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Paychecks or Promises? Lessons from the Death Spiral of Detroit

August 12, 2014 Comments off

Paychecks or Promises? Lessons from the Death Spiral of Detroit
Source: Federal Reserve Bank of Minneapolis

Pay-with-promises compensation plans accumulate liability for future employee benefits, such as retiree health insurance. A simple economic model demonstrates that such plans can exacerbate fiscal crises faced by cities that experience external economic shocks, such as the departure of a major employer. City leaders often raise taxes and/or reduce public services to pay off legacy employee debts, and such steps encourage residents to move out, reducing the tax base and raising fiscal stress. Pay-as-you-go compensation plans are more prudent; they settle liabilities to employees paycheck by paycheck.

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Federal Reserve Board issues Report on the Economic Well-Being of U.S. Households

August 8, 2014 Comments off

Federal Reserve Board issues Report on the Economic Well-Being of U.S. Households
Source: Federal Reserve Board

In its new Report on the Economic Well-Being of U.S. Households, the Federal Reserve Board provides a snapshot of the self-perceived financial and economic well-being of U.S. households and the issues they face, based on responses to the Board’s 2013 Survey of Household Economics and Decisionmaking. The report provides insight into numerous topics of current relevance to household finances, including: housing and living arrangements; credit access and behavior; education and student loan debt; savings; retirement; and health expenses.

Overall, the survey found that as of September 2013 many households were faring well, but that sizable fractions of the population were at the same time displaying signs of financial stress. Over 60 percent of respondents reported that their families were either “doing okay” or “living comfortably” financially; although one-fourth said that they were “just getting by” financially and another 13 percent said they were struggling to do so. The effects of the recession also continued to be felt by many households, with 34 percent reporting that they were somewhat worse off or much worse off financially than they had been five years earlier in 2008 and 34 percent reporting that they were about the same.

As of September 2013, education debt of some kind was held by 24 percent of the population, with 16 percent having acquired debt for their own education, 7 percent for their spouse/partner’s education, and 6 percent for their child’s education.

The survey results suggest that many households are not adequately prepared for retirement. Thirty-one percent of non-retired respondents reported having no retirement savings or pension, including 19 percent of those ages 55 to 64.

The Great Recession pushed back the planned date of retirement for two-fifths of those ages 45 and over who had not yet retired, and 15 percent of those who had retired since 2008 reported that they retired earlier than planned due to the recession. Among those ages 55 to 64 who had not yet retired, only 18 percent plan to follow the traditional retirement model of working full time until a set date and then stop working altogether, while 24 percent expected to keep working as long as possible, 18 percent expected to retire and then work a part-time job, and 9 percent expected to retire and then become self-employed.

A College Education Saddles Young Households with Debt, but Still Pays Off

August 7, 2014 Comments off

A College Education Saddles Young Households with Debt, but Still Pays Off
Source: Federal Reserve Bank of Cleveland

Many parents believe their children must get a college degree—especially if they want to have at least as comfortable a lifestyle as their parents had; yet the price of a college degree has been rising rapidly over the past three decades. As costs have risen, more and more students and their families have turned to education loans for financing. This trend, combined with the strong propensity for households to form among individuals of similar education levels, has led to much larger student loan debt burdens for households headed by young adults who have attended college. In the 1989 Survey of Consumer Finances, real (inflation-adjusted) average student loan debt for young households (those headed by someone between 22 and 29 years of age) with a college degree was $3,420. In 2010, the same average was $16,714, nearly a 400 percent increase. For households with some college, but without a college degree, average student loan debt rose about 270 percent.

Federal Reserve issues FOMC statement (7/30/14)

July 31, 2014 Comments off

Federal Reserve issues FOMC statement
Source: Federal Reserve Board

Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has moved somewhat closer to the Committee’s longer-run objective. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.

The 2013 Federal Reserve Payments Study — Recent and Long-Term Trends in the United States: 2000–2012

July 28, 2014 Comments off

The 2013 Federal Reserve Payments Study — Recent and Long-Term Trends in the United States: 2000–2012 (PDF)
Source: Federal Reserve Board

Underlying the net economic output of the country are billions of transactions between buyers and sellers of goods and services (such as consumers and merchants, factories and suppliers, employers and employees), as well as various financial transactions (such as transfers of balances between accounts, loan originations, and loan payments). The 2013 Federal Reserve Payments Study attempts to measure the number and value of all such transactions conducted over noncash payment systems—including general-purpose and private-label card systems, automated clearinghouse (ACH), and checks. The study builds on the triennial Federal Reserve Payments Study series, conducted since 2001, to paint a more comprehensive picture of the U.S. payments system.

Impact of Fed Tapering Announcements on Emerging Markets

July 21, 2014 Comments off

Impact of Fed Tapering Announcements on Emerging Markets
Source: International Monetary Fund

This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals.

