Tag: USA

What Are the Economic Impacts of Climate Change?

Strategically, the economic risks relating to the changing climate are one of the most significant challenges we face. But what are the potential long term impacts likely to be? In this Federal Reserve of St. Louis, on the economy blog,  this important subject is explored.

We think there is a need for similar modelling to be done in Australia, as many of the most populated areas are most likely to be impacted.

How might climate change impact the economy over the long term? Some potential impacts include increased mortality, higher demand for electricity and reduced yields for certain crops.

At a recent Dialogue with the Fed presentation, William Emmons, lead economist with the St. Louis Fed’s Center for Household Financial Stability, highlighted research1 that identified geographic “winners and losers” on a county-by-county level across the United States.

Looking out to the year 2090, the findings showed that the St. Louis region could expect a significant impact on its economic activity, Emmons said.

“And if you zoom in and look at our region, [the researchers’] estimates are that we could lose the economic equivalent of 5 to 10 percent of GDP as a result of these effects,” he said, noting that impacts would be gradual.

Higher asset threshold for US SIFI designation will ease some banks’ regulatory oversight, a credit negative

From Moody’s

Last Wednesday, the US Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act. A key component of this bill increases the asset threshold for a bank to be designated a systemically important financial institution (SIFI) to $250 billion of total consolidated assets from $50 billion, the threshold defined in the Dodd-Frank Act of 2010.

For US banks with assets of less than $250 billion, the higher asset threshold for SIFI designation is likely to lead to a relaxation of risk governance and encourage more aggressive capital management, a credit-negative outcome.

SIFI banks are subject to the enhanced prudential standards of the US Federal Reserve (Fed). The regulatory oversight of SIFIs is greater than for other banks, and SIFIs participate in the Fed’s annual Dodd-Frank Act stress test (DFAST) and the Comprehensive Capital Analysis and Review (CCAR), which evaluate banks’ capital adequacy under stress scenarios. Furthermore, transparency will decline with fewer participants in the public comparative assessment the stress tests provide.

In 2018, the 38 bank holding companies shown in the exhibit below are subject to the Fed’s annual capital stress test. Passage of the bill into law would immediately exempt four banks with less than $100 billion of assets from the Fed’s enhanced prudential standards, which includes the stress test and living will requirements. These banks will have the most leeway in relaxing risk governance practices and managing their capital.

The 21 banks at the right of the top exhibit that have assets of $100-$250 billion1 could become exempt from enhanced prudential standards 18 months after passage of the bill into law. However, the Fed will have the authority to apply enhanced oversight to any bank holding company of this asset size and will still conduct periodic stress tests. In the 18 months after passage into law, it will be up to the Fed to develop a more tailored enhanced oversight regime for the $100-$250 billion asset group. The Fed also could continue to apply the same enhanced prudential standards. Therefore, it is difficult to assess the potential for their easier risk governance practices until more about the regulatory oversight is known.

If many of these banks are no longer required to participate in the public stress tests, it would reduce transparency. The quantitative results of DFAST and CCAR provide a relative rank ordering of stress capital resilience under a common set of assumptions. The loss of such transparency is credit negative.

For the largest banks, those with more than $250 billion in assets that remain SIFIs, there are no changes in the Fed’s supervision. The bill also specifies that foreign banking organizations with consolidated assets of $100 billion or more are still subject to enhanced prudential standards and intermediate holding company requirements.

In order to become law, the bill must also be passed by the US House of Representatives and signed by the president. This year’s annual Fed stress test will proceed as usual with submissions by the banks due 5 April, with results announced in June.

 

US Hourly Earnings Up Just 0.4% In Past Year

Data from the US Bureau of Labor Statistics  shows from February 2017 to February 2018, real average hourly earnings increased 0.4 percent, seasonally adjusted. The increase in real average hourly earnings combined with a 0.3-percent increase in the average workweek resulted in a 0.6-percent increase in real average weekly earnings over the 12-month period.

Real average hourly earnings for production and nonsupervisory employees increased 0.2 percent from January to February, seasonally adjusted. This result stems from a 0.3-percent increase in average hourly earnings combined with a 0.1-percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers.

Real average weekly earnings increased 0.8 percent over the month due to the increase in real average hourly earnings combined with a 0.6-percent increase in average weekly hours.

From February 2017 to February 2018, real average hourly earnings increased 0.1 percent, seasonally adjusted. The increase in real average hourly earnings combined with a 0.6-percent increase in the average workweek resulted in a 0.7-percent increase in real average weekly earnings over this period.

