy reaches full employment?! </li>
</ul>
The two proposals also differ in the width of the tolerance zone. <br /> <ul>
<li>Evans would be willing to tolerate inflation as high as 3%; that’s a lot! Kocherlakota would be willing to tolerate inflation as high as 21⁄4%; that’s not much! </li>
<li>President Kocherlakota’s narrow tolerance zone is a protection, to some degree, relative to the very low numerical trigger for the unemployment rate. </li>
<li>But this protection makes his proposal hard to fathom. One should pick a tolerance zone that one believes is wide enough to be consistent with the numerical unemployment rate trigger. </li>
<li>The Kocherlakota proposal would make market participants scratch their heads, perhaps to the point of baldness! </li>
</ul>
We would like to be matchmakers and marry the Evans and Kocherlakota proposals. <br /> <ul>
<li>Given the current state of the economy, substantial uncertainty about the macro outlook, and the risks to the stability of longer-term inflation expectations, we find the Evans tolerance zone for inflation too wide. </li>
<li>We believe that most FOMC members agree with our assessment of the Evans proposal and, we suspect, that’s why President Evans has not gotten much traction, even though his basic idea is appealing, if not compelling. </li>
<li>In contrast, President Kocherlakota’s numerical trigger for the unemployment rate is too low. This would be even more unacceptable to Committee members than the Evans threshold for inflation tolerance.</li>
<li>Here is our proposal: a 7/21⁄2% plan: Keep the funds rate where it is today for as long as the unemployment rate remains higher than 7%, provided inflation remains below 21⁄2%, and, of course, longer-term inflation expectations remain stable. </li>
</ul>
We are big fans of outcome-based guidance, but it may be hard to change communication horses so soon. <br /> <ul>
<li>While one can translate a calendar-based guidance into an implicit outcome-based guidance for the unemployment rate, there is no information about the tolerance zone for inflation. </li>
<li>A calendar-based guidance has to be regularly changed as the forecast changes. Outcome-based guidance remains in place until the triggers are breached. </li>
<li>Outcome-based guidance allows the market to learn about the FOMC’s reaction function. </li>
<li>Nonetheless, the FOMC moved to a calendar-based guidance only about one year ago, and the Committee might have a hard time agreeing on the relevant numerical thresholds. (Perhaps, members should take turns sitting next to President Evans!) </li>
</ul>
<br />
Interested in reading more of Larry Meyer's analysis of the FOMC?<br />
<a href="http://www.macroadvisers.com/browser/contactus.html">Contact Macroeconomic Advisers</a>Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-6781054821386836302012-09-18T06:15:00.002-07:002012-09-18T06:15:50.512-07:00MA's Monthly GDP rose 0.7% in July<br />
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Monthly GDP rose 0.7% in July following a 0.2% increase
in June that was revised up by two-tenths.<span style="mso-spacerun: yes;">
</span>The sharp increase in July was more than accounted for by a large
increase in nonfarm inventory investment.<span style="mso-spacerun: yes;">
</span>Outside of nonfarm inventories, declines in net exports and capital
goods were partially offset by an increase in PCE.<span style="mso-spacerun: yes;"> </span>Monthly GDP in July was 3.4% above the
second-quarter average at an annual rate.<span style="mso-spacerun: yes;">
</span>Our latest tracking forecast of 1.7% GDP growth in the third quarter
includes a 0.7% decline in GDP in August--reflecting an assumed sharp decline
in nonfarm inventory investment--and a 0.2% increase in September.</div>
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This is based on a commentary that was published on September 18, 2012.<br />
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<span style="font-size: xx-small;">Macroeconomic Advisers’ index of Monthly GDP (MGDP) is a monthly indicator of real aggregate output that is conceptually consistent with real Gross Domestic Product (GDP) in the NIPA’s. The consistency is derived from two sources. First, MGDP is calculated using much of the same underlying monthly source data that is used in the calculation of GDP. Second, the method of aggregation to arrive at MGDP is similar to that for official GDP. Growth of MGDP at the monthly frequency is determined primarily by movements in the underlying monthly source data, and growth of MGDP at the quarterly frequency is nearly identical to growth of real GDP.</span><br />
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Unknownnoreply@blogger.comtag:blogger.com,1999:blog-4676840009938714368.post-46766470264671144672012-09-10T12:18:00.001-07:002012-09-10T12:18:24.990-07:00MA Analysis: Drought to shave 0.6 pct pts from 2nd half GDP growthThe U.S. is experiencing one of the worst droughts in recent history. While the farm sector directly accounts for only about 1% of the U.S. economy, the hit to farm output is likely to be large enough to have a noticeable impact on U.S. GDP. We estimate that a sharp drop in farm inventories as a direct result of the drought will shave just over ½ percentage point from GDP growth in the second half of this year. This effect will be quickly reversed early next year. Furthermore, a rise in the price of food late this year and into next year will lower real income and wealth enough to shave an additional one-tenth from GDP growth in the fourth quarter of this year and the first quarter of next year, with this effect gradually reversing as prices return to baseline. In this Macro Musing, we discuss how we arrived at these estimates.<br />
