Interbank market news scan: Lael Brainard provides detailed description of the inflationary bump expected from the American Recovery Plan …

The following remarks by Federal Reserve Governor Lael Brainard were delivered yesterday before the annual conference of the National Association of Business Economics …

“It has now been a year since the onset of COVID-19 in the United States. The past year has been marked by heartache and hardship, especially for vulnerable communities, as well as by the resilience and extraordinary efforts of Americans everywhere, particularly those on the front lines. The past year has also seen determined efforts on the part of policymakers—public health, fiscal, and monetary—to do what is necessary and stay the course until we return to full strength.1

These determined efforts have contributed to a considerably brighter economic outlook. A comparison between the median of the most recent Federal Open Market Committee (FOMC) Summary of Economic Projections (SEP) and the first projection following the onset of the pandemic, in June of last year, highlights the improvement in the outlook. The change in the SEP median suggests an improvement in the projected level of gross domestic product of 6 percent at the end of 2021 and 2022, a decline in the unemployment rate of 2 percentage points at the end of 2021 and 1-1/2 percentage points at the end of 2022, and an upward revision to the headline inflation rate of 0.8 percentage point at the end of 2021 that narrows to a 0.3 percentage point upward revision at the end of 2022.2 The expected improvements in the outlook reflect progress on controlling the virus, nearly $3 trillion in additional fiscal support, and forceful and timely support from monetary policy.

Although the outlook has brightened considerably, the fog of uncertainty associated with the virus has yet to lift completely, and current employment and inflation outcomes remain far from our goals. The focus on achieved outcomes rather than the anticipated outlook is central to the Committee’s guidance regarding both asset purchases and the policy rate. The emphasis on outcomes rather than the outlook corresponds to the shift in our monetary policy approach that suggests policy should be patient rather than preemptive at this stage in the recovery.

Outcomes
Recent data indicate that activity has picked up this year. After a dip in the final months of 2020, personal consumption expenditures (PCE) stepped up considerably so far this year, and spending on durable goods has been particularly strong. This pattern appears consistent with a quick spend-out from the Consolidated Appropriations Act (CAA) stimulus checks at the turn of the year, particularly among lower-income households that may have previously exhausted the funds provided in the CARES Act (Coronavirus Aid, Relief, and Economic Security Act).3

Like the spending data, the labor market data turned more positive in January and February following weakness at the end of 2020. Although the unemployment rate has moved down 1/2 a percentage point since December, the K-shaped labor market recovery remains uneven across racial groups, industries, and wage levels.4 The employment-to-population (EPOP) ratio for Black prime-age workers is 7.2 percentage points lower than for white workers, while the EPOP ratio is 6.2 percentage points lower for Hispanic workers than for white workers—an increase in each gap of about 3 percentage points from pre-crisis lows in October 2019.

Workers in the lowest-wage quartile continued to face staggering levels of unemployment of around 22 percent in February, reflecting the disproportionate concentration of lower-wage jobs in services sectors still sidelined by social distancing.5 The leisure and hospitality sector is still down almost 3.5 million jobs, or roughly 20 percent of its pre-COVID level. This sector accounts for more than 40 percent of the net decline in private payrolls since February 2020. Overall, with 9.5 million fewer jobs than pre-COVID levels, we are far from our broad-based and inclusive maximum-employment goal.

Inflation similarly remains far from the goal of 2 percent inflation on average over time. Both headline and core PCE inflation were below 2 percent on a 12-month basis throughout 2020 and came in at 1.5 percent in January.

Finally, while vaccinations are continuing at an accelerating pace, over two-thirds of the adult population have yet to receive their first dose, and there are risks from more contagious strains of the virus, social-distancing fatigue, and vaccine hesitancy.6

Outlook
As the economy reopens, the potential release of pent-up demand could drive stronger growth in 2021 than we have seen in decades. However, it is uncertain how much pent-up consumption will be unleashed when social distancing completely lifts, and how much household spending will result from the new stimulus and accumulated savings. With PCE accounting for roughly 70 percent of the economy, this uncertainty about consumption spending contributes to uncertainty about activity, employment, and inflation.

In part, the outcome will hinge on distributive questions that are imperfectly understood. Households accrued considerable additional savings that led to a $2.1 trillion increase in liquid assets by the end of last year.7 Higher-income households appear to have cut back on discretionary services spending over the past year and increased their purchases of durable goods, which may see some satiation going forward. For moderate-income households that are not cash constrained, it is possible there will be a lower near-term spend-out from the American Rescue Plan payments relative to the CAA payments, given that less than 75 days elapsed between the two rounds of payments. Households whose cash flows were improved by the CAA stimulus may save more of the most recent stimulus for precautionary reasons. That said, there is upside risk if a substantial fraction of stimulus payments and accumulated savings are spent in 2021 rather than more slowly over a longer time period.

On the other side, there is potential for some leakage abroad if, as anticipated, foreign demand growth in some regions is weaker than in the United States. Imports soared during the second half of last year and grew further in January, even with worsening backlogs at U.S. ports. As port congestion and supply chain bottlenecks ease, international spillovers could lead to some slippage between the increase in domestic demand and resource utilization, which has implications for employment and inflation.

In the labor market, as vaccinations continue and social distancing eases, businesses in hard-hit services sectors will increase hiring, accelerating the pace at which workers find employment. The strong and timely support from fiscal as well as monetary policy likely reduced the extent of scarring during the pandemic, which should aid the pace of hiring at in-person services establishments once the virus is well controlled.

The speed of further improvement in the labor market following the initial rush of reopening is less clear, however. Some employers may be cautious about significantly increasing payrolls before post-COVID consumption patterns are more firmly established. Others may be implementing measures to stay lean and contain costs. In the December Duke CFO survey, roughly one-half of CFOs from large firms and about one-third of those from small firms reported “using, or planning to use, automation or technology to reduce reliance on labor.”8

In addition to greater use of technology, there is likely a significant amount of slack on the participation and part-time margins. The EPOP ratio among workers ages 25 to 54 is still a full 4 percentage points below its pre-COVID level, and the number of workers working part time because they cannot find a full-time job is 1.7 million higher than pre-COVID.