NOTE: Seasonally adjusted data are used for estimates of percent change from the same month a year ago for current and constant average hourly and weekly earnings. Special techniques are applied to the CES hours and earnings data in the seasonal adjustment process to mitigate the effect of certain calendar-related fluctuations. Thus, over-the-year changes of these hours and earnings are best measured using seasonally adjusted series. A discussion of the calendar-related fluctuations in the hours and earnings data and the special techniques to remove them is available in the February 2004 issue of Employment and Earnings or at www.bls.gov/ces/cesfltxt.htm.

US Employment Data Strong Again In February

The latest data from the US Bureau of Labor Statistics for February 2018 shows that total nonfarm payroll employment increased by 313,000 in February, and the unemployment rate was unchanged at 4.1 percent. Employment rose in construction, retail trade, professional and business services, manufacturing, financial activities, and mining.

This is a strong result, and provides further support for potential rate rises this year.  On the other hand, wage growth was a little more contained, alleviating concerns about rising inflation. In February, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents to $26.75, following a 7-cent gain in January. Over the year, average hourly earnings have increased by 68 cents, or 2.6 percent

The US markets reacted positively.

Here is the release:

Household Survey Data

In February, the unemployment rate was 4.1 percent for the fifth consecutive month, and the number of unemployed persons was essentially unchanged at 6.7 million.

Among the major worker groups, the unemployment rate for Blacks declined to 6.9 percent in February, while the jobless rates for adult men (3.7 percent), adult women (3.8 percent), teenagers (14.4 percent), Whites (3.7 percent), Asians (2.9 percent), and Hispanics (4.9 percent) showed little change.

The number of long-term unemployed (those jobless for 27 weeks or more) was essentially unchanged at 1.4 million in February and accounted for 20.7 percent of the unemployed. Over the year, the number of long-term unemployed was down by 369,000.

The civilian labor force rose by 806,000 in February. The labor force participation rate increased by 0.3 percentage point over the month to 63.0 percent but changed little over the year.

In February, total employment, as measured by the household survey, rose by 785,000. The employment-population ratio increased by 0.3 percentage point to 60.4 percent in February, following 4 months of little change.

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed at 5.2 million in February. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut or because they were unable to find full-time
jobs.

In February, 1.6 million persons were marginally attached to the labor force, little different from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Among the marginally attached, there were 373,000 discouraged workers in February, down by 149,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.2 million persons marginally attached to the labor force in February had not searched for work for reasons such as school attendance or family responsibilities.

Establishment Survey Data

Total nonfarm payroll employment rose by 313,000 in February. Job gains occurred in construction, retail trade, professional and business services, manufacturing, financial activities, and mining.

In February, construction employment increased by 61,000, with gains in specialty trade contractors (+38,000) and construction of buildings (+16,000). Construction has added 185,000 jobs over the past 4 months.

Retail trade employment increased by 50,000 over the month. Within the industry, employment rose in general merchandise stores (+18,000) and in clothing and clothing accessories stores (+15,000). However, over the past 4 months, which traditionally see the bulk of the holiday hiring and layoff, employment in these industries has changed little on net. Elsewhere in retail trade, building material and garden supply stores added jobs over the month (+10,000).

Employment in professional and business services increased by 50,000 in February and has risen by 495,000 over the year. Employment in temporary help services edged up over the month (+27,000).

Manufacturing added 31,000 jobs in February. Within the industry, employment rose in transportation equipment (+8,000), fabricated metal products (+6,000), machinery (+6,000), and primary metals (+4,000). Over the past year, manufacturing has added 224,000 jobs.

Financial activities added 28,000 jobs over the month, with gains in credit intermediation and related activities (+8,000); insurance carriers and related activities (+8,000); and securities, commodity contracts, and investments (+5,000). Over the year, financial activities has added 143,000 jobs.

Employment in mining rose by 9,000 in February, with most of the increase in support activities for mining (+7,000). Since a recent low in October 2016, mining has added 69,000 jobs.

Employment in health care continued to trend up in February (+19,000), with a gain of 9,000 in hospitals. Health care has added 290,000 jobs over the past year.

Employment in other major industries, including wholesale trade, transportation and warehousing, information, leisure and hospitality, and government, showed little change over the month.

The average workweek for all employees on private nonfarm payrolls rose by 0.1 hour to 34.5 hours in February. In manufacturing, the workweek increased by 0.2 hour to 41.0 hours, while overtime edged up by 0.1 hour to 3.6 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls increased by 0.2 hour to 33.8 hours.

