Michigan Economy Blog issued by the Federal Reserve Bank of Chicago. https://www.chicagofed.org//forms/rss/MichiganEconomy en-us https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2024/2023-community-bankers-symposium-recap https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2024/2023-community-bankers-symposium-recap Tue, 02 Jan 2024 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>Entitled Back to the New Basics, the <a href="https://www.chicagofed.org/events/2023/community-bankers-symposium">17th annual Community Bankers Symposium</a> focused on the current issues facing community bankers, ranging from cybersecurity to global crises to the importance of diversity in banking. The event, held on Friday, November 17, 2023, was hosted jointly by the Federal Reserve Bank of Chicago, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Conference of State Bank Supervisors.</p> <h2>Pre-symposium cyber workshop</h2> <p>Following on the cyber-focused theme of the 2022 Community Bankers Symposium, the Chicago Fed partnered with IBM and the Federal Reserve Bank of Richmond to offer an immersive simulation lab allowing participating bankers to walk through a cyber-attack and, with an IBM facilitator, learn what actions are necessary for managing such a challenge. Participants in this pre-symposium workshop discussed the lifecycle of a cyber attack at a community bank and explored how taking certain steps to identify, protect, detect, respond, and recover from an incident could be impactful. Participants learned it is important to have a plan ready to cover internal and external communication, regularly test the incident response plan, and, of course, maintain cybersecurity vigilance.</p> <h2>Symposium welcome</h2> <p>Julie Williams, executive vice president of Supervision and Regulation at the Chicago Fed, welcomed the audience of 250 community bankers, senior policymakers, and regulators. She said the theme for this year’s symposium, Back to the New Basics, is a reminder to stay focused on banking principles while using the new tools that have emerged over time. With this backdrop, Williams centered her remarks on the publicly announced plans to enhance Federal Reserve oversight of financial institutions that arose from Vice Chair of Supervision Michael Barr’s internal review of the Silicon Valley Bank failure in March and the role Fed supervision and regulation played in it. Barr’s two primary areas of focus, she said, were: 1) to improve the speed, force, and agility of supervision and 2) to raise the baseline for resilience. There are several efforts underway internally to determine the best options to address these areas of focus, Williams noted. </p> <h2>Austan Goolsbee: Remarks on the economy</h2> <p>“In 2023, we are on path to rival the 1982 record of how fast inflation came down, more than 4 percentage points, and this year the unemployment rate never rose above 4%,” said Austan Goolsbee, president and CEO of the Chicago Fed, delivering a summary of where the economy stands. Monetary policymakers have noted these are times unlike the past, Goolsbee said, with strong gross domestic product (GDP) growth in the most recent quarter, the unemployment rate at a very low 3.9%, and inflation having declined significantly since it peaked at 9.1% in June 2022. </p> <p>Reasons a ”soft landing“ might be achievable, Goolsbee said, include healing of the supply chain disruptions caused by the pandemic, a strong rebound of labor supply, increased productivity growth, and market expectations of future inflation that did not go up as the actual inflation rate rose.</p> <p>“If we can get back to trend, without a recession, that would be a major achievement,” he said, while noting he and his peers will continue to monitor “the real economy going forward.” While GDP has grown, consumer sentiment indicators have remained largely negative, said Goolsbee, who added that in the past, external shocks to the economy have disrupted anticipated “soft landings.” He emphasized that the continuing goal for core inflation stands at the Fed’s target of 2%, and the metric that will be key to achieving this goal is housing inflation. </p> <h2>The business case for diversity in banking</h2> <p>In a “fireside chat,” Jennifer Docherty, founding director and CEO of Bank on Women, and Bruce Lee, president and CEO of Heartland Financial USA, explored the importance of diversity in community banks and its critical role in leadership. “Leadership teams are needed that can think creatively, accommodate differences of opinion, and produce innovation,” Lee said.</p> <p>To make the case, Docherty shared some statistics. Women in 2019 started almost 2,000 net new businesses a day, yet 73% of women remain dissatisfied with their financial services, she said. By 2045, the U.S. will be a majority minority country that is evolving very rapidly, so banks need to be thinking about a workforce that represents the future customer base, she added. Additionally, said Docherty, the younger generation wants to take their business to places that represent them, which they believe are committed to inclusion.</p> <p>From a financial perspective, companies that have below-average diversity tend to produce about 26% of their revenue from innovative products projects versus 45% for companies with above-average diversity, she noted, and a bank’s hiring of diverse candidates has been tied to observed financial improvements in its respective markets. Being profitable while still managing risk requires people who see the world differently, said Lee, and different skill sets, backgrounds, and experiences are needed because groupthink is a direct challenge to effective risk management.</p> <p>To make diversity, equity, and inclusion part of standard operating procedure, bankers must assess the demographic makeup of their community and how a bank serves that community, said Lee. Heartland includes 11 community banks, with 114 banking centers serving 83 communities and a significant number of Spanish-speaking people, he said. Improving diversity was part of senior leadership performance reviews, Lee said, and the company spent time educating hiring managers about the need for diversity. </p> <p>Heartland Financial was able to create an inclusive environment by listening to its employees, which in turn led to a better customer experience and reduced turnover, which reduced expenses, he said. “We were able to meet the needs of the communities [Heartland serves], as it is not people sitting in the boardroom making decisions but rather thousands of employees making decisions on the best way to serve our communities,” said Lee. </p> <h2>Common sense strategic planning</h2> <p>Banking consultant J. Michael Woody, Sr., provided his perspective on developing a useful strategic plan and the challenges this task poses to financial institutions in the current banking environment. Woody, formerly president, CEO, and director for banks in Tennessee and Oklahoma, remarked on the many changes he has seen since he began working in banking in the 1970s and said the basics of banking should also evolve. </p> <p>With a mission statement to “maximize safe and sustainable wealth for shareholders,” community banks should identify targets for earnings and growth while balancing risks in the areas of operations, asset quality, lender liability, and vendor management, he said, stressing that accurate loan file documentation will help manage risks.</p> <p>Woody also emphasized that every strategic plan should hinge on a bank’s next safety and soundness exam, given the impact adverse ratings can have. Bankers crafting a strategic plan should understand supervisory ratings and the <a href="https://frbprod1-my.sharepoint.com/personal/natashia_bryson_chi_frb_org/Documents/blog posts/chicago fed insights/2024/FFIEC UBPR Home Page">Uniform Bank Performance Report</a>, including key financial ratios applicable to their bank, he noted, and they should be comfortable with reporting systems and procedures and ensure the independence of the audit committee. Regardless of these challenges, “What better business could you be in?” Woody asked. Working in banking is worthwhile, he said, because “it counts, it’s challenging, and you meet interesting people.”</p> <h2>Keynote: A tumultuous year in review and a look ahead</h2> <p>Over lunch, bank and capital markets risk consultant and trainer Mayra Rodríguez Valladares, managing principal at MRV Associates, discussed some of the significant events over the last year and some of the risks looming in the future. The Standard & Poor’s (S&P) Index for regional banks underperformed compared to the S&P 500 due to investor concerns over the regional bank failures that occurred early in the year, she said. However, earnings for all banks are at historically high levels, and net income for community banks also went up.</p> <p>Geopolitical risk, including the Russian invasion of Ukraine, periodic tensions between the U.S. and China, and the Israel–Hamas war can affect oil prices and the agriculture industry, which can affect U.S. business activity, said Rodriguez Valladares.</p> <p>Looking at the future for community banks, she noted that continued elevated interest rates will adversely impact net interest margins as very leveraged companies show a risk of rising defaults. “Inflation isn't domestic, it’s global,” she said, so geopolitical risks can affect domestic efforts to bring it down. Possible Basel III rule changes on capital requirements and potential anti-terrorism financing rules would be focused on large and regional banks but may spill over to community banks, Rodriguez Valladares said. And changes in commodity prices, cybersecurity events, supply chain disruptions, and possible civil unrest in the U.S. can affect borrowers at community banks and increase the risk of instability, she said, so all will need to be watched carefully.</p> <h2>The state of commercial real estate</h2> <p>Joesph Hoge, commercial credit lead expert within Community Bank Supervision at the Office of the Comptroller of the Currency (OCC), discussed the hot issue of commercial real estate (CRE) and how high refinance risk and the hybrid work environment have adversely impacted the office sector. Data show that numerous financial institutions in the Seventh Federal Reserve District exceeded interagency guidelines for higher risk designation, he said, and the post-Covid hybrid work environment has structurally shifted the market for commercial real estate. Return-to-work levels have been at 50% for the past year, said Hoge, and office vacancies are at 40-year highs in the District, which includes the cities of Chicago, Detroit, Indianapolis, and Milwaukee. These factors are part of the reason that repricing and refinancing risk are elevated, he said, adding that capitalization rates are expected to increase, which will lower collateral values and add further challenges to refinancing and managing potential problem loans.</p> <p>Hoge shared a historical anecdote: In December 1863, he said, Hugh McCulloch, then Comptroller of the Currency and later Secretary of the Treasury, emphasized the need for national banks to diversify their loan portfolios or their customers will suffer due to the risk. “Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe,” McCulloch said. This advice remains largely unchanged in 160 years, according to Hoge, so identifying and managing concentrations of credit is paramount. </p> <p>Concentrations of credit create pockets of risk that may lead to losses if not properly identified, quantified, and managed, said Hoge. This was a key lesson learned from the Great Recession (2007–09) crisis, he said: “The ‘music stopped’ for those banks with significant construction and development exposures in vulnerable markets; they ‘didn’t have a chair’ and, consequently, not only failed but accounted for 80% of FDIC [Federal Deposit Insurance Corporation] losses.” Among banks that fell under the designation of high risk—with total CRE in excess of 300% of capital, construction and development over 100%, and 50% loan growth over a three-year period—nearly one-quarter failed. </p> <p>The main takeaway? “Do not put all your eggs in one basket and have prudent credit risk management practices,” Hoge said.</p> <h2>Public policy in uncertain times</h2> <p>Margaret Liu, executive vice president of strategic engagement at the Conference of State Bank Supervisors (CSBS), discussed congressional makeup and leadership and said collaboration between the political parties has mostly disappeared in recent years. </p> <p>Legislation under consideration, Liu said, includes more independent oversight of bank regulators, clawback of bank compensation, removal or disbarment of ‘bad actors’ from bank management, and requirements of written ethics. The House Financial Services Committee drafted the McHenry Stablecoin bill, a crypto assets regulatory framework bill and a Digital Assets Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) bill, which would subject large parts of the crypto industry to Bank Secrecy Act (BSA)/AML regulations, she said. However, with an election year in 2024, little legislation is expected to pass in the coming year, said Liu.</p> <h2>Regulatory panel: Discussion of emerging issues and the new basics</h2> <p>This panel, moderated by Debbie Bush, an assistant regional director with the Federal Deposit Insurance Corporation, included representatives from the FDIC, OCC, Federal Reserve Bank of Chicago, and the Illinois Department of Financial and Professional Regulation, who spoke on current challenges in the regulatory environment and answered audience questions. Although regulatory perspectives and experiences can differ, certain common themes emerged, including a focus on liquidity and interest rate risks following the bank closings and related events in the first quarter of 2023 and the significance of outreach to and relationships with the banking industry. </p> <p>Some of the key ideas brought up included the following:</p> <ul class="cfedList--bulleted"> <li>Greater focus is being placed on the examination strategy surrounding liquidity risk and interest rate risk and how these components are related. </li> <li>Regulators are keying in on asset/liability management, stressing the importance of formal planning and access to contingency funding, tracking deposit fluctuations, and recognizing the impact of interest rate increases on securities portfolios. </li> <li>The FDIC is engaged in policy development to cover advisory changes in supervisory expectations of liquidity and interest rate risk and updating existing guidance in managing interest rate risk.</li> <li>The Chicago Fed is engaging with bankers to encourage consideration of use of the discount window as a viable contingent funding tool. </li> </ul> <p>And the panelists offered recommendations, including the following:</p> <ul class="cfedList--bulleted"> <li>Coordination between the various regulatory agencies is critical in the current risk environment. </li> <li>The ability to work together to have similar supervisory focuses, or “harmonization of supervisory approach,” will help to benefit the supervisory outcomes for institutions. </li> <li>Overall, to cultivate a safe and sound banking environment, regulators and bankers need to remain in constant communication about business products offered, the strategy going forward, and more risky areas of operations. </li> <li>And transparency throughout will ensure that bankers will get their questions and concerns addressed in a timely manner. </li> </ul> <h2>Closing remarks</h2> <p>At the close of the symposium, Bush shared her key takeaways from the day’s discussions. Diversity in banking has taken root in the composition of assistant general regional directors, she said. The strategic planning session made her reminisce about her prior career as a banker when she focused on “blocking and tackling” to ensure loan documents were in order and liens perfected, said Bush. Finally, she added, the geopolitical risks highlighted in the keynote address gave her greater perspective on the interconnectivity of events and organizations across the world. Bush expressed thanks on behalf of the interagency hosts to presenters and attendees and said she looked forward to seeing everyone at the 2024 Community Bankers Symposium.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/minority-owned-banks-recap https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/minority-owned-banks-recap Fri, 01 Dec 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>The importance of banking institutions valuing the communities they serve was reasserted in a recent gathering of researchers and industry leaders at a Chicago Fed <a href="https://www.chicagofed.org/research/mobility/about">Economic Mobility Project</a> event. Business models and market forces prove to be insufficient explanations for why we see fewer formal banking services offered and/or leveraged in Black and low-income communities, according to research presented at the event. One speaker, University of California Professor of Law Mehrsa Baradaran, posed the rhetorical question whether one of the reasons we see reduced banking investment in Black communities is that “we don’t think that there is something to be invested in.” </p> <p>“We invest in certain types of genius,” she said, “while ignoring other kinds.” </p> <p>Baradaran and the other panelists shared valuable historical context that can inform future policy on community banking topics ranging from digital transformation needs to regulatory concerns and deposit volatility.</p> <p>Chicago Fed researchers Jung Sakong and Maude Toussaint-Comeau shared their latest work on banking access. Toussaint-Comeau, a senior economist and economic advisor, discussed how the number of Black-owned minority depository institutions (MDIs) has shrunk and how the entire MDI sector will need additional support to hedge against economic shocks so that they can continue to serve their communities. </p> <p>The research by Sakong, an economist, explores the use of banking services in both low-income and Black communities and finds reduced use in both groups as compared to the average, but for the opposite reasons. Low-income communities have access to bank branches but demand far less formal banking services; Black communities, on the other hand, have similar demand to White communities but have less access to bank branches.</p> <p>The Sept. 26 event, titled <a href="https://www.chicagofed.org/events/2023/minority-owned-banks">Minority-Owned Banks and Banking Access in Minority Communities</a>, was part of the Chicago Fed’s Economic Mobility Project, which aims to better connect research and policy communities on issues related to economic mobility within the United States. </p> <p>Before Toussaint-Comeau and Sakong presented their papers, Tracey Morant Adams, senior executive vice president and the chief community development and corporate social responsibility officer for Renasant Bank, gave opening remarks. The presentations were followed by a roundtable discussion moderated by Bloomberg’s Jonnelle Marte. Joining Baradaran on the panel were Anthony Barr, research and impact director at the National Bankers Association, and Gregg Brown, president and chief executive officer at South Side Community Federal Credit Union. The event concluded with brief remarks from Nicole Elam, president and CEO of the National Bankers Association.</p> <p><strong>To explore further:</strong></p> <p>Jung Sakong’s policy brief can be found <a href="https://www.chicagofed.org/research/mobility/policy-brief-bank-branch-location">here</a> and the accompanying working paper can be found <a href="https://www.chicagofed.org/publications/working-papers/2023/2023-15">here</a>.</p> <p>Maude Toussaint-Comeau’s policy brief can be found <a href="https://www.chicagofed.org/research/mobility/policy-brief-preserving-minority-depository-institutions">here</a> and the accompanying article can be found <a href="https://www.chicagofed.org/publications/economic-perspectives/2017/4">here</a>.</p> <p>A transcript and replay of the event can be found <a href="https://www.chicagofed.org/events/2023/minority-owned-banks">here</a>.</p> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/goolsbee-importance-of-travel-in-district https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/goolsbee-importance-of-travel-in-district Mon, 16 Oct 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <figure> <img src="-/media/7907261C0B2C4B6680061200A69133B8.ashx" alt="Chicago Fed President Austan Goolsbee responds to interview questions" /> </figure> <p>Upon becoming president of the Federal Reserve Bank of Chicago in January, Austan Goolsbee called the Chicago Fed’s Seventh District “the backbone of the American economy.” Now that he’s had a chance to travel in the District, we sat down to talk with him about what else he’s learned about it—and why it’s important to make such visits. The following transcript has been edited for concision and clarity. </p> <p><strong>Q.</strong> In your first six months on the job, you made it a priority to visit all five states in the District covered by the Chicago Fed. Why was it important for you to make those trips early in your tenure? </p> <p><strong>A.</strong> We visited all the states and some of them more than once. And my view is a central job for the president of the Chicago Fed is to get out and see the District because we are evaluated, in the end, on the real economy—not markets, not any obscure financial indicators, but, Are we stabilizing prices? Are we maximizing employment? And you can get the most timely information by going out and talking to people. </p> <p>And then the other thing is the Fed has gone through some rough patches. If you look at the polling, the Fed is not always popular, and its job often isn’t understood. It’s dealing with the everyday economic issues that our District is facing. So I wanted to get out, and we were able to do that. </p> <div style="display: block; position: relative; max-width: 100%;"> <div style="padding-top: 56.25%;margin-bottom:5%"> <iframe src="//players.brightcove.net/4934638106001/Sk7cO8ZDB_default/index.html?videoId=6338857756112" allowfullscreen="" style="left: 0px; top: 0px; width: 100%; height: 100%; right: 0px; bottom: 0px; position: absolute;" allow="encrypted-media" mozallowfullscreen="" webkitallowfullscreen=""></iframe></div> </div> <p><strong>Q.</strong> Was there a specific goal of getting to the five states in a relatively short period of time? </p> <p><strong>A.</strong> My first six months on the job has been a bit of a whirlwind. But I wanted to show our commitment to the District. So I went to Indiana. We toured an RV manufacturing plant in Elkhart, Indiana, and <a href="~/link.aspx?_id=6C6F47DEF9714DAE837A1CDFF4D152E9&_z=z">I spoke</a> to the Ivy Tech Community College and met with students and faculty. </p> <p>I’ve been multiple times to Detroit for board meetings, to <a href="~/link.aspx?_id=9A808D02C0C14D8BBD1D5F48A291955F&_z=z">tour our Branch there</a>, and also to get out in the community in Detroit, including seeing the Marygrove Early Education Center, and to meet with business and community leaders. </p> <p>We went to Des Moines, Iowa. I met with the governor, Kim Reynolds, and heard about some of the training programs and labor force programs that they’ve done on the policy side. We <a href="~/link.aspx?_id=ACB1E65D8EA640978C0E96BA26BB50AB&_z=z">toured an agricultural cooperative</a>—grain silos, chemicals, fertilizers, and the agricultural economy—and <a href="~/link.aspx?_id=1F5AF8454D9247D9A29258CAA6CC360C&_z=z">met with</a> the Des Moines office of the Chicago Fed, which focuses on supervising and regulating banks in the state. </p> <p>We went up to Green Bay, Wisconsin. We visited a neighborhood where they’re <a href="~/link.aspx?_id=1065C0B590484E608717E1DA1299D8A3&_z=z">digging up the streets</a> and learned about their successful program to remove all of the city’s lead service lines. We’ve done a <a href="~/link.aspx?_id=A7338D4FD63F4D00A36134F60AD3C18E&_z=z">bunch of work on that</a>, highlighting the importance of lead service line removal and the use of creative financing to help the economy and to improve health. </p> <p>But maybe the most heartbreaking for me, as a Bears fan: We <a href="~/link.aspx?_id=AB06D7754C024AEF8BBD9E6689DCD29E&_z=z">toured Lambeau Field!</a> I also spent time learning about development efforts focused on tourism around the stadium, visiting a tech incubator that’s right in the shadow of the field, and meeting with leaders in the community—and I had to admit they’ve done a good job up there.</p> <p>So we’ve been going nonstop. But I think our goal is to keep going. Yes, it was a whirlwind. But, ultimately, we want to be out in the community, in the District, hearing from people and talking to people, explaining what the Fed’s—what are we thinking, what is the Fed doing.</p> <p><strong>Q.</strong> Why is it important for central bankers to get out of the building and meet with people? </p> <p><strong>A.</strong> Look, my view is if you’re a central banker who only stays in the central bank, you’ve failed. You’ve set yourself up for failure. You’ve got to get information on the ground from the real economy. It’s in your interest to do that because that information can be timely in a way that the data will never be. There will always be lags in the data. </p> <p>And then the third thing I’ll say: [Former Federal Reserve Chair] Paul Volcker was my great mentor. And he used to have this phrase that when the crisis comes, the only asset that you ever have is your credibility. And his view was, all your life as a central banker, you’re trying to establish your credibility—because you know that one day is going to come, and if people trust in what you say, it’s going to make your dealing with the crisis a lot easier. </p> <p>And the thing is, to establish credibility, I think you’ve got to get out on the road and meet people where they are and show that you do actually believe in—you do have a commitment to—the real economy, to stabilizing prices and maximizing employment, that it’s not all some market expectations game. It’s about their lives and their jobs and their businesses.</p> <figure> <img src="-/media/D9A6C0823C5D4338ACE39A918B844373.ashx" alt="President Goolsbee speaks with workers from Green Bay Water." /> <figcaption class="caption mb-4">In Green Bay, Wis., in July, President Goolsbee speaks with workers from Green Bay Water to learn about the city's completed lead service line replacements.</figcaption> </figure> <p><strong>Q.</strong> You talk often about how much you love data. But are you gaining new respect for the power of anecdotes? </p> <p><strong>A.</strong> Well, look, people who follow the Fed will ask, “Are you a dove? Are you a hawk?” I say, “I’m not a bird. I’m a data dog.” That’s the part of economics that I came from: empirical work and data. </p> <p>The best central bankers are data dependent. You’ve got to figure out what’s happening, and the data help you figure out what’s happening. </p> <p>But the stories that folks will tell you about their businesses, explaining what they’re facing in the labor market, what they’re facing on supply chain constraints, as well as timely information that we always gather for the Beige Book or for our regional outreach—I’ve always had a lot of respect for the power of that to shape how we look at the data. </p> <p>And that’s only grown since I became president of the Chicago Fed. It’s a different environment than an academic environment, and that’s exciting. We’ve got a lot of expertise in how to interpret the anecdote, how to interpret readings on how business is going. We’ve been asking the same questions for many decades, and so we can put the countless conversations we have in perspective. </p> <p><strong>Q.</strong> So you talked about some of the other states and cities in the District. Obviously, Chicago, as your longtime residence, is the most familiar to you, and your <a href="~/link.aspx?_id=4A6F2EA9990D4DCD834A8F6FC692E851&_z=z">first major economic policy speech</a> was here. Now that you’re looking at Chicago through the specific lens of the Chicago Fed presidency, does it look different to you? Are you seeing new things? </p> <p><strong>A.</strong> One thing about Chicago and Detroit, a lot of the Midwest urban areas, there’s a civic commitment by the business community and the nonprofit community in a way that is very powerful. I mean, people are loyal to their place, and they’re involved. </p> <p>And the Fed benefits from that. Partly, there are people willing to serve on the Bank’s boards of directors in Detroit and in Chicago. But even if it’s not the board, there are open doors, open phone lines, open Zoom, whatever. If we call from the Chicago Fed, we haven’t had anybody that’s like, “I’m too busy. I’m not willing to talk to you.” </p> <p>And I joked without joking—half joking, whole earnest—that the Midwest way is, we get the job done. It doesn’t matter what the conditions are. There’s no bad weather. There’s only bad clothing. And that attitude is very appealing. </p> <p><strong>Q.</strong> Speaking of Chicago, an event we just had here at the Bank in August that I thought was really successful was a Fed Listens conference. </p> <p><strong>A.</strong> The whole program of <a href="https://www.federalreserve.gov/fedlistens.htm">Fed Listens</a> is really important. The Fed should be listening. Fed Listens started pre-pandemic, including holding a foundational research conference here in Chicago, and the Fed has done events across the country since then, including returning here on more than one occasion. </p> <p>Our <a href="~/link.aspx?_id=74E5172D507B41949E0BBF3D312D8BCB&_z=z">recent Fed Listens event</a> focused on youth employment and the transition from school to getting job skills and a career. And it was really a great event. We had people from across the District. We had a high school student from the Chicago Public Schools who talked about summer jobs and some of the things that our community development team and my predecessor, Charlie Evans, had emphasized about the importance of summer work in successfully transitioning from schooling to the labor force. </p> <p>We want to get people training or working in our community into discussions to understand how monetary policy affects daily life and the choice of career and other decisions. That’s an important side of the Fed that does go into our thinking. And I don’t think the world realizes that. And so, events like Fed Listens give us an opportunity to do that, and that is a big win on every side. </p> <p class="calloutBox2023">For more about Austan Goolsbee and his work at the Chicago Fed, please visit the <a href="~/link.aspx?_id=F470EEB7D01E45E98E8E9E3EC71A7E9C&_z=z">Office of the President</a>. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/college-investment-recap https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/college-investment-recap Tue, 10 Oct 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>Alongside homeownership, a college degree has been widely regarded as one of the most effective ways to achieve the American dream of financial security, even upward mobility.</p> <p>But college sticker prices have risen steadily, making postsecondary education more expensive relative to median household income. So does it still make sense to invest in a college education? And once people decide to make that investment, how do they pay for it?</p> <p>Research from economists at the Federal Reserve Bank of Chicago—spotlighted at <a href="https://www.chicagofed.org/events/2023/college-investment"><strong>College as an Investment: Costs, Payoffs, and Financing</strong></a>, a July 11 virtual event from the Bank’s <a href="https://www.chicagofed.org/research/mobility/about">Economic Mobility Project</a>—provided answers to those questions and laid the groundwork for an expert-panel discussion about paying for college and weighing its costs and benefits in the wake of the pandemic. </p> <p>“Postsecondary education remains one of the best investments for individuals,” said Lisa Barrow, a Chicago Fed senior economist and economic adviser, revisiting <a href="https://www.annualreviews.org/doi/full/10.1146/annurev-economics-080614-115510#_i38">previously published research</a>. Most of the benefits, she noted, come via higher lifetime earnings and lower unemployment rates compared to those who do not attend college. </p> <p>Barrow’s research showed that sacrificing potential earnings while in school, plus paying tuition, ultimately more than paid off. </p> <p>The event’s second presenter, Gene Amromin, Chicago Fed vice president and director of financial research, showed that the college tuition burden has been shifting from parents to the students themselves, according to unpublished research led by him. <p>Amromin demonstrated that as home equity decreased following the financial crisis of 2007–08, college payment sources changed from parents borrowing against their homes to students taking out loans. “Declines in house prices limited access to home equity, which then shifted some of the burden of college funding to students” in the form of federal student loans, Amromin said. Availability of these loans “definitely served as a stabilizing mechanism in terms of preserving the ability to enroll in college.”</p> <p>But the data suggest that the increased debt burden may be limiting those students’ ability to become homeowners themselves, among other potential long-term impacts, Amromin said.</p> <p>In the discussion that followed these presentations, a key idea that came up was an unfortunate shift in public perception, from student loans being seen as a valuable tool to them being viewed in some cases as “inherently bad” and needing to be avoided no matter what, said Makola Abdullah, president of Virginia State University.</p> <p><a href="https://www.chicagofed.org/events/2023/college-investment">On this page</a> is a full transcript and video replay of the conversation between Abdullah, the Chicago Fed researchers, Lesley J. Turner of the University of Chicago’s Harris School of Public Policy, and Jason Delisle of the Center on Education Data and Policy at the Urban Institute. Also available are presenters’ slide decks, the agenda, and speaker bios. Stacey Vanek Smith, cohost of NPR’s <cite>The Indicator from Planet Money</cite>, moderated.</p> </p> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/not-your-grandpas-monetary-policy-moment-background-information https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/not-your-grandpas-monetary-policy-moment-background-information Wed, 04 Oct 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <div style="margin-top:0; margin-bottom:1rem;" class="calloutBox2023"> <p>Background information for exhibits in Chicago Fed President Austan D. Goolsbee’s <a href="https://www.chicagofed.org/publications/speeches/2023/september-28-peterson-institute">speech</a>, delivered at the Peterson Institute for International Economics on September 28, 2023.</p> </div> <p>Since March 2022, the Federal Reserve has tightened policy substantially, increasing the federal funds rate by 525 basis points (bps), in an effort to diminish inflation by bringing demand in line with supply. In this post, I present some simple calculations to estimate the contribution of this monetary policy tightening to the evolution of gross domestic product (GDP), employment, and inflation. I first present and discuss the results, which are depicted in figure 1. Then, I discuss the methodology.</p> <h3>1. Estimated contribution of monetary policy</h3> <figure class="mb-4"> <img src="-/media/C13581CACF7F42449E08BBF6FE532B81.ashx" alt="The figure has three panels; each has two lines, a blue line for the estimated contribution of monetary policy and a red line for the data (relative to trend). The left panel shows that the estimated contribution of monetary policy to GDP small until 2023, when it becomes large and negative. Actual GDP has been stable relative to trend. The middle panel shows that the estimated contribution of monetary policy to the level of employment is small until 2023, when it becomes large and negative. Actual employment has been strong relative to trend. The right panel shows that the estimated contribution of monetary policy to inflation is positive until 2025 when it becomes strongly negative. Actual inflation has fallen slowly." /> <figcaption class="caption"> Note: Log levels of GDP and nonfarm payroll employment and the 12-month change in core PCE prices. Recent data are quarterly since 2021:Q4 for GDP and monthly since November 2021 for employment and core PCE inflation. <br /> Sources: U.S. Bureau of Economic Analysis and U.S. Bureau of Labor Statistics data through Haver Analytics and author’s calculations. </figcaption> </figure> <h2>Results</h2> <p>Each panel in the figure shows the estimated contribution of monetary policy in blue. These lines represent the cumulative effect of the interest rate policy actually followed, compared to a hypothetical world in which the Fed had kept the policy interest rate constant since the fourth quarter of 2021. </p> <p>According to my estimates, the dramatic tightening of monetary policy had a relatively small effect on GDP until the beginning of 2023. At this point, the contribution of monetary policy becomes substantial, reaching about –3.5% by the end of 2023, before levelling out in 2024. The effect of the tightening starts to diminish in 2025. These estimates are consistent with the traditional view that monetary policy operates with long lags. According to my estimates, the lags are even slightly longer for employment. The leftmost panel shows the effect on year-over-year core PCE (personal consumption expenditures) inflation. Monetary policy eventually reduces inflation significantly—by about 3 percentage points—but these effects take a very long time to occur. <sup><a href="#ftn1" id="ftnref1">1</a></sup></p> <p>The figure also shows, in red, the evolution of the data since 2021:Q4. I report the change in GDP and employment since 2021:Q4, net of their 2014–19 average growth rates, and the change in inflation since 2021:Q4. While GDP has grown tepidly since the monetary policy tightening started, employment growth has remained strong, and inflation has started to fall. (The recent decline in inflation is starker if calculated on a month-over-month basis as opposed to year over year as displayed.) Clearly, we would not expect the data (red) to line up perfectly with the effect of monetary policy (blue), since the economy is buffeted by other factors, in particular the unusual aftermath of the Covid contraction. Still, the divergence of employment is remarkable, as is the absence of a significant slowdown in GDP growth this year. In that sense, the current experience is markedly different from previous monetary tightening cycles. Of course, a number of reasons have been advanced to explain why the economy might be less sensitive to monetary policy currently than in the past.<sup><a href="#ftn2" id="ftnref2">2</a></sup></p> <h2>Methodology</h2> <p>This calculation combines two inputs: first, an estimate of the dynamic effects of a surprise monetary policy tightening on the outcome variables (GDP, employment, and inflation), also known as an “impulse response function”; second, a measure of the monetary policy tightening. To estimate the impulse response function, I estimate linear regressions (“local projections”) of each outcome variable (in the future) on past lags of itself and measures of monetary policy surprises.<sup><a href="#ftn3" id="ftnref3">3</a></sup> I use the so-called Romer and Romer shocks, which are changes in the target fed funds rate that are not explained by revisions in the Federal Reserve’s <a href="https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/greenbook">Greenbook</a> forecast or by the lagged target fed funds rate.<sup><a href="#ftn4" id="ftnref4">4</a></sup> </p> <p>The second step of the calculation is to infer the changes in monetary policy since 2021:Q4. I use the two-year real interest rate to measure the monetary policy stance. I use the estimated impulse response of this rate to Romer-Romer shocks, and recursively back out the shocks that generate the observed path of the two-year real interest rate since 2021:Q4. I then use the resulting shocks in the impulse response functions of the outcome variables to generate the estimated contributions of monetary policy (i.e., the blue lines in figure 1).<sup><a href="#ftn5" id="ftnref5">5</a></sup> This calculation assumes that all interest rate changes since 2021:Q4 have the same effect as the historical surprises—whether they are actual surprises or not.</p> <p>I use a real interest rate because, in many models, the real interest rate, rather than the nominal rate, reflects the stance of monetary policy. I use a two-year rate to capture expectations about future monetary policy. For instance, during the current tightening episode, longer-dated interest rates rose ahead of the actual increases in the federal funds rate.</p> <p>Of course, there are a number of assumptions underlying these calculations, such as the linearity of the effect of monetary policy. The estimates are also subject to large statistical uncertainty. But the general patterns are in line with a long research literature. </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> Indeed, the estimates suggest that monetary policy initially increases inflation. This counterintuitive feature (often deemed the “price puzzle”) is frequently found in empirical estimates of the effects of monetary policy.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> To note just one potential explanation, balance sheets of households and businesses are healthier than is typical during a tightening cycle, in part because they “locked in” low interest rates in 2020–21.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> Specifically, the equation is $y(t+h) = a(h) + b(h,0)RR(t) + b(h,1)RR(t–1)+…+ b(h,M)RR(t–M)+ c(h,1)y(t–1)+…+ c(h,L)y(t–L)+ d(h)x(t) + e(t+h)$, where <i>y</i> is the outcome variable, <i>h</i> the horizon, <i>a</i> an intercept, $b(h,0)$ the coefficient of interest (the IRF is the sequence $b(h,0))$, $RR$ is the Romer-Romer shock, <i>x</i> is a set of control variables, and <i>e</i> an error term. I run a monthly model for inflation and employment; in this model, I use M=24 and L=12 and include a quadratic time trend as control. In the quarterly model, used for GDP, I use M=L=16 and a linear time trend. The estimation period is 1969–2007.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> These series were constructed in <a href="https://eml.berkeley.edu/~dromer/papers/AER_September04.pdf">Romer and Romer, 2004</a>, “A new measure of monetary shocks: Derivation and implications,” <cite>American Economic Review</cite>, Vol. 94, No. 4, pp. 1055–1084, and extended by <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/jmcb.12681">Wieland and Yang, 2020</a>, “Financial dampening,” <cite>Journal of Money, Credit and Banking</cite>, Vol. 52, No. 1, pp. 79–113.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> The two-year real interest rate for historical estimation is constructed as the two-year nominal rate net of realized one-year forward core PCE inflation. To construct the shocks since 2021:Q4, I use the two-year nominal rate net of the two-year inflation swap.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/student-based-budgeting-chicago-public-schools https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/student-based-budgeting-chicago-public-schools Thu, 28 Sep 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <p> Over the past 20 years, U.S. school districts have increasingly adopted funding models that aim to allocate money to schools based on individual student need. One such approach—weighted student funding—apportions funds to schools based on a combination of total enrollment and the characteristics of the students they serve. Chicago Public Schools (CPS) adopted such a funding model, known as student-based budgeting (SBB), beginning with the 2013–14 school year.</p> <p> Prior to the adoption of SBB, staff positions were allocated to CPS schools based on student enrollment projections. Under SBB, however, the district instead uses a per-pupil weighted formula to distribute funds to schools and then allows school principals to decide how to spend this money on staff or other areas (e.g., curriculum, student services, etc.). The weights in this formula depended on students’ grade levels and the percentage of time they spend in a general education classroom (versus receiving special education instruction in a pull-out setting). The goal was in part to give school principals increased flexibility over how to best allocate funds to meet their students’ needs. In a recent <a href="https://www.chicagofed.org/publications/working-papers/2023/2023-31">working paper</a>, we find that the switch to SBB resulted in greater equity in school funding, with relatively more funds being directed toward schools serving higher shares of low-income students (as measured by the percentage of students eligible for free or reduced-price lunch).</p> <p><strong>After full implementation of student-based budgeting, per-pupil expenditures at schools serving higher shares of students from low-income families exceeds per-pupil expenditures at schools serving relatively higher income students by more than $1,000.</strong> </p> <p>In our analysis, we divide elementary schools into five bins based on the percentage of students in the school who were eligible for free or reduced-price lunch (FRL). Bin 1 includes schools where less than 20% of students are FRL-eligible, while bin 5 includes schools where more than 80% of students are FRL-eligible (most CPS elementary schools are in bin 5). </p> <p>Figure 1 plots average inflation-adjusted per-pupil expenditures at the school level over our sample period for schools in bin 1 (dark blue solid line with circles) versus bin 5 (light blue dashed line with diamonds).<sup><a href="#ftn1" id="ftnref1">1</a></sup> As shown in figure 1, during the pre-SBB and transition periods, inflation-adjusted expenditures per pupil were relatively similar for schools in these two groups. After the transition period, however, average inflation-adjusted expenditures per pupil diverged across these two groups of schools. This divergence was caused by both decreases in per-pupil expenditures in the lowest eligibility bin (bin 1) and increases in the highest bin (bin 5). In the final year of our sample, average per-pupil expenditures in the highest FRL-eligibility bin were nearly $11,000 compared with $8,900 for schools in the lowest FRL-eligibility bin.</p> <h3>1. Per-pupil expenditures over time by school share of students eligible for free or reduced-price school lunch (FRL)</h3> <figure> <img src="-/media/37676981C69F467A8FC4EC8BF6D59965.ashx" alt="Figure 1 is a line graph depicting per pupil expenditures by school share of students eligible for free or reduced-price school lunch (FRL) from school year 2011-12 through school year 2018-19. The y-axis has average per pupil expenditures in 2018 dollars ranging from $8,000 to $12,000; the x-axis has the school year. Vertical lines indicate the pre-SBB, transition, and SBB periods. Average per pupil expenditures were relatively similar for schools with between 81 and 100 percent of students eligible for FRL and school with between 0 and 20 percent of student FRL eligible during the pre-SBB and transition periods. After the transition period, the lines diverge such that average per pupil expenditures in schools with high shares of FRL-eligible students are higher than average per pupil expenditures in schools with low shares of FRL-eligible students." /> <figcaption class="caption"> Notes: The sample is comprised of 403 traditional elementary schools that are continuously open over the period. Total per-pupil expenditures exclude central office expenditures on behalf of schools and are reported in 2018 dollars. The solid vertical line marks the adoption of SBB funding. The dashed vertical line marks the end of the SBB transition period. See note 1 for more details.<br />Source: Authors’ calculations based on publicly available CPS budget and demographic data. </figcaption> </figure> <p><strong>The relative rise in per-pupil expenditures at schools with higher numbers of students from families with low incomes was driven by the shift to SBB.</strong></p> <p>Beginning with the 2013–14 school year, CPS budget data include detailed information on the sources of funds contributing to individual school budgets. Using this detailed data, we can look at the difference in per-pupil expenditures between schools in the highest and lowest FRL-eligibility bins and determine the funding sources that contributed to observed differences. We group funds into five categories: 1) 114 and 115 funds, which are the combined special and regular education funds<sup><a href="#ftn2" id="ftnref2">2</a></sup>; 2) Supplemental General State Aid (SGSA) and federal Title I funds, which are the state and federal dollars for schools that are based on the number and shares of low-income students served; 3) 124 funds (school special income funds), which reflect private foundation grants and donations that schools secure on their own; 4) equity grant funds, which were introduced in the final year of our sample and were directed to schools with low enrollment; and 5) other funds, which include a variety of categories such as Head Start and preschool funding from the state (both of which allocate more money on a per-pupil basis to schools serving more low-income students).<sup><a href="#ftn3" id="ftnref3">3</a></sup> </p> <p>Figure 2 plots the total difference or “gap” (depicted in black diamonds) in per-pupil expenditures between schools in the highest and lowest FRL-eligibility bins over the 2011–12 through 2018–19 school years. This gap is the difference in the heights of the dark blue and light blue lines depicted in figure 1. Vertical lines demarcate our three periods of study (pre-SBB, transitional, and SBB periods). The solid vertical line represents the onset of SBB funding, and the dashed vertical line marks the end of the transition period. When the gap is zero, average per-pupil expenditures at schools in the highest and lowest FRL-eligibility bins are equal. The vertical bars behind the black diamonds depict how much each of the five funding sources contributes to the gap. The height of the bar for each category illustrates how much it contributes to the overall gap in average per pupil funding between schools in the highest and lowest FRL-eligibility bins. When schools in the highest FRL-eligibility bin receive more dollars per pupil from a particular source than schools in the lowest bin, the bar for that source lies above the zero line. Correspondingly, when schools in the highest FRL-eligibility bin receive fewer dollars per pupil from a source than schools in the lowest bin, the bar for that source lies below the zero line. </p> <h3>2. Average difference in per-pupil expenditures between the highest and lowest FRL-eligibility schools, overall and by source</h3> <figure> <img src="-/media/A07699399B8E40C09BB825FE464B84F9.ashx" alt="Figure 2 is a combined line graph and stacked-bar graph. The line graph depicts the difference in average per pupil expenditures between schools with between 81 and 100 percent of students eligible for free or reduced-price school lunch (FRL) and schools with between 0 and 20 percent of students eligible for FRL from school year 2011-12 through school year 2018-19. The stacked-bar graph displays these differences in expenditures by funding source from school year 2013-14 through school year 2018-19. The y-axis has the expenditure difference in 2018 dollars ranging from -$2,000 to $4,000. The x-axis has the school year. Vertical lines indicate the pre-SBB, transition, and SBB periods. The difference in expenditures is close to $0 during the pre-SBB and transition periods and rises to $2,000 by the end of our sample. The stacked-bar graph indicates that school fund groups 114 and 115 were contributing negatively to differences in expenditures during the transition period and shrink to near $0 differences in the SBB period. SGSA and Title I funds contribute positively to the differences in expenditures over all school years available. The negative contribution to the expenditure differences from 124 funds rises somewhat over the period shown." /> <figcaption class="caption"> Notes: The sample is comprised of 403 traditional elementary schools that are continuously open over the period. Total per-pupil expenditures exclude central office expenditures on behalf of schools and are reported in 2018 dollars. The dashed vertical line marks the adoption of SBB funding. The solid vertical line marks the end of the SBB transitional period. The sold black line with diamonds represents the difference in average per-pupil expenditures between bin 1 and bin 5.<br /> Source: Authors’ calculations based on publicly available CPS budget and demographic data. </figcaption> </figure> <p>The 2011–12 school year was the only year in which the gap in average per-pupil expenditures was negative (although small), with schools in the highest FRL-eligibility bin spending $62 per pupil less than schools in the lowest FRL-eligibility bin. The gap was positive in every subsequent school year, reflecting in part that CPS was successful at directing relatively more funding toward schools with the highest shares of FRL-eligible students, particularly in later school years. The increasingly positive gap between schools serving the highest versus lowest shares of FRL-eligible students occurred despite the fact that the SBB formulas used by CPS do not directly allocate more dollars toward FRL-eligible students (or schools serving higher shares of FRL-eligible students). In other words, the dollars allocated to a school for a grade 3 general education student are the same whether the student is eligible for free or reduced-price lunch or not and whether or not they attend a school with a high or low share of other FRL-eligible students. However, as we show, the switch to the SBB funding formula was effective in equalizing the combined special and regular education funds (114 and 115) across schools serving lower and higher shares of low-income students.</p> <p>The gap in per-pupil expenditures was relatively small during the SBB transition period, $105 to $369 per pupil, after which the spending gap widened to around $1,500 per pupil. This gap stayed relatively constant through 2017–18 and then widened further again in 2018–19, in part due to equity grants that were awarded to schools with low total enrollment (most of which are in the highest FRL-eligibility bin). </p> <p>Notably, gaps in per-pupil special and regular education funding (114 and 115) narrowed from around −$1,400 during the SBB transition period to −$350 in 2016–17 and −$77 in 2018–19.<sup><a href="#ftn4" id="ftnref4">4</a></sup> Once again, we see that the switch to SBB helped equalize regular and special education funding for high- and low-FRL eligible schools. Not surprisingly, Title I funding and supplemental state grants (see figure 2) are fundamental in ensuring that relatively more dollars are allocated to schools serving larger numbers (and higher shares) of FRL-eligible students. Over all years shown, these funds contributed between $1,200 and $1,500 per pupil to the gap in spending between high- and low-FRL eligibility schools.</p> <p>Offsetting the forces that work toward equalizing or increasing funding for schools in the highest FRL-eligibility bin—adoption of SBB and categorical aid for FRL-eligible students—are the school special income (124) funds. The per-pupil gap in special income funds was −$240 in 2013–14, growing in absolute value terms to −$387 in 2018–19.</p> <h2>How does SBB help equalize funding across schools?</h2> <p>As we noted earlier, SBB funding does not vary with student-level FRL eligibility nor the share of FRL-eligible students served by the school. However, one reason that the SBB system might equalize funding between schools serving high and low shares of FRL-eligible students is if schools differ in terms of how experienced their teachers are—and thus average teacher salary level. Based on <a href="https://nces.ed.gov/surveys/ntps/tables/ntps_3t_051617.asp">national</a> data, schools with less-experienced teachers, on average, tend to serve higher shares of students from low-income families. Thus, while the CPS SBB model for distributing general funds does not explicitly target FRL-eligible students, it could lead to a relative increase in per-pupil funding in schools serving higher shares of FRL-eligible students because less-experienced teachers typically earn less than more-experienced teachers. Under the staff-position-based allocation budgeting system (pre-SBB), differences in teacher experience likely translated into large differences in school-level expenditures on teacher salary (and therefore large differences in per-pupil expenditures). In other words, a principal could end up spending more money in the old regime by attracting more experienced teachers to their school, which was more likely to be the case in higher-income districts.</p> <p>Although we cannot explicitly observe average experience and salary levels with the available data, we can look at how school-level spending on teacher salaries and benefits changed over school years 2013–14 through 2018–19. As shown in figure 3, the evolution of average inflation-adjusted per-pupil expenditures on salary and benefits by school FRL eligibility closely mirrors what happened to overall per-pupil expenditures (see figure 1). We see some increase for schools serving the highest shares of students from low-income families and decreases for schools with relatively small shares of low-income students.</p> <h3>3. Per-pupil expenditures on salary and benefits by FRL eligibility </h3> <figure> <img src="-/media/EADB3C08CDF544EB95A71DA2C5FD89E8.ashx" alt="Figure 3 is a line graph depicting per pupil expenditures on salary and benefits by school share of students eligible for free or reduced-price school lunch (FRL) from school year 2013-14 through school year 2018-19. The y-axis has average per pupil expenditures on salary and benefits in 2018 dollars ranging from $7,000 to $11,000; the x-axis has the school year. A vertical line indicates the transition and SBB periods. Average per pupil expenditures on salary and benefits were relatively similar for schools with between 81 and 100 percent of students eligible for FRL and school with between 0 and 20 percent of student FRL eligible during the transition period. After the transition period, the lines diverge such that average per pupil expenditures on salary and benefits in schools with high shares of FRL-eligible students are higher than average per pupil expenditures on salary and benefits in schools with low shares of FRL-eligible students." /> <figcaption class="caption"> Notes: The sample is comprised of 403 traditional elementary schools that are continuously open from 2011–12 through 2018–19. The dashed vertical line marks the end of the SBB transition period. Per-pupil salary and benefits are reported in 2018 dollars.<br /> Source: Authors’ calculations based on publicly available CPS budget and demographic data. </figcaption> </figure> <p>Prior to the adoption of SBB, the primary resources under direct control of the principal were Supplemental General State Aid and federal Title I funds, which made up a relatively small share of the overall school budget. SBB increased flexibility for principals by giving them control over a greater share of school-level funding in order to make spending tradeoffs that made the most sense for their individual school. While SBB in no way ensures that schools are receiving adequate levels of funding, our analysis demonstrates that in the Chicago context, SBB distributed dollars more equitably across schools serving higher and lower shares of students whose families are at the low end of the income scale.</p> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> We refer to the first two school years (2011–12 and 2012–13) in our study as the “pre-SBB” period. During these two school years, CPS used a school-level budgeting system primarily based on staff allocations. We refer to the 2013–14 and 2014–15 school years as the “transition period” because CPS did not immediately replace the staff position-based system with SBB. For example, if a school’s enrollment in the fall fell short of the enrollment projection from the previous spring, school budgets were not cut (i.e., the school was “held harmless” and funding was not entirely based on the weighted formula). Following these two transitional school years, the SBB system was fully implemented: School-level budgets were determined by the weighted formula and then decisions about how the funds were spent were made by school principals. We refer to school years 2015–16 through the end of our sample as the SBB period. </p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> CPS experimented with allocating special education funds through SBB in FY 2017 and FY 2018; as a result we cannot separate 114 and 115 funds in each year.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> Head Start, school improvement, teacher quality, and IDEA grants. The largest of these are the early childhood education funds (Head Start and state preschool) and the school improvement funds, both of which allocate more funds on a per-pupil basis to schools in the highest FRL-eligibility bin.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> The regular education funds are substantially larger than the special education funds on a per-pupil basis (including all pupils, not just those receiving special education services). For FY 2019, the total special education ending budget was less than one-third the size of the total regular education fund ending budget (CPS FY 2020 <a href="https://www.cps.edu/about/finance/budget/budget-2020/">Interactive Budget</a>). However, because CPS experimented with including some special education funding in SBB in school years 2016–17 and 2017–18, we cannot disaggregate the funds separately.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/charging-ahead-trends-in-leasing-bevs https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/charging-ahead-trends-in-leasing-bevs Tue, 26 Sep 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>How do consumers acquire vehicles that feature new propulsion technology? This question is of specific interest in the context of the growing sales of battery electric vehicles (BEVs), vehicles that run exclusively on electricity. In this post, we look at trends in leasing for BEVs during the past decade or so, a period in which the electric vehicle market has seen remarkable growth. </p> <p>Our analysis goes through the end of 2022.<sup><a href="#ftn1" id="ftnref1">1</a></sup> Thus, we do not include this year’s uptick in leasing rates, spurred by the implementation of the Inflation Reduction Act (IRA). We find that the incidence of leasing for new BEVs has been elevated for the majority of years since the introduction of the modern BEV. Two factors seem to be driving this observation: In light of rapidly changing technology, leasing can offer some “insurance” to consumers. Second, in a market featuring relatively small volumes, pricing decisions by specific motor vehicle companies can have an outsized effect on the aggregate leasing statistics. </p> <p>Leasing of BEVs received some attention earlier this year, as administrative details of the implementation of the Inflation Reduction Act were specified. Industry observers noted that under the IRA’s rules, there are fewer restrictions to qualify for the $7,500 federal tax credit for electric vehicles that are leased instead of purchased outright (<a href="~/link.aspx?_id=1AD74A7E8B1642E59A4610A30C34FAA5&_z=z">Federal Reserve Bank of Chicago, 2023</a>; <a href="https://www.axios.com/2023/04/11/ev-lease-or-buy">Muller, 2023</a>). As a result, leasing take-up rates for electric vehicles rose quickly from 25% at the beginning of 2023 to 52% in early February. In this post, we focus on leasing take-up for BEVs prior to the introduction of the IRA consumer-oriented incentives.</p> <p>Leasing is a popular type of auto financing whereby a consumer commits to making monthly payments to a financial entity that retains the title to the vehicle for the right to utilize the vehicle for a set amount of time and miles. This practice essentially allows consumers to “rent” a vehicle, typically for a period of 24 to 36 months. Utilizing registration microdata, we examine trends in the leasing market for new BEVs and compare them to those of vehicles powered by other powertrain technology, such as gasoline-powered or hybrid vehicles. We conclude by discussing potential factors driving trends in the leasing of BEVs.</p> <h2>Data </h2> <p>To study leasing trends for BEVs, we look at over a decade’s worth of new vehicle registration data. We utilize data from two sources: 1) the <a href="https://www.autocount.com/">AutoCount</a> database from Experian Automotive; and 2) the Wards Intelligence <a href="https://wardsintelligence.informa.com/datacenter">Data Center</a>. The AutoCount database comprises the universe of nonfleet vehicle registrations across the entire United States, sourced from state-level department of motor vehicles (DMV) title and registration data. We use data from AutoCount to recover information on the make (e.g., Chevrolet), model (e.g., Blazer), model year (MY), lease status, and registration date (month and year) of all new vehicle registrations from model year MY2010 to MY2022. We start with data for MY2010 because annual BEV sales broke 5,000 units in MY2011, and we wanted to begin our data collection before that milestone was reached. From Wards Intelligence we add information on the vehicle powertrain (gasoline, electric, hybrid, etc.) to the registration data. Our data consist of 147 million new vehicle registrations in the 13 model years of our sample, with registration dates from January 2009 to December 2022. We group each registration into one of four mutually exclusive categories of powertrain type: internal combustion engine, hybrid (including plug-in hybrid, or PHEV), mixed (which are models available with two or more powertrain options that cannot be delineated in the data), and pure battery electric.</p> <h2>BEVs leased at a strikingly higher rate from MY2012 to MY2017</h2> <p>We first plot the share of new registrations that are leased for each powertrain category in figure 1. It shows that BEVs were leased at strikingly higher rates for much of the sample period. Between MY2012 and MY2017, over 40% of new BEVs were financed through leasing. This is almost double the leasing incidence for the other powertrain categories, which hover around 20% to 30%. Interestingly, leasing shares for BEVs dropped to a more normal percentage from MY2018 onward, fluctuating between 15% and 25%. </p> <h3>Figure 1. Leasing share by powertrain category</h3> <figure class="mb-3"> <img src="-/media/94DB1657466740259735D28D0E0B286B.ashx" alt="Figure 1 shows the leasing share of new vehicles registered in the U.S. between model years 2010 and 2022. It distinguishes vehicles of four different powertrain categories." /> <figcaption class="caption"> Source: Wards Intelligence and AutoCount. </figcaption> </figure> <h2>Factors influencing the high leasing shares of BEVs </h2> <p>There are several potential benefits to financing a vehicle through leasing. Leasing typically involves lower up-front costs, lower monthly payments, and shorter time commitments. For individuals uncertain about the long-term investment that comes with purchasing a given vehicle, leasing can be a preferred option. Leasing also protects against sudden depreciation of a vehicle. If the value of a leased vehicle suddenly drops, it is the lease holder (as opposed to the consumer) who experiences this drop in equity. </p> <p>For consumers interested in BEVs, leasing arrangements may be a particularly attractive option, given that these vehicles are currently, on average, priced higher than comparable ICE vehicles. The shorter time commitment from leasing agreements might also be attractive for consumers who have concerns about adopting a rather new and fast-changing technology. For instance, some consumers may be concerned about the risk that a particular vehicle’s technology could become obsolete as new models and new technology emerge. Another related concern may be the lack of data regarding the expected depreciation of BEVs compared with vehicles powered by other propulsion technology. </p> <p>The mechanics of tax incentives toward the purchase of a BEV have also likely played a role in raising leasing rates of BEVs—even before the recent uptick related to implementation of the IRA. When leasing a vehicle, the financial incentives accrue to the leasing entity, which typically passes them on to the consumer at the time of leasing. This allows consumers to benefit from the tax credits immediately. In contrast, if the consumer purchases a BEV outright, they must wait until they file their next tax return to take advantage of the tax credit, assuming they qualify for it. </p> <h2>Distinguishing BEV registrations by vehicle make</h2> <p>In light of the fact that during the early years of BEV availability in the U.S. market, consumer choices were limited to very few products, we also distinguish new BEV registrations by make and model year (see figure 2). The figure plots the percentage share for BEV new registrations by make from MY2010 to MY2022. It shows that early on, the Nissan Leaf was essentially the only BEV available in the U.S. market. Incidentally, that is also the time when we observe the highest leasing take-up. By MY2016, Tesla new vehicle registrations account for half of all new BEV registrations in the U.S. market. Tesla’s growth is correlated with the declining lease rates for BEVs.</p> <h3>Figure 2. BEV new registration share by make</h3> <figure class="mb-3"> <img src="-/media/5389C489D7E7428ABA70A946C1104025.ashx" alt="Figure 2 shows new BEV registrations for model years 2010-2022 by make." /> <figcaption class="caption"> Source: Wards Intelligence and AutoCount. </figcaption> </figure> <p>Figure 3 plots the share of new registrations that are leased but splits out the BEVs into Teslas and non-Teslas. We can see that non-Tesla BEVs between MY2012 and MY2016 were driving the unusually high leasing take-up rates observed in figure 1, as they were leased at shares between 60% and 80%. On the other hand, Tesla BEVs, the most popular models of which were not offered for lease (i.e., the Model S) until MY2014, show much lower leasing shares. The aggregate share of leased new registrations drops for BEVs post-MY2015 due to Tesla’s growing dominance in BEV market share during this period. Returning to the role of the Nissan Leaf early on in BEV new vehicle sales, it is worth noting that Nissan ended up incentivizing the Leaf, at the time the only fully electric non-luxury car that was sold nationwide, by offering rather generous lease rates: For example, in 2014 the Leaf was available for $199/month for a 36-month lease, with a $2,400 down payment (<a href="https://www.wired.com/2014/08/why-its-cheaper-to-lease-a-new-electric-car-than-to-buy-one-used/">Golson, 2014</a>). Leasing take-up for the Leaf peaked in model year 2013 at well over 80% (see figure 4). Figure 4 also shows very high leasing take up for other non-Tesla BEV products.</p> <h3>Figure 3. Leasing share by powertrain category and BEV makes </h3> <figure class="mb-3"> <img src="-/media/D4D42DF705654A718ED6B18A1B198673.ashx" alt="Figure 3 is closely related to Figure 1. It adds the distinction of BEVs into Tesla and non-Tesla vehicles." /> <figcaption class="caption"> Source: Wards Intelligence and AutoCount. </figcaption> </figure> <h3>Figure 4. Leasing share among non-Tesla BEVs by product</h3> <figure class="mb-3"> <img src="-/media/05732BC9B9C4404F93E6742CA3A32907.ashx" alt="Figure 4 illustrates leasing rates of new BEVs between model year 2010 and 2022 for six non-Tesla BEV products." /> <figcaption class="caption"> Source: Wards Intelligence and AutoCount. </figcaption> </figure> <h2>Conclusion</h2> <p>At the beginning of the year the increase in the take-up of leasing for BEVs gained attention as a response to specific aspects of applicable rules of the IRA. This post shows that leasing of BEVs has, on balance, been above the average rate across vehicles of all powertrain technologies for the past decade or so. For more information about the BEV market, see our <a href="~/link.aspx?_id=4B1B7FBEE774453AB7DAA7F06740246B&_z=z">working paper</a></p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> In 2022, 735,561 BEVs were sold in the U.S market, corresponding to 5% of all light vehicle sales. Authors’ calculations based on data from Wards Intelligence.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/how-uaw-negotiations-ford-gm-stellantis-usually-work https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/how-uaw-negotiations-ford-gm-stellantis-usually-work Tue, 22 Aug 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>In two previous blog posts, I’ve talked about the backdrop and environment for 2023 UAW negotiations with Ford, GM, and Stellantis, recent contract history, and how that history has impacted hourly labor costs, wages, and other conditions of work. In this post, I cover the typical process for these contract talks, which is largely guided by the UAW’s constitution and existing organizational structures. In the <a href="~/link.aspx?_id=CF7B752499A046A68B9463054CE48762&_z=z">first post</a> in this series, I also mentioned how 2023 might be different, so in this post I explain some of those differences and list what the UAW has publicly said are its bargaining demands this year. </p> <div class="calloutBox2023"> <p>This article is one in a series discussing UAW auto contract negotiations. Read the companion pieces here:</p> <ul class="cfedList--bulleted"> <li><a href="~/link.aspx?_id=CF7B752499A046A68B9463054CE48762&_z=z">2023 UAW Contract Negotiations with Ford, GM, and Stellantis</a></li> <li><a href="~/link.aspx?_id=BD4BFBF541864CA28EFF328D44863CCF&_z=z">Recent UAW Contracts with Ford, GM, and Stellantis</a></li> </ul> </div> <p>Preparations for the UAW bargaining process begin late in the year before the Ford, GM, and Stellantis contracts expire. The first step is the election of a national negotiating committee and collection of members’ bargaining resolutions (demands) through their local unions. The national bargaining committees meet to review these resolutions and prepare for the bargaining convention and future council and sub-council meetings.</p> <p>The next step is to hold the Special Collective Bargaining Convention—usually in March during the year in which the contracts with Ford, GM, and Stellantis expire (often the year after the union’s Constitutional Convention). This year’s Special Bargaining Convention was held on 27–29 March in Detroit.<sup><a href="#ftn1" id="ftnref1">1</a></sup> In the months leading up to the convention, members submit resolutions to be considered by the Bargaining Convention delegates (local union presidents and negotiations committee chairs). The delegates meet to review the union’s bargaining priorities for all sectors where UAW members work and approve resolutions around the UAW’s goals for wages, profit-sharing, benefits, health and safety, work schedules, and related issues. This year’s bargaining resolutions focused on the following topics:</p> <ul class="cfedList--bulleted"> <li>Improving wages and salaries,</li> <li>Ensuring earnings “keep pace with or exceed inflation and productivity increases, whether through general wage increases, bonuses, profit sharing, cost-of-living adjustments (COLA), or other means,”<sup><a href="#ftn2" id="ftnref2">2</a></sup></li> <li>Reducing wage disparities within classifications (commonly called “tiered wages”),</li> <li>Reducing the use of temporary workers and improving working conditions,</li> <li>Insourcing new and outsourced work,</li> <li>Securing new investments,</li> <li>Investing in training,</li> <li>Protecting health care and retirement security,</li> <li>Protecting workplace health and safety,</li> <li>Committing to fair and inclusive workplaces, and</li> <li>Organizing new employers to increase union density.</li> </ul> <p>After the Special Collective Bargaining Convention, the national Ford, GM, and Stellantis councils meet to compile demands, determine strategies, and prepare for open bargaining with the companies.<sup><a href="#ftn3" id="ftnref3">3</a></sup></p> <h2>Formally begin bargaining</h2> <p>While the UAW and automakers continue to talk and jointly administer their existing agreements throughout the contract term, the formal opening of bargaining with each employer signals a shift to begin negotiating the next agreement. This year’s quadrennial UAW labor talks with the three unionized U.S. automakers formally kicked off on July 13–18. This timing is typical for the parties to open national negotiations.</p> <p>For many years, these kickoff ceremonies involved the lead negotiators for each side meeting for a press event, handshake, and photo opportunity. The UAW met with Stellantis (13 July), Ford (14 July), and General Motors (GM, 18 July) with no press in attendance and no handshakes. UAW President Fain had previously said, “I’ll shake hands with the CEOs when they come to the table with a deal that reflects the needs of the workers who make this industry run. When the 150,000 autoworkers at Ford, GM, and Stellantis receive the respect they are due for their sacrifice in generating the historic profits of the past decade, then we can proceed with a handshake.”<sup><a href="#ftn4" id="ftnref4">4</a></sup> Instead of shaking hands with the company CEOs and lead bargainers, the UAW leaders went to three metro Detroit auto assembly plants on July 12, 2023, for a “members handshake.” </p> <h2>Sub-committee work</h2> <p>After talks open, it is customary for the national bargaining sub-committees to begin to meet regularly to present what are called “noneconomic” bargaining proposals (examples of noneconomic demands include job classification structures, the process for transferring between jobs or between plants, or increased input on company technology or sourcing decisions),<sup><a href="#ftn5" id="ftnref5">5</a></sup> review current contract language, determine what text can carry over to the next contract, and identify areas where the negotiators might want to make improvements based on the UAW’s bargaining priorities and demands submitted by members. These sub-committees consist of the UAW and automaker representatives who serve on the bargaining teams. The UAW side is represented by a national negotiating committee elected by members who work for each of the automakers (typically local union leaders), an international vice president assigned to each automaker, and the union’s international president. Management is represented on the committee by labor relations and manufacturing staff, an executive-level lead bargainer (generally a corporate vice president or executive director), and the automakers’ top executives (CEOs and presidents). Both sides have professional staff who support the negotiations with expertise in law, economics, benefits, health and safety, and related disciplines. The committees work throughout the bargaining, and both sides must sign off on language that is passed out of committee. </p> <h2>Economic demands</h2> <p>Early in the process, the UAW makes a request for financial and other data from the automakers. This information helps the union better understand each company’s situation and helps shape the economic bargaining demands. After the data request is fulfilled, the UAW and the automakers pass economic demands across the table (generally in late July or early August). Some topics—wage rates, investments and job security, health care benefits—are discussed at the main table and often involve the international UAW president, UAW vice president, company CEO, and lead executive bargainer. These “main table” talks generally intensify in mid- to late August. </p> <p>The UAW presented their 2023 <a href="https://uaw.org/uaw-auto-bargaining/">economic demands</a> to their members and the public in an open meeting on both the Facebook and Twitter platforms. The list includes <a href="https://uaw.org/uaw-auto-bargaining/">ten priorities</a>: </p> <ol class="cfedList--ordered"> <li>“Eliminate tiers”—The term “tiers” refers to the different classifications of work and workers that earn different pay and benefits.