Although core and headline PCE inflation came in at 1.5 percent on a 12-month basis in January, the well-anticipated base effects from price declines in March and April of last year will cause inflation to move above 2 percent in April and May. It also seems likely that a surge of demand may be met by some transitory supply bottlenecks amid a rapid reopening of the economy, leading PCE inflation to rise somewhat above 2 percent on a transitory basis by the end of 2021.

Entrenched inflation dynamics are likely to take over following the transitory pressures associated with reopening. Underlying trend inflation has been running persistently below 2 percent for many years.9 In addition, research suggests that although increasing labor market tightness may show through to wage inflation, the pass-through to price inflation has become highly attenuated.10 These results suggest that businesses tend to respond to increased labor costs by reducing margins rather than increasing prices later in the cycle. Thus, as resource utilization continues to tighten over coming years, recent decades provide little evidence to suggest there will be a material nonlinear effect on price inflation.

Policy
The FOMC has communicated its reaction function under the new framework and provided powerful forward guidance that is conditioned on employment and inflation outcomes. This approach implies resolute patience while the gap closes between current conditions and the maximum-employment and average inflation outcomes in the guidance.

By focusing on eliminating shortfalls from maximum employment rather than deviations in either direction and on the achievement of inflation that averages 2 percent over time, monetary policy can take a patient approach rather than a preemptive approach. The preemptive approach that calls for a reduction of accommodation when the unemployment rate nears estimates of its neutral rate in anticipation of high inflation risks an unwarranted loss of opportunity for many of the most economically vulnerable Americans and entrenching inflation persistently below its 2 percent target.11 Instead, the current approach calls for patience, enabling the labor market to continue to improve and inflation expectations to become re-anchored at 2 percent.

One simple illustration of this difference is the way in which FOMC communications under the new framework have shifted market expectations around the conditions associated with the lift off of the policy rate from the lower bound. This shift is suggested by a comparison of the surveys of primary dealers and market participants conducted by the Federal Reserve Bank of New York in the most recently available surveys, in January 2021, and under the prior policy framework, in March 2015. In the January 2021 surveys, the median respondent expected the unemployment rate to be a bit below 4 percent at the time of liftoff, as compared with 5.3 percent in the March 2015 surveys. Similarly, in the January 2021 surveys, the median respondent expected a 12-month headline PCE inflation rate of 2.2 to 2.3 percent at the time of liftoff, as compared to roughly 0.5 percent in the March 2015 surveys. The most recently available surveys suggest that market participants expect policy to look through the rolling off of base effects as well as possible transitory price increases due to short-term supply-demand imbalances.

The FOMC has stated that in order to anchor inflation expectations at 2 percent, it seeks to achieve inflation that averages 2 percent over time. This language recognizes that the public’s expectations of inflation are linked to the experience of inflation outcomes. In the nine years since the Committee formally defined price stability as annual PCE inflation of 2 percent, the average 12-month PCE inflation reading has been 1.4 percent. Persistently low inflation creates the risk that households and businesses come to expect inflation to run persistently below target and change their behavior in ways that reinforce low inflation.12

With inflation expected to rise above 2 percent on a transitory basis, I will be closely monitoring a dashboard of indicators to assess that inflation expectations remain well anchored at levels consistent with the Committee’s objective. These indicators include survey and market-based measures, along with composite measures like the staff’s Index of Common Inflation Expectations.13 Survey measures have picked up a little but remain around pre-COVID levels. Meanwhile, five- and 10-year TIPS (Treasury Inflation-Protected Securities)-based measures of inflation compensation have moved up almost 1 percentage point since last summer and are now at levels last seen in 2013 and 2014. These changes likely reflect both the improvement in the anticipated outlook and market participants’ understanding of the Committee’s new reaction function.14

The overall price-stability objective of achieving inflation that averages 2 percent over time provides an important guidepost for assessing the path of inflation. Along with realized inflation, I will be monitoring a range of average inflation concepts in the literature to assess the path of policy that would be consistent with closing the inflation gap under a variety of make-up strategies.15

While the outlook has brightened considerably, with jobs nearly 10 million below the pre-COVID level and inflation persistently below 2 percent, the economy remains far from our goals, and it will take some time to achieve substantial further progress. By taking a patient approach based on outcomes rather than a preemptive approach based on the outlook, policy will be more effective in achieving broad-based and inclusive maximum employment and inflation that averages 2 percent over time. The combination of patient monetary policy, together with accelerating progress on vaccinations and substantial fiscal stimulus, should support a strong and inclusive recovery as the economy reopens fully.”

Government strategy: Joe Biden Playing it “by the book” and Scoring an “A” So Far ….

As Savik questioned Spock about his use of deception in their communications, the seasoned Starfleet officer reminded her that the narrative must always be presented by the book.Joe Biden is the seasoned commander and his “by the book” play so far has him scoring an “A.”

Yesterday, his Treasury secretary released a statement describing an economy on the rebound. The irony is that she noted it has been on a rebound since May 2020. MarketWatch, a business publication, has made the same observation.

Even with 10 million fewer people employed, the economy is inching closer to where it stood pre-pandemic. This should scare us folk who rely on our wages, but like Mr Spock, the Biden administration is using a little distraction away from the economic enemy by focusing on a reconciliation bill that may or may not provide any sustainable stimulus to an economy that may not need anymore stimulus dollars.

If a labor force of x-10 million can get the economy back on its feet then the real issue is not stimulus money or impeaching Donald Trump (another distraction engineered by Senate and House leadership). The real issues are a weaker dollar that suppresses wages, unemployed people who need work, higher interest rates due to the government borrowing needed to pay for stimulus, and a brewing currency war that challenges the dollar’s status as the world’s reserve currency. So, why the “A”? Because this is what a smart, newly elected president does in the first 100 days; they deliver what they promise.

The question is, at what cost the deception?