<b><br />Project 2012 NIPA farm value added using USDA projections</b>. The U.S. Department of Agriculture (USDA) prepares detailed projections of several measures related to farm income. Included in the details are receipts from sales of crops and livestock, purchases of inputs, interest expenses, spending on contract and hired labor, etc. BEA uses these data to estimate value added in the farm sector. While it’s not possible to reproduce BEA figures with precision — some of the data are unpublished, and BEA makes some adjustments — we can arrive at reasonable estimates. USDA’s August 28 detailed projection of 2012 farm income and related measures suggests nominal value added in the farm sector of $133.5 billion for 2012, down 3.7% from 2011.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnbo-qisIfX6X1Duy1e9qeFp9NqR5Xb_BFkbu56RS3-IDT17yLECPbvV3MVFhPeZgtWpRHZMJhJ8UoXlX_ZwaqoWjfeAY3RgpGso11gWMUIpWvjTqNTJvlMkspXU_ppEXVrL7rqi0xfTSB/s1600/table+1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"></a><b><br />Fill in Q3 and Q4 2012 farm value added given 2012 projection and published values for Q1 and Q2</b>. Using BEA’s published estimate of nominal farm value added for the first half of this year, we judgmentally filled in values for the third and fourth quarters to hit the 2012 annual total. This resulted in a 17% annualized decline in nominal farm value added from the first half of 2012 to the second half.<br />
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<b>Project farm prices using USDA reports</b>. Implicit in USDA’s projection for 2012 receipts from farm sales are projected prices for crops and livestock. From various USDA reports, we compiled forecasts for prices of corn, soybeans, wheat, cattle, hogs, and milk. Historically, variation in these prices has accounted for the majority of variation in overall farm prices. We used these projections to generate a forecast of the price index for NIPA farm value added. From the first to the second half of this year, we project a 26% annualized increase in the price index for farm value added.<br />
Deflate Q3 and Q4 2012 nominal farm value added with the projected NIPA price index to arrive at real farm value added in Q3 and Q4 of 2012. The quarterly profiles we assume for nominal farm value added and the price index in the third and fourth quarters imply that (annualized) real farm value added will decline $14 billion (46% annual rate) in the third quarter and $12 billion (46% annual rate) in the fourth quarter. <br />
<b><br />Project real farm value added over 2013 and 2014</b>. Over the last 35 years, real farm value added has trended higher at roughly a 3% annual rate. Chart 1 shows the log of real farm value added along with this trend over history and in our forecast. Notice that farm output dropped sharply from 2010 to 2011, reflecting drought conditions last year. Our projection for real farm value added shows recovery over 2012 and 2013 that reverses not only the effects of this year’s drought, but last year’s drought, too.<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9P64v_uxUQSKMvYvqQgGD3_m-YNa8XcuYef7BJby0FGPWAHwuRCVsbgUJ-jIaRVEQrLMi_rpNouVscuSm5ibcwkbciqS8Ba7TOpd9Z8mDVURs6E5iMlHy4kEKkw5FXuJRAdIvr1SSiFWu/s1600/chart+1.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="448" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9P64v_uxUQSKMvYvqQgGD3_m-YNa8XcuYef7BJby0FGPWAHwuRCVsbgUJ-jIaRVEQrLMi_rpNouVscuSm5ibcwkbciqS8Ba7TOpd9Z8mDVURs6E5iMlHy4kEKkw5FXuJRAdIvr1SSiFWu/s640/chart+1.jpg" width="640" /></a><br />
A quick aside on GDP, value added, and spending. Nominal GDP is the sum of value added across all producing sectors of the economy. It is also the sum of final sales and inventory investment across all goods and services, regardless of the producing sector. Any change on the value-added side, therefore, must be matched in magnitude by a change on the spending side. A drop in nominal farm value added, in particular, holding constant value added in other sectors, must be matched by a drop in nominal spending on final goods and services or inventories (or some combination of the two). In real terms, though, this is only approximately true, because real GDP is not additive across components of real value added or across components of real final sales and inventory investment. A change in real value added in one producing sector, holding constant real value added in the other producing sectors, need not be matched exactly by a drop in real final sales or inventories. But the correspondence usually will be close.<br />
<b><br />Estimate the response of farm inventories to the decline in real farm value added</b>. We assume that the direct hit to real farm value added is reflected on the spending side in farm inventory investment only.3 Furthermore, rather than assuming that the hit to real farm value added is absorbed exactly by farm inventory investment, we estimate the response of farm inventory investment using our error-correction model that links real farm inventories to real farm value added. This allows for the possibility of an effect on the spending side (in real farm inventory investment) that is different from the direct effect on real farm value added.4 Finally, we judgmentally adjusted down the prediction of our model for farm inventory investment over the second half of this year by an average amount equal to 1½ standard errors of the model. We did this to move the estimated hit to real farm inventory investment close to our estimate of the hit to real farm value added.<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnbo-qisIfX6X1Duy1e9qeFp9NqR5Xb_BFkbu56RS3-IDT17yLECPbvV3MVFhPeZgtWpRHZMJhJ8UoXlX_ZwaqoWjfeAY3RgpGso11gWMUIpWvjTqNTJvlMkspXU_ppEXVrL7rqi0xfTSB/s1600/table+1.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="540" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnbo-qisIfX6X1Duy1e9qeFp9NqR5Xb_BFkbu56RS3-IDT17yLECPbvV3MVFhPeZgtWpRHZMJhJ8UoXlX_ZwaqoWjfeAY3RgpGso11gWMUIpWvjTqNTJvlMkspXU_ppEXVrL7rqi0xfTSB/s640/table+1.jpg" width="640" /></a> <br />