</li> <li>“Big wage increases”—Current wages range from $16.67 per hour for temporary workers to a top production wage of $32.32 per hour. While Fain did not reveal the exact wage demands in his initial presentation, later reports revealed the ask to be a 20% raise upon signing of the new contract and 5% annual raises for the four years of the contract.</li> <li>“Restore COLA”—COLA (or cost-of-living adjustment) was suspended in 2009 bargaining and later eliminated from the Ford and Stellantis contracts (it remains suspended in the GM agreement). COLA provisions provide quarterly increases to base wages based on a formula tied to the Consumer Price Index (CPI) and would be in addition to any base wage increases the union and company may have negotiated.</li> <li>“Defined benefit pension for all workers”—Workers hired before the effective date of the 2007 UAW contracts have defined benefit pensions and those hired after 2007 have defined contribution plan pensions with a 6.4% company contribution.</li> <li>“Re-establish retiree medical benefits”—Workers hired before the 2007 agreements have access to retiree medical benefits through a Voluntary Employee Benefit Association (VEBA) funded by the companies; workers hired after 2007 get $1 per hour worked paid into a 401(k) with which they may purchase health care in retirement.</li> <li>“Right to strike over plant closures”—Ford, GM, and Stellantis have idled or closed many plants over the years as they have adjusted production to meet their smaller market shares.</li> <li>“Working family protection program”—This demand is similar to a job security program colloquially known as “jobs banks” that the UAW and Ford, GM, and Stellantis had in place prior to 2009 bargaining. If employment dipped below an agreed level, those workers placed on layoff would receive pay and benefits.</li> <li>“End abuse of temp workers”—Temporary workers at Ford, GM, and Stellantis plants are union members, and the UAW wants to improve their wages and working conditions. All automakers, not just Ford, GM, and Stellantis, use temporary workers to backfill for absences and leaves and to boost production in times of peak demand. </li> <li>“More paid time off to be with families”—UAW workers currently receive between 40 and 200 hours of annual vacation plus 16 or 17 holidays per year.</li> <li>“Significantly increase retiree pay”—The basic pension benefit was last increased in 2007. It stands at a maximum of $54.30 for each year of credited service per month.</li> </ol> <p>The UAW’s public statements have included other demands, such as bringing workers who work at the joint venture battery plants or automaker subsidiaries under the master agreement, health care benefit improvements without further cost sharing, and a moratorium on plant closures. The UAW is seeking to keep all of its plants open and secure product<sup><a href="#ftn6" id="ftnref6">6</a></sup>—especially at the Stellantis assembly plant in Belvidere, Illinois, which was idled in February 2023.<sup><a href="#ftn7" id="ftnref7">7</a></sup></p> <p>The companies’ demands have not been officially released, but based on past negotiations, media reports, and sources with knowledge of current negotiations, company priorities may include:<sup><a href="#ftn8" id="ftnref8">8</a></sup></p> <ol class="cfedList--ordered"> <li>Limiting labor cost growth,</li> <li>Retaining flexibility in staffing and footprint decisions,</li> <li>Maintaining wage tiers and separations between the master agreement and other workers—including in JV battery plants, and</li> <li>Improving productivity, quality, and attendance.</li> </ol> <h2>Strike authorization votes</h2> <p>In August, the UAW generally takes a strike vote at each of the companies. Members will vote to authorize their bargaining representatives to call a strike after their contract expires if they cannot reach a satisfactory agreement. These strike authorizations generally pass with 90% or more approval; in 2019, the strike authorization votes were 96% or more at each of the three companies. Voting to authorize a strike does not mean the workers will strike—just that they will go on strike if their leaders decide that it is the best strategy for the union to reach a favorable agreement.</p> <h2>Lead or “target” company selection</h2> <p>When the UAW gets a sense of with which automaker they think can make the most progress, they often (though not always) select that company as a “lead” company. The lead company designation is generally announced after Labor Day. UAW President Fain has declared that “<a href="https://www.freep.com/story/money/cars/chrysler/2023/07/11/uaw-president-fain-strike-target-big-three/70404113007/">the Big Three</a>” will be the collective target this year—with no one company selected as the lead.</p> <h2>Pattern bargaining</h2> <p>The UAW has long pursued a strategy of “pattern bargaining” with the automakers. Former UAW President Walter Reuther pioneered the strategy in the 1940s. In 1946, Reuther told the UAW’s International Executive Board that, “An industry-wide wage agreement based on the principle of equal pay for equal work without regard to products being manufactured or the geographical location of the plant is the most important economic objective.”<sup><a href="#ftn9" id="ftnref9">9</a></sup> Under a pattern-bargaining strategy, the union chooses the order in which it negotiates with firms in an industry and negotiates with each firm sequentially. The contract achieved at the first employer then sets the basic wage, benefit, and other terms for subsequent negotiations to level the labor costs across the sector so that employers cannot compete based on their employees’ wage and benefit differentials.<sup><a href="#ftn10" id="ftnref10">10</a></sup></p> <h2>From tentative agreement to a contract</h2> <p>If contract talks are on schedule, the UAW and at least one of the automakers will reach a tentative agreement on or just prior to the expiration of the current contract (September 14, 2023). The core economics of the deal often come together in the last days and hours of the negotiations, and the UAW and company sides will frequently enter marathon bargaining sessions to try to reach a deal. When they have an agreement at one automaker, the UAW usually announces that they have reached a tentative accord and then they formally extend the contracts at the other two automakers pending ratification of the agreement at the first company.</p> <p>Ratification involves taking the agreement to the union’s council for the automaker (the council is made up of local union presidents and bargaining chairs) to vote to recommend passage by the membership. Then the UAW and the company generally work together to produce a summary of the contract language for members to review; they also make the full text of the agreement available for members to read if they so wish (since 2011, the full text of the tentative agreement—called the “white book”—has been posted online). Union leadership holds informational meetings at every local to present the agreement and answer members’ questions. The members will then vote by local on whether to accept the tentative agreement and make it a contract. The whole ratification process can take about two weeks. </p> <p>If the agreement is ratified, the UAW then turns to one of the other two automakers to try to craft a pattern agreement with that company. When that company reaches a deal, the ratification process starts again. The final company usually completes bargaining of their contract only once the second agreement has been ratified. In 2019, it took eight additional weeks to negotiate and ratify all three agreements once the first tentative agreement was announced.</p> <p>The UAW’s tentative agreement with an automaker is really a set of agreements—the main text, as well as appendixes for different aspects, such as pensions and retirement plans, health care benefits, supplemental unemployment benefits, profit sharing, personal savings plans, life and disability benefits, dependent care benefits, and salaried workers (for those who are also UAW-represented). The contract ratification vote is tallied for the membership overall, and skilled trades workers’ votes count for the main agreement and the separate provisions that apply only to them. If the overall membership votes in favor of the tentative agreement, it becomes a contract.</p> <h2>When they do not reach a tentative agreement</h2> <p>If the UAW does not reach a tentative agreement with at least one of the U.S. automakers by midnight on the expiration date of the contract, the leadership has a few options:</p> <ul class="cfedList--bulleted"> <li>If talks are productive and they feel like they just need a little more time, they can extend all three existing agreements and continue negotiating with the target company.</li> <li>If talks are stalled, they can “change horses,” extend the contracts, and turn to one of the other automakers to craft the first deal.</li> <li>If talks are at an impasse, they can call a strike. The UAW cannot call a national strike until after the current contract has expired.</li> </ul> <p>If the UAW chooses to call a strike, it can do so company-wide (all UAW members at a company in all locations, as UAW-GM workers did in 2019) or through local strikes (all UAW members at a company in a specific location or locations, as UAW-GM workers did in Flint, Michigan, in 1998). Companies, too, can initiate a labor dispute by choosing to lock out workers (denying employment) or by hiring permanent replacement employees for striking workers. How workers are paid during a labor dispute in each of these instances depends on the nature of the dispute and the state in which they work. </p> <p>In general, workers who are out of work due to an authorized strike<sup><a href="#ftn11" id="ftnref11">11</a></sup> receive weekly strike pay from the International Union Strike and Defense Fund. UAW leaders report that the current fund balance is around $825 million.<sup><a href="#ftn12" id="ftnref12">12</a></sup> While the UAW’s constitution defines the weekly strike benefit as $400 per week,<sup><a href="#ftn13" id="ftnref13">13</a></sup> the union’s International Executive Board (IEB) unanimously approved an increase to $500 per week in February 2023.<sup><a href="#ftn14" id="ftnref14">14</a></sup> The UAW strike fund also covers medical and prescription drug insurance for striking members (but not dental, vision, hearing, or sickness and accident insurances),<sup><a href="#ftn15" id="ftnref15">15</a></sup> so in the event of a strike, the weekly cost to the union would be somewhat higher than $500 per week per striking member. Strike benefits in excess of $600 per year are reported on IRS Form 1099-MISC and are taxable, but taxes are not withheld. Striking UAW members are entitled to strike pay and benefits assuming they are members in good standing, on active payroll at the target company at the time of the strike, and they perform their required strike duties (picket line or other strike support). Strike pay begins on the first day of the strike and is paid on day eight. The strike fund pays bonuses to workers who are on strike during the Thanksgiving or Christmas holidays.</p> <p>Striking UAW members may find another job during the strike, and outside earnings are allowed without offset up to the amount of the strike benefit. For example, a striking worker who qualifies for $500 a week in strike pay can earn up to $499 a week for a total of $999 in weekly earnings. If the striker earns $500 or more per week, the entire amount is offset. These strikers would not receive strike pay for the weeks in which their earnings exceeded the strike benefit but would continue to qualify for medical and prescription drug insurance. During the 2019 UAW-GM strike, the union’s International Executive Board voted to allow outside earnings to exceed strike benefits without offset, which means workers were not penalized for outside earnings. That policy is not currently in effect, but the UAW IEB could again vote to allow workers to earn more than the strike benefit.</p> <p>In general, striking workers at a location that is the target of a labor dispute are not allowed to collect unemployment insurance. However, a strike at one company may have the effect of idling workers—even other UAW members—who work at other companies or other locations of the same company. Workers idled because of a strike who do not work at the site where union members are striking generally qualify for unemployment benefits under usual eligibility rules. UAW members who work at the same company where the workers are striking at another site (or sites) and have a “direct interest” in the outcome of the dispute are sometimes disqualified from receiving unemployment benefits.<sup><a href="#ftn16" id="ftnref16">16</a></sup> For example, Michigan has language that disqualifies laid off workers from receiving unemployment insurance if they are idled as a result of a strike at a another “functionally integrated” U.S. establishment of the same employer<sup><a href="#ftn17" id="ftnref17">17</a></sup> and New York has a seven-week exclusion from receiving unemployment insurance benefits for any workers idled as a result of “industrial controversy” at other sites within the same employer.<sup><a href="#ftn18" id="ftnref18">18</a></sup> In many states, workers who work at the same company and are idled due to a strike at another location who are qualified for unemployment insurance benefits may lose eligibility if they participate in the strike through picketing, financing, or other forms of support for the strike.</p> <p>A labor dispute could also arise because of an employer’s actions, such as contract or labor law violations or a lockout or hiring permanent replacement workers for employees who are on strike. For the most part, workers denied employment due to employers’ actions in cases where the union is engaged in good faith bargaining are eligible for state unemployment insurance benefits. If the workers had been on strike and were previously disqualified from receiving unemployment insurance due to the labor dispute, an employer’s contract or labor law violation or lockout may reinstate eligibility for these workers.</p> <h2>Conclusion</h2> <p>This post covers what typically happens in negotiations between the UAW and Ford, GM, and Stellantis, but as I explained in a previous post, 2023 is not a typical contract negotiations year due to a unique set of factors. The issues the two sides seek to solve at the negotiating table are large and highly complex and could have far-reaching implications for the U.S. economy—especially that of the Chicago Fed’s Seventh District. We will continue to follow these events and provide our analysis of their economic implications.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> Because the direct election of UAW leadership led to a runoff election for three offices, UAW President Shawn Fain, Vice President Chuck Browning, and Region 9 Director Daniel Vicente were not installed until March 2023—just before the Bargaining Convention began. President Fain presided over the event.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> See <a href="https://solidweb2.uaw.org/system/files/uaw_resolutions-2023_v2_plus_additions.pdf">online</a>.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> Each department (Ford, GM, and Stellantis) within the UAW has a council with delegates who must approve a tentative agreement before it can be sent to the membership for ratification. Each council has several sub-councils that work on individual subject areas who meet to review and approve members’ demands to go to the council for adoption.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> See <a href="https://www.detroitnews.com/story/business/autos/2023/07/10/uaw-president-shawn-fain-handshake-automaker-ceo-negotiations/70398936007/">online</a>. </p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> Some “noneconomic” demands are later determined to have economic significance, such as a demand for an additional job category that could limit a company’s staffing flexibility or a demand for higher representation ratios.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> Securing product means means the company has allocated a new or renewed vehicle model (or engine or transmission or other product) for production in that plant. It means the company is investing in modernizing the plant and it’s a sign of longevity.</p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> See <a href="https://media.stellantisnorthamerica.com/newsrelease.do?id=323&mid=105">online</a>.</p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> For example, see online <a href="https://www.gmnegotiations2023.com/public/us/en/negotiations/home/negotiation-updates/gm-statement-0803.html">here</a>, <a href="https://www.reuters.com/business/autos-transportation/uaw-says-chrysler-parent-stellantis-seeking-concessions-talks-2023-08-08/">here</a>, and <a href="https://stellantisnegotiations2023.com/employee-letter-uaw-negotiations-update/">here</a>.</p> <p><sup><a href="#ftnref9" id="ftn9">9</a></sup> <cite>International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America, 1946, A program for UAW-CIO members: workers, consumers, citizens, Detroit: UAW-CIO</cite>, from UAW President's Office: Walter P. Reuther Records, LR000261, Walter P. Reuther Library, Wayne State University. </p> <p><sup><a href="#ftnref10" id="ftn10">10</a></sup> See <a href="https://conservancy.umn.edu/bitstream/handle/11299/55755/1996-290.pdf?sequence=1&isAllowed=y">online</a>. </p> <p><sup><a href="#ftnref11" id="ftn11">11</a></sup> UAW strikes must be authorized by the members of the union’s International Executive Board.</p> <p><sup><a href="#ftnref12" id="ftn12">12</a></sup> In the July 2022 Report of the Secretary-Treasurer to the UAW’s 38th Constitutional Convention, the International Strike and Defense Fund was listed at a value of $815.3 million on a modified cash basis. This accounting method does not account for current market valuation of the assets in the fund.</p> <p><sup><a href="#ftnref13" id="ftn13">13</a></sup> See details <a href="https://uaw.org/wp-content/uploads/2019/01/2018-UAW-Constitution.pdf">online</a>, Article 50, §10.</p> <p><sup><a href="#ftnref14" id="ftn14">14</a></sup> See <a href="https://uaw.org/uaw-statement-increasing-strike-pay-500-per-week/">online</a>.</p> <p><sup><a href="#ftnref15" id="ftn15">15</a></sup> See <a href="https://uaw.org/strike-faq-2/">online</a>.</p> <p><sup><a href="#ftnref16" id="ftn16">16</a></sup> See <a href="https://oui.doleta.gov/unemploy/pdf/uilawcompar/2022/complete.pdf">online</a>, pp. 5-21 through 5-25. </p> <p><sup><a href="#ftnref17" id="ftn17">17</a></sup> See <a href="http://www.legislature.mi.gov/(S(32xrtor0lc5mstwceru55uyc))/mileg.aspx?page=getObject&objectName=mcl-421-29&highlight=functionally%20AND%20integrated">online</a>. </p> <p><sup><a href="#ftnref18" id="ftn18">18</a></sup> See <a href="https://www.nysenate.gov/legislation/laws/LAB/593">online</a>.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/recent-uaw-contracts-ford-gm-stellantis https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/recent-uaw-contracts-ford-gm-stellantis Mon, 21 Aug 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>The U.S. auto industry is highly cyclical and even when the overall industry is up or down, the fortunes of individual UAW-represented automakers have waxed and waned. What follows is a summary of previous rounds of bargaining between 2003 and 2019. Contracts during this period were for four years, though the parties could—and can in the future—agree to any term. This blog post first discusses recent trends in U.S. wages and market share for the UAW-represented firms to provide the long-term wage context of bargaining and then provides high-level summaries of recent bargaining rounds.</p> <div class="calloutBox2023"> <p>This article is one in a series discussing UAW auto contract negotiations. Read the companion pieces here:</p> <ul class="cfedList--bulleted"> <li><a href="~/link.aspx?_id=CF7B752499A046A68B9463054CE48762&_z=z">2023 UAW Contract Negotiations with Ford, GM, and Stellantis</a></li> <li><a href="~/link.aspx?_id=A150F8E6AB1345A3873E5D38FD2A849A&_z=z">How UAW Negotiations with Ford, GM, and Stellantis Usually Work</a></li> </ul> </div> <p>The combined market share of Ford, GM, and Stellantis<sup><a href="#ftn1" id="ftnref1">1</a></sup> has fallen steadily since 1976. As the companies’ market share declined, so, too, did the UAW’s share of U.S. motor vehicle and parts employment and their bargaining strength. The three automakers’ U.S. market share fell from roughly two-thirds to two-fifths between 2000 and 2009 and has been hovering in the mid 40% range since the Great Financial Crisis and GM’s and Chrysler’s (now Stellantis) bankruptcies.<sup><a href="#ftn2" id="ftnref2">2</a></sup> Thus far in 2023, the combined market share of the three companies is 39%.</p> <p>As auto companies have adjusted to falling market share, they have also seen rising nominal labor costs. It is important to note that labor costs do not represent the dollar value of wages and benefits to each individual worker nor are they indicative of UAW members’ take-home pay. Instead, labor costs represent all the costs of employing workers—their wages, benefits, bonuses, lump sums, statutory costs (taxes, workers compensation insurance, and unemployment insurance), and post-employment benefits divided by the number of hours worked. A company with high legacy cost burdens (more retirees than active workers) or a larger share of workers on layoff or sick leave would see higher costs per hour worked. Labor costs are also higher when output is lower—such as the recent supply-constrained period due to fewer hours worked overall and thus a smaller denominator. Labor costs are also a blend of costs of employing different categories of workers, so a company with a larger share of higher-paid skilled trades workers might see higher average hourly labor costs, and a company that chooses to use more temporary workers might have lower costs. The composition of the workforce matters, too. A company that has a younger workforce compared to their competitors might see lower costs for health care because their workers may be healthier or have fewer dependents.</p> <p>Wages are defined as the base rate paid to workers and are the key component of UAW members’ take-home pay. Individual workers’ pay determines the rate at which they earn overtime or shift premiums, vacation or holiday pay, and the like. These payments—plus lump sums, bonuses, and profit-sharing checks—are what workers earn.</p> <p>The table below shows the combined market share of Ford, GM, and Stellantis, an estimate of the blended average of the companies’ labor costs, and the top production (hourly) wage in UAW contracts. Note that the top hourly wage for production workers did not increase between 2006 and 2015, while wages for temporary workers and new hires (not shown in table) did see gains in this period.</p> <div class="table-responsive"> <table class="table cfedTable--dataCenter"> <caption class="caption"> Note: Costs and wages are nominal blended averages weighted by total employment by company.<br /> Sources: Wards Informa, <a href="https://www.cargroup.org/the-issues-in-2019-uaw-fca-ford-gm-negotiations/">Cargroup.org (2019)</a>, <a href="https://www.chicagofed.org/-/media/others/events/2008/automotive-outlook-symposium/presentation-labor-negotiations-pdf.pdf">Dziczek (2008)</a>, <a href="https://www.chicagofed.org/-/media/others/events/2012/aos/dziczek-pdf.pdf">Dziczek (2012)</a>, and <a href="https://www.chicagofed.org/-/media/others/events/2020/auto-insights-conference/dziczek-uaw-contract-pdf.pdf?sc_lang=en">Dziczek (2020)</a>. </caption> <thead> <tr class="cfedTable--rowBorderBottom font-weight-bold text-center"> <th></th> <th>Combined market share (%)</th> <th>Estimated hourly labor costs ($)</th> <th>Top production wage, hourly ($)</th> </tr> </thead> <tbody> <tr> <td>1999</td> <td>67</td> <td>45</td> <td>26</td> </tr> <tr> <td>2003</td> <td>59</td> <td>55</td> <td>28</td> </tr> <tr> <td>2005</td> <td>56</td> <td>67</td> <td>28</td> </tr> <tr> <td>2007</td> <td>50</td> <td>78</td> <td>28</td> </tr> <tr> <td>2009</td> <td>44</td> <td>56</td> <td>28</td> </tr> <tr> <td>2011</td> <td>46</td> <td>55</td> <td>28</td> </tr> <tr> <td>2015</td> <td>45</td> <td>55</td> <td>30</td> </tr> <tr> <td>2019</td> <td>43</td> <td>62</td> <td>32</td> </tr> <tr class="text-nowrap"> <td>2023 year to date</td> <td>39</td> <td>66</td> <td>(not yet known)</td> </tr> </tbody> </table> </div> <p>The companies’ estimated hourly labor costs and top production hourly wages are influenced by their UAW contracts. The next section reviews the base wage increases and other major changes in each of the last seven rounds of bargaining between the UAW and Ford, GM, and Chrysler/DaimlerChrysler/Stellantis between 2003 and 2019.<sup><a href="#ftn3" id="ftnref3">3</a></sup></p> <h2>2003: Cuts, cuts, cuts</h2> <p>In the 1980s and 1990s, UAW contracts generally contained wage and benefit gains. Wage increases ranged from 2.25% to 3%, and the contracts included similarly sized lump sum payments in the years in which there was not a base wage increase. The 2003 contract differed in that it contained a two-year base wage freeze, followed by a 2% pay raise in year three and a 3% raise in year four. Aside from smaller gains, the 2003 agreement also diverted some money that had been intended to pay cost-of-living adjustments (COLA) to instead pay for rising health care costs. As a result of the 2003 agreements, the companies closed 11 plants and indicated they would sell seven more.</p> <h2>2005: Concessions, revisited</h2> <p>2005 was not an on-cycle bargaining year. However, the UAW agreed to reopen talks with Ford and GM to negotiate a company-run Voluntary Employee Benefit Association (VEBA) agreement to fund rising retiree health care costs. Under the VEBA, the company’s obligations to pay for future retiree health costs would be capped, and the post-employment health benefits package could be adjusted based on the balance in the VEBA retiree medical benefit trust funds. The UAW and Chrysler (now Stellantis) did not make a similar deal in 2005.</p> <h2>2007: Enter the second tier</h2> <p>2007 bargaining brought about monumental changes to the UAW agreements with Ford, GM, and Stellantis. Notably, the parties agreed to a four-year base wage freeze with 3% lump sums in the last three years of the contract. The UAW won a pension increase and product commitments that signaled job security for their members, but they also made some major concessions. Concessions included a new wage and benefit scale for workers hired after the 2007 contracts were ratified—which was called the “second tier.” These workers’ starting pay was roughly half that of the incumbent workers and they would not be eligible for the same active health care benefits, pensions, or retiree health care coverage (though they did have a smaller package of both active and post-employment benefits). Another major change was offloading the entire retiree health care cost burden to a new independent UAW Retirees Medical Benefits Trust (VEBA) that would be funded by the companies and transfer to independent management on January 1, 2010. The current UAW leadership team (president and three vice presidents) holds four of the eleven seats on the VEBA trust board of directors, with a fifth seat currently filled by a retired UAW vice president. The companies also closed eight plants as part of the 2007 deal.</p> <h2>2009: The bankruptcy rounds</h2> <p>Just two years after signing the major concessions in 2007, the Financial Crisis of 2008–09 happened, and the automakers were facing very challenging financial conditions. With the U.S. government involved in the Chrysler and GM rescue plans, the UAW and all three companies agreed to additional concessions in a contract addendum. A condition of the government assistance to Chrysler and GM was that they become “cost-competitive” with the international automakers that also produced light vehicles in the United States; this required closing a roughly $10 per hour labor cost gap with their international competitors. To do that, the UAW agreed to suspend the 2007 lump sums, COLA, and job security programs. Workers lost a holiday and their legal aid benefits, and older workers were offered buyouts and early retirement packages to make room for younger (and less costly) workers to be hired. The companies restructured their VEBA obligations by replacing cash commitments with equity. An additional provision mandated by the government was that the UAW could not strike until 2015.</p> <h2>2011: Bargaining within government constraints</h2> <p>One of the few ways a union can apply pressure on employers to reach a deal is the threat of withholding labor through a strike, and in 2011, the UAW could not strike at Ford, GM, or Chrysler under the provisions of the 2009 agreements. As a result, the contract gains were muted. The 2011 agreement contained wage increases for workers hired since 2007, but no raises for legacy workers. Some of the provisions of previous contracts that were suspended (such as the job security programs) were eliminated, while COLA remained suspended. There were more buyouts for workers hired before 2007 and no pension increases. The contract was not all concessions, however. Notably, health care coverage was improved, and the UAW won a revamped profit-sharing formula and significant product commitments that contributed to job security.</p> <h2>2015: Status quo</h2> <p>The 2015 UAW contracts with Ford, GM, and Chrysler brought the first wage increases for legacy workers since 2006. These top-tier workers received 3% wage increases in the first and third year of the agreement and 4% lump sums in the second and fourth years. Workers hired since 2007 also received wage gains and active health care benefit equity with the legacy workers at Ford and GM. The UAW won back the holiday and legal aid benefits that had been eliminated in 2009, but COLA language was completely stricken from the Ford and Chrysler agreements (it remained suspended in the GM contract). The 2015 agreement also contained significant investments in products and plants in place of a formal job security program.</p> <h2>2019: 40-day strike at GM</h2> <p>In 2019, the UAW chose GM as the lead company in the negotiations, and when they could not reach a tentative agreement by the contract expiration, the union launched a strike against the company that lasted 40 days. The resulting contract gave legacy workers the same 3% wage increases in the second and fourth years of the contract and 4% lump sums in the first and third years. Workers hired after 2007 had a defined wage progression to reach parity with legacy worker wages ($32 per hour) in four years for workers who were on the rolls at the time the contract was signed and eight years for those hired after the effective date.<sup><a href="#ftn4" id="ftnref4">4</a></sup> The post-2007 workers at Stellantis also received active health care benefit parity in this agreement. The UAW negotiated language that gave temporary workers a path to become permanent workers at Ford and GM and preferential hiring status at Stellantis. The contract also included more buyout opportunities for workers hired before 2007 and large investments in products and plants.</p> <p>My next post will explore the negotiating process for UAW and the automakers. </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> Stellantis is the current name (since 2021) of the automaker that was known as Chrysler (pre-1998), Chrysler LLC (2007–09), Chrysler Group LLC (2009–14), DaimlerChrysler (1998–2007), and Fiat Chrysler Automobiles (FCA) (2014–21).</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> According to Wards Informa.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> The sources for this section include the UAW-Ford, UAW-GM, and UAW-Chrysler/UAW-DaimlerChrysler/UAW-Stellantis agreements and contract highlights documents produced in each round of bargaining. Links to examples of the current (2019) and past (2015) contracts and highlighters can be found on these websites: <a href="https://uaw.org/uaw-auto-bargaining/fordcontract/">Ford | UAW</a>, <a href="https://uaw.org/uaw-auto-bargaining/generalmotors/">GM | UAW</a>, and <a href="https://uaw.org/uaw-auto-bargaining/stellantis/">Stellantis | UAW</a>.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> The workers who were hired after 2007 but could now reach top pay and active benefits parity were called “in-progression” workers.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/2023-uaw-contract-negotiations-with-ford-gm-and-stellantis https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/2023-uaw-contract-negotiations-with-ford-gm-and-stellantis Wed, 16 Aug 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <p style="margin-bottom: 6pt;">The U.S. automotive industry is a large and critical part of the U.S. economy, and nowhere is that more apparent than in the Federal Reserve’s Seventh District, home of the Federal Reserve Bank of Chicago.<sup><a href="#ftn1" id="ftnref1">1</a></sup><span> About 60% of the UAW members impacted by this year’s high-profile UAW labor negotiations with Ford, General Motors (GM), and Stellantis work in the Chicago Fed’s District.<sup><a href="#ftn2" id="ftnref2">2</a></sup></span><span> These three companies produce just over half of all their U.S. vehicle output, 40% of all U.S. engine plant output, and 75% of all U.S. transmission plant output in Illinois, Indiana, and Michigan—three of the five states in the Seventh District.<sup><a href="#ftn3" id="ftnref3">3</a></sup></span><span> Due to the substantial role of the unionized auto sector in the District economy, the Chicago Fed is closely monitoring the developments in automotive labor negotiations, and I provide background on the history and process of UAW talks with these three companies in a series of three blog posts. </span></p> <div class="calloutBox2023"> <p>This article is one in a series discussing UAW auto contract negotiations. Read the companion pieces here:</p> <ul class="cfedList--bulleted"> <li><a href="~/link.aspx?_id=BD4BFBF541864CA28EFF328D44863CCF&_z=z">Recent UAW Contracts with Ford, GM, and Stellantis</a></li> <li><a href="~/link.aspx?_id=A150F8E6AB1345A3873E5D38FD2A849A&_z=z">How UAW Negotiations with Ford, GM, and Stellantis Usually Work</a></li> </ul> </div> <p style="margin-bottom: 6pt;"><span>In this post, I cover the backdrop and environment for talks and what issues can and cannot be discussed in bargaining. The second post in this series will provide a summary of recent contract outcomes. And the third post will cover how contract talks <em>typically </em>work. </span></p> <p style="margin-bottom: 6pt;"><span>Every four years, the UAW and Ford, General Motors, and Stellantis sit down to hammer out a new labor agreement to cover the wages, benefits, and terms of employment for more than 150,000 workers throughout the United States.<sup><a href="#ftn4" id="ftnref4">4</a></sup> </span><span>One might think of these UAW contracts as a set of three large purchase orders to secure the labor needed to assemble future vehicles, parts, and components—contracts that are collectively worth roughly $70–$80 billion over the course of the next four years.<sup><a href="#ftn5" id="ftnref5">5</a></sup></span></p> <h2>Backdrop and environment </h2> <p style="margin-bottom: 6pt;">While many elements of this year’s labor negotiations are similar to past years, some aspects are decidedly different. The 2023 negotiations must be considered against the backdrop of:</p> <ul class="cfedList--bulleted"> <li><span>The 40-day UAW strike at GM in 2019, </span></li> <li><span>A federal investigation into union and management corruption that put a federal monitor in place to oversee the UAW’s operations and put all joint labor management programs and funds in a Taft-Hartley trust to protect against future corruption,<sup><a href="#ftn6" id="ftnref6">6</a></sup></span></li> <li><span>Installation of new UAW leadership chosen in a historic one-member, one-vote election, </span></li> <li><span>Supply chain and other pandemic-era disruptions that have limited production, </span></li> <li><span>A tight labor market marked by record low rates of unemployment, </span></li> <li><span>Over a decade of strong automaker profits (even considering lower production volumes in the past three years), and</span></li> <li><span>A rapid run-up in inflation that has eroded purchasing power and led to declines in real wages for many workers during parts of the period after the pandemic recession.</span></li> </ul> <p style="margin-bottom: 6pt;">The overall environment for this year’s talks is different, as well. </p> <p style="margin-bottom: 6pt;">Electric vehicle shift: Most notably, automakers are amid a monumental shift to producing electric vehicles (EVs). EVs do not have engines, transmissions, exhaust systems, or many of the other parts and components UAW members currently produce. The new parts in EVs—batteries, motors, e-axles, and power electronics—are often made by workers who earn lower wages and work in plants that are not unionized. The EV transition has the UAW and its members concerned about their future wages and job security.<sup><a href="#ftn7" id="ftnref7">7</a></sup> Ford, GM, and Stellantis are investing billions of dollars in the EV<span> transition—including joint venture companies to produce batteries—and will need to manage pressures on their profitability as they make fewer high-margin internal combustion engine vehicles and have not yet reached profitable scale on their EV models.</span></p> <p style="margin-bottom: 6pt;">Change in strategy and tone: The new UAW leaders have declared a sharp break from past union leadership’s strategies and seek to distance themselves from previous leadership who were charged and convicted in federal financial crimes. UAW President Shawn Fain ran on a platform of “No Corruption. No Concessions. No Tiers” that resonated with the membership who elected him. In office, Fain has taken a much more adversarial tone in his public comments than recent UAW presidents. Fain and other UAW leaders have issued strong warnings that their members are willing and prepared to strike to win their contract demands this year.<sup><a href="#ftn8" id="ftnref8">8</a></sup></p> <p style="margin-bottom: 6pt;">Pro-union sentiment, recent labor actions, and union wins: Public opinion in favor of labor unions has been rising since the Great Recession and reached a 71% approval rate in 2022—a level not seen since the mid-1960s.<sup><a href="#ftn9" id="ftnref9">9</a></sup> U.S. President Joe Biden has expressly stated his support for unionized workers, frequently declares himself “a union guy,”<sup><a href="#ftn10" id="ftnref10">10</a></sup> and has a policy agenda that aims to increase U.S. manufacturing investments and labor rights. Sectors of the economy that were hardest hit by the pandemic—most notably food service, travel, package delivery, and logistics—are seeing a rise in union organizing, labor actions, and contract wins. Labor disputes have increased in the wake of the Covid-19 pandemic, according to the U.S. Department of Labor.<sup><a href="#ftn11" id="ftnref11">11</a></sup> After a five-week strike and two failed ratification votes, UAW workers at John Deere won significant contract gains in their 2021 contract, including reinstating the cost-of-living adjustment (COLA) that had been eliminated in 2015, as well as wage, benefit, and pension gains.<sup><a href="#ftn12" id="ftnref12">12</a></sup></p> <p style="margin-bottom: 6pt;">Federal policies supportive of manufacturing investment: A trio of laws were recently enacted to promote investments in U.S. manufacturing, electrical grid, charging, and EV adoption. The Inflation Reduction Act includes manufacturer and consumer incentives for electric vehicles, the Infrastructure Investment and Jobs Act contains funding for a national network of high-speed EV chargers, and the Chips and Science Act incentivizes domestic investment in semiconductors that will be needed to make vehicles in the future—whether powered by electric batteries and motors or conventional internal combustion engines.</p> <p style="margin-bottom: 6pt;">UAW and Unifor negotiating simultaneously: Unifor—the union that represents Ford, GM, and Stellantis workers in Canada—negotiated a three-year contract in 2020, which puts them at the bargaining table at the same time as the UAW for the first time since the 2009 auto-rescue contract addendums. The two unions have similar bargaining goals. However, since both unions need future investments in their plants, they may also find themselves competing to win the commitments they are seeking.</p> <p style="margin-bottom: 6pt;">(Almost) Everyone at the table is new: While all the individuals leading 2023 UAW talks for the union and the company have expertise in negotiations, only four of the ten top bargainers have directly led national bargaining in their current roles: Ford Chairman Bill Ford, GM CEO Mary Barra, Stellantis COO Mark Stewart, and UAW-Ford Vice President Chuck Browning. </p> <h2>U.S. labor law determines what can and cannot be on the table</h2> <p style="margin-bottom: 6pt;">When a union and company negotiate a new contract, there are a set of topics that U.S. labor law categorizes as mandatory—the two sides must negotiate a satisfactory outcome for both sides in each of these areas:</p> <ul class="cfedList--bulleted"> <li>Wages and compensation: base wages, shift premiums, overtime, piece rates, bonuses (including profit or gain sharing programs), lump sums, incentives, holiday pay, paid time off, vacations, insurance, severance pay, pensions, and other items counted as compensation, such as supplemental unemployment insurance programs.</li> <li>Schedules: daily schedules, working hours, breaks, holidays, and vacation scheduling.</li> <li>Work rules: a broad category of rules including those that govern health and safety, employee discipline, monitoring, including drug or alcohol testing, smoking policies, and “any policy that may have compensation, discipline, or job security implications.” </li> <li>Work assignments and job protections: job assignments, layoffs, transfers, and recall rights.</li> <li>Grievance and arbitration: a procedure to resolve labor-management disputes.</li> </ul> <p style="margin-bottom: 6pt;">There are other topics that U.S. labor law permits to be subjects of bargaining. These include topics that may be discussed and agreed upon but either side can refuse to make them part of their agreement. These topics include provisions about how a workplace might become unionized for workers not already in the bargaining unit or at other sites in a national agreement, expanding the bargaining unit, how contracts are to be ratified, training funds, political action funds, interest arbitration, how prospective employees apply for jobs, benefits for workers who have already retired, and use of a union label on the product or service produced.</p> <p style="margin-bottom: 6pt;">Finally, there are topics that are not legal to discuss in bargaining. These generally concern management’s right to run the business, to choose suppliers and contractors, to hire and fire workers, language that would discriminate against protected classes of people, or closed-shop provisions. </p> <p style="margin-bottom: 6pt;">In the case of the UAW negotiations with Ford, GM, and Stellantis, there are several sets of negotiations going on simultaneously. First, there are the national bargaining tables at each company—where issues that are common to all workers within a company are discussed and agreed upon. Generally, these include a common wage scale at each automaker (usually very similar if not the same at all three), benefits, seniority and transfer rights, and investment and job security provisions. Then there are the local negotiations. These take place at each plant or worksite and concern the issues specific to each site. They may include topics such as work assignments within a plant, flexibility within and across job classifications, and plant amenities, such as break rooms, parking, and food services. In the United States, the national agreement and local agreements do not have to be resolved simultaneously. This differs from the situation for Unifor in Canada, where labor and management must reach an agreement on local and national contracts at the same time.</p> <p> <span>In my next post, I will provide a summary of recent auto contract negotiations.</span></p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> <span>The Seventh District is made up <span style="background: #fafcfc; color: #212529;">of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin.</span></span> </p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> <span>Federal Reserve Bank of Chicago staff estimate based on automaker employment data. Stellantis is the current name (since 2021) of the automaker that was known as Chrysler (pre-1998), Chrysler LLC (2007–09), Chrysler Group LLC (2009–14), DaimlerChrysler (1998–2007), and Fiat Chrysler Automobiles (FCA) (2014–21).</span></p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> <span>Wards Informa and S&P.</span></p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> <span>Since 2003, these contracts have renewed on a four-year cycle. Prior to 2003, contracts generally lasted for three-year terms.</span> </p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> <span>Federal Reserve Bank of Chicago staff estimate.</span> </p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> <span>In the 2019 UAW contracts with the three automakers, the funds and assets of the joint programs were placed into trusts created under the Taft-Hartley Act of 1947 to allow for greater transparency and stricter financial reporting and oversight. These funds are used for labor-management activities, joint training programs, safety, and diversity and inclusion initiatives, as well as employee assistance and tuition reimbursement programs. More information available <a href="https://www.detroitnews.com/story/business/autos/2020/06/23/uaw-training-center-reforms-seek-transparency-higher-standards/3208063001/">online</a>.</span></p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> <span>More information available online <a href="https://uaw.org/wp-content/uploads/2019/07/190416-EV-White-Paper-REVISED-January-2020-Final.pdf">here</a> and <a href="https://uaw.org/wp-content/uploads/2023/07/Ultium-White-Paper.pdf">here</a>.  </span></p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> <span>See <a href="https://apnews.com/article/uaw-ford-gm-stellantis-labor-strike-eda3b48bfdfa04e0e7254ce7681972e0">online</a>. </span></p> <p><sup><a href="#ftnref9" id="ftn9">9</a></sup> <span>See <a href="https://news.gallup.com/opinion/gallup/402497/reporter-resources-unions-labor.aspx">online</a>. </span></p> <p><sup><a href="#ftnref10" id="ftn10">10</a></sup> <span>See <a href="https://www.wsj.com/articles/joe-biden-union-guy-11618871294">online</a>. </span></p> <p><sup><a href="#ftnref11" id="ftn11">11</a></sup> <span>See <a href="https://striketracker.ilr.cornell.edu/">online</a>. </span></p> <p><sup><a href="#ftnref12" id="ftn12">12</a></sup> <span>See <a href="https://www.desmoinesregister.com/story/money/business/2021/11/17/uaw-john-deere-strike-2021-vote-results-contract-end/8619898002/">online</a>. <a href="https://www.desmoinesregister.com/story/money/business/2021/11/17/uaw-john-deere-strike-2021-vote-results-contract-end/8619898002/"></a> </span></p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/clean-vehicle-credits-recap https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/clean-vehicle-credits-recap Fri, 04 Aug 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <div class="d-none">The Inflation Reduction Act (IRA) promised strong government incentives for the purchase and manufacture of green vehicles. However, specific guidance on these incentives c ame out slowly over the course of months. </div> <div> <img src="-/media/9CB4131467054510B7E81C8B7EF392ED.ashx" alt="onurdongel via Getty Images" /> </div> <figcaption class="caption mb-4"> An electric vehicle 'refuels' from a public charging station. (Photo: onurdongel via Getty Images) </figcaption> <p>The Inflation Reduction Act (IRA) promised strong government incentives for the purchase and manufacture of green vehicles. However, specific guidance on these incentives came out slowly over the course of months. </p> <p>To help shed light on the situation, the Federal Reserve Bank of Chicago hosted a <a href="https://www.chicagofed.org/events/2023/inflation-reduction-clean-vehicles">webinar</a> on the clean energy aspects of the IRA, a wide-ranging piece of legislation passed on August 16, 2022. Joining Kristin Dziczek, a Chicago Fed policy advisor and automotive industry expert, were David Schwietert, chief policy officer for the Alliance for Automotive Innovation (the industry association for major vehicle manufacturers and leading suppliers), and Andrew Koblenz, executive vice president of legal and regulatory affairs for the National Automobile Dealers Association. </p> <p>The following six key takeaways, focusing on what consumers need to know about clean vehicles, were developed from the April webinar titled An In-Depth View of the Inflation Reduction Act’s Clean Vehicle Credits. For further detail on what Dziczek, Schwietert, and Koblenz had to say, including more on the legislation’s substantial incentives for producers, please <a href="https://www.chicagofed.org/events/2023/inflation-reduction-clean-vehicles/transcript">read the transcript</a> or <a href="https://www.chicagofed.org/events/2023/inflation-reduction-clean-vehicles">watch the video</a> from the event.</p> <ol> <strong><li style="line-height: 1.3rem;">The IRA makes tax credits available on the manufacture, purchase, and leasing of clean vehicles.</li></strong> <p>The main provisions in the act to help consumers acquire clean vehicles are known as 30D, 45W, and 25E—part of what Dziczek called the “alphabet soup” of the Internal Revenue Service (IRS). Provision 30D is a federal tax credit for up to $7,500 available to buyers who purchase or lease a new clean vehicle. (Clean vehicles are defined as battery electric vehicles, plug-in hybrid vehicles, and fuel cell electric vehicles. A tax credit reduces the amount of taxes an individual owes when they file their taxes). There are many requirements for both consumers and vehicles to qualify for 30D, including North American assembly, price caps for the vehicle ($55,000 for cars and $80,000 for trucks, SUVs, CUVs, and vans), income caps for the buyer ($300,000 adjusted gross income, or AGI, for married filers who are filing jointly or $150,000 AGI for single filers), battery component and critical minerals requirements, and a prohibition on use of inputs from countries that are considered “foreign entities of concern.” According to Schwietert, only 43% of electric vehicles for sale in the United States were eligible for the credit in April 2023. </p> <p>Similar to the 30D provision, section 45W is a tax credit for up to $7,500, but for those acquiring a clean vehicle for commercial purposes. In contrast to section 30D, 45W has fewer requirements. “There’s no income cap for the acquiring person, there’s no North American assembly requirement, there’s no minerals limitation, there’s no battery component limitation, and there’s no ‘entity of concern’ limitation,” said Koblenz. “None of those are present in [45W].” However, the vehicle must be for business use. </p> <p>Even so, since leasing companies qualify for 45W incentives and can choose to pass some or all of the $7,500 benefit through to consumers who lease vehicles, this provision offers a way to access the incentives for vehicles or consumers not qualifying for 30D credits. “All vehicles technically qualify under 45W,” said Schwietert.</p> <p>Section 25E provides incentives for used vehicle purchasers and shares many of the same requirements as 30D, including income caps (half of the AGI limits for the acquisition of a new vehicle) and price caps ($25,000). There are two additional requirements for 25E: The vehicle must be at least two years old, and it must be the first sale as a used vehicle after passage of the law in August 2022. </p> <strong><li style="line-height: 1.3rem;">Vehicles are eligible for the $7,500 30D consumer credit only if they meet certain battery component and critical mineral requirements. </li></strong> <p>The tax credit rules are written to encourage growth in U.S. participation in all aspects of the clean vehicle industry. So, half of the $7,500 30D consumer tax credit comes from meeting the content requirements for critical minerals and the other half comes from meeting the content requirements for battery components, which are “the active materials inside a battery that help convert chemical energy into electrical energy,” said Dziczek. The requirement regarding critical minerals does not go into effect until 2025, starting at 40% of the value of the critical minerals contained in the battery and rising to 80% by 2027. The minerals must be extracted or processed in the United States or a free trade partner of the United States. The critical and other minerals listed in the law make up about 40% of the elements in the periodic table and include 48 elements and two compounds, noted Dziczek. An increasingly larger share of battery components must be assembled in North America, starting at 50% in 2024 and rising to 100% by 2029. </p> <p>The IRA also requires that the battery components be assembled in North America starting in 2024, but there is an additional requirement related to countries the U.S. State Department labels “foreign entities of concern.” Dziczek shared the department’s definition of the term: a country that is “involved in torture, prolonged detention without charges, forces, disappearance, or other flagrant denials of life, liberty, and security of persons.” This requirement is still awaiting further guidance and clarification, she said, although to qualify for the credits, vehicles must not contain battery components or critical minerals processed, extracted, or recycled by one of these countries come 2025. A key issue here is that China is on the list of countries of concern, and it dominates the battery supply chain and battery manufacturing. </p> <strong><li style="line-height: 1.3rem;">There is a federal website that lays out the key information consumers need to know about clean vehicle credits in simple language. </li></strong> <p><a href="https://fueleconomy.gov/">Fueleconomy.gov</a> bills itself as “the official U.S. government source for fuel economy information,” and in addition to more general information such as trip calculators and lists of most efficient vehicles, it lists which vehicles qualify for new federal tax credits for clean vehicles. The site helps to “address some of the confusion between consumers or dealers in terms of the potential vehicles that qualify” for the IRA’s tax credits, Schwietert said. In other words, site visitors plug in a make and model, and the website tells them whether the vehicle qualifies for no credit, $3,750, or the full $7,500—and there’s also an FAQ that details the tax credits’ other requirements. </p> <p>Eventually, the website should be even more precise in informing consumers whether a particular car they are considering qualifies for the credit, said Koblenz. Being able to look up a car by vehicle identification number (VIN) would provide that specificity so the shopping process is as simple and clear as possible for the consumer. “Right now, it’s at the make-model level, but the information is coming in from the [manufacturers] on a VIN basis,” he said. “And we hope that soon the IRS can move [the website] to a VIN tool.”</p> <strong><li style="line-height: 1.3rem;">Starting in 2024, consumers should be able to get the value of the clean vehicle tax credit directly from the dealer. </li></strong> <p>A challenge with 30D, panelists observed, is there is a three- to 15-month wait period before a purchaser can actually receive their credit, because it reduces the taxpayer’s liability when they file federal income taxes for the year in which they bought the vehicle. “Not everybody in the world has the cash flow that enables them to do that,” Koblenz said.</p> <p>“Under the IRA, starting on January 1, 2024, there is a provision that allows the value of the credit under 30D to be transferred, shifted to the dealer so that the dealer can put it in the deal at the dealership,” he said. “The dealer is a conduit through which the value is passed to the consumer at an earlier point in time.”</p> <p>While this provision will eliminate that wait time for consumers, there is still uncertainty in how the IRS is going to establish a set of rules that allows this to ensure dealers are reimbursed properly, according to Koblenz. Dealers still need guidance on “what information is going to have to flow between the consumer, the dealer, and the IRS for that to happen,” he said.</p> <strong><li style="line-height: 1.3rem;">There is a need for charging infrastructure across the U.S.</li></strong> <p>With the rise of electric vehicles comes an increasing need for charging stations. According to Schwietert, while 80% of charging happens at home or work, easily accessible public charging is necessary to alleviate “range anxiety” (the fear of running out of power in an EV before getting to a charging station) or simply to be able to make long trips. To accomplish this, Congress included $7.5 billion in the 2022 Infrastructure Investment and Jobs Act (a law that is separate from the IRA) to create a seamless network of charging stations along the highway system. “It's one thing to produce vehicles,” said Schwietert. “But we also need to ensure those vehicles can be accessibly refueled, recharged, refilled.” </p> <strong><li style="line-height: 1.3rem;">Some questions remain unanswered. </li></strong> <p>There are additional issues that need to be addressed, which Schwietert and Koblenz briefly went over at the end of the webinar. Schwietert said he still wants to know what the process will be for validating critical mineral and battery component thresholds. Manufacturers will need to provide this information to both the general public and the IRS for a car to be categorized as eligible for a credit.</p> <p>In addition to his previously mentioned concerns about the usefulness of the website and the 2024 rule that will let dealers factor the tax credit into the vehicle sale, Koblenz said he thinks the government should clarify the date on which a vehicle’s eligibility for the credits is determined. Currently, the meaningful date is when possession of the vehicle is transferred to the consumer, which is more of a “use-by” date than a “born-on” date, he explained. Koblenz said he believes it is more consumer friendly and less confusing to have a vehicle’s tax credit eligibility be determined by the set of requirements in place when the car’s manufacture was complete; otherwise, vehicles manufactured in one year may not qualify for the incentives when requirements become more stringent in the next calendar year. </p> <p>An important continuing issue that Dziczek identified is the need for more clarity from the government on how the “foreign entity of concern” standard will be applied. </p> </ol> <h2>To explore further</h2> <p>Go to <a href="https://www.chicagofed.org/events/2023/inflation-reduction-clean-vehicles">this page</a> to watch the video replay, view presenters’ slide decks, and read the transcript.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/ui-claims-google-trends https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/ui-claims-google-trends Thu, 01 Jun 2023 00:00:00 -0500 <div class="cfedContent__text"> <p>Initial unemployment insurance (UI) claims are a weekly measure from the U.S. Department of Labor of how many new people have filed for unemployment benefits. A <a href="https://cepr.org/voxeu/columns/green-shoot-or-dead-twig-can-unemployment-claims-predict-end-american-recession">well-known leading indicator</a> and one of the few official statistics released at a weekly frequency, initial UI claims are carefully monitored by economists for signs of turning points in economic activity. That said, they are at best an imperfect measure of turning points for several reasons: The information comes out with a lag, it is sensitive to changing seasonal patterns, and it is subject to revision. Given these challenges, researchers often turn to auxiliary data sources to help uncover the underlying trend in initial UI claims. One such alternative data source that has been used extensively in recent years for this purpose is internet search data.</p> <p>Google’s <a href="https://trends.google.com/trends/">Trends</a> tool analyzes the popularity of related search terms, called topics, over both space and time. Previous research has highlighted how Google Trends can be utilized to effectively predict in real time, or nowcast, a range of less frequently available economic statistics, including initial UI claims.<sup><a href="#ftn1" id="ftnref1">1</a></sup> The basic intuition for using Google Trends data for this purpose is that the tool provides timely information on internet searches people make related to the process of determining how to file a UI claim. In this blog post, we look at recent initial UI claims alongside the Google Trends unemployment topic data and discuss what they may tell us about the current state of the labor market. </p> <h2>Recent developments in UI claims and Google Trends </h2> <p>Figure 1 shows non-seasonally adjusted initial UI claims and the Google Trends unemployment topic data for the weeks of January 1, 2022, through May 6, 2023, with each series indexed to its sample mean over this period. It offers motivation for why researchers use this Google Trends topic to predict initial UI claims, as the two series closely follow each other. From January through October 2022, both initial UI claims and the Google Trends unemployment topic data steadily declined, with the labor market enjoying a record-breaking recovery in the aftermath of the recession caused by the Covid-19 pandemic. From October 2022 to May 2023 there was an uptick in both series, but the initial increase was considerably less pronounced in the Google Trends data, with initial UI claims gradually converging to this lower level over time. </p> <h3>1. Initial UI claims and Google Trends unemployment topic, January 2022–May 2023</h3> <figure> <img alt="Figure 1 is a line graph depicting the Google Trends Index and UI Claims Index from January 8, 2022 to May 6, 2023 at a weekly frequency. Each figure is indexed to equal 100 at its sample mean, respectively. The y-axis has the index ranging from 50 to 200 in increments of 50. The x-axis has the labeled dates going from January 1, 2022 to April 1, 2022 in increments of 3 months. From January 2022 to October 2022, both lines see a sharp decline. From October 2022 to May 2023, both lines uptick and then flatten." src="-/media/E0423583A00E4F77845D9AA56338C675.ashx" /> <figcaption class="caption"> Sources: U.S. Department of Labor <a href="https://www.dol.gov/ui/data.pdf">Weekly Release</a> and Google Trends unemployment topic data. </figcaption> </figure> <p>At face value, the evidence presented in figure 1 aligns closely with the conclusions from our previous research (Aaronson et al., <a href="https://doi.org/10.21033/wp-2020-10">2020</a>, <a href="https://doi.org/10.1016/j.ijforecast.2021.04.001">2022</a>), highlighting a strong amount of co-movement between the two series. Tracking the Google Trends topic on a week-to-week basis should therefore be a useful guide for judging the underlying trend in the noisier initial UI claims data. On this basis, some of the recent upward movement in initial UI claims should be taken with a grain of salt,<sup><a href="#ftn2" id="ftnref2">2</a></sup> as the Google Trends data has largely moved sideways in the last several months even as initial UI claims have edged higher. </p> <p>However, the fact that previous research studying this relationship has focused on pre-pandemic periods makes it reasonable to question whether the relationship continues to hold post-pandemic. For instance, the pandemic recession led to dramatic changes in the UI system, such as extending the eligibility of and length of time an individual could be on unemployment insurance. While these changes have since expired, it is possible that this lived experience and any changes in how individuals search for information about UI using Google may have remained. Furthermore, the pandemic recession was one of the sharpest and most devastating contractions in the U.S. labor market in recent history. It is possible that this experience permanently shifted how individuals engage with the take-up of UI. </p> <p>All of these concerns remain highly relevant for the models researchers have used in the past to predict initial UI claims with Google Trends. So, how comfortable should we be that the historical relationship will continue to hold? To answer that question, we provide below some updated evidence from the model of Aaronson et al. (2020, 2022). </p> <h2>Using hurricanes to model UI claims and Google Trends</h2> <p>Aaronson et al (2020, 2022) showed that major hurricanes provide a unique opportunity to estimate how Google searches for terms related to unemployment can be translated into a prediction of future initial UI claims. The damage that major hurricanes cause to the labor market resembles in many ways what we see during recessions. But unlike recessions, which through media coverage alone can stimulate internet searches related to unemployment, hurricanes tend to prompt mostly UI-related searches rather than broad unemployment-related searches. After landfall of a hurricane, unemployment-related search on Google is much more likely to be related to the process of filing a UI claim than other factors, as well as more likely to lead to the eventual take-up of UI. In this sense, hurricanes provide what econometricians refer to as a natural experiment that can be used to estimate the connection between UI take-up and internet search. </p> <p>The hurricanes featured in Aaronson et al. (2020, 2022) all occurred before the pandemic recession. In September 2022, however, Florida was devasted by Hurricane Ian. A category 5 hurricane, Ian made its initial landfall on September 28 near Punta Gorda, FL, and left a path of destruction that made it the third-costliest weather disaster on record and the deadliest hurricane to strike the state of Florida since 1935. As the first significant hurricane to have occurred since the pandemic, Hurricane Ian allows us to investigate whether the relationship between search behavior on Google for unemployment terms and subsequent initial UI claims in the state of Florida was any different than earlier events.</p> <p>To test this, we collect data on non-seasonally adjusted initial UI claims and Google Trends for both Florida and the entire U.S. in each week for six months prior and six months after Hurricane Ian made landfall. For each series, we then take the log ratio of the series in the state of Florida relative to the U.S. and subtract the annual average over this sample period. This allows us to measure the share of initial UI claims and Google Trends intensity in the state of Florida in each week relative to the U.S. leading up to and following landfall of the hurricane, which mirrors the analysis of Aaronson et al. (2020, 2022).</p> <p>Figure 2 displays the two measures in a scatter plot, with the line corresponding to their elasticity estimated by linear regression. With an estimated elasticity of 1, Hurricane Ian is well within the range of estimates for the pre-pandemic hurricanes Katrina, Sandy, and Harvey found in Aaronson et al. (2022), and which now round out the top four hurricanes by measure of overall monetary damage for the U.S. In other words, utilizing the same methodology with a post-pandemic hurricane, we find that the relationship between initial UI claims and the Google Trends unemployment topic data is unchanged: A 1% increase in unemployment-related search on Google tends to lead to a 1% increase in initial UI claims.</p> <h3>2. Hurricane Ian</h3> <figure> <img alt="Figure 2 displays a scatter plot with a line of best fit. The y-axis contains the log ratio of initial UI claims in the state of Florida relative to the U.S. less the annual average over the sample period. It labels from -0.5 to 1 in increments of 0.5. The x-axis contains the log ratio of Google Trends in the state of Florida relative to the U.S. less the annual average over the sample period. It labels from -0.2 to 0.4 in increments of 0.2. Each dot represents a week, spanning 6 months prior and 6 months post the Hurricane event. The dots formulate a cloud that indicates a positive linear relationship. This is represented by the line of best fit through the scatter plot, which has a slope of approximately 1. " src="-/media/EB482909144C4311ADB7AFBD8DAFA7E4.ashx" /> <figcaption class="caption"> Sources: U.S. Department of Labor <a href="https://www.dol.gov/ui/data.pdf">Weekly Release</a> and Google Trends unemployment topic data. </figcaption> </figure> <h2>Conclusion</h2> <p>Taken together, the evidence presented here suggests that the relationship between initial UI claims and Google Trends has continued to hold post-pandemic. What does this imply for the current situation in which initial UI claims have increased but the Google Trends unemployment topic has not? While the two measures of labor market health do not always align, over time they do tend to follow the same trend. This makes the deviations that do occur of some interest and worthy of further study. While not particularly large, the current deviation is one such example. As the labor market recovery continues to evolve in 2023, in our view Google Trends remains an alternative data source worth watching closely. </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> For example, see <a href="https://doi.org/10.1111/j.1475-4932.2012.00809.x">Hyunyoung Choi and Hal Varian, 2012</a>, “Predicting the present with Google Trends,” Economic Record, Vol. 88, No. s1, June, pp. 2–9; <a href="https://doi.org/10.1016/j.ijforecast.2021.01.001">Larson, W. and T. Sinclair, 2022</a>, “Nowcasting unemployment insurance claims in the time of COVID-19,” International Journal of Forecasting, Vol. 38, No. 2, pp. 635–647; and <a href="https://doi.org/10.1016/j.ijforecast.2021.04.001">Daniel Aaronson et al., 2022</a>, “Forecasting unemployment insurance claims in realtime with Google Trends,” International Journal of Forecasting, Vol. 38, No. 2, pp. 567–581.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> <a href="https://www.cbsnews.com/boston/news/unemployment-fraud-massachusetts-benefits-jobs-numbers-data/">Recent reports</a> have documented how upticks in fraudulent UI claims in Massachusetts have deceptively inflated national claims numbers. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/rural-economic-development-conference-2022-part2 https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/rural-economic-development-conference-2022-part2 Thu, 25 May 2023 00:00:00 -0500 <div class="cfedContent__text"> <p>This is the second of two blog posts summarizing <a href="~/link.aspx?_id=71936B9F8B1E494180C9B66E87D235C0&_z=z">Creating Conversations on the Challenges and Opportunities Facing Rural Economic Development</a>—a conference cohosted by the Federal Reserve Bank of Chicago and the W. E. Upjohn Institute for Employment Research on September 28–29, 2022, in western Michigan.</p> <p>As explained in greater detail in the <a href="~/link.aspx?_id=566C097C646C41278376F650F19DC0B6&_z=z">first blog post</a>, the conference featured two major segments—one at Montcalm Community College (MCC) in Greenville, Michigan, and the other at the primary event site in Grand Rapids, Michigan. Moreover, the conference was structured to include practitioner responses to each of the research papers presented. This format yielded robust discussions, which provided momentum to continue related policy work and research. Both this blog post and the previous one identify overarching themes from the event and summarize the researchers’ and practitioners’ findings.<sup><a href="#ftn1" id="ftnref1">1</a></sup> Videos of each of the conference panels are <a href="~/link.aspx?_id=71936B9F8B1E494180C9B66E87D235C0&_z=z">available online</a>.</p> <p>This second post summarizes panel discussions on recent economic development efforts in the rural Midwest, the importance of rural roadways and other infrastructure, and ways to improve rural areas’ access to key services, such as health care and broadband internet. This post also goes over how some local governments and nonprofits have been able to help maintain or raise the quality of life in rural communities by overcoming the challenges associated with their own capacity constraints—which the first post covered in more depth.</p> <h2>Assessing rural economic development efforts</h2> <p>A <a href="https://www.stlouisfed.org/open-vault/2022/may/building-rural-capacity-inclusive-recovery">May 2022 St. Louis Fed blog post</a> listed infrastructure, public services, and workforce development as key priorities for rural economic development over the coming years. Infrastructure improvements in rural areas can be overlooked, even though they often have outsized impacts on rural economies. <a href="https://www.transportation.gov/rural">Over two-thirds of the United States’ total lane-miles</a> (the number of lanes multiplied by the roadway length) in 2020 were in rural areas, yet a little <a href="https://data.bts.gov/stories/s/Rural-Access-to-Intercity-Transportation/gr9y-9gjq/">over one-fifth of all people living in rural areas</a> had no access to intercity bus transportation in 2018. The lack of good roadway infrastructure and public transportation options primarily affect those with low and moderate incomes who must drive (or must be driven) to work or school in rural areas.</p> <p>Improvements in broadband internet access—which will require further investments in broadband infrastructure to build out networks—are vital for advancing rural economies. In 2020, <a href="https://www.usda.gov/broadband">over 20% of people living in rural areas</a> did not have access to reliable broadband. Nowadays broadband access is critical given the increased number of people who engage in school, work, and community activities via the web. </p> <p>Rural areas need not only greater broadband internet access, but also other technological advancements in order to improve their economic conditions. Johnny Park (CEO, Wabash Heartland Innovation Network) and Stacy Nimmo (executive director, Red Wing Ignite) described their experiences with introducing new technologies—as well as new working approaches that leverage broadband and other technologies—to rural communities. Park shared that his firm has been working to bring rural Indiana advancements in farming technology, including technology automating traditionally labor-intensive agricultural work. Nimmo said that while her region—made up by Red Wing, Minnesota, and the surrounding rural areas—has had issues with gaining greater broadband internet access, it has found success through different tech programs that have introduced rural places to innovations such as coworking spaces with high-speed internet connections. Advancements like these provide people living in rural areas the chance to work and learn without radically altering the characteristics that make a place rural or diminishing the benefits from living in the countryside. </p> <p>As nationwide and worldwide shocks affect the way people work, programs that bolster access to work (like those that create coworking spaces) and workforce training programs are important. Economic and financial crises can have disparate impacts on the workforce in rural versus urban areas—for instance, the labor force participation rate among adults aged 25–64 <a href="https://www.ers.usda.gov/topics/rural-economy-population/employment-education/rural-employment-and-unemployment/">declined three times more</a> in rural areas than in urban areas over the period 2007–19 (i.e., during the Great Recession and the following decade). The threat of major employers leaving rural areas—either for nearby urban areas or different regions of the country altogether—often looms. Therefore, efforts to maintain a viable workforce and employers are a large part of rural economic development. </p> <p>One MCC panel discussed a model of what a dedicated school-to-workforce pipeline looks like in a rural area. Susan Hatto (dean for industrial education and workforce training, Montcalm Community College) described the current challenges facing students at MCC and in the Greenville area. Transportation and access to broadband internet are big issues for students—with some working from the school’s parking lot after hours and over weekends to access its Wi-Fi signal. Andrew Nielsen (instructor, Montcalm Community College) spoke about his experiences growing up in Montcalm County, returning to MCC to pursue an apprenticeship, and gaining employment in the area by following that educational track. He now teaches welding at MCC along with Peter Murr (instructor, Montcalm Community College). Murr said that as a welding instructor, he saw a lack of marketable skills among many MCC students. According to Murr, MCC now coordinates with local employers to determine the skills needed for students to get jobs with these employers after they graduate; in addition, MCC works with the employers to produce measures of consistency in skill standards. Rich Ring (manager of human resources safety, Greenville Tool & Die) described the collaborative efforts of area employers and MCC to provide a clear education-to-employment track for the college’s students. Local employers, including manufacturers, work closely with Hatto to ensure that students are aware of apprenticeship opportunities and to help tailor MCC’s curriculum, so that students can get the training they need to find employment with them after graduation. </p> <p>The partnership between MCC and local employers serves as a good example of what can be achieved through strong collaborations that build a robust employment base in a rural area. However, there are still challenges with assuring students that they can live and work affordably and sustainably in a rural area like Montcalm County. Olivia Blomstrom (assistant manager, business solutions, West Michigan Works!), Terri Legg (executive director, United Way Montcalm–Ionia Counties), and Travis Alden (senior director of community development, The Right Place) discussed organizational capacity constraints, similar to the ones described for local governments by Dood and Falcon (as summarized in the first blog post). They, along with Dood and Falcon, emphasized that day-to-day governing—including addressing problems arising from insufficient housing, broadband internet access, and transportation options—can make it challenging for them to find the time to write those critical grant applications, especially given their staffing constraints. Housing was one issue that stood out to Legg. Although rural areas engage with economic development initiatives, said Legg, there is often not enough housing stock for retirees, working-age people, or younger people who want to live and work in rural areas. Legg asserted the Covid-19 pandemic has made rural housing less affordable for locals mainly because so many people from cities moved into rural areas in 2020–21 but continued to work for employers based in urban areas such as Grand Rapids, retaining their relatively higher salaries. </p> <p>Several academics shared their research about rural economic development programs, the local economic impact of rural infrastructure investments, and rural–urban labor market dynamics. Andrew Van Leuven (assistant professor, Oklahoma State University) presented his research on the <a href="https://www.mainstreet.org/mainstreetamerica/theprograms">Main Street America</a> program and its impact on small-town business districts.