Treasury releases assessment of US economy

The following is a press release from the U.S. Department of the Treasury:

“In the final quarter of 2020, the U.S. economy expanded further, with growth in real GDP of 4.0 percent, according to the advance estimate released last Thursday.  Despite this second consecutive quarter of growth, real GDP still declined 2.5 percent over the four quarters of 2020, given the severity of the contraction in the first half of the year.  The economy’s recovery slackened by the end of the year.  Payroll job creation slowed noticeably from September through November, before declining outright in December, largely due to losses in leisure and hospitality service industries—such as restaurants and bars, hotels, performing arts venues, and other establishments that are particularly vulnerable to stay-at-home orders and other measures implemented to combat the pandemic.  While real personal consumption rose in the fourth quarter, the pace of growth was constrained in part by renewed lockdowns and reduced capacity in key service industries.  Though the second Federal economic aid package passed in December 2020 should boost growth in the first half of 2021, a full recovery nonetheless depends on effectively resolving the pandemic – the efficacy of public health measures and the rapid vaccination of the population – while ensuring that households and businesses can cope with the variety of headwinds presented by the pandemic.

GDP GROWTH

Real GDP grew 4.0 percent at an annual rate in the fourth quarter of 2020, following a surge of 33.4 percent in the third quarter.  Two major components of GDP – private fixed investment and residential investment – grew at double-digit paces, but private consumption also made healthy positive contribution to growth in the fourth quarter.  Private domestic final purchases – the sum of personal consumption, business fixed investment, and residential investment – increased 5.6 percent at an annual rate in the fourth quarter, extending the 39.0 percent advance in the third quarter.  This measure captures the economy’s capacity for a self-sustaining recovery, and also attests to an underlying upward momentum in private demand.

Real personal consumer expenditures (PCE), which accounts for about two-thirds of overall GDP, grew 2.5 percent at an annual rate in the fourth quarter.  This followed a surge of 41.0 percent in the third quarter; by the fourth quarter, PCE had recovered 77 percent of what was lost in the first half of 2020.  Purchases of durable goods – a category that includes motor vehicles, household equipment and furnishings, among other items – were unchanged in the fourth quarter, after spiking 82.7 percent in the third quarter.  Purchases of nondurable goods – such as food and beverages purchased for off-premises consumption, gasoline and other energy goods, clothing, footwear, and other goods – declined 0.7 percent in the fourth quarter, following a gain of 31.1 percent in the third quarter.  Meanwhile, household expenditures on services – the component of PCE most severely affected by the pandemic and related measures – grew 4.0 percent in the fourth quarter, after rebounding by 38.0 percent in the third quarter.  With two consecutive quarters of gains in most categories, consumer spending was 2.6 percent below its level at the end of 2019.  Overall, real personal consumption expenditures added 1.7 percentage points to the rise in total GDP in Q4.

Business fixed investment (BFI) rose 13.8 percent at an annual rate in the fourth quarter, driven by gains in all three major components, and following a jump of 22.9 percent in the third quarter.  Equipment investment showed the most rapid and broad-based growth in the fourth quarter, rising 24.9 percent overall – with gains in each sub-component – after surging 68.2 percent in the third quarter.  Investment in intellectual property products grew 7.5 percent, roughly comparable to the 8.4 percent increase in the third quarter.  Meanwhile, investment in structures was up 3.0 percent in the fourth quarter.  This represented a sharp swing from the 17.4 percent drop in the third quarter, when appetite for such investment was diminished due to lower oil prices and less oil exploration, continued use of telework, and a shift in consumption patterns away from brick-and-mortar to online retail sites.  While the latter two factors were still present in the fourth quarter, oil prices have trended up since late October, prompting more investment in oil-drilling structures; according to private sources, the average rig count rose 21 percent from the third to the fourth quarters.  The fourth quarter rebound in investment for mining-related structures partially offset annualized declines of 82.1 percent and 67.0 percent in the second and third quarters, respectively. Overall, total business fixed investment added 1.7 percentage points to real GDP growth in the fourth quarter, after contributing 3.2 percentage points in the third quarter.

Inventory accumulation, albeit a volatile component, returned to a more normal pace in the fourth quarter, after a significant buildup in the third quarter.  In the fourth quarter, the change in private inventories added 1.0 percentage points to economic growth, after contributing 6.6 percentage points in the third quarter.

In three of the past four quarters, residential investment has grown at double-digit paces. After surging by 63.0 percent in the third quarter – its largest advance since 1983 – residential investment increased 33.5 percent in the fourth quarter.  This component added 1.3 percentage points to growth, after contributing 2.2 percentage points in the third quarter.  Prior to the pandemic, residential investment had contributed to GDP growth for two quarters, and growth in this sector was solid in the first quarter of 2020.  The pandemic led to a steep but temporary decline in the second quarter.  Yet since last May, this sector has gained considerable strength, supported by record-low interest rates and record highs in builder confidence.  Demand for homes has far outstripped available supply, which has led to the recent, strong acceleration in home price growth—as well as strong gains in housing wealth among homeowners.  High house prices should eventually draw in more supply to help redress the current imbalance; until then, the rise in prices is making owner-occupied housing somewhat less affordable.  

Single-family housing starts and permits have grown strongly each month since May.  As of December, single-family housing starts were nearly 30 percent above their February level and single-family building permits – a leading indicator for starts – were 23 percent above pre-pandemic levels.  Existing home sales, which account for 90 percent of all home sales, rose to a fourteen-year high in October and were up more than 22 percent over the year through December.  New single-family home sales reached a 13-year high last August; though pulling back since, new home sales were still 15.2 percent higher over the year through December. In November, the National Association of Home Builder’s home builder confidence index rose to a record high of 90; though declining a combined 7 points over the two subsequent months, the home builder confidence index in January was still at an elevated level, conveying a significantly positive outlook about market conditions in the housing sector.  In early January, average rates for 30-year mortgages set a record low that was 2¼ percentage points below the levels since in November 2018.  In the intervening weeks, rates have risen only modestly above the record low.

Government spending declined 1.2 percent at an annual rate in the fourth quarter, reflecting a 0.5 percent decline in Federal spending and a 1.7 percent decline in state and local government expenditures. Total government spending pared 0.2 percentage points from GDP growth in the fourth quarter, mostly due to the state and local government component.  State and local government consumption has fallen for three consecutive quarters, partially owing to the reduction in employees as these governments struggled to meet balanced-budget requirements. The pandemic increased health care costs for these governments but social distancing restrictions lowered revenue, creating budget shortfalls. 

