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Macro Roundup


Tuesday, August 19, 2014

AI Summary. Market pricing implies real interest rates gradually returning to about 1%, versus a pre-recession average of 1.5%, with most of the current low level attributable to short-term factors. That pattern suggests deleveraging and nominal-income shocks may explain past conditions without invoking secular stagnation as a separate framework.

Evan Soltas Evan Soltas Blog
Date Posted:
Is Database:
Database

Markets expect real interest rates to return to 1%, but data suggests most of the current low rates are due to short-term factors, not secular stagnation.

Do market-implied real rates require a secular stagnation explanation?

Core argument: Markets price real interest rates gradually returning to 1%, below the pre-recession average of 1.5%, consistent with the secular stagnation hypothesis of persistently low real rates.

Markets anticipate that real interest rates will gradually return to 1%, down from the pre-recession average of 1.5%, reflecting a potential long-term trend towards lower rates. This aligns with the secular stagnation hypothesis, which suggests persistently low real interest rates. However, the data indicates that most of the current low rates are due to short-term factors. The implied real forwards for longer-term bonds suggest that future real interest rates will be similar to or slightly lower than historical levels. This raises questions about the necessity of secular stagnation as a unique explanatory framework, as deleveraging and nominal-income shocks may sufficiently account for past economic conditions.

Takeaways by Macro Roundup® AI

  1. Markets price real interest rates gradually returning to 1%, below the pre-recession average of 1.5%, consistent with the secular stagnation hypothesis of persistently low real rates.
  2. Implied real forwards on longer-term bonds point to future real interest rates similar to or slightly below historical levels, with most of the currently low rates attributable to short-term factors.
  3. Deleveraging and nominal-income shocks may account for past economic conditions, raising the question of whether secular stagnation is needed as a separate explanatory framework.

"...If real interest rates are going to be low for a long period of time, as secular stagnation implies, then the market should say that, and the way it would is through forward rates....Markets anticipate that real interest rates will return slowly to one percent. For reference, prior to the recession, these ratesaveragedabout 1.5 percent, at least on an ex-post basis. Another way to look at this is to figure out the implied real forwards for longer-term bonds. This builds in market views on what the term premium will be in the future, of course. The market's message is generally the same: Real interest rates will be the same as, or modestly lower than, where they have been in the past. Most of the depressed position of interest rates comes from the short run....There is nothing outrageously low about forward real interest rates. If secular stagnation is merely an organizing device, the problem is that it seems to want to say something about the future, whereas the base case of deleveraging and the nominal-income shock speak mainly about the past. That's why the issue must be cast in light of forward interest rates -- and why I remain sympathetic but unconvinced."
Secular Stagnation, Meet DataThere is a newe-bookout on secular stagnation, with contributions from Larry Summers, Barry Eichengreen, Paul Krugman, Olivier Blanchard, and others. It offers a lot to discuss, but I'm struck by something mostly missing:implied forward real interest rates.

This seems like it should be important data for the hypothesis, but it's only discussed briefly in the chapter by Frank Smets and two other economists. The graph, fittingly enough, is on the very last page of content.

If real interest rates are going to be low for a long period of time, as secular stagnation implies, then the market should say that, and the way it would is through forward rates. So what do we see?

The first graph shows the instantaneous forward real interest rate -- basically, what the market thinks the cost of overnight funding should be in real terms at some future date -- as derived fromTIPS yields. There aremore precise waysto do this, but it's close enough for a blog post.

Markets anticipate that real interest rates will return slowly to one percent. For reference, prior to the recession, these ratesaveragedabout 1.5 percent, at least on an ex-post basis.

Another way to look at this is to figure out the implied real forwards for longer-term bonds. This builds in market views on what the term premium will be in the future, of course. The market's message is generally the same: Real interest rates will be the same as, or modestly lower than, where they have been in the past. Most of the depressed position of interest rates comes from the short run.

It's early to come to any solid conclusions about what the secular-stagnation discussion has and hasn't accomplished. Yet the thought that lingers for me is: Why do we need "secular stagnation"?

For all the interesting discussion so far, much of it in this book, nothing has yet convinced me that secular stagnation is a necessary and unique component to my understanding -- my mental model -- of the post-recession global economy. What someone who is convinced needs to do is identify the key facts that cannot be explained by deleveraging and the huge shock to nominal income.

The closest anyone has come, in fact, was Summers when he discussed the mid-2000s as a period of mediocre growth despite pedal-to-the-metal monetary policy. Krugman's "observation #2," that there seems to be a long-term trend towards ever-lower real interest rates, is also getting there. The bar, generally speaking, for a new theory to get into a model is that the model's predictions must beotherwise inconsistent with reality.

There just doesn't seem to be such a need for an additional "secular stagnation" component, as I interpret the data above. There is nothing outrageously low about forward real interest rates. If secular stagnation is merely an organizing device, the problem is that it seems to want to say something about the future, whereas the base case of deleveraging and the nominal-income shock speak mainly about the past. That's why the issue must be cast in light of forward interest rates -- and why I remain sympathetic but unconvinced.
Soltas, Evan, "Secular Stagnation, Meet Data," Evan Soltas Blog, August 17, 2014. Available at:http://esoltas.blogspot.in/2014/08/secular-stagnation-meet-data.html

Monday, August 25, 2014

AI Summary. U.S. business dynamism has declined over the long run, with gross job creation falling 2.9 percentage points and gross job destruction 1.5 percentage points between 1985 and 2005, alongside less entrepreneurship and a smaller role for young firms. The authors estimate the shift toward larger, mature firms accounts for about 26% of the decline in job reallocation.