<sup><a href="#ftn2" id="ftnref2">2</a></sup> His results ultimately showed disparate effects across Midwest towns. Towns in Iowa reaped economic benefits as a result of participating in the program, whereas those in Wisconsin, Michigan, and Ohio saw little benefit from joining the program. Van Leuven said that there is more research to be done on why Iowa might have differed from other Midwest states and had a higher success rate with Main Street America. However, he suggested it might have to do with Iowa having fewer large cities and thus small-town Main Streets being relatively more important to that state. David Albouy (professor, University of Illinois Urbana–Champaign) presented his research on the value of public infrastructure in rural and urban places. He said his research shows that public infrastructure increases employment in urban counties and property values in rural counties.<sup><a href="#ftn3" id="ftnref3">3</a></sup> Christiana McFarland (research director, National League of Cities) shared her research on industry clusters, which shows that local employment grows faster when that employment is part of a regional industry cluster.<sup><a href="#ftn4" id="ftnref4">4</a></sup> Oudom Hean (assistant professor, North Dakota State University) presented a paper suggesting that growth in technology in urban areas leads to worse labor market performance in the surrounding rural areas, which is partially due to brain drain.<sup><a href="#ftn5" id="ftnref5">5</a></sup> As McFarland’s research shows, a rural area’s labor force can benefit from being part of an industry cluster (normally) centered in an urban area. However, Hean’s research shows that overall labor force growth in an urban area can lead to worse labor market outcomes in rural areas because of the competition from the urban area. This is an example of how rural economic development issues are not always so straightforward to address. </p> <p>Practitioners with experience in rural economic development and infrastructure investment responded to the research. Jeremy Solin (co-owner, Tapped Maple Syrup, and global affiliate scholar/instructor, University of Wisconsin–Stevens Point) shared his experience working with the Main Street Program in Stevens Point, Wisconsin. He said that the program gave downtown Stevens Point long-lasting credibility and a sort of revival. Solin noted that one negative aspect of the program might have been its rigid structure. In his experience, many successful programs adapt their structure to meet the needs of the local community. </p> <p>Some practitioners at the conference had worked with large governing bodies, such as regional development organizations or multicounty groups, to pass infrastructure and economic development initiatives. Kristin Pruitt (president, Lake City Bank), Neil Sheridan (executive director, Michigan Townships Association), and Raymond Lai (executive director, McLean County Regional Planning Commission in Illinois) all spoke about their experiences working with such governing bodies. States and localities within a region have been increasingly working together on regional economic development programs, especially because some state and local funding is dedicated for regions rather than individual local governments of counties or townships. As a region’s localities work together to pursue state funding, they often gain opportunities to identify their comparative strengths and weaknesses, recognize industry clusters, and move forward economically together. Such regional development efforts can help alleviate some capacity problems as rural towns pool their resources and collaborate with urban areas. Along with pooling resources with urban areas to advance economic development goals, some rural places have had success increasing access to medical care in similar ways.</p> <h2>Improving access to key services and raising the quality of life</h2> <p>Having reasonable access to key services such as health care is not a given in some rural areas because of their physical remoteness from medical facilities. Indeed, health care can be downright difficult to access in rural areas because of the “scarcity of services, a lack of trained physicians, insufficient public transport, and poor availability of broadband internet services.”<sup><a href="#ftn6" id="ftnref6">6</a></sup> The U.S. Department of Agriculture’s <a href="https://ers.usda.gov/amber-waves/2022/august/the-most-rural-counties-have-the-fewest-health-care-services-available/">Economic Research Service</a> noted that rural counties had “fewer health care facilities and were more likely to have health professional shortage areas” than metro areas. Xiaochu Hu (research manager of workforce studies, Association of American Medical Colleges) presented a paper on why physicians choose to practice in rural areas and what incentives and policy initiatives might help increase the number of physicians who work in rural areas.<sup><a href="#ftn7" id="ftnref7">7</a></sup> Where physicians grew up and where they got their medical training are both significant factors in their decision to practice in a rural area; more specifically, if physicians have a rural upbringing and their medical training has been in a rural setting, then they’re more likely to practice medicine in a rural place. Because of declining enrollments in rural medical schools, many of these institutions try to recruit and admit students who plan to remain in rural areas after their medical training. Marie Barry (director of community economic development, Rural Wisconsin Health Cooperative) and Lydia Watson (president and CEO, MyMichigan Health) are experts in the rural health care sector, and they responded to Hu’s research. Both touched on existing programs that encourage doctors to practice in rural areas. And based on their own experiences in the field of health care, they agreed with Hu’s finding that doctors most frequently remain in rural areas if they are originally from rural areas themselves. Barry and Watson also pointed out that there are initiatives to share health care and ambulance services across hospitals and other medical facilities—which can be helpful to physically isolated rural communities. </p> <p>There were some research papers that focused on the relationship between economic development and the quality of life in rural areas. These papers demonstrated the complexity of rural economic development efforts—in that they could either lower or raise the quality of life: Both underdeveloping (e.g., by not providing enough services) and overdeveloping (e.g., by destroying the natural beauty of the countryside with capital investments) can hurt the local rural economy. J. Tom Mueller (research assistant professor, University of Oklahoma) presented a paper linking “natural resource dependence” (meaning a local economy’s overspecialization in a natural resource’s sector) and nonmetropolitan economic prosperity.<sup><a href="#ftn8" id="ftnref8">8</a></sup> He explained that nonmetropolitan areas’ natural resource development takes one of two forms—the “extractive” form (e.g., oil drilling, mining, or logging) and “nonextractive” form (e.g., tourism and real estate). According to Mueller’s paper, there is some evidence from the 2000–15 period that indicates that while low levels of extractive development were beneficial to nonmetropolitan areas, higher levels of specialization in either form of natural resource development were associated negative outcomes for some measures of economic prosperity—specifically, lower per capita income and higher rates of poverty. Xue Zhang (postdoctoral scholar, Syracuse University) presented a research paper suggesting that as people age, they increasingly value the characteristics of rural communities, like active civic and social engagement among residents and easy access to a natural environment.<sup><a href="#ftn9" id="ftnref9">9</a></sup> Such features are as important as economic development strategies, if not more so, for drawing people to rural areas and convincing them to stay, Zhang contended. Jeremy Solin (who is the co-owner of Tapped Maple Syrup) stated that people who are civically and socially engaged in their local communities and also actively involved with <a href="https://www.futureoffood.ox.ac.uk/what-food-system">food systems</a> usually gain a greater sense of place, which spurs them on to make further personal investments in their communities.</p> <h2>Conclusion</h2> <p>This rural economic development conference was originally scheduled to be held in 2020, but those plans were upended by the Covid-19 pandemic. Over the course of the pandemic, the inequalities between rural and urban areas—especially in regard to health care and broadband internet access—were exacerbated. Nonmetropolitan areas had <a href="https://rupri.public-health.uiowa.edu/publications/policybriefs/2020/COVID Longitudinal Data.pdf">higher cumulative mortality rates on average</a> than metropolitan areas during the pandemic. As many panelists described during the conference, it can be difficult to access health care from rural areas. Additionally, metropolitan areas saw a <a href="https://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2022/03/23/the-pandemic-prompted-people-to-move-but-many-didnt-go-far">surge in outmigration</a> to suburban, <a href="https://www.census.gov/programs-surveys/metro-micro/about.html">micropolitan</a>, or rural areas as people sought more space during Covid-19 lockdowns. This put upward pressure on home prices in rural regions and decreased the stock of affordable housing for some of the rural workforce. As economic development agencies increasingly market their respective areas to try to attract large employers to relocate to their areas, the shortage of affordable housing is highlighted as an issue to work on. The pandemic also underscored the importance of essential workers, who were not able to work remotely throughout much of the pandemic. Many of the essential jobs included manufacturing jobs, and therefore, some rural manufacturing workers like those in Montcalm County, Michigan, were adversely affected. For those who were able to do work or attend school from home, the pandemic made clear the importance of broadband internet access. </p> <p>Indeed, the pandemic turned the spotlight on a good many of these issues. This has led to some funding from the federal government to help address the needs of rural communities. For instance, the Bipartisan Infrastructure Deal (Infrastructure Investment and Jobs Act) has a specific high-speed internet fund for rural areas, and the American Rescue Plan Act has various funds and grants for providing housing, food, education, and health care to rural areas. As a result of the national attention paid to rural areas—as well as the wealth of research presented at this conference and produced over the pandemic—there is now greater financial support for economic development practitioners across the Midwest and the rural communities they serve. Yet there is still much more work to be done. </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> In this post, the panelists’ titles and affiliations reflect their roles as of May 2023, when this blog post was composed; some of their titles and affiliations are different from what they were in late September 2022, when the event was held.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> Andrew J. Van Leuven, 2022, “The impact of Main Street revitalization on the economic vitality of small-town business districts,” <cite>Economic Development Quarterly</cite>, Vol. 36, No. 3, August, pp. 193–207. <a href="https://doi.org/10.1177/08912424211038060">Crossref</a></p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> David Albouy and Heejin Kim, 2022, “The value of rural and urban public infrastructure,” <cite>Economic Development Quarterly</cite>, Vol. 36, No. 3, August, pp. 177–192. <a href="https://doi.org/10.1177/08912424221112074">Crossref</a></p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> Christiana K. McFarland and Erica H. Grabowski, 2022, “Local employment impacts of connectivity to regional economies: The role of industry clusters in bridging the urban-rural divide,” <cite>Economic Development Quarterly</cite>, Vol. 36, No. 3, August, pp. 317–328. <a href="https://doi.org/10.1177/08912424221094496">Crossref</a></p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> Oudom Hean and Mark D. Partridge, 2022, “The impact of metropolitan technology on the non-metropolitan labour market: Evidence from US patents,” <cite>Regional Studies</cite>, Vol. 56, No. 3, pp. 476–488. <a href="https://doi.org/10.1080/00343404.2021.1935841">Crossref</a></p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> N. Douthit, S. Kiv, T. Dwolatzky, and S. Biswas, 2015, “Exposing some important barriers to health care access in the rural USA,” <cite>Public Health</cite>, Vol. 129, No. 6, June, pp. 611–620. <a href="https://doi.org/10.1016/j.puhe.2015.04.001">Crossref</a></p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> Xiaochu Hu, Michael J. Dill, and Sarah S. Conrad, 2022, “What moves physicians to work in rural areas? An in-depth examination of physician practice location decisions,” <cite>Economic Development Quarterly</cite>, Vol. 36, No. 3, August, pp. 245–260. <a href="https://doi.org/10.1177/08912424211046600">Crossref</a></p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> J. Tom Mueller, 2022, “Natural resource dependence and rural American economic prosperity from 2000 to 2015,” <cite>Economic Development Quarterly</cite>, Vol. 36, No. 3, August, pp. 160–176. <a href="https://doi.org/10.1177/0891242420984512">Crossref</a></p> <p><sup><a href="#ftnref9" id="ftn9">9</a></sup> Xue Zhang, 2022, “Linking people’s mobility and place livability: Implications for rural communities,” <cite>Economic Development Quarterly</cite>, Vol. 36, No. 3, August, pp. 149–159. <a href="https://doi.org/10.1177/08912424211045916">Crossref</a></p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/rural-economic-development-conference-2022-part1 https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/rural-economic-development-conference-2022-part1 Thu, 25 May 2023 00:00:00 -0500 <div class="cfedContent__text"> <p>This is the first of two blog posts summarizing <a href="~/link.aspx?_id=71936B9F8B1E494180C9B66E87D235C0&_z=z">Creating Conversations on the Challenges and Opportunities Facing Rural Economic Development</a>—a conference cohosted by the Federal Reserve Bank of Chicago and the W. E. Upjohn Institute for Employment Research on September 28–29, 2022, in western Michigan.</p> <p>The conference featured two major segments. The first segment was a field trip to Montcalm Community College (MCC) in Greenville, Michigan—located over 30 miles away from the conference base in Grand Rapids. At the college, panels of MCC leaders and community leaders from Montcalm County spoke about their local rural development challenges. The second segment, which was held at the primary event site in Grand Rapids, featured several panels of researchers and practitioners who discussed a host of issues related to rural economic development—including how to define rural areas and how to raise the quality of life in these places, for instance, by improving their access to broadband internet and health care.</p> <p>The conference was structured to include practitioner responses to each research paper presented. This gave the audience—and the researchers themselves—plenty of opportunities to place the research within the context of policy decisions and to consider the practical applicability of the research results. This approach also provided a way for practitioners from different regions to learn about different approaches to addressing similar rural development issues facing them locally. This format yielded robust discussions, which provided momentum to continue related policy work and research. Both this blog post and the <a href="~/link.aspx?_id=B0DBC512B82842CA942EF4C0614D26A0&_z=z">follow-up post</a> identify overarching themes from the event and summarize the researchers’ and practitioners’ findings. Videos of each of the conference panels are <a href="~/link.aspx?_id=71936B9F8B1E494180C9B66E87D235C0&_z=z">available online</a>.</p> <p>This first post focuses on why it is difficult but vital for policymakers and researchers to define the term <i>rural</i>. One of the key issues facing policymakers and researchers when working with rural communities is <a href="~/link.aspx?_id=B3EDFDB48D634685AB10177480F77125&_z=z">how best to define rural</a>, which involves demarcating rural, suburban, and urban areas. This question has important policy implications, such as how best to provide federal and state government funding to rural localities and how to improve intergovernmental cooperation to deliver stronger results to rural communities. Researchers and practitioners explained how changing the definition of rural can alter the policy implications. This post also goes over panel discussions on a rural area’s capacity to meet its residents’ needs—i.e., the maximum level of services that a local rural government or nonprofit can directly (or indirectly) deliver based on the number (and skill sets) of people, financial assets, and other resources available. Conference panelists explored the capacity issues facing many rural local governments and nonprofits, particularly in the wake of the Covid-19 pandemic.</p> <h2>Defining rural</h2> <p>Kicking off the research presentation panels were Nathan Anderson (assistant vice president, Federal Reserve Bank of Chicago) and Mark Partridge (professor, Ohio State University). Anderson and Partridge each presented their individual research on the ways that rural areas are defined according to different governmental standards—and how those official measurements can alter the population count, which is vital when it comes to the amount of grants and other benefits that a rural locality can qualify for.</p> <p>Anderson’s research found that the total population of rural and small-town counties within the entirety of the five states of the Federal Reserve System’s <a href="~/link.aspx?_id=D9A5D9C41045499898CC7379449FE742&_z=z">Seventh District</a> (Illinois, Indiana, Iowa, Michigan, and Wisconsin) fell by 23% between 1980 and 2020, using official data and definitions from the U.S. Census Bureau and the U.S. Department of Agriculture’s Economic Research Service (USDA ERS). A significant portion of this drop stems from some critical changes in classification: Some rural places gained enough population between 1980 and 2020 to become classified as nonrural or metropolitan areas. Because of these shifts, many areas were lost from the official calculation of the rural population. Anderson calculated that places in Seventh District states that were classified as rural in both 1980 and 2020 actually gained in population by 1%. So, even though some places have officially transitioned from rural regions to more suburban or <a href="https://www.census.gov/programs-surveys/metro-micro/about.html">micropolitan</a> ones, the population in areas under Anderson’s definition of rural (which is broader and may be more in line with how many of these areas consider themselves) has still grown somewhat over those four decades.</p> <p>Partridge explained his own understanding about how the official definitions of rural and urban have changed as the country’s population has changed. He said that rural places do not suddenly switch to being urban ones, but instead, they usually go through stages—i.e., the suburban or micropolitan classifications—before becoming officially urban. As the shifts in populations occur within and between regions across the United States over time, people in rural places are connecting more and more to nearby urban areas. Partridge shared that rural areas largely benefit from connecting to urban areas for things like services, jobs, and industry clustering (which has positive effects such as improved efficiencies). The population required to keep some services, amenities, and stores viable has changed during the past few decades; for instance, across the United States, the retail landscape has been transformed from small, mom-and-pop stores to big-box ones, he pointed out. Partridge noted that a big-box store cannot operate unless it has an ever-rising base of customers, so generally it cannot exist in an isolated rural place. This implies that rural areas that do not connect to nearby suburban and urban areas for amenities like big-box retailers can shrink as businesses and people move to places with a larger customer base or more amenities.</p> <p>In their separate presentations, both Anderson and Partridge emphasized that although many rural areas can and do have similar economic and demographic issues, rural areas are not as homogenous as they might seem on the surface. Anderson also pointed out that only 13% of the five Seventh District states’ population live in rural or small-town counties; given that this relatively small share of the population is spread out across these geographically vast states, it can be challenging to provide services to some rural residents, especially those who live in places that are physically remote from urban centers or from other rural communities.</p> <h2>Understanding rural areas’ capacity constraints</h2> <p>A major challenge for rural economic development is increasing a rural area’s capacity. Rural areas are, by nature, less populated than urban areas and can have fewer resources and fewer people with the required skills to help create and implement public programs. The lack of such capacity extends to local governments—indeed, village managers or township leaders must often try to provide for their rural constituents using fairly small government budgets. Rural government budgets can be strained when leaders must sometimes pay for additional services that can’t be provided locally—such as for clean water and sewer-system connectivity to the nearest city. According to a <a href="https://www.stlouisfed.org/open-vault/2022/may/building-rural-capacity-inclusive-recovery">May 2022 St. Louis Fed blog post</a>, rural governments can be understaffed and underfunded, leading to a need for community-based nonprofits and development organizations to make up the difference. A <a href="https://headwaterseconomics.org/equity/rural-capacity-map/">January 2022 report from Headwaters Economics</a> acknowledges that often “communities simply lack the staff—and the tax base to support staff—needed to apply for federal programs.” In sessions held at Montcalm Community College, many speakers discussed such capacity constraints in their local communities. </p> <p>At MCC, local government and nonprofit leaders spoke about the importance of boosting capacity, funding, and support for rural areas. Darin Dood and Mike Falcon (village managers for Lakeview and Howard City, Michigan, respectively) described the ways in which their rural towns do not have enough capacity for pressing work. Along with his village manager duties, Dood acts as airport manager and police chief for Lakeview and sits on the board of the Montcalm Economic Alliance. Similarly, Falcon is a member of Howard City’s Downtown Development Authority. While large cities have dedicated grant writers on payroll, small rural towns generally do not: In fact, village managers and small-town government staff often submit grants and seek funding in their spare hours. Both Dood and Falcon described situations where a county or state government agency suggested solutions that are infeasible for small towns and rural areas, such as hiring a city engineer or grant writer. Both Dood and Falcon shared that they need more capacity (i.e., more staff) to focus on procuring further funding through federal and state government grant programs and other avenues. </p> <p>One of the reasons rural areas have issues with capacity and funding is the differing official definitions of rural—which can pose multiple obstacles to rural governments. The United States Office of Management and Budget (OMB) and the U.S. Census Bureau use <a href="https://www.hrsa.gov/rural-health/about-us/what-is-rural">different definitions</a> for the term <i>rural</i>, and the USDA ERS uses yet <a href="https://www.ers.usda.gov/topics/rural-economy-population/rural-classifications/">another definition</a>. All three definitions are based on the number of people in counties or outside of urban areas. As explained in research by Christelle Khalaf (associate director of the Government Finance Research Center, University of Illinois at Chicago) and her co-authors,<sup><a href="#ftn1" id="ftnref1">1</a></sup> generalized and inconsistent definitions of rural (determined by agencies at the federal level) make it difficult to implement useful policy at the local level. In her research paper presentation, Khalaf contended that economic development strategies devised by taking local characteristics into account are often a better fit for rural communities than more general federal definitions, ultimately yielding better economic outcomes for them. Khalaf presented her research on a new machine-learning method that accounts for more nuances in the definition of rural, which may prove to be more useful for policymaking. While Khalaf did not provide a concrete new definition for rural, she did explain that the new method incorporated more-granular information and different community characteristics that factor into the definition (instead of relying solely or chiefly on population thresholds). Results based on machine-learning methods are often more complicated to interpret on a large scale because of the number of variables they include; however, as Khalaf argued, the level of detail provided to the model described in her paper might prove to be more helpful to policymakers who want to develop successful rural development programs that are more precisely tailored to their local communities.</p> <p>Marcello Graziano (associate professor, Southern Connecticut State University) presented research on an algorithm that redefines rural places by demographic, economic, <a href="https://oceanservice.noaa.gov/facts/lclu.html">land cover</a>, and transportation characteristics.<sup><a href="#ftn2" id="ftnref2">2</a></sup> He identified how the rural (or urban) characteristics of places affected their recoveries from the Great Financial Crisis and the Great Recession, and concluded that during the recovery, rural areas had lower increases in income and workforce—but also lower increases in poverty rates—relative to urban areas. To close his presentation, Graziano concluded that local economies that were not overly reliant on physically distant economies more robustly recovered. </p> <p>As the panel discussions revealed, both Khalaf’s and Graziano’s more nuanced definitions for rural can help in two main ways: They can identify similar characteristics across rural areas outside of their low population counts, and they can be fine-tuned to identify specific places based on their particular economic and financial circumstances. If adopted, these and similar methods of identifying rural areas could help more local governments qualify for federal and state grants and other benefits.</p> <p>In their response to the research presentations, Sam Moore (executive director, Lapeer Development Corporation in Michigan) and Taylor Stuckert (executive director, Clinton County Regional Planning Commission in Ohio) confirmed that official definitions of rural—as well as certain regional categorizations—often did not prove useful to practitioners; and in many cases, they were actually counterproductive. As a practitioner of rural economic development in Michigan, Moore stated that different official definitions of rural can sometimes add more obstacles for a rural community seeking resources. Moore confirmed that too much time can be spent during the grant-writing process to ensure that a community fits into various federal definitions of rural in order to obtain the needed funding. According to Moore, any changes to the definition of rural should better serve rural communities and provide a clearer framework for funding and support. Stuckert shared his own experience of working in development in Ohio. Clinton County is part of the Dayton Development Coalition, though Clinton County now has more economic ties to the Cincinnati metro area (after this area’s population grew in size). He indicated that Clinton County’s inclusion in the Dayton coalition is an example of when politically defined boundaries (which can seem arbitrary from an economic development standpoint) determine a region’s interaction with nearby metro areas and the programs they have access to. In Stuckert’s view, Clinton County’s involvement with the Dayton coalition does not always make sense for development programs because Clinton County is more economically integrated with Cincinnati. Stuckert mentioned that a framework on community typology would be helpful in identifying peer communities with similar challenges, which could lead them to collaborate and share economic development strategies. </p> <p>Throughout the conference, other practitioners discussed the challenges of finding adequate funding for rural areas, plus their experiences working with governments and grant programs to accomplish economic development goals. One such practitioner was Liesl Seabert (rural community revitalization program manager, Iowa Economic Development Authority), who spoke about how her organization provides support and direction to different rural and small-town governments—mostly to guide them to funding. Seabert said the State of Iowa has grant programs to support rural revitalization projects, including one that helps provide access to broadband internet in rural areas; but some local governments need guidance on available programs and ways to “stack” programs’ benefits to ensure their economic development goals are met. Seabert said she acts as the coordinator for local governments in Iowa to help them learn about and access these programs. Because so many grant and funding opportunities are aimed at metropolitan areas, she noted local rural governments have needed more guidance to access the right programs that can help their economic development initiatives.</p> <h2>Conclusion</h2> <p>Establishing the definition of rural is important to farming and rural manufacturing communities and the surrounding areas because this can affect their access to federal and state funding and other resources. Researchers described the difficulties with nailing down a definition of rural, especially as the number and geographies of rural places appear to be shrinking over time. The organization of rural governments and their relationship to larger urban areas do shape how practitioners like Moore and Seabert think about developing and funding their economic development programs. The <a href="~/link.aspx?_id=B0DBC512B82842CA942EF4C0614D26A0&_z=z">follow-up blog post</a> will go into greater detail about how both researchers and practitioners approach and assess economic development initiatives and how their work helps rural communities gain more access to key services, such as medical care. </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> Christelle Khalaf, Gilbert Michaud, and G. Jason Jolley, 2022, “Toward a new rural typology: Mapping resources, opportunities, and challenges,” <cite>Economic Development Quarterly</cite>, Vol. 36, No. 3, August, pp. 276–293. <a href="https://doi.org/10.1177/08912424211069122">Crossref</a></p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> Benjamin W. Heumann, Marcello Graziano, and Maurizio Fiaschetti, 2022, “A data-driven algorithm to redefine the U.S. rural landscape: Affinity propagation as a mixed-data/mixed-method tool,” <cite>Economic Development Quarterly</cite>, Vol. 36, No. 3, August, pp. 294–316. <a href="https://doi.org/10.1177/08912424221103556">Crossref</a></p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/public-transit-post-covid-world-recap https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/public-transit-post-covid-world-recap Mon, 15 May 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <p style="padding:0;margin:0;font-style: italic;">Change happens when the pain of staying the same is greater than the pain of change.</p> <div style="padding:5px 0 0 0;font-style: italic;line-height:125%;">—Tony Robbins, as cited by Georgia Gann Dohrmann, Assistant Director of the San Francisco Bay Area’s Metropolitan Transportation Commission</div> <p>As public transit experts gathered at the Chicago Fed recently to confront post-pandemic challenges, one theme kept appearing: The pain points transit agencies and commuters are facing must lead to dramatic change, and that change needs to start happening now. </p> <p>The informal consensus emerged from a one-day transportation forum,<a href="https://www.chicagofed.org/events/2023/public-transit-post-covid-world"> Public Transit in a Post-Covid World: Building a Financially Stable, Equitable, and Accessible Mass Transit System</a>. Held on April 13, 2023, this event was hosted by the Federal Reserve Bank of Chicago, along with the Civic Federation and the Civic Committee of the Commercial Club of Chicago. Speakers, moderators, and panelists discussed the history of operations funding for Chicago mass transit; the looming transit funding crisis and how to solve it; how to reimagine mass transit in a way that promotes equity and accessibility; and how those involved in mass transit work must refocus their goals to achieve real change and solve fundamental problems. </p> <p>Across the board, panelists agreed that the biggest concern was the rapidly approaching fiscal cliff, when transit agencies in many major cities will run out of federal emergency relief funding and face operating cost deficits. Much of this is because of a huge dip in ridership during the pandemic and because federal infrastructure funding was for capital, not operations. “We’re past the time where we can hope riders come back en masse,” said Andrew Ward, group credit officer for U.S. public finance, Fitch Ratings, a leading credit rating agency. Attracting new riders—as well as retaining current ones—is a difficult task, given service and personnel cuts and added frustrations for riders when it comes to commuting. And fare hikes would only deter riders more. </p> <p>That said, improved intra-agency cooperation and fresh thinking about funding mechanisms could be a major attraction to new riders, speakers agreed. Developing integrated fare options across different modes of public transportation, for instance, could ease riders’ commutes by making them seamless. Offering free transit to those in need, such as victims of domestic violence and their children, could add essential value. In his keynote speech, Joshua Schank, managing principal, InfraStrategies LLC—a U.S. consulting firm that provides strategy and services to infrastructure programs—emphasized the importance of universal basic mobility. “Everyone is entitled to move freely,” Schank said. </p> <p>Although the sense of urgency was profound, it also brought some hope. After quoting the self-help author Robbins, San Francisco transit official Dohrmann said: “The pain hasn’t been enough to force government entities and transit people to change things. Now it’s bad enough to make it so people are willing to change.”</p> <h2>To explore further</h2> <p>Go <a href="https://www.chicagofed.org/events/2023/public-transit-post-covid-world">to this page</a> to see the agenda, watch video replays, view presenters’ slide decks, and read transcripts of speeches and panels.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/the-automation-of-jobs https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/the-automation-of-jobs Wed, 19 Apr 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>Automation has been replacing or enhancing human labor for centuries now. But between advances in robotics and artificial intelligence and the spur of the Covid-19 pandemic, this seems an especially significant time in machines’ move toward taking over work that humans used to do. </p> <p>While job automation is a seemingly inexorable process, it is not necessarily an equitable one. Recent research from Federal Reserve Bank of Chicago economists looks at the combination of work automation and Covid and its particular impact on Black and Latino workers, as well as at the lasting after-effects of job displacement. </p> <p>The Chicago Fed’s <a href="https://www.chicagofed.org/research/mobility/about">Economic Mobility Project</a> hosted a virtual event to spotlight this new work and hear an expert panel expand on the topic. In addition to the Bank’s Kristen Broady and Kristin Butcher, the panelists were MIT economist David Autor, U.S. Chamber of Commerce education and labor executive Allison Dembeck, City Colleges of Chicago chancellor Juan Salgado, and then-president of Jackson State University Thomas Hudson. Kate Bahn, director of labor market policy and chief economist at the Washington Center for Equitable Growth, moderated.</p> <p>Below are six key ideas from the event, “The Automation of Jobs: Impacts on Workers and Inequality,” held in late February and available for video replay and as a transcript on <a href="https://www.chicagofed.org/events/2023/automation-of-jobs">this page</a>. There’s also <a href="https://www.chicagofed.org/research/mobility/policy-brief-automation">a policy brief</a> derived from a paper by Broady, a Chicago Fed senior economist and economic advisor and director of the Bank’s Economic Mobility Project. </p> <p><strong>1. The impacts of job displacement are immediate and long-term across all demographics, but the likelihood of displacement is higher in less privileged groups.</strong></p> <p>The shock of job displacement can happen due to technological change, a plant closing or moving, or, indeed, a once-in-a-century pandemic. And when that happens, “it’s very unlikely that you’re going to go out and find a very similar job,” said Chicago Fed vice president and director of microeconomic research Kristin Butcher, citing “Job displacement in the United States by race, education and parental income,” a Brookings Institution <a href="https://www.brookings.edu/research/job-displacement-in-the-united-states-by-race-education-and-parental-income/">paper on the topic</a> she coauthored with Ariel Gelrud Shiro. </p> <p>Displacement is thought of as the loss of a job that a worker held for a substantial period of time, typically at least two years, and it brings a likely lifetime of lower wages than if that job, and the experience built up in it, had not been lost. “There’s a ginormous—that’s the technical term-- impact of displacement on annual earnings,” Butcher said during the conference. Meanwhile, the risk of displacement, she found, is higher for Black workers than for White non-Hispanic workers, for those without a bachelor’s degree than for those with one, and even for those whose parents had low incomes than for those whose parents had high incomes. </p> <p>As for the solutions society offers, traditional unemployment insurance, which assumes that what is needed is money to tide you over until you get your job back, doesn’t fit the way job displacement plays out. The same position being available down the road “is not what’s happening when your job leaves you… from something like technological change,” said Butcher.</p> <p><strong>2. As Covid spread, automation accelerated, and its impact exacerbated pre-existing economic inequities.</strong></p> <p>Between March and April of 2020, U.S. employment fell by 20.5 million jobs, by far the biggest one-month decline since the Bureau of Labor Statistics has been keeping track, said Broady, explaining <a href="https://www.chicagofed.org/publications/working-papers/2023/2023-06">her paper</a>, “The Covid-19 Pandemic Spurred Growth in Automation: What Does this Mean for Minority Workers?” The economy began improving and vaccines became available, but Covid variants brought new problems and even those workers who had workplaces to return to often felt “uncomfortable” doing so, she said.</p> <p>So new work-from-home protocols became one new front of workplace automation, and the technologies that helped people function remotely worked better in job categories at comparatively lower risk of being automated—that is, of being “completed by a computer or machine,” she said. At the same time, “pandemic-related labor shortages and an increasing demand for contactless delivery,” said Broady, put pressure on employers to use machines when possible: robots cleaning airplanes and grocery stores, stores adding more self-checkout kiosks, shoppers shifting to online purchasing, and the like.</p> <p>With that backdrop in mind, she said, consider the categories of jobs at highest risk of being automated, including “cashiers, construction laborers, secretaries, cooks.” Black and Hispanic workers are overrepresented in 17 of the 30 job categories at such risk, she found. A key to surviving in this coming employment landscape will be to “prepare students and workers to work with automation and not fear being replaced by it,” said Broady.</p> <p><strong>3. The labor market was tightening even before the pandemic and more so since, and the tightening has been good for lower-wage workers. </strong></p> <p>David Autor, the Ford Professor of Economics at the Massachusetts Institute of Technology, pointed out that already, before the pandemic, Baby Boomers were starting to retire and immigration numbers and fertility rates were down considerably—all things creating “a need for young, able-bodied workers,” he said. </p> <p>The labor market has changed in surprising ways since the onset of the pandemic, he said. “In particular, we've seen a very sharp reduction in inequality measured as the ratio of earnings of the 95th percentile worker to the 10th percentile worker. And a real tightening of the labor market… for young workers without college degrees–who have seen wages mostly keeping up with inflation, unlike everyone else. They’re doing a lot more job hopping.”</p> <p>Autor acknowledged that he was initially “pessimistic” about labor-force prospects during the pandemic, but that he has shifted his thinking. “What the pandemic has taught us is that labor-market competition is very healthy for workers in general, but particularly for low-paid workers,” he said. “Employers are competing with one another fiercely to hire those workers.” </p> <p><strong>4. Even as it changed some aspects of labor, the pandemic also highlighted existing problems. Case in point: Child care. </strong></p> <p>Allison Dembeck, vice president of education and labor advocacy and government affairs at the U.S. Chamber of Commerce, noted that the troubles in the child-care sector were only made more obvious during the pandemic. Taking care of other people’s kids was a lower-wage job to begin with, and then it became more dangerous amid the pandemic because it can only be done in person. </p> <p>But such jobs are hugely important to the development and safety of children—and to their parents being able to work—and “now, people don’t want to do them anymore,” said Dembeck. </p> <p>So while in some employment sectors “people are seeing the value and the need for finding jobs that they think are fulfilling” and that pay them well, a flip side of that is “the child-care space, where we need to figure out how to handle that,” she said. </p> <p><strong>5. Periods of high unemployment typically result in people going back to community colleges to build their skill sets. That’s not how the pandemic played out. </strong></p> <p>“Our students are in many cases the low-wage workers that are trying to up-skill to get into better occupations,” said panelist Juan Salgado, chancellor of City Colleges of Chicago, which serves some 55,000 students at its seven colleges. Yet, “we, like many community colleges, saw a major decrease, in the pandemic, of students going on to college.”</p> <p>Covid hit this population and their families especially hard and so they temporarily stopped following this traditional path. But recently a rebound has come. “Quite dramatically,” Salgado said, “we saw a 9% increase in student enrollment in the fall. We saw a nearly 15% increase here in the spring. And so we’re seeing the workers coming back for greater skills, which I think is a great sign.”</p> <p>His institution takes job displacement into account in designing its course offerings, he said. “We’ve oriented all our colleges to the market, to where the growth in demand is for higher-wage opportunities,” said Salgado. “If you look at the list of occupations that are least likely to be displaced [by automation], we’re right there. … We’re on both sides. Our students are in the occupations that are going to probably get displaced, and our students are moving towards those other occupations.” </p> <p><strong>6. Educational institutions should consider the potential for vocational automation and displacement as they plan the courses and hands-on training they offer. </strong> </p> <p>“It’s up to all institutions to try to take a peek into the future as far as possible and calibrate yourselves to what your students need, especially if you're servicing a minority population, such as Jackson State” as a Historically Black College or University (HBCU), said Thomas Hudson, president of the Mississippi school at the time of the event. </p> <p>“I know as an HBCU, we pride ourselves on starting the type of programs and really emphasizing the type of programs, whether they’re STEM, whether they’re business,” that will have a lower possibility of being automated, Hudson said. One he mentioned was a recently started supply chain management program in public health. </p> <p>Salgado, from City Colleges of Chicago, agreed. “We’ve oriented ourselves to the areas of growth in the marketplace—not just growth, but where growth meets a living wage, where growth meets career opportunity,” he said. “And so that’s number one. Number two is, when you’re in regular communication with employers, backward mapping that curriculum, you can see the changes coming, whether it’s in advanced manufacturing or logistics or any one of those fields that are adapting very, very quickly.” </p> <p><strong>To explore further:</strong></p> <ul class="cfedList--bulleted"> <li>Event replay and transcript: “<a href="https://www.chicagofed.org/events/2023/automation-of-jobs">The Automation of Jobs: Impacts on Workers and Inequality.</a>” </li> <li>Paper: “<a href="https://www.chicagofed.org/publications/working-papers/2023/2023-06">The Covid-19 Pandemic Spurred Growth in Automation: What Does this Mean for Minority Workers?</a>”</li> <li>Policy brief: “<a href="https://www.chicagofed.org/research/mobility/policy-brief-automation">Automation Affects Workers of Color the Most. How Can We Lessen the Impact?</a>”</li> <li>Paper: “<a href="https://www.brookings.edu/research/job-displacement-in-the-united-states-by-race-education-and-parental-income/">Job displacement in the United States by race, education and parental income.</a>”</li> </ul> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/2023-ais-affordability https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/2023-ais-affordability Tue, 04 Apr 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <div class="d-none">Affordability has been one of the dominant recent issues in the automotive industry. Average new car prices were at $48,763 in February, according to Kelley Blue Book, almost 30% higher than three years earlier, before the Covid-19 pandemic and its disruptions.</div> <div><img src="-/media/1FDBEE20ECB94ECCB64A667C4696E37C.ashx" alt="AIS event pic" /></div> <figcaption class="caption mb-4"> David Gohlke (l.) of Argonne National Laboratory presents at the Chicago Fed’s 2023 Automotive Insights Symposium while Peter DeLongchamps (c.) and Lonnie Smith (r.) look on. The event was held in January at the Bank’s Detroit branch. </figcaption> <p>Affordability has been one of the dominant recent issues in the automotive industry. Average new car prices were at $48,763 in February, according to Kelley Blue Book, almost 30% higher than three years earlier, before the Covid-19 pandemic and its disruptions.</p> <p>At the same time, interest rates have climbed steeply over the past year. So even if people opt for a vehicle that costs much less than $49,000, their car payment will be significantly higher than in previous years. Average finance rates for new light vehicles (cars, pickups, vans, SUVs, and crossovers) reached about 6.5% in the fourth quarter of 2022; for used vehicles, they pushed 10%. </p> <p>This is all happening against a backdrop of the growing push for automakers, parts suppliers, and consumers to switch over from internal combustion engine (ICE) vehicles to those powered by electric batteries. Right now, electric vehicles (EVs) are, in general, about 35% pricier than comparable gasoline-fueled models, but market pressures and new government incentives are moving them toward affordability. </p> <p>So there was a lot to talk about when the Federal Reserve Bank of Chicago made the transition to EVs and vehicle affordability key elements of its 2023 <a href="https://www.chicagofed.org/events/2023/ais-2023">Automotive Insights Symposium</a>, held at the Bank’s Detroit branch in January. These seven key takeaways are culled from two expert panels the symposium convened on affordability, one examining the <a href="https://www.chicagofed.org/events/2023/ais-2023/2023-ais-day-1-panel-the-consumer-challenge-transcript">consumers’ perspective</a> and one the <a href="https://www.chicagofed.org/events/2023/ais-2023/2023-ais-day-1-panel-the-response-transcript">manufacturers’</a>. For the full range of what the panelists had to say, check out the transcripts, <a href="https://www.chicagofed.org/events/2023/ais-2023">slide decks</a>, and <a href="https://www.chicagofed.org/events/2023/ais-2023-sessions">video recordings</a>.</p> <div style="line-height: 1.3rem;"><strong>1. Consumers are taking longer to pay for their cars and having a harder time making payments —but mostly they are making their payments.</strong> <p class="mt-3">It is not uncommon now to see customers taking 72-month car loans, said Peter DeLongchamps, a senior vice president at Houston-based Group 1 Automotive, one of the nation’s largest car dealership groups. “When we started in this business, who’d have thunk it, right?” he said. “Clearly, loan terms are getting longer in order to lower payments.”</p> <p>And as people by now have largely spent the pandemic relief payments they received, there’s been a “big spike in delinquencies, all due to affordability,” DeLongchamps said—but not nearly as big an increase in repossessions of vehicles. </p> <p>People are making their car repayments a priority, according to Lonnie Smith, president of On the Road Lending, which works with economically disadvantaged buyers to get them into good used cars that can be key to maintaining employment and building credit. “Our default rate, it used to be below 3% and now it’s ticking up to 4%,” Smith said. “But still people are working with us,” to meet their loan obligations. </p></div> <div style="line-height: 1.3rem;"><strong>2. Sometimes affordability is about helping people see what’s right for them.</strong> <p class="mt-3">“Everybody wants a [Ford] F-150. I want an F-150, but I don't even know if it will fit in my garage,” said David Gohlke, an energy and environmental analyst at Argonne National Laboratory who has done extensive work examining EV versus ICE cost of ownership. If car-buying decisions were more rational, he said, people would realize, for instance, that Ford’s large, powerful pickup truck is used to full capacity only infrequently in typical driving patterns. By contrast, even a first-generation EV, with just 80 or so miles of battery range, “would be a great daily commuter for most people in the United States,” he said.</p> <p>At On the Road Lending, “we do get a lot of requests and demands for F-150s,” Smith said, as part of a discussion of the vehicle that is perennially America’s most popular. “But people don't have an F-150 budget. So, we have to recalibrate that conversation and say, ‘What can your budget, from a total cost standpoint, support?’</p> <p>“When you talk about your finances, that's an embarrassing topic to talk about, and especially if you have some shame associated with that. We're like, ‘That's OK, let's work through this together so we can build that bridge, so you can access credit.’”</p> </div> <div style="line-height: 1.3rem;"><strong>3. At the moment, electric vehicle buyers must be willing to pay a premium—more than one, in fact.</strong> <p class="mt-3">As a group, EVs were about one-third costlier than other vehicles between 2020 and 2022. Specifically, let’s look at the most popular vehicle in America, the aforementioned Ford F-150 pickup. Over roughly the past two years across Group 1 Automotive’s dealerships, DeLongchamps said, the average gasoline-fueled F-150 went for $65,000 (and had a three-month wait time for delivery); its EV counterpart, the F-150 Lightning, sold for $85,000 on average (with a year-plus wait time). </p> <p>And that’s for a vehicle with less capability: 230–320 miles of range on a charge versus the ICE model’s more than 500 on a tank of gas, and that EV range falls by half or more when the truck is used to tow. </p> <p>“So, we're seeing a lot of interest within the city, but not so much in the rural areas,” said DeLongchamps. New federal clean vehicle purchase and lease incentives might boost interest, but it is still unclear which vehicles will qualify—and for how much. </p> </div> <div style="line-height: 1.3rem;"><strong>4. Even with EVs’ significantly higher upfront costs, the cost of owning them becomes cheaper over time.</strong> <p class="mt-3">Considering the total cost of ownership—including financing, maintenance, fuel and insurance—“starting around year seven, the EVs can be cheaper than the internal combustion engine vehicles,” said Gohlke, of Argonne, as overall savings make up for the price premium at purchase. “So that’s a great story.”</p> <p>But such deferred payback also means that EV ownership for now is concentrated in higher-income areas, he added. </p> <p>As for fuel, even at the most expensive, direct-current fast-charging stations, the per-mile cost is comparable to gasoline-fueled vehicles, he said. Charging at home, it’s considerably cheaper. </p> <p>What he’s really interested in at this point, Gohlke said, is the secondary market. “I'm very curious to see how that plays out over the next six or so years when the new vehicles of [today] become the used vehicles of the mid to late 2020s.”</p> </div> <div style="line-height: 1.3rem;"><strong>5. Increased production of EVs will help drive affordability…</strong> <p class="mt-3">“We are really ramping up. And that is where the affordability comes from in this industry,” said Dan Nicholson, vice president of electrification controls, software and electronics at General Motors. Pledging to be completely electric by 2035, GM is introducing new EV models rapidly and aims to be building one million such vehicles a year in North America by 2025, Nicholson said. </p> <p>Another way GM is making EVs more affordable is by designing multiple vehicles on shared battery and software platforms, he said. That allows much faster new vehicle development times and many more shared parts, among other efficiencies.</p> <p>Nissan, too, is incorporating common platforms into its EV planning. “We’ll have different body styles on a common platform that will come out over the next few years,” said Aditya Jairaj, senior director in Nissan USA’s EV Transformation Office.</p> <p>And what’s good for the manufacturers is good for their parts suppliers, said Daniel Kennel, managing director at BorgWarner, one of the critical suppliers of vehicle propulsion systems and parts. “We need [manufacturers]… having few dedicated electric vehicle platforms because then we can leverage scale,” he said. “And this is the easiest economic way to bring costs down.”</p> </div> <div style="line-height: 1.3rem;"><strong>6. …but increased production won’t mean much unless there is also increased demand. And incentives and market momentum are pushing EVs toward affordability.</strong> <p class="mt-3">Demand for EVs in the U.S. is climbing quickly but was still less than 6% of the new-vehicle market in 2022. That’s in part because of EVs’ higher cost and concentration in the luxury end of the market. “If you exclude pickup trucks, only 15% of the U.S. market is vehicles that are $50,000 or more. And that's essentially where the EV market has been competing,” said Rod Lache, managing director and auto industry analyst with Wolfe Research.</p> <p>But change is almost inevitable, predicted Lache. “There’s this saying in the markets that there’s no better cure for high prices than high prices,” he said. </p> <p>“We’re reasonably confident in the measures that will be taken to reduce the costs of [EV] batteries… And then we’re seeing a massive amount of money being spent—$50 billion in GM's case, $35 billion in Ford’s case, a million units coming out by 2025.” The recently passed federal Inflation Reduction Act also contains incentives for clean vehicle, battery, component, and critical minerals manufacturing that may help to lower costs over time.</p> <p>“So, the capacity will be there. You’re going to see a barrage of new vehicles. That’s going to drive growth. Right now, we’re projecting that in the U.S. market we’ll go from about 5.5% [EV] penetration to about 20% by 2025.”</p> <p>Meanwhile, he added, “ICE’s day in the price hot seat is coming”—spurred by declining utilization and tightening fuel economy and emissions standards. “I think that at some point—maybe it’s towards the end of this decade—we’re going to be talking about how much of a premium are you willing to pay for internal combustion to get the utility that you need because of towing or, whatever, range.” </p> </div> <div style="line-height: 1.3rem;"><strong>7. Don’t count the internal combustion engine fully out, however.</strong> <p class="mt-3">Even if Europe and the U.S. are well down the road to EV dominance by, say, 2030, they’re responsible for a combined 40 million vehicles annually, “not even half of the global manufacturing,” said Kennel, of BorgWarner. “There will be still a lot of regions out there that will fully depend on ICE vehicles.”</p> <p> “And,” added Kristin Dziczek, an automotive industry expert with the Federal Reserve Bank of Chicago, there are currently “280 million vehicles on the road that are ICE.” </p> </div> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/inside-chicago-fed-using-data-anecdotes https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/inside-chicago-fed-using-data-anecdotes Tue, 28 Feb 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <div class="d-none">"Data are really great," says Leslie McGranahan, the Federal Reserve Bank of Chicago’s vice president and director of regional research. "But sometimes the stories behind the data help you understand the data. It's why we are seeing what we're seeing."</div> <div> <img src="--/media/04A0E8B9C84D40F0B3CD7CCDF3E8BFE9.ashx" alt="Economists participating in roundtable discussion." /> </div> <figcaption class="caption mb-4"> Chicago Fed economists Leslie McGranahan (l.), Anna Paulson (r.), and David Oppedahl (far right) participate in a roundtable discussion of the regional economy in Des Moines, Iowa on June 28, 2022. </figcaption> <p>"Data are really great," says Leslie McGranahan, the Federal Reserve Bank of Chicago’s vice president and director of regional research. "But sometimes the stories behind the data help you understand the data. It's why we are seeing what we're seeing."</p> <p>Seeking out such illuminating stories across its five-state region is essential to what the Chicago Fed does. This region, the Seventh Federal Reserve District, covers Iowa and most of Illinois, Indiana, Michigan, and Wisconsin. A fundamental part of the Federal Reserve’s mission is to foster a stable and inclusive economy. Representing what is happening in the District economy is an important input to the discussions that occur when the Federal Open Market Committee meets to set U.S. monetary policy.</p> <p>So specialists from the Chicago Fed are out in the District year round, conducting economic roundtable discussions and producing research that gets published in places like the <i>Midwest Economy</i> blog, the quarterly <i>AgLetter</i>, and the <i>Chicago Fed Insights</i> blog. As new FRB Chicago President Austan Goolsbee begins traveling the District, with February stops in Detroit and Elkhart, Indiana, we sat down with McGranahan to learn more fully the hows and the whys of the Chicago Fed’s efforts to understand the economy of the upper Midwest. </p> <p><strong>Q: This place is called a “bank.” What about its business has it doing regional economic research?</strong></p> <p>A: The U.S. is a big, diverse economy. And in order to have a really deep understanding of the economy, the original authors of the Federal Reserve Act came up with this system with numerous regional Federal Reserve banks. For the central bank to understand the regions that comprise its economy seems pretty key. </p> <p><strong>Q: Please describe the scope of the research done by the regional team at the Bank. </strong></p> <p>A: Some of the research is related to the economy of the District, specifically thinking about manufacturing, economic growth and population dynamics in the region, and the auto industry. We also have an agricultural economist and we do research on household finance, housing, and labor markets that's not always regional in nature but has implications for the regional economy. I think of research and outreach as being two different but related things. So in research, we're gaining new knowledge about the fundamentals of the economy, and we tend to have a regional lens on a lot of it. </p> <p>In outreach, we are out there talking to people all the time. We have about 35 roundtables a year, happening in all five of our states, with individuals in the business community and from the nonprofit, government, and grassroots sectors. We sit around a table with people in places ranging from Flint to Des Moines and say, ‘What do things look like from your perspective?’</p> <p><strong>Q: How do you handle confidentiality? Are those meetings public? </strong></p> <p>A: No. They’re pretty informal, but for people to share what's going on in their businesses, we need to have confidentiality and knowledge that things that are said in the room stay in the room—and are sufficiently deidentified when they are put out to the public. But we tend to keep that information internal or for the Beige Book, the Federal Reserve System’s regularly published public summary of commentary on economic conditions nationwide.</p> <p><strong>Q: Do you only talk to businesses, or do you talk to other people?</strong></p> <p>A: We talk to business leaders and also individuals in government and from nonprofit and community organizations. Last year we, along with some other Feds, added a Community Conditions section to the Beige Book to independently highlight the information coming from these non-business contacts.</p> <p><strong>Q: Can you share an example of how one roundtable would work? </strong></p> <p>A: We have a Chicago-based roundtable where we have individuals from businesses, community groups, government, and industry in Chicago. Maybe we'd have eight to ten people—a manufacturing executive, a university professor researching agricultural conditions, and an HR consultant, for example. We have some questions that we send out in advance. And everyone will have an opportunity to share with us what they are seeing, both addressing our questions and adding their boots-on-the-ground perspective. So we've been asking a lot of questions about the labor markets that they're facing over the past couple of years. Or we would ask questions about supply chains—is it getting easier or is it harder to find materials—about shipping, freight costs. And people will riff off of each other: ‘Hey, I’m seeing that, too.’ It's really a pretty effective way to hear what's going on from people who are participating in making economic decisions at that moment. </p> <p><strong>Q: As I understand it, the people doing the research tend to be trained as economists, people who might otherwise be working in academia or at think tanks. </strong></p> <p>A: That’s right. So we have really three groups of people. We have regional research staff that are in Detroit, headed by Rick Mattoon, who's the branch executive there, and three colleagues. A lot of our auto sector research comes from there, understandably. And then within my group in Chicago, there are two sets of individuals, some who do more academic-style research and some who do more of the outreach-type work. But the line between those types of work is really, really blurry. So everyone who is doing the outreach-type work also does academic-style research. And that helps give rigor and clarity to the outreach. And the outreach helps to give context and life to the research. </p> <p><strong>Q: What do you want people to understand, first and foremost, about the work the Chicago Fed does on the regional economy? </strong></p> <p>A: One crucial thing to understand is that we are looking at the national economy through a regional lens. We're asking, ‘What does it look like from here?’ And then the other 11 Federal Reserve banks are doing it from their perspective. And in my view, if you have 12 lenses looking at the same thing, the national economy, that's how you get a really good picture. And so that's the paradigm in the back of my mind: If the camera on your phone has more lenses, you get a much better picture. This makes sense because monetary policy is national in nature. </p> <p><strong>Q: And is this all building into the Beige Book as a primary focus? </strong></p> <p>A: The Beige Book is the primary output. We use this information in other ways, as well: for the Federal Open Market Committee meeting process and informing the Bank president about what's going on in our District. </p> <p><strong>Q: So what's a good anecdote? How do you spot it? How do you stress test it, too? </strong></p> <p>A: I think sometimes, you'll hear something, and it'll make something click. There is something that you're seeing in the data or in the world around you that is head-scratching. And then you hear the anecdote in a little bit of an a-ha moment. One example of that: Early in the pandemic, as people started to talk about the challenges with childcare, we were starting to hear that anecdotally very clearly. And again, this eventually was in the data. But people saying, ‘Hey, my employees aren't coming to work because they can't find places for their children’—I first heard that as an anecdote. And once you heard the anecdote, you're like, ‘Oh my gosh, of course that has to be something that's true.’ So I think that makes a really good anecdote. </p> <p><strong>Q: Oh, interesting. So they can be almost a leading indicator or a preview of coming data? </strong></p> <p>A: Exactly. And I think the thing about data is that they're backward looking. They often come out with a lag. And in addition to seeking out more anecdotes, we sought more high-frequency data. Those two things are ways of trying to get ahead of the data. </p> <p><strong>Q: What’s something you enjoy about the job? </strong></p> <p>A: One of the things that's so nice, post-pandemic, is to be able to get out again and talk to people. And it's not only talking to people in a roundtable. It's going to the convenience store across from the roundtable and seeing what's on the shelves and what shelves are empty and talking to the cashier and asking ‘how's business’? In some ways, I feel like in every conversation I have, especially when I'm somewhere in the District, I’m trying to learn. I’m asking, ‘How does this help us understand what's going on in the regional economy?’</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/2023-ais-keynote https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/2023-ais-keynote Fri, 17 Feb 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <div class="d-none">2023 looks to be another dynamic year in the automotive business. The quickening transition to electric vehicles (EVs), fluctuating prices and interest rates, and uncertain consumer confidence all promise to impact what happens in this industry that plays such a pivotal role in the U.S. economy.</div> <div> <img src="-/media/5D9DCB42AEC24258AB68874A44F591DC.ashx" alt="AIS event pic" /> </div> <figcaption class="caption mb-4"> Detroit-based Chicago Fed policy advisor Kristin Dziczek speaks at the Bank’s 2023 Automotive Insights Symposium. </figcaption> <p>2023 looks to be another dynamic year in the automotive business. The quickening transition to electric vehicles (EVs), fluctuating prices and interest rates, and uncertain consumer confidence all promise to impact what happens in this industry that plays such a pivotal role in the U.S. economy. </p> <p>Speaking at the Federal Reserve Bank of Chicago’s 2023 <a href="https://www.chicagofed.org/events/2023/ais-2023">Automotive Insights Symposium</a>, held at the Bank’s Detroit branch in January, Chicago Fed policy advisor and automotive industry expert Kristin Dziczek shared her thoughts on what will shape the sector in the coming year. These seven key points are derived from that talk, entitled “An Economic View of the Electric Vehicle Transition.” To get the fuller, much more detailed picture of what she had to say, check out the <a href="https://www.chicagofed.org/events/2023/ais-2023/2023-ais-day-1-keynote-kristen-dziczek-transcript">transcript</a>, <a href="https://www.chicagofed.org/events/2023/ais-2023">slide deck</a>, and <a href="https://www.chicagofed.org/events/2023/ais-2023-sessions">video recording</a>.</p> <ol> <strong><li style="line-height: 1.3rem;">2021 was a “hockey stick moment,” with plug-in vehicles’ share of U.S. sales reaching an inflection point.</li></strong> <p style="margin-top:15px;">“Are we really at that hockey-stick moment that we've been talking about for decades in the EV world?” Dziczek asked, as she shared a slide that showed sales starting to move sharply upward, like the blade of a hockey stick. “I think we are.” Data show the U.S. market share of plug-in vehicles – plug-in hybrids or those powered fully by battery cells or fuel cells – jumping from under 2.1% in 2020 to 4.3% in 2021 and then to 6.7% in 2022. When you add conventional (non-plug-in) hybrid vehicles to the picture, the climb was from over 5% market share in 2020 to more than 12% in 2022. </p> <p>And the number of options is growing as well. North American plants made 20 plug-in vehicles in 2020. There will be ten times that number by 2030, according to some estimates. </p> <div class="my-4"> <img src="-/media/DF072A8D878D4449B3C4813F3ED89252.ashx" alt="Automotive Outlook 2023: Seven Issues to Watch slide picture" /> </div> <strong><li style="line-height: 1.3rem;">New vehicle prices are rising overall, and EV prices are even higher. They averaged 35% more than other vehicles between 2020 and 2022.</li></strong> <p>Affordability is one of the biggest issues hanging over the electric vehicle transition. “Safe, reliable transportation matters,” Dziczek said, citing the early days of Ford, when the workers who built Model Ts could also afford to buy them. </p> <p>But EVs remain pricey, often too pricey for consumers who would otherwise like to experience their many advantages. Battery electric vehicles cost about one third more than other vehicles, and current EV ownership is concentrated in high-income households on the coasts and in the mountain states. </p> <strong><li style="line-height: 1.3rem;">Jobs and job quality are changing. Upcoming union negotiations in the U.S. and Canada will focus on the pay, benefits, and conditions of automotive jobs.</li></strong> <p>Despite the pandemic and its disruptions, the manufacturers have been making money and lots of it. And this summer and fall they’ll be negotiating expiring contracts with the major unions. “Very profitable companies will have a difficult time telling the union that they can’t give them what they want,” said Dziczek. At the same time, the unions will be seeking to guarantee security for workers as manufacturing – the very way in which vehicles are made – undergoes a seismic shift. </p> <strong><li style="line-height: 1.3rem;">Raw material costs remain elevated. They shot up in the early months of the pandemic, and while they’re lower now, they are still well above pre-2020 levels.</li></strong> <p>The estimated cost of raw materials per average vehicle was about $2,000 in 2016. Since then, it’s climbed to over $3,000 in 2018, plunged almost all the way back to $2,000 in 2020, and then shot up to some $6,000 in 2022. Thankfully for the question of cars becoming more affordable, there’s been a significant decrease in materials prices in the past couple of months. </p> <strong><li style="line-height: 1.3rem;">The market share of vehicles considered “luxury” is growing, going from about 12% to more than 17% during the pandemic. This has big implications for the future used-car market.</li></strong> <p>This rich mix, coupled with low production volumes in recent years, could keep supply tight and the price of used vehicles elevated in coming years, with comparatively fewer vehicles of moderate price entering the market. There still seems to be considerable pent-up demand in the new vehicle market, but it’s unclear if consumers will continue to prefer luxury models and features or if the mix will become less rich as supply constraints ease and production recovers.</p> <strong><li style="line-height: 1.3rem;">The average monthly car payment was at a 20-year high, at $762 a month in November 2022, according to Cox Automotive.</li></strong> <p>Much of that rise came in 2021, when the average transaction price for light vehicles (passenger cars, crossovers and SUVs, plus pickups and vans) climbed more than 19% in six months. Those costs appear to have hit a plateau in recent months. But what has been climbing is the interest consumers pay: Average finance rates for light vehicles hit about 6.5% in the fourth quarter of 2022, a 1.5% climb during the year. Yet sales were slightly higher in the fourth quarter than in the first. </p> <p>And the consensus among forecasters is that manufacturers will sell more cars in 2023 than they did in 2022, although still significantly fewer than they did in 2019. </p> <strong><li style="line-height: 1.3rem;">Bringing battery electric prices down is likely to require some recovery in the production and supply chain, declining raw materials costs, cooler demand, and purchase and manufacturing incentives.</li></strong> <p>The price of an EV is determined by a complex mix of factors. But manufacturers seem a long way from reaching a perceived market sweet spot of offering a $30,000 vehicle that has 300 miles of battery driving range. </p> <p>Still, Dziczek said, current purchase and manufacturing incentives, both state and federal, are pushing EVs toward becoming more affordable. Introduction of new models and recovery in the production supply chain and moderating costs of raw materials should help, too.</p> </ol> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/2022-fmg-fall-conference-recap https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/2022-fmg-fall-conference-recap Mon, 06 Feb 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>On November 16, 2022, the Financial Markets Group (FMG) of the Federal Reserve Bank of Chicago hosted its ninth annual Fall Conference. The conference featured a keynote address from Commissioner Kristin N. Johnson and a fireside chat with Commissioner Christy Goldsmith Romero, both of the U.S. Commodity Futures Trading Commission (CFTC). Lamont Black, a professor of finance at DePaul University and former Federal Reserve Board economist, discussed “Decentralization as a Paradigm Shift for Financial Markets,” and Klaus Löber from the European Securities and Markets Authority (ESMA) offered “Reflections on Regulatory Policy.” </p> <p>This year the three conference panels focused on innovation: 1) in trade execution—crypto trading; 2) in post-trade clearing and settlement and market structure; and 3) in CCP governance. The conference opened and concluded with remarks from Alessandro Cocco, vice president and head of FMG. </p> <p>Panelists and attendees at the conference included representatives from central counterparties (CCPs), exchanges, investment firms, regulatory authorities, technology firms, clearing members, and proprietary trading firms. This event was held for invited guests who are thought leaders among policymakers, market participants, and academics, with no press in attendance, and under the Chatham House Rule to encourage an open and candid discussion. Of note, the conference took place a week after the collapse of the cryptocurrency exchange FTX, providing a timely opportunity for discussion of the potential spillover risks into traditional finance, existing opportunities and risks in digital assets, and key regulatory tools in place or under consideration to address systemic risks and strengthen consumer protections going forward.