The net export deficit increased $102.1 billion at an annual rate during the fourth quarter to $1.12 trillion, as recovering domestic demand fueled another surge in imports.  Exports grew strongly, if less so than imports.  Total exports of goods and services grew by 22.0 percent, while imports advanced 29.5 percent. The widening of the trade deficit subtracted 1.5 percentage points from fourth quarter GDP growth, though this was less than one-half the 3.2 percentage points of drag posed by net exports in the third quarter.

LABOR MARKETS AND WAGES

Due to measures taken to control the spread of the virus, the economy lost 22.2 million jobs last March and April, 21.1 million of which were in the private sector.  Payroll job growth resumed last May: through December, the economy had recovered nearly 56 percent of all jobs lost and 60 percent of the private sector’s job losses.  Nonetheless, the pace of job growth slowed in more recent months and the labor market recovery stalled in December, with the economy losing 140,000 jobs, including 95,000 jobs in the private sector.  In all, the number of unemployed persons stood at 10.7 million in December, and weekly initial unemployment claims continue to run about four times the average levels seen prior to the pandemic’s onset.

The headline unemployment rate remained at 6.7 percent in December for the second consecutive month, nearly double its pre-pandemic level but more than 8 percentage points below the 14.8 percent, post-World War II high reached in April 2020.  The broadest measure of labor market slack, the U-6 unemployment rate, has also declined noticeably over the past several months yet remains above pre-pandemic levels.  By December, the U-6 had been cut to 11.7 percent, roughly half its level in April 2020.  But it remains nearly 5 percentage points above the pre-pandemic low of 6.8 percent observed in in December 2019.  Moreover, long-term unemployment continues to rise: the share of the labor force who were unemployed 27 weeks or more reached 2.46 percent in December, or roughly four times the 0.68 percent rate seen in February 2020.

Although the headline labor force participation rate (LFPR) – as well as prime-age (ages 25-54) LFPR – have recovered from the lows seen in April, they have yet to return to their pre-pandemic levels and in recent months, progress has slowed.  As of December, the headline LFPR stood at 61.5 percent, or almost 2 percentage points below the six-year high seen in January 2020, and the prime-age LFPR was 81.0 percent, 2 percentage points below the eleven-year high seen in January 2020.  The employment report for January 2021 will be released this Friday, February 5.

Nominal average hourly earnings for production and nonsupervisory workers rose 5.2 percent over the year ending in December 2020, faster than the 3.2 percent pace over the 12 months through December 2019.  December marked the 29th month that this measure of wage growth has remained above 3 percent, a consistency not seen since the mid-2000s.  Job losses among lower-wage workers tended to push average wages much higher for a time, but even with the rehiring of many of these workers, wage gains remain elevated, possibly pointing to the continued shortage of skilled workers.  Relatively low inflation has also boosted purchasing power: real average hourly earnings rose 3.8 percent over the year through December 2020, accelerating sharply from the year-earlier pace of 0.9 percent.  In contrast, growth in wages and salaries for private industry workers, as measured by the Employment Cost Index, has slowed a bit.  This measure advanced 2.8 percent over the four quarters ending in December 2020, slowing from the 3.0 percent gain over the four quarters through December 2019.

PRICES

Inflationary pressures remain subdued, even with the recent, moderate climb in oil prices, and still-sizeable gaps remain relative to year-ago rates.  The Consumer Price Index (CPI) for all items accelerated to 0.4 percent in December, reflecting a 4.0 percent jump in energy prices, but over the 12 months through December, CPI inflation was 1.4 percent, almost a full percentage point below its year-earlier pace.  Despite recent gains, energy prices were still 7.0 percent lower than a year ago, versus a 3.4 percent gain over the previous 12-month period.  After tapering in recent months, food price inflation accelerated again in December, as the re-imposition of dining-out restrictions boosted demand for food consumed at home.  It bears noting that 12-month food price inflation rates have remained in the range of 3.5 percent to 4.5 percent since April 2020.  Over the year through December, food prices rose 3.9 percent, more than double the 1.8 percent pace over the 12 months through December 2019.  Meanwhile, core CPI inflation edged down to 0.1 percent in the month of December.  Over the past 12 months, core inflation was 1.6 percent, or 0.7 percentage points below its pace over the year through December 2019.

The headline Personal Consumption Expenditures (PCE) Price Index (the preferred measure for the FOMC’s inflation target) also shows a restrained pace of inflation; in contrast to CPI inflation, however, current rates remain nearer to year-ago levels. The 12-month headline PCE inflation rate was 1.3 percent through December 2020, within range of the 1.6 percent pace over the previous year.  Core PCE inflation was 1.5 percent over the year through December 2020, close to the 1.6 percent, year-earlier rate.  Inflation as measured by the PCE price index has held below the FOMC’s target since November 2018.  The FOMC’s target for inflation is an average of 2 percent over time as measured by the PCE price index.  Due to the significant drop in prices during the March to May lockdowns, there may be a spike in inflation in late-winter and early-spring, but it should prove transitory.

CONCLUSION

After two consecutive quarters of growth, real GDP is nearing the level of economic activity achieved in the fourth quarter of 2019.  Yet, 10.7 million workers remain unemployed, and many businesses have closed.  A variety of headwinds and uncertainties persist, all presenting considerable downside risks to growth.  On the domestic front, the possibility that consumer mood simply levels off, or even deteriorates, could weigh on private consumption in the future.  In addition, there is considerable uncertainty about the reach of existing vaccines vis-à-vis the emergence of mutated forms of the virus, mutations which appear to be significantly more contagious.  Given the difficulties in distributing the virus to date, slower-than-expected attainment of so-called “herd immunity” could hamper the return to normal operation of the businesses most affected by the pandemic.  Finally, slower recovery in overseas markets could also adversely affect U.S. economic recovery.  To address some of these challenges, the Administration has presented a plan for rapid vaccination of the population and has proposed $1.9 trillion in additional fiscal support the economy more broadly.  Private forecasters currently project a growth rate in real GDP of 2.3 percent in the first quarter of 2021, and of 3.9 percent for the year as a whole.”