In February, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents to $26.75, following a 7-cent gain in January. Over the year, average hourly earnings have increased by 68 cents, or 2.6 percent. Average hourly earnings of private-sector production and nonsupervisory employees increased by 6 cents to $22.40 in February.

The change in total nonfarm payroll employment for December was revised up from +160,000 to +175,000, and the change for January was revised up from +200,000 to +239,000. With these revisions, employment gains in December and January combined were 54,000 more than previously reported. (Monthly revisions result from additional reports received from businesses and government agencies since the last published
estimates and from the recalculation of seasonal factors.) After revisions, job gains have averaged 242,000 over the last 3 months.

The Baby Boom and the U.S. Productivity Slowdown

From The St. Louis Fed On The Economy Blog.

The U.S. economy is currently experiencing a prolonged productivity slowdown, comparable to another slowdown during in the 1970s.

Economists have debated the causes for these slowdowns: The reasons range from the 1970s oil price shock to the 2007-08 financial crisis.

But did the baby boom generation partly cause both periods of slowing productivity growth?

A Demographic Shift

Guillaume Vandenbroucke, an economist at the St. Louis Fed, explored the role of the baby boom generation—specifically, those born in the period of 1946 to 1957 when the birth rate increased by 20 percent—in these slowdowns.

In a recent article in the Regional Economist, he pointed out a demographic shift: Many baby boomers began entering the labor market as young, inexperienced workers during the 1970s, and now they’ve begun retiring after becoming skilled, experienced workers.

“This hypothesis is not to say that the baby boom was entirely responsible for these two episodes of low productivity growth,” the author wrote. “Rather, it is to point out the mechanism through which the baby boom contributed to both.”

Productivity 101

One measure of productivity is labor productivity, which can be measured as gross domestic product (GDP) per worker. By this measure, the growth of labor productivity was low in the 1970s. Between 1980 and 2000, this growth accelerated, but then has slowed since 2000.

“It is interesting to note that the current state of low labor productivity growth is comparable to that of the 1970s and that it results from a decline that started before the 2007 recession,” Vandenbroucke wrote.

How does a worker’s age affect an individual’s productivity? According to economic theory, young workers have relatively low human capital; as they grow older, they accumulate human capital, Vandenbroucke wrote.

“Human capital is what makes a worker productive: The more human capital, the more output a worker produces in a day’s work,” the author wrote.

The Demographic Link

Vandenbroucke gave an example of how this simple idea could affect overall productivity. His example looked at a world in which there are only young and old workers. Each young worker produces one unit of a good, while the older worker—who has more human capital—can produce two goods. If there were 50 young workers and 50 old workers in this simple economy, the total number of goods produced would be by 150, which gives labor productivity of 1.5 goods per worker.

Now, suppose the demographics changed, with this economy having 75 young workers and 25 old workers. Overall output would be only 125 goods. Therefore, labor productivity would be 1.25.

“Thus, the increased proportion of young workers reduces labor productivity as we measure it via output per worker,” he wrote. “The mechanism just described is exactly how the baby boom may have affected the growth rate of U.S. labor productivity.”

The Link between Boomers and Productivity Growth

Vandenbroucke then compared the growth rate of GDP per worker (labor productivity) with the share of the population 23 to 33 years old, which he used as a proxy for young workers.

This measure of young workers began steadily increasing in the late 1960s before peaking circa 1980, which represented the time when baby boomers entered the labor force.

Looking at these variables from 1955 to 2014, he found the two lines move mostly in opposite directions (the share of young people growing as labor productivity growth declined) except in the 2000s.

(To see these trends, see the Regional Economist article, “Boomers Have Played a Role in Changes in Productivity.”)

“The correlation between the two lines is, indeed, –37 percent,” Vandenbroucke wrote.1

The share of the population who were 23 to 33 years old began to increase in the late 2000s, which can be viewed as the result of baby boomers retiring and making the working-age population younger.

“This trend is noticeably less pronounced, however, during the 2000s than it was during the 1970s,” the author wrote. “Thus, the mechanism discussed here is likely to be a stronger contributor to the 1970s slowdown than to the current one.”

Conclusion

If this theory is correct, it may be that the productivity of individual workers did not change at all during the 1970s, but that the change in the composition of the workforce caused the productivity slowdown, he wrote.