</p> <h2>Keynote address </h2> <p>Commissioner Johnson emphasized the remarkable speed and breadth of fintech innovation and discussed how innovation is reshaping traditional finance (TradFi) and market structure in important ways. She stated that the integration of decentralized finance (DeFi), in some contexts, can lead to disruption of markets, particularly if market participants fail to effectively employ the longstanding body of best practices and regulation. She cited the following examples of best practices: setting aside adequate reserves to address liquidity issues or solvency crises, effective internal controls, risk management oversight, appropriate governance of conflict of interests, and use of circuit breakers. </p> <p>Commissioner Johnson explained that market regulators can and should act now using their existing regulatory authority to ensure adequate customer protections in every market within the ambit of the CFTC’s jurisdiction. The CFTC’s mission, she noted, is to promote the application of the core principles at the center of the CFTC’s statutory and regulatory mandate—transparency and disclosure—without regard to technology or asset class. The spectacular and mounting risk management and governance crises that crypto markets experienced during the third and fourth quarters of 2022 demonstrate the necessity of introducing these values through regulatory interventions as swiftly as may be practicable</p> <p>Following the failure of MF Global and the discovery that the firm had misappropriated $1.6 billion in customer funds in 2011, Commissioner Johnson said, the CFTC supplemented and tightened regulation that mandates the segregation of customer assets and guardrails around the investment and treatment of customer funds. She argued there is a gap within the existing regulatory structure that leaves customers, particularly crypto-market customers, vulnerable, and it should be addressed. Not all crypto-market participants embrace governance and risk management principles. In fact, operating behind a veil of opacity, some abuse the corporate form, obscuring related party transactions, lending arrangements, reinvestment of customer funds, and the role of affiliates operating as intermediaries, she said.</p> <p>Commissioner Johnson indicated that she asked the CFTC to investigate these deeply concerning issues. She is encouraging the commission to address the disparate customer protections in intermediated and non-intermediated market structure. Specifically, she noted that lack of statutory protections and regulations that require segregation of customer funds and the treatment of funds in intermediated markets in certain disintermediated markets. Noting the string of bankruptcies at cryptocurrency firms over the course of the summer and fall of 2022, Commissioner Johnson proposed the CFTC consider releasing a request for information or advanced notice of proposed rule-making or hosting a hearing or series of roundtables to gather the information necessary to close this regulatory gap and immediately establish needed customer segregation and treatment of fund protections for customers of crypto firms or other firms in non-intermediated markets operating in a manner similar to FCMs, broker-dealers, CCPs or in other custodial roles. </p> <p>In addition, Commissioner Johnson stated that she had recently asked Chair Benham if she could serve as an ambassador to marginalized communities, because she wanted to work on implementing investor protections in the context of new technologies, so that citizens from many communities, including marginalized communities, can access new markets and new opportunities while benefiting from appropriate investor protections. She concluded by underscoring that we should not let a good crisis go to waste and emphasizing that it is imperative to introduce effective customer protections in the crypto ecosystem.</p> <h2>Fireside chat</h2> <p>The fireside chat with Commissioner Goldsmith Romero focused on the systemic stability implications of crypto trading, including her <a href="https://www.cftc.gov/PressRoom/SpeechesTestimony/oparomero3">prior warnings</a> about the risks in crypto, whether the crypto market will reach a size that will impact systemic stability, and how to achieve greater consumer protection in crypto markets. Commissioner Goldsmith Romero stated that she was seeing growing interest from TradFi players in crypto and that their interest had changed significantly from the prior six months. She noted that despite being designed to break from the TradFi system with all of its vulnerabilities, crypto presents many similar financial stability risks as the traditional financial system, and she saw many parallel themes between crypto and the 2008 financial crisis: Crypto has innovative, complex, and opaque products that are not regulated, it has a lot of hidden exposure and risk, it is a highly interconnected market that can produce contagion risk, and there are concerns about the quality of underlying assets that can produce run risk. She also talked about novel risks to crypto, including fraud scams, cybertheft, conflicts of interest, and the lack of segregating customer assets from company assets. </p> <p>Speaking on whether crypto will impact systemic stability, Commissioner Goldsmith Romero said that crypto remains relatively small and contained from a level of systemic risk that would come with greater scale or interconnections with TradFi. However, because it is unregulated, regulators cannot see all the connections and intermarket risk occurring between crypto and traditional finance. She said financial stability risk will increase and could rise to systemic risk if in the future there are greater interconnections. She added that she is observing a lot of interest by traditional finance players in <a href="https://home.treasury.gov/news/press-releases/jy0454">stablecoins</a> and is concerned about pension funds and retirement funds investing in crypto. She highlighted that credibility for stablecoins would be bolstered if these coins had independent third-party audits and comprehensive disclosures, which is what she has proposed. She said she takes a “same risk, same regulatory outcome” approach, and is not in favor of bespoke treatment that could increase financial stability risks. She said crypto companies set up in an unregulated environment need to change to look more like a regulated entity. Crypto companies coming within U.S. markets should expect the full application of the CFTC’s existing regulatory framework, which has stood the test of time and has reduced financial stability risks.</p> <p>Turning to consumer protection in crypto markets, Commissioner Goldsmith Romero emphasized that for consumer protection, the most important thing is that crypto companies must segregate customer assets from company assets and provide customers with bankruptcy protections. She added that conflicts of interest in crypto firms must be resolved. She said that crypto companies or their affiliates are serving multiple roles, such as the lender, broker, exchange, custodian, and CCP. She said there is contagion risk, so when these firms collapse, they pull down their affiliates with them. She also proposed a breakdown of the CFTC’s <a href="https://www.cftc.gov/LearnAndProtect/EducationCenter/CFTCGlossary/glossary_qr.html">definition</a> of retail customers, which constitutes a broad range. She proposed breaking the definition of retail into two categories of household retail customers and high-net-worth/professionals and then tailoring the customer protection regime to each category. Customer protections for household retail could include <i>plain English </i>disclosures, limits on leverage, and suitability determinations. She expressed concern about the loss of suitability determinations in a disintermediated model. </p> <p>The chat ended with a discussion on representation in the financial sector, where Commissioner Goldsmith Romero discussed her career journey as an LGBTQ woman. She remarked that despite coming out at work in 2009 during her time at the Treasury Department and feeling that a burden had lifted off her shoulder, the thought that crossed her mind was that she was being successful <i>despite</i> her identity. She added that today, her identity is a celebrated part of her success, but it took years for the federal government to get to this point. When asked for suggestions on how others can be allies to the LGBTQ community, Commissioner Goldsmith Romero advised that people should not be worried about being perfect in saying the right thing, they should treat people like people, and that people should actively work against stigmas. </p> <h2>Presentations</h2> <p>The first presentation focused on the differences between centralized finance (CeFi) and decentralized finance. Centralization was described as a hub and spoke model, whereas decentralization was described as a network without a hub. Lamont Black argued that while decentralization was the issue during the 2008 financial crises, the centralized world created post financial crisis has had its own set of risks and inefficiencies. He discussed decentralization on the blockchain as a way forward for financial markets, which would result in code replacing some financial intermediaries and enabling more transparency and efficiency in financial markets.</p> <p>The second presentation focused on the rapid change in existing market infrastructure and its regulatory implications. Klaus Löber highlighted the emergence of new players, such as unregulated actors, fintech firms, and big tech firms, with different motivations and focus. He also noted two high-level trends in the emergence of new products and services, including decentralization and the bundling of financial services. With such rapid change, he said, regulatory policy needs to evolve. Specifically, Löber stressed the need for the regulatory and oversight frameworks to adapt to the evolving landscape, for public authorities to obtain relevant knowledge to fully understand and assess new technologies, and for more cooperation and coordination of central banks and regulatory authorities. </p> <h2>Panel 1: Innovation in trade execution: Crypto trading</h2> <p>The first panel discussion among five panelists discussed the recent collapse of the crypto platform FTX, 24/7 trading in crypto markets, and investor protection issues. </p> <p>The conversation began with reflections on the collapse of FTX. A panelist stated that as an active fund manager, they are witnessing client redemptions from funds citing losses in FTX and other crypto firms. The same panelist noted that other active managers were not affected by FTX’s collapse. Another panelist stated that the FTX collapse followed a formula that is ubiquitous among firms that fail across crypto and traditional finance: a tightly controlled organization that is opaque, mishandles liquidity and risk management, and has little oversight by the firm’s board of directors. The same panelist noted that blockchain technology, with its decentralization, transparency, visibility, and democratic governance, provides a new opportunity to solve old problems. This panelist also added that blockchain technology must improve its user interface and deal with anti-money laundering (AML) and know your customer (KYC) issues before becoming a useful solution. </p> <p>Turning to crypto markets more broadly, a panelist noted that crypto markets operate 24/7, and current traditional finance operations are not designed to support any market 24/7. This panelist added that to support crypto markets, either operations in traditional finance need to be fixed or market participants need to re-think the ecosystem of accessing the market. Another panelist echoed this sentiment by relaying that their firm is looking to move to 24/7 trading in their designated contract market (<a href="https://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm">DCM</a>) to have a critical match with the underlying 24/7 spot exchange. However, they face difficulties with this transition due to a lack of service providers and partners that can meet operational demands, such as 24/7 banking and clearing. A different panelist added that innovation must occur on the settlement side in traditional finance to allow banks and investment managers to settle faster. This panelist said that the counterparties they work with are operating on traditional settlement timelines and do not possess the technical capability to settle faster despite their desire to do so.</p> <p>Later, the conversation shifted to investor protection issues in crypto markets. One panelist listed exchange controls, segregation of customer assets, and transparency as necessary investor protections, while another panelist added the need for disclosures tailored to retail customers that accurately describe the risks in crypto markets. A different panelist echoed the importance of disclosures but added that disclosures are not enough, as some crypto protocols are difficult to understand even for the most savvy customers. This panelist also stated that “<a href="https://www.forbes.com/sites/forbesbusinesscouncil/2022/05/17/code-is-law-during-the-age-of-blockchain/?sh=5bf447f82adb">code is law</a>” is not a sufficient argument for investor protection and overlays are needed on top via laws and regulations. One panelist stated that a lack of adequate disclosures and investor education is a big issue especially regarding stablecoins. This panelist provided the <a href="https://www.wsj.com/articles/why-did-cryptocurrencies-terrausd-and-luna-unravel-stablecoin-price-crash-explained-11652462779">Terra/Luna debacle</a> as an example where, according to this panelist, the algorithmic stablecoin protocol worked as designed, but investors failed to understand the difference between an algorithmic stablecoin and a fiat-backed stablecoin.</p> <h2>Panel 2: Innovation in post-trade clearing and settlement and market structure implications</h2> <p>This discussion began with comments by panelists on the bankruptcy filing by FTX Trading Ltd. and related entities. Panelists agreed, based on publicly available information, that the FTX bankruptcy appears to have been the result of fraud. Panelists also shared their perspectives on striking the right balance between innovation and the need for effective regulation of nascent models of clearing and settlement.</p> <p>Panelists also discussed the adoption of new technologies and the implications of those changes, as well as changing business practices, regulation, and other factors in reshaping traditional post-trade market infrastructure and in emerging DeFi markets. In particular, panelists noted the difficulty of transferring assets—even those that are already in digital form—a problem that was attributed to market structure frictions, undeveloped or incompatible technology platforms, and legal and regulatory issues. </p> <p>This was followed by a discussion of the ability of crypto markets to transfer digital assets immediately anywhere in the world and achieve “atomic settlement” (meaning that in the exchange of one asset versus another, the transfer of the first asset occurs instantly and simultaneously with the transfer of the other asset) using smart contracts and other novel technologies. One panelist expanded the focus to the application of these technologies in TradFi, noting they could significantly shorten settlement timing and enable alternative margining frameworks.</p> <p>Panelists also discussed whether market participants are trying to use new technologies to solve a problem of behavior, noting that market participants are often resistant to adopting new operational and risk management processes. They also shared their perspectives on the cost of implementing new technologies and the problem of finding a common timeframe for transition. </p> <p>The discussion focused, in part, on the problem of moving from the existing reliance on various “batch” (aggregated/periodic) operations to a “real-time” or near real-time environment for data and risk management operations. Panelists noted that it would take some time to replace legacy systems with distributed ledger technology (DLTs) and other new technologies. There was some disagreement among panelists regarding the capacity of DLT and other new technologies to support traditional market activity. Panelists agreed that it is important to ensure that any new technology is resilient and secure.</p> <h2>Panel 3: Innovation in CCP governance</h2> <p>The conference concluded with a panel conversation focused on progress in central clearing counterparty (CCP) governance. The topic was last discussed at our Fall Conference in 2019, and since then <a href="https://www.cftc.gov/PressRoom/PressReleases/8565-22">CFTC</a> and <a href="https://www.sec.gov/news/press-release/2022-138">SEC</a> have issued proposed rules on CCP governance.</p> <p>CCPs reduce counterparty risk by becoming the buyer to every seller and the seller to every buyer and applying prudent risk management principles to the transactions they clear. The key question discussed by this panel was who drives risk management at the CCP, and in whose interest the stakeholders are acting: the interest of the stability of the financial markets, of the CCP, of the clearing members, or of the end users? A panelist stated that there has been demonstratable progress on CCP governance, starting with the <a href="https://www.cftc.gov/About/AdvisoryCommittees/MRAC">recommendations</a> of the CFTC Market Risk Advisory Committee’s subcommittee on CCP Risk and Governance in February 2021. This panelist added that other areas of governance still need to be addressed, including determining whether <a href="https://www.iosco.org/library/pubdocs/pdf/IOSCOPD475.pdf">public quantitative disclosures</a> (PQDs) achieve their intended purpose and making progress on concerns around margin procyclicality. Another panelist noted that CCP governance has seen good progress in terms of disclosures. This panelist added that end users would like to see all <a href="https://www.bis.org/cpmi/info_pfmi.htm">principles for financial market infrastructure</a> (PFMI) disclosures and PQDs in machine-readable format to easily scrape for data that can be entered into models to conduct internal risk analysis. </p> <p>On the topic of the newly proposed CCP governance regulations by the CFTC and SEC, a panelist highlighted that, under the current CFTC proposal, two primary categories of risk bodies would be required. The first would be a risk management committee, and the second would be risk working groups. The panelist added that the purpose of risk working groups is to provide CCPs with a broader range of expertise and to provide market participants with more opportunities to express their views on risk matters affecting the CCP. Regarding the SEC proposal, this panelist underscored the significant subject matter and time frame overlap between the two regulatory proposals while calling attention to some differences between the two. Later in the panel, a different panelist stated that the SEC proposal contains specific language that would make the risk committee a subcommittee of the CCP board, which has a fiduciary duty toward the CCP. As a result, risk committee members in the SEC proposal would be subject to a fiduciary duty and care obligation.</p> <p>To conclude, the panel discussed challenges in staffing risk committees, such as CCP clearing members and end users having a limited number of trading experts that can serve on risk committees, and how more frequent rotations could be a solution. One panelist emphasized the major investment of time that is required to be a useful member of a risk committee and warned of the potential loss of expertise if committee members’ terms are too short. Another panelist responded that there is a difficult balance to strike due to the desire for continuity on risk committees by having members who have gone through past proposed changes to the CCP’s risk management policies, yet some level of rotation should be included. Another panelist echoed the desire for having continuity and expertise on risk committees, while acknowledging the necessity of fresh ideas and perspectives. Thus, this panelist charted a middle ground by stating a rotational process for risk committees is required, but not all committee participants should roll off simultaneously. </p> <p>The conference was then adjourned to the fall of 2023. Key takeaways from the conference are: </p> <ul class="cfedList--bulleted"> <li>The importance of tried and tested customer protection tools, such as segregation of house and client collateral, adequate disclosures, transparency, financial resources, and risk management standards. </li> <li>The tradeoffs of decentralization on the blockchain as a potential way forward for financial markets to enable more transparency and efficiency. <li>The challenges and opportunities posed by new ways to connect customers directly to CCPs.</li> <li>The risk management implications of transitioning from “batch” (aggregated/periodic) operations to a “real-time” or near real-time environment for data and risk management operations. </li> <li>The challenges and opportunities of ensuring that CCP risk management reflects the input of CCPs, as well as clearing members and customers, so that CCPs can perform their function of increasing the stability of the financial markets.</li> </li></ul> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/higher-ed-enroll https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/higher-ed-enroll Wed, 18 Jan 2023 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>Despite the widely documented benefits of enrolling and completing a college degree, postsecondary enrollment has been declining overall since fall 2010. Declines in the number of individuals enrolling in college are worrisome to the colleges themselves, and researchers and the press wrote of the impending enrollment “crisis” prior to the Covid-19 pandemic (e.g., <a href="https://ngrawe.sites.carleton.edu/demographics-and-the-demand-for-higher-education/">Grawe, 2017</a>; and <a href="https://www.bloomberg.com/news/articles/2014-04-14/small-u-s-colleges-battle-death-spiral-as-enrollment-drops?leadSource=uverify%20wall#xj4y7vzkg">Bloomberg, 2014</a>). However, the decline in the shares of young people enrolling in college also has important individual and societal ramifications, making it important for researchers and policymakers to understand the underlying causes. In this blog post, we discuss trends in postsecondary enrollment and factors driving these trends. We explore what young people in particular are doing with their time if they are not pursuing higher education, and we discuss some of the implications of the changes in activity and time use for young people and the economy. </p> <p>There has been a lot of talk in the press about the pandemic-era declines in postsecondary enrollment. But even before the pandemic, enrollment was declining. In fact, total postsecondary enrollment peaked in fall 2010 (see figure 1), roughly coinciding with a peak in the population of 18 to 21-year-olds.<sup><a href="#ftn1" id="ftnref1">1</a></sup> Enrollment in the private nonprofit and public four-year college sectors continued to rise between 2010 and 2019, but those increases were more than offset by enrollment declines in the public two-year and private for-profit four-year sectors.<sup><a href="#ftn2" id="ftnref2">2</a></sup> As a result, total enrollment declined by an annual average rate of 0.8% per year between 2010 and 2019. </p> <p>How do we explain this decline? In part, it reflects a decline in the population of traditional college-going age. Between 2010 and 2019, the estimated population of 18 to 21 year olds in the United States declined by an average 0.6% per year. The population changes don’t tell the whole story, however—college enrollment rates of young people declined as well, with the percentage of recent high school completers enrolling in college falling from 68% in 2010 to 66% in 2019.<sup><a href="#ftn3" id="ftnref3">3</a></sup> Researchers have found that college enrollment often increases when unemployment rates are increasing (<a href="http://gseacademic.harvard.edu/~longbr/Long_2004_College_Decisions_Overtime.pdf">Long, 2004</a>; <a href="https://www.chicagofed.org/publications/economic-perspectives/2012/4q-barrow-davis">Barrow and Davis, 2012</a>), so perhaps it’s not surprising that enrollment rates were declining throughout the 2010 to 2019 period, a time of economic expansion and falling unemployment rates.</p> <h3>1. Total fall enrollment by type of institution, fall 1990 through fall 2019</h3> <figure> <img src="-/media/C42BAB354E9A44ECBFE3C64C5EF9F49B.ashx" alt="Figure 1 is a line graph depicting enrollment in institutions of higher education by type of institution from fall 1990 through fall 2019. The y-axis has total fall enrollment in millions ranging from 0 to 22 million. The x-axis has the year corresponding to the fall term. Total enrollment rises from fall 1990 to fall 2010 and then declines, as do enrollment at public two-year colleges and enrollment at private for-profit four-year colleges. Enrollment at public four-year colleges and enrollment at private non-profit four-year colleges rise throughout." /> <figcaption class="caption"> Source: U.S. Department of Education, National Center for Education Statistics, 2020 (<a href="https://nces.ed.gov/programs/digest/d21/tables/dt21_303.25.asp?current=yes">Table 303.25</a>). </figcaption> </figure> <p>Following the onset of the Covid-19 pandemic in early 2020, the decline in postsecondary enrollment accelerated (see figure 2)—falling 3.3% between <a href="https://nces.ed.gov/programs/digest/d21/tables/dt21_303.25.asp?current=yes">fall 2019 and fall 2020</a> and an additional 2.7% between <a href="https://nscresearchcenter.org/wp-content/uploads/CTEE_Report_Fall_2021.pdf">fall 2020 and fall 2021</a>, more than three times the annual average over the prior decade. Public two-year institutions experienced the largest enrollment declines in both years—a 12.9% decline in 2020 and a further 5.0% decline in 2021. This large decline in public two-year college enrollment likely reflects both supply- and demand-side factors. For example, two-year colleges offer many courses that require hands-on learning, such as assembly, repair, and maintenance courses, that would have had to reduce class sizes in response to the pandemic (<a href="https://www.sciencedirect.com/science/article/pii/S0047272722001050?via%3Dihub">Schanzenbach and Turner, 2022</a>). Further, students who enroll at two-year public institutions are more likely to have lower incomes and/or have dependents of their own, so they are likely to have faced greater barriers to enrollment during the pandemic, including increased childcare needs or lack of access to broadband internet service. However, enrollment rates continued to decline in fall 2021 as pandemic restrictions eased, labor markets strengthened, and vaccination rates improved nationwide. Indeed, enrollment declines were fairly sizable across all sectors between fall 2020 and fall 2021 (see figure 2), perhaps driven by individuals finding employment opportunities more attractive than pursuing further education. </p> <h3>2. Enrollment changes by type of institution, fall 2020 through fall 2022</h3> <figure> <img src="-/media/493CB6E597944E7995231A8369F68432.ashx" alt="Figure 2 is a column chart showing the percentage change in fall enrollment from the previous year by type of institution. The y-axis ranges from a 14 percent decline in enrollment to a 2 percent increase in enrollment. Changes in enrollment are clustered by fall calendar year on the x-axis. Enrollment changes between fall 2019 and fall 2020 are both positive and negative depending on the institution type with the largest percentage decline of 12.9 percent at public two-year colleges. Fall enrollment declined for all types of institutions in 2021 and 2022 (public two-year, public four-year, private non-profit four-year, and private for-profit four-year), but the enrollment declines are estimated to be smaller in fall 2022 than in fall 2021." /> <figcaption class="caption"> Sources: Digest of Education Statistics 2020 (<a href="https://nces.ed.gov/programs/digest/d21/tables/dt21_303.25.asp?current=yes">Table 303.25</a>); <a href="https://nscresearchcenter.org/wp-content/uploads/CTEE_Report_Fall_2021.pdf">NSC Research Center Current Term Enrollment Estimates Fall 2021</a>, <a href="https://nscresearchcenter.org/stay-informed/stayinformed_datamethodologyfall2022-2/">NSC First Look Fall 2022</a>, and Chicago Fed analysis. </figcaption> </figure> <p>The most recent data from the National Student Clearinghouse suggest that enrollments may be returning to their pre-pandemic trends. Enrollment continued to decline between fall 2021 and fall 2022 by an additional 1.1% (figure 2).<sup><a href="#ftn4" id="ftnref4">4</a></sup> However, the decline in enrollment at public two-year colleges slowed substantially in this period to −0.4%, and the overall rate of decline is much more in line with the pre-pandemic trend in enrollment, which averaged −0.8% per year from 2010 to 2019. </p> <p>Consistent with these pandemic-era declines in total number of students enrolled, the enrollment rate for recent high school completers declined an additional 3.5 percentage points to 61.8% in 2021, the lowest rate since 2001. Looking more generally at all school enrollment regardless of high school completion status, there has also been a decline in the percentage of all 16 to 24 year olds enrolled in either high school or college. The percentage of teens (aged 16 to 19) enrolled in school peaked in 2011 and declined 5 percentage points to 81% in 2021. Over the same period, the school enrollment rate for young adults (aged 20 to 24) declined from 40% to 37%.<sup><a href="#ftn5" id="ftnref5">5</a></sup> As noted earlier, falling enrollment rates may reflect that individuals find employment opportunities more attractive than pursuing further education. If this is the case, we should see corresponding rises in labor force participation.</p> <h2>Are young people entering the labor force in greater numbers (instead of going to school)? </h2> <p>Apparently not. In fact, only about half of the decline in enrollment among teens could potentially be explained by a shift to greater labor force participation, and there has been no increase in labor force participation among 20 to 24 year olds. Labor force participation of young people aged 16 to 19 declined substantially between 2000 and 2010 and has only recovered slightly over the past ten years. The labor force participation rate for individuals 16 to 19 years old was 52% in 2000 and declined by 17 percentage points to 35% in 2010. As of December 2022, the labor force participation rate for teens aged 16 to 19 had increased to 37% (figure 3). This increase is less than half the size of the decline in the share enrolled in school. Labor force participation for individuals 20 to 24 years old also declined between 2000 and 2010 but has shown no sign of recovery. Specifically, labor force participation for 20 to 24 year olds was 77.8% in 2000, declined to 71.4% in 2010, and stood at 71.3% in December 2022 (figure 3). </p> <h3>3. Labor force participation rates by age, January 2000 through December 2022</h3> <figure class="mb-3"> <img src="-/media/E644B4D722E74966BCEE60768AD95690.ashx" alt="Figure 3 is a line graph displaying monthly seasonally adjusted labor force participation rates (LFPR) for young people from January 2000 through November 2022 for three age groups—16 to 19, 20 to 24, and 16 to 24. The y-axis is the percentage of the age group participating in the labor force ranging from 0 to 90 percent." /> <figcaption class="caption"> Source: <cite>Current Population Survey</cite> data seasonally adjusted by Haver Analytics. </figcaption> </figure> <h2>How are young people spending their days? Has this changed over time? </h2> <p>We use <cite>American Time Use Survey</cite> (<a href="https://www.bls.gov/tus/">ATUS</a>) data to look for changes in how 16 to 24 year olds are spending their time as labor force participation and school enrollment rates have declined. One possible explanation for these declines could be that young people are taking on more care and other responsibilities at home rather than working or going to school and hiring outside help for childcare, elder care, and other home help services. In the figures that follow, we grouped primary activities from the time diary data into seven categories—personal care, leisure, work, school, chores, care for others, and missing—and calculated the average share of a day spent on each activity, separately for men and women. The stacked bar charts show these averages for all categories, excluding personal care, of which the largest subcategory is sleep. We show these averages separately for men and women since changes in activities may systematically differ by sex.</p> <p>Overall, young people aged 16 to 24 report spending a somewhat higher share of their day—roughly 30 more minutes—on personal care in 2019 than in 2003. The increases in time spent on personal care are largely accounted for by declines in reported time spent on leisure activities, followed by declines in the percentage of time spent caring for others. Notably, we don’t see an obvious shift from time spent on school and market work toward chores and caring for others. Also notable is that the share of time spent working was largely unchanged for both young men and young women over this period, despite the sizable declines in labor force participation rates.<sup><a href="#ftn6" id="ftnref6">6</a></sup> This suggests that hours worked increased among those who were participating, but aggregate time use patterns do not provide a clear story regarding changes in time use related to the decline in participation in school and work. </p> <h3>4. Proportion of the day young men and young women spend on different activities, 2003 through 2021</h3> <figure class="mb-3"> <img src="-/media/90039EC132744AE3A305A0CB97AA3514.ashx" alt="Figure 4 is a stacked bar chart showing what share of each day individuals aged 16 to 24 spend on various activities. The left panel is men, and the right panel is women. The y-axis displays years from 2003 through 2021 with 2020 excluded due to missing data. The x-axis ranges from 0 to 0.6 of a day with personal care excluded. Both young men and young women are spending more of their day on personal care in 2021 than in 2003." /> <figcaption class="caption"> Sources: <a href="https://www.bls.gov/tus/data/datafiles-0321.htm">American Time Use Survey 2003-2021 Microdata files</a> and Chicago Fed analysis. </figcaption> </figure> <h2>Implications for individuals’ labor market prospects and the economy</h2> <p>It is well documented that individuals who enroll and complete more education have better labor market outcomes. Specifically, <a href="https://www.bls.gov/emp/chart-unemployment-earnings-education.htm">earnings increase and unemployment decreases</a> with educational attainment, leading to corresponding declines in poverty. Further, increased educational attainment has been linked to lower mortality (<a href="https://www.sciencedirect.com/science/article/pii/S0167629616301382">Buckles et al., 2016</a>) and incarceration (<a href="https://www.aeaweb.org/articles?id=10.1257/000282804322970751">Lochner and Moretti, 2004</a>) rates, and greater civic participation (<a href="https://www.sciencedirect.com/science/article/pii/S0047272703002056">Milligan, Moretti, and Oreopoulos, 2004</a>). It can even have beneficial spillovers to the next generation, as maternal education has a positive impact on infant health (<a href="https://academic.oup.com/qje/article/118/4/1495/1925120">Currie & Moretti, 2003</a>). As such, declining enrollment of young people in higher education will likely have adverse effects on labor market and other outcomes of this generation and may adversely affect future generations as well. </p> <p>Not only will declining enrollment impact individuals and families, but declining enrollment will also likely affect growth of the U.S. economy. U.S. economic growth depends, in part, on the skills of the U.S. workforce. Thus, declining shares of young people enrolling in postsecondary education suggests that we will see associated declines in the average skill levels of the future workforce. While there has been some shift by employers toward recognizing skills obtained through channels other than formal education, the continued high average rate of return to a college education implies that the need for workers with at least some college education has not changed significantly.</p> <p>Given the individual and societal ramifications of declining enrollment rates, it will be important for researchers and policymakers to understand the causes, whether they are due to a perceived increase in the riskiness of the investment, decreased affordability, or a decline in the value of education. Further, to the extent that enrollment rate declines today instead reflect delayed enrollment, community colleges may play an important role in helping this generation attain skills later while also balancing family and work. If this is the case, community college enrollment will likely recover somewhat, and these colleges will need continued investment to meet future demand.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> Estimates of the resident population aged 18 to 21 peaked in 2011 at 18.1 million. Between 2011 and 2019, the estimated number of residents in this age range declined by 5.4%. See Digest of Education Statistics <a href="https://nces.ed.gov/programs/digest/d21/tables/dt21_101.10.asp?current=yes">Table 101.10</a>. </p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> Enrollment in the smaller two-year private for-profit sector also declined over this period, but it makes up less than 2% of total enrollment. Enrollment in the even smaller two-year private nonprofit sector increased.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> The enrollment rate of recent high school completers is based on October CPS data on the share of individuals aged 16 to 24 who had completed high school earlier in the calendar year and report being enrolled in college. See Digest of Education Statistics <a href="https://nces.ed.gov/programs/digest/d21/tables/dt21_302.10.asp?current=yes">Table 302.10</a>. Authors’ calculations using October CPS data from IPUMS-CPS, University of Minnesota, <a href="http://www.ipums.org/">www.ipums.org</a> for 2021.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> <a href="https://nscresearchcenter.org/stay-informed/">NSC Research Center First Look Fall 2022</a> data are reported separately for undergraduate and graduate enrollment. We take a weighted average of the enrollment changes using undergraduate and graduate enrollment shares for 2020 from Digest of Education Statistics 2021 (<a href="https://nces.ed.gov/programs/digest/d21/tables/dt21_303.60.asp?current=yes">Table 303.60</a>). </p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> Authors calculations based on the Annual Social and Economic Supplement of the <cite>Current Population Survey</cite> from IPUMS-CPS, University of Minnesota, <a href="http://www.ipums.org/">www.ipums.org</a>. Overall, the percentage of 16 to 24 year olds enrolled in either high school or college fell from 60% in 2011 to 58% in 2019.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> Estimates of labor force participation from the ATUS differ in levels from those in the CPS data; however, the declines are even larger. Between 2003 and 2019, the labor force participation rate for men 16 to 24 years of age in the ATUS fell by 11 percentage points, while the corresponding rate for women fell by 9 percentage points.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/2022-ag-conference https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/2022-ag-conference Tue, 20 Dec 2022 00:00:00 -0500 <div class="cfedContent__text"> <p> Rising agricultural land values, diminishing farmland availability, and limited access to credit are primary barriers to entry for new farmers. <a href="https://www.ers.usda.gov/topics/farm-economy/socially-disadvantaged-beginning-limited-resource-and-female-farmers-and-ranchers/">Socially disadvantaged</a> and women farmers and ranchers often face their own hurdles, including discrimination. And next-generation farmers are not immune to issues of land values and credit as they take over operations from older family members. </p> <p> New farmers may stay small to focus on niche markets, producing value-added products as a way to add income and introduce new products. For others, the majority of their income may come from off-ranch/farm employment, sometimes simply to provide health insurance for the family. </p> <p> With these and other issues facing new farmers, and with a new farm bill in front of Congress next year, David Oppedahl, policy advisor, Federal Reserve Bank of Chicago, opened this year’s <a href="https://www.chicagofed.org/events/2022/ag-conference">Midwest Agriculture Conference</a> by raising the following questions: Will the financial relief program for Black farmers get implemented? What about farmers from other historically underrepresented groups? How are new farmers impacted by ever-rising land costs at the same time farmland is diminishing? What about the environmental impact of new farms? How will the financial sector evolve to promote beginning and socially disadvantaged farmers and ranchers? This post summarizes the discussions from the daylong event, including a keynote by <a href="https://www.fsa.usda.gov/about-fsa/fsa-biographies/fsa-administrator/index">Zach Ducheneaux</a>, rancher and administrator of the Farm Service Agency at the U.S. Department of Agriculture. </p> <h2>Farmland access </h2> <p> Jeffrey Hopkins, Economic Research Service, U.S. Department of Agriculture (USDA), shared his agency’s ongoing research on beginning farmers and ranchers, that is, those farming for ten years or less (not including next-generation farmers). He cited credit barriers, land barriers, technology, and market-based barriers, in particular, that affect historically underserved farmers and ranchers. Beginning farmers exhibit very high reliance on off-farm income, Hopkins said, adding that the most popular beginning farm types are located in areas where they play a relatively minor role in total agricultural production, which could be a symptom of credit difficulties. </p> <p> Tax policy and goals related to land access are often in conflict, said Tia McDonald, research agricultural economist, Economic Research Service, USDA, especially when they impact intergenerational transfers and access for new farmers to land. McDonald shared a proposal that would increase land access for farmers who are young, beginning, veterans, women, or from an underrepresented racial or ethnic group. </p> <p> The American Farmland Trust policy would exclude sales of agricultural land to the target groups from taxation for up to $1 million of capital gains. Young and beginning farmers are more likely to locate in metro counties, but that’s not where available land is, McDonald said. McDonald noted she wasn’t sure how far the policy would go to encourage more intergenerational transfers. While the proposal to exempt land sales to the target population from capital gains may increase land access, the current pattern of land transfers implies that the majority of sales would be unaffected, she said. McDonald also cited additional considerations regarding geographical distribution of target populations and available land. </p> <p> While a few states, such as Minnesota and Iowa, offer estate tax benefits on selling to a beginning farmer, the proposed program would have a greater reach, if it goes into effect, said McDonald. </p> <p> Fewer farms and farmers, compounded by loss of land to development, creates a special need, said Emy Brawley, Great Lakes regional director, Conservation Acquisition, and Illinois state director of the Conservation Fund, which has a dual mission of land and water conservation and sustainable agriculture. Brawley talked about the Working Farms Fund, which provides access and business support for beginning and next-generation farmers. “Most food is grown in metro or metro-adjacent areas,” Brawley noted. “That’s the same land that’s under threat to conversion.” The acres growing food in metro Chicago declined from just over 11,000 acres in 1995 to 4,600 acres in the mid-2010s. And our regional goal is to get to 10,000 acres growing food in metro Chicago by 2050, Brawley said. </p> <p> Brawley said the benefits of getting younger farmers on the land are many: They innovate, do niche farming, try new business models, and most want to own land. The fund creates a pathway to affordable land ownership, permanently conserves farmland, accelerates the adoption of sustainable agricultural practices, and grows a resilient regional food system. </p> <p> As interim landowner, the fund bridges the differences between old and new owners and most importantly, helps the farmer to focus less on financing and more on growing their operation. </p> <p> Training partnerships help to ensure farmers’ success, and market partnerships help preserve farmland while boosting local food systems. Brawley said results of the Working Farms Fund to date include 10 participating farms of 750 acres in total, with 40 active farmers, of whom 75% are women or people of color, and $7 million invested in farmland purchases. Programs currently operate in Illinois and Georgia, and the Conservation Fund looks forward to expanding the program to other states. </p> <h2>Supporting new farmers</h2> <p> Research on the use of agricultural credit by beginning farmers was the focus of a presentation by Bruce Ahrendsen, professor of Agricultural Economics & Agribusiness, University of Arkansas. Ahrendsen looked at principal operators by race/ethnicity and gender and found that one in four are women, and about 30% are <a href="https://www.ers.usda.gov/topics/farm-economy/socially-disadvantaged-beginning-limited-resource-and-female-farmers-and-ranchers/">socially disadvantaged</a> farmers or ranchers (SDFR, as defined by the USDA) in 2017. While there’s been an increase in parts of the country, there are smaller shares of women and people of color farming in the Midwest; for example, just 1% in Iowa and 3% in South Dakota of farms are SDFR-operated. Nationwide, 70%of farmers and ranchers are non-Hispanic White men. There has been an increase in farms operated by beginning primary producers, Ahrendsen reported. He also found a significant increase in the number of woman-operated farms from 2012 to 2017 and growth in the share of Asian American farmers beginning farm operations during this period. Direct and guaranteed credit programs from the USDA’s Farm Service Agency (FSA) appear to be crucial in enabling targeted groups (SDFR and women) to access loans, he said. </p> <p> However, the programs may not be as effective at correcting historical inequities. The potential effects of alleged discrimination on SDFR exit from farming are important to acknowledge, Ahrendsen added. </p> <p> But nearly 75% of all SDFR farmers didn’t pay interest (indicating no debt financing), according to Ahrendsen, raising the question of whether SDFR farmers might still be underserved. This concern seems somewhat less problematic in the Midwest than for the entire country. Is it because of farm structure differences, regional differences, differences in banking operations, or lending practices, he asked? Are there more resources available? These are all issues requiring future consideration, Ahrendsen said. </p> <p> A project that focuses specifically on developing and supporting Black farmers is the <a href="https://www.blackoakscenter.org/mission-approach">Black Oaks Center</a> in Pembroke Township, IL. Jifunza Wright-Carter is co-founder and president of this program in what was a thriving Black farming community in the 1940s–50s, Wright-Carter said, when 2,000 acres helped feed a region that extended to Detroit and Cleveland. “Our mission is to take the community from fallow to fruitful,” by restoring farming, re-establishing local food systems, and securing the needed resources and skill sets to successfully restore Black farming in Illinois and the Midwest, said Wright-Carter. Black farming is endangered with only about 188 farms out of a total 70,000 farms registered in Illinois, Wright-Carter said, in stark contrast to 890 in the 1920s. </p> <p> Black Oaks Center faces challenges, according to Wright-Carter, citing land loss prevention, leasing land to train apprentices to farm, paying back taxes to turn farmland into a revenue-generating source, increasing equipment access to small farmers, expanding access to markets, and establishing third-party distributors, for example. </p> <p> The center is also looking for lending programs that provide greater access to capital, tax incentives, and grant opportunities that will grow local equitable agro-economies, Wright-Carter said. To help make the project successful, the center looks to partners, such as the Chicago High School for Agricultural Sciences, Conservation Fund, Food Finance Institute, and Savanna Institute. </p> <p> Wright-Carter sees a sign that Illinois is supporting innovations in farming, she said: The governor has signed a bill providing assistance to BIPOC (Black, Indigenous, and people of color) farmers to help address food insecurity in the state. </p> <p> Also focusing on ways to support the next generation of farmers was Shari Rogge-Fidler, president and CEO, Farm Foundation, and a member of the USDA’s Equity Commission. Rogge-Fidler is also a fifth-generation farm operator in Nebraska, continuing a 150-year tradition. </p> <p> Rogge-Fidler said it’s important to cultivate the next generation of farmers and understand the changes in farming and for farmers themselves. For example, Rogge-Fidler said, when new women farmers consider where to locate, they may also be looking at access to health care and schools. </p> <p> The Farm Foundation is an accelerator of practical solutions for agriculture issues, Rogge-Fidler said. Farmer health, digital agriculture, market development and access, and conservation and sustainability are some focus areas. The foundation supports programs for mentors of next-generation farmers, as well as informing agricultural leaders. Another piece of the foundation’s work is with beginning and SDFR farmers through emerging research and providing resources and tools for beginning farmers and ranchers, including publications and conferences. </p> <p> The foundation has purchased farmland in Libertyville, IL, for its <a href="https://www.farmfoundation.org/innovation-education-campus/">Innovation and Education Campus</a> to provide local, regional, and global in-person and virtual programs. Plans include holding boot camps for agricultural businesses and policymakers to promote restorative agriculture. </p> <h2>Keynote: Farmer and FSA administrator Zach Ducheneaux</h2> <p> Zach Ducheneaux, FSA administrator, USDA, is intimately familiar with barriers to farming and ranching. “I was a child of the farm financial crisis,” in the 1980s, he said. Ducheneaux came to his present position via time as executive director of the Intertribal Agricultural Council (IAC). He also served as a tribal council representative for the Cheyenne River Sioux. </p> <p> He began by sharing a personal story: “The Production Credit Association saw fit to stop lending in Indian Country because of a couple bad apples and withheld operating credit for my old man. Production Credit withholding the capital that was needed for him to continue our ranching operation started a cascading effect, where pretty quick, the Farmer’s Home Administration said, hey, we need to get paid up too. So, he liquidated the cow herd, kept the land together, and we had to start over. He was 51 at that time, 51 and starting over with seven kids. So that will help you understand the formative processes that helped develop the philosophies that I’m trying to bring to bear as your administrator at the Farm Service Agency.” </p> <p> Ducheneaux then shared his own farm credit story: “I went to six different banks and was turned down for a loan to buy some cows, even with a 90% guarantee by the Bureau of Indian Affairs. So, redlining and lenders' unwillingness to serve where they should really motivates everything that I do today because that still happens.” So that discrimination, both in its active form and its passive form, still are pervasive in the industry, he added, “and one of my jobs as the administrator here at the FSA is to try to chip away at that.” </p> <p> Ducheneaux argued that: “Loan servicing should be used as a proactive tool. Instead of waiting for someone to fall off the cliff and try to lift them back out, do some data analytics, take a look at equity positions, take a look at balance sheet ratios, and step in there sooner.” </p> <p> The FSA’s entire direct loan portfolio is about $6 billion a year. So, there's a lot of other capital out there, and the way the FSA can help farmers access that capital to start to advocate about what the agency is doing, Ducheneaux said. </p> <p> The grand vision Ducheneaux would like to bring to bear during his tenure at the FSA, he said, is a system of agricultural finance that is really an investment in that producer, that has a return that covers the cost of capital, and that has repayment terms that are dictated by the producer. If there’s an investment out there that's paying for its own cost and meeting some other needs, and the producer can pay it back at their comfort, that eliminates a lot of their stress, he added. </p> <p> “There’s a quote that I've heard and butchered repeatedly,” Ducheneaux said: “A system is perfectly designed to create what it produces.” Our system is perfectly designed for an ever-aging rancher, ever-aging farmer, more consolidation, and increasing debt, Ducheneaux added, and “we're going to have to do it differently if we want to have a different outcome.” </p> <h2>Financial capital for beginning farmers and generational transfers </h2> <p> The conference culminated in a discussion with two specialists in farm lending, Paul Dietmann, senior focused lending specialist with Compeer Financial, and Brad Guse, senior vice president at BMO Harris Bank. Chad Jorgensen, senior supervision manager, Federal Reserve Bank of Chicago, who is based in Des Moines, moderated the discussion. </p> <p> Jorgenson asked: Do we have right tools for where agriculture is going? Dietmann described the emerging market program he leads, which has at its center a microloan effort begun in 2017. He said the program now has 300 participants, with a $5 million portfolio. While these loans are often under-collateralized because of unusual crops and animals or specialized equipment, they have been very successful, Dietmann said. </p> <p> Are some niches more successful than others, Jorgensen asked? Dietmann said organic vegetables, value-added products, cideries, and, most recently, flower production have become profitable. The struggle has been in indoor agriculture, which is very capital intensive, he added, and costs are astronomical in cold climates. </p> <p> Guse shared that he’s seeing more strategic alliances and growing niche markets. For example, in the dairy sector, renewable natural gas extends profitability, he said. </p> <p> The panel went on to discuss challenges in generational transitions. Jorgensen asked: Do the size and type of operations matter? Guse said his bank sees layers of new entity formations. Nonfarm investments or larger operations make a transition more complicated. “Small or large, communication is a big hurdle,” he said. </p> <p> Dietmann concurred that communication is the hardest piece: “It helps to have a third party facilitate the conversation. Everybody has a vested interest.” He suggested that it is important for the farmer to have a plan in place before seeing a lawyer. </p> <p> Even with open communication among parties, Jorgensen asked, what obstacles affect the transfer of a farm operation? Guse said the parties need to be proactive, not reactive. So many make a death plan instead of an estate plan, he said. They can’t start soon enough to make plans because of the complicated nature of a management transfer, tax implications, etc. And flexibility is important, Guse said. </p> <h2>Conclusion</h2> <p> In closing the conference, Leslie McGranahan, vice president and director of regional research at the Chicago Fed, shared the following takeaways from the day: </p> <ul class="cfedList--bulleted"> <li>Farming is not a particularly easy way to make a living, but people have a real connection to farming and to feeding the people in their communities. And the connection can be shared through stories that are both personal and community based.</li> <li>There’s a lot of comparability with the conversations that we’re having today and the conversations we have about small businesses, in general, around access to credit, transitions, getting started, record keeping, lending, and lending products. Supports need to meet people where they are.</li> <li>The barriers to entry are both complex and nuanced—so access to capital at the right price and terms is important. You need land where people are and where they want to be, i.e., in urban-adjacent areas. And you also need farmland to open up to a new generation in order to have some of these transitions happen.</li> <li>Agricultural land and market access is increasingly complex.</li> </ul> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/annual-economic-outlook-symposium https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/annual-economic-outlook-symposium Tue, 20 Dec 2022 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>The Chicago Fed’s 36th annual <a href="https://www.chicagofed.org/events/2022/2022-economic-outlook-symposium">Economic Outlook Symposium</a> was held on December 2, 2022, where participants provided their insights and perspectives on the health of the economy in 2022 and forecasts for 2023. Charles Evans, president of the Chicago Fed, kicked off the event by highlighting the long history of the symposium and describing some of the notable economic challenges facing the Midwest and the entire country over the years. Thom Walstrum, senior business economist with the Chicago Fed, reflected on the 2022 consensus forecast received at last year’s symposium and presented the consensus forecast for 2023. Thomas Klier, senior economist and economic advisor with the Chicago Fed, moderated a panel on the key regional industries, and Thom Walstrum moderated a panel on households and the labor market. The keynote speaker, Northern Trust chief economist Carl Tannenbaum, and panel participants, comprising economists and sector specialists, provided their views on the state of economy and societal well-being. These invited speakers’ perspectives and forecasts submitted by participants make up the basis for this summary, and, thus, the information provided does not necessarily represent the views of the Federal Reserve System.</p> <p>The main takeaways as communicated by the symposium’s speakers include that real GDP growth is currently weak, but the U.S. economy is not in recession, and a “soft landing” is not out of the question for 2023. Inflation remains high to the detriment of consumers, but price growth is beginning to cool in line with Fed policy actions taken in 2022 to raise the federal funds rate. The labor market remains tight, with demand for workers outpacing supply in most industries. Labor market imbalances are keeping upward pressure on wages, which makes the fight to control inflation more challenging for the Fed. The supply chain woes of the past couple of years are easing, though not yet eliminated, with shipping costs coming down, benefiting both businesses and consumers. Symposium participants spoke of elevated inflation, geopolitical challenges (including Russia’s invasion of Ukraine, China’s Covid-19 policies, and tensions between China and Taiwan), and energy costs as risks to their forecasts in 2023</p> <h2>Sectoral performance</h2> <p>There is good news on the inflation front, Tannenbaum explained, resulting from lower housing prices, declining transoceanic shipping costs, higher inventories on the part of businesses, and fewer delays receiving materials through supply chains. Kanlaya Barr, director of corporate economics at John Deere, reiterated that supply bottlenecks are easing from her vantage point, noting that conditions are the best they have been in two years and are likely to improve further in 2023. Many commodity prices are also coming down, she said, including for wheat, steel, oil, and lumber. General Motors’ chief economist Elaine Buckberg reported that while the auto industry as a whole contributed significantly to inflation in the last couple of years, “our contribution has gotten smaller as prices have stabilized,” and used car prices are moderating as well. Nevertheless, tight labor market conditions and the resulting upward pressure on wages continue to challenge policymakers in their efforts to control inflation, as noted by various panel members. Conference Board chief economist Dana Peterson explained that “many businesses are throwing money at the problem by raising wages to not only attract workers but to retain workers.” Despite the continued wage pressure, the consensus forecast is for inflation to lessen, falling to 3.7% (Q4 2023 over Q4 2022) compared with 7.6% for the corresponding period last year.</p> <p>With labor shortages continuing in many sectors following the Covid-19 supply shock, “one of the mysteries continues to be how the labor markets will evolve,” Tannenbaum said. Thousands of working-age people lost their lives during the pandemic, others are out of the workforce because of long Covid, and still others remain out of the workforce with lingering concerns about Covid-19, including many workers age 55 and older, all contributing to low labor force participation, he added. Peterson explained that labor market participation among older workers has not rebounded from the early days of the pandemic, and labor shortages are the greatest in professions where you have to physically show up for work, including in healthcare, professional and business services, hotels and restaurants, manufacturing, and transportation. Susan Dunseth, vice president of business development at Skills for Chicagoland’s Future, explained that women and African American workers have remained disproportionately out of the workforce since the start of the pandemic. Labor shortages across industries are also partially a result of stricter immigration policies, which were put in place before the pandemic, Peterson added. Furthermore, worker productivity data is “disappointing,” Tannenbaum said, and he questioned whether working remotely may be a contributing factor. Notwithstanding the currently tight labor market, the consensus forecast is for the unemployment rate to rise from 3.7% in Q4 2022 to 4.4% in Q4 2023.</p> <p>In an effort to lessen labor market imbalances and improve productivity, Dunseth’s organization, Skills for Chicagoland’s Future, acts as a business intermediary by understanding the workforce needs of its business clients and supplying them with workers with appropriate skills in a quick and efficient manner. Dunseth noted that, in response to the limited supply of workers, she witnessed that employers are expanding efforts to invest in their employees through various types of trainings at all levels—including for entry level workers—to demonstrate that “they are a value to the organization.” Working against some of these efforts, Dunseth explained that there are some disincentives in place for some individuals to seek out higher paying jobs as it may mean they lose some public assistance benefits, for which she suggested further dialogue to address this important issue.</p> <p>Due to high inflation, many consumers are finding it difficult to afford basic necessities, as wages are typically not keeping up with inflation, reported Peterson. Overall, consumers are spending more on services, especially “experiences” over goods, which is the opposite trend that we saw at the height of the pandemic, she said. Consumers are also facing housing affordability challenges, with the rapid home price acceleration from earlier in the pandemic continuing to reflect in higher rents, although some relief for renters is in sight, she added. Moreover, potential home buyers face prices that are still very high and the inventory of homes for purchase is down considerably in 2022, Peterson said. Tannenbaum predicted that housing prices and rents should continue to soften over the next 12 months, helping to bring down the shelter inflation component. At the same time, general borrowing among households is on the way up, although “a strong labor market is usually the best guarantee against default in that sector,” he said. </p> <p>The manufacturing sector has had bright spots as well as challenges in 2022, many of which can be traced back to the Covid-19 shock. In the auto industry, production was up overall in 2022 over 2021, but the industry is still hampered by chip shortages—although to a lesser degree than earlier in the pandemic, Buckberg explained. The industry also continues to be constrained by labor supply issues and high turnover rates, impacting productivity, she said. The easing of supply chain disruptions in 2022 benefited companies in the heavy machinery sector, Barr noted, reporting that John Deere’s sales were up 40% in Q3 2022 over Q3 2021. With respect to the transportation industry, Kenny Vieth, president of ACT Research, reported that freight costs are coming down, helping with the fight against inflation. In terms of freight market activity, ACT is forecasting a decline of 5% in 2023 (based on their freight composite, which applies weights for various GDP components because different segments create freight at different rates). Vieth attributes the freight market decline primarily to lower home-building activity (which is a freight-intensive industry) and consumers spending less on goods purchases. Container ship backlogs have also “largely dissipated,” he said, but the shortage of truck drivers remains a concern. Looking to 2023, the members of the panel suggested that supply chain issues are likely to continue but at a much lower level than in 2022. </p> <p>Efforts to shift production to electric vehicles to address climate change are gaining speed, with Buckberg expecting the auto industry to increase its sales of electric vehicles from 17% of total U.S. sales in 2025 to 44% in 2030. Klier and Buckberg both acknowledged the challenges of building up charging infrastructure and accessing adequate amounts of critical material supplies for batteries. Buckberg also pointed out the important role government programs (notably, the infrastructure package and the Inflation Reduction Act) play in trying to address these obstacles. Vieth added that moving to electric heavy trucks is a greater challenge as they are more costly than electric cars, they take more time to charge, and the charging infrastructure for trucks is not widely available yet.</p> <p> Tannenbaum said that “banks are in great shape,” with a lot of cash currently on their balance sheets, while at the same time, financial markets have been volatile in response to monetary policy tightening. The higher interest rates mean higher costs of credit card debt and mortgage debt for consumers, as well as higher costs to service the government debt, which creates potential risks in funding future government programs, he added. </p> <p>Roy Ahn of NORC at the University of Chicago reported on polling that his organization conducted in the summer of 2022 using a representative sample of adults nationally. They found that while few people feel their lives are back to normal following the pandemic, the availability of vaccines, boosters, and the build-up of natural immunity have led many people to return to their old routines of going out and gathering with people. Among those who were social in the pre-pandemic period, eight out of ten people indicated they were likely to go to a bar or restaurant, travel, visit older relatives, or attend church, Ahn reported. When asked about their view of the health of the national economy, as of January 2020, about 60% described the national economy as “good,” but as of October 2022, only 23% thought so. Relatedly, “people’s mental health really suffered over the last few years,” Ahn added</p> <h2>Overall outlook</h2> <p>Expectations for growth in GDP in 2023 hinge on a number of factors as expressed by conference participants, including the impact of the Federal Reserve’s monetary policy tightening measures on economic activity, geopolitical risks, and uncertainty over future energy prices. Peterson noted that consumer spending is slowing, including for big ticket items like appliances and cars, which she believes is in response not only to a shift in preferences to services but also in response to elevated prices and rising interest rates. On the flip side, the loosening of supply chain disruptions is helping manufacturers ramp up production, Buckberg explained. Tannenbaum sees a narrow path for a soft landing in 2023, and the consensus forecast among the conference participants is for 0.6% real GDP growth (Q4 2023 over Q4 2022) following a 0.2% increase in the previous corresponding period. Walstrum pointed out that this consensus growth rate forecast for real GDP for the coming year does not portray a recession, yet it does represent significantly slower growth than in 2021.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/examining-retirement https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/examining-retirement Tue, 29 Nov 2022 00:00:00 -0500 <div class="cfedContent__text"> <p>Americans are failing to claim tens of millions of dollars held in Individual Retirement Accounts (IRAs), one reason why experts are calling for changes in a system that is not providing retirement security for a significant number of households. Also contributing to the challenges facing retirees: 401(k) plans–which have replaced pensions for much of the nation’s workforce–often are not being funded sufficiently, and financial literacy lags well behind where it needs to be.</p> <p>Those were among the key takeaways from “Retirement in America: Underfunded 401(k)s and Forgotten IRAs,” an October 18, 2022, Federal Reserve Bank of Chicago Economic Mobility Project virtual event exploring the growing difficulties facing Americans who wish to retire with a semblance of fiscal security. The problem is especially acute, panelists said, for lower-income workers, who tend to change jobs more frequently and have less capacity to contribute to self-funded retirement plans. </p> <p>“The (retirement) industry tends to cater to the clients who are affluent and leave behind the lower-wage, as well as, unfortunately, people who are of color and women,” said J. Mark Iwry, a nonresident senior fellow in economic studies at the Brookings Institution and one of the event’s expert panelists. </p> <p>Aiming to connect the economic research the Chicago Fed produces with policymakers, the Economic Mobility Project was founded at the Bank in 2022. Previous events examined <a href="~/link.aspx?_id=411FBD05D34A44F585B65709912080A9&_z=z">redlining and blockbusting</a> as contributors to the racial wealth gap and the question of what is meant by <a href="~/link.aspx?_id=0A99E04D4FAC410E97F397D69675E048&_z=z">inclusive full employment</a>.</p> <p>The 65-minute retirement event, which can be seen <a href="~/link.aspx?_id=0E5627484634428FB0AA309F7BCDDDF8&_z=z">on replay here</a>, featured Federal Reserve Bank of Chicago economists and a range of other experts on the topic. They shared not only their analysis of what has gone wrong, but some of their best ideas for improving things going forward, including legislatively. </p> <p>“I think in terms of policy space, it's likely to be sort of small changes at a time to strengthen the existing system,” said Shanthi Ramnath, a senior economist at the Chicago Fed, who earlier in the event shared findings from the recent paper she co-authored, <a href="~/link.aspx?_id=34946DDABFB34EB3AE409A15CBFA92AF&_z=z">“Set It and Forget It? Financing Retirement in an Age of Defaults.”</a></p> <p>Ramnath told attendees that people abandoning or losing track of IRAs is of increasing concern in this era of workers being enrolled in such plans by default. According to the research, tax data showed that 0.4% of one cohort of retirement-age people appeared to have abandoned some $66 million held in IRAs. While these numbers are small, there is a concern about people increasingly losing track.</p> <p>That’s just one facet of the new research, prompted, Ramnath said, by the intuitive sense that people who work multiple jobs over a lifetime may well forget about or be unable to locate some of the employer-mandated retirement accounts they accumulate. “There’s even been in the past some policy proposals that sort of address this,” she said. “But to date there hasn't really been that much empirical work to get a sense of the scope of this issue.”</p> <p>To combat the problem, she suggested several policy changes that are worth examining. They include increased education and some form of easy consolidation of workers’ multiple accounts, such as a “retirement dashboard” to keep tabs on their savings. (Ramnath elaborated on those thoughts in the policy brief, <a href="~/link.aspx?_id=0F1DC7E1BA6D4E5F82365C640C7CCC30&_z=z">“Americans Are Abandoning Their IRAs. What Can Be Done?”</a>)</p> <p>While knowing where your retirement dollars are is important, so, too, is having enough of them to keep you secure.</p> <p>To that end, Chicago Fed senior economist Enrichetta Ravina presented a summary of her joint research paper, <a href="~/link.aspx?_id=201A1F2C29394DA58DC519389AF66BEB&_z=z">“Retirement Savings Adequacy in U.S. Defined Contribution Plans.”</a></p> <p>The study’s headline finding is that three in four workers are not saving enough to be able to maintain a standard of living comparable to the one they had while working, a threshold defined at 80% of their work-life earnings. To reach that conclusion, Ravina and her co-authors studied more than 350,000 U.S. workers enrolled in 401(k) plans and developed “a new methodology to evaluate retirement savings adequacy,” she said, simulating 10,000 scenarios for each worker to predict the wealth they will have at age 65.</p> <p>Savings inadequacy is acute for a significant proportion of workers. “We also find that one in three workers will have to decrease their standard of living once they reach retirement by more than 10% per year,” Ravina said. </p> <p>A potential bright spot was the finding that workers under age 40 are more likely than their elders to be on track to meet that retirement adequacy threshold. </p> <p>To address the problem of insufficient retirement savings, Ravina suggested policymakers consider ways to encourage workers to boost savings rates, currently at 6.3% in the sample, up to 10%. Another possibility: Limit withdrawals people are able to take beginning at age 59. (Ravina’s policy brief on the topic is entitled <a href="~/link.aspx?_id=D1374CEAE93B4CBF8DE93FF37F3F11F1&_z=z">“In the Future, Americans’ 401(k)s May Be Underfunded—Here Are Some Suggested Solutions.”</a>)</p> <p>The panel discussion that followed brought in Iwry, who is also a visiting scholar at UPenn’s Wharton School; Annamaria Lusardi, a professor of economics and accountancy at the George Washington University School of Business; and Sita Nataraj Slavov, professor of public policy at George Mason University and a nonresident senior fellow at the American Enterprise Institute. Journalist Kristin Myers (The Balance) moderated.</p> <p>The findings presented are “quite somber,” Lusardi said. Not only are people not saving enough, but “some workers are simply forgetting or not using their retirement accounts, and the money forgone, as Shanthi has shown us, is not always small.”</p> <p>The current system can be too much “one size fits all,” she said. Against such a backdrop, financial literacy, a core understanding of how retirement plans can be made to work best for individuals, is paramount: “We need a system that makes it easy for people to save for retirement, but also that they know what they are doing,” said Lusardi.</p> <p>Iwry outlined three important proposed policy changes he said he has had a hand in developing: </p> <ul class="cfedList--bulleted"> <li>Automatic enrollment in plans such as 401(k)s, including automatic increases in contribution levels over time.</li> <li>As is starting to happen at the state level, automatic enrollment into such plans for the 55 to 60 million workers who don’t have access to them through their employer. “We need to get them into the system, at least give them a realistic chance,” he said.</li> <li>And a “savers tax credit to make saving more remunerative for people who are in the lowest tax brackets.” </li> </ul> <p>Slavov, meanwhile, cautioned people not to forget about Social Security in these discussions. Automatic enrollment in retirement plans can be “a powerful tool,” she said.</p> <p>“But… understanding Social Security is hugely important because for most people, especially people with lower incomes, that's their biggest retirement asset,” said Slavov. “So it is very important to understand what you're going to get from Social Security and then how you need to optimize your own retirement saving around that.”</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/community-bankers-symposium https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/community-bankers-symposium Mon, 28 Nov 2022 00:00:00 -0500 <div class="cfedContent__text"> <p>The <a href="~/link.aspx?_id=7F42E65528F14D4D8C664D113DF2AA76&_z=z">16th annual Community Bankers Symposium</a>, held on Friday, October 21, 2022, focused on the headwinds and tailwinds affecting community bankers, with a special focus on the impact of cybertechnology and the risk of cyber threats banks face in today’s rapidly changing environment. The event was hosted jointly by the Federal Reserve Bank of Chicago (FRB Chicago), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Conference of State Bank Supervisors.</p> <p>Julie A. Williams, executive vice president of Supervision and Regulation at FRB Chicago welcomed community bankers, senior policymakers, and experts to the symposium, and challenged the audience to consider, “How we can be diligent in the current cyber environment? How can we find new paths and innovation in community banking? Lastly, how are community banks doing?”</p> <h2>Economic outlook</h2> <p>Charlie Evans, president and CEO of FRB Chicago, addressed the pressing topic of the current economic outlook: rising interest rates and inflation. Monetary policymakers are now significantly tightening policy to bring inflation back in line with their price stability mandates. </p> <p>“I see the nominal funds rate rising to a bit above 4.5% early in 2023 and then remaining at this level for some time while the FOMC assesses how our policy adjustments are affecting the economy,” said Evans.