Consumers’ Spending Expectations Rise Despite Flat Income and Earning Expectations

Source: Federal Reserve Bank of New York

PRESS RELEASE

NEW YORK—The Federal Reserve Bank of New York’s Center for Microeconomic Data released the November 2020 Survey of Consumer Expectations, which shows that despite flat income and earnings growth expectations, households’ year-ahead spending growth expectations rose sharply in November to 3.7%, the highest level recorded in more than 4 years. Labor expectations were mixed with deteriorating expectations about the unemployment rate and improving expectations about job security. After returning to their pre-COVID-19 levels in recent months, home price expectations recorded their first decline since April 2020. Median inflation expectations increased at both the short and medium-term horizons, while uncertainty and disagreement about future inflation remain elevated.

The main findings from the November 2020 Survey are:

Inflation

  • Median inflation expectations increased 0.2 percentage point in November to 3.0% at the one-year horizon and increased 0.1 percentage point to 2.8% at the three-year horizon. The increase in the short-term measure was driven mostly by respondents who are younger (below the age of 60), more educated (bachelor’s degree or higher) and with higher household income (over $100,000). Our measures of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) remain substantially above their pre-COVID-19 level at both horizons.
  • Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes— remained unchanged at the short-term horizon and increased at the medium-term horizon. Both measures are elevated relative to pre-COVID-19 readings.
  • Median year-ahead home price change expectations decreased 0.1 percentage point to 3.0% in November. This is the first monthly decline in the series since April 2020 when it reached its lowest level of 0%. The decline was recorded in all Census regions except the Northeast.
  • The median one-year ahead expected change in the cost of a college education and in the price of gasoline both increased by 0.3 percentage points to 5.2%. In contrast, the median expected change in the cost of medical care declined sharply, from 9.1% to 7.1%, slightly below its 2019 average of 7.2%. Expected changes in food prices and in the cost of rent declined by 0.1 and 0.2 percentage point to 5.1% and 5.5%, respectively.

                     
Labor Market

  • Median one-year ahead expected earnings growth remained flat in November at 2.0%, below its 2019 average level of 2.3%. This is the fifth consecutive month that the series has remained unchanged.
  • Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased for the first time since July 2020, from 35.4% in October to 40.1% in November.
  • The mean perceived probability of losing one’s job in the next 12 months decreased for the third consecutive month from 15.5% in October to 14.6% in November, still slightly above its 2019 average of 14.3%. The decrease was more pronounced among respondents above the age of 60 and without a college education. The mean probability of leaving one’s job voluntarily in the next 12 months decreased by 1.3 percentage point to 16.6% in November, a new series low. The decrease was driven mostly by respondents above the age of 60.
  • The mean perceived probability of finding a job (if one’s current job was lost) increased from 46.9% in October to 47.9% in November, but remains substantially below its 2019 average of 59.8%.

Household Finance

  • The median expected household income growth stayed flat in November at 2.1%, well below its 2019 average of 2.8%.
  • Median household spending growth expectations rebounded sharply in November, increasing 0.6 percentage points to 3.7%, its highest level since July 2016. The increase was driven mostly by those with household incomes below $50,000.
  • Perceptions of credit access compared to a year ago remained essentially unchanged in November. In contrast, expectations for future credit availability improved, with more respondents expecting it will be easier to obtain credit in the year ahead.
  • The average perceived probability of missing a minimum debt payment over the next three months increased by 1.6 percentage points to 10.9% in November, still below its 2019 average of 11.5%.
  • The median expectation regarding a year-ahead change in taxes (at current income level) increased sharply in November from 2.9% to 4.1%, the highest reading since May 2014. The increase was more pronounced for respondents between the age of 40 and 60.
  • The mean perceived probability that the average interest rate on saving accounts will be higher 12 months from now increased 0.5 percentage point to 24.8% in November, remaining below its 2019 average of 30.0%.
  • Perceptions about households’ current financial situations compared to a year ago remained essentially unchanged in November. In contrast, respondents were more pessimistic about their households’ financial situations in the year ahead, with more respondents expecting their financial situation to deteriorate, and fewer respondent expecting an improvement in their financial situation.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now decreased 2.3 percentage points to 38.5% in November, its lowest level since August 2019.

About the Survey of Consumer Expectations (SCE)
The SCE contains information about how consumers expect overall inflation and prices for food, gas, housing, and education to behave. It also provides insight into Americans’ views about job prospects and earnings growth and their expectations about future spending and access to credit. The SCE also provides measures of uncertainty regarding consumers’ outlooks. Expectations are also available by age, geography, income, education, and numeracy. 

The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month. Unlike comparable surveys based on repeated cross-sections with a different set of respondents in each wave, our panel allows us to observe the changes in expectations and behavior of the same individuals over time.

Contact
Shelley Pitterson
(212) 720-2552
shelley.pitterson@ny.frb.org

Federal Reserve Bank of New York releases survey on consumer expectations regarding the economy …

Yesterday, the Federal Reserve Bank of New York released its October 2020 Survey of Consumer Expectations. Overall, consumer expectations regarding inflation, employment, and income appear to be trending negative.

November 09, 2020

NEW YORK—The Federal Reserve Bank of New York’s Center for Microeconomic Data released the October 2020 Survey of Consumer Expectations, which shows a decline in income and spending growth expectations. Changes in labor market expectations were mixed showing declines in both average job loss and job finding expectations. Median inflation expectations declined at the short-term horizon, while remaining unchanged at the medium-term horizon. Uncertainty and disagreement about future inflation decreased slightly but remained at an elevated level.

The main findings from the October 2020 Survey are:

Inflation

  • Median inflation expectations in October decreased from 3.0% to 2.8% at the one-year horizon and remained unchanged at 2.7% at the three-year horizon. The decline was driven by higher-income respondents (household income above $100,000). Our measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) was unchanged at the one-year horizon but declined at the three-year horizon. Both remain substantially above their pre-COVID-19 levels.
  • Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—decreased at both horizons but remains elevated relative to pre-COVID-19 readings.
  • Median home price change expectations, which have been trending upward after reaching a series’ low of 0% in April 2020, were unchanged at 3.1% in October.
  • The median one-year ahead expected change in the cost of a college education declined from 5.2% to 4.9% in October. Median expectations for the cost of rent and medical care both increased from 5.4% and 6.8% to 5.7% and 9.1% in October, respectively.