Ryan Decker and John Haltiwanger, Ron S Jarmin and Javier Miranda National Bureau of Economic Research
Date Posted:
Is Database:
Database

US business dynamism has declined significantly since 1985, with gross job creation falling 2.9% and gross job destruction by 1.5%. Young firms are driving this trend, with age composition change explaining 32% of job creation decline.

Why has U.S. business dynamism declined over the long run?

Core argument: U.S. gross job creation fell 2.9 percentage points and gross job destruction fell 1.5 percentage points between 1985 and 2005, evidence of a secular decline in business dynamism.

The secular decline in business dynamism in the U.S. is evidenced by a significant reduction in job creation and destruction rates, with gross job creation falling by 2.9 percentage points and gross job destruction by 1.5 percentage points between 1985 and 2005. This trend is largely driven by a decline in entrepreneurship and the diminishing role of young firms, which traditionally exhibit high rates of job creation and destruction. The shift from smaller, younger firms to larger, mature ones accounts for about 26% of the decline in job reallocation, with the age composition change explaining 32% of the decline in job creation and 20% in job destruction. Despite compositional changes, unexplained factors within industries and firm characteristics suggest deeper underlying causes for this decline.

Takeaways by Macro Roundup® AI

  1. U.S. gross job creation fell 2.9 percentage points and gross job destruction fell 1.5 percentage points between 1985 and 2005, evidence of a secular decline in business dynamism.
  2. The shift from smaller, younger firms toward larger, mature ones accounts for about 26% of the decline in job reallocation, with age composition explaining 32% of the job creation decline and 20% of the job destruction decline.
  3. Declining entrepreneurship and the diminishing role of young firms, which traditionally show high job creation and destruction rates, drive much of the decline, though factors unexplained within industries and firm characteristics suggest deeper underlying causes.

> “…While it is difficult to prescribe what the optimal pace should be, > there is accumulating evidence from multiple datasets and a variety of > methodologies that the pace of business dynamism in the U.S. has fallen over > recent decades and that this downward trend accelerated after 2000….To get > a sense of the pace of business dynamism in the U.S. note that, over the > 1980 to 2011 period, annual rates of gross job creation and gross job > destruction for private sector businesses averaged 16.7 and 15.2 > respectively. That is 16.9 percent of U.S. private jobs are created at new > and growing businesses, and 15.2 percent of jobs are lost at shrinking and > closing business. Net employment growth is the difference between creation > and destruction. Figure 1 shows that these rates exhibit both cyclical and > secular patterns. The magnitude of the decline is significant. Between > 1985 and 2005, the rate of gross job creation fell by 2.9 percentage points, > and the gross job destruction rate fell by 1.5 percentage points. A 1.0 > percentage point increase in the rate of gross job creation for the U.S. > private non-agricultural sector would represent roughly 1.1 million > additional jobs created in recent years….. a critical factor in the > decreasing pace of business dynamics is lower business start-up rates and a > decreasing role in the dynamic young businesses in the economy… In this > paper, we explore these trends further and discuss potential explanations. > For this purpose we use the Bureau of the Census Longitudinal Business > Database, a new database that covers all non-farm private sector > establishments and firms with paid employees in the U.S. between 1976 and > 2011. We analyze the extend to which compositional changes in U.S. > businesses across detailed industries, states, size classes, age classes and > firm structure account for the decline in dynamism. We find that the shift > in economic activity from smaller and younger firms toward larger more > mature firms over this period help explain the decreasing pace of business > dynamism. Changes in the industrial composition toward more dynamic sectors > have a muting effect but are not sufficient to reverse the firm age and size > effects. Overall, we find that such composition effects explain no more > than a quarter of the decline in dynamism even when we consider rich > interactions across these firm characteristics. The failure of these > effects to account for the aggregate decline partially reflects offsetting > composition effects but suggest that the real driving force is to be found > in factors working within detailed industry, firm size and age and > geographic groupings….Business dynamism as measured by the pace of job > creation, job destruction and/or job reallocation, has exhibited a > pronounced secular decline in the U.S. The most important factor we have > identified that helps to account for this decline is the decline in the pace > of entrepreneurship and the accompanying decline in the share of young > firms. Young firms have the highest pace of both job creation and job > destruction in the U.S. The large decline in the share of economic activity > by young firms accounts for a substantial share of the overall trend decline > in the pace of job reallocation. Changes in the age composition of U.S. > business activity accounts for about 26 percent of the overall decline in > the pace of job reallocation. In some sectors such as services, it > accounts for over 40 percent of the decline in the pace of job reallocation. > We do not have an explanation for the decline in the pace of > entrepreneurship, but it is apparent that this is one of the primary > contributing factors in accounting for the decline in the pace of business > dynamics….Shifting age composition accounts for 32 percent of the observed > decline in job creation, 20 percent of the decline in job destruction, and > 26 percent of the decline in job reallocation…. Ultimately, most of the > declines in these sectors is in the “unexplained” within component. There > are apparently changes in the conditions facing businesses in these sectors > that cannot be accounted for by the joint contribution of firm age, firm > size, detailed industry, geography and multiple location status….” > > Decker, Ryan and John Haltiwanger, Ron S Jarmin and Javier Miranda, “The > Secular Decline in Business Dynamism in the U.S.” NBER, 2014. Available at: > http://econweb.umd.edu/~haltiwan/DHJM_JEP_5_17_2013.pdf