</p> <p>Inflation is expected to subside next year, so with those expectations and when reductions in the Fed’s balance sheet (known as quantitative tightening) are factored in, Evans said he expects the stance of policy to be at a place nearly equivalent to a real fed funds rate of 2%. He noted that this is far above the one-quarter to one-half percent estimated benchmark long run neutral rate. </p> <p>Reducing inflation may cause some softening of labor market conditions. “However, ensuring low and stable inflation is a prerequisite for achieving the sustained strong labor market outcomes that bring benefits to everyone in our society,” Evans said. </p> <p>The unemployment rate is currently 3.5% and is projected to rise to 4.4% by late next year and remain near that level until 2024 and 2025. While this does represent a noticeably softer labor market when compared to today’s level, Evans pointed out that these are certainly not recession-like numbers. </p> <h2>Cyber vigilance in the current environment: Keynote fireside chat</h2> <p>Retired admiral Mike Rogers, former NSA director and head of U.S. Cyber Command and the Central Security Services, spoke about the current state of cyber risks, including ransomware, faced across sectors and industries. </p> <p>For most U.S. institutions and individuals, non-state criminal actors pose the biggest challenge—causing the explosion of criminal activity in cyber space over the past decade. Rogers noted that cyber-criminal activity and ransomware attacks impact all of us across every industry regardless of size and geographical footprint. While quantifying the scale of ransomware attacks precisely is difficult since most attacks go unreported, he pointed out that “it is estimated that cyber criminals will take in $1.5 trillion in revenue as we end 2022, and that figure could approach $5 trillion by 2025.”</p> <p>This represents a challenge to the sustainability of cyber security and cyber resiliency efforts, as not all firms have the same financial resources for tackling this continuously growing problem.</p> <p>Despite this seismic challenge, Rogers said he was encouraged to see government and the private sector partnering to combat these issues, as well as greater private sector responsiveness and government-led accountability for cyber performance. He noted that “we need to be collaborators, not competitors in cyber resiliency,” working together with industry groups, peers, regulators, and law enforcement as resources to help combat these challenges.</p> <p>Rogers noted that for smaller institutions, finding the right partners to help combat cyber threats and managing vendors is a challenge, while their ability to be agile and react quickly to changes is an advantage of their small scale. </p> <p>Lastly, Rogers emphasized transparency as an important way to improve management of cyber security and ransomware risks, noting, for example, that “companies that have paid the ransom can help prevent similar scenarios for others by sharing their experience.”</p> <h2>Innovation: Community bank trends and opportunities </h2> <p>Nathan Perry, associate deputy comptroller, OCC, moderated a panel of bank regulators from across the District. The panel featured Ric Brunskill, senior vice president, regional and community supervision, FRB Chicago; Karen Boehler, senior deputy comptroller, midsize and community banks, OCC; Chris Dietz, deputy director, Indiana Department of Financial Institutions; and Nicole Orlando, assistant regional director, FDIC.</p> <p>Brunskill discussed the rising interest rate environment and the impact on banks across the District, particularly from increasing accumulated other comprehensive income (AOCI). He said that when evaluating the adequacy of a bank’s capital position, regulators generally prioritize other measures of capital rather than the tangible equity capital ratio, which can be significantly adversely impacted by rising AOCI. Other parties, such as the Federal Home Loan Bank, external rating agencies, and firms providing brokered deposits to financial institutions, may place more weight on the tangible equity capital ratio and this is something bankers should be mindful of, he said.</p> <p>Boehler highlighted some community bank initiatives at the OCC. Notably, the OCC will reduce assessments against national banks beginning in March 2023. “Our review of the geographic footprint and degree of examiner travel during the Covid-19 pandemic found efficiencies in the OCC’s assessment structure,” she said. And “many impacted bankers shared they intend to use these cost savings toward investing more in technology or preventative measures against cyber risks,” she added. She also discussed the importance of an innovation strategy and noted that engaging with your primary regulator is an excellent first step when pursuing new initiatives.</p> <p>Dietz discussed the overall strong credit conditions at community banking organizations across the District and highlighted several key asset-quality metrics, most of which compare favorably to the same measure immediately prior to the Covid-19 pandemic. Dietz noted that these are lagging indicators and bankers should be proactively identifying and working with their problem customers now in anticipation of possible economic headwinds. He discussed the importance of capital planning, performing stress-testing exercises, and having reasonable triggers in place to drive how capital is allocated and accumulated.</p> <p>Orlando discussed the FDIC’s five key priorities for 2022, including strengthening the Community Reinvestment Act, addressing the financial risk posed by climate change, reviewing and modernizing the Bank Merger Act, evaluating crypto asset risk, and finalizing the Basel III capital rule. </p> <h2>Financial performance of community banks </h2> <p>Doreen Eberley, director, Risk Management Supervision, FDIC, discussed the persisting inflationary pressures, supply chain challenges, and labor competition. As a result of these factors, the industry is under stress and there are potential vulnerabilities in: commercial real estate values; other asset values and the potential for borrower strain; and interest rate risk and liquidity.</p> <p>Eberley acknowledged that commercial real estate values are one of the largest single holdings on community banks’ balance sheets, noting that “the FDIC is focused on management’s efforts to identify and work with borrowers experiencing strains in the current rate environment due to rising rates and related changes to market demands.”</p> <p>The FDIC is looking at interest rate risk and liquidity, which accounts for a significant amount of interest risk on banks’ balance sheets. “The funding pressures may increase for those banks that offer more wholesale [products] or are more rate-sensitive funding sources,” Eberley noted.</p> <p>While liquidity is strong now, it could change if banks are forced to sell securities to cover losses, which may impact regulatory capital and market perceptions. Regulatory agencies are working together to monitor unrealized losses and actively engaging with institutions that have exposure.</p> <p>Lastly, Eberley reiterated the criticality of cybersecurity risk management practices, which continue to be a high-priority focus of the supervisory program, including relevant safety and soundness standards, periodic guidance, alerts, and advisories technical assistance.</p> <p>She further underscored that examination helps examiners focus on controls that bolster an institution’s effectiveness in the event of a threat. “Through FDIC Connect,” she said, the FDIC “will amplify messages from law enforcement and security agencies to inform banks and service providers of potential threats.”</p> <h2>Closing the cyber agility gap </h2> <p>Bob Maley, inventor, author, futurist, and chief cybersecurity officer at Black Kite, outlined ways to close the cyber agility gap. Maley noted that bad actors are focused on accessing an organization’s cybersecurity systems to determine vulnerability of their assets. Cybersecurity defenses should be designed to disrupt cybercriminals’ decision-making, by employing an OODA Loop strategy developed by the United States Airforce, which consists of four phases: observe, orient, decide, and act.</p> <p>Today’s cybersecurity is failing because criminals are increasingly innovative, and many vendors are vulnerable and not classified as high risk, Maley said. Current regulations encourage a qualitative classification-based approach instead of a risk-based approach, he added, for identifying high-risk third-party vendors. Maley advised companies to employ a quantitative approach, thereby measuring risk in dollars rather than risk tiers.</p> <p>Inherent risk should be redefined as vulnerabilities that would have the largest impact in the absence of controls. Maley said, organizations should ask, “what represents the highest risk today and the probable financial impact?” The cost of a data breach now averages $75.21 million, including so-called low-risk vendors, he said, but excluding those vendors, it averages a much lower $15.01 million. Seventy-four percent of incidents originate from third parties. The OCC advocates continuous monitoring based on vendor grading, but that has not proven effective against third party risk, Maley said, because vendors are so diverse and have different risk profiles.</p> <p>Banks should assess the probable financial impact of a cyberattack in the next 12 months, according to Maley. Despite favorable community bank cybersecurity risk assessment scores, there were still 4,000 critical cybersecurity control failures reported this year, he said. Guidelines from both the International Organization for Standardization (ISO) and the National Institute for Standards and Technology (NIST) advise banks to replace their risk assessment model with Factor Analysis of Information Risk (FAIR) to develop a risk assessment process, Maley said. He noted that the international consortium The Open Group has developed an enterprise cyber risk taxonomy that should be incorporated into the cyber risk assessment process, based on what’s at stake for the bank.</p> <p>To change the game, banks need to understand how a bad actor looks at them, Maley said. According to recent surveys, he added, vulnerabilities include a 67% chance of a ransomware attack and a 32% chance of insider threats. Ransomware attacks focus on vulnerabilities, including open critical ports, phishing domains, remote code execution, endpoint security, leaked credentials, company size, and email security, in the most vulnerable industries like banking. Closing those gaps, he said, will greatly reduce the likelihood of a successful ransomware attack. Staying agile, he added, should allow community banks to stay ahead of cyber threats and mitigate risk.</p> <h2>Cyber insurance: How much is enough?</h2> <p>Ben Zviti, managing director, Financial and Professional Products (FINPRO) and FI cyber-crime leader, Marsh & McLennan, provided his perspective on cyber insurance, including what is covered, what is not covered, the cyber insurance market today, and what factors are considered in assessing the adequacy of limits.</p> <p>Cyber policies cover cyber extortion and ransomware, including the costs to pay ransom demands and for vendors to negotiate ransom. However, paying a ransom to anyone on the OFAC sanction list is not allowed, Zviti said. Any allegation that the bank failed to protect customer information or their network, he noted, would trigger a liability policy that covers defense costs and judgments.</p> <p>Insurance carriers worry most about systemic risk and privacy regulations, Zviti said. Systemic risk is a widespread event where the insured is indirectly impacted by something that impacts many. The insurance company must pay a lot of claims when the insured is not even directly attacked, he said. The second most important worry for insurance carriers, he said, is privacy regulations. There is not a federal standard, but a few states have adopted some regulations. Operating or having a customer in one of those states requires that the regulations are followed, he said.</p> <p>“The advent of ransomware has caused insurance rates to go up substantially over the last two years,” Zviti said, and bad actors know they can get paid up to the insurance limit. Financial institutions generally do a much better job of securing their systems, but insurance companies have still increased the costs due to other industries that are not as secure, Zviti said. The cyber insurance application is much longer than other types of insurance applications while the insurance company checks that a minimum number of controls are in place, he added. If a bank does not have controls in place, such as multifactor authentication, end point detection and response, encrypted backups, privileged access management, and email filtering and web security, the bank may not even get insurance, he said.</p> <p>Zviti noted that it is possible that cyber insurance requirements could increase to include patch and vulnerability management, cyber incident programs, cyber awareness training, hardening techniques, logging and monitoring, end-of-life systems, and vendor risk management. He said that the more you can hit on these control elements, the better the outcome of the cyber insurance renewal.</p> <p>As for the question of how much cyber insurance is enough, Zviti said organizations should perform a cost benefit analysis to understand the total cost of risk, the mitigating controls, and residual risk, then determine how much of that risk is transferable into the insurance market. He recommended asking the bank’s risk adviser for peer benchmarking to see what other banks of the same size and geo footprint are doing and then assessing the adequacy of the limits.</p> <h2>Closing remarks</h2> <p>At the close of the symposium, Nathan Perry, associate deputy comptroller of Midsize & Community Bank Supervision at the OCC expressed his thanks to everyone who presented and attended. Perry confirmed the 2023 Community Bankers Symposium will be held on November 17, 2023.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/used-car-market-electric-vehicles https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/used-car-market-electric-vehicles Thu, 17 Nov 2022 00:00:00 -0500 <div class="cfedContent__text"> <p>The motor vehicle industry is facing a momentous paradigm shift away from cars and trucks powered by the internal combustion engine (ICE) <a href="~/link.aspx?_id=74474E3461B641E8B20F13A1DFA625B6&_z=z">toward those powered by electricity</a>. There are a number of environmental policy reasons—notably, the goal to reduce greenhouse gas (GHG) emissions in the transportation sector—helping to drive this technological transformation in the automotive sector. To date, U.S. policymakers have generally focused on raising the share of electric vehicle (EV) sales among new vehicle sales.<sup><a href="#ftn1" id="ftnref1">1</a></sup> Currently, the <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/08/05/fact-sheet-president-biden-announces-steps-to-drive-american-leadership-forward-on-clean-cars-and-trucks/">official goal</a> in the United States—as set by the Biden administration in August 2021—is for half of new vehicle sales in 2030 to be made up of sales of <a href="https://afdc.energy.gov/vehicles/electric_basics_ev.html">battery electric vehicles (BEVs)</a>,<sup><a href="#ftn2" id="ftnref2">2</a></sup> <a href="https://afdc.energy.gov/vehicles/electric_basics_phev.html">plug-in hybrid electric vehicles (PHEVs)</a>,<sup><a href="#ftn3" id="ftnref3">3</a></sup> and <a href="https://afdc.energy.gov/vehicles/fuel_cell.html">fuel cell electric vehicles (FCEVs)</a>. Yet, economic factors will very much influence the diffusion of EV technology across the country. For instance, at $66,000, the average price of new EVs in 2021 was <a href="https://www.nytimes.com/2022/08/08/business/energy-environment/electric-vehicles-climate-bill.html">$20,000 higher</a> than the average price of all new cars.</p> <p>In this blog post, we examine how the used vehicle market might serve as the mechanism by which BEVs become more popular and prevalent. To address this question, we expand on a <a href="~/link.aspx?_id=E51C8CF0B5684A6186798F1C5799EEBD&_z=z">previous blog post</a> that utilized vehicle registration data to explore the used BEV market. In the United States, the overall used car market has historically been two-and-a-half to three times larger than the overall new car market, according to <a href="https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles">data from the U.S. Transportation Department’s Bureau of Transportation Statistics</a>. So, the used car market can play an important role in the wider adoption of the new automotive propulsion technology.</p> <h2>Data</h2> <p>To study how the used car market has helped popularize BEVs thus far (and could help in the future), we look at over a decade’s worth of vehicle registration data. We utilize data from two sources: 1) the AutoCount database from Experian Automotive and 2) the Wards Intelligence Data Center. The AutoCount database comprises the universe of nonfleet<sup><a href="#ftn4" id="ftnref4">4</a></sup> vehicle registrations across the entire United States, sourced from state-level department of motor vehicles (DMV) title and registration data. These data are updated monthly. We use data from AutoCount on the make (e.g., Chevrolet), model (e.g., Blazer), model year, odometer reading, registration date (month and year), and new or used indicator of all vehicle registrations from model year (MY) 2010 through MY2021.<sup><a href="#ftn5" id="ftnref5">5</a></sup> We refer to a make-model of a specific model year (e.g., the 2021 Chevrolet Blazer) as a <i>product</i> for the remainder of this blog post. We start with data for MY2010 because annual BEV sales had broken 5,000 units in MY2011 and we wanted to begin tracking the registration data shortly before that milestone was hit.<sup><a href="#ftn6" id="ftnref6">6</a></sup> From Wards Intelligence we add information on the vehicle powertrain (gasoline, electric, hybrid, etc.) to the registration data.</p> <h2>Analysis</h2> <p>There are 248 million light vehicle registrations in the 12 model years of our data sample. Those registrations can be matched to 3,078 unique products. Because we cannot observe individual vehicles (by vehicle titles or vehicle identification numbers) over time, we track the changes to all product registrations on a monthly basis. In order to keep track of the aging for each product, we set its age to (month) 1 when its very first new registration appears in the data set; with each passing month since that point, the product’s age goes up by one month. This approach allows us to compare all observed products by their ages. Distinguishing a product’s age—by tracking the number of months since the first new registration—results in 222,724 observations (given that an observation is a product-age). </p> <p>A new vehicle becomes a used one when it is registered as used. To measure the rate at which new vehicles become used ones, we determine a ratio: For each product we divide its cumulative used registrations observed through month <i>t</i> by all its new registrations ever recorded in our data sample.<sup><a href="#ftn7" id="ftnref7">7</a></sup> We call this the used vehicle prevalence ratio, as it measures the transition rate from new to used vehicles. Figure 1 shows the weighted average of this measure for all 3,078 products, anchored by age as measured in months from the first new registration of each product. The weights are determined by the number of new registrations per product. This ratio starts out as zero, as only new vehicles are registered initially. Over time, new vehicles turn into used ones—first at an accelerating rate, but then at a decelerating rate. At age 120 months (ten years) the used prevalence ratio settles at just below 0.8.</p> <h3>1. Used vehicle prevalence ratio, by age, model years 2010–21</h3> <figure> <img src="-/media/C417050A84154B45A3EAC385CE15C67E.ashx" alt="Figure 1 is a line chart that plots the rate at which new vehicles turn into used ones in our data sample. For each product, we divide its cumulative used registrations observed through month t by all its new registrations ever recorded in the sample. We take a weighted average across all the products at each age (in months)—with the weights determined by the number of new registrations per product." /> <figcaption class="caption"> Notes: See the text for the definition of the used vehicle prevalence ratio for all the products (the make-models of specific model years) in our sample. Age is measured by the number of months since the first unit of a product was registered as new.<br /> Source: Authors’ calculations based on data from AutoCount. </figcaption> </figure> <p>Next, we distinguish the transition rates from new to used vehicles according to the products’ powertrain type (see figure 2). In our analysis of the vehicle registration data, we identify four mutually exclusive categories of powertrain type for the sample’s products: internal combustion engine; hybrid, including plug-in hybrid (see note 3); mixed (which refers to make-models available with two or more powertrain options that cannot be clearly delineated in the data);<sup><a href="#ftn8" id="ftnref8">8</a></sup> and pure battery electric. We find that the transition rate from new to used vehicles for products with battery electric powertrains is behaving very differently from the transition rates for the products in the other three categories.</p> <h3>2. Used vehicle prevalence ratio, by age and powertrain category, model years 2010–21</h3> <figure> <img src="-/media/C5B15B0C4C7A48BEA2FE60E2F33CA3B8.ashx" alt="Figure 2 is a line chart that plots the rates at which new vehicles turn into used ones in our data sample. It distinguishes vehicles and products by four different types of powertrains: internal combustion engine; hybrid, including plug-in hybrid; mixed (which refers to make-models available with two or more powertrain options that cannot be clearly delineated in the data); and pure battery electric. For each product, we divide its cumulative used registrations observed through month t by all its new registrations ever recorded in the sample. We take a weighted average of these values across the products in each powertrain category at each age (in months)—with the weights determined by the number of new registrations per product." /> <figcaption class="caption"> Notes: See the text for the definition of the used vehicle prevalence ratio, as well as for details on the four powertrain categories, for the products (the make-models of specific model years) in our sample. Age is measured by the number of months since the first unit of a product was registered as new.<br /> Sources: Authors’ calculations based on data from AutoCount and Wards Intelligence. </figcaption> </figure> <h2>BEVs transition to the used market more slowly</h2> <p>Figure 2 shows that BEV products do transition from being new to used vehicles at a much slower rate than any of the other types of products. For example, at 60 months (five years) of a product’s age, 55% of ICE vehicles have changed status from being new to used. For BEVs the transition happens much more slowly: Only 14% of BEV products are registered as used at the same age marker of 60 months. </p> <p>What can explain the significantly longer ownership spells of new BEV products? There are likely several factors. One might be a relatively lower willingness on the part of BEV owners to sell or trade in their vehicles because of their strong personal commitment to the new, cleaner technology. Another might be the fact that improvements to BEVs can be <a href="https://cleantechnica.com/2022/10/26/latest-tesla-ota-update-increases-charging-speed-adds-other-features/">gained simply through software downloads and installations</a>, possibly obviating the need to buy a newer version of the same model. And yet another reason could be lower usage of BEVs (compared with ICE vehicles) by their owners because of “<a href="https://www.jdpower.com/cars/shopping-guides/what-is-range-anxiety-with-electric-vehicles">range anxiety</a>,” or the fear of running out of battery power while driving. Lower relative usage of a BEV due to range anxiety reduces its wear and tear and might lengthen the ownership spell. In the next section, we explore this last factor for why BEVs are taking longer to transition to used status.</p> <h2>Exploring one possible explanation for the lack of used BEVs</h2> <p>We can investigate the relevance of vehicle usage in the decision to hold on to a vehicle, given that our data set allows us to observe a vehicle’s odometer reading every time it gets registered. Figure 3 shows the average odometer readings for used vehicles within each of the four powertrain categories at every age (in months) of the products. One can clearly see that used BEVs show significantly lower mileage than all other types of vehicles. For example, at age 120 months (ten years) an average used BEV has been driven for about 50,000 miles—less than half the mileage of an average used vehicle in any of the other three powertrain categories. Our finding of low BEV usage by their owners is consistent with a <a href="https://www.nber.org/papers/w28451">recent study</a> using a sample of BEVs registered in California. </p> <h3>3. Average odometer readings of used vehicles, by age and powertrain category, model years 2010–21</h3> <figure> <img src="-/media/656180B283494AE4A937E40D9FDB08AD.ashx" alt="Figure 3 is a line chart that plots the average odometer readings of used vehicles in our sample. The figure distinguishes vehicles and products by four different types of powertrains: internal combustion engine; hybrid, including plug-in hybrid; mixed (which refers to products available with two or more different powertrain options that cannot be clearly delineated in the data); and pure battery electric. We take an average of the odometer readings for the vehicles within each of the four powertrain categories at each age (in months) of the products. An odometer reading is observed when a vehicle’s registration changes." /> <figcaption class="caption"> Notes: See the text for details on the four powertrain categories for the products (the make-models of specific model years) in our sample. Age is measured by the number of months since the first unit of a product was registered as new.<br /> Sources: Authors’ calculations based on data from AutoCount and Wards Intelligence. </figcaption> </figure> <p>The difference in usage between BEVs and other types of vehicles is rather striking. The observed lower usage of BEVs is consistent with a slower transition rate to used vehicle status. As a result, the used vehicle channel has not nearly been as relevant for popularizing BEVs as it could be. This insight suggests that if the usage deficit for BEVs could be addressed—for instance, by building out the network of charging stations—the resulting higher usage of BEVs could also lead to more transactions in the used vehicle market and, thereby, boost the dispersion of this new technology. </p> <p>We will conduct further investigations with these vehicle registration data, so watch out for additional posts reporting our results.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> One caveat is that the <a href="https://www.congress.gov/bill/117th-congress/house-bill/5376/text">Inflation Reduction Act</a>, which was passed in August 2022, does <a href="https://www.electrificationcoalition.org/wp-content/uploads/2022/08/SAFE_1-sheet_Webinar.pdf">incentivize purchases of <em>used</em> electric vehicles through tax credits</a>.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> More details on BEVs—which are also referred to as all-electric vehicles (AEVs)—are provided by <a href="https://crsreports.congress.gov/product/pdf/R/R46231">Diaz (2020, p. 11)</a>. In 2022 the share of BEV sales among new light vehicle (car and light truck) sales in the United States reached 5.2% (year-to-date as of November 2022), according to our calculations based on data from Wards Intelligence.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> PHEVs are primarily distinguished from other <a href="https://afdc.energy.gov/vehicles/electric_basics_hev.html">hybrid electric vehicles (HEVs)</a> by the fact that PHEVs can be charged from an external power source and can run without gasoline. For more details on both HEVs and PHEVs, see <a href="https://crsreports.congress.gov/product/pdf/R/R46231">Diaz (2020, pp. 9–10)</a>.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> Fleet vehicles are those owned by an organization (e.g., a rental car company or governmental agency), not an individual (such vehicles are considered nonfleet). Further details on fleet vehicles are <a href="https://www.lendingtree.com/auto/should-i-buy-a-used-fleet-vehicle/">available online</a>.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> The data we use in this blog post were imported from the AutoCount database on September 23, 2021.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> General Motors’ <a href="https://electricvehiclesnews.com/History/Companies/General_Motors_EV1.htm">EV1</a> was only available for lease on a very select basis from 1996 through 1999. Tesla started selling its Roadster BEV in MY2008, but the number of sales for that model was extremely small, amounting to 1,329 units over five years, according to data from Wards Intelligence.</p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> For example, say that for a specific make-model only 100 new units were sold of a specific model year. Thirty-six months (three years) after the first unit of that product was sold, 40 of the 100 cars are now registered as used. The product’s used prevalence ratio at that point is 0.4 (which is derived by dividing 40 by 100). Notably, given the nature of our data set and our approach to analyzing it, when the same vehicle is registered as used more than once, we would treat it as if it were two or more different vehicles registered as used. Given this limitation, the used prevalence ratio for a particular product could exceed one.</p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> For example, the 2015 Ford Fusion was available as a gasoline-powered (ICE) vehicle, as well as a hybrid vehicle (HEV and PHEV). The registration data do not allow us to distinguish between the varieties (with different powertrains) of the same product, such as the 2015 Ford Fusion.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/internal-migration-patterns https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/internal-migration-patterns Wed, 16 Nov 2022 00:00:00 -0500 <div class="cfedContent__text"> <p>The 2008 financial crisis and the recession that followed saw unemployment soaring and house prices declining. The unemployment rate remained stubbornly high during the recovery that started in 2010. One factor that helps us to understand the slow pace of the recovery is the lack of internal migration to better job markets within the United States. While substantial internal migration flows have long been an important feature of the U.S. labor market,<sup><a href="#ftn1" id="ftnref1">1</a></sup> internal migration dropped significantly during and after 2008 and reached a record low during the global financial crisis (<a href="https://www.nber.org/papers/w18507">Kaplan and Schulhofer-Wohl, 2017</a>).<sup><a href="#ftn2" id="ftnref2">2</a></sup> Prior research suggests that the decline in house prices, which meant that homeowners were less likely to sell their homes and move to new job opportunities, lowered migration rates.<sup><a href="#ftn3" id="ftnref3">3</a></sup> Less internal migration likely contributed to a misallocation of workers and therefore contributed to the slow pace of the recovery. </p> <p>Utilizing credit bureau data, we take a fresh look at U.S. internal migration between 2011 and 2019—that is, after the Great Recession and before the 2020 Covid-19 pandemic—and study whether and, if so, when internal migration recovered.<sup><a href="#ftn4" id="ftnref4">4</a></sup> Using the ZIP codes households live in that are included in the credit bureau data, we can track whether households left a metropolitan statistical area (MSA). Moving from one MSA to another is a clear indication of a longer distance move, presumably for work reasons, rather than changes at the ZIP code level, which could indicate moves within an MSA without changes in employment. So, we calculate migration rates at the MSA-level that we use to document internal migration flows. We find that starting around 2016, when the national unemployment rate dropped below 5%, indicating a tight labor market, internal migration increased significantly. We also document that during this period, migration of individuals ages 25 to 35 years old shifted sharply towards MSAs with larger shares of white-collar jobs, consistent with the most mobile workers moving to new opportunities. </p> <p>We then zoom in on the Seventh District.<sup><a href="#ftn5" id="ftnref5">5</a></sup> We find that while the District’s migration rates were lower than the national average, its migration patterns were comparable to those of the U.S. We document that most MSAs in the Seventh District exhibited higher net outmigration rates of younger workers than of all workers.</p> <h2>Data</h2> <p>Our analysis relies on the Federal Reserve Bank of New York/Equifax Consumer Credit Panel (FRBNY CCP), which consists of detailed credit-report data for a unique longitudinal panel of individuals and households in quarterly increments beginning in 1999. The FRBNY CCP is an anonymized, nationally representative 5% random sample of individuals that have a Social Security number and credit report. This data set allows us to track all aspects of household-level credit and debt, including student loans, and crucially, the ZIP code of residence, which can be assigned to a county in a given quarter. Using the geographical information, we construct migration patterns on the individual level.</p> <p>Since we are interested in migration patterns after the Great Recession, we use data from the first quarter of 2011 to the fourth quarter of 2019. Additional sample restrictions that we impose are: All individuals need to be in the sample for at least five years. The reported data on the individual are available for each quarter without gaps. The individual did not move between counties more than once in a given year. </p> <p>We focus on moves between MSAs. For this purpose, we match county Federal Information Processing Standards (FIPS) codes with the corresponding MSA identifier. We then aggregate inflows and outflows to the MSA level.<sup><a href="#ftn6" id="ftnref6">6</a></sup> </p> <p>For our analysis, we also use MSA-level occupational employment and wage statistics from the Bureau of Labor Statistics (BLS). Specifically, we used total employment numbers for white-collar/professional occupations. </p> <h2>Time series evidence </h2> <p>We begin our analysis by examining the internal migration between MSAs during the recovery from the Great Recession to assess whether migration rates stayed at low levels or increased. </p> <h3>1. Annual internal migration rates between MSAs </h3> <figure> <img class="" src="-/media/CA10BA0E7C854136928C5AA6441892D7.ashx" alt="This figure shows the annual migration rate, the unemployment rate, and the non-accelerating inflation rate of unemployment (NAIRU). The annual migration rate is stable around 1.6 percent between 2011 and 2016. In 2017, the rate increases to almost 2 percent and remains around this level until 2019. The unemployment rate continuously drops from about 9 percent in 2011 to 3.5 percent in 2019. The NAIRU is about 4.8 percent for the whole sample period. Notably, the NAIRU and the unemployment rate have about the same value in 2016." /> <figcaption class="caption"> Notes: The internal migration rate between MSAs is defined as the number of individuals moving between MSA divided by the total population and measured in percent (left y-axis). The unemployment rate and the non-accelerating inflation rate of unemployment (NAIRU) are shown on the right y-axis. <br /> Source: NYCCP/Equifax, BLS (via FRED), CBO (via FRED). </figcaption> </figure> <p>The blue line in figure 1 plots the internal migration rate defined as the number of individuals moving between MSAs divided by the total population in a given year from 2011 to 2019.<sup><a href="#ftn7" id="ftnref7">7</a></sup> Consistent with migration rates during the recession reported by Kaplan and Schulhofer-Wohl (2017), in the first five years of our sample, internal migration rates were between 1.5% and 1.7%. Starting in 2016, internal migration rates notably increased to about 2%.</p> <p>One potential reason for increased internal migration rates is improved labor market conditions encouraging workers to move MSAs for new job opportunities. The black line in figure 1 plots the national unemployment rate during the sample period. The red dashed line shows the non-acceleration inflation rate of unemployment (NAIRU) or natural rate of unemployment. The NAIRU is a common measure of how tight the labor market is. If the unemployment rate is above the NAIRU, then unemployment is higher than expected in the long run. If, in contrast, the unemployment rate falls below the NAIRU, the labor market is considered to be tight, and firms have to offer higher wages to attract workers. The figure shows that by 2016, the unemployment rate had decreased to about 5%, close to estimates of the NAIRU—suggesting a tight labor market. Consistent with tight labor markets increasing wages and, hence, opportunities for workers, the internal migration rate picked up around 2016 and remained at a higher level. </p> <h2>MSA-level evidence</h2> <p>We now focus on the MSA level to better understand which MSAs were seeing in-migration and outmigration, on net, in each year between 2011 and 2019. We define the annual net migration rate as the annual inflow minus annual outflow of people as a percentage of the total MSA population. We then take the average over these net migration rates over our sample period and plot these average net migration rates for the period 2011–19 in the figures below. We also construct migration rates for younger workers, those ages 25 to 35, to assess potential drivers for migration patterns.</p> <p>Figure 2, panel A plots the average net migration rates for the overall MSA population against the net migration rates for those ages 25 to 35.<sup><a href="#ftn8" id="ftnref8">8</a></sup> Most MSAs exhibit average net migration rates close to 0. MSAs below the 45-degree line in the bottom-left quadrant see a net outmigration that is driven by differentially larger outflows of 25- to 35-year-olds compared with the total average net migration. These MSAs are likely to experience medium- and long-term challenges to their economic prospects, as a differentially larger net outflow of younger workers does not only suggest a lack of labor market opportunities for these workers, but also limits the attractiveness of the area for new potential employers going forward. There are a significant number of MSAs (218) in the bottom-left quadrant. While these areas tended to be smaller, we found no discernable regional patterns.<sup><a href="#ftn9" id="ftnref9">9</a></sup> </p> <h3>2. Average net migration rate (overall) vs. average net migration rate (ages 25–35)</h3> <h4>A. Full sample</h4> <figure> <img class="" src="-/media/798808396FA6426FA53ABF169AABA5D0.ashx" alt="This figure shows the average net migration rate for the sample period for the overall population of a given MSA against the average migration rate for individuals ages 25 to 35. The key insight is that if an MSA loses populations through outmigration (a negative net migration rate), individuals ages 25 to 35 are driving this population loss. Conversely, MSAs that are growing experience relatively higher inflows of individuals ages 25 to 35 compared to the total population. The figure highlights that these trends are not specific to the top 10 MSAs." /> </figure> <h4>B. Top 50 MSAs</h4> <figure> <img class="" src="-/media/043150B4E814479F9D3CA6C9958CCB95.ashx" alt="This figure shows the same graph as panel A with only the top 50 most populated MSAs in our sample. The MSAs with the significant inflows, especially of individuals ages 25 to 35, are Austin, TX, Dallas, Houston, Atlanta, and Denver. Rochester, NY has the most drastic outmigration. However, most top 50 MSAs are near the 45 degree line, meaning that most of them do not disproportionately lose younger individuals." /> <figcaption class="caption"> Notes: Panel A plots the average net migration rate for the sample period for the overall population of a given MSA against the average migration rate for individuals ages 25 to 35. The annual net migration rate is defined as the inflow minus outflow of people as a percentage of the total MSA population. Panel B shows the same graph with only the top 50 most populated MSAs in our sample. <br /> Source: NYCCP/Equifax. </figcaption> </figure> <p>Figure 2, panel B focuses on the top 50 most populated MSAs. The top ten most populated MSAs in the sample along with outliers are labeled. Of the top ten, only the Atlanta-Sandy Springs-Alpharetta, Dallas-Fort Worth-Arlington, and Houston-The Woodlands-Sugar Land areas experienced net in-migration from other MSAs. This in-migration was driven by younger workers, ages 25–35. The other seven of the top ten MSAs experienced small outflows, on net, with little difference between the overall population and younger workers. </p> <p>We now study the composition of migrant workers in more detail. Specifically, we examine the average net migration rates of workers ages 25 to 35 who were college educated. Since Equifax does not contain information on individual educational attainment, we use student loans as an indicator for having gone to college. There are several caveats to this measure: 1) some students never took out student loans, 2) not everyone taking out student loans finished college, and 3) some households may have already paid off their student loans.<sup><a href="#ftn10" id="ftnref10">10</a></sup> </p> <h3>3. Average net migration rate (overall) vs. average net student migration rate (ages 25–35)</h3> <figure> <img class="" src="-/media/DF6D97D23EE24E8BBEBB729C275B01CA.ashx" alt="This figure shows the average net migration rate for the sample period for the overall population of a given MSA against the average migration rate for individuals ages 25 to 35 with student loans. The key insight is that if an MSA loses populations through outmigration (a negative net migration rate), individuals ages 25 to 35 with student loans are driving this population loss. However, the MSAs experiencing the largest outflows of individuals ages 25 to 35 with student loans are smaller MSAs with large universities such as Bloomington, In." /> <figcaption class="caption"> Notes: The average net migration rate for the sample period for the overall population of a given MSA is plotted against the average migration rate for individuals with student loans ages 25 to 35. The annual net migration rate is defined as the inflow minus outflow of people as a percent of the total MSA population. <br /> Source: NYCCP/Equifax. </figcaption> </figure> <p>Figure 3 plots the average net migration rates of those with student loans against the net migration rate of the MSA population. While the overall patterns are comparable to those in figure 2, it is worth noting that the largest MSAs appeared to experience less outmigration of college-educated, young workers, on net. For instance, the Miami-Fort Lauderdale-Pompano Beach metropolitan average is now above the 45-degree line, while it was below the 45-degree line in figure 2. This pattern indicates that this MSA experienced less net outmigration of college-educated young workers than of non-college-educated young workers, resulting in a somewhat more educated workforce, on average. </p> <p>More generally, the MSAs in the lower left quadrant are smaller. These MSAs experienced a differently larger net outmigration of college-educated young workers, suggesting that these smaller MSAs were experiencing a “brain drain.”<sup><a href="#ftn11" id="ftnref11">11</a></sup> </p> <p>We also study migration patterns by the prevalence of jobs that are more likely to require college degrees. For this purpose, we split the sample by above and below the median share of white-collar jobs in 2011 based on the Bureau of Labor Statistics’ Occupational Employment and Wage Statistics data, which provides annual total employment numbers by occupation for each MSA.<sup><a href="#ftn12" id="ftnref12">12</a></sup> Since figure 1 showed an acceleration in internal migration, we further split the data into a pre period from 2011 to 2016 and post period from 2017 to 2019.<sup><a href="#ftn13" id="ftnref13">13</a></sup> For each period, we calculate the mean net migration rates for each split by age group.</p> <p>Figure 4 shows the difference in the net migration rates between those above and below the 2011 median white-collar job shares for the 2011–16 and 2017–19 periods for all workers ages 25–35 and those with student loans. To give a sense of magnitude, the blue bar in the left panel indicates that MSAs with relatively more white-collar jobs attracted, on net, 0.17 percentage points more workers ages 25–35 annually than MSAs with relatively fewer white-collar jobs during 2011–16. In the left panel, we see that the difference in net migration rates increases to 0.43 percentage points annually between 2017 and 2019. This increase indicates that when internal migration rates increased in general, net migration to MSAs with relatively more white-collar jobs increased significantly more than to MSAs with relatively fewer white-collar jobs. This change in the difference is particularly pronounced for college-educated young workers (figure 4, right panel). Here, the difference in net migration rates increases from 0.38 percentage points annually to 0.86 percentage points annually. One interpretation of this finding is that with an overall increase in migration, the brain drain experienced by smaller MSAs with fewer professional jobs accelerated.</p> <h3>4. MSA average net migration rate difference</h3> <figure> <img class="" src="-/media/5892C796AEBA4B1798963A1DFF16D664.ashx" alt="This figure shows the differences in migration rates of individuals ages 25 to 35 on two dimensions: time (2011-2016 and 2017-2019) and share of white-collar jobs. The left panel shows for all in individuals ages 25 to 35, the differences in net migration rates of MSAs above and below the median share of white-collar job increased from 0.17 percentage points in the 2011-2016 sample period to 0.43 percentage points 2017-2019 sample period. The means that between 2017-2019, individuals ages 25 to 35 were much more likely to move to or stay in MSAs with above median share of white-collar jobs. The right panel restricts the sample to individuals ages 25 to 35 with student loans. In this sample, the difference increases from 0.38 percentage points in the 2011-2016 sample period to 0.86 percentage points 2017-2019 sample period." /> <figcaption class="caption mb-4"> Notes: For each period, the average net migration rate difference for MSAs above and below the 2011 median employment share of the professional, science, and technical sector. <br /> Source: NYCCP/Equifax, BLS. </figcaption> </figure> <h3>5. Annual MSA migration rates (Seventh District/U.S.)</h3> <figure> <img class="" src="-/media/4CD43EA333AE44829A31DA07FD062271.ashx" alt="This figure shows the annual migration rate for the United States (see also figure 1) and the 7th districts for 2011-2019. While the 7th districts exhibit migration rates that are about 0.4 percentage points lower than the US migration rates, the overall counter over time is the same. " /> <figcaption class="caption"> Note: The black line shows internal migration rate between MSAs from figure 1, while the blue line shows internal migration rates for only the Federal Reserve Seventh District. <br /> Source: NYCCP/Equifax. </figcaption> </figure> <h2>Seventh District</h2> <p>We now zoom in on the Seventh District. Figure 5 compares annual MSA migrations rates between the Seventh District and the U.S. The migration rates for the Seventh District are lower than for the U.S. However, the Seventh District exhibits the same aggregate pattern over time. Migration rates went up after 2016, though the increase was less pronounced in 2017 than for the U.S.</p> <p>Figure 6 recreates figure 2, panel A for the Seventh District with the five most populated MSAs and notable outliers labeled. Most MSAs were experiencing net outmigration with little difference by age group for the largest MSAs. However, we note that most MSAs in the Seventh District saw higher net outmigration of younger workers than of the population. While MSAs with large universities faced the largest outflows of young workers, the overall net loss of younger workers across the Seventh District illustrates the challenges due to the long run decline in manufacturing in the Midwest.<sup><a href="#ftn14" id="ftnref14">14</a></sup> </p> <h3>6. Seventh District average net migration rate (overall) vs. average net migration rate (ages 25–35)</h3> <figure> <img class="" src="-/media/E3E95DB6AA9C4EEDB7A3076D7F3C95BF.ashx" alt="This figure shows the average net migration rate for the sample period for the overall population of a given MSA against the average migration rate for individuals ages 25 to 35 for MSAs in the 7th district. The key insight is that almost all MSAs in the 7th District experience net outmigration, especially of younger workers. MSAs with the largest net outmigration rates of individuals ages 25 to 35 are small MSAs with large universities and colleges: Ames, IA, Iowa City, IA, Urbana-Champaign, IL, Bloomington, IN, and Ann Arbor, MI." /> <figcaption class="caption"> Note: The Federal Reserve Seventh district average net migration rate for the sample period for the overall population of a given MSA is plotted against the average migration rate for individuals ages 25 to 35. <br /> Source: NYCCP/Equifax. </figcaption> </figure> <h2>Conclusion</h2> <p>We show that starting in 2016, internal migration rates across U.S. MSAs went up, with a tight labor market being the likely driver. We provide supporting evidence by showing that more young people, especially those with a college education, moved to MSAs with higher shares of white-collar/professional jobs. This trend holds for the Seventh District as well, although it is less pronounced than for the nation as a whole.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> <a href="https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.3.173">Molloy, Smith, and Wozniak (2011)</a> discuss the history and trends of internal migration in the U.S.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> <a href="https://pop.umn.edu/sites/pop.umn.edu/files/dewaard-johnson-combined.pdf">DeWaard, Johnson, and Whitaker (2019)</a> find continued low migration rates after the 2008 financial crisis, when compared to earlier periods.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> <a href="https://www.tau.ac.il/~itaysap/mobility_mar2013.pdf">Kothari, Saporta-Eksten, and Yu (2013)</a> report a drop in migration rates of homeowners by 27%. Whether negative home equity accounts for this drop is subject to debate. While Ferreira, Gyourko, and Tracy (<a href="https://www.nber.org/papers/w17405">2011</a>, <a href="https://www.newyorkfed.org/research/economists/medialibrary/media/research/epr/2012/EPRvol18n3.pdf">2012</a>) present some evidence for the importance of the decline in home values, <a href="https://www.nber.org/papers/w16701">Schulhofer-Wohl (2012)</a> finds that households with negative home equity were somewhat more likely to move and<a href="https://www.chicagofed.org/publications/chicago-fed-letter/2011/september-290"> Aaronson and Davis (2011)</a> find no evidence for differences between homeowners and renters.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> <a href="https://www.chicagofed.org/publications/blogs/midwest-economy/2022/migration-before-and-during-pandemic">Lavelle and Kepner (2022)</a> use data from a large moving company and show that the patterns of migration in the Seventh district did not change during Covid.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> The Seventh Federal Reserve District covers the state of Iowa; 68 counties of northern Indiana; 50 counties of northern Illinois; 68 counties of southern Michigan; and 46 counties of southern Wisconsin.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> For robustness, we also constructed the same measures for commuting zones and found similar results.</p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> Note that these internal migration rates are somewhat biased downward as we divide by total population and not by population living in MSAs.</p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> We only consider MSA-to-MSA migration.</p> <p><sup><a href="#ftnref9" id="ftn9">9</a></sup> Thirty-five percent of these MSAs are in the Midwest, 32% in the South, 18% in the Northeast, and 15% in the West. </p> <p><sup><a href="#ftnref10" id="ftn10">10</a></sup> About 72% of college students financed their studies with debt (<a href="https://journals.sagepub.com/doi/epub/10.1177/0895904820951119">Ison, 2022</a>).</p> <p><sup><a href="#ftnref11" id="ftn11">11</a></sup> Some of these MSAs are college towns such as Bloomington, IN and hence this pattern is expected for some smaller MSAs.</p> <p><sup><a href="#ftnref12" id="ftn12">12</a></sup> The occupations we included to calculate the share of white-collar jobs were Management, Business and Financial Operations, Computer and Mathematical, Architecture and Engineering, Life, Physical, and Social Science, Legal, and Office and Administrative Support. We chose these occupations according to NAICS code 54 (Professional, Scientific, and Technical Services).</p> <p><sup><a href="#ftnref13" id="ftn13">13</a></sup> We drop MSAs for which less than 1,000 individuals were sampled.</p> <p><sup><a href="#ftnref14" id="ftn14">14</a></sup> Ames, IA, is home to Iowa State University, Iowa City to the University of Iowa, Urbana-Champaign to the University of Illinois, Urbana-Champaign, Ann Arbor, MI, to the University of Michigan, and Bloomington, IA, to Indiana University. These MSA are most likely experiencing a large net outflow of young individuals because these individuals were graduate students. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/racial-wealth-gap https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/racial-wealth-gap Fri, 19 Aug 2022 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>Our second Economic Mobility Project virtual event brought economics and policy professionals together to discuss the racial wealth gap in America — and how discriminatory twentieth century housing policies have compounded over generations to affect the wealth of individuals and families today.</p> <p><a href="~/link.aspx?_id=08A3A14D8AB94710ACF0843DD02D3982&_z=z">Watch the full event</a></p> <hr /> <h2>2:04 - Economic Facts about the U.S. Wealth Gap</h2> <p>Kristen Broady opened the event with data on racial disparities in income, employment, homeownership, education, access to credit, and retirement savings — all factors that contribute to a persistent gap in net worth between Black and White households in particular. These findings are showcased in a recent working paper, <a href="~/link.aspx?_id=0859D7E533394399AA77D1A511BE3477&_z=z">Seven Economic Facts About the U.S. Racial Wealth Gap</a>.</p> <p>The seven facts:</p> <ol style="line-height:125%"> <li>Racial disparities in income are significant and persistent.</li> <li>In 2019, the average White household had 5.2 times greater wealth than the average Hispanic household and 7.8 times greater wealth than the average Black household.</li> <li>Higher unemployment rates and lower household incomes for Black Americans reflect a history of structural barriers to economic mobility.</li> <li>White Americans have higher rates of homeownership than Black and Hispanic Americans.</li> <li>Black and Hispanic Americans have significantly less saved for retirement than their White and Asian American counterparts.</li> <li>Black and Hispanic Americans are less likely to be fully banked and more likely to pay higher banking fees than White Americans.</li> <li>While White students are more likely to earn a baccalaureate degree, Black and Hispanic graduates shoulder a higher financial burden.</li> </ol> <div class="card mb-3 cyan-blockquote"> <div class="row no-gutters"> <div class="col-3 mb-0"> <img src="-/media/6AFFAE1A1E034D02A2884CF9A535F4FF.ashx" alt="Kristen Broady" /> </div> <div class="col-9"> <div class="card-body"> <blockquote>“Homeownership is part of the American Dream… [The data] shows annual homeownership rates by race or ethnicity from 1983 to 2021, clearly illustrating a significant gap in homeownership between White, Black, and Hispanic households.”</blockquote> <p><strong>Kristen Broady</strong>, Senior Economist, Economic Advisor and Director of the Economic Mobility Project, Chicago Fed</p> </div> </div> </div> </div> <hr /> <h2>11:42 - The Effects of Redlining Maps on the Long-Run Trajectories of Neighborhoods</h2> <p>Next, Daniel Aaronson examined recently discovered lending maps created by the Home Owners’ Loan Corporation (HOLC) in the 1930s, using them to establish the practice of redlining as a contributing factor to the racial wealth gap today, generations later.</p> <p>Key takeaways from the presentation:</p> <ul style="line-height: 125%;"> <li>Redlining has long been suspected to have led to financial disinvestment in neighborhoods, but until recently, there has been little quantitative evidence of long-run effects.</li> <li>Research finds strongly suggestive evidence that reduced access to capital had causal effects over subsequent decades on neighborhood segregation and housing markets.</li> <li>Redlining resulted in lowered human capital investment and lifetime earnings of children growing up on the lower-graded side of redlining maps.</li> </ul> <div class="card mb-3 cyan-blockquote"> <div class="row no-gutters"> <div class="col-9"> <div class="card-body"> <blockquote>“This new research fits nicely into a growing literature and economic history that stresses the highly persistent effects that policy can have.”</blockquote> <p><strong>Daniel Aaronson</strong>, Senior Vice President and Associate Director of Research, Chicago Fed</p> </div> </div> <div class="col-3 mb-0"> <img src="-/media/7ED6C370A80548E7A53BB12957B6428D.ashx" alt="Daniel Aaronson" /> </div> </div> </div> <hr /> <h2>25:21 - Blockbusting and the Challenges Faced by Black Families in Building Wealth Through Housing in the Postwar United States</h2> <p>Then, Daniel Hartley introduced the postwar practice of blockbusting as another contributing factor to the racial wealth gap, tracking the economic outcomes of neighborhoods targeted for racial turnover in comparison to neighboring areas.</p> <p>Key takeaways from the presentation:</p> <ul style="line-height: 125%;"> <li>Tract-level analysis indicates blockbusting caused extreme racial turnover and relative declines in housing prices.</li> <li>An example neighborhood in Baltimore, Edmondson Village, had high rates of foreclosure as a result of blockbusting, which likely put downward pressure on prices over time.</li> <li>Previous blockbusting studies estimate positive returns on investment (ROI) for White households, negative ROI for Black households, and sizeable house price markups in neighborhoods targeted for blockbusting.</li> </ul> <div class="card mb-3 cyan-blockquote"> <div class="row no-gutters"> <div class="col-3 mb-0"> <img src="-/media/2FBF85E6EACB4489AB111694E823849C.ashx" alt="Daniel Hartley" /> </div> <div class="col-9"> <div class="card-body"> <blockquote>“Black households that bought from blockbusters, while finally gaining access to neighborhoods that had been denied to them before, wound up paying a high price for homes that declined in value.”</blockquote> <p><strong>Daniel Hartley</strong>, Senior Economist, Chicago Fed</p> </div> </div> </div> </div> <hr /> <h2>37:05 - Panel Discussion: Factors Contributing to the Racial Wealth Gap</h2> <p>Finally, a panel of economics and policy experts discussed the intersection of redlining, blockbusting, and other factors that led to decreased homeownership and wealth-building in the twentieth century among Black and Hispanic Americans — and the compounding effects of generational wealth that perpetuate the wealth gap today. </p> <p>Panelists discussed:</p> <ul style="line-height: 125%;"> <li>Past and current factors contributing to and perpetuating the racial wealth gap, from the twentieth century practices of redlining and blockbusting to the disproportionate effects of the Covid-19 pandemic on Black families.</li> <li>The intergenerational transmission of wealth and resources as a compounding factor behind wealth disparity between groups.</li> <li>Steps toward closing the racial wealth gap, including changes to employment, credit, and housing policies, as well as diversified methods of measuring the impact of the wealth gap that synthesize different drivers of inequity.</li> </ul> <div class="card mb-3 cyan-blockquote"> <div class="row no-gutters"> <div class="col-9"> <div class="card-body"> <blockquote>“In a circular way, existing wealth gaps feed into future wealth gaps.”</blockquote> <p><strong>Damon Jones</strong>, Associate Professor, University of Chicago Harris School of Public Policy</p> </div> </div> <div class="col-3 mb-0"> <img src="-/media/1521D2066B2945ADB4E60B0D230AF04D.ashx" alt="Damon Jones" /> </div> </div> </div> <div class="card mb-3 cyan-blockquote"> <div class="row no-gutters"> <div class="col-3 mb-0"> <img src="-/media/DF845DCDB7814F7E90B63A8C7D375389.ashx" alt="William Darity" /> </div> <div class="col-9"> <div class="card-body"> <blockquote>“I think the decisive factor shaping the racial wealth gap is the intergenerational transmission of resources.”</blockquote> <p><strong>William Darity</strong>, Samuel DuBois Cook Distinguished Professor of Public Policy, Duke University</p> </div> </div> </div> </div> <div class="card mb-3 cyan-blockquote"> <div class="row no-gutters"> <div class="col-9"> <div class="card-body"> <blockquote>“Our work today may not bear fruit tomorrow, but it may bear fruit 30 years from now.” </blockquote> <p><strong>Andre M. Perry</strong>, Senior Fellow at Brookings Metro and scholar-in-residence at American University</p> </div> </div> <div class="col-3 mb-0"> <img src="-/media/101EE7AB90F541CCBBD8F26DF2A179FC.ashx" alt="Andre M. Perry" /> </div> </div> </div> <div class="card mb-3 cyan-blockquote"> <div class="row no-gutters"> <div class="col-3 mb-0"> <img src="-/media/A6EB4F4CE12046D19ADAD988078C8BE0.ashx?" alt="Nicole Elam" /> </div> <div class="col-9"> <div class="card-body"> <blockquote>“How do we maximize this moment to create systemic change?”</blockquote> <p><strong>Nicole Elam</strong>, President and CEO, National Bankers Association</p> </div> </div> </div> </div> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> <style> .cyan-blockquote .card-body { padding: 0px; } .cyan-blockquote blockquote { background: #dfe4db; border: none; margin: 0px 15px; padding: 15px; line-height: 125%; } .cyan-blockquote p { padding-top: 10px; margin-left: 30px; margin-right: 30px; } .cyan-blockquote img { width: 100%; } .card.cyan-blockquote { background-color: transparent; border: none; margin-top: 1rem; margin-bottom: 1rem; } </style> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/broad-and-inclusive-employment https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/broad-and-inclusive-employment Fri, 06 May 2022 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>In August 2020, after a nearly two-year review, the Federal Reserve released an important update to the monetary policy framework that guides its work. Under the new framework, the Federal Open Market Committee (FOMC) will continue to pursue maximum employment, as directed by its dual mandate, and will consider maximum employment “a broad-based and inclusive goal.” </p> <p>On April 7, 2022, the Economic Mobility Project—a new initiative at the Chicago Fed—convened Federal Reserve policymakers and outside experts to discuss the new framework and what “broad-based and inclusive” might mean in practice.</p> <p>The release of the new monetary policy framework followed a two-year review process in which Federal Reserve officials traveled across the country to hear more about how monetary policy affects people’s daily lives. At the same time, research economists throughout the Federal Reserve System have been increasingly able to use new and better data and methods to understand how economic forces have affected different groups of people.</p> <h2>For many, the American Dream is out of reach</h2> <p>In a presentation on how difficult it is for children in the United States to overcome the economic circumstances of their parents, senior economist Bhashkar Mazumder of the Chicago Fed shared compelling evidence that, despite what many believe, the American Dream is out of reach for many.</p> <p>In the past, many people believed that income gaps between families disappeared within two or three generations. However today, using better, more comprehensive data that encompasses earnings for parents and their children over longer time periods, Mazumder and other researchers have shown that it might take five generations before the descendants of a family living in poverty would be expected to earn close to the national average.</p> <p>“This suggests that there’s a radically different picture of mobility in American society today, and that we’re really not in this rags-to-riches in a generation type economy, as was more commonly thought,” said Mazumder.</p> <p>Importantly, and relevant to conversations about inclusive employment, Mazumder’s research shows that rates of economic mobility differ drastically by race and geography.</p> <p>“I would say the most salient finding is that Black American families are doubly disadvantaged,” he said, adding that Black families “experience both low upward mobility from the bottom and high downward mobility from the top.”</p> <p><a href="https://www.chicagofed.org/publications/working-papers/2014/wp2014-28">Citing a 2014 paper</a>, Mazumder noted that children from Black families are about 24 percentage points less likely than White children to move out of the bottom quintile as adults. Black families are also 14 percentage points more likely to fall out of the top quintile than White families.</p> <p>Mazumder also cited research by Harvard University’s Raj Chetty and Nathan Hendren and their co-authors showing massive geographical variation in rates of economic mobility, as well as evidence from time trends studies that economic mobility rates began to fall after 1980 as economic inequality began to rise.</p> <p>In terms of why economic mobility has fallen, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2944584">Mazumder cited a 2022 paper</a> that shows there’s a rising payoff to more education, which can explain about 20% of the decline in economic mobility since around 1980.</p> <p>Looking at changes in intergenerational mobility across generations of families, Mazumder also explained that the likelihood of being married has increasingly been tied to one’s parents’ income and that this change has contributed about 40% to the decline in intergenerational mobility in family income. For those born in the early 1960s who entered the labor market after the rise in inequality in the 1980s, having parents at the 75th income percentile made them 11 percentage points more likely to be married than someone with parents at the 25th income percentile.</p> <p>Speaking to the disadvantages that make it harder for Black families than White families to see improved economic circumstances over time, Mazumder said there’s an opportunity to change things moving forward. The gap in intergenerational mobility by race “is a function of the policies that we choose,” he said. “And there are lots of studies of previous policies in the realms of education, health, and labor markets that suggest that policy can profoundly change this forecast,” according to Mazumder.</p> <h2>What does “broad and inclusive” mean in practice?</h2> <p>With low rates of economic mobility as context, three expert economists from outside the Federal Reserve System joined the event to share their perspectives on what the Fed’s new framework might mean for policymaking.</p> <p>Although the panelists had different ideas about the role for monetary policy in creating a more inclusive labor market, they agreed that putting the new framework into practice means looking beyond the unemployment rate as a single indicator and taking a closer look at structural factors in the labor market. The panel was moderated by <em>Washington Post</em> columnist and editorial board member Heather Long.</p> <h3>Wendy Edelberg: Race and gender employment gaps are problematic, but monetary policy alone can’t address underlying structural factors.</h3> <p>Wendy Edelberg, director of the Hamilton Project at the Brookings Institution, stressed the importance of thinking about different ways to measure full employment, arguing that full employment, as a measure, can differ from “maximum optimal employment,”—a measure that would take into account employment-to-population ratios for different groups, among other things.</p> <p>Edelberg also expressed skepticism that inclusive maximum optimal employment could be achieved through monetary policymaking at the Federal Reserve, saying “a hot labor market shrinks disparities, but doesn’t eliminate them.”</p> <p>As a historical comparison, Edelberg pointed to increases in women’s labor force participation that she argued were driven by structural changes enabling more women to return to work. “Were we at maximum optimal employment in the late 1960s, when the unemployment rate was below 4%? Surely not. But given structural factors at the time, the labor market likely was near its potential full employment level,” Edelberg said.</p> <p>Referencing <a href="https://www.brookings.edu/blog/up-front/2021/09/02/a-hot-labor-market-wont-eliminate-racial-and-ethnic-unemployment-gaps/">recent work with colleagues at the Brookings Institution</a>, she said that “creating true equality of opportunity will require structural changes to our institutions, policies, and attitudes, and for that we need fiscal policy.”</p> <h3>William Spriggs: Monetary policy can promote inclusive employment, and too many economists misunderstand how Black workers interact with the labor market.</h3> <p>William Spriggs, professor of economics at Howard University and chief economist of the AFL-CIO, said he thought the Fed should keep financial conditions accommodative so that more people would be brought back into the labor market.</p> <p>Spriggs said that looking at how Black workers interact with the labor market can be very instructive for policymaking, noting the importance of looking beyond the unemployment rate and considering the labor force participation rate for Black workers.</p> <p>“Unfortunately, too many economists see the Black–White unemployment gap as a skills gap,” Spriggs said. He said policymakers need to understand that many Black workers who might take a job are not counted in the unemployment rate because they are considered outside the labor force.</p> <p>“Black workers are exceedingly sensitive in terms of their labor force participation to whether or not firms are really hiring. That insight gives the Fed a good barometer to look at,” Spriggs said.</p> <p>He also noted that 70% of the people who have found a job in the past five to six months came from outside the labor force, and that the share of workers who were unemployed and leaving the labor force has been declining.</p> <p>All of this is evidence, Spriggs argued, that our concept of maximum employment could move beyond accepting these frictions for certain groups and instead toward pursuing an economy that “makes those frictions begin to disappear.”</p> <h3>Michael Strain: Running a hot economy is not a good way to help vulnerable workers.</h3> <p>Michael Strain, director of Economic Policy Studies at the American Enterprise Institute, agreed with Edelberg that a hot labor market can partially improve employment prospects for people of color and workers with disabilities, but said that “full employment should be considered over a longer time horizon than just a few months.”</p> <p>“I don’t think the Fed will be helping workers over the long term, especially lower income workers and traditionally vulnerable workers who often fare the worst during a downturn, by running the economy really hot, creating some opportunities for them, but then seeing the economy collapse,” said Strain.</p> <p>He added, “I think we’re at an unhealthy point [in the labor market], in the sense that we’re at an unsustainable point.”</p> <p>Strain said he thinks about full employment, in a non-technical sense, as “a situation where businesses are chasing workers, and where workers aren't chasing businesses.” He said businesses now “are just desperate for workers, and that creates a situation that isn’t sustainable. And it puts upward pressure on consumer prices, and it risks recession.”</p> <p>Strain said he agreed with Spriggs that we should be aiming to restore the employment rate to what it was in 2001 and to increase wages, especially for low-wage workers, but “that’s more of a goal for fiscal policy than monetary policy,” he said, “especially given the state of the economy right now.”</p> <p>Strain called on federal, state, and local policymakers to improve workforce productivity through improvements in education and job training. He also called for policies to draw people into the labor market, like the Earned Income Tax Credit, and for policies that make the labor market more competitive.</p> <h2>Perspectives from two Federal Reserve Bank presidents</h2> <p>To wrap up the event, Federal Reserve Bank Presidents Raphael Bostic (Atlanta) and Charles Evans (Chicago) joined the conversation with Long, responding to what they heard from outside experts and sharing their own perspectives on the Federal Reserve’s updated framework.</p> <h3>Raphael Bostic: Longer economic expansions allow groups that have not participated to participate more, but we can’t push too hard.</h3> <p>Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said his vision of an inclusive economy is one where “everyone who wants to work is able to find work that is commensurate with their full potential.”</p> <p>If that can be achieved, Bostic went on to say, “then our economy will be bigger: It will be more robust, it will be more resilient, and it'll be more inclusive, because we will see participation happening in parts of the economy [where] we’re not seeing it happen right now.”</p> <p>Referencing a discussion about different ways to measure employment and labor force participation, Bostic said that regardless of what measure you use, things look better “across the board when an expansion lasts longer.”</p> <p>“On the other hand,” he added, “if you push it too hard, there’s a chance that you will have to create some sharp reductions in economic activity.”</p> <p>Finally, when asked if the Fed was experiencing “mission creep” by pursuing an inclusive economy, Bostic said no, adding that improving economic mobility is in line with the Fed’s maximum employment mandate.</p> <p>The Fed’s aim, he said “is really to try to deploy our resources as effectively as possible to achieve our goals. And it’s just very clear in this instance, just right today, I would say, if you think about the imbalance between supply and demand, labor is a big part of that,” said Bostic.</p> <p>Understanding what can be done to reduce that imbalance both now and in the future, Bostic said, will allow the Fed “to more fully achieve our mandate as we move forward.”</p> <h3>Charles Evans: There’s a lot of re-sorting in the labor market right now, but it’s not unhealthy.</h3> <p>Charles Evans, president of the Federal Reserve Bank of Chicago, said a strong understanding of the structure of the labor market is critical to advancing the Fed’s dual mandate. “It’s very important to have a measure of what you think full employment, maximum employment, [and] optimal maximum employment is.”</p> <p>However, Evans said, he personally thinks it’s good to focus on eliminating employment shortfalls. “If we eliminate employment shortfalls, I don’t believe unemployment is necessarily too low.”</p> <p>Asked if he thought that the labor market was definitely too tight, Evans said no, noting that what we’re seeing in the labor market is a lot of people with good opportunities to move to better jobs—a kind of “re-sorting.”</p> <p>For businesses, “re-sorting, that’s going to look painful,” he said. “And I think there are just a lot of businesses where their business model probably isn’t going to work the way it used to. … I don't necessarily see it as unhealthy. I do say it’s a big challenge for businesses,” he added.</p> <p>Finally, Evans said he’s of the opinion that most of the rise in inflation we’ve seen is tied to short-term supply disruptions and not necessarily overly accommodative monetary policy.</p> <p>“I’m optimistic that we can get to neutral, look around, and find that we’re not necessarily that far from where we need to go,” Evans said, adding that “there’s a lot to be monitoring still.”</p> <h2>About the Economic Mobility Project</h2> <p>The Economic Mobility Project was formed at the Chicago Fed in 2022 to provide evidence-based research on the factors and policies that affect economic mobility to those who can enact meaningful change. At the project’s first event on inclusive full employment, Dan Sullivan, executive director of the Economic Mobility Project, spoke about the motivation for launching the project.</p> <p>“Economists at the Chicago Fed have a long tradition of doing research on topics, such as inequality and intergenerational mobility, racial equity, education, health, and household financial decision-making, that are important for understanding what kinds of policies lead to greater economic mobility.”</p> <p>Sullivan said while that work is often highly regarded in the academic world, it’s not always easily accessible to the policy community. The Economic Mobility Project aims to change that by sharing useful policy briefs and hosting events that bring together researchers and policymakers for productive dialogue.</p> <p>Research briefs from the new project can be found on <a href="https://www.chicagofed.org/research/mobility/about">the Economic Mobility Project website</a>. Full video from the project’s event on inclusive employment <a href="https://www.chicagofed.org/research/mobility/event">can be found here</a>.