           
Labor Market

  • Median one-year ahead expected earnings growth remained unchanged at 2.0% in October, for the third consecutive month. The series remains well below its 2019 average level of 2.4%.
  • Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—decreased from 36.4% in September to 35.4% in October, its third consecutive decline. The decline was driven by respondents without a college education.
  • The mean perceived probability of losing one’s job in the next 12 months decreased from 16.6% in September to 15.5% in October, remaining above its pre-COVID-19 reading of 13.8% in February. This month’s decline was more pronounced among respondents with more than a high school education and those with household incomes above $50,000. The mean probability of leaving one’s job voluntarily in the next 12 months declined substantially from 20.3% in September to 17.8% in October. The decrease was broad-based across demographic groups.
  • The mean perceived probability of finding a job (if one’s current job was lost) declined from 49.9% in September to 46.9% in October, its lowest reading since April 2014. The decline was broad based across education and income groups. The series remains well below its 2019 average of 59.9% and its February 2020 level of 58.7%.

Household Finance

  • Median expected household income growth decreased by 0.3 percentage point to 2.1% in October. Since February, this series has moved within a narrow range from 1.9% to 2.3%, well below its 2019 average of 2.8%. The decrease was driven by respondents without a college education.
  • Median household spending growth expectations decreased from 3.4% in September to 3.1% in October, which was the same as its February 2020 level.
  • Expectations for year-ahead credit availability deteriorated in October, with more respondents expecting credit to become more difficult to obtain.
  • The average perceived probability of missing a minimum debt payment over the next three months decreased from 10.7% in September to 9.3% in October, remaining below its 2019 average of 11.5%.
  • The median expectation regarding a year-ahead change in taxes (at current income level) declined from 3.0% in September to 2.9% in October.
  • The mean perceived probability that the average interest rate on saving accounts will be higher 12 months from now declined from 27.6% in September to 24.3% in October, a new series low.
  • Perceptions about households’ current financial situations compared to a year ago were largely unchanged, while one-year ahead expectations about households’ financial situations deteriorated slightly with fewer respondents expecting their financial situation to improve and more respondents expecting their financial situation to worsen.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now decreased 3.3 percentage points to 40.8% in October, its lowest monthly reading this year.

 
About the Survey of Consumer Expectations (SCE)
The SCE contains information about how consumers expect overall inflation and prices for food, gas, housing, and education to behave. It also provides insight into Americans’ views about job prospects and earnings growth and their expectations about future spending and access to credit. The SCE also provides measures of uncertainty regarding consumers’ outlooks. Expectations are also available by age, geography, income, education, and numeracy. 

The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month. Unlike comparable surveys based on repeated cross-sections with a different set of respondents in each wave, our panel allows us to observe the changes in expectations and behavior of the same individuals over time.

Contact
Shelley Pitterson
(212) 720-2552
shelley.pitterson@ny.frb.org

3815 Media, Inc., is expanding in metro Atlanta …

Source: Georgia Department of Economic Development

ATLANTA, October 30, 2020 —The Georgia Department of Economic Development (GDEcD) today announced that content development, production, marketing and distribution company 3815 Media, Inc. is expanding with a new headquarters in Peachtree Corners. Founded by two-time Emmy Award-winning executive producer and Georgia Minority Supplier Development Council member Rushion McDonald, 3815 Media’s focus is identifying and promoting positive values for the Black community through diverse content creation.

“Investments from innovative companies like 3815 Media, Inc. are a testament to Georgia’s support for the film and production industries and to the investments Georgia has made in developing creative talent in the state,” said Georgia Department of Economic Development Commissioner Pat Wilson. “I thank Rushion McDonald for his continued investment in Georgia, and look forward to seeing the incredible opportunities he creates in Peachtree Corners with his commitment to producing quality content with an eye to diversity.”

Originally started in 2014, 3815 Media, Inc.’s expansion to 3201 Peachtree Corners Circle is expected to create 23 jobs in Gwinnett County. 3815 Media’s mission is to produce and market diverse content to consumers. Company Founder Rushion McDonald is also a multiple Emmy and NAACP Image Award-winner for television production and has produced national campaigns for State Farm, Ford, MGM, iHeartRadio, HBCU Week, ESPN, NBC, BET and ABC. He has written and produced for Steve Harvey, Kevin Hart, Taraji P. Henson, Mo’Nique, Gabrielle Union, Tia and Tamera Mowry, Stephen A. Smith, Jamie Foxx and many other household names.

“It was a no brainer for me to open 3815 Media in a city recognized as one of the best places to live in the entire State of Georgia thanks to its education quality, low crime rate, cost of living, employment and access to amenities,” said 3815 Media CEO Rushion McDonald. 

3815 Media, Inc.’s additional staff will include graphic designers, legal experts, talent managers, producers, creative strategists, virtual exhibit designers, marketing experts and more. Individuals interested in working for 3815 Media, Inc. who have experience in graphic design, social media, digital marketing and SEOs are encouraged to email their resumes to Rushion@3815Media.com. 3815 Media, Inc. will also offer internship opportunities.

“It is indeed a pleasure to welcome Mr. McDonald and his talented team to Peachtree Corners,” said Peachtree Corners Mayor Mike Mason. “One of our city’s top priorities is to ensure that all businesses have the opportunity to succeed. Our zero-millage rate and business-friendly city continues to draw remarkable businesses like 3815 Media. We wish them great success.”

“Gwinnett County is a great home for 3815 Media due to the strong diversity within the community,” said Andrew Carnes, vice president of economic development at Partnership Gwinnett. “We are always excited to continue to expand the creative talent workforce and provide opportunities for our region.”

Project Manager Asante Bradford represented GDEcD’s Global Commerce division on this project. 

About 3815 Media, Inc. 
3815 Media is built on the vision and career success of Rushion McDonald. Whether it’s print, radio, TV, film, live touring productions, industry exhibits, in person or across social networks, 3815 Media can help its clients create the exact message to build their brand, as well as produce content on the right platform medium. 3815 Media covers content development, production, marketing, distribution and multi-platform initiatives including digital video.