Labor Market Upheaval, Default Regulations, and Consumer Debt

July 7, 2014 Comments off

Labor Market Upheaval, Default Regulations, and Consumer Debt
Source: Federal Reserve Bank of St. Louis

In 2005, bankruptcy laws were reformed significantly, making personal bankruptcy substantially more costly to file than before. Shortly after, the US began to experience its most severe recession in seventy years. While personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment, perhaps as a consequence of the reform. Moreover, in the subsequent recovery, households have been widely viewed as “develeraging” (Mian and Sufi (2011), Krugman and Eggertson (2012)), an interpretation consistent with the largest reduction in the volume of unsecured debt in the past three decades. In this paper, we aim to measure the role jointly played by recent bankruptcy reforms and labor market risks during the Great Recession in accounting for the use of consumer credit and debt default. We use a setting that features high-frequency life-cycle consumption-savings decisions, defaultable debt, search frictions, and aggregate risk. Our results suggest that the 2005 bankruptcy reform likely prevented a substantial increase in bankruptcy filings, but had only limited effect on the observed path of delinquencies. Thus, the reform appears to have “worked.” We also find that fluctuations in the job separation rate observed over the Great Recession did not significantly affect the dynamics of default; all of the work is done, instead, by the large decline in the job-finding rate.

The Energy Boom and Manufacturing in the United States

June 30, 2014 Comments off

The Energy Boom and Manufacturing in the United States
Source: Federal Reserve Board

This paper examines the response of U.S. manufacturers to changes in competitiveness brought about by movements in the price of natural gas. I estimate the response of various measures of manufacturing activity using panel regression methods across roughly 80 industries that allow each industry’s response to vary with its energy intensity. These estimates suggest that the fall in the price of natural gas since 2006 is associated with a 2 to 3 percent increase in activity for the entire manufacturing sector, with much larger effects of 30 percent or more for the most energy intensive industries.

Home Hours in the United States and Europe

June 26, 2014 Comments off

Home Hours in the United States and Europe
Source: Federal Reserve Bank of Atlanta

Using data from the Multinational Time Use Study, this paper documents the trends and levels of time allocation, with a focus on home hours, for a relatively large set of industrialized countries during the past 50 years. Three patterns emerge. First, home hours have decreased in both the United States and European countries. Second, female time allocation contributes more to the cross-country difference in both the trends and the levels of market hours and home hours per person. Third, time allocations between the United States and Europe are more similar for the prime-age group than for the young and old groups.

The Economic Plight of Millenials

June 16, 2014 Comments off

The Economic Plight of Millenials (PDF)
Source: Federal Reserve Bank of Atlanta

A demographic cohort is never monolithic, but the group that recently entered the labor force had one trait in common: they watched as the Great Recession dramatically reshaped the landscape of employment, housing, and, in general, their expectations. How profoundly will the economic downturn and its associated effects mark this generation?

Bank Failure, Relationship Lending, and Local Economic Performance

June 10, 2014 Comments off

Bank Failure, Relationship Lending, and Local Economic Performance
Source: Federal Reserve Board

Whether bank failures have adverse effects on local economies is an important question for which there is conflicting and relatively scarce evidence. In this study, I use county-level data to examine the effect of bank failures and resolutions on local economies. Using quasi-experimental techniques as well as cross-sectional variation in bank failures, I show that recent bank failures lead to lower income and compensation growth, higher poverty rates, and lower employment. Additionally, I find that the structure of bank resolution appears to be important. Resolutions that include loss-sharing agreements tend to be less deleterious to local economies, supporting the notion that the importance of bank failure to local economies stems from banking and credit relationships. Finally, I show that markets with more inter-bank competition are more strongly affected by bank failure.

Middle-Skill Jobs Lost in U.S. Labor Market Polarization

June 9, 2014 Comments off

Middle-Skill Jobs Lost in U.S. Labor Market Polarization (PDF)
Source: Federal Reserve Bank of Dallas

Employment in the United States is becoming increasingly polarized, growing ever more concentrated in the highest- and lowest-paying occupations and creating growing income inequality. The causes and consequences of this trend are often considered in the context of what has been a relatively “jobless” recovery from the Great Recession.

Market changes involving middle-skill jobs in the U.S. are hastening labor market polarization. The distribution of jobs by skill level has shifted dramatically since 1980 (Chart 1). The number of jobs requiring medium levels of skill has shrunk, while the number at both ends of the distribution— those requiring high and low skill levels—has expanded.