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System. </h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/fedlistens-summary https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/fedlistens-summary Tue, 26 Apr 2022 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>Throughout the pandemic, the Chicago Fed has <a href="https://www.chicagofed.org/hometown">heard</a> that the need to address learning and opportunity gaps for youth is a first-order concern for their well-being and future success. Fortunately, though the pandemic presented innumerable disruptions and challenges for schools and students, it also created opportunities for educators and communities to innovate.</p> <p>In a recent <a href="https://www.chicagofed.org/events/2022/fedlistens">FedListens event</a>, organized by the Chicago Fed, former U.S. Secretary of Education Arne Duncan moderated a discussion with K-16 education leaders who were on the ground throughout the pandemic, working with teachers, professors, principals, and students across the Seventh District’s many public education systems to navigate unprecedented challenges. The conversation highlighted several ways schools and communities can work together to help young people thrive in the years ahead.</p> <aside class="cfedAside--left"> “One thing I know is that America can’t thrive economically or financially unless young people thrive,” Federal Reserve Governor Michelle Bowman. </aside> <h3>1. Create “systems of care” that look beyond individual solutions </h3> <p>A major theme highlighted by each panelist was the need to shift the burden for any given problem away from the individual—be it student, teacher, or staff—and instead build solutions into and across entire systems.</p> <p>“Thinking about systems of care is really an important piece,” said Tina Owen-Moore, superintendent of the School District of Cudahy in Wisconsin. “In our district, we heard very loudly from our teachers about the weight of the work throughout this pandemic,” she said.</p> <p>To turn self-care into a system of care, Owen-Moore said the Cudahy district set up opportunities for the teachers to speak directly to the school board about how they were feeling and what they needed.</p> <p>Other panelists shared similar initiatives. Juan Salgado, chancellor of City Colleges of Chicago, a community college system serving nearly 70,000 students across seven colleges, agreed it’s critical to find ways for leaders to work together to improve decision-making.</p> <p>“The entire institution rests on those critical decisions that are being made and how they’re communicated,” he said. “I think we do have a big responsibility for just getting core decision-making healthier in our institutions because I think that can help a lot,” Salgado added.</p> <h3>2. Address not only learning loss, but “opportunity loss” </h3> <p>After two years of educational disruption, panelists agreed learning loss was a major concern. However, they also agreed with Duncan that the term “learning loss” doesn’t capture the full breadth of what students missed and need to regain. Students need to catch up on formal instruction and learning, but they also need to benefit from other opportunities that are critical to their development.</p> <p>To create new opportunities for youth throughout Chicago, Salgado discussed a major effort to make sure Chicago City Colleges are “tied at the hip” with Chicago Public Schools “in ways they never were before.”</p> <p>“Every community college in America has a responsibility to have that kind of relationship with their public school system,” said Salgado.</p> <p>Speaking about learning loss, Sharita Ware, the 2022 Indiana State Teacher of the Year, who teaches engineering and technology to middle school students in Tippecanoe, Indiana, gave several examples of how she and other teachers need to continually innovate to help students build motivation and learn new skills through problem-based learning.</p> <p>“We’ve tried to make some of these projects real-world problem-solving projects. Like, how do you develop a mask that doesn’t fog up your glasses?” Jones said. “Give the kids real-world problems to solve,” she added, “and they feel like they’re doing things to help contribute to the issues that we are dealing with.”</p> <p>Owen-Moore highlighted her district’s focus on literacy, and how they used Federal Elementary and Secondary School Emergency Relief Fund (ESSER) funds to rework literacy teaching district-wide. “We really focused on the science of reading and have been building the systems within our schools to help students to get the number of repetitions that they need to both make up for what they missed out on… and also just to accelerate their learning overall,” she said.</p> <h3>3. Make education and opportunity-building a community call to action</h3> <p>Not every household or business in a community interacts with their schools on a daily basis. However, schools are “the nucleus of the community,” said Iranetta Wright, the deputy superintendent of the Detroit Public Schools Community District and the newly appointed superintendent of Cincinnati Public Schools. Wright went on to argue that community partnerships are critical for serving students holistically.</p> <p>“I think it’s really important for the community to engage in any way that they can. Everyone does not have the expertise to work with students in terms of tutoring, but everyone can be a mentor,” Wright said.</p> <p>Wright described a $23 million investment from the Detroit Business Community to ensure that students had take-home devices and Internet service during the pandemic. “That was a big ask, and it was a tall order, but they made it happen. And I think that continuing to do that is important.”</p> <p>Maurice Swinney, former interim chief education officer of Chicago Public Schools, said there’s an opportunity to work with the community to increase the capacity for mentorships, internships, and apprenticeships that “allow young people to experience the real world earlier,” and strengthen the systems of support that surround students. “There are lots of opportunities [to engage community members], whether we’re thinking about mentorship, internships, mental health,” said Swinney. “I think it [doing the work at scale] was really seeing ourselves as a convener, at some point, to do the right work with the people who are impacted by it.”</p> <p>As a final idea for community involvement, Chicago Fed President Charles Evans, gave a nod to <a href="https://www.chicagofed.org/summerjobs">summer jobs programs</a>, which the Chicago Fed has encouraged business leaders to support to help young people meet mentors, develop soft skills, and earn and save money.</p> <aside class="cfedAside--left">“This is a moment where [a young adult’s] career could be easily marked by their lack of progress through this [the pandemic], and that could be permanent throughout their lifetime. And I think we need to help and make sure that people get beyond that.” Chicago Federal Reserve Bank President Charles Evans</aside> <h3>4. Embrace agility and drive transformative change</h3> <p>In his opening remarks at the event, Evans emphasized a point he heard repeated at several <a href="https://www.chicagofed.org/hometown">Project Hometown</a> listening sessions: Though it’s undeniable the pandemic continues to exacerbate many pre-existing inequities, he said, he also heard from community leaders “about opportunities the pandemic provides to reimagine what schools can do.”</p> <p>Shantá Robinson, an assistant professor at the Crown Family School of Social Work, Policy, and Practice at the University of Chicago, echoed this point, noting that “people started talking about schools and educational spaces as agile spaces. … I don’t know when in my recent past I’ve ever heard anyone talk about schools as agile spaces, or even anywhere in modern history that we phrase schools in that way. And yet, they did that,” Robinson said.</p> <p>Swinney spoke about the importance of embracing change, but also the critical need to bring young people into the conversation so they can inform the process.</p> <p>“We have to start inviting young people into this space to help us respond to the problems that were not created by them, but that they are most impacted by,” said Swinney. “There’s got to be a way to see young people as a part of the team, as partners in this work, to continue to codesign solutions moving forward.”</p> <p>To close the event, Duncan said he was optimistic that the pandemic can catalyze overdue and much-needed changes. “For me, the goal is not to go back to quote-unquote ‘normal,’ because normal didn’t serve far too many kids,” Duncan said.</p> <p>Robinson agreed, adding “The young people give me hope. The way that they’re learning to recognize their voices, and use it for what they think is right, and to advocate for themselves and others gives me hope. The persistence and dedication of teachers gives me hope. The willingness of people to start to think about others and put the community’s needs above their own gives me hope,” she said.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System. </h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/covid-chicago-zip-codes https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/covid-chicago-zip-codes Tue, 01 Mar 2022 00:00:00 -0500 <div class="cfedContent__text"> <p> The Covid-19 pandemic has affected people differently, depending on their location, access to health care, job status, and socioeconomic status. In this blog post, we compare Covid case and death rates in each wave of the pandemic with poverty rates across Chicago zip codes to investigate the different impacts on Chicago’s communities. What we discover is a distinct relationship between case rates and poverty for each wave of the pandemic and evidence that Covid-19 death rates have been consistently higher in high-poverty neighborhoods.<a href="#ftn1" name="ftnref1"><sup>1</sup></a> This time-changing relationship between Covid rates and poverty could be ascribed, in part, to differences in exposure during the early months of the pandemic between essential workers and those able to work from home.</p> <h2>Covid-19 waves in Chicago</h2> <p> The Covid-19 pandemic has affected Chicago and other locations in a series of waves. We break the pandemic into different waves as shown in figure 1 below. These date breaks (June 22, 2020; February 19, 2021; June 23, 2021; and October 21, 2021) represent the week of a local minimum in case rates for each valley of the pandemic. There are five waves of the pandemic in Chicago, the latest subsiding rapidly as of January 22, 2022, our latest pull of the data.</p> <h3>1. Waves of the pandemic in Chicago</h3> <figure> <img src="~/media/732C3F96A0784AC1939A8EEB08D4EBFF.ashx" alt="Figure 1 is a line graph depicting the waves of Covid-19 in Chicago. The y-axis has weekly infections ranging from 0 to 70,000. The x-axis has the date for which the weekly infections are calculated. Each wave shows high count of Covid-19 infections, with the fifth wave being the largest." /> </figure> <p>In order to understand how Covid-19 has affected Chicago communities according to their socioeconomic position, we plot Covid-19 case rates against poverty rates in Chicago zip codes. We attribute each zip code to a more recognizable neighborhood zone and apply a line of best fit. Figure 2 shows the relationship between Covid-19 case rates and poverty rates for March 2020 through January 22, 2022. The line of best fit illustrates a negative relationship between case rates and poverty rates for the entire period. Over the course of the pandemic in 2020, 2021, and early 2022, areas with relatively low rates of poverty, such as Mount Greenwood and Portage Park, had higher case rates than areas with relatively high rates of poverty, such as Rogers Park, Englewood, and Woodlawn.</p> <h3>2. Overall infections and poverty rates</h3> <figure> <img src="~/media/6CC3598D4065492CB25A24BBD86BE059.ashx" alt="Figure 2 is a scatterplot showing the total Covid-19 infections per 100,000 in a Chicago zip code on the y-axis according to that zip code’s poverty rate on the x-axis. There is a line of best fit that shows a negative relationship between Covid-19 infections and poverty rates. Each scatter point is labeled with a corresponding neighborhood name for that zip code." /> </figure> <h3>3. Relationship between poverty and cases by wave</h3> <figure> <img src="~/media/65C345C6F4784BC7B808AB5C001F2988.ashx " alt="Figure 3 is a line graph. The y-axis has total Covid-19 infections per 100,000, and the x-axis has the poverty rate. There are five lines, each a best-fit line for each wave of the pandemic. The first wave shows a positive relationship, the second wave a negative relationship, the third wave a neutral relationship, the fourth wave a slightly negative relationship, and the fifth wave a negative relationship." /> </figure> <p> In figure 3, we display the relationship between case rates and poverty rates for each wave separately; and we can see here that this cumulative negative relationship is not representative of all waves of the pandemic. Each wave of Covid-19 shows a different relationship between poverty rate and Covid cases in Chicago, suggesting a change in behavior or effect over time. In fact, the relationship appears to “see-saw” and is neither consistently negative nor positive.</p> <p>The first wave of the pandemic shows a strong positive relationship between Covid-19 case rates and poverty rates in Chicago communities, possibly due to the number of essential workers exposed to the virus in the early days of the pandemic. There is <a href="https://www.healthaffairs.org/do/10.1377/hpb20210428.863621/full/">evidence</a> to show that essential workers with high Covid-19 exposure risk are more likely to be at the low end of the earnings spectrum and reside in low-income neighborhoods. Zip codes with higher poverty rates at the start of the pandemic were more likely to have higher case rates than those with lower poverty rates. By the second wave, this pattern reverses, with low-poverty zip codes seeing higher case rates and high-poverty zip codes seeing lower case rates.</p> <p>The lines for the third and fourth waves of the pandemic are nearly flat, while the fifth wave parallels the second wave. The second wave and the fifth wave have noticeably similar slopes and are so large that they dominate the pattern shown in figure 2. It is also worth noting that both waves two and five happened in the winter, when Covid-19 cases have generally been high and it is harder for people to engage in outdoor or distanced activities.</p> <p>Cases are not the only relevant measure of the impact of Covid across populations. Death rates are a crucial measure of the pandemic’s consequences. In figures 4 and 5, we plot the relationship between Covid-19 death rates and poverty rates in Chicago zip codes overall and for each wave of the pandemic so far. Contrary to case rates, the death rates have a consistently positive relationship with poverty rates in Chicago. The most drastic difference between death rates in low-poverty areas and death rates in high-poverty areas was in wave one. This pattern weakened considerably between the first and second waves and remained weaker for waves three through five. In addition, death rates themselves decreased with each wave of the pandemic until the fifth wave, when they increased again but remained substantially below the levels of the first two waves.</p> <h3>4. Overall deaths and poverty rates</h3> <figure> <img src="~/media/E6B453AC0FE64152B7C89A735EC4FD69.ashx " alt="Figure 4 is a scatterplot showing the total deaths from Covid-19 per 100,000 in a Chicago zip code. The x-axis shows that zip code’s poverty rate. There is a line of best fit that shows a positive relationship between Covid-19 deaths and poverty rates. Each scatter point is labeled with a corresponding neighborhood name for that zip code." /> </figure> <h3>5. Relationship between deaths and cases by wave</h3> <figure> <img src="~/media/83FCB16F2437473EB61167B99B4DD2FD.ashx" alt="Figure 5 is a line graph. The y-axis has total deaths from Covid-19 per 100,000, and the x-axis has the poverty rate. There are five lines, each a best-fit line for each wave of the pandemic. Each wave shows a positive relationship, but the first wave has the steepest slope, with the slop softening with each wave. The fifth wave returns to a higher slope." /> </figure> <p>The positive relationship between deaths and poverty and negative relationship between cases and poverty indicate that there is a positive relationship between deaths per case and area poverty. In other words, among all individuals who contracted Covid-19, those from high-poverty areas were more likely to die of the virus than those from low-poverty areas. There could be a number of reasons for this pattern. For example, residents of high-poverty neighborhoods may lack adequate access to health care, have relatively high rates of pre-existing conditions that exacerbate Covid-19 effects, or have lower levels of vaccination. It might also be the case that individuals in high-poverty areas are less likely to have access to testing, so mild and asymptomatic cases are less likely to be counted in the data.</p> <p>We look into these explanations by plotting test rates and vaccination rates by poverty rates for each zip code. We can see in figure 6 that there is a weak negative relationship between testing rates and poverty rates in Chicago zip codes. We also notice a higher incidence of testing in high-traffic and high-density zip codes. We omit the Loop zip codes from the figure because they have exceedingly high testing rates that both distort the scale and suggest that some individuals who reside outside the Loop and were tested in the Loop may be recorded incorrectly in the Loop zip codes. Overall, we are concerned that the testing data may not be fully accurate, a concern that is shared by the City of Chicago.<a href="#ftn2" name="ftnref2"><sup>2</sup></a> However, based on the available data, testing rates in the non-Loop zip codes vary dramatically but have no strong systematic relationship with poverty rates.</p> <h3>6. Overall tests and poverty rates</h3> <figure> <img src="~/media/40C6367E7B204F60BFC84796BEA45233.ashx" alt="Figure 6 is a scatterplot showing the total Covid-19 tests per 100,000 in a Chicago zip code on the y-axis. The x-axis shows that zip code’s poverty rate. There is a line of best fit that shows a neutral relationship between Covid-19 tests and poverty rates. Each scatter point is labeled with a corresponding neighborhood name for that zip code." /> </figure> <p> In figure 7, we display the relationship between poverty rates and vaccinations, where we measure vaccination as having completed the one- or two-dose initial series. Note that these are relative to the entire 2019 <em>American Community Survey</em> 5-year estimate zip code population, not the vaccine eligible population (aged five and up). We see a negative relationship between vaccinations and poverty rates in zip codes. Residents in high-poverty areas are less likely to have a completed vaccine series, while residents in low-poverty areas are more likely to have a completed vaccine series. The Loop zip codes continue to be outliers and report vaccination rates over 100%, so we omit them from the figure. This is another indication that some reporting may be by provider rather than recipient’s residential location. There are many potential explanations for this pattern, including access to vaccination or transportation and share of the population under five, as well as willingness to get vaccinated.<a href="#ftn3" name="ftnref3"><sup>3</sup></a></p> <h3>7. Completed vaccinations and poverty rates</h3> <figure> <img src="~/media/15CCC5826C0A448AB0CD9FA1467598B2.ashx" alt="Figure 7 is a scatterplot showing completed vaccine series per 100,000 in a Chicago zip code on the y-axis. The x-axis shows that zip code’s poverty rate. There is a line of best fit that shows a negative relationship between vaccination and poverty rates. Each scatter point is labeled with a corresponding neighborhood name for that zip code." /> </figure> <p>As further evidence of the link between low vaccination rates and higher death rates, figure 8 shows the relationship between Covid-19 death rates and the share of unvaccinated individuals in Chicago zip codes since the start of the fourth wave, a period when vaccine availability had improved. There is a clear positive correlation between death rates and unvaccinated status during this period.</p> <h3>8. Cumulative deaths since June 23, 2021 and unvaccinated rate as of January 22, 2022</h3> <figure> <img src="~/media/B6515294B6BD4BE4AE9DC01CA5ED94DE.ashx" alt="Figure 8 is a scatterplot showing the total deaths from Covid-19 per 100,000 in a Chicago zip code since June 23, 2021 on the y-axis. The x-axis shows that zip code’s unvaccinated rate. There is a line of best fit that shows a positive relationship between deaths since the start of the fourth wave and the rate of unvaccinated people in a Chicago zip code. Each scatter point is labeled with a corresponding neighborhood name for that zip code." /> </figure> <h2>Conclusion</h2> <p>Although the relationship between Covid-19 case rates and poverty rates varies across the waves of the pandemic, death rates have had an exclusively positive relationship with poverty rates in Chicago zip codes. During the first wave of the pandemic, March until late June 2020, the positive relationship between case rates and poverty rates was at its strongest. The positive relationship between death rates and poverty rates was also at its strongest, indicating a substantial impact of the first wave on communities with high rates of poverty during this first wave. The negative relationship between vaccination rates and poverty rates might hold some information for the pattern of death rates across zip codes in the city in the later waves of the pandemic.</p> <hr /> <h3>Notes</h3> <p><a href="#ftnref1" name="ftn1"><sup>1</sup></a> The average poverty rate for Chicago zip codes is around 18%. The median is around 17%. We use the term “high poverty” in this post to refer to zip codes where the poverty rate is above 18%. We use the term “low poverty” to refer to zip codes where the poverty rate is below 18%.</p> <p>The Covid-19 data are from the <a href="https://data.cityofchicago.org/">City of Chicago Data Portal</a>. The data are at a weekly frequency, split up by the home zip code of Chicagoans. The City provides data for the 59 zip codes fully or partially in Chicago rather than for the 77 community areas that are the more recognizable divisions of the city. For the sake of displaying the zip code data in the graphs in an accessible way, we map it to community area names. This is not a straightforward process. Most zip codes contain parts of more than one community area and most community areas contain parts of more than one zip code. If more than one zip code is mapped to the same community area, we include the last two digits of the zip code in the display name. We remove four zip codes that either have significant populations that reside outside of the City, or with no population (O’Hare). We provide more information on the mapping process in the appendix.</p> <p>Numbers for cases, deaths, and tests per 100,000 are from the City’s data portal. Numbers for vaccinations per 100,000 are calculated by the authors using the <a href="https://www.census.gov/newsroom/press-kits/2020/acs-5-year.html">American Community Survey 2015-2019 5-Year Data Release (census.gov)</a>. </p> <p>The data on poverty and population in Chicago zip codes are from the <a href="https://www.census.gov/newsroom/press-kits/2020/acs-5-year.html">American Community Survey 2015-2019 5-Year Data Release (census.gov)</a>, table S1701.</p> <p><a href="#ftnref2" name="ftn2"><sup>2</sup></a> The City of Chicago Data Portal <a href="https://data.cityofchicago.org/Health-Human-Services/COVID-19-Cases-Tests-and-Deaths-by-ZIP-Code/yhhz-zm2v">notes</a> that test counts and testing rates are likely underestimated.</p> <p><a href="#ftnref3" name="ftn3"><sup>3</sup></a> See City Bureau’s <a href="https://www.citybureau.org/newswire/2021/11/15/in-englewood-and-south-austin-what-do-chicagoans-say-about-low-vaccination-rates">reporting</a> on interviews with residents of Englewood and South Austin and <a href="https://www.citybureau.org/newswire/2021/12/8/against-all-odds-black-health-experts-weigh-in-on-covid-19-vaccine-woes-in-englewood">article</a> on health experts’ views on vaccination trends in Englewood.</p> <h2>Appendix</h2> <h2>Mapping Between Zip Codes and Community Areas</h2> <p>The Covid data from the city of Chicago are available for the 59 zip codes fully or partially in Chicago rather than for the 77 community areas that are the more recognizable divisions of the city. For the sake of displaying the zip code data in the graphs in an accessible way, we map it to community area names. The mapping is displayed in table A. This is not a straightforward process. Most zip codes contain parts of more than one community area, and most community areas contain parts of more than one zip code.</p> <p>We do this mapping in three steps based on information provided by the <em>Chicago Tribune</em> on the community areas partially or fully in each zip code, <a href="https://www.chicagotribune.com/chi-community-areas-htmlstory.html">Chicago communities - Chicago Tribune</a>, and based on the City of Chicago’s community area and zip code map, <a href="https://www.chicago.gov/content/dam/city/sites/covid/reports/2020-04-24/ChicagoCommunityAreaandZipcodeMap.pdf">ChicagoCommunityAreaandZipcodeMap.pdf</a></p> <p>Our goal is to label each zip code with one community area name from the newpaper’s list.</p> <ol type="“1”"> <li>If there is only one community area in a zip code, we choose that community area name.</li> <li>If there are more than one community area in a zip code, we choose the community area that makes up the largest part of a zip code.</li> <li>If the zip code is evenly split among more than one community area, we pick the community area where the community area makes up more of the zip code.</li> </ol> <p>Note that some community areas are associated with more than one zip code. In these cases, we augment the display name with the last two digits of the zip code for clarity.</p> <p>Finally, there are some zip codes that are partially inside and partially outside the City of Chicago. This is problematic for our analysis because the Covid data only include information (cases, deaths, tests, vaccinations) for zip code residents who are also residents of the city, while ACS population data and other demographics are for the entire zip code, including the part outside the city limits. These are labeled in the table as “partially outside the city” and are deleted from our analysis if they also contain at least one school that is outside the city according to <a href="http://www.unitedstateszipcodes.org/">www.unitedstateszipcodes.org</a>. There are three zip codes that we exclude for this reason—60633, 60707 and 60827. We also drop zip code 60666, an O’Hare airport zip code that contains no resident population. </p> <h3>A. Mapping between zip codes and community areas</h3> <figure> <div class="table-responsive"> <table class="table"> <caption class="caption">Note: Chosen community area in bold.</caption> <thead> <tr class="cfedTable--rowBorderBottom cfedTable--rowBorderTop"> <th>Zip Code</th> <th>Community Areas Within Zip Code</th> <th>Display Name</th> <th>Partially Outside City?</th> </tr> </thead> <tbody> <tr> <td>60601</td> <td><strong>Loop</strong></td> <td>Loop (01)</td> <td>no</td> </tr> <tr> <td>60602</td> <td><strong>Loop</strong></td> <td>Loop (02)</td> <td>no</td> </tr> <tr> <td>60603</td> <td><strong>Loop</strong></td> <td>Loop (03)</td> <td>no</td> </tr> <tr> <td>60604</td> <td><strong>Loop</strong></td> <td>Loop (04)</td> <td>no</td> </tr> <tr> <td>60605</td> <td>Loop, <strong>Near South Side</strong></td> <td>Near South Side</td> <td>no</td> </tr> <tr> <td>60606</td> <td><strong>Loop</strong>, Near West Side</td> <td>Loop (06)</td> <td>no</td> </tr> <tr> <td>60607</td> <td>Loop, <strong>Near West Side</strong>, Near South Side</td> <td>Near West Side (07)</td> <td>no</td> </tr> <tr> <td>60608</td> <td>Bridgeport, <strong>Lower West Side</strong> (Pilsen), McKinley Park, Near West Side, North Lawndale, South Lawndale</td> <td>Lower West Side </td> <td>no</td> </tr> <tr> <td>60609</td> <td>Armour Square, Bridgeport, Douglas, Fuller Park, Gage Park, Grand Boulevard, McKinley Park, <strong>New City</strong>, Washington Park</td> <td>New City</td> <td>no</td> </tr> <tr> <td>60610</td> <td><strong>Near North Side</strong>, Near West Side</td> <td>Near North Side (10)</td> <td>no</td> </tr> <tr> <td>60611</td> <td><strong>Near North Side</strong></td> <td>Near North Side (11)</td> <td>no</td> </tr> <tr> <td>60612</td> <td><strong>Near West Side</strong>, West Town</td> <td>Near West Side (12)</td> <td>no</td> </tr> <tr> <td>60613</td> <td><strong>Lakeview</strong>, North Center, Uptown</td> <td>Lakeview (13)</td> <td>no</td> </tr> <tr> <td>60614</td> <td><strong>Lincoln Park</strong>, Logan Square</td> <td>Lincoln Park</td> <td>no</td> </tr> <tr> <td>60615</td> <td>Grand Boulevard, <strong>Hyde Park</strong>, Kenwood, Washington Park</td> <td>Hyde Park</td> <td>no</td> </tr> <tr> <td>60616</td> <td>Armour Square, Bridgeport, <strong>Douglas</strong>, Lower West Side (Pilsen), Near South Side</td> <td>Douglas</td> <td>no</td> </tr> <tr> <td>60617</td> <td>Avalon Park, Calumet Heights, East Side, South Chicago, <strong>South Deering</strong></td> <td>South Deering</td> <td>no</td> </tr> <tr> <td>60618</td> <td><strong>Avondale</strong>, Irving Park, North Center</td> <td>Avondale</td> <td>no</td> </tr> <tr> <td>60619</td> <td>Avalon Park, Burnside, Calumet Heights, <strong>Chatham</strong>, Greater Grand Crossing, Roseland, South Shore</td> <td>Chatham</td> <td>no</td> </tr> <tr> <td>60620</td> <td><strong>Auburn Gresham</strong>, Beverly, Chatham, Greater Grand Crossing, Roseland, Washington Heights</td> <td>Auburn Gresham</td> <td>no</td> </tr> <tr> <td>60621</td> <td><strong>Englewood</strong>, Greater Grand Crossing, Washington Park</td> <td>Englewood</td> <td>no</td> </tr> <tr> <td>60622</td> <td>Humboldt Park, Logan Square, Near North Side, <strong>West Town</strong></td> <td>West Town (22)</td> <td>no</td> </tr> <tr> <td>60623</td> <td>North Lawndale, <strong>South Lawndale</strong></td> <td>South Lawndale</td> <td>no</td> </tr> <tr> <td>60624</td> <td>East Garfield Park, Humboldt Park, North Lawndale, <strong>West Garfield Park</strong></td> <td>West Garfield Park</td> <td>no</td> </tr> <tr> <td>60625</td> <td>Albany Park, <strong>Lincoln Square</strong>, North Park</td> <td>Lincoln Square</td> <td>no</td> </tr> <tr> <td>60626</td> <td><strong>Rogers Park</strong></td> <td>Rogers Park</td> <td>no</td> </tr> <tr> <td>60628</td> <td>Pullman, <strong>Roseland</strong>, Washington Heights, West Pullman</td> <td>Roseland</td> <td>no</td> </tr> <tr> <td>60629</td> <td><strong>Chicago Lawn</strong>, Clearing, Gage Park, Garfield Ridge, West Elsdon, West Lawn</td> <td>Chicago Lawn</td> <td>no</td> </tr> <tr> <td>60630</td> <td>Albany Park, Forest Glen, Irving Park, <strong>Jefferson Park</strong>, Portage Park</td> <td>Jefferson Park</td> <td>no</td> </tr> <tr> <td>60631</td> <td>Edison Park, <strong>Norwood Park</strong></td> <td>Norwood Park</td> <td>no</td> </tr> <tr> <td>60632</td> <td>Archer Heights, <strong>Brighton Park</strong>, Gage Park, Garfield Ridge, West Elsdon</td> <td>Brighton Park</td> <td>no</td> </tr> <tr> <td>60633</td> <td><strong>Hegewisch</strong>, South Deering</td> <td>Hegewisch</td> <td>yes (Burnham, IL)</td> </tr> <tr> <td>60634</td> <td>Belmont Cragin, <strong>Dunning</strong>, Montclare, Portage Park</td> <td>Dunning</td> <td>no</td> </tr> <tr> <td>60636</td> <td>Chicago Lawn, Gage Park, <strong>West Englewood</strong></td> <td>West Englewood</td> <td>no</td> </tr> <tr> <td>60637</td> <td>Greater Grand Crossing, Hyde Park, South Shore, Washington Park, <strong>Woodlawn</strong></td> <td>Woodlawn</td> <td>no</td> </tr> <tr> <td>60638</td> <td>Clearing, <strong>Garfield Ridge</strong></td> <td>Garfield Ridge</td> <td>don't drop (Bedford Park, no school)</td> </tr> <tr> <td>60639</td> <td>Austin, <strong>Belmont Cragin</strong>, Hermosa, Humboldt Park, Logan Square</td> <td>Belmont Cragin</td> <td>no</td> </tr> <tr> <td>60640</td> <td>Edgewater, Lincoln Square, <strong>Uptown</strong></td> <td>Uptown</td> <td>no</td> </tr> <tr> <td>60641</td> <td>Avondale, Belmont Cragin, Hermosa, Irving Park, <strong>Portage Park</strong></td> <td>Portage Park</td> <td>no</td> </tr> <tr> <td>60642</td> <td><strong>West Town</strong></td> <td>West Town (42)</td> <td>no</td> </tr> <tr> <td>60643</td> <td>Beverly, <strong>Morgan Park</strong>, Washington Heights, West Pullman</td> <td>Morgan Park</td> <td>don't drop (Calumet Park, no school)</td> </tr> <tr> <td>60644</td> <td><strong>Austin</strong></td> <td>Austin (44)</td> <td>no</td> </tr> <tr> <td>60645</td> <td><strong>West Ridge</strong></td> <td>West Ridge (45)</td> <td>no</td> </tr> <tr> <td>60646</td> <td><strong>Forest Glen</strong>, Jefferson Park, North Park, Norwood Park</td> <td>Forest Glen</td> <td>no</td> </tr> <tr> <td>60647</td> <td>Hermosa, Humboldt Park, Logan Square, West Town</td> <td>Logan Square</td> <td>no</td> </tr> <tr> <td>60649</td> <td><strong>South Shore</strong></td> <td>South Shore</td> <td>no</td> </tr> <tr> <td>60651</td> <td>Austin, <strong>Humboldt Park</strong></td> <td>Humboldt Park</td> <td>no</td> </tr> <tr> <td>60652</td> <td><strong>Ashburn</strong></td> <td>Ashburn</td> <td>no</td> </tr> <tr> <td>60653</td> <td>Douglas, <strong>Grand Boulevard</strong>, Kenwood, Oakland</td> <td>Grand Boulevard</td> <td>no</td> </tr> <tr> <td>60654</td> <td><strong>Near North Side</strong></td> <td>Near North Side (54)</td> <td>no</td> </tr> <tr> <td>60655</td> <td>Beverly, Morgan Park, <strong>Mount Greenwood</strong></td> <td>Mount Greenwood</td> <td>no</td> </tr> <tr> <td>60656</td> <td><strong>O’Hare</strong></td> <td>O’Hare (56)</td> <td>no</td> </tr> <tr> <td>60657</td> <td><strong>Lakeview</strong>, North Center</td> <td>Lakeview (57)</td> <td>no</td> </tr> <tr> <td>60659</td> <td>North Park, <strong>West Ridge<strong></strong></strong></td> <td>West Ridge (59)</td> <td>no</td> </tr> <tr> <td>60660</td> <td><strong>Edgewater</strong></td> <td>Edgewater</td> <td>no</td> </tr> <tr> <td>60661</td> <td>Loop, <strong>Near West Side</strong></td> <td>Near West Side (61)</td> <td>no</td> </tr> <tr> <td>60666</td> <td><strong>O’Hare</strong></td> <td>O’Hare (66)</td> <td>no people (can drop)</td> </tr> <tr> <td>60707</td> <td><strong>Austin</strong>, Belmont Cragin, Montclare</td> <td>Austin (07)</td> <td>yes (Elmwood Park,IL)</td> </tr> <tr> <td>60827</td> <td><strong>Riverdale Chicago</strong></td> <td>Riverdale Chicago</td> <td>yes (Riverdale, IL)</td> </tr> </tbody> </table> </div> </figure> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/8th-annual-ccp-conference https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2022/8th-annual-ccp-conference Mon, 31 Jan 2022 00:00:00 -0500 <div class="cfedContent__text"> <p>On October 19, 2021, the Financial Markets Group of the Federal Reserve Bank of Chicago hosted its eighth annual Central Counterparties (CCP) Risk Management conference. The conference opened and concluded with remarks from <a href="~/link.aspx?_id=71F4514A93784907AD527F67B8611BD2&_z=z">Alessandro Cocco</a>, vice president and head of the Chicago Fed’s Financial Markets Group. The event featured a panel on the U.S. Treasury market structure that was moderated by <a href="~/link.aspx?_id=4BC63100E5114CE386625CF4D537B32D&_z=z">Ketan Patel</a>, policy advisor and head of financial markets risk analysis, Financial Markets Group, and a fireside chat with <a href="https://www.sec.gov/biography/allison-herren-lee">Commissioner Allison Herren Lee</a> of the U.S. Securities and Exchange Commission (SEC) and <a href="~/link.aspx?_id=E746C5F544D6420D81F57A924B9AF880&_z=z">Maggie Sklar</a>, senior policy advisor and director of international engagement, Financial Markets Group. This blog post summarizes the discussions.</p> <p>The panel on the U.S. Treasury market structure featured five experts from central counterparties, banks, and a proprietary trading firm. This event was held under the <a href="https://www.chathamhouse.org/about-us/chatham-house-rule">Chatham House Rule</a> to encourage an open and candid discussion; as a result, a recording of the event is not available. However, a summary is provided below. Our conversation with SEC Commissioner Allison Herren Lee is publicly available, and we encourage you to watch the entire <a href="https://www.chicagofed.org/people/documents/sklar-fireside-chat-sec-commissioner-lee">fireside chat</a> on our website.</p> <h2>U.S. Treasury market structure</h2> <p>The panel discussion among our five panelists produced some consensus and some nuanced debate on the following topics: the Federal Reserve’s standing repo facility, supplementary leverage ratio (SLR) constraints, viable options to access clearing, cross-margining structure, and making the Treasury market more resilient.</p> <p>The conversation began with the Federal Reserve’s <a href="https://www.federalreserve.gov/monetarypolicy/standing-overnight-repurchase-agreement-facility.htm">standing repo facility</a>. A panelist stated that markets welcomed the expansion of the facility beyond primary dealers to depository institutions. This panelist also noted that adding additional counterparties with access to the Federal Reserve repo facility would provide enhanced liquidity to the Treasury market. The conversation on this topic ended with an acknowledgement among speakers that independent broker-dealers believe they should be added to the list of counterparties that can access the facility.</p> <p>The next topic the panel touched on was SLR constraints. The SLR measures tier 1 capital of a bank, primarily common stock and preferred stock, relative to that bank’s total leverage exposure, which includes on-balance-sheet assets, such as loans, securities (including Treasury securities) and reserves, and off-balance-sheet exposures, such as certain aspects of derivatives and repo contracts. In April 2020, the Federal Reserve Board temporarily modified the SLR calculation to exclude U.S. Treasury securities and central bank reserves to ease strains in the Treasury market resulting from the Covid-19 pandemic and promote lending to households and businesses. This temporary modification expired in March 2021. There was widespread acknowledgement among panelists that the SLR is constraining dealers’ balance sheets and having a negative impact on their commitment to the Treasury market, and that the exclusion of central bank reserves and Treasury securities from SLR calculations granted in April 2020 is what helped ease pressure on dealer balance sheets and increased dealers’ intermediation capacity in the Treasury market. One panelist pointed out that since 2007, Treasury securities as a share of primary dealers’ balance sheet have been constant but the Treasury market itself has expanded, reducing the primary dealer’s overall share in this market. Some panelists advocated for permanently excluding central bank reserves from SLR calculations to expand dealer intermediation capacity in the Treasury market.</p> <p>The panel then turned to a discussion on the multiple viable options for various market participants to access clearing. A panelist noted that there is not one single method for clearing and that clearing could be done directly with CCP membership for broker-dealers or through client clearing solutions for end-users. This panelist also added that for client clearing solutions, a closer look at the clearing structure would be needed to ensure a viable model exists before a mandate to clear were introduced. Such a mandate has already been proposed and was one of the topics discussed among the panelists during this part of the panel. Turning to risks that come with additional clearing, a panelist laid out two major concerns: Concentration of risk in CCPs and the need to consider the increased cost of clearing for end-users. A different panelist argued that to manage additional clearing risks, the market structure for U.S. Treasury securities needs to resemble that of the derivatives market, where a client’s margin can be transferred over to CCPs to ensure appropriate collateral exists. Under current SEC Rule 15C3-3, broker-dealer members of CCPs cannot post client margin deposits to a CCP. The current exception to this rule has been the Options Clearing Corporation (OCC), as the SEC has permitted broker-dealers to pass margins received from clients to the OCC.</p> <p>Throughout the session, conference participants were polled on the topics covered. Our first poll question asked: “Which structural change in clearing would constitute an incentive to clear U.S. Treasury trades?” Of the 30 people who responded, 50% answered, “Adjustments to client access models to clear;” 37% answered, “improved cross-margining arrangements for cash, repo, and futures trades;” and 13% answered, “changes to broker capital rules to allow for client margin on securities trades to be posted to the CCP.”</p> <p>Later, the conversation turned to the cross-margin structure. Margin is the amount of collateral in cash or liquid securities that a trader or investor must have in their portfolio to enter a position. A trader or investor may have separate portfolios with offsetting positions at different CCPs. The practice of cross-margining allows a trader or investor to combine portfolios with offsetting positions to reduce the amount of total margin owed. Thus, a cross-margin structure allows greater capital flexibility, as the total margin owed from combined portfolios with offsetting positions will likely be smaller than the total margin owed from separate portfolios. As a result of this benefit, the Fixed Income Clearing Corporation (FICC) and the Chicago Mercantile Exchange (CME) are working on a cross-margin arrangement that would more accurately reflect the overall risk position of a market participant across different CCPs. Depending on the makeup of a market participant’s portfolio, this arrangement to enhance the existing cross-margin structure may have a positive impact on the cost of clearing, as a market participant’s position at one CCP could be offset by a position held by that same market participant at another CCP. Furthermore, FICC is exploring a customer level cross-margining structure for customers who might want to clear their transactions, either as direct members or as clients of direct members.</p> <p>Before heading into a discussion of all-to-all trading, we asked participants: “All-to-all trading for U.S. Treasury securities is…?” Of the 30 people who responded to this question, 70% answered, “only practical if coupled with clearing;” 20% answered, “most practical if focused on the more liquid securities;” and 10% answered, “not needed.”</p> <p>Finally, the panelists discussed what is required to make the Treasury market more resilient. The conversation focused on all-to-all trading and whether it should be a feature of the Treasury market. In an all-to-all trading system, market participants of all types would be able to trade directly with each other rather than trading solely with broker-dealers. One panelist stated that all-to-all trading is not needed for U.S. Treasury markets due to lack of demand from clients. This panelist also expressed that the comparison between the U.S. corporate bond market and the U.S. Treasury market is misleading, as the corporate bond market lends itself more easily to all-to-all trading. In the corporate bond market, approximately 16,000 securities trade daily, while in the U.S. Treasury market only about 200 securities trade daily. In the credit markets, due to the number of securities actively trading, buyers and sellers can interact using an all-to-all protocol and settle on a price for the security, based on factors such as supply and demand and publicly available information.</p> <p>Prior to concluding the panel discussion, we asked our final poll question: “Which change, or enhancement could have the most beneficial impact on U.S. Treasury market structure?” Of the 31 people who responded to this question, 13% answered, “increase access to standby Federal Reserve repo facilities;” 32% answered, “adjustments to SLR treatment of reserves and U.S. Treasuries held by banks;” 23% answered, “clearing mandate for cash and repos transactions;” 23% answered, “requirements to trade U.S. treasuries on all-to-all trading platforms;” 6% answered, “other changes;” and one person answered, “no major changes are required.” Given the dispersion of views among those who answered the poll question, attendees expressed different views regarding which solution would have the most impact on the U.S. Treasury market structure.</p> <h2>Fireside chat with Commissioner Allison Herren Lee</h2> <p>Our conference ended with a fireside chat with Commissioner Lee. The fireside chat focused on a broad list of topics that have affected financial markets over the past 18 months, including retail trading, Treasury markets, cryptocurrency, swaps, and diversity. On retail trading, Lee acknowledged that there is an increase in the number and nature of retail participation and that a growing number of firms are using mobile investing apps to interact with retail investors. She added that the SEC needs to take a closer look at customer order handling practices and broker conflicts of interest. Speaking about the Treasury market, Lee said that regulators should consider expanding central clearing into the Treasury market as it can provide clear benefits, reduce risks, increase transparency, and facilitate liquidity. Turing to cryptocurrency, she noted that digital assets raise several issues, but unequivocally, they provide less investor protection and less oversight than traditional securities markets. Lee said that while certain issues are beyond the SEC’s purview, the digital asset space more broadly includes securities, making it important for the SEC to work closely with fellow regulators. Lee also stated that the SEC needs to finish their Title VII Dodd Frank rules but that they have already added provisions for the registration and regulation of swap execution facilities. Finally, Lee and Sklar talked about the need to improve diversity and inclusion in U.S. financial markets. Lee noted that fundamental fairness is crucial for investors, markets, and the economy, as it allows our country to tap into all its resources and fully compete on a global stage.</p> <p>A video of the <a href="https://www.chicagofed.org/people/documents/sklar-fireside-chat-sec-commissioner-lee">fireside chat</a> is available on our website.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/eos https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/eos Thu, 23 Dec 2021 00:00:00 -0500 <div class="cfedContent__text"> <p>The Chicago Fed hosted its <a href="https://www.chicagofed.org/events/2021/economic-outlook-symposium">35th annual Economic Outlook Symposium</a> (EOS) on December 3, 2021. Distinguished economists and industry specialists reported on economic and sectoral performance in 2021, provided projections for 2022, and discussed key policy issues. This blog post provides highlights of those presentations and discussions.</p> <h2>Discussion of the economy and consensus outlook</h2> <p>Anna Paulson, Chicago Fed executive vice president and director of research, opened the program by saying that we are close to entering our third year of the pandemic impacting our economy. Rising Covid-19 cases over the summer exacerbated supply chain disruptions and restrained previously rapid growth in household and business spending in the third quarter, she said. </p> <p>On a positive note, Paulson said that economic activity has picked up in recent months. This can be seen in the labor market data, she noted, with the unemployment rate in November at 4.2%. Also, labor force participation increased in November to 61.8%, although this represents only a partial recovery as compared with when the pandemic started.</p> <p>We continue to experience inflationary pressures, Paulson stated, because supply chain problems have made it difficult for producers to meet strong demand, particularly for goods. Higher energy prices and rents are also putting upward pressure on inflation, and there are signs that inflation trends are picking up more broadly, she added. “There is uncertainty as to when inflation pressures will abate,” she noted, and as a result, “monetary policy will need to adapt to reflect the changing data.”</p> <p>Paulson warned that the recent rise in Covid cases and the emergence of the Omicron variant are a sharp reminder that we remain in the grips of the pandemic and must be humble in our assessments. As for the future, she and her colleagues will be watching the incoming data closely to determine the extent to which the pandemic is causing shorter-term changes as compared with longer-term structural adjustments (for example, in terms of workforce participation, capital investment, and wage and price-setting psychology).</p> <p>Thomas Walstrum, Chicago Fed senior business economist, reported on the consensus outlook, which is based on inputs from numerous forecasters and is published annually. (Walstrum also looked back at last year’s submitted forecasts and determined that actual real gross domestic product (GDP) and inflation were both higher than anyone predicted for 2021.) Overall, the submitted forecasts predict a strong 2022, Walstrum noted; for instance, the median projection for real GDP growth is 3.7% between 2021:Q4 and 2022:Q4.</p> <p>The submitted median forecast for the unemployment rate is 3.9% for 2022:Q4, Walstrum said. Based on this forecast, as well as a similar projection for 2022 from the Fed’s Federal Open Market Committee (FOMC) in September (the FOMC’s December projections for the unemployment rate and other key economic variables were released after the EOS took place), Walstrum noted that the November 2021 unemployment rate of 4.2% is only modestly above these predictions.</p> <p>Walstrum reported that the submitted median forecast for Consumer Price Index (CPI) inflation is 3.1% for 2022:Q4 over 2021:Q4—which is lower than the median expected rate of 6.1% for 2021:Q4 over 2020:Q4. He suggested that this predicted decline is driven by an anticipated reduction in wage pressures, as well as an easing of supply chain constraints, including those faced by the hard-hit auto industry.</p> <h2>Panelists’ perspectives on the economy</h2> <p>Thomas Klier, Chicago Fed senior economist, moderated a panel of four guests representing different perspectives on the economy. Panelist Karin Kimbrough, chief economist at LinkedIn, shared insights on the labor market from the perspective of the LinkedIn platform. She noted that while the labor market remains tight, November was a very strong month for hiring, up 7% from October, which was fairly broad-based across industries.</p> <p>Kimbrough explained that “there seems to be a real aggressive preference for remote work.” Before the pandemic, one in every 67 jobs was remote on the LinkedIn platform versus one in seven today, she said, adding that “it seems as if remote is starting to entrench itself into the fabric of our world of work.” Drawing from a LinkedIn survey of 350,000 members, 81% of employees in the U.S. prefer remote work, she shared. </p> <p>Recently, women have started coming back to the labor market in larger numbers following a large decline earlier in the pandemic, Kimbrough said. Women have a particularly strong preference for remote work as well as entrepreneurial work, she reported.</p> <p>Recent hiring has been robust among millennials and Generation X but less so among baby boomers, Kimbrough said, suggesting that baby boomers may have accelerated their retirements based on Covid-19 concerns and likely benefited from housing and stock market gains over the past few years. Optimistic about the future labor market, Kimbrough stated, “I think people will come back when they’re lured back for the right reasons and the right price or wage.”</p> <p>An associate professor at Georgetown University’s McCourt School of Public Policy, Bradley Hardy, whose work focuses on low-income families, said that the social safety net was quite effective during the pandemic. Poverty reduction was substantial thanks to economic assistance payments, food stamps, emergency unemployment insurance programs, and income support through the tax system (notably, the child tax credit).</p> <p>While there are families that are still hurting because of the pandemic, the U.S. Census Bureau’s Supplemental Poverty Measure shows a 2.6 percentage point decline in the poverty rate in 2020 from 2019, Hardy reported. At the same time, evidence from the Atlanta Fed, in particular from its Wage Growth Tracker, shows that nominal wages are rising substantially for the bottom 20% of the wage distribution, which is undoubtedly helping to offset the negative effect of rising inflation for low-income families, he added.</p> <p>Hardy recommended reinvesting in state human resource agencies to “make sure that we can efficiently deliver benefits to families that are suffering.” He said he hopes the child tax credit will become a permanent tax allowance for families in the U.S. He stressed that the child tax credit, which has been used in many Organisation for Economic Co-operation and Development (OECD) countries, is a very effective way to deliver assistance.</p> <p>Svenja Gudell, chief economist at Zillow, reported that home values are up 18% nationally as of September 2021 over the previous year (compared with a historical annual growth rate of about 3.5%). She said that high demand relative to the supply of homes is driving up home prices. At the same time, mortgage rates have remained low—at the time of the EOS, right around 3% for a 30-year fixed mortgage—which “has certainly kept affordability in check, even though home values have risen dramatically over the last few years,” she said.</p> <p>Gudell noted that she is starting to see some tapering off in housing prices, with inventory levels bottoming out. However, she also said, “I’d argue that we do not have enough units right now to actually meet demand.” The fact is that lumber, steel, and labor supply constraints are still impacting new home construction, she explained.</p> <p>Gudell said that rental affordability has been an issue for some time and continues to be a concern, reporting that rents are up 13% in September 2021 from the same month of the previous year (compared with a historical annual growth rate of between 2.5% and 3.5%). With regard to whether the changes in the housing market will persist, she shared that she’s not yet convinced that anything will permanently change. </p> <p>Chad Moutray, chief economist at the National Association of Manufacturers (NAM), reported that demand in the manufacturing sector continues to be strong, based on the timely data collected from NAM's <cite>Manufacturers’ Outlook Survey</cite>. Drawing upon the results from the November survey of the Institute for Supply Management (ISM), he also said he sees very positive signs in terms of manufacturing production, employment, and factory orders.</p> <p>The number one challenge in the manufacturing sector, Moutray said, is the higher cost of raw materials, but the sector is also facing issues related to labor shortages (especially for entry-level workers despite significant increases in their salaries in 2021), supply chain issues (including a semiconductor chip shortage, although that has subsided somewhat), and higher freight costs (especially for small- and medium-sized businesses). Manufacturing production is up 1.2% from when the pandemic started, “so we have bounced back pretty nicely from that,” he said. Moutray said he expects growth in the manufacturing sector to continue into 2022.</p> <p>On the supply chain issue, Moutray suggested that “we’ll see a lot more production return to the U.S., and at least North America, especially in light of these increasingly large freight costs.” He also noted that “companies in general are looking at making sure that they have more than one supplier.”</p> <h2>Summary remarks from the keynote speaker</h2> <p>Diane Swonk, chief economist at Grant Thornton, said that, in general, pandemics tend to lead to labor shortages and thus push wages up, but they don’t usually lead to inflation as we have seen with the Covid-19 experience. This time, technology helped to prop up demand by supporting the continuation of work despite lockdowns and hesitance to return to work for fear of exposure to the virus. The unprecedented assistance by government also helped to support demand in ways not seen in earlier pandemics. Both factors contributed to inflationary pressures, she acknowledged. </p> <p>“The labor markets are beginning to heal,” Swonk said, with the labor force participation rate at its highest level since the pandemic started. Going forward, consistent childcare options and school schedules are necessary to get more people back into the workforce, she said.</p> <p>According to the ISM service index published in early December 2021, Swonk observed, the travel and tourism sectors achieved their highest levels since 2019 as people returned to restaurants, hotels, theaters, and sporting events in greater numbers. Swonk said she predicts the U.S. economy would grow by 5.7% in 2021, although she anticipates that the nation’s growth rate will slow to about 4.3% in 2022. </p> <p>Average inflation for the year as measured by the CPI will be about 4.5% in 2021, Swonk said, and she expects inflation to slow to about 3.5% in 2022.<a href="#ftn1" name="ftnref1"><sup>1</sup></a> Despite some easing, inflation will continue to be of concern to the Federal Reserve next year, which she said will likely translate into policy-driven interest rate hikes in 2022.</p> <p>Consumer spending should continue to be strong in 2022, but not as robust as in 2021, Swonk noted. Spending on services should pick up more than goods purchases, which were relatively strong during the height of the pandemic, she added. </p> <p>On the business side, “we’re seeing the strongest investments in technology and intellectual property that we’ve seen since World War II,” Swonk stated. Inventories are currently at extremely low levels, she said, and “we’ll spend much of 2022 replenishing those inventories, so store shelves will be full again and dealer lots will have cars on them again.”</p> <p>Fiscal stimulus from the government in response to the pandemic will continue to abate next year, with the private sector needing to pick up some of the slack in spending, Swonk said. In addition, government spending associated with the infrastructure bill that has passed Congress will not fully show its effects until the mid-2020s, she noted. </p> <p>In closing, Leslie McGranahan, Chicago Fed vice president and director of regional research, gave her appreciation to the EOS’s panelists and keynote speaker for their insights on the economy, as well as to all participants that gave inputs throughout the year for the Chicago Fed’s surveys, roundtables, and public events.</p> <hr /> <h3>Note</h3> <p><a href="#ftnref1" name="ftn1"><sup>1</sup></a> In her presentation, Swonk provided annual average CPI inflation forecasts for 2021 and 2022—which are calculated differently from the EOS consensus outlook’s fourth-quarter-over-fourth-quarter CPI inflation forecasts. This difference largely explains why, for example, her inflation forecast for 2021 (4.5%) is much lower than the consensus outlook’s median forecast for the same year (6.1%), as presented by Thomas Walstrum earlier.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/biofuels-in-the-midwest https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/biofuels-in-the-midwest Tue, 14 Dec 2021 00:00:00 -0500 <div class="cfedContent__text"> <p>Biofuels have been on a roller coaster ride over the past two decades, driven up initially by the national renewable fuel standard (RFS) program that triggered ethanol’s heyday from 2002 to 2010 with growing corn prices and surging farmland values—until 2013, when ethanol growth plateaued. Bio-based diesel hit a peak in 2016 and then it too reached a plateau.</p> <p>Leslie McGranahan, vice president and director of regional research, kicked off the Chicago Fed’s virtual <a href="~/link.aspx?_id=4815673FB6234DC297169F909D11C56F&_z=z">2021 Agriculture Conference</a> with a summary of those boom years, which were followed by the recent pandemic-related situation of fewer miles driven, “leading to plummeting gasoline and biofuel prices.” McGranahan added that while there has been some recovery in usage, “the volatility of fuel prices has ripple effects across many sectors.”</p> <p>The uncertainties of the market, state and national energy policies, and the ongoing Covid-19 pandemic resonate throughout the Seventh District, where many biofuel crops and processing plants are central to the agricultural economy. Add new biofuel technologies, a trend toward electric vehicles (EVs), and a new Administration in Washington, and it’s clear that a discussion of biofuels gets complicated.</p> <p>It’s fitting then that featured speaker <a href="https://scotthirwin.com/">Scott H. Irwin</a> titled his presentation “The Future of Biofuels … It’s Complicated.” Irwin, Laurence J. Norton chair of agricultural marketing in the department of agricultural and consumer economics at the University of Illinois, Urbana–Champaign, highlighted a theme that he said doesn’t get enough attention when considering the future of biofuels. “And that's really, just simply put, politics, and not economics” drives the future of biofuels, he said.</p> <p>Based on data on ethanol and biomass-based diesel production, consumption, and costs over that past ten to 15 years, Irwin said, it is clear is that ethanol usage has been stuck because of the E10 blend wall, a federal requirement limiting ethanol to 10% of a gallon of gasoline for most uses. And while the growth rate is more impressive for biomass-based diesel, usage is still only about one-sixth that of ethanol.</p> <p>The current RFS volumes are due to expire in 2022, and new standards are expected to be introduced by the Environmental Protection Agency (EPA), in coordination with the U.S. Departments of Agriculture and Energy, for 2023 and going forward. But Irwin cautioned that future standards “will inevitably be constrained by court interpretations of the congressional intent for the RFS,” and changing the RFS program would require congressional action.</p> <p>Another topic Irwin stressed was the ongoing transition from traditional FAME (fatty acid methyl ester) biodiesel to renewable diesel. When asked about the implications for corn and soybean farmers as they look at prices in the future because of this demand for the new form of diesel, Irwin suggested that “there's going to be a bullish surprise in terms of price of corn and soybeans” and that renewable diesel will have enormous implications for soybean acreage allocations, both in the U.S. and globally.</p> <p>He added, “But the net price impact for this renewable diesel boom is somewhat uncertain because if we're starting to grow increasing acreage of soybeans for the oil content, we're going to create a huge surplus of soybean meal. And so, it's very difficult then to figure out the net impact on soybean prices. It's clearly not entirely positive.”</p> <p>Irwin went on to say: “And what it basically means is that potentially, the renewable diesel plants could drive out the FAME biodiesel production by outbidding them for feedstock. That's already beginning to happen. I expect that trend to pick up. Right now, the economics are such that it's really difficult for me to see how most FAME biodiesel plants are even staying in business right now, based on the economics as I follow them.”</p> <p>A reasonable projection is that for every gallon of increased renewable diesel in the future, Irwin said, we'll see at least a half-gallon cannibalization of FAME biodiesel production. “But even that half a gallon increase in feedstock needs is just ginormous,” he added.</p> <p>Pricing pressures on consumers are another important factor. Irwin noted that there are signs that U.S. drivers don't have much tolerance for the added expense from the low-carbon fuel standard- type programs, such as in California. These pressures increase the risk of a political counter reaction to expensive renewable diesel, he said, and may lengthen the timeline for investments in renewable diesel to pay off in market growth.</p> <p>Speaking to ethanol industry investments was John Campbell, managing director of Ocean Park, headquartered in Los Angeles, which is involved with investing in biofuels and other parts of the agricultural sector. Campbell said ethanol producers have had to look to new revenue streams or higher margin opportunities due to the E10 blend wall. “We have about 17 billion gallons of capacity. And we have a domestic market of about 13 billion gallons. Some of our ethanol is exported, but ethanol producers have been squeezed for several years,” Campbell said. “So, what they have done is to invest in things they think will bring them more margin.”</p> <p>In particular, the pandemic has led to a demand for more high-quality alcohols. As a result, several plants have undergone expansions to accommodate high-quality alcohol production, Campbell said. Another area has been in concentrating protein for higher-value markets, especially looking toward aquaculture as a potential end use, he added.</p> <p>One big initiative has been to reduce carbon index scores (measures of carbon dioxide emitted along the supply chain for a given fuel), again looking toward California and other states with low-carbon fuel standards, Campbell said. Reducing the carbon index of ethanol has been a key driver for investment, he noted, and this includes putting in combined heat and power, energy centers, and also carbon capture and sequestration, both through direct injection at or near the ethanol plant into geological formations. And then, he added, there are the planned pipelines to collect and transport carbon from the fermentation of ethanol for permanent storage at more remote locations or for use in enhanced oil recovery.</p> <p>In addition, Campbell said, there continue to be expansions that provide on-site low-cost incremental production, mainly through additional fermentation and distillation capacity for ethanol. Still, he added, corn production continues to grow on a yield basis, meaning that there is corn starch available for additional alcohol production, in spite of the vehicle market stuck on the 10% blend. Whether or not the blend wall can be breached, he said, alternative jet fuel, biochemicals, and exports are potential future markets.</p> <p>Some investment in alternative feedstocks (raw materials) for biofuels, such as pennycress, camelina, and other crops, was noted by Campbell. But getting to commercially viable volumes that can be fermented or crushed will take some time, he said.</p> <p>Campbell concluded: “When you look at the landscape and you look at agriculture and agricultural economics, I think we probably have to get back to biomass. When you look across the landscape, woody biomass and other forms of biomass are probably the only widely available feedstock across the planet to ramp up additional biofuels.”</p> <p>The next panelist also focused on next generation corn products. Natalie Mason is commercial area lead, Gevo Inc., a renewable chemicals and advanced biofuels company headquartered near Denver. Mason said she has good news for corn producers, who may see their ethanol market dwindling, in that Gevo is focused on producing renewable hydrocarbons from corn.</p> <p>Mason said demand is increasing for renewable jet fuel, and she expects Gevo to be the first to market, given that their process is similar to that at existing ethanol plants.</p> <p>Gevo is also commercializing the next generation of advanced bio-based renewable fuels with sustainable aviation fuel, renewable premium gasoline, and renewable natural gas that has the potential to achieve net zero carbon emissions over the lifecycle of the fuel, Mason said. She added that the company aims to be net zero from a production standpoint.</p> <h2>A different view on environmental benefits</h2> <p>Taking an entirely different view of the value of biofuels, especially for the environment, the final panelist Jason Hill, professor, department of bioproducts and biosystems engineering, University of Minnesota, argued that biofuels will not be the solution to climate change and air quality issues. Hill said the success of biofuels is “certainly not based on any environmental benefit that has been realized from this industry or on energy security concerns. Statistics often overstate benefits of biofuels. Whatever the blends of ethanol, emissions are not all that different from gasoline. What counts is how they’re produced.”</p> <p>Hill said there is reason to believe that biofuels have increased greenhouse gases rather than decreased them. He explained that's possible because some of the first order effects of biofuel use, such as fuel market rebound effects, haven't been factored into the analysis that the EPA and others have done that look at the net carbon emissions from biofuels.</p> <p>Regarding air quality impacts, Hill noted that vehicle emissions control technologies are so good now that fuel choice really doesn't matter much. However, he added, “when you look at the emissions in the supply chains of those fuels, the external costs of gasoline end up being about $0.50 a gallon that society bears as a result of poor air quality from biofuels. For corn ethanol it's about double that, about $1.”</p> <p>However, a few, truly advanced biofuels actually fit the criteria for being lower carbon fuels, Hill said. Those tend to be made from biomass produced in systems that mimic natural systems. Removing biomass from diverse plots of land could lead to a low-carbon fuel future, but not in the near term, he concluded.</p> <h2>Debate over acres used for food versus fuel</h2> <p>One of the issues that confronts the biofuel industry is the trade-off between crops used for fuel rather than food. Irwin said one way to think of the food versus fuel question and how it will likely play out is to look at the dynamics of the ethanol boom years from roughly 2004 to 2010, when, for example, U.S. corn acreage rose dramatically, particularly in the Great Plains, taking away from the production of wheat and small grains.</p> <p>“I think that we could see a similar dynamic as we have a need to expand oilseed crops, in particular soybeans” Irwin said. It could be that wheat and small grains crops get left behind once again, as market prices would dictate the need for additional soybean acres, he added.</p> <p>Hill noted that the real battle is between electrification and liquid fuels for transportation energy demands. Hill said that, “all this is happening in the broader context of the world demanding more and more food every year, more and more land used for food—50% more over the next few decades as a result of increased population and increased affluence.” With growing affluence, people usually eat more animal products, which tend to be more land intensive, he said.</p> <p>Electrification is where we want to go, Hill said. However, Campbell questioned whether enough research has been done on the life cycle of electric vehicles in order to come to this conclusion.</p> <h2>Where do electric vehicles fit into the biofuels picture?</h2> <p>A discussion of the future of biofuels would not be complete without including electric vehicles (EVs). Irwin said, “the endpoint is clear and obvious” that we’ll transition to electric, and, in the long run, agriculture will need to deal with this issue. However, he added, it will take a long time to phase out the current petroleum-based vehicle fleet. Irwin doesn’t see a big impact for at least ten to 15 years. “We have a massive fleet of internal combustion engine cars that are going to turn over fairly slowly,” he noted. Irwin added that of the approximately 17 million light duty vehicles sold annually in the U.S., currently only about 2% to 3% are EVs, with maybe 1 to 2 million on the road.</p> <p>Government policies may ramp up EV use, but the key variable is whether drivers globally and in the U.S. are ready to absorb the cost of climate mitigation. “It’s not 100% clear that EVs as a technology get us that far in terms of climate mitigation,” Irwin said. He concluded: “We’re going to do it, but I believe it’s going to take a while.”</p> <p>Though all of the speakers at the conference came from different perspectives, they each confirmed that the future of biofuels is indeed complicated and in flux.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/banking-on-the-future-part-1 https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/banking-on-the-future-part-1 Mon, 29 Nov 2021 00:00:00 -0500 <div class="cfedContent__text"> <p>The annual Community Bankers Symposium is an interagency event, hosted by the Federal Reserve Bank of Chicago, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and the Conference of State Bank Supervisors (CSBS). This year’s <a href="https://www.chicagofed.org/events/2021/community-bankers-symposium-2021">event</a>, which focused on technology, security, and regulatory initiatives to prepare banks for the future, was held virtually on Friday, October 22, 2021.</p> <p>In this blog post, we summarize the welcoming remarks, keynote address by Federal Reserve Board Governor <a href="https://www.federalreserve.gov/aboutthefed/bios/board/bowman.htm">Michelle (Miki) Bowman</a>, and presentation by futurist author <a href="http://brettking.com/biography/">Brett King</a>. In a follow-up post, we will summarize the view from the CSBS, expert perspectives on cyber security, the regulatory panel, and new initiatives from the FDIC, including an investment fund for mission-driven banks and their communities, presented by Chair <a href="https://www.fdic.gov/about/jelena-mcwilliams/">Jelena McWilliams</a>.</p> <p>In welcoming remarks, <a href="https://www.chicagofed.org/people/w/williams-julie">Julie A. Williams</a>, executive vice president of Supervision and Regulation at the Federal Reserve Bank of Chicago, highlighted the many challenges community banks have faced during the pandemic, including branch closures, limited onsite staff, navigating the risks of new technologies, and ensuring the safety of employees and customers. Among the most important, she noted, was the stress associated with Covid-19 and its impact on bank employees and customers, families, and communities.</p> <p>In spite of the many challenges, there are some bright spots in the financial picture for community banks. According to Williams, returns on average assets (ROAA), an important measure of financial health, reached its highest level over the past five years as of the second quarter of 2021; asset quality trends have demonstrated improvements; banks with agriculture loan concentrations continue to perform well; and liquidity is robust. Granted, she said, net interest margins continue to be negatively impacted in the current low interest rate environment.</p> <p>Williams also highlighted the value the Seventh District places on supervisory relationships with community banks and bank holding companies and its high-touch approach to the supervisory process. During the pandemic, supervisory managers were empowered to stay in regular contact with their respective portfolio of institutions to learn what was happening at the banks, as well as share information about key decisions bank supervisors had to make in real time to deal with uncertainties of the pandemic and overall bank supervision. Williams emphasized the importance of ensuring compliance with the Bank Secrecy Act and anti-money laundering law (BSA/AML) and managing risks related to increasingly sophisticated cyber attacks.</p> <p> Finally, Williams noted that staffing is among the challenges community bankers face as they work through strategic plans for 2022. The market for talent is becoming increasingly competitive, she said, while at the same time the sector is confronting the retirement of baby boomers.</p> <p>Indeed, staffing issues are currently affecting all sectors of the economy. <a href="https://www.chicagofed.org/people/p/paulson-anna">Anna Paulson</a>, executive vice president and director of research, Federal Reserve Bank of Chicago, noted that there are approximately three million fewer people in the labor force than before the pandemic, and approximately five million fewer people are employed today than prior to the pandemic, as she also welcomed the symposium audience. Paulson explained that the labor force decline is due to several pandemic-influenced factors, including health concerns keeping some people from looking for work or returning to jobs in higher-risk industries, a surge in early retirements, and school closures and childcare concerns keeping some parents out of the labor force. To a lesser degree, she said, expanded unemployment insurance benefits and other fiscal supports may have reduced incentives for some workers to return.  </p> <h2>Banking on the Future: Keynote address</h2> <p>Federal Reserve Board Governor Michelle (Miki) Bowman focused her speech on the scarcity of de novo banks over the past decade and said the future of community banking is one of the Board’s highest priorities. She highlighted the importance of community banks in providing access to services, as well as their superior knowledge of their customers and skills in relationship banking using qualitative as well as quantitative lending models. She noted that community banks provided almost 60% of pandemic-era loan volume under the Paycheck Protection Program, including 87% of emergency loans to businesses owned by entrepreneurs from minority racial/ethnic groups, 81% to businesses owned by women, and 69% to businesses owned by veterans.</p> <p>The community bank footprint has been declining due to ongoing merger activity; and only 44 de novo community banks have been chartered in the past ten years. Between 1990 and 2008, over 2,000 de novo charters were issued, averaging 100 per year. Only seven new banks were formed between 2009 and 2013 because of low interest rates and reduced demand for banking services, Bowman said. New bank formations typically increase in expansions and decline in contractions, she added, given capital raising requirements that average $30 million and a smaller margin of error in providing shareholder return. They also face growth pressures that could lead to riskier lending practices, an initial tier one leverage requirement averaging 8%, as well as a need to hire experienced staff to meet profit targets and handle regulatory burden, said Bowman. Non-regulated financial institutions have a competitive advantage, she noted, because investors can simply acquire an existing bank charter, branch, or nonbank financial firm subject to less regulation. While the loss of a small bank may not be systemically significant, Bowman said, it can have a devastating impact on a community by limiting access to the economy.