Contact

Marie Hodge Gordon
Director of Communications
404-962-4075
MGordon@Georgia.org

Alison Wentley
Communications Specialist
404-962-4086
AWentley@Georgia.org

Cayman Islands, United Kingdom, and Japan lead as source of foreign securities held by the United States

Source: U.S. Department of the Treasury

Washington – The findings from the annual survey of U.S. portfolio holdings of foreign securities at year-end 2019 were released today and posted on the Treasury web site at https://www.treasury.gov/resource-center/data-chart-center/tic/Pages/shcreports.aspx

The survey was undertaken jointly by the U.S. Department of the Treasury, the Federal Reserve Bank of New York, and the Board of Governors of the Federal Reserve System. 

A complementary survey measuring foreign holdings of U.S. securities is also conducted annually.  Data from the most recent such survey, which reports on securities held at end-June 2020, are currently being processed.  Preliminary results are expected to be reported on February 26, 2021.

OVERALL RESULTS

This survey measured the value of U.S. portfolio holdings of foreign securities at year-end 2019 as approximately $13.1 trillion, with $9.5  trillion held in foreign equity, $3.1 trillion held in foreign long-term debt securities (original term-to-maturity in excess of one year), and $0.5 trillion held in foreign short-term debt securities.  The previous such survey, conducted as of year-end 2018, measured U.S. holdings of approximately $11.3 trillion, with $7.9 trillion held in foreign equity, $2.9 trillion held in foreign long-term debt securities, and $0.5 trillion held in foreign short-term debt securities.  The increase in 2019 was mainly in equity (see Table 1).

U.S. portfolio holdings of foreign securities by country at the end of 2019 were the largest for the Cayman Islands ($2.00 trillion), followed by the United Kingdom ($1.52 trillion), Japan ($1.15 trillion), and Canada ($1.10 trillion) (see Table 2).  These four countries attracted 44 percent of total U.S. portfolio investment, versus 45 percent the previous year.
The surveys are part of an internationally coordinated effort under the auspices of the International Monetary Fund (IMF) to improve the measurement of portfolio asset holdings.

TABLE 1.  U.S. HOLDINGS OF FOREIGN SECURITIES, BY TYPE OF SECURITY, AS OF SURVEY DATES [1]

(Billions of dollars)

Type of SecurityDecember 31, 2018December 31, 2019
   
Long-term Securities10,79312,617
            Equity7,8999,478
            Long-term debt2,8943,139
Short-term debt securities502470
Total11,29513,087

U.S. PORTFOLIO INVESTMENT BY COUNTRY

Table 2.  Market value of U.S. portfolio holdings of foreign securities, by country and type of security, for countries attracting the most U.S. investment, as of December 31, 2019 [1]

(Billions of dollars)

Country or categoryTotalEquityDebt
TotalLong-termShort-term
Cayman Islands2,000,8011,501,486499,315494,4794,836
United Kingdom1,517,1651,013,549503,616411,51092,106
Japan1,147,091926,921220,171164,22555,946
Canada1,097,840592,702505,138394,631110,507
France661,756468,257193,499167,97425,525
Ireland647,745560,50887,23778,2369,001
Switzerland596,729551,90144,82842,1952,633
Netherlands572,862370,537202,324188,33613,988
Germany467,164380,90786,25770,43715,820
Australia366,041201,612164,429120,58943,840
Bermuda274,844239,41235,43135,39734
Korea, South231,202211,61519,58819,354234
China, mainland (1)222,282204,25218,03015,1972,833
Taiwan214,872214,80369690
India200,659185,10715,55214,5471,005
Brazil197,708168,53029,17828,624554
Hong Kong180,713170,8349,8797,2192,660
Spain162,493115,11247,38144,2103,171
Luxembourg156,69381,25175,44271,9233,519
Sweden155,408110,17245,23529,85215,383
Rest of world2,015,2931,208,546806,748740,46666,282
Total13,087,3619,478,0143,609,3473,139,470469,877

*     Greater than zero but less than $500 million.

Items may not sum to totals due to rounding.

[1] The stock of foreign securities for December 31, 2019, reported in this survey may not, for a number of reasons, correspond to the stock of foreign securities on December 31, 2018, plus cumulative flows reported in Treasury’s transactions reporting system.  An analysis of the relationship between the stock and flow data is available in Exhibit 4 and the associated text of “U.S. Portfolio Holdings of Foreign Securities as of End-December 2019.”

[2] China, Hong Kong, and Macau are all reported separately.

U.S. Treasury conference call with finance ministers of Australia, Canada, and the United Kingdom …

WASHINGTON – On October 28, 2020, U.S. Treasury Secretary Steven T. Mnuchin participated in a conference call with the Finance Ministers of Australia, Canada and the United Kingdom to discuss policies to support business and employment in response to the COVID-19 pandemic.  The call, hosted by Chancellor Rishi Sunak, is the latest in a series of regular calls among the Finance Ministers of the “Five Eyes” nations.  The Ministers discussed various policy responses to support workers and businesses and collaborative efforts to promote a strong and sustained economic recovery.

Source: U.S. Department of Treasury

High points from Federal Reserve vice-chair Richard Clarida show how Biden will play economy in 2023 …

News and Analysis

Yesterday, vice-chairman of the Board of Governors of the Federal Reserve, Richard Clarida, reiterated the Federal Reserve’s call for continued stimulus spending to reboot an American economy severely slowed down by a government-ordered commercial lockdown resulting from efforts to stem the virality of Covid-19. In describing combined fiscal and monetary efforts to reboot the economy, Mr Clarida shared the following:

“Although spending on many services continues to lag, the rebound in the GDP data has been broad based across indicators of goods consumption, housing, and investment. These components of aggregate demand have benefited from robust fiscal support—including the Paycheck Protection Program and expanded unemployment benefits—as well as low interest rates and efforts by the Federal Reserve to sustain the flow of credit to households and firms. In the labor market, about half of the 22 million jobs that were lost in the spring have been restored, and the unemployment rate has fallen since April by nearly 7 percentage points to 7.9 percent as of September.”