“In a way, therefore, there is nothing to be fixed via government programs,” Vandenbroucke wrote. “Productivity slows down because of the changing composition of the labor force, and that results from births that took place at least 20 years before.”

Notes and References

1 A correlation of 100 percent means a perfect positive relationship, zero percent means no relationship and -100 percent means a perfect negative relationship.

Why Are Banks Shuttering Branches?

From The St. Louis Fed On The Economy Blog

On Feb. 6, the Wall Street Journal published a startling statistic: Between June 2016 and June 2017, more than 1,700 U.S. bank branches were closed, the largest 12-month decline on record.1

Structural Shift

That large drop, while surprising, is part of a trend in net branch closures that began in 2009. It follows a profound structural shift in the number and size of independent U.S. banking headquarters, or charters, over the past three decades.

In 1980, nearly 20,000 commercial banks and thrifts with more than 42,000 branches were operating in the nation. Since then, the number of bank and thrift headquarters has steadily declined.

The reasons for the decline in charters and branches are varied. Regarding charters, the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act in 1994 played a significant role in their decline. Banks operating in more than one state took advantage of the opportunity to consolidate individual state charters into one entity and convert the remaining banks into branches. Almost all states opted in to a provision in the law permitting interstate branching, which led to a steady increase in branches.

Trend Reversal

Even before the number of charters declined, however, the number of branches grew steadily throughout the 1980s, 1990s and early 2000s. It peaked in 2009, when the trend reversed, as seen in the figure below.

Since 2009, the number of commercial bank and thrift branches has shrunk nearly 10 percent, or just over 1 percent per year.

The initial wave of closings can be attributed to a wave of mergers and failed bank acquisitions following the financial crisis. There was an immediate opportunity to reduce cost through the shuttering of inefficient office locations. Branch closings were also influenced by earnings pressure from low interest rates and rising regulatory costs.

More recently, changing consumer preferences and improvements in financial technology have further spurred the reduction in branches. Customers increasingly use ATMs, online banking and mobile apps to conduct routine banking business, meaning banks can close less profitable branches without sacrificing market share.

Uneven Changes

The reduction in offices has not been uniform. According to the Federal Deposit Insurance Corp., less than one-fifth of banks reported a net decline in offices between 2012 and 2017, and slightly more than one-fifth reported an increase in offices.

Just 15 percent of community banks reported branch office closures between 2012 and 2017. And though closures outnumber them, new branches continue to be opened. It’s also important to note that deposits continue to grow—especially at community banks—even as the number of institutions and branches decline.

The Industry of the Future

It seems inevitable that this long-term trend in branch closings will continue as consumer preferences evolve and financial technology becomes further ingrained in credit and payment services.

Although it is unlikely that the U.S. will end up resembling other countries with relatively few bank charters, it seems certain that consumers and businesses will increasingly access services with technology, no matter the size or location of bank offices. This change creates opportunities as well as operational risks that will need to be managed by banks and regulators alike.

US Mortgage Rates Continue To Climb

Mortgage rates continued higher following the release of the Minutes from the Federal Reserve’s (aka “The Fed”) most recent policy meeting.

The Fed was slightly more upbeat than markets expected, saying that most members agreed that a stronger economy increased the likelihood of further rate hikes.  Although the Fed Funds Rate doesn’t directly dictate mortgage rates, there is plenty of long-term correlation.  Because the Fed only meets 8 times a year to adjust rates (and rarely adjusts rates on all 8 occasions), bond markets (which include mortgage rates) are constantly adjusting to what the Fed will probably do in the future.

 

Of course, it could be argued that both the Fed AND financial markets are simply adjusting to the state of the economy, inflation, etc., but that’s more of a philosophical discussion (chicken vs egg type stuff).  What’s important is that financial markets saw a reason for the recent trend in rates to continue.  Unfortunately, today that meant rates moved to their highest levels in more than 4 years.  For what it’s worth, today’s rates are only microscopically higher than last week’s highs.

US Debt Will Grow, But It’s Mostly Government Borrowing

Moody’s says a possible $975 billion increase in U.S. government debt for fiscal 2018 would leave Q3-2018’s outstanding federal debt up by 5.9% annually. As of Q3-2017, federal debt outstanding grew by $597
billion, or 3.8%, from a year earlier.

Into the indefinite future, federal debt is likely to materially outrun each of the other broad components of U.S. nonfinancial-sector debt. Because of non-federal debt’s relatively slow growth, the private and public debt of the U.S.’ nonfinancial sectors may grow no faster than 4.3% annually during the year ended Q3-2018 to a record $50.77 trillion. For the year-ended Q3-2017, this most comprehensive estimate of U.S. nonfinancial-sector debt rose by 3.8% to $48.64 trillion.