</p> <p>Bowman noted that policymakers are seeking to understand why there has been a decline in new bank formation and how it can be encouraged in this competitive environment. The Board will continue working to identify regulatory and policy constraints that limit bank formation. She also discussed cyber risk, which is an increasing threat to community banks and requires action plans and regulatory reporting.</p> <p>Finally, Bowman discussed the growth of fintechs and the potential for them to partner with other financial institutions. The emergence of this technology-driven financial sector has led to interagency guidance on the adoption of artificial intelligence and the need for comprehensive financial due diligence, she added.</p> <h2>A view of the future from Brett King</h2> <p>Brett King, an international best-selling author, futurist and media personality, joined the symposium to share his vision of how the landscape of the financial services industry will change in the coming decades. King predicted that the banking industry will face disruption arising, in part, from an inevitable transition to digital services. As evidence, he cited record setting investment in fintech during the first two quarters of 2021. Rapid technological innovations, including the development of more sophisticated artificial intelligence (AI), will lower costs, improve security, and change how consumers conduct financial transactions, particularly payment activities, through the adoption of mobile wallets, King said.</p> <p>During the pandemic, consumers became more accustomed to using virtual services, such as telemedicine, remote learning, and e-commerce, King noted, and that might help to open the minds of Americans who have been slower to embrace the use of mobile wallets than other countries, particularly in Asia. For example, King stated the use of currency as a mode of payment in China decreased from 98% in 2014 to 36% in 2020 due to the introduction and acceptance of mobile wallets.</p> <p>Today 95% of Chinese consumers use a mobile wallet for day-to-day activities, and the global volume of mobile transactions is on a trajectory to triple that of traditional card payments. King said that security is often raised as a concern related to the use of mobile wallets; however, AI and increased technological capacity will enable the use of biometrics or the accumulation of behavioral data to more effectively identify and prevent fraud than the legacy identity infrastructure employed today, such as pin numbers or mother’s maiden name, he added. In fact, fraud arising from a “card not present” transaction is over ten times higher than fraud related to a mobile wallet transaction, King said, despite the rapid and instant nature of the latter.</p> <p>Outside the United States and other Western nations, mobile wallets are the primary bank account for the majority of consumers, and by 2025, King predicted, there will likely be more bank accounts opened via a mobile wallet on a smart phone than in traditional banking offices. Technology will enable the mobile wallet to be a “smart wallet,” and in that context may be able to help consumers save money or ensure funds are available for key purchases by assessing the situation in real time using behavioral data to generate a warning or advisory. For example, a mobile wallet consumer entering a grocery store may be warned there are insufficient funds for a habitual shopping excursion. In King’s view, the ability to safely store and move money and access credit in real time will drive the financial services industry in the digital age.</p> <p>These technological advances will not only apply to consumer accounts, but also to commercial customers. King said he expects commercial customers to demand seamless interaction with accounting and cash flow applications, which will facilitate instant access to commercial credit. Finally, King cautioned that the fastest growing financial institutions are all digital “fintechs” or “techfins.” If U.S. financial service providers do not respond by supporting development of a digital infrastructure and new identity mechanisms, he concluded, U.S. consumers may come to rely on a foreign underlying currency or possibly foreign cryptocurrency for their economic activities.</p> <p>Our <a href="~/link.aspx?_id=B58F8A6BC73F4485A88D3BD92280C043&_z=z">next post</a> will cover updates from the CSPS, expert perspectives on security and regulation, and an overview of important new FDIC initiatives from Chair Jelena McWilliams.</p><hr /> <h3 class="text-center"> The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System. </h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/banking-on-the-future-part-2 https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/banking-on-the-future-part-2 Mon, 29 Nov 2021 00:00:00 -0500 <div class="cfedContent__text"> <p>This is our second post summarizing the 2021 Community Bankers Symposium, held virtually on October 22. Our first post covered the opening remarks, keynote address, and a special presentation on the future by Brett King. Read it <a href="~/link.aspx?_id=E07DFCECDCA54257B704C11F7BA8CC65&_z=z">here</a>. In this post, we summarize the view from the CSBS, expert perspectives on cyber security, the regulatory panel, and new initiatives from the FDIC, including an investment fund for mission-driven banks and their communities. The FDIC overview was provided by Chair <a href="https://www.fdic.gov/about/jelena-mcwilliams/">Jelena McWilliams</a>.</p> <h2>View from the CSBS</h2> <p><a href="https://www.csbs.org/csbs-management">John Ryan</a>, president and CEO of the Conference of State Bank Supervisors (CSBS) discussed what he termed the five Cs—the issues that he said will have the greatest impact on the banking system. They are: crypto currency, climate risk, cyber attacks and security, chartering, and central bank digital currency (CBDC). These issues impact policy at the state and federal level, he argued, and can impact the future of banking and specifically the future of community banking.</p> <p><em>Crypto currency</em> has grown from a market cap of approximately $4 billion in 2014 to $2.4 trillion dollars (an increase of 59,900%), Ryan said. The regulators and Financial Stability Oversight Council (FSOC) are trying to identify the risks to the financial stability of the banking system. Ryan argued that crypto currencies threaten to cause disintermediation within the financial system, and that the regulatory structure concerning cryptos needs to be addressed.</p> <p>On <em>climate risk</em>, Ryan said that as the country moves policy toward more sustainable energies, banks may experience transition risk in state and local economies.</p> <p><em>Cyber</em> <em>attacks</em> are not slowing down, and ransom-related attacks are up 30% from 2020, Ryan said. Given the cost to protect systems, he added, it is important to fix inefficiencies and push innovation and not risk losing the diversity of the banking system to consolidation.</p> <p><em>Chartering</em> in this context is specifically related to the uninsured chartered institutions, Ryan said. These uninsured fintech chartered institutions are not covered by federal law or conditions of the Federal Deposit Insurance Act or Bank Holding Company Act and are not held to the same level of scrutiny related to capital, Community Reinvestment Act, or safety and soundness, he added. Ryan said this creates an un-level playing field, and the chartering of these institutions gives the appearance of federal support. States like Wyoming have passed laws to help define and control these charters, he noted.</p> <p>A <em>central bank digital currency</em> is a fiat currency that is backed by the full faith and credit of the issuing government. China and other countries are experimenting with CBDCs. This can promote financial inclusion to the unbanked (adults that do not have their own bank account), Ryan pointed out, but may change forever how banking is done.</p> <p>Ryan concluded that federal regulatory authorities understand the value proposition of community banking and the importance of the lending relationship, as well as how community banks can reach underserved markets throughout the country. As an example, he said, 51% of Payment Protection Program (PPP) funds were distributed through state-chartered banks.</p> <h2>Cyber risk: Perspectives from the Secret Service and CISA</h2> <p>Patrick Hogan, U.S. Secret Service, Chicago Cyber Fraud Task Force, and Tony Enriquez, U.S. Department of Homeland Security, Cyber Security & Infrastructure Security Agency (CISA), provided their perspectives on cyber risk and current threats. Hogan shared some of the salient trends the Secret Service is seeing in the areas of e-skimming (infecting online shopping or service checkout pages with malware to steal payment and personal information), business email compromise (BEC), ransomware, and fraudulent activities related to Covid-19. Enriquez spoke about how CISA focuses on mitigating and responding to disruptions in communications and cyber threats while making Homeland Security’s IT infrastructure more resilient.</p> <p>Hogan noted that cyber criminals have shifted from point-of-sale terminal hacks to e-skimming because payment card industry standards and chip-enabled cards have made point-of-sale transactions more secure. Supply chains as well as third-party vendors, such as those that provide payment platforms or web analytics are more commonly being targeted, in cases where it is easier to cause harm to the target through this mode. BEC resulted in 35% of all fraud losses reported to the Secret Service in 2019 and 29% of all fraud losses in 2020, Hogan said. He added that $1.8 billion was reported in BEC fraud losses to the FBI in 2020, with $26 billion reported worldwide.</p> <p>Ransomware is on the rise, Hogan said, with a 17% increase in cyber insurance claims between 2019 and 2020. He reiterated law enforcement’s stance of advising businesses not to pay when they are victims of ransomware as there are additional risks that include violating government and/or financial regulations based on the jurisdictions where payments are sent. Hogan highlighted the <a href="https://www.csbs.org/ransomware-self-assessment-tool">Ransomware Self-Assessment Tool</a>, released in October 2020, which consists of 16 questions focused on how a system is being protected, what detection methods are in place, responses to ransomware, and systems recovery. Lastly, Hogan highlighted the Secret Service’s other investigative priorities, including various Covid-19 related frauds, apps that install malware, phishing schemes, sale of counterfeit goods, and CARES Act fraud.</p> <p>Enriquez said that our nation’s critical infrastructure sectors are becoming increasingly vulnerable to ransomware attacks that severely impact business processes and cripple an organization’s ability to deliver mission-critical services. Ransomware threatens public and private networks, costing billions of dollars in post-incident recovery. Enriquez highlighted how ransomware can affect individuals from a personal perspective, by gaining access to personal files, saved passwords, and financial information, as well as the risk of data being destroyed or lost. From an organizational standpoint, an entity can temporarily or permanently lose corporate data or intellectual property, as well as suffering a loss of revenue, in addition to potential legal fees and damaged reputation. Enriquez highlighted two CISA resources: the joint <a href="https://www.cisa.gov/stopransomware/ransomware-guide">Ransomware Guide</a> and the <a href="https://www.cisa.gov/publication/ransomware-campaign-toolkit">Ransomware Campaign Toolkit</a>. He stressed that we all need to work together to raise awareness about the threat ransomware poses, sharing key actions that make organizations more resilient. Additionally, Enriquez provided an overview of the purpose and benefits of CISA’s range of cybersecurity assessments, including vulnerability scanning and cyber resilience review.</p> <h2>Regulatory panel: Current and emerging issues</h2> <p>Cathy Langlois, vice president, Federal Reserve Bank of Chicago, moderated a panel of bank regulators from across the District. The panel featured Stephen Wheatley, assistant vice president, community banking organization supervision, Federal Reserve Bank of Chicago; Brian James, deputy comptroller central district, OCC, Greg Bottone, regional director, FDIC; and Thomas Fite, director, Indiana Department of Financial Institutions.</p> <p>Wheatley discussed how the supervisory approach changed during the pandemic. The focus was to help ensure that banks could continue to provide credit and services to their customers in an unprecedented environment, he said. He detailed the necessity to modify examination timelines and expectations during this period, and ultimately examinations were paused, while health checks were conducted, and contingency plans were monitored. Wheatley noted that a lot has been learned during this period, and as examiners begin to move to a more normal examination environment, they will continue to maintain a risk-focused approach and look for ways to reduce regulatory burden. Even though virtual exams have gone well, Wheatley emphasized the importance of some on-site presence and the value of face-to-face conversations. He noted that examiners will look to use more of a hybrid approach going forward, coordinating with the regulated institutions and state counterparts.</p> <p>Fite discussed strategic risks and how the industry is evolving. He noted that the pandemic accelerated the rate at which new financial service providers showed up with new products and services. Fite said he was concerned that some of these products or services might be coming to market without regulation. For example, Venmo used to be a simple way to pay your friend to split a dinner bill, he said, and now Venmo will send you offers for credit cards, offers to have your paycheck directly deposited to a Venmo account, and offers to exchange crypto currency. Fite explained that banks can’t ignore these products but they do need to focus on safe and sound banking as they approach new products. He explained that state regulators do regulate some fintechs, and that there is a really big difference between a charter and a license, as Banks are chartered, while a lot of fintechs are licensed, though some are uninsured fintech chartered institutions. States are working on ways to regulate these marketplaces, he said. Fite noted that regulators need to avoid picking winners and losers as the regulatory environment is being established. </p> <p>Bottone agreed that the pace of change is accelerating. He added that some banking institutions have not been thinking enough about the future or evolving as much as they might need to. Bankers need to focus on what they are good at, Bottone said, and on what they can offer existing customers and how they can grow with new customers. Bankers need to develop new products and services, he said, but they first need to assess whether they have the appropriate processes in place, the appropriate staff, and evaluate items with their compliance team. After a careful assessment, they may find out it is not profitable to get into something, he added.</p> <p>James discussed the lessons learned over the last two years that are important for supervised institutions to know. “We fully appreciate the importance of community banks,” he said. Community banks demonstrated strong financial resilience and were effective at utilizing government support programs for pandemic relief; “the PPP is a great example of that,” he added. He also noted that communities, not just customers, realized the value of community banks during this time, and that community banks have made great strides in risk management practices since the Great Recession. The banks went into the pandemic-related slowdown with strong asset quality, good earnings, and improved capital positions, due to better underwriting and lower concentration risks, James said. Community banks really adapted quickly from an operational perspective, he added, but challenges remain, and this highlights the need for strong operational resiliency, he said.</p> <p>James noted that operational risk, resiliency, incident response, data recovery, and business resumption plans will be a supervisory focal point going forward. Bank management and examiners must be diligent to ensure risk management is maintained as we adapt to the changing environment and manage the changing risks, he said. The OCC will approach examinations with a risk-based focus, taking into consideration the excess liquidity and its impact on earnings and capital, but focusing on banks’ ability to manage the risks, he said. James added that credit uncertainty remains, and while the OCC supports banks working with borrowers, bank management should continue to rate credit appropriately. Lastly, James highlighted the importance of good due diligence as we move forward.  </p> <h2>Chair McWilliams shares new initiatives from the FDIC</h2> <p>Closing remarks were presented by Jelena McWilliams, who was sworn in as the twenty-first Chair of the FDIC on June 5, 2018. McWilliams noted that in times like these, it is crucial to come together to celebrate the successes of our community banks and address the challenges. She said that as of year-end 2019, community banks held 36% of small business loans, despite holding only 12% of banking assets. At the same time, community banks accounted for over one-third of commercial real estate loans and 70% of farm and agriculture loans. She also highlighted the impact community banks have in reaching minority, rural, and low- and moderate-income communities. There are currently 608 counties nationwide, McWilliams said, where one or more community banks represent the only FDIC-insured institutions physically present. Despite improvements over the past decade, there continue to be more than 7 million unbanked households in the United States, translating into many more individuals who do not have a basic banking relationship.</p> <p>Today, as we think about the regulatory system we want to build coming out of the pandemic, McWilliams said, innovation will be critical to fostering financial inclusion and the competitiveness of community banks—challenges that are intertwined.</p> <p>And the FDIC is addressing these dual challenges head-on, McWilliams said. First, they are taking a multi-pronged approach to supporting financial inclusion in ways that McWilliams hopes will drive home the message that “this is not your grandmother’s FDIC.” Just recently she introduced the <em>Mission Driven Bank Fund</em>. McWilliams explained that based on her conversations with community development financial institutions (CDFIs) and minority depository institutions (MDIs), it became clear that what these organizations need most is capital. McWilliams challenged the FDIC to come up with a framework that would match these banks with investors interested in the particular challenges and opportunities facing these banks and their communities. She said that Microsoft and Truist Financial Corporation are the anchoring investors in this fund, and Discovery Inc has announced its intention to join as a founding member. Combined, these investors are pledging $120 million to support mission-driven banks and the communities they serve, with additional investments expected in the coming months.</p> <p>The funds will support CDFIs and MDIs to build size, scale, and capacity that will in turn allow them to provide affordable financial products and services to individuals and businesses, McWilliams said. The FDIC will not manage the fund, contribute capital, or be involved in the fund’s investment decisions.</p> <p>The FDIC is also using <em>tech sprints</em> run by their Office of Innovation, or FDITech, as a novel tool to tackle the gap in financial inclusion, said McWilliams. A tech sprint brings together a diverse set of stakeholders in collaborative settings for a short period to focus intensely on specific issues with implications important to the FDIC and its regulated entities. The first such tech sprint was launched in July of this year and involved eight teams tasked with exploring new technologies and techniques that would help expand the capabilities of banks to meet the needs of unbanked consumers. A demo was held on September 10 and three winning teams were selected.</p> <p>As part of its efforts to promote financial inclusion, McWilliams said, the FDIC is also conducting an assessment of where their rules may cause impediments. For example, Section 19 of the Federal Deposit Insurance Act was amended in 2020 to reduce barriers to employment in the banking industry.</p> <p>McWilliams stressed the urgency of innovation to support community banks’ ability to compete and thrive in the modern banking sector. Innovation is no longer an option, she said, but a must. To this end, the FDIC is challenging external parties to develop tools for providing more timely and granular data to the FDIC on the health of the banking sector—more than what is provided in the standard <em>Call reports </em>banks are required to file with their regulators, McWilliams said. Four technology firms have been selected to propose a proof of content for their respective technologies, she added, and the goal is to conduct a pilot program with up to nine FDIC supervised institutions to test the reporting technologies and determine their potential.   </p> <p>The FDIC has also been working on several initiatives to facilitate partnerships between fintechs and banks to allow banks to reach new customers and offer new products, McWilliams said. At the end of 2020, she noted, the FDIC updated their brokered deposit regulations—the first substantial update in approximately 30 years—which removed the regulatory hurdles to certain types of innovative partnerships between banks and fintechs.</p> <p>In conclusion, McWilliams said her goal as FDIC chair is to lay the foundation for the next chapter of banking by encouraging innovation that meets consumer demand, promotes community banking, reduces compliance burdens, and modernizes supervision while increasing access to banking services. The importance of these goals has only been underscored by the upheaval caused by the pandemic, she said.</p> <hr /> <h3 class="text-center"> The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System. </h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/post-pandemic-needs-of-detroit-black-led-businesses https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/post-pandemic-needs-of-detroit-black-led-businesses Tue, 23 Nov 2021 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>Long before the Covid-19 pandemic, Black-led businesses faced unequal access to capital that limited their ability to sustain themselves and grow.</p> <p>But with Black-led businesses nationwide reportedly receiving a disproportionately lower share of Paycheck Protection Program (PPP) funding, especially at the first round of disbursement, the pandemic has cast a spotlight on the need for reforms to better support these important community institutions.</p> <p>On November 17, business experts, funders, thought leaders, and advocates from Detroit’s  business community joined <a href="https://www.chicagofed.org/events/project-hometown/access-to-capital-survey-results">a Project Hometown event</a> to discuss the needs of Black businesses and provide insights and suggestions on how policymakers, financial institutions, and business service intermediaries can provide the necessary infrastructure, support, and financing to help these businesses succeed.</p> <h2>Healthy small businesses are key to wealth-building in minority communities.</h2> <p>For decades, research has documented a wide and ­persistent wealth gap between Black and White households. Joseph Anderson—who in addition to serving as chairman of the board of directors for the Chicago Fed’s Detroit Branch and on the board of Business Leaders for Michigan is the CEO of TAG Holding—said policies to help Black-led businesses thrive is key to closing this gap.</p> <p>“Healthy small businesses provide a key mechanism where wealth can be built and retained in Black and minority communities,” Anderson said in remarks at the start of the event.</p> <p>“This is critical to economic development of neighborhoods and creating investment opportunities. Supporting the vibrancy of these businesses by ensuring that they have necessary financing and access to capital to build, expand, and sustain their businesses will provide both economic and social benefits.”</p> <h2>Detroit is home to a dynamic Black business landscape, but many businesses are low-revenue or home-based and face unique challenges.</h2> <p>Sharing preliminary results from a Chicago Fed Detroit Branch survey of Detroit’s Black business owners, Maude Toussaint-Comeau, senior economist and economic advisor in the Community Development and Policy Studies (CDPS) division at the Chicago Fed, echoed Anderson’s view that these businesses play a vital role in shaping their neighborhoods.</p> <p>But with most businesses surveyed classifying as microenterprises with less than $25,000 in annual revenue, and a number of them reporting poor financial health or that they are operating at a loss, the results highlight unique pain points that need to be addressed.</p> <p>Though in the preliminary survey results the majority of responding “survivor businesses” applied for and obtained pandemic-related emergency funding, primarily through local banks, little is known about the experience with pandemic funding of failed businesses that shuttered during the pandemic, noted Toussaint-Comeau. Respondents who didn’t apply for funding said they chose not to because they didn’t expect to qualify or found the process too confusing. And importantly, according to the preliminary results and consistent with low formal banking access by Black small businesses observed in previous research, very few businesses reported using external financing from banks in the three years prior to applying for pandemic-related funding.</p> <h2>The pandemic emphasized the need for readiness programs that help minority businesses seize available opportunities. </h2> <p>Speaking to why minority-led businesses may have struggled to obtain emergency financing, Paul Jones, business support network director with Invest Detroit, said there’s a clear need for readiness programs that ensure businesses are ready to receive capital and put it to productive use.</p> <p>Stressing that capital shouldn’t be the only goal of these readiness programs, Jones said that we need “institutions that are helping the small businesses prepare for accessing capital and preparing to engage in all of the opportunities that should be coming their way,” including providing both technical support and helping to bridge cultural divides that hamper efforts by Black-led businesses to obtain funding.</p> <h2>There should be public, data-driven accountability for efforts to reform lending practices and create racial equity. </h2> <p>Dr. Ken Harris, CEO and National President of National Business League—a trade organization that advocates for Black-led businesses throughout the U.S.—noted that far too many have either closed their doors permanently or are on the brink of doing so, largely due to barriers that exclude them from pivoting and building the capacity required to succeed.</p> <p>Noting the strong presence of Black-led businesses in Detroit, Harris said there’s major opportunity for financial institutions looking for promising ventures to invest in.</p> <p>“Detroit is unlike any other place in the country,” Harris said. “If we are still struggling to lend to Black-owned firms with this type of population setting, then in my opinion it is either intentional or a complete failure of leadership.”</p> <h2>Banks have a massive “Black business opportunity,” but need to build trust with historically underserved communities. </h2> <p>In responding to the Chicago Fed Detroit Branch Black business survey, business owners shared the myriad of challenges they face when working with financial institutions. Specifically, many expressed a lack of knowledge as to sources of capital, limited relationships with lending institutions, and difficulties obtaining advantageous lending terms.</p> <p>Maggie Ference, senior vice president at Huntington Bank, acknowledged these challenges and said it’s important that banks find ways to build trust with minority-led businesses.</p> <p>“Black and Brown small businesses are not looking to banks for financing needs, while bank financing is often the cheapest option out there,” Ference said.</p> <p>Ference said banks should work alongside community partners that have already built trust and can act as intermediaries to under-resourced communities. She also said banks should encourage financial education so that businesses have the legal, accounting, and professional help they need to make smart business decisions.  </p> <p>“Relying on doing things the way that we've done is not going to get us to where we need to go,” said Ference.</p> <p>To learn more about the funding challenges facing Detroit’s minority businesses, <a href="https://www.chicagofed.org/events/project-hometown/access-to-capital-survey-results">watch the full event</a>.</p> <hr /> <h3 class="text-center"> The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System. </h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/charging-ahead-midwest-autos-face-an-electric-future https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/charging-ahead-midwest-autos-face-an-electric-future Wed, 06 Oct 2021 00:00:00 -0500 <p> In a virtual <a href="~/link.aspx?_id=2A9E3DBB2E7B408C8A538754C161644E&_z=z">event</a> on October 6, 2021, an expert panel discussed the auto industry’s technological transformation to electric vehicles (EVs), shared ideas about what firms and workers will likely face during the transition by 2030 and beyond, and identified obstacles to achieving policy goals of reducing greenhouse gas emissions through electrification of transport. This blog post summarizes the discussions. This event was the latest in the Chicago Fed’s <a href="~/link.aspx?_id=547F2A1D9D0A4018B614AD4D2DEEE495&_z=z">Project Hometown</a> series, designed to address the needs and challenges facing our region and our communities. </p> <br /> <p> “We are now at an inflection point” with the technological transition underway toward EVs, explained Leslie McGranahan, vice president and director of regional research at the Chicago Fed, in opening the event. The impetus for the shift to electrification of autos in the U.S. and worldwide is policy-driven to reduce greenhouse gas emissions, said Thomas Klier, senior economist and economic advisor with the Chicago Fed and the event’s moderator. There is also a strong push for EVs in China for other reasons, added John Graham, professor in the O’Neill School of Public and Environmental Affairs at Indiana University. China has the largest car market globally and a strategic interest in securing a leadership position in the EV industry, he said, with the added benefit of reducing their oil dependence. </p> <br /> <p> Klier stressed the growing commitment toward electrification of the U.S. auto industry, noting the recent announcement by Ford (September 27, 2021) of its plan to invest billions in four new plants (three battery plants joint with a South Korean battery partner and one assembly plant), all of which will be located in Kentucky and Tennessee. The Chicago Fed’s region is currently home to 44% of the country’s jobs in the manufacturing of engines and transmissions; add in Ohio and that figure jumps to over 60%, reported Kristin Dziczek, senior vice president of research at the Center for Automotive Research (CAR). In particular, Detroit “has been the center of North America’s auto industry for many decades,” Klier noted. As the industry moves toward EVs, the region’s auto industry will face challenges, as EVs have far fewer mechanical parts and take about 30% less time to assemble; this means that noticeably fewer people and parts will be needed to satisfy demand, Dziczek said. Despite the different manufacturing requirements, she noted that expanding the production scale may work to counteract a decline for specific companies. EVs are not profitable at low production levels, so the way to reach profitability, she explained, is to expand the scale of production. This will likely be easier for large automakers to achieve, Dziczek said. </p> <br /> <p> The large tier 1 auto manufacturers are currently investing in EV technology by placing electric transmissions and motor production into their existing powertrain plants, Dziczek reported. Tesla, the largest player in the EV market, is already positioned in this market space, Graham added. Dziczek shared her concerns about the hundreds of small auto suppliers in the Midwest region as EVs become more dominant because “not all small manufacturers will be able to make this leap.” </p> <br /> <p> Dziczek said she expects the transition period to be characterized by a scale down of internal combustion engine (ICE) production and an expansion of EVs, but the scale up of EVs will be slow, as has been the recent experience of a large Ontario plant currently undergoing the transformation. During the transition period of low productivity, Dziczek also expects some consolidation in the industry. As new firms enter the EV market space, she said, new plants are being built. And as the share of internal combustion vehicles declines, the last standing ICE plants are likely to migrate to lower-cost locations like Mexico, she noted. </p> <br /> <p> With the industry shift to EVs, there could also be changes in the union status of auto workers and their terms of employment. The Tesla battery gigafactory in Nevada pays lower wages than an engine plant in Anna, Ohio, Dziczek said.<strong> </strong>On a positive note, she explained that current auto production and skilled trades workers will require only limited additional training and no new formal education credentials to prepare for the transformation to EVs. The auto industry is already experiencing a shortage of engineers specializing in battery manufacture and electricity, Dziczek said, and there will likely be increased demand for these specialties in the years ahead. </p> <br /> <p> The Biden administration has announced the goal of a 50% EV share in new vehicle sales by 2030. Because of its large geographical size, getting the U.S. electric grid strengthened to achieve the 50% goal “is going to be tough,” Dziczek remarked. Klier added that it will also be necessary to expand the number of battery charging stations. “The good news is that the money is also flowing into the raw materials that are necessary to make lithium-ion batteries,” Graham said, and “we are starting to develop some diversified suppliers around the world.” </p> <br /> <p> It is too soon to tell what role there will be for hybrid vehicles, which can be powered by either gasoline or battery, Graham remarked. A study by the University of Toronto suggests that given the energy sources of electricity generation in the U.S., the lowest transportation carbon footprint will be represented by a mix of hybrid and electric vehicles, Dziczek said, because in some locations in the U.S. (and abroad) there is less of an advantage for EVs due to the reliance on fossil fuels for electricity. Graham agreed that hybrid electric vehicles have some important advantages by not having to rely on the electric grid yet providing significant greenhouse gas control. </p> <br /> <p> U.S. EV sales as a share of total vehicles sales are currently less than 3%, Klier reported. He asked the panel, What is holding back growth? Consumers want price, utility, and convenience parity when compared to ICE vehicles, explained Dziczek. Currently, “range anxiety” is a particularly large barrier, she said, with consumers demanding convenience for charging along their driving route. Also, media reports of some fires in Teslas and Chevrolet Bolts do not instill confidence, and some consumers are waiting for safety improvements before transitioning, she added. There are plans for electrification across industry segments, but for now most EV sales in the U.S. are in premium markets, Graham noted. In contrast, EVs in Europe are more affordable, with various price points. In Europe and China, the market share for EVs is currently 15–25%, well past California’s 10%, he added. </p> <br /> <p> In Europe, the auto industry transformation is also being supported by government subsidies for EVs, Klier noted. President Biden’s goals for the expansion of electric and hybrid vehicles are a signal to the industry and Congress that U.S. rules are going to become increasingly stringent to get carbon out of personal transportation, Dziczek said, especially because the transportation sector recently overtook power generation as the largest U.S. carbon emitter. Substantial policy hurdles need to be overcome to make EVs more affordable, and government subsidy options, including those being used successfully in Europe, are being considered right now, Klier said. Another area requiring attention is to identify a new revenue source for infrastructure funding to replace our reliance on gasoline sales, he added. </p> <br /> <p> To sum up, Klier reiterated that the U.S. auto industry is facing an enormous transition. We know this by observing where companies are putting their money, and “there is a flood of billions of dollars” being allocated to electrification, Dziczek said. It remains to be seen which U.S. companies will be successful in introducing affordable electric vehicles and how much incentive the U.S. government is going to give people to buy them, Graham remarked. Auto producers, workers, and suppliers will have to make changes in order to meet demand for EVs. With effective policies in place to support EV infrastructure and buyers, the outcome for the Midwest region might depend on how fast and effectively firms and workers can reorient their production and ramp up scale, Klier concluded. </p> <hr /> <h3 class="text-center"> The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System. </h3> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/used-battery-electric-vehicles https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/used-battery-electric-vehicles Wed, 29 Sep 2021 00:00:00 -0500 <div class="cfedStandardSpacing"> <p> Electric vehicles are receiving lots of attention these days as public policy measures are increasingly encouraging their use. For instance, the White House recently <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/08/05/fact-sheet-president-biden-announces-steps-to-drive-american-leadership-forward-on-clean-cars-and-trucks/">announced</a> a new target of half of all new vehicles sold in the U.S. being zero-emissions vehicles by 2030—which would be supported with fuel efficiency and emissions regulations and investments in charging infrastructure by the federal government. Automakers have been responding to such public policy measures by investing heavily in <a href="https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/charging-ahead-electrification-auto-industry">electric vehicle technology</a>. </p> <p> This blog post focuses on battery electric vehicles, or BEVs. As the focus on the transition to BEVs has sharpened of late in the U.S., there’s been increasing concern that owning a BEV may not be realistic for many Americans. It is possible that the overall accessibility of BEVs could depend a lot on the used vehicle market. What do we know about sales of new and used BEVs to date? And what role does the market for used BEVs play in the overall transition toward BEVs? We present and analyze some recent sales and registration data on new and used BEVs across the U.S. to address these two key questions. </p> <h2>Sales of new BEV models</h2> <p> Sales of new BEVs have been rising noticeably in recent years. However, the yearly increases come off a very low base. In 2021 so far (through July), BEVs represent only 2.4% of all new light vehicle sales; moreover, all electric vehicles (which include hybrids and plug-in hybrids) make up 8.4% of total new light vehicle sales, according to our calculations using data from WardsAuto InfoBank. There are now 21 different battery electric vehicle models sold in the U.S. (some of them are only available as BEVs, with no hybrid or internal combustion engine, or ICE, variants). Many more are on the way, including the first-ever electric full-size pickup trucks and vans. To date, sales of BEVs have been heavily skewed toward cars (especially luxury cars) and cross-utility vehicles. Table 1 shows the six top-selling BEV models in the U.S. new light vehicle market for the first seven months of 2021. </p> <h3>Table 1. Best-selling BEV models, 2021</h3> <figure> <div class="table-responsive "> <table class="table cfedTable--allCenter w-100"> <thead> <tr class="cfedTable--rowBorderBottom cfedTable--rowBorderTop"> <th class="text-left border-bottom">Brand</th> <th class="text-left border-bottom">Series</th> <th class="text-left border-bottom">Segment group</th> <th class="border-bottom">2021 sales<br />(through end of July)</th> <th class="border-bottom">Percent of<br />BEV sales</th> </tr> </thead> <tbody> <tr> <td class="text-left">Tesla</td> <td class="text-left">Model Y</td> <td class="text-left">Cross utility</td> <td>86,108</td> <td>37.6</td> </tr> <tr> <td class="text-left">Tesla</td> <td class="text-left">Model 3</td> <td class="text-left">Luxury car</td> <td>50,882</td> <td>22.2</td> </tr> <tr> <td class="text-left">Chevrolet</td> <td class="text-left">Bolt</td> <td class="text-left">Cross utility</td> <td>18,805</td> <td>8.2</td> </tr> <tr> <td class="text-left">Ford</td> <td class="text-left">Mustang Mach-E</td> <td class="text-left">Cross utility</td> <td>15,829</td> <td>6.9</td> </tr> <tr> <td class="text-left">Nissan</td> <td class="text-left">LEAF</td> <td class="text-left">Middle car</td> <td>8,880</td> <td>3.9</td> </tr> <tr> <td class="text-left">Audi</td> <td class="text-left">e-tron</td> <td class="text-left">Cross utility</td> <td>8,530</td> <td>3.7</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Note: BEV stands for battery electric vehicle.<br /> Source: Authors’ calculations based on data from WardsAuto InfoBank. </figcaption> </figure> <br /> <h2>Used BEV registrations</h2> <p> To analyze the markets for new and used BEVs, we use data from the AutoCount vehicle registrations database. The database contains a record of each and every vehicle registered in the U.S. through May 2021. It includes geographic information about the owner of the vehicle and the dealer where it was purchased, as well as whether it was bought new or used and its odometer reading at the time of purchase. BEV registrations start appearing in the database in December 2010. We limit the sample to include only those vehicle models that are available exclusively as BEVs. There are currently 11 such BEV models. We exclude models that are also available as hybrids or ICE vehicles, as the registration data do not distinguish between those variants and the BEV variant for a given vehicle model. To identify which models are BEV only, we use sales data from WardsAuto InfoBank. Those data distinguish the way a vehicle is powered by vehicle model. </p> <p> Figure 1 features a line graph of the annual volumes of new and used BEV registrations since 2010; it also features tables with shares of U.S. registrations of new and used BEVs for the top three states in select years (which we will discuss later on). It is evident that used BEV registrations lag new BEV registrations. This starkly contrasts with what we see in the overall used vehicle market, which typically represents more than twice the size of the overall new vehicle market, according to <a href="https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/used-cars-new-platforms-accelerating-sales-in-a-digitally-disrupted-market" target="_blank">industry research</a>. That said, there is one BEV model that stands apart from the general pattern for used versus new BEVs: the Nissan LEAF. Of all BEV models for sale today as new vehicles, the LEAF has been on the market the longest (the LEAF’s launch year was 2010). Used LEAF registrations make up 33.6% of total LEAF registrations—twice the average for all BEV models’ registrations (16.8%). Used LEAF registrations are also more evenly distributed across the country: In each of the eight U.S. Bureau of Economic Analysis (BEA) <a href="https://fred.stlouisfed.org/categories/32061" target="_blank">regions</a>, at least 20% of LEAF registrations are used vehicles. These Nissan LEAF results, all of which are based on our calculations using AutoCount data, suggest that with enough time the used BEV market relative to the new BEV market will look more similar to the overall used vehicle market relative to the overall new vehicle market. </p> <h3>Figure 1. Volume of BEV registrations, 2010–20, and percentage of BEV registrations, by year and top states</h3> <figure> <img src="-/media/112E026311924F538E8635955AEADAD6.ashx" alt="Figure 1 features a line chart displaying the annual volumes of new and used BEV registrations from 2010 through 2020. While both have been rising, new BEV registrations far exceed used BEV registrations. It also features two tables showing the shares of total U.S. registrations for new and used BEVs in the top three states for such registrations in 2011, 2015, and 2020." /> <div class="table-responsive"> <table class="table cfedTable--allCenter"> <tbody> <thead> <tr> <td colspan="6" class="text-left"><strong> <h4>New</h4> </strong></td> </tr> <tr class="cfedTable--rowBorderTop cfedTable--rowBorderBottom"> <td colspan="2">2011</td> <td colspan="2">2015</td> <td colspan="2">2020</td> </tr> <tr class="cfedTable--rowBorderBottom"> <td>State</td> <td>Share</td> <td>State</td> <td>Share</td> <td>State</td> <td>Share</td> </tr> </thead> <tr> <td>CA</td> <td>60.1</td> <td>CA</td> <td>58.1</td> <td>CA</td> <td>43.2</td> </tr> <tr> <td>WA</td> <td>12.2</td> <td>WA</td> <td>6.6</td> <td>FL</td> <td>7.2</td> </tr> <tr> <td>TN</td> <td>5.3</td> <td>FL</td> <td>4.6</td> <td>NY</td> <td>4.9</td> </tr> </tbody> </table> </div> <br /> <div class="table-responsive"> <table class="table cfedTable--allCenter"> <thead> <tr> <td colspan="6" class="text-left"><strong> <h4>Used</h4> </strong></td> </tr> <tr class="cfedTable--rowBorderTop cfedTable--rowBorderBottom"> <td colspan="2">2011</td> <td colspan="2">2015</td> <td colspan="2">2020</td> </tr> <tr class="cfedTable--rowBorderBottom"> <td>State</td> <td>Share</td> <td>State</td> <td>Share</td> <td>State</td> <td>Share</td> </tr> </thead> <tbody> <tr> <td>OR</td> <td>49.6</td> <td>CA</td> <td>34.5</td> <td>CA</td> <td>34.6</td> </tr> <tr> <td>CA</td> <td>25.6</td> <td>WA</td> <td>10.8</td> <td>FL</td> <td>6.1</td> </tr> <tr> <td>AZ</td> <td>4.0</td> <td>GA</td> <td>6.0</td> <td>WA</td> <td>6.1</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Notes: The shares in the top table represent the percentages of U.S. registrations for new battery electric vehicles (BEVs) in the top three states for such registrations in 2011, 2015, and 2020; the shares in the bottom table represent the same except for used BEVs. To identify which models are BEV only, we use sales data from WardsAuto InfoBank; see the text for further details.<br /> Source: Authors’ calculations based on data from AutoCount. </figcaption> </figure> <p> What is causing this lag in used BEV registrations? There are a couple of possibilities. First, the BEVs available in the market today have only been around for a relatively short period of time, especially when compared with the amount of time a typical ICE vehicle model has been available to consumers. The nature of the data set from AutoCount implies that while each vehicle can only be registered as new once, it can be registered as used several times. The brief history of the BEV means that there has been less time for individual vehicles to be sold and registered multiple times. The high frequency of used LEAF registrations relative to that of other used BEV models may provide insight into the future of used BEV adoption. The LEAF was released in 2010. Relative to owners of other BEV models, LEAF owners, therefore, have had more time to consider selling their cars on the used market; and consumers looking to buy used BEVs could have found the LEAF to be the most available option.<sup><a href="#ftn1" id="ftnref1">1</a></sup> </p> <p> Another possibility is that consumers view BEVs as being quite different from ICE vehicles. There’s been <a href="https://www.bloomberg.com/news/newsletters/2021-07-30/hyperdrive-daily-electric-cars-left-behind-as-used-car-prices-soar" target="_blank">recent evidence</a> that used BEVs have not experienced price increases to the same extent as used cars in general since the onset of the Covid-19 pandemic. This may be related to concerns among consumers about the new BEV technology, such as the battery charge range and the ease of charging. Whether this factor persists as a feature of the demand for BEVs remains to be seen. Figure 2 shows a comparison between two compact car models—the Acura ILX and Nissan LEAF. Both have similar launch years and overall sales of new vehicles since their respective launches, according to data from WardsAuto InfoBank. The figure illustrates that for both vehicle models, new car registrations of more recent model years (or vintages) support fewer used car registrations than those of model years further past. However, across the observable years, the ICE car Acura ILX supports more used car registrations (relative to new car registrations) than the BEV Nissan LEAF. Though only two specific vehicle models are compared in figure 2, the results suggest a lower level of sales activity in the used BEV market than in the used ICE vehicle market. </p> <h3>Figure 2. Ratio of used vehicle to new vehicle registrations, by model year of new vehicle</h3> <figure> <img src="-/media/DAB91D3F183641638EF3E48E0661D3AF.ashx" alt="Figure 2 is a line chart displaying the ratio of used vehicle registrations to new vehicle registrations, expressed as a percentage, for each model year of the Acura ILX (an internal combustion engine vehicle) and the Nissan LEAF (a battery electric vehicle) from model year 2011 through model year 2020." /> <figcaption class="caption"> Notes: For each model year (or vintage), the percentage is obtained by dividing the number of used vehicle registrations by the number of new vehicle registrations. For example, as of May 2021 (the latest date of available AutoCount data), there were 10,916 used 2012 LEAF registrations versus 10,621 new 2012 LEAF registrations.<br /> Source: Authors’ calculations based on data from AutoCount. </figcaption> </figure> <br /> <h2>Regional geography of BEV registrations</h2> <p> Using the geographic indicators in the AutoCount data, we sorted all BEV registrations into eight broad regions as defined by the BEA to analyze the distribution of these registrations across the country. Panel A of figure 3 shows this distribution based on the reported zip code of the vehicle’s owner. Most BEVs registered—57.9%—have been sold to consumers living in the Far West. </p> <p>As shown in panels B and C of figure 3, owners in the Far West still account for the largest share of BEV registrations when we distinguish between new and used BEV registrations. Of note, however, is that the share of new BEVs registered by consumers in the Far West is somewhat lower than the share of used BEVs registered by them: 59.4% of all new BEV registrations have owners based in the Far West, while 50.4% of all used BEV registrations have owners from that same region. Consumers in the Southeast and the Southwest account for greater shares of used BEV registrations than they do of new BEV registrations. While the broad pattern is similar across all three panels of figure 3, the geography of used BEV owners is slightly different from that of new BEV owners. </p> <h3>Figure 3. Share of BEV registrations across the nation since December 2010, by region</h3> <figure> <img src="-/media/65817B9D93394955B47E5FE666B0817F.ashx" atl="Figure 3 features three panels of bar charts displaying the share of total, new, and used battery electric vehicle registrations across the nation by U.S. BEA region." /> <figcaption class="caption"> Notes: BEV means battery electric vehicle. We use the <a href="https://fred.stlouisfed.org/categories/32061" target="_blank">eight regions</a> of the nation as defined by the U.S. Bureau of Economic Analysis (BEA).<br /> Source: Authors’ calculations based on data from AutoCount. </figcaption> </figure> <p> These nuanced differences in the regional geography of new and used BEV registrations are put into better context when referring to the tables embedded in figure 1. Between 2011 and 2020, California’s share of new BEV registrations fell from 60.1% to 43.2%. Between 2015 and 2020 that state’s share of used BEV registrations held steady at around 34.5%. These data are interesting for two reasons. First, California generally dominates both the new and used BEV markets (in 2011 it ranked second in the used BEV market). However, there is a noticeable difference in the overall geography of new and used BEV registrations. First, used BEV registrations are more geographically dispersed than new BEV ones in 2015 and 2020 (i.e., the top three states for used BEV registrations account for a smaller share of the total than the top three states for new BEV registrations do in those two years). Moreover, California accounts for a noticeably lower share of used BEV registrations than new BEV ones in 2015 and 2020. Second, while California continues to lead the country in the share of new BEV registrations, its share has been declining noticeably over time.</p> <h2>The dominance of California</h2> <p> Given its prominence in terms of BEV registration share, we further investigate the Far West BEA region (comprising Alaska, California, Hawaii, Nevada, Oregon, and Washington) by breaking down the region’s registrations by state for figure 4. California is indeed the outlier in that region. At over 80% of all BEV registrations in the Far West region, California is clearly the main driver of the Far West’s high shares of BEV registrations in all three panels of figure 3. Meanwhile, according to <a href="https://www.nada.org/WorkArea/DownloadAsset.aspx?id=21474861098" target="_blank">research</a> from the National Automobile Dealers Association, in 2020, California accounted for only 11% of all new vehicle registrations nationwide—a stark difference from its strong lead among all states in the BEV market. </p> <h3>Figure 4. Share of BEV registrations within the Far West region since December 2010, by state</h3> <figure> <img src="-/media/7E36A9EED40A4DC49AB1E9D9557CFAFB.ashx" alt="Figure 4 is a bar chart displaying the share of total battery electric vehicle registrations within the Far West BEA region by state." /> <figcaption class="caption"> Notes: BEV means battery electric vehicle. In this figure, we show a breakdown of total BEV registrations in the Far West <a href="https://fred.stlouisfed.org/categories/32061" target="_blank">region</a>, as defined by the U.S. Bureau of Economic Analysis (BEA), by state.<br /> Source: Authors’ calculations based on data from AutoCount. </figcaption> </figure> <p> Why has California been so dominant in BEV registrations? The state started addressing environmental issues related to the use of automobiles many years ago—even before the establishment of the U.S. Environmental Protection Agency (EPA) in 1970; in fact, amendments to the Clean Air Act in 1970 allowed California to take a tougher line on air quality issues.<sup><a href="#ftn2" id="ftnref2">2</a></sup> More recently, in September 2020, California issued a <a href="https://www.gov.ca.gov/2020/09/23/governor-newsom-announces-california-will-phase-out-gasoline-powered-cars-drastically-reduce-demand-for-fossil-fuel-in-californias-fight-against-climate-change/" target="_blank">directive</a> for all new cars and passenger trucks sold in the state to be zero-emissions vehicles by 2035. It is not surprising that BEVs typically are first made available in California and that Tesla, the first BEV-only automaker in the country, started out in that state. In addition, California’s drivers face some of the highest gasoline prices in the country, impacting the economics of choosing between an ICE vehicle and a BEV.</p> <h2>Conclusion</h2> <p> We find some evidence that suggests new and used BEV sales behave differently. To date, new BEV registrations have been far more prevalent than used BEV ones. That is quite different from the general relationship between new and used vehicle registrations across the entirety of the auto market. BEV registrations are also more concentrated geographically—in the Far West. Yet, importantly, the data show that the geography of BEV ownership has been expanding since 2010, particularly through a rise in used BEV purchases. </p> <p> Many questions remain about the used BEV market. The topic bears revisiting once a longer sample period of BEV sales and registrations is available. More comprehensive data—such as BEV pricing, the expected rate of depreciation, and the relationship between BEV popularity, gas prices, and availability of charging infrastructure—would be useful as well. Regardless, the used BEV market seems likely to play a growing role in the transition from ICE vehicles to BEVs in the coming years and needs to be watched closely. </p> <div class="card card-body border-0" style="background: #E8E8E8;"> <h2 class="text-center">Virtual Event<br /> Charging Ahead with Electrification—A Conversation About the Auto Industry</h2> <p class="text-center"><strong>Wednesday, October 6, 2021, from 10:00 am to 11:00 am CT</strong></p> <p>We are at the beginning of a dramatic shift in the auto industry—a transformation that will impact manufacturers, their workforce, and the Detroit region. Join us for our next virtual Project Hometown event, where we will discuss battery electric vehicles and their impact on the auto industry.</p> <p class="text-center"><a href="https://www.chicagofed.org/events/project-hometown/charging-ahead-with-electrification" class="cfedTextButton--large p-2 m-auto">Register Now</a></p> </div> <hr /> <h3>Notes</h3><sup><a href="#ftnref1" id="ftn1">1</a></sup> Note that among all BEV registrations observed since 2010 in the AutoCount database, the LEAF accounts for the second-highest number of them and has also the longest history of any of the top three models. (The Tesla Model 3 has the highest number of registrations in the database.)<p><sup><a href="#ftnref2" id="ftn2">2</a></sup> Smog in the Los Angeles basin played a huge role in the State of California beginning to address environmental issues related to the use of vehicles in the 1960s. See, for example, John D. Graham, 2021, <cite>The Global Rise of the Modern Plug-In Electric Vehicle: Public Policy, Innovation and Strategy</cite>, Northampton, MA: Edward Elgar.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/measuring-learning-loss https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/measuring-learning-loss Thu, 19 Aug 2021 00:00:00 -0500 <div class="cfedContent__text"> <p><a href="~/link.aspx?_id=90C44CB2072247FEBEBE50176212336C&_z=z">Learning Loss and Renewal after the Pandemic</a> (August 10, 2021) was the latest in a series of <a href="~/link.aspx?_id=547F2A1D9D0A4018B614AD4D2DEEE495&_z=z">Project Hometown</a> virtual events hosted by the Chicago Fed. The latest event featured a panel of experts in the field of education and aimed to raise awareness of the consequences of school closures and remote learning on academic achievement and economic opportunities, particularly for students in economically disadvantaged communities.</p> <p>Universal school closures beginning in March 2020 led many students into virtual or hybrid learning, leading to widespread concerns about learning loss among students. Though there is uncertainty in terms of the long-run effects of these closures, Eric Hanushek, fellow at the Hoover Institution of Stanford University, noted that fully remote learning is not as effective as in-person learning, and hybrid learning falls in between by most estimates. Many students in large urban districts have not shown up in school post-pandemic, he added, suggesting that opportunities for learning are not as widespread as before. Large drops in enrollment at community colleges also occurred last year, said Betheny Gross, research director at WGU Labs. Ann Whalen, policy director at Advance Illinois, reported that community college enrollment in Illinois was down 13% in spring 2021 over the prior year, and the number of students entering pre-k and kindergarten dropped by almost 8%.</p> <p>As another indication of learning loss, available scholastic achievement tests show that students are lagging in learning gains during the pandemic. Megan Kuhfeld, senior research scientist with NWEA, described estimates of learning loss across 50 states from testing 5.5 million K-8 public school students on a voluntary basis during the 2020–21 school year. The test results from grade-level cohorts in 2020–21 were compared to those in 2018–19, a more normal school year than 2019–20. She found that in the fall of 2020, learners kept close to the pace of those tested in 2018–19, but by the spring of 2021, students were making smaller gains than in previous years, especially in math. Her assessments revealed larger learning losses for Black, Brown, and Native American students, particularly in the younger grades, and for schools in areas with high levels of poverty. Kuhfeld concluded that in general “students were making gains this last year, however, they are not as steep as a typical year,” yet she noted one important caveat: Her results may understate the extent and nature of the learning loss as many of those not tested were probably the most impacted by the pandemic.</p> <p>Hanushek and his colleague Ludger Woessmann estimated the potential impact of learning loss in the U.S. In terms of earnings, they estimated an approximate 6% to 9% reduction in lifetime earnings for the average student in K-12 impacted by the pandemic, and these impacts are disproportionately large for kids in disadvantaged communities. Robin Newberger, policy advisor in the Community Development and Policy Studies Division at the Chicago Fed and moderator of the event reiterated that “inequality and inequities are perpetrating and deepening this learning loss problem.” Because overall economic growth is tied to the skills of the workforce, Hanushek expects the lower learning levels to decrease U.S. GDP by roughly 3% to 4% over the remainder of this century. He emphasized that “if we just returned to where we were before the pandemic, we will not erase these losses.”</p> <p>To support students most effectively going forward, many administrators, teachers, parents, and even students want to see a shift towards individualized learning, Gross said. The interest in this new approach reflects the growing divergence in skills among students that occurred during the pandemic, with the skill gap widening the most for students in low-income and minority communities, Hanushek said. There is also a new emphasis on curriculum advancement and developing new ways to be flexible and accommodating, Gross explained. To support students going forward, “we want to take this moment and put everyone on a new path” to respond to historical gaps and underperformance that is evident across the system, she added. Whalen concurred, stating that in the case of Illinois, our goal is to “to build back better.”</p> <p>Whalen reported that Illinois serves a majority of Black and Brown students in its 852 district system, and 49% of these students’ families are at the low end of the income scale. Funding from various sources currently amounts to $8 billion, of which 90% is to be spent at the district level through September 2024. The State of Illinois has developed a resource guide for districts—“a roadmap of what learning renewal should look like in our state”—to target the use of the funds, she said. Twelve different priority areas have been identified, including an emphasis on individualized learning and culturally responsive practices, and plans for the 10% allocated to the state include high-impact tutoring and training and mental health support, Whalen added.</p> <p>Hanushek stressed that data from various studies confirm that the best way to help students in Illinois and across states is to have effective teachers, stating that “we knew this beforehand, but now it becomes imperative if we’re going to make up for these learning losses.” Gross reported that teachers have experienced fatigue and burnout, with some considering leaving the profession (at the height of the pandemic, one in four teachers considered leaving their jobs after the 2021 school year, according to a Rand study), highlighting the urgency to support teachers and their professional development.</p> <p>Looking ahead to the 2021–22 school year, “the delta variant is definitely throwing everyone for a loop” and school district leaders in Illinois keep having to change plans, Whalen said. This variant is particularly problematic given low vaccination rates among school-age children nationally (only 30% among 12- to 15-year-olds, 41% among 16- to 17-year-olds, and none for those under age 12), adding uncertainly as we enter the new school year, Gross said.</p> <p>In summary, Hanushek remarked, “this is not a normal recession. It is a learning crisis.” Kuhfeld stressed, “we need to take action to help students catch up,” and “it takes collective action to support schools.” It is important for community partners to support students, Whalen added, and local stakeholders can help inform how districts use funds such as those provided under the American Rescue Plan Act. Support may include providing internship opportunities to facilitate educational transitions, partnerships with after-school programs, and reinforcements in health and social-emotional learning, Newberger said. Beyond the massive distribution of resources (especially technology) that has already been provided by our communities during the pandemic, we still need help with expanding broadband access and more community-based learning initiatives, Gross added. Whalen emphasized that the data are still coming in and the path of the pandemic is still unfolding, so we should be prepared to adapt and pivot as needed to help to reverse our students’ learning loss.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/detroits-challenges-and-opportunities https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/detroits-challenges-and-opportunities Tue, 20 Jul 2021 00:00:00 -0500 <div class="cfedContent__text"> <p> The Chicago Fed’s virtual event, “<a href="~/link.aspx?_id=83C94F61CFA64E66A3307BF46FEC3566&_z=z">Charting Detroit’s Fiscal Future: Challenges and Opportunities</a>,” held on July 14, 2021, is the latest in a series of <a href="~/link.aspx?_id=547F2A1D9D0A4018B614AD4D2DEEE495&_z=z">Project Hometown</a> events aimed at identifying obstacles facing communities in the Seventh District during the pandemic. The event examined Detroit’s city government financing to understand how its unique revenue structure has fared during the Covid-19 pandemic, how it will respond post-pandemic, and how federal funding under the American Rescue Plan Act can best be put to use to meet the needs of its residents and promote inclusive economic growth. </p> <p> Overviewing Detroit’s economy, panelist Evan Cunningham, senior economist in the Office of the Chief Financial Officer of the City of Detroit, reported that Detroit’s unemployment rate was down significantly from January through May 2021 (9.8%) compared with 2020 (20%), although it is still well above pre-pandemic levels. Despite the encouraging unemployment figures, Cunningham explained that these data should be interpreted with caution because the unemployment rate is relative to the size of the labor force, and the number of Detroiters who are working or actively seeking work has shrunk since the pandemic started due to a variety of factors, such as childcare responsibilities, illness, or choice. Cunningham also highlighted the “stark difference” in annual salaries between residents of Detroit and nonresidents working in the city. While data limitations make direct comparisons difficult, Anika Goss, CEO of Detroit Future City, roughly estimates the wage differential at $35,000 lower for Detroit residents than nonresidents who work in Detroit. To address the inequity, Goss recommended investing not only in skills training in the city but also higher education so more residents can qualify for higher-level jobs. Currently only 14% of Detroit residents have an associate degree or higher. Goss also recommended requiring firms that operate in Detroit to pay residents higher wages ($18 per hour), versus the existing wage of $12 per hour on average. </p> <p> Detroit has been under substantial fiscal pressure as a result of the pandemic, while at the same time the demand for many local government services has spiked, especially health services, said Rick Mattoon, vice president and regional executive of the Chicago Fed’s Detroit branch and moderator of the event. Detroit has a diversified revenue structure to meet the needs of Detroiters, explained Taylor Griffin, research analyst with the Chicago Fed in the Community Development and Policy Studies area. Yet Detroit relies heavily on two sources of finance that have been heavily impacted by the Covid-19 crisis—the municipal income tax, with losses driven by nonresidents working remotely, and the wagering tax on casinos, which have experienced intermittent closures. Steve Watson, Detroit’s Deputy Chief Financial Officer, added that out of a general fund budget of only about $1 billion per year, Detroit lost about $400 million in revenues during the pandemic (fiscal year 2020–21). </p> <p> Detroit’s unique revenue structure poses particular challenges in meeting its fiscal responsibilities, said Griffin. Both residents and nonresidents pay a municipal income tax (2.4% and 1.2%, respectively), yet nonresidents only pay income tax on the earnings from the time they spend physically working in the city. Griffin explained that income tax revenues from nonresidents fell sharply during the height of the pandemic and continue to be strained as people continue to work from home and engage in hybrid work, stressing that “Detroit’s income tax laws clash with the lingering Covid-19 reality of remote work.” While the overall city budget has been strained by lost revenues from closed casinos, among other reasons, nonresidents working remotely represent the largest source of revenue lost during the pandemic, Watson reported. </p> <p> Nathan Anderson, senior economist with the Federal Reserve Bank of Chicago, said that it is hard to forecast how many employees will work from home in the future, and “this remains a serious threat to Detroit tax revenues.” Michigan’s Department of Treasury says that Detroit cannot tax people’s income when working from home, and it cannot raise its municipal tax rates on residents or nonresidents because it has set those rates at the maximum level state law allows, he explained. To address the city’s revenue shortfall, he suggested exploring whether the state legislature can change the law so that it states explicitly that Detroit can tax part or all of the income nonresidents earn when they work from home for city employers. Anderson also recommended investigating whether the Treasury Department can interpret the law differently as has been done in other cities. For instance, Pennsylvania law is similar to Michigan law, but Pennsylvania has interpreted it differently to allow a city, such as Philadelphia, to tax the income of a nonresident who works from home when they work there for their own convenience rather than as a requirement for employment. </p> <p> Despite these challenges, a tremendous revenue boost for Detroit is on the horizon as a result of the federal government’s American Rescue Plan (ARP), whereby Detroit city government is set to receive $826 million in revenue, Watson explained. Separately, the Detroit school district will receive over $800 million. Also, federal funding for Detroit transit and other infrastructure is in the works but is not yet confirmed, he said. While the ARP funds are substantial, it is just one time money, he noted, and therefore it cannot be used for recurring costs after a few years. </p> <p> How should those ARP funds be used most effectively? According to Watson, the Detroit city council approved an overall spending plan for the $826 million on June 29, which broadly includes $400 million to stabilize the municipal budget and the remaining $426 million to be used for a Detroit Future Fund. The city council is “casting a wide net” in the use of this fund, Watson said, with projects ranging from neighborhood and park improvements and investments in community health, to funding for skills training, small business development, and homeownership assistance. Not only will these projects help the community, but they will also help to grow the future tax base, he said. </p> <p> Detroiters, the majority of whom are African American, face tremendous challenges with respect to access to funds for small business development, skills training and education, employment opportunities, and housing, Goss said. With the APR funds, “we have this one shot to really think about how we can make these investments to improve conditions for Detroiters,” she remarked. To address racial inequality in Detroit and historically poor investment decisions, she recommended targeting new investments in traditionally low-income neighborhoods. High-priority areas for these investments include housing and small business development as well as reforms in lending practices, she said. </p> <p> Looking to the future, Watson noted a huge amount of uncertainty around what the future of work in the city will look like and the tax base derived from it. Forecasting is challenging because “all previous trends are broken,” said Cunningham, with Mattoon adding, it is “a time for humility for economists.” Reworking or reinterpreting the law is one way to regain some certainty, as Anderson pointed out. Despite the uncertain future with respect to revenue generation, Goss emphasized that the Detroit community currently has an extraordinary opportunity to use ARP funds to reverse long standing inequities—notably to reduce the earnings gap and improve Detroit’s neighborhoods. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/introducing-carts https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/introducing-carts Mon, 12 Jul 2021 00:00:00 -0500 <div class="cfedContent__text"> <p>During the early days of the Covid-19 pandemic in the U.S., the speed with which economic activity responded to the spread of the virus and the public policy responses that followed laid bare the need for both accurate and timely measures of consumer spending. In this <cite>Chicago Fed Insights</cite> blog post, we discuss a new Chicago Fed index called CARTS and its implications for the high-frequency measurement of consumer spending. For more information and to sign up to receive CARTS updates by email, <a href="https://www.chicagofed.org/publications/carts/index">go to this page</a>.</p> <h3>What is CARTS?</h3> <p> CARTS—which is short for Chicago Fed Advance Retail Trade Summary—refers to a weekly index of national retail spending that tracks the U.S. Census Bureau's <cite>Monthly Retail Trade Survey</cite> (MRTS) using a mixed-frequency dynamic factor model to combine high-frequency time series from five private companies (Consumer Edge, Facteus, Morning Consult, SafeGraph, and Womply), as well as two federal agencies (the U.S. Energy Information Administration and the U.S. Census Bureau). By using multiple sources of information on consumer spending measured at different frequencies, this model accurately predicts the MRTS in real time as well as reveals substantial week-to-week variation in retail spending that cannot be seen in the MRTS. For further details on the index’s construction and how we test its accuracy against consensus forecasts, baseline autoregressive models, and other high-frequency data, see “<a href="https://www.chicagofed.org/~/media/publications/working-papers/2021/wp2021-05-pdf.pdf">Tracking U.S. consumers in real time with a new weekly index of retail trade</a>.” </p> <h3>What does CARTS tell us about national retail spending?</h3> <p> The MRTS is a vital snapshot of consumer spending on goods and select services in the U.S. The Census Bureau notes the following about MRTS: </p> <div class="cfedStandardSpacing"> <blockquote> These data are widely used throughout government, academic, and business communities. The Bureau of Economic Analysis uses the estimates to calculate Gross Domestic Product. The Bureau of Labor Statistics uses the estimates to develop consumer price indexes and productivity measurements. The Council of Economic Advisers uses the estimates to analyze current economic activity. The Federal Reserve Board uses the estimates to assess recent trends in consumer purchases. The media use the estimates to report news of recent consumer activity. Financial and investment companies use the estimates to measure recent economic trends.<sup><a href="#ftn1" id="ftnref1">1</a></sup> </blockquote> </div> <p> However, because official statistics on consumer spending such as the MRTS are typically only available at a monthly frequency, analysts often turn to other more-frequent sources of information to supplement them. Reconciling these alternative high-frequency data sources with official statistics can be very difficult. CARTS was designed with this challenge in mind. Thus, CARTS provides at a weekly frequency an early and reliable snapshot of the MRTS using several high-frequency alternative data sources on credit & debit card transactions, mobility (capturing retail foot traffic and gasoline sales), and consumer sentiment. Unlike these individual alternative measures, however, CARTS is also benchmarked to the MRTS, such that historical values when averaged over the month are identical to the Census Bureau’s estimates of retail & food services sales excluding motor vehicles & parts (ex. auto). When this data series is not yet available for the latest month, CARTS estimates it. </p> <p> This can be seen in figure 1 showing our Weekly Index of Retail Trade from the July 9, 2021, CARTS release in comparison with the historical MRTS data and the Census Bureau’s most recent advance estimates of retail spending—which are called the MARTS (<cite>Advance Monthly Retail Trade Survey</cite>) and are the preliminary release of the MRTS data. When the MARTS is not yet available, recent weekly readings of the Weekly Index of Retail Trade can be used to project current monthly retail & food services sales ex. auto. For example, in its July 9 release, CARTS suggested that retail & food services sales ex. auto increased by 0.8% in June relative to May. This result was somewhat higher than the median of consensus forecasts for retail & food services sales ex. auto available on July 8—a gain of 0.3% in June relative to May.