Mr Clarida challenged naysayers who had argued that interest rate cuts, asset purchases, and loan programs would not facilitate growth in gross domestic product by reminding them that the unemployment rate has fallen almost seven percentage points since April and that the labor market has replaced almost half of the 22 million jobs lost last spring. But even at this rate of progress, Mr Clarida made it clear that it may take another year before the American economy gets back to its previous 2019 peak.

The Federal Reserve’s decision to modify its inflation target policy, where inflation may be allowed to run moderately over two percent and federal funds rates remaining relatively unchanged (0 to .25%) over the next three years, is expected to result in an unemployment rate of four percent and inflation returning to two percent.

Assuming the polls hold and Joe Biden is able to take over the Oval Office on 20 January 2021, a first glance expectation is that Mr Biden will pursue spending bills that, in addition to increases in transfer payments, will increase pools of public capital available for access by private firms or private-public partnerships. Mr Biden’s “Build Back Better” initiative appears, in theory, to call for creating these opportunities.

One potential area for increasing pools of public capital is the financing of energy infrastructure projects. According to language from his campaign platform:

“Biden will immediately invest in engines of sustainable job creation – new industries and re-invigorated regional economies spurred by innovation from our national labs and universities; commercialized into new and better products that can be manufactured and built by American workers; and put together using feedstocks, materials, and parts supplied by small businesses, family farms, and job creators all across our country.”

Mr Biden may not have much re-creating the wheel to do. The United States Department of Energy has a number of financing programs in place that can be used to finance these endeavors. For example, the federal government offers what it calls a “Small Business Toolbox” that helps small businesses, no matter their experience level with government contracting, navigate the requirements for financing.

Mr Biden will have to finance these procurement programs so that these programs can turn around and finance the private companies ready to carry out the federal government’s energy infrastructure agenda. If the Federal Reserve remains on its modified inflation glide path, Mr Biden will have three fiscal years of low interest rates to borrow the funds necessary for his energy infrastructure plans and create the collateral employment of labor that may come along with it.

Mr Biden is likely praying that the “blue wave” narrative, where the Democratic Party sweeps the White House and the Congress, comes to fruition in November. With both chambers of Congress under Democratic control, there may be greater ease at delivering the necessary government financing for his initiatives. If he learned anything from the Obama administration’s first term in office, it is the need to move fast during his first two years to secure the necessary spending bills.

If Mr Biden does not get the “blue wave” then he will have to apply his ‘across the aisle” skills to get Republican senators to buy into his infrastructure plan.

Meanwhile, America is going through a structural employment shift, one that many wage earners will not recover from. Shrinking tax bases due to lower labor force participation and increased tax bills for those who are still working but making less money doth not make a certain second term.

Covid-19 and the need for talent driving executive decisions on work location …

NEW YORK, Oct. 13, 2020 /PRNewswire/ — A new survey of U.S. business executives concludes corporate decision makers find large urban areas less attractive business locations due to the COVID-19 pandemic. Released today at the International Economic Development Council (IEDC) Annual Conference, which is being held virtually from Dallas, the study shows that nearly 50% of the executives surveyed reported that large urban areas – cities with a population of more than 1 million – are less attractive as business locations due to COVID-19. Respondents also reported that their perception of some state’s business climates has deteriorated due to the way some states have handled the pandemic.

Conducted by Development Counsellors International (DCI) every three years, the “Winning Strategies in Economic Development Marketing” survey has tracked trends in economic development since its inception in 1996. In light of COVID-19, this year’s survey also includes findings about how the pandemic affects corporate location decisions and perceptions of U.S. cities and states.

“Now in its ninth iteration, the Winning Strategies survey reveals the changing perceptions of location decision makers, as well as the tools and tactics that help shape those perceptions,” said Julie Curtin, president of DCI’s economic development practice. “The confluence of a global pandemic, a presidential election and intense scrutiny of equity policies is putting a renewed interest on how location decisions are made, so the results from this year’s survey are especially interesting for communities and site selectors alike.”

Key findings from the 2020 survey, which is based on the aggregate responses of 316 corporate executives with site selection responsibilities, include:

  • States with the Best Business Climates: Texas ranks No. 1 with 48% of respondents citing the state as having a favorable business climate, followed by Georgia at No. 2 with 25%, North Carolina at No. 3 with 22%, Florida at No. 4 with 18% and Tennessee at No. 5 with 13%.
  • States with the Worst Business Climates: California has held the distinction of being the least-favorable state for the past seven editions of the survey, with the percentage rising from 57% in 2017 to 63% this year. New York, Illinois and New Jersey have also been ranked in the top five for the last three editions of the report.
  • Corporate executives are closely watching the presidential election and expecting to pivot if needed. A majority of respondents (55%) reported that should President Trump be re-elected, they—or their clients—will be more likely to explore locations in the United States.
  • Talent continues to rule the decision-making process. Even as the country has seen unemployment rates skyrocket since the start of the pandemic, skills gaps continue to exist and access to skilled talent remains the top location factor in site selection searches.
  • Even amidst the pandemic, companies are moving forward with location decisions. 55% of respondents reported that their company will make a location decision (such as move, expand or consolidate) during the next 24 months—5 percentage points up from 2017.

Best States for Business:

  1. Texas                                 48%
  2. Georgia                              25%
  3. North Carolina                    22%
  4. Florida                                18%
  5. Tennessee                         13%

Worst States for Business:

  1. California                           63%
  2. New York                           33%
  3. Illinois                                 32%
  4. New Jersey                        14%
  5. Florida                                12%

For a free copy of the full “Winning Strategies” survey report or an executive summary, visit aboutdci.com/thought-leadership/winning-strategies.

About DCI
Development Counsellors International (DCI) is the leader in travel and economic development marketing — increasing visitors and business inquiries for places across the globe. Since 1960, DCI has worked with more than 500 cities, regions, states and countries, helping them attract both investors and visitors. DCI has offices in New York, Denver, Toronto and Los Angeles. For more information, visit aboutdci.com or follow @aboutDCI on Twitter.

SOURCE Development Counsellors International

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