Though expectations of faster growth for total nonfinancial-sector debt complements forecasts of higher short- and long-term interest rates for 2018, the quickening of total nonfinancial-sector debt growth may not be enough to sustain the 10-year Treasury yield above the 2.85% average that the Blue Chip consensus recently predicted for 2018.

The projected growth of nonfinancial-sector debt looks manageable from a historical perspective. For one thing, 2018’s projected percent increase by debt lags far behind the 9.1% average annual advance by U.S. nonfinancial sector debt from the five-years-ended 2007. Back then, unsustainably rapid growth for total nonfinancial-sector debt and 2003-2007’s 2.1% annualized rate of core PCE price index inflation supplied a 4.4% average for the 10-year Treasury yield of the five-years-ended 2007. By contrast, the 10-year Treasury yield’s moving five-year average sagged to 2.2% during the span-ended September 2017 as the accompanying five-year average annualized growth rates descended to 4.4% for nonfinancial-sector debt and 1.5% for core PCE price index inflation.

Westpac Says The Fed May Lift Rates Faster And Higher Than Markets Currently Expect

From Business Insider.

Now here’s an interesting paragraph from the minutes of the US Federal Reserve’s January FOMC meeting released on Wednesday.

Many participants noted that financial conditions had eased significantly over the intermeeting period; these participants generally viewed the economic effects of the decline in the dollar and the rise in equity prices as more than offsetting the effects of the increase in nominal Treasury yields.

So we know the question you’re asking — what are “financial conditions” and why is this interesting?

According to the St Louis Fed, financial conditions indices “summarise different financial indicators and, because they measure financial stress, can serve as a barometer of the health of financial markets”.

Using short and long-term bond yields, credit spreads, the value of the US dollar and stock market valuations, it attempts to measure the degree of stress in financial markets.

What the minutes conveyed in January was despite a lift in longer-dated bond yields, strength in stocks and decline in the US dollar suggest that financial conditions still improved.

So why is that important?

According to Elliot Clarke, economist at Westpac, it suggests the Fed may need to hike rates more aggressively than markets currently anticipate.

“That financial conditions have eased at a time when the FOMC is tightening policy will grant confidence that downside risks associated with further gradual rate increases and quantitative tightening are negligible,” he says.

“More to the point, this implies that risks to the FOMC rate view, and Westpac’s, are arguably to the upside.”

Adding to those risks, and even with the correction in US stocks seen after the January FOMC meeting was held, Elliot says in February “we have seen a further significant increase in government spending and signs of stronger wages”.

He also says the stronger-than-expected consumer price inflation in January — also released after the FOMC meeting was held — “will have also given the FOMC greater cause for confidence that inflation disappointment is behind them and that the risks are instead skewed to inflation at or moderately above target”.

As such, Elliot says the tone of the January minutes points to gradual rate rises from the Fed, mirroring what was seen last year.

However, the risk to this view, he says, is for more and faster hikes in the years ahead.

“In these circumstances, a continued ‘gradual’ increase in the fed funds rate through 2018 and 2019 — implying five hikes in total — is still the best base case,” he says.

“However, a careful eye will need to remain on financial conditions.

“Should they continue to move in the opposite direction to policy, a more concerted effort by the FOMC may prove necessary to keep the economy on an even footing.”

US Inflation Up 0.5% In January

More evidence of inflation lurking in the US economy, as the headline rate for January was higher than expected. This gives more support to the view the FED will indeed lift interest rates.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.1 percent before seasonal adjustment.

The seasonally adjusted increase in the all items index was broad-based, with increases in the indexes for gasoline, shelter, apparel, medical care, and food all contributing. The energy index rose 3.0 percent in January, with the increase in the gasoline index more than offsetting declines in other energy component indexes. The food index rose 0.2 percent with the indexes for food at home and food away from home both rising.

The index for all items less food and energy increased 0.3 percent in January. Along with shelter, apparel, and medical care, the indexes for motor vehicle insurance, personal care, and used cars and trucks also rose in January. The indexes for airline fares and new vehicles were among those that declined over the month.

The all items index rose 2.1 percent for the 12 months ending January, the same increase as for the 12 months ending December. The index for all items less food and energy rose 1.8 percent over the past year, while the energy index increased 5.5 percent and the food index advanced 1.7 percent.