In our forecast, real farm inventories decline at an annual rate of $14 billion in the third quarter and $30 billion in the fourth quarter. (See the section of Table 1 titled “Forecast Including Direct Impact of Drought.”) This would follow declines in the first and second quarters averaging about $2½ billion per quarter. Were it not for the drought, our model of farm inventories would have predicted a $2 billion annualized increase in farm inventories in the third quarter and a $4 billion increase in the fourth quarter. (See the section of Table 1 titled “No 2012 Drought Baseline.”) The difference between the drought and no-drought projection for the level of farm inventory investment in the third and fourth quarters is $16 billion and $34 billion, respectively (Table 1, “Direct Impact of Drought”). The difference between the drought and no-drought projection for the change in farm inventory investment in the third and fourth quarters is $16 billion and $17 billion, respectively, implying subtractions from GDP growth in the third and fourth quarters of 0.6 percentage point per quarter (relative to the no-drought baseline). This is our estimate of the direct hit to GDP growth from the drought. <br />
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Early next year, as conditions are assumed to return to normal, real farm value added rises quickly (see Chart 1) and real farm inventory investment rises rapidly. The contribution to GDP growth in the first quarter of next year is nine-tenths, and the contribution in the second quarter is five-tenths. The level of real farm inventory investment rises above baseline to begin rebuilding depleted farm inventories.<br />
<b><br />Estimate the indirect effect of higher food prices</b>. While prices received by farmers are expected to rise substantially from the first to the second half of this year, retail prices for food are expected to rise considerably less. This is because raw materials (grain and livestock) account for only a small share of the cost of finished foods. Other costs include processing, packaging, transportation, advertising, retail margins, and so on. In late August, the USDA projected that the CPI-U for food at home, on a year-over-year basis, would rise from 2.5% to 3.5% in 2012 and 3.0% to 4.0% in 2013. We filled in a reasonable monthly profile for the CPI-U for food at home that hits the middle points of these ranges to generate Chart 2, which shows the 12-month percent change in the CPI-U for food at home as projected by USDA (including the effects of the drought) and, for reference, the 12-month change that would result were the CPI-U for food at home to rise from August forward at the rate it has risen on average over the last 20 years (0.22% per month).<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiyaLviyN3PQHvSZrG3be-ynmeUjEtS189zKLETgM0kWq6fWNrRF3doBbS4cQaquFs54DUROt7zqsCT_K28hxyb5MGaO8ta6qUZluk7IypIIvZVWJwBk3NxUGOIDM5oZd_5f9MW9qRA0qpO/s1600/chart+2.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="472" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiyaLviyN3PQHvSZrG3be-ynmeUjEtS189zKLETgM0kWq6fWNrRF3doBbS4cQaquFs54DUROt7zqsCT_K28hxyb5MGaO8ta6qUZluk7IypIIvZVWJwBk3NxUGOIDM5oZd_5f9MW9qRA0qpO/s640/chart+2.jpg" width="640" /></a> <br />
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Using a relative importance of 0.07, which is roughly the nominal share of food and beverages purchased for off premises consumption in total PCE, we estimated the boost to annualized quarterly growth of the PCE price index implicit in the difference between growth of the CPI-U for food at home in USDA’s forecast and the no-drought alternative. That boost is about 0.1 percentage point in the third quarter of this year, 0.4 percentage point in the fourth quarter, and 0.2 percentage point in the first quarter of next year. (See the section of Table 1 titled “Indirect Impact of Drought from Higher Food Prices.”) After that, the boost turns into a subtraction of one- to two-tenths over several quarters (as prices return to baseline). We simulated the effects of this boost to the PCE price index using our macroeconometric model and found that GDP growth was reduced by one-tenth in the fourth quarter of this year and by one-tenth in the first quarter of next year. The contribution to GDP growth rounds to zero over the balance of next year. Combining this with the direct impact of the drought, we estimate that annualized GDP growth will be reduced by six-tenths in the third quarter and by seven tenths in the fourth quarter (Table 1, section “Total Impact of Drought”). During the first half of next year, assuming conditions return to normal, GDP growth will be boosted by an average of seven-tenths per quarter.<br />
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