Federal Reserve Board — Beige Book – June 4, 2014

June 6, 2014 Comments off

Beige Book – June 4, 2014
Source: Federal Reserve Board

All twelve Federal Reserve Districts report that economic activity expanded during the current reporting period. The pace of growth was characterized as moderate in the Boston, New York, Richmond, Chicago, Minneapolis, Dallas, and San Francisco Districts, and modest in the remaining regions. Compared with the previous report, the pace of growth picked up in the Cleveland and St. Louis Districts but slowed slightly in the Kansas City District.
Consumer spending expanded across almost all Districts, to varying degrees. Non-auto retail sales grew at a moderate pace across most of the country: Although improved weather generally gave a boost to business, lingering wintry weather in the Northeast continued to weigh on sales in parts of the Boston and New York Districts. Increasingly strong new vehicle sales were reported by more than half the Districts, with most other regions seeing steady sales; demand was generally reported to be less robust for used vehicles than for new vehicles. Tourism was steady to stronger across most of the country–particularly in most of the eastern seaboard Districts.

Activity in the service sector, excluding finance, grew across most reporting Districts, though New York and San Francisco reported a mixed performance. Boston, Kansas City, and San Francisco noted particular strength among technology firms. Transportation activity strengthened in most Districts reporting on that sector, with Richmond and Atlanta observing brisk growth in port activity, and Cleveland noting a rebound from weather-related weakness in the prior report. Manufacturing activity expanded throughout the nation, and at an increasingly strong pace in a number of Districts–notably along the East Coast, as well as in the St. Louis and Kansas City Districts.

Residential real estate activity was mixed across the country, with some reports of low inventories constraining sales–specifically in the Boston, New York, and Kansas City Districts. Still, home prices continued to increase across most of the country, while the markets for both condos and apartment rentals were mostly robust. Residential construction activity was mixed, with half the Districts reporting increases but a few indicating some weakening in activity; multi-family construction remained particularly robust. Both non-residential construction activity and commercial real estate markets were generally steady to stronger since the last report.

Was the Fed a Good Idea?

June 2, 2014 Comments off

Was the Fed a Good Idea? (Spring/Summer 2014 Issue of Cato Journal)
Source: Cato Institute

The Federal Reserve System today is very different than a century ago when it was created. So how well has the Fed performed? Was the Fed a good idea? Can we do better? To address those and related questions, the Cato Institute brought together some of the most respected monetary scholars and policymakers at its Annual Monetary Conference in November 2013. The papers from that conference are featured in the latest volume of Cato Journal.

An In-depth Look at Large and Complex Banks

May 29, 2014 Comments off

An In-depth Look at Large and Complex Banks
Source: Federal Reserve Bank of New York

The Federal Reserve Bank of New York today released a special Economic Policy Review series on large and complex banks. The 11 research papers that make up this series provide analysis in several key areas, including bank size, complexity and resolution. The papers, which are written by New York Fed economists, aim to further study and debate of these topics and to help inform policymakers.

Among the papers’ key findings:
Bank size has benefits and costs: the upside is the potential for economies of scale and lower operating costs; the downside is the “too-big-to-fail” problem and associated funding advantages and moral hazard.
Banks have become less bank-centric and more organizationally complex. Furthermore, the increase in bank complexity may be a natural response to an evolving intermediation technology.
Bail-in regimes, where the claims of creditors of the parent company are converted to equity in resolution, are an efficient and superior process for resolving the failure of a large financial firm. Requiring systemically important bank holding companies to issue “bail-inable” long-term debt that converts to equity in resolution would make large bank failures more orderly.

Minutes of the Federal Open Market Committee, April 29-30, 2014

May 22, 2014 Comments off

Minutes of the Federal Open Market Committee, April 29-30, 2014
Source: Federal Reserve Board

The Federal Reserve Board and the Federal Open Market Committee on Wednesday released the attached minutes of the Committee meeting held on April 29-30, 2014.

The minutes for each regularly scheduled meeting of the Committee ordinarily are made available three weeks after the day of the policy decision and subsequently are published in the Board’s Annual Report. The descriptions of economic and financial conditions contained in these minutes are based solely on the information that was available to the Committee at the time of the meeting.

See also: Speech by Chair Yellen at New York University’s commencement

Black–white differences in intergenerational economic mobility in the United States

May 15, 2014 Comments off

Black–white differences in intergenerational economic mobility in the United States (PDF)
Source: Federal Reserve Bank of Chicago

The large and persistent gap in economic status between blacks and whites in the United States has been a topic of considerable interest among social scientists and policymakers for many decades. The historical legacy of slavery and segregation raises the question of how long black Americans are likely to remain a disadvantaged minority. Despite the enormous literature on black–white inequality and its historical trends, few studies have directly measured black–white differences in rates of intergenerational mobility, that is, the ability of families to improve their position in the income distribution from one generation to the next. Estimates of rates of intergenerational mobility by race can pro – vide insight on whether racial differences in the United States are likely to be eliminated and, if so, how long it might take. Furthermore, they might also help inform policymakers as to whether there are lingering racial differences in equality of opportunity and, if so, what the underlying sources for these differences are.

More generally, the relatively low rate of inter – generational mobility in the United States compared with other industrialized countries has been a growing concern to policymakers across the political spectrum. 1 Understanding the sources of racial differences in intergenerational mobility might also shed light on the mechanisms behind the relatively high degree of intergenerational persistence of inequality in the United States.

How We Pay: Results from the Federal Reserve’s Latest Payments Study

May 8, 2014 Comments off

How We Pay: Results from the Federal Reserve’s Latest Payments Study
Source: Federal Reserve Bank of Atlanta

Every three years, the Federal Reserve payments study presents a snapshot of the rapidly evolving U.S. payments system. The latest issue of the Atlanta Fed’s EconSouth magazine highlights the preliminary results of the 2013 study.

Since 2003, when Congress passed the Check Clearing for the 21st Century Act (commonly known as Check 21), the U.S. payments system has shifted dramatically. For instance, paper checks, which once comprised nearly half of noncash payments, accounted for only 15 percent in 2012. Checks are down, but not out, however. Although they made up a smaller share of the payments pie, they are declining from a dominant position. “As check writing continued to decline, the number of checks that could be converted declined as well,” the story notes. As a result, automated clearinghouse (ACH) transactions—many of which originate from the conversion of paper checks to ACH— decelerated, growing just 5.1 percent from 2009 to 2012, compared to 10.9 percent growth during the 2003 to 2012 period.

Meanwhile, payment cards continued to grow, accounting for two-thirds of consumer and business noncash payments in 2012. With annual growth of 15.8 percent, prepaid card payments grew the fastest of all noncash payments. The 2013 study the Fed’s fifth in a series of triennial studies.

Beige Book – April 16, 2014 (Summary of Commentary on Current Economic Conditions by Federal Reserve District )

April 25, 2014 Comments off

Beige Book – April 16, 2016
Source: Federal Reserve Board

Reports from the twelve Federal Reserve Districts suggest economic activity increased in most regions of the country since the previous report. The expansion was characterized as modest or moderate by the Boston, Philadelphia, Richmond, Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco Districts. Chicago reported that economic growth had picked up, and New York and Philadelphia indicated that business activity had rebounded from weather-related slowdowns earlier in the year. The Cleveland and St. Louis Districts both reported a decline in economic activity.

Consumer spending increased in most Districts, as weather conditions improved and foot traffic returned. Auto sales were up in the New York, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, and San Francisco Districts, but they were little changed from a year earlier in Kansas City and Cleveland. In addition, assessments of tourism were generally positive, particularly for the Districts of Philadelphia, Richmond, and Minneapolis, where ski resorts had record seasons. Summer bookings were also solid in several Districts. Activity was mixed at non-financial services firms, with the Boston, Philadelphia, Minneapolis, and Kansas City Districts reporting increased demand. In the Boston District, for example, advertising and consulting were strong. The Richmond District indicated that revenues at non-retail services firms were flat, and St. Louis said firms’ planned activity declined on net.

The transportation sector generally strengthened in recent weeks, with higher port volumes and increased trucking. Even in districts where transportation was soft, the outlook was optimistic.

Manufacturing improved in most Districts. Several Districts reported that the impact of winter weather was less severe than earlier this year. Chicago and Minneapolis saw moderate growth, while manufacturing grew at a steady pace in New York, Atlanta, St. Louis, and Dallas. San Francisco noted that manufacturing appeared to gain some momentum. Other Districts noted mild growth, except Richmond, where manufacturing activity was mixed. Demand for food production declined in the Boston, Richmond, and Dallas Districts; however the drop was primarily weather related. Steel production picked up in several districts.

Reports on residential housing markets varied.

An Evaluation of the Inflationary Pressure Associated with Short- and Long-term Unemployment

April 25, 2014 Comments off

An Evaluation of the Inflationary Pressure Associated with Short- and Long-term Unemployment
Source: Federal Reserve Board

In the years following 2009, long-term unemployment has been very elevated while inflation has fallen only moderately, raising the question of whether the long-term unemployed exert less downward pressure on prices than the short-term unemployed, perhaps because such potential workers are disconnected from the labor market. However, empirical evidence is mixed. This analysis demonstrates that the typical approach, using national data, is incapable of discriminating the inflationary pressure exerted by short and long-term unemployment because the series are highly correlated, making inference difficult given the short-span of data used in Phillips-curve estimation. However, application of more data, through the use of regional variation, can discriminate the independent influences of short-and long-term unemployment on price inflation. We present a model illustrating these issues and apply the model to data for U.S. metropolitan regions. We find that that short- and long-term unemployment exert equal downward pressure on price inflation.

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