<sup><a href="#ftn2" id="ftnref2">2</a></sup> </p> <h3>Figure 1. Retail & food services sales ex. auto</h3> <p><strong><i>billions of $, seasonally adjusted</i></strong></p> <figure> <img height="358" alt="Figure 1 is a line graph showing retail & food services sales ex. auto from the U.S. Census Bureau’s Monthly Retail Trade Survey and Advance Monthly Retail Trade Survey (black dashed line with X marks for each month). Also shown in the figure as a seasonally adjusted monthly rate is a weekly index of retail trade that is benchmarked to the Census Bureau’s data (blue line with a red X mark at the end for the latest projection for the Advance Monthly Retail Trade Survey)." width="800" src="~/media/5e814aa00dae488e935ea112f68f9108.ashx" /> <figcaption class="caption"> Notes: The figure shows retail & food services sales ex. auto from the U.S. Census Bureau’s <cite>Monthly Retail Trade Survey</cite> (MRTS) and <cite>Advance Monthly Retail Trade Survey</cite> (MARTS). Also shown in the figure as a seasonally adjusted monthly rate is a weekly index of retail trade that is benchmarked to the Census Bureau’s data.<br /> Source: Federal Reserve Bank of Chicago, CARTS. </figcaption> </figure> <p> This CARTS projection can be explained by two factors: 1) past values of the monthly MRTS and MARTS and 2) recent weekly readings on credit & debit cards, mobility, and consumer sentiment. For June, past values of the MRTS and MARTS contributed around 0.3%, credit & debit cards contributed about 0.1%, and mobility measures contributed roughly 0.4% (while consumer sentiment made a neutral contribution) to our projection. These contributions reflect an expected rebound from the decline in May in the MARTS data, boosted by gains in seasonally adjusted credit & debit card transactions and gasoline consumption. </p> <h3>What else does CARTS tell us about consumer behavior?</h3> <p> In addition to being able to use CARTS to project the MRTS in real time, its weekly frequency of observation allows us to study the high-frequency drivers of consumer spending at a more granular level. We can see this historically in figure 2, which displays the week-over-week (w/w) percent change (in logs) for our Weekly Index of Retail Trade broken down into contributions from the <em>monthly</em> MRTS and MARTS data and the <em>weekly</em> data on credit & debit cards, mobility, and consumer sentiment. </p> <h3>Figure 2. Weekly Index of Retail Trade</h3> <p><strong><i>log percent change, w/w</i></strong></p> <figure> <img height="337" alt="Figure 2 is a combined line and bar graph displaying a decomposition of the week-over-week (w/w) log percent change in the Weekly Index of Retail Trade (black line). The bars in the figure represent the history of the monthly (blue) or weekly (orange) data series’ contributions to the index in each week. By construction, the month-over-month log percent change in the weekly index is identical to that for the Census Bureau’s data on retail & food services sales ex. auto." width="1000" src="~/media/f694f940ffef4d21adda0e80a0c47a8c.ashx" /> <figcaption class="caption"> Notes: The figure displays a decomposition of the week-over-week (w/w) log percent change in the Weekly Index of Retail Trade (black line). The bars in the figure represent the history of the monthly (blue) or weekly (orange) data series’ contributions to the index in each week. By construction, the month-over-month log percent change in the weekly index is identical to that for the Census Bureau’s data on retail & food services sales ex. auto.<br /> Source: Federal Reserve Bank of Chicago, CARTS. </figcaption> </figure> <p> We can see from figure 2 that both data types are important in explaining high-frequency fluctuations in national retail spending. The use of multiple types and frequencies of data is, thus, an advantage that CARTS has over other existing alternatives. For example, our Weekly Index of Retail Trade tracks retail spending with less volatility than several alternatives that rely solely on credit & debit card data and at the same time reveals facets of national retail spending that cannot be seen in the MRTS. For example, in March 2020 our weekly index identifies a stockpiling effect in the early stages of the Covid-19 pandemic, which is not noticeable in the averaged monthly spending data from the MRTS. Additional examples such as this include tracking the real-time effects of Covid-19 cases and the economic impact payments on consumer spending. Further details on the usefulness of CARTS as a weekly indicator of consumer spending are <a href="https://www.chicagofed.org/research/data/carts/background">available online</a>. </p> <h3>Is CARTS adjusted for inflation?</h3> <p> Table 1 shows recent values for the month-over-month (m/m) percent change in retail & food services sales ex. auto in addition to our projection for June. These data (as well as those in figures 1 and 2) are shown in nominal terms, meaning that they are not adjusted for changes over time in the prices of retail goods and services. To account for the fact that <em>real</em> consumer spending is often desired, the table also displays an inflation-adjusted version of the data, where we use a corresponding price index from the U.S. Bureau of Economic Analysis (BEA) to measure retail price inflation. </p> <h3>Table 1. Recent monthly values </h3> <p><strong><i>percent change, m/m</i></strong></p> <figure> <div class="table-responsive"> <table class="table cfedTable--numbersRight"> <thead> <tr class="cfedTable--rowBorderBottom cfedTable--rowBorderTop"> <th style="border-bottom: solid;"></th> <th style="border-bottom: solid;">Jun '21</th> <th style="border-bottom: solid;">May</th> <th style="border-bottom: solid;">Apr</th> <th style="border-bottom: solid;">Mar</th> <th style="border-bottom: solid;">Feb</th> <th style="border-bottom: solid;">Jan</th> </tr> </thead> <tbody> <tr class="cfedTable--rowBorderBottom cfedTable--rowBorderTop font-weight-bold"> <td>Retail & food service sales ex. auto</td> <td>0.8*</td> <td><span style="white-space: nowrap;">–0.7</span></td> <td>0.0</td> <td>9.8</td> <td><span style="white-space: nowrap;">–2.7</span></td> <td>8.3</td> </tr> <tr> <td>Inflation adjusted</td> <td>0.5*</td> <td><span style="white-space: nowrap;">–1.1</span></td> <td><span style="white-space: nowrap;">–0.4</span></td> <td>8.6</td> <td><span style="white-space: nowrap;">–3.3</span></td> <td>7.2</td> </tr> <tr class="cfedTable--rowBorderBottom"> <td>BEA price index</td> <td>0.3*</td> <td>0.5</td> <td>0.4</td> <td>1.1</td> <td>0.7</td> <td>1.0</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Notes: The table contains recent month-over-month (m/m) percent changes for retail & food services sales ex. auto and retail prices as measured by the U.S. Bureau of Economic Analysis’s (BEA) price index for the same retail category. Inflation-adjusted retail & food services sales ex. auto are constructed using the BEA retail price index. The asterisks (*) denote projections. Retail & food services sales ex. auto are projected from the mixed-frequency dynamic factor model used to estimate the Weekly Index of Retail Trade. The retail price index is projected from a mixed-frequency vector autoregression (MF-VAR) that also includes a weekly index of online prices.<br /> Source: Federal Reserve Bank of Chicago, CARTS. </figcaption> </figure> <p> Like the MRTS, the BEA price index is only available with a lag. Therefore, to display recent values in the table, we must project it. To do so, we use a mixed-frequency vector autoregression that includes the monthly BEA price index and a weekly index of online prices from State Street PriceStats. We have found this model to be a reliable predictor of the BEA data.<sup><a href="#ftn3" id="ftnref3">3</a></sup> </p> <p> Retail prices have risen considerably in early 2021. However, online price inflation has since moderated somewhat; and based on these data, we project the BEA price index to have increased 0.3% in June. Adjusting for inflation, retail & food services sales ex. auto is projected to have increased 0.5% in June after declining in both May and April. </p> <h3>Conclusion</h3> <p> Updates to CARTS are released at 10:00 a.m. ET on <a href="https://www.chicagofed.org/research/data/data-release-calendar#carts-table">scheduled days</a>. Note that while CARTS is a weekly index, we release it only twice per month: The first release of the month covers the entirety of the previous month (final release), and the second release covers the first half of the current month (preliminary release). </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> <a href="https://www.census.gov/econ/overview/re0400.html">Available online</a>. </p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> The consensus forecasts referenced in the text refer to the median forecasts from surveys by Action Economics and Informa Global Markets accessed via Haver Analytics.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> We use the log first-difference of the monthly BEA price index and the weekly State Street PriceStats overall measure of online prices to project monthly retail price inflation with an MF-VAR that includes two weekly lags. Based on pseudo real-time out-of-sample testing of this model, we find that it outperforms a monthly autoregressive model including two monthly lags of the BEA price index by about 20% in terms of lower root mean-squared error and mean absolute error over a sample period that covers 2014 to the present.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/industry-employment-and-covid-vaccination https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/industry-employment-and-covid-vaccination Thu, 01 Jul 2021 00:00:00 -0500 <div class="cfedContent__text"> <p> In this <cite>Chicago Fed Insights</cite> blog post, we take a first look at the relationship between industry employment and Covid-19 vaccine take-up. As the U.S. population becomes increasingly vaccinated against Covid-19, the ongoing recovery in the labor market is expected to strengthen. In early 2020, employment was hit hardest in industries where it was either difficult to work from home or where demand was severely limited by social distancing restrictions. One might expect then that jobs in these industries would benefit the most from the Covid-19 vaccines and the potential for a return to more normal levels of economic activity. However, the timing and extent of any such impact on the labor market remain uncertain. </p> <p> We analyze state-level payroll data to investigate the relationship between employment and Covid-19 vaccination rates. Our analysis of these data by industry suggests that gains in employment in some industries have already been positively associated with higher vaccine take-up; but through early 2021, this was most strongly evident in the accommodation and food services industry. This result also varies regionally: Relative to other parts of the U.S., western states show a stronger correlation between employment in the accommodation and food services industry and vaccination rates, whereas southern states show a much weaker connection. </p> <h3>Comparing state-level payrolls by industry before and after vaccine availability</h3> <p> We begin by comparing state-level payrolls for each industry (or state-industry payroll data) before and after Covid-19 vaccines became available in the U.S. To measure vaccine take-up in each state, we use the percentage of the civilian noninstitutional population aged 16 and above that was fully vaccinated for Covid-19 in mid-May 2021.<sup><a href="#ftn1" id="ftnref1">1</a></sup> Covid-19 vaccines in the U.S. were not widely distributed before January 2021. Therefore, we use the months of January through May 2021 as our sample period for when vaccines became available. </p> <p> Ending the vaccine data in May is necessary in order to compare them against state-level payroll data for each industry from the U.S. Bureau of Labor Statistics (BLS), because these BLS data are currently only available through the same month.<sup><a href="#ftn2" id="ftnref2">2</a></sup> In order to measure payrolls and vaccinations on a consistent basis, we also divide the former by the same measure of state population used to construct the measure of vaccine take-up. Then, to account for the fact there may have been some pre-existing trends within states and industries, we take the difference between the monthly average percent change in industry payrolls during the period when vaccines became available and a pre-vaccine baseline period—for the months of January through May 2019. </p> <p> With these data, we next run a series of linear regressions—statistical processes that measure the degree of correlation between two variables. Specifically, our regression analysis relates the differences in average payroll growth between the periods before and after vaccines became available to vaccine take-up. In these regressions, we limit our analysis to only the contiguous U.S. states (and exclude the District of Columbia), and include those states for which payroll data are available from the BLS for a given industry.<sup><a href="#ftn3" id="ftnref3">3</a></sup> We also include U.S. Census division “fixed effects” in the regressions.<sup><a href="#ftn4" id="ftnref4">4</a></sup> This means that in establishing the relationship between changes in payrolls and vaccine take-up between our two sample periods, we restrict our focus to the variation across states within each Census division. </p> <p> Census division fixed effects help to account for factors that are unlikely to vary across our two time periods, before and after vaccine availability (such as political and cultural considerations<sup><a href="#ftn5" id="ftnref5">5</a></sup>), but that are likely to impact both payrolls and vaccine take-up. To account for any remaining spatial dependence in the state-industry payroll data not correlated with vaccine take-up, we adjust the regression’s standard errors (showing the precision of the estimate of the correlation) for “clustering” at the U.S. Census division level. The four Census regions (Northeast, South, Midwest, and West) each contain at least two Census divisions (with nine in total—see note 4). </p> <h3>Regression estimates </h3> <p> The estimated coefficients from these regressions (showing the degree of correlation) and their standard errors are shown in table 1. We also show in the table whether the correlations are statistically significantly different from zero, marking each of these instances with an asterisk (*). In order to see the impact that the Census division fixed effects have on these coefficients and their statistical significance, we present regression results both <em>with</em> and <em>without</em> them. </p> </div> <!--TABLE 1--> <div class="cfedStandardSpacing"> <h3>Table 1. Payroll growth by industry and vaccine take-up: January–May 2021 versus January–May 2019</h3> <figure> <div class="table-responsive"> <table class="table cfedTable--fixed cfedTable--allCenter cfedTable--controlledHover cfedTableAllVerticalCenter"> <thead> <tr class="cfedTable--rowBorderBottom cfedTable--rowBorderTop"> <th style="text-align: left;"><strong>Industry</strong></th> <th><strong>Without Census division fixed effects</strong></th> <th><strong>With Census division fixed effects</strong></th> </tr> </thead> <tbody> <tr> <td style="text-align: left;">Accommodation and food services</td> <td>0.113*</td> <td>0.080*</td> </tr> <tr> <td></td> <td>(0.020)</td> <td>(0.030)</td> </tr> <tr> <td style="text-align: left;">Administrative, waste management, and remediation services</td> <td>0.034</td> <td>0.051</td> </tr> <tr> <td></td> <td>(0.026)</td> <td>(0.052)</td> </tr> <tr> <td style="text-align: left;">Arts, entertainment, and recreation</td> <td>0.043</td> <td>–0.170</td> </tr> <tr> <td></td> <td>(0.076)</td> <td>(0.119)</td> </tr> <tr> <td style="text-align: left;">Construction</td> <td>0.010</td> <td>–0.017</td> </tr> <tr> <td></td> <td>(0.020)</td> <td>(0.020)</td> </tr> <tr> <td style="text-align: left;">Educational services</td> <td>–0.010</td> <td>–0.036</td> </tr> <tr> <td></td> <td>(0.030)</td> <td>(0.044)</td> </tr> <tr> <td style="text-align: left;">Finance and insurance</td> <td>–0.004</td> <td>–0.021*</td> </tr> <tr> <td></td> <td>(0.006)</td> <td>(0.007)</td> </tr> <tr> <td style="text-align: left;">Government</td> <td>0.012</td> <td>0.012</td> </tr> <tr> <td></td> <td>(0.010)</td> <td>(0.016)</td> </tr> <tr> <td style="text-align: left;">Health care and social assistance</td> <td>0.010*</td> <td>0.003</td> </tr> <tr> <td></td> <td>(0.004)</td> <td>(0.006)</td> </tr> <tr> <td style="text-align: left;">Information</td> <td>–0.007</td> <td>–0.050</td> </tr> <tr> <td></td> <td>(0.014)</td> <td>(0.028)</td> </tr> <tr> <td style="text-align: left;">Manufacturing</td> <td>0.004</td> <td>–0.002</td> </tr> <tr> <td></td> <td>(0.005)</td> <td>(0.010)</td> </tr> <tr> <td style="text-align: left;">Management of companies and enterprises</td> <td>–0.001</td> <td>–0.003</td> </tr> <tr> <td></td> <td>(0.011)</td> <td>(0.011)</td> </tr> <tr> <td style="text-align: left;">Mining and logging</td> <td>0.037</td> <td>0.029</td> </tr> <tr> <td></td> <td>(0.038)</td> <td>(0.039)</td> </tr> <tr> <td style="text-align: left;">Other services</td> <td>0.023</td> <td>0.001</td> </tr> <tr> <td></td> <td>(0.014)</td> <td>(0.022)</td> </tr> <tr> <td style="text-align: left;">Professional, scientific, and technical services</td> <td>0.009</td> <td>0.019</td> </tr> <tr> <td></td> <td>(0.010)</td> <td>(0.014)</td> </tr> <tr> <td style="text-align: left;">Real estate, rental, and leasing</td> <td>–0.004</td> <td>–0.001</td> </tr> <tr> <td></td> <td>(0.016)</td> <td>(0.028)</td> </tr> <tr> <td style="text-align: left;">Retail trade</td> <td>0.013</td> <td>0.015</td> </tr> <tr> <td></td> <td>(0.008)</td> <td>(0.014)</td> </tr> <tr> <td style="text-align: left;">Transportation, warehousing, and utilities</td> <td>–0.016</td> <td>0.006</td> </tr> <tr> <td></td> <td>(0.014)</td> <td>(0.019)</td> </tr> <tr> <td style="text-align: left;">Wholesale trade</td> <td>0.006</td> <td>0.023</td> </tr> <tr class="cfedTable--rowBorderBottom" > <td></td> <td>(0.015)</td> <td>(0.033)</td> </tr> </tbody> </table> </div> <figcaption class="caption"> * ≥ 95% significance level.<br /> Notes: The table displays coefficients and standard errors adjusted for clustering by Census division (in parentheses) from linear regressions comparing differences in the rate of growth in industry payrolls before and after Covid-19 vaccines became available in the U.S. with the rate of vaccine take-up across U.S. states. We present results from regressions that exclude and include additional Census division fixed effects as controls. See note 4 for details on Census divisions.<br /> Sources: Authors’ calculations based on data from the U.S. Bureau of Labor Statistics from Haver Analytics and the Centers for Disease Control and Prevention. </figcaption> </figure> </div> <br /> <div class="cfedContent__text"> <p> As table 1 shows, a positive correlation typically exists between changes in industry payrolls and vaccine take-up across the contiguous U.S. states between our two time periods (of the 18 industries only six are negative in the first column of results in table 1 and eight are negative in the second column). However, only for a handful of industries is this correlation (positive or negative) statistically significantly different from zero at the 95% confidence level. This is true despite our estimates being quite large in some instances (e.g., for the arts, entertainment, and recreation industry). In those cases, our estimates are highly imprecise (i.e., showing large standard errors) because of the large amount of variability across states in terms of the relationship between employment and vaccination rates.<sup><a href="#ftn6" id="ftnref6">6</a></sup> </p> <p> Generally speaking, the conclusions drawn from table 1 are similar with and without the Census division fixed effects included in the regressions. However, for the three industries where we find statistically significant correlations (accommodation and food services, health care and social assistance, and finance and insurance), their inclusion matters. Including Census division fixed effects leads to a statistically insignificant correlation between employment and vaccine take-up in the health care and social assistance industry and a statistically significant correlation in the finance and insurance industry. Furthermore, their inclusion reduces the magnitude of the positive correlation in the accommodation and food services industry by almost 30%. </p> <p> Thus, the results in table 1 confirm the need to account for factors that are likely to impact both payrolls and vaccine take-up. To investigate this further, we generated figure 1, which displays graphically results from Census division fixed effect regressions for our measures of percent changes in payrolls, run separately for the periods before and after Covid-19 vaccines became available. Unlike in table 1, in this figure we focus on only the industries with correlations that are statistically significantly different from zero in the second column of table 1—namely, the accommodation and food services industry and the finance and insurance industry. </p> <h3>Figure 1. Regression results for two industries in the periods before and after vaccine availability</h3> <figure> <img height="680" alt="Figure 1 contains panels of scatter plots displaying the relationship between monthly average percent changes in payroll employment for the accommodation and food services and finance and insurance industries and Covid-19 vaccine take-up across the lower 48 U.S states. Both payroll employment and the number of fully vaccinated individuals are measured as a percent of the civilian noninstitutional population aged 16 and above in each state and are shown as state-level differences from their Census division averages. This relationship is shown separately using payroll employment data before (January–May 2019) and after (January–May 2021) the availability of Covid-19 vaccines in each panel with a linear regression line." width="849" src="~/media/c99104480d074b44873ed0496f61a917.ashx" /> <figcaption class="caption"> Notes: In keeping with the Census division fixed effects from our regressions (red lines in the figure), percent changes in payroll employment and vaccine take-up rates in the figure are shown for each state relative to the average values for their Census divisions. The blue lines in the figure depict a regression coefficient of zero. The population measure used in the figure and referred to as “pop.” in the axis labels corresponds to the civilian noninstitutional population aged 16 and above for each state. The number of vaccinated persons aged 16 and above refers to those who are fully vaccinated according to the Centers for Disease Control and Prevention (see note 1).<br /> Sources: Authors’ calculations based on data from the U.S. Bureau of Labor Statistics from Haver Analytics and the Centers for Disease Control and Prevention. </figcaption> </figure> <p> We should expect to find a zero correlation in this figure (i.e., statistically insignificant differences between the red and blue lines) for both industries during the period of time before vaccines became available. A result to the contrary suggests that our regressions are misspecified and that the correlation we estimate between employment and vaccine take-up may instead capture other factors present prior to Covid-19 vaccines becoming available that are correlated with differences in vaccination rates across states. </p> <p> For at least one of the two industries—finance and insurance—this is in fact what we see in the regression results reported below the bottom left panel of the figure. There is indeed a statistically significant negative correlation between employment growth in this industry in 2019 and Covid-19 vaccination rates in 2021—long before these vaccinations began.<sup><a href="#ftn7" id="ftnref7">7</a></sup> For this reason, we choose to focus solely on the accommodation and food services industry. The estimate we obtain for this industry in figure 1 using data for only the period after vaccines became available is comparable to that in table 1 in terms of both statistical significance and magnitude. </p> <h3>Accommodation and food services employment and vaccine take-up by region</h3> <p> In table 2, we break down our regression estimates for the accommodation and food services industry further, examining possible differences in the relationship between employment in this industry and vaccine take-up by Census region (see note 4). These four separate regressions reveal that the positive association between changes in accommodation and food services industry payrolls and vaccine take-up varies considerably across the U.S., with the strongest correlation for the West Census region and the weakest correlation for the South Census region. </p> </div> <div class="cfedStandardSpacing"> <h3>Table 2. Accommodation and food services payroll growth and vaccine take-up, by U.S. Census region</h3> <figure> <div class="table-responsive"> <table class="table cfedTable--fixed cfedTable--rightAlign cfedTable--controlledHover"> <thead> <tr class="cfedTable--rowBorderBottom cfedTable--rowBorderTop"> <th><strong>U.S. Census region</strong></th> <th style="text-align: center;"><strong>With Census division fixed effects</strong></th> </tr> </thead> <tbody> <tr> <td>West (excluding HI and AK)</td> <td style="text-align: center;">0.218*</td> </tr> <tr> <td></td> <td style="text-align: center;">(0.01)</td> </tr> <tr> <td>Midwest</td> <td style="text-align: center;">0.098*</td> </tr> <tr> <td></td> <td style="text-align: center;">(0.006)</td> </tr> <tr> <td>Northeast</td> <td style="text-align: center;">0.073*</td> </tr> <tr> <td></td> <td style="text-align: center;">(0.001)</td> </tr> <tr> <td>South</td> <td style="text-align: center;">0.03</td> </tr> <tr class="cfedTable--rowBorderBottom"> <td></td> <td style="text-align: center;">(0.018)</td> </tr> </tbody> </table> </div> <figcaption class="caption"> * ≥ 95% significance level.<br /> Notes: The table displays coefficients by Census region and standard errors adjusted for clustering by Census division (in parentheses) from linear regressions comparing differences in the rate of growth in payrolls for the accommodation and food services industry before and after Covid-19 vaccines became available in the U.S. with the rate of vaccine take-up across U.S. states. All regressions include Census division fixed effects as controls. See note 4 for details on Census divisions and regions.<br /> Sources: Authors’ calculations based on data from the U.S. Bureau of Labor Statistics from Haver Analytics and the Centers for Disease Control and Prevention. </figcaption> </figure> </div> <br /> <div class="cfedContent__text"> <p> To put the numbers in table 2 in perspective, we consider the following thought experiment. Imagine increasing every state’s rate of vaccine take-up through mid-May 2021 by 1 percentage point (say, from 15% of the population to 16% of the population). The regression coefficients in table 2 tell us how much higher the monthly average percent change in accommodation and food services payrolls would be in early 2021 than it was in early 2019 as a result of this change. We can then translate these differences into the expected number of additional jobs that would be added in early 2021. Adding up these numbers across the states, we arrive at the total expected number of additional jobs for the industry. </p> <p> Running the numbers for this experiment, we find that accommodation and food services payrolls would increase by about 15,000 more jobs per month as a result. In arriving at this number, though, we rather arbitrarily assumed an increase of 1 percentage point in state vaccine take-up rates in our thought experiment. This turns out to be a reasonable choice given the amount of variation in vaccine take-up that we do see across states. For instance, the standard deviation (a measure of dispersion around the average) of vaccine take-up across states was about 6 percentage points, with a difference of about 20 percentage points between the states with the highest and lowest vaccine take-up through mid-May 2021. If we instead repeat our thought experiment using the actual increases in state vaccine take-up rates from mid-May to mid-June,<sup><a href="#ftn8" id="ftnref8">8</a></sup> it suggests that accommodation and food services payrolls in June will be boosted by about 90,000 jobs by the recent increase in vaccinations. </p> <h3>Conclusion</h3> <p> Despite a gain of almost 1 million jobs this year, payrolls in the accommodation and food services industry are still close to 2 million jobs lower than in February 2020—a month prior to when the World Health Organization declared the Covid-19 outbreak a global pandemic and many U.S. states began implementing lockdown measures. Our analysis suggests, however, that employment in this industry has been the most responsive to changes in Covid-19 vaccine take-up. Interestingly, this relationship in the lower 48 U.S. states appears to be strongest for the western states and weakest for the southern states. Based on these regional differences and vaccine take-up through mid-June, our results suggest that increasing vaccination rates could add about 90,000 jobs in June to accommodation and food services payrolls. </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> Centers for Disease Control and Prevention (CDC) data, <a href="https://covid.cdc.gov/covid-data-tracker/#vaccinations" target="_blank">available online</a>, accessed on May 13, 2021. Only those individuals aged 16 and above could be fully vaccinated at this time; the CDC’s definition of “fully vaccinated” against Covid-19 is <a href="https://www.cdc.gov/coronavirus/2019-ncov/vaccines/fully-vaccinated.html#vaccinated" target="_blank">available online</a>. We divide the number of fully vaccinated individuals for each state by the state’s civilian noninstitutional population aged 16 and above.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> The reference week for the May 2021 <cite>Current Employment Statistics</cite> (CES) survey (also known as the establishment or payroll survey), published by the BLS, was the week ending on May 17, 2021. </p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> Not every state reports payroll data for all of the industries that we examine in our regressions in table 1. </p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> Details on Census divisions, as well as Census regions, are <a href="https://www2.census.gov/geo/pdfs/maps-data/maps/reference/us_regdiv.pdf" target="_blank">available online</a>. While not part of our analysis, both Hawaii and Alaska are part of the Pacific division and West region.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> See, e.g., this <a href="https://www.npr.org/2021/06/09/1004430257/theres-a-stark-red-blue-divide-when-it-comes-to-states-vaccination-rates" target="_blank">article</a>.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> Both the accommodation and food services and arts, entertainment, and recreation industries are part of the larger leisure and hospitality sector. That said, the accommodation and food services industry accounts for about 85% of leisure and hospitality payrolls at the national level. </p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> Several other industries display a similar result. For example, the arts, entertainment, and recreation industry shows a statistically significant positive correlation between employment growth in 2019 and Covid-19 vaccination rates in 2021. This is further reason why we focus solely on the accommodation and food services industry.</p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> For this calculation, we use the CDC data through June 12, 2021, for fully vaccinated individuals aged 18 and above in order to avoid including 12–15 year olds, and assume that growth in the civilian noninstitutional population aged 16 and above was the same in June as it was in May for each state.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/what-happened-subprime-auto-loans https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/what-happened-subprime-auto-loans Wed, 30 Jun 2021 00:00:00 -0500 <div class="cfedContent__text"> <p> At the onset of the Covid-19 pandemic, subprime auto loans appeared to be particularly vulnerable to credit quality deterioration potentially arising from pandemic-related economic hardships. For one thing, the delinquency rate on subprime auto loans had risen to a fairly high level in the years leading up to 2020, signaling that many borrowers were already under financial stress when the pandemic began. In addition, unlike other consumer loan categories, such as federal student loans or some residential mortgages, no new laws required lenders to provide forbearance to auto loan borrowers. </p> <p> In this post, we review how subprime auto loan borrowers nevertheless largely avoided delinquency during the pandemic. Though not required by law to do so, auto lenders still widely offered forbearance to borrowers early on. In addition, many states imposed temporary moratoriums on vehicle repossessions. These actions, in combination with the fiscal support that households received, appear to have successfully suppressed delinquencies and repossessions. </p> <h3>Data</h3> <p> To analyze auto loans during the pandemic, we use monthly data on individual auto loans that are collateral for Asset Backed Securities (ABS)—i.e., loans that lenders fund by issuing bonds to investors rather than, for example, using bank deposits. Loan-level data from auto ABS are provided to the public through ABS-EE filings required by the Securities and Exchange Commission for certain types of ABS. We compile a database including all auto loans from any auto ABS with available data, and restrict the data in two ways: loans that were outstanding as of January 2020 and loans that were part of ABS issues that reported data for every month in 2020. </p> <p> The advantage of these data is that they are publicly available and they provide information on two key events that other data sets may not record: forbearance and repossession. The downside is that the data are not likely to be representative—these ABS issues represent only about 6% of the auto market, and ABS issuers deliberately select loans so that the portfolio underlying a given ABS issue can be expected to yield a targeted risk and return distribution. </p> <p> Altogether, the ABS database we have assembled comprises a panel that included about seven million loans per month at the beginning of 2020. The sample size decreases over time and dips below six million by the end of 2020 and to about 4.5 million by April 2021. Loans exit the sample for various reasons, including being paid off in full or charged off after default. </p> <p> The data include a substantial amount of subprime loans, totaling about 1.2 million loans a month at the beginning of the sample, using a definition of subprime as a FICO score below 620.<sup><a href="#ftn1" id="ftnref1">1</a></sup> The ABS securitizers with the most subprime loans in the data are Ally, Americredit, Carmax, Santander Consumer USA, and World Omni. </p> <h3>Forbearance</h3> <p> Starting in late March 2020, lenders granted forbearance to borrowers across a variety of household and business loans. In the consumer auto loan sector, forbearance agreements peaked quickly in April and May (see figure 1), when approval of forbearance was nearly automatic at many lenders. Since then forbearance take-up has fallen to much lower levels, though the decline has been uneven and the level of forbearance is still higher than before the pandemic, particularly for subprime loans. </p> <h3>Figure 1: Forbearance take-up was substantial</h3> <figure> <img height="402" alt="This figure shows two lines over time from January 2020 to April 2021. The first line is the percent of subprime loans in the ABS data set that were in forbearance in each month. This line start at around 2 percent in January 2020, rises rapidly in March and April to reach about 20 percent, and then falls starting in June to reach a plateau around 5 percent in September. The subprime line increases slightly at the end of the year to reach around 6 percent, but then falls after that to end at around 2-3 percent in April 2021. The second line is for prime and near prime loans, which follows the same pattern but at much lower levels, beginning just above 0 percent, rising to around 7-8 percent, and returning to just above 0 percent by September 2020." width="552" src="~/media/8b6159079d4d49369304e701deb88179.ashx" /> <figcaption class="caption"> Source: Auto loan ABS data. We define a subprime loan as having a FICO score of less than 620. </figcaption> </figure> <p> A typical forbearance agreement in the auto ABS data allowed a borrower to skip from one to four months of payments, making up those payments at the end of their loan and effectively shifting the stream of required payments forward in time. Two months was the most common duration of forbearance. Many lenders allowed borrowers to receive more than one round of forbearance, though the additional rounds of forbearance tended to come with stricter qualification criteria than the initial round from March to May, when approval of forbearance was closer to automatic. </p> <h3>Delinquencies</h3> <p> Aggregate data show that delinquencies decreased substantially in the late spring and summer of 2020 when forbearance was widespread. Figure 2 displays the delinquency rates on subprime auto loans in the ABS data and, for comparison, also displays the delinquency rate on the sample of subprime auto loans contained in the FRBNY Consumer Credit Panel/Equifax Data. The differences in the levels of delinquency rates across the two series reflect the differences between the ABS loans and the universe of auto loans in the FRBNY Consumer Credit Panel/Equifax data, and also perhaps the differences that arise from using the FICO score in the ABS data and the Equifax Risk Score in the FRBNY Consumer Credit Panel/Equifax data. </p> <h3>Figure 2: Percentage of subprime loans 30+ days delinquent</h3> <figure> <img height="498" alt="This chart shows two lines over time, from January 2020 to April 2021. The first line is the percent of subprime loans in the ABS data set that are 30 days or more delinquent. This line starts at around 12 percent at the beginning of the period, declines to below 8 percent in the summer of 2020, and then rises again toward the end of the year to end around 10 percent. The second line is also the percent of subprime loans that are delinquent, but using the FRBNY Consumer Credit Panel/Equifax data set. This line follows the same pattern but shifted up by about 2 percentage points." width="684" src="~/media/d2f7450297e549a8b10550310afddb53.ashx" /> <figcaption class="caption"> Sources: Auto loan ABS data and FRBNY Consumer Credit Panel/Equifax Data. For the CCP/Equifax data, we define subprime loans as those with an Equifax Risk Score of less than 620. For the auto loan ABS data, we define subprime loans as those with a FICO score of less than 620. </figcaption> </figure> <p> To understand the relationship between forbearance and delinquency a bit more precisely, we look at the delinquency rate over time (figure 3) depending on the duration of forbearance received in April 2020. Loans that received longer durations of forbearance show commensurately longer-lasting declines in their delinquency rates. For example, loans that received one month of forbearance in April 2020 experienced the fastest rebound in delinquency rates. This graph also shows a spike in delinquency rates in March 2020 among this set of loans that received forbearance in April, an indication of the need for forbearance due to the economic hardships that many households experienced at the onset of the pandemic, before receiving much fiscal support. </p> <h3>Figure 3: Longer forbearance durations led to longer-lasting declines in delinquency rates</h3> <figure> <img height="498" alt="This chart how delinquencies evolved from February 2020 to April 2021, focusing on auto loans that received forbearance for the first time in April 2020. There are four lines, for loans that received 1, 2, 3, or 4 months of forbearance. The delinquency rates, indexed to February 2020, increase in March 2020, the month before these loans receive forbearance, and then drop to nearly zero in April. After April, all of the lines begin to increase, but the line for 1 month of forbearance increases the fastest, followed by 2 months, and then 3 and 4 months. " width="684" src="~/media/fa1444dd52ae4abe86dd12267f65bd3f.ashx" /> <figcaption class="caption"> Source: Auto loan ABS data. </figcaption> </figure> <p> The variation in the duration of forbearance is largely driven by lenders choosing different default amounts of forbearance that they granted to all of their borrowers, rather than by borrower choice. While borrowers may differ systematically across lenders, the effect we see here is largely mechanical, since delinquency is typically reset once a borrower is in forbearance. As a result, what we are capturing is essentially the decision by lenders to mechanically suppress delinquencies with the aim of providing borrowers time to receive fiscal support during the pandemic. </p> <h3>Repossessions</h3> <p> Repossessions on auto loans fell in mid-2020, reflecting pandemic-driven lockdowns that restricted vehicle repossessions (on the basis that repossessions were not an essential activity) and also reflecting that many borrowers were able to avoid default through either forbearance or fiscal support. That said, repossessions rebounded in the late summer, and as shown in figure 4, many of the underlying loans had received forbearance earlier that year. This is an indication of rising economic hardship at the end of 2020, as forbearance was no longer widely available and as the support provided by the fiscal stimulus from the previous spring began to fade away. </p> <h3>Figure 4: Repossessions increasingly consist of loans previously in forbearance</h3> <figure> <img height="402" alt="This chart shows the level of repossessions in the ABS data over time, from January 2020 to April 2021. The level is decomposed into two components: loans that received forbearance at some point during 2020, and those that did not. Repossessions dropped to very low levels in April and May 2020, and then increased over June and July. Over time, an increasing share of the volume of repossessions is comprised of loans that had received forbearance earlier in the year, starting at almost zero in April to about half of the loans by the fall. " width="552" src="~/media/1bbaebca2ba746238ede74c6065fc868.ashx" /> <figcaption class="caption"> Source: Auto loan ABS data. </figcaption> </figure> <p> Some states imposed moratoriums on repossessions in recognition of the hardships imposed by the pandemic. Figure 5 captures the impact of these state-level moratoriums in the ABS data. Illinois and Maryland were the second-to-last and last states, respectively, to lift their moratoriums. In all other states combined, repossessions increased substantially by July 2020, but this increase was delayed by a few months in Illinois (which lifted its moratorium in late August 2020) and another month or so in Maryland (which lifted its moratorium in October). These later spikes in Illinois and Maryland suggest that the moratoriums effectively held down some latent repossession activity that might have occurred otherwise, much like forbearance agreements appear to have lowered delinquencies earlier in the year. </p> <h3>Figure 5: Lifting of repossession moratoriums led to temporary spikes in repossessions</h3> <figure> <img height="402" alt="This figure shows the volume of repossessions over time in the ABS data, from February 2020 to April 2021. There are three lines, showing the volume in three geographic areas: Illinois, Maryland, and all other states, each indexed to February 2020. The volume for all other states drops during April and May 2020, and then rebounds by July. The rebound takes place later in the remaining two states, taking place in August and September in Illinois, and in October and November in Maryland. " width="552" src="~/media/999225d92bc54f72bc58aaf2423f4b46.ashx" /> <figcaption class="caption"> Source: Auto loan ABS data. </figcaption> </figure> <br /> <h3>Conclusion</h3> <p> Most auto lenders made forbearance widely available in the spring of 2020, according to data from auto ABS. Nearly one in five subprime auto borrowers in these data availed themselves of forbearance. As a result of this forbearance and other fiscal support for households, delinquency rates on auto loans fell significantly during the summer of 2020. Auto lenders significantly rolled back the availability of forbearance during the summer, after which delinquencies rebounded but still remained at or below pre-pandemic levels. Similarly, the overall volume of repossessions has rebounded but has yet to return to pre-pandemic levels, even as repossessions are increasingly affecting borrowers who received forbearance early in the pandemic. The overall picture is one in which the combination of forbearance, repossession moratoriums, and fiscal support from the CARES Act and the American Rescue Plan Act appear to have significantly helped subprime auto borrowers to avoid more adverse outcomes during the pandemic. </p> <hr /> <h3>Note</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> We use the FICO score at origination, obtained from the ABS Auto Database.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/charging-ahead-electrification-auto-industry https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/charging-ahead-electrification-auto-industry Wed, 23 Jun 2021 00:00:00 -0500 <div class="cfedContent__text"> <p> Lately, not a day goes by without a major player in the auto industry issuing a press release that signals a shift toward electrification. According to the <cite>New York Times</cite>, as many as 100 electric vehicle (EV) models will be featured in showrooms by 2025.<sup><a href="#ftn1" id="ftnref1">1</a></sup> All three carmakers with historical ties to Detroit have major plans to develop more EVs. General Motors Co. (GM) will invest $20 billion to produce electric and autonomous vehicles by 2025—with the goal of having 20 EV models in its global lineup even sooner (by 2023). Ford Motor Co. intends to spend over $11 billion on EV development by 2022. Ford also stated in 2020 that it will add 300 jobs at its Rouge Complex in Dearborn, Michigan, to support battery assembly and the production of its new F-150 Lightning models (both hybrid and fully electric), scheduled for release in 2022. Like its competitors, Fiat Chrysler Automobiles N.V. (now Stellantis N.V.) announced that it will invest over $10.5 billion in EVs—with the goal of having more than 30 nameplates with electrified powertrains (including new Jeep models) in its lineup over the next few years.<sup><a href="#ftn2" id="ftnref2">2</a></sup> </p> <p> Is the electrification of the auto industry today akin to when the internal combustion engine (ICE), led by Ford’s Model T, wiped out alternative propulsion systems (such as those based on steam power and even electricity<sup><a href="#ftn3" id="ftnref3">3</a></sup>) just over a hundred years ago? If so, what are the principal features of this transition? In this blog post, we provide some big-picture context for what’s going on in the auto industry as it ramps up its efforts to produce and sell more electric cars. </p> <p> According to Melissa Diaz, an analyst in energy policy with the Congressional Research Service,<sup><a href="#ftn4" id="ftnref4">4</a></sup> electric vehicles can be divided into “three broad categories,” which she defines as follows: </p> <ul class="cfedList--bulleted"> <li>Hybrid-electric vehicles (HEVs): The internal combustion engine primarily powers the wheels. The battery pack and electric motor provide supplemental power.</li> <li>Plug-in hybrid-electric vehicles (PHEVs): The battery pack can be charged by an external source of electricity. Depending on the model, primary power to the wheels may be supplied by the battery pack and electric motor, the internal combustion engine, or a combination.</li> <li>All-electric vehicles (AEVs; also called battery-electric vehicles, or BEVs): The battery pack must be charged via an external source of electricity. The battery pack and electric motor power the wheels.</li> </ul> <p> In this blog post, we focus on the final category of electric vehicles, given that many within the auto industry and those who study it view the hybrids as transitional technologies. We prefer the term “BEVs,” so we’ll refer to such vehicles with that shorthand, rather than “AEVs.” </p> <p> The current popularity of BEVs originated with Tesla, which started selling its first model in 2008. Since then the company has become the largest producer of BEVs globally. In the U.S., Tesla accounted for 77% of all BEV sales in 2020.<sup><a href="#ftn5" id="ftnref5">5</a></sup> The company has been valued by financial markets as the most valuable car company anywhere. </p> <p> What’s behind the current move toward electrification in the auto industry? As of 2017, the transportation sector accounted for the largest share of greenhouse gas emissions in the U.S. Moreover, nearly 60% of this sector’s emissions are attributed to light-duty vehicles, such as cars and light trucks (see Diaz, 2020, p. 4). Led by regulatory efforts designed to reduce greenhouse gas emissions, carmakers have intensified their efforts to reduce tailpipe emissions. Traditional carmakers (such as GM and Volvo) have publicly committed to phasing out the production of ICE vehicles by specific dates (2035 and 2030, respectively).<sup><a href="#ftn6" id="ftnref6">6</a></sup> The California government has banned selling new gasoline-powered motor vehicles in the state starting in the year 2035.<sup><a href="#ftn7" id="ftnref7">7</a></sup> </p> <p> How will the switch to electrification in the auto industry play out? At this point, the share of EVs—and especially BEVs—in U.S. auto production and sales is still quite small,<sup><a href="#ftn8" id="ftnref8">8</a></sup> but it’s growing (see table 1 for the multiple BEV models currently being sold in the U.S.). The consulting firm IHS Markit, which has deep expertise in both energy markets and auto supply chains, predicts that with the regulations presently in discussion, BEVs could represent more than 50% of auto sales in Europe, more than 40% in China, and more than 25% in the U.S. by 2030.<sup><a href="#ftn9" id="ftnref9">9</a></sup> </p> </div> <div class="cfedStandardSpacing"> <h3>Table 1. BEV models sold in the U.S. market in 2021, year to date</h3> <figure> <div class="table-responsive"> <table class="table cfedTable--fixed"> <thead> <tr class="cfedTable--rowBorderTop cfedTable--rowBorderBottom"> <th><strong>Automaker</strong></th> <th><strong>Models</strong></th> </tr> </thead> <tbody> <tr> <td>Audi</td> <td>e-tron</td> </tr> <tr> <td>BMW</td> <td>i3</td> </tr> <tr> <td>Ford</td> <td>Mustang Mach-E</td> </tr> <tr> <td>General Motors</td> <td>Chevrolet Bolt</td> </tr> <tr> <td>Hyundai</td> <td>Ioniq and Kona</td> </tr> <tr> <td>Kia Motors</td> <td>Niro</td> </tr> <tr> <td>Jaguar Land Rover</td> <td>Jaguar I-PACE</td> </tr> <tr> <td>Nissan</td> <td>LEAF</td> </tr> <tr> <td>Porsche</td> <td>Taycan</td> </tr> <tr> <td>Tesla Motors</td> <td>Model 3, Model S, Model X, and Model Y</td> </tr> <tr> <td>Volkswagen</td> <td>Golf</td> </tr> <tr style="border-bottom: 1px solid #dee2e6"> <td>Volvo</td> <td>Polestar 2 and XC40</td> </tr> </tbody> </table> </div> <figcaption class='caption'>Note: BEV means battery-electric vehicle.<br /> Source: WardsAuto InfoBank. </figcaption> </figure> </div> <br /> <div class="cfedContent__text"> <p> While regulatory forces are having an impact on the auto market, the take-up rate of BEVs is also being shaped by consumer concerns: It currently takes much longer to charge a BEV than to refuel an ICE vehicle; there are far fewer charging stations than gasoline stations; and the relatively high cost of electric batteries tilts the purchase price in favor of ICE vehicles over BEVs. Note that the Biden administration’s proposed infrastructure bill includes $174 billion for the further development of electric cars and the infrastructure that supports them—50% more than for building or repairing bridges and roads.<sup><a href="#ftn10" id="ftnref10">10</a></sup> </p> <p> It is important to note that a transition to electric vehicles would change many aspects of the auto industry—ranging from the design and production of cars to their distribution and maintenance. For example, a BEV does not require a conventional engine and transmission, thereby noticeably reducing the number of parts and time required to build a vehicle. That could have significant effects on industry employment,<sup><a href="#ftn11" id="ftnref11">11</a></sup> as well as on industry geography, as it is not clear that BEV batteries and electric motors will be produced where conventional vehicle engines and transmissions are presently made. Furthermore, the repair and maintenance of BEVs will require different sets of skills and likely different equipment for dealers and repair shops across the nation. Finally, if Tesla’s entry into the auto industry is any guidance, the many producers of new BEVs that are attempting to gain a foothold in the industry may not follow the historical pattern of establishing vehicle dealer networks in order to sell their products. For instance, Tesla owns and operates its own distribution channels—which is quite different from the situation for traditional car companies that contract with a vast network of independent dealers to sell and repair their products. </p> <p> Regardless, a transition away from vehicles with internal combustion engines will take time.<sup><a href="#ftn12" id="ftnref12">12</a></sup> That means we shouldn’t be thinking of their eventual demise as a sudden drop off a cliff, but rather as a much more gradual process. Even after BEVs reach a tipping point among consumers, the composition of vehicles in use will change only gradually, as the average car in the U.S. stays on the road for about 12 years.<sup><a href="#ftn13" id="ftnref13">13</a></sup> </p> <p> We are witnessing the beginnings of a far-reaching transformation of the auto industry. The environment is quite dynamic—influenced by technological progress, consumer demand, and regulatory requirements. Watch this space for further analysis of the auto industry’s electrification. </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> Lawrence Ulrich, 2021, “Three electric S.U.V.s with Tesla in their sights,” Wheels: Driver’s Notebook, <cite>New York Times</cite>, updated April 26 (originally published April 22), <a href="https://www.nytimes.com/2021/04/22/business/electric-suvs-ford-volkswagen-volvo.html" target="_blank">available online by subscription</a>.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> Jordyn Grzelewski, 2020, “In the shift to EVs, some worry workers could suffer,” <cite>Government Technology</cite>, November 2, <a href="https://www.govtech.com/fs/transportation/in-the-shift-to-evs-some-worry-workers-could-suffer.html" target="_blank">available online</a>, accessed on June 2, 2021. In January 2021, Fiat Chrysler Automobiles N.V. completed its merger with Groupe PSA to create Stellantis N.V.; details are <a href="https://www.fcagroup.com/en-US/media_center/fca_press_release/FiatDocuments/2021/January/The_merger_of_FCA_and_Groupe_PSA_has_been_completed.pdf" target="_blank">available online</a>.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> Electric vehicles are not a new concept. Around the beginning of the twentieth century, about a third of the vehicles in New York City, Boston, and Chicago were electric. Several factors explain the demise of the early electric vehicles, including the increasing availability of cheap oil and the invention of the electric starter motor for gasoline-powered vehicles (see John D. Graham, 2021, <cite>The Global Rise of the Modern Plug-In Electric Vehicle: Public Policy, Innovation and Strategy</cite>, Northampton, MA: Edward Elgar, pp. 3–4). Advancements in electric batteries revived interest in electric vehicles nearly 100 years later.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> Melissa N. Diaz, 2020, “Electric vehicles: A primer on technology and selected policy issues,” CRS Report for Congress, Congressional Research Service, No. R46231, February 14, <a href="https://crsreports.congress.gov/product/pdf/R/R46231" target="_blank">available online</a>.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> Authors’ calculations based on data from WardsAuto InfoBank.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> CBS and Associated Press, 2021, “Volvo plans to phase out gas engines in all its cars by 2030,” CBS News, March 2, <a href="https://www.cbsnews.com/news/volvo-gas-cars-c40-hybrids-production-2030/" target="_blank">available online</a>, accessed on June 10, 2021.</p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> Russ Mitchell, 2020, “Sales of new gas-powered cars banned in California by 2035: What you need to know,” <cite>Los Angeles Times</cite>, September 23, <a href="https://www.latimes.com/business/story/2020-09-23/sales-new-gasoline-cars-banned-by-2035-what-you-need-to-know" target="_blank">available online by subscription</a>.</p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> For instance, through the first five months of 2021, the share of BEVs among new light vehicle sales in the U.S. market came to just 2.5% (according to authors’ calculations based on data from WardsAuto InfoBank).</p> <p><sup><a href="#ftnref9" id="ftn9">9</a></sup> Reinhard Schorsch, 2021, “Commitments to carbon-neutral economies accelerate the reshaping of the automotive industry,” IHS Markit, blog post, April 14, <a href="https://ihsmarkit.com/research-analysis/commitments-to-carbonn-eutral-economies-accelerate-the-reshapin.html" target="_blank">available online</a>, accessed on April 28, 2021.</p> <p><sup><a href="#ftnref10" id="ftn10">10</a></sup> Daniel Yergin, 2021, “How electric, self-driving cars and ride-hailing will transform the car industry,” Saturday Essay, <cite>Wall Street Journal</cite>, April 23, <a href="https://www.wsj.com/articles/how-electric-self-driving-cars-and-ride-hailing-will-transform-the-car-industry-11619189966" target="_blank">available online by subscription</a>. See also White House, 2021, “FACT SHEET: Biden administration advances electric vehicle charging infrastructure,” press release, Washington, DC, April 22, <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/22/fact-sheet-biden-administration-advances-electric-vehicle-charging-infrastructure/" target="_blank">available online</a>.</p> <p><sup><a href="#ftnref11" id="ftn11">11</a></sup> UAW Research Department, 2020, “Taking the high road: Strategies for a fair EV future,” white paper, Detroit, revised January 2020, <a href="https://uaw.org/wp-content/uploads/2019/07/190416-EV-White-Paper-REVISED-January-2020-Final.pdf" target="_blank">available online</a>, accessed on April 28, 2021.</p> <p><sup><a href="#ftnref12" id="ftn12">12</a></sup> Brad Plumer, Nadja Popovich, and Blacki Migliozzi, 2021, “Electric cars are coming. How long until they rule the road?,” <cite>New York Times</cite>, March 10, <a href="https://www.nytimes.com/interactive/2021/03/10/climate/electric-vehicle-fleet-turnover.html" target="_blank">available by subscription</a>, accessed on April 28, 2021.</p> <p><sup><a href="#ftnref13" id="ftn13">13</a></sup> Colin Beresford, 2020, “Average age of vehicles on the road is approaching 12 years,” <cite>Car and Driver</cite>, July 29, <a href="https://www.caranddriver.com/news/a33457915/average-age-vehicles-on-road-12-years/" target="_blank">available online</a>, accessed on June 6, 2021.</p> <a name="video"></a> <div style="display: block; position: relative; max-width: 100%;"> <div style="padding-top: 56.25%;"> <iframe src="https://players.brightcove.net/4934638106001/5Xo5mJ0zK_default/index.html?videoId=6269459364001" style="left: 0px; top: 0px; width: 100%; height: 100%; right: 0px; bottom: 0px; position: absolute;" mozallowfullscreen="" webkitallowfullscreen="" allowfullscreen=""></iframe> </div> </div> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/treasury-clearing-mandate https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/treasury-clearing-mandate Wed, 23 Jun 2021 00:00:00 -0500 <div class="cfedContent__text"> <p>Following stresses in the market for U.S. Treasury securities in March 2020, several observers suggested that increased central clearing of Treasury transactions could help the market function better and called for investigating the costs and benefits of a clearing mandate. This post examines more basic questions: Would structural changes to the market be required to increase central clearing of Treasuries? And what mechanisms, voluntary or mandatory, could result in increased clearing? We argue that the effectiveness of a clearing mandate is unclear absent broad changes in the design of the Treasury market. Additionally, we argue that the changes in the design of the Treasury market necessary to facilitate a clearing mandate could increase clearing even without a mandate. Analysis of the costs and benefits of expanded clearing therefore needs to consider the specific costs and benefits of these broader changes.</p> <h3>What is central clearing and why might it help the Treasury market?</h3> <p>Central clearing is a method used to reduce and manage risk in financial markets. For example, in the Treasury market, it is conventional for cash and securities to change hands one business day after the trade is agreed to. Although this convention has a range of benefits for market functioning, it introduces the possibility that a participant will not hand over money or securities when due. With central clearing, a clearinghouse or central counterparty (CCP) steps into the middle of transactions and ensures their completion. </p> <p>As discussed, for example, by <a href="https://www.chicagofed.org/~/media/publications/understanding-derivatives/understanding-derivatives-chapter-2-central-counterparty-clearing-pdf.pdf?la=en">Robert Steigerwald</a>, central clearing offers a number of benefits to post-trade risk management and operations that can enhance the functioning of cash securities and derivatives markets. Central clearing can mitigate counterparty credit risk by guaranteeing positions and can simplify the operational and legal complexities of transactions. </p> <p>In addition, a CCP can net out offsetting obligations and reduce the total amounts of money and securities that must change hands. For example, suppose that at 9 a.m. Monday, Ava agrees to sell a certain Treasury bond to Bill for $100; at 10 a.m., Bill agrees to sell the same bond to Carlos for $100; and at 11 a.m., Carlos agrees to sell the very same bond to Ava for $100. Without a CCP, when it comes time to settle the transactions on Tuesday, the bond must be passed in a circle from Ava to Bill to Carlos and back to Ava, and the $100 must move around the circle in the opposite direction. But if all of the transactions are submitted to a CCP, the CCP can calculate that the settlements cancel out and that, on net, Ava, Bill, and Carlos don’t need to make any payments at all. Even with more complicated trading patterns, netting at a CCP typically greatly reduces the cash flows needed in financial markets. </p> <p>Only some Treasury transactions are currently centrally cleared and receive these benefits. (We focus here on outright purchases and sales, not on the collateralized financing transactions known as repurchase agreements or repos.) The market for Treasury securities effectively has two segments, one segment that trades bilaterally and one segment that trades through platforms operated by interdealer brokers (IDBs). The bilateral segment typically involves securities dealers trading Treasuries with their customers, such as investment managers or other institutional investors. These trades are generally cleared and settled bilaterally, without a CCP. In the other market segment, securities dealers as well as specialized “principal trading firms” (PTFs) that trade for their own accounts transact with each other on IDB platforms. Each transaction at an IDB is split into two pieces: a leg between the buyer and the IDB and a leg between the IDB and the seller. If the buyer or seller is a dealer, the respective leg is centrally cleared through a CCP, the Fixed Income Clearing Corp. (FICC). Transaction legs involving PTFs are generally cleared and settled bilaterally.</p> <p>Observers including <a href="https://www.brookings.edu/research/still-the-worlds-safe-haven/" target="_blank">Darrell Duffie</a> and <a href="https://www.brookings.edu/research/enhancing-liquidity-of-the-u-s-treasury-market-under-stress/" target="_blank">Nellie Liang and Pat Parkinson</a> as well as <a href="https://www.dtcc.com/-/media/Files/PDFs/DTCC-US-Treasury-Whitepaper.pdf" target="_blank">FICC</a> have suggested four main reasons that a clearing mandate or expanded clearing could make the Treasury market more robust. First, if transactions with customers or PTFs were cleared, these transactions could be netted at the CCP against one another and against the interdealer trades that are already cleared. As dealers may hold capital against unsettled trades or take other steps to manage risks associated with them, increased netting might free up space on dealers’ balance sheets for additional trades that could help keep the market liquid. Indeed, <a href="https://www.newyorkfed.org/research/staff_reports/sr964" target="_blank">Michael Fleming and Frank Keane</a> calculate that universal central clearing of outright trades would have reduced dealers’ daily settlement obligations by nearly $800 billion, or 70%, at the height of the March 2020 stress. (However, dealers may not always hold capital against typical unsettled outright Treasury trades.) Second, expanded clearing could reduce the number of transactions that fail to settle on time, by eliminating chain reactions in which Ava’s failure to deliver a bond to Bill leaves Bill unable to deliver to Carlos and so on. Third, if traders knew that a transaction would be centrally cleared, they might be less concerned with the reliability of the counterparty to the deal, which might support broader “all-to-all,” anonymous trading similar to that on stock exchanges, in contrast to the current system where customers typically trade with their own dealers. (However, the swaps market has not broadly adopted anonymous trading despite the establishment of a clearing mandate in that market after the Global Financial Crisis of 2008.) Finally, broader central clearing could enhance and standardize risk management.</p> <h3>Can more trades be centrally cleared with the market’s current structure?</h3> <p>Expanding central clearing while retaining the market’s existing structure, including how trading occurs and the relationship between dealers and their clients, could be challenging. To understand why this is, we first have to examine how CCPs interact with market participants.</p> <p>CCPs clear trades only for their members, which are firms that meet stringent risk-management standards, such as capital requirements, operational capacity, and the commitment to share in certain losses if another member defaults. Membership requirements are an important part of a CCP’s tools for guaranteeing the completion of trades, as it would be difficult for a CCP to ensure the performance of traders that do not meet its risk management standards. </p> <p>All significant dealers and IDBs in the Treasury market are members of FICC, whose rules require its members to submit trades with other members for central clearing. Thus, Treasury trades between two dealers that are FICC members or between a FICC member dealer and an IDB are centrally cleared. Other important market participants, notably major PTFs, are not members of FICC; as discussed above, transactions with these participants on one side are not centrally cleared. </p> <p>Market participants may choose not to join FICC for a variety of reasons. Some may not meet the membership requirements, which are designed to ensure that members can meet their risk management obligations to FICC. Other market participants may prefer not to develop and maintain the operational capabilities to clear and settle trades at FICC, instead relying on dealers to provide those services. A subset of market participants, such as certain money market funds, face legal obstacles to joining FICC because they are prohibited from mutualizing losses from other clearing members in the way that FICC rules currently require.</p> <p>Although central clearing could be expanded by requiring certain market participants to become FICC members, such a requirement could also drive some participants to exit the market if they were unable or unwilling to meet the membership standards and obligations. FICC could change the risk management obligations that deter membership; however, any decrease in those standards could be highly problematic and unlikely to be approved by regulators. Centrally clearing all Treasury trades would therefore likely require finding ways to centrally clear more trades by non-members. </p> <p>Instead of joining FICC, non-members can centrally clear their trades by finding a member who will take responsibility for the transactions and submit them for clearing through FICC’s Prime Broker or Correspondent Clearing services. Although FICC rules allow this process for non-member trades, in practice it is used only on a limited basis because submitting typical non-member trades would offer limited benefits. As one of us discussed in <a href="https://www.chicagofed.org/publications/policy-discussion-papers/2021/2021-02">recent research</a>, if a dealer were to buy a security from its own customer and submit this transaction to FICC, there would be no effect on the dealer’s net position at, obligations to, or guarantees from FICC, nor on the amount of trades that are, in fact, centrally cleared. The reason is that FICC nets members’ trades for their own accounts against trades by the members’ customers, so the dealer’s and customer’s sides of the trade would cancel out in the netting process. For example, if Ava, a customer, sold a Treasury bond to a dealer for $100, clearing this transaction through FICC would theoretically require four steps (before netting takes place): 1) the dealer would give $100 to FICC; 2) the dealer would obtain the bond from Ava and give it to FICC; 3) FICC would return the $100 to the dealer, but for credit to Ava rather than for the dealer’s own benefit; and 4) FICC would give the bond to the dealer. FICC’s netting process would net out all four of these steps, with the end result that the dealer would not send or receive money or securities to or from FICC, as illustrated in table 1. That is, the flows from the dealer to the CCP would exactly cancel out the flows from the CCP to the dealer. The same would be true if an IDB submitted its own trade with a PTF. Thus, a mandate for members to submit their trades with non-members to FICC for clearing would not, on its own, increase the amount of centrally cleared trades; broader changes in market design would be needed. </p> <h3>Table 1: Netting of a dealer-to-customer trade if passed through FICC</h3> <figure> <div class="table-responsive"> <table class="table cfedTable--dataRight"> <thead> <tr class="cfedTable--rowBorderTop cfedTable--rowBorderBottom" style="text-align: right;"> <th style="text-align: left;">Item</th> <th>Securities from dealer to FICC</th> <th>Securities from FICC to dealer</th> <th>Cash from dealer to FICC</th> <th>Cash from FICC to dealer</th> </tr> </thead> <tbody> <tr> <td>Payment of purchase price (by dealer)</td> <td></td> <td></td> <td>$100</td> <td></td> </tr> <tr> <td>Delivery of bond (by dealer on behalf of customer)</td> <td>1</td> <td></td> <td></td> <td></td> </tr> <tr> <td>Receipt of purchase price (by dealer, for credit to customer)</td> <td></td> <td></td> <td></td> <td>$100</td> </tr> <tr> <td>Receipt of bond (by dealer)</td> <td></td> <td>1</td> <td></td> <td></td> </tr> <tr style="font-style: italic; text-align: right;"> <td>Total</td> <td>1</td> <td>1</td> <td>$100</td> <td>$100</td> </tr> <tr style="font-style: italic; text-align: right;"> <td>Net</td> <td>0</td> <td>0</td> <td>$0</td> <td>$0</td> </tr> </tbody> </table> </div> <figcaption class='caption'>This table shows the gross and net obligations a dealer would have to FICC if the dealer purchased one Treasury bond from a customer for $100 and submitted the transaction for central clearing. </figcaption> </figure> <br> <h3>What changes could increase clearing?</h3> <p>While a variety of broader changes in institutions and market structure could increase the amount of clearing, this analysis evaluates two such changes. These changes could result in additional voluntary clearing or could be paired with mandatory clearing requirements. First, the client clearing model of the futures or options market could be implemented at FICC. Second, trading venues could be created in which FICC non-members trade directly with other non-members, without involving a dealer or interdealer broker as principal to the transaction. Both of these possibilities could have costs as well as benefits.</p> <p><em>Adapt clearing and segregation model of other markets:</em> CCPs in some other markets, such as futures, options, and swaps, do not net members’ trades for their own accounts against trades for members’ customers. Adopting this type of model in the Treasury market would require significant changes in the market’s structure and regulation. In particular, Securities and Exchange Commission customer protection regulations would need to be modified to allow dealers to post customer assets to FICC as collateral for customers’ obligations. The costs and benefits of any such change would need to be weighed carefully. </p> <p>If members’ “house” positions were segregated from their customers’ positions, then submitting a dealer-to-customer trade for clearing would change the dealer’s net position at the CCP. Table 2 illustrates how a dealer-to-customer trade would be accounted for at FICC if, contrary to current rules, FICC segregated dealers’ house and customer positions. It may appear at first that separating house and customer positions means there is less netting and clearing, not more, since the two sides of the dealer’s trade with its customer no longer cancel out on the dealer’s books. However, once a dealer’s house and customer trades are separated, the dealer’s position vis-à-vis its customer can be netted against the dealer’s position vis-à-vis other dealers, which was not possible previously. Separating house and customer positions at FICC would therefore allow for centrally clearing more Treasury trades whether dealers voluntarily submitted dealer-to-customer trades or were required to do so. <a href="https://www.chicagofed.org/publications/policy-discussion-papers/2021/2021-02">Recent research</a> by one of us finds that a transition to segregated clearing of customer securities trades would have a wide range of costs, primarily from increasing the amount of assets needed as collateral at the CCP, as well as benefits, primarily from requiring customers to more directly bear the cost of risk management for their trades. </p> <p>A related approach would be an expansion of FICC’s sponsored membership program, which allows non-members to transact through FICC under the umbrella of a guarantee provided by a FICC member. The transactions of a sponsored participant are segregated from those of the member that is its sponsor. Sponsored membership is currently used largely for repurchase agreements, which are short-term financing transactions, rather than outright purchases and sales of securities. In addition, sponsored membership is currently available only to firms managing substantial amounts of assets. It might be possible to expand the sponsored membership program to include more outright purchases and sales and more market participants. However, because sponsored clearing requires FICC members to sponsor firms and FICC members may not be willing to expand their sponsorship to capture all trading, mandatory clearing with a sponsored membership approach would risk shutting out certain segments of the current market from trading. This could be addressed by limiting the scope of a clearing mandate, but would need careful consideration.</p> <h3>Table 2: Netting of a dealer-to-customer trade if FICC changed its rules to segregate dealer and customer accounts</h3> <figure> <div class="table-responsive"> <table class="table cfedTable--dataRight"> <thead> <tr class="cfedTable--rowBorderTop cfedTable--rowBorderBottom" style="text-align: right;"> <th style="text-align: left;">Item</th> <th>Securities from dealer to FICC</th> <th>Securities from FICC to dealer</th> <th>Cash from dealer to FICC</th> <th>Cash from FICC to dealer</th> </tr> </thead> <tbody> <tr> <td colspan="5" style="font-weight: bold;">Dealer’s house account</td> </tr> <tr> <td>Payment of purchase price</td> <td></td> <td></td> <td>$100</td> <td></td> </tr> <tr> <td>Receipt of bond</td> <td></td> <td>1</td> <td></td> <td></td> </tr> <tr style="font-style: italic; text-align: right;"> <td>Total</td> <td></td> <td>1</td> <td>$100</td> <td></td> </tr> <tr style="font-style: italic; text-align: right;"> <td>Net</td> <td></td> <td>1</td> <td>$100</td> <td></td> </tr> <tr> <td colspan="5" style="font-weight: bold;">Dealer’s customer account</td> </tr> <tr> <td>Delivery of bond</td> <td>1</td> <td></td> <td></td> <td></td> </tr> <tr> <td>Receipt of purchase price</td> <td></td> <td></td> <td></td> <td>$100</td> </tr> <tr style="font-style: italic; text-align: right;"> <td>Total</td> <td>1</td> <td></td> <td></td> <td>$100</td> </tr> <tr style="font-style: italic; text-align: right;"> <td>Net</td> <td>1</td> <td></td> <td></td> <td>$100</td> </tr> </tbody> </table> </div> <figcaption class='caption'>This table shows the gross and net obligations a dealer would have to FICC for a cleared dealer-to-customer purchase, if FICC changed its rules to keep separate accounts for dealers’ “house” positions and customers’ positions. </figcaption> </figure> <p><em>Expand all-to-all trading platforms that link directly to a CCP:</em> In the stock market, all-to-all trading is commonplace, and essentially all trades are centrally cleared at a CCP, the National Securities Clearing Corp., even though the market has no clearing mandate. Dealers and non-dealers commonly trade stocks with each other on stock exchanges, which automatically submit trades for clearing. If market participants were able to transact on anonymous Treasury trading venues linked to FICC in the same way that they can transact on stock exchanges, a significant expansion of central clearing could be achieved. To settle such trades, the seller’s dealer would need to collect the securities from the selling customer and deliver them to the buyer’s dealer, while the buyer’s dealer would need to collect the cash from the buying customer and deliver it to the seller’s dealer. As a result, there would be an obligation between the two dealers that would be cleared at FICC. The model of an exchange linking directly to clearing could thus both facilitate growth of all-to-all trading in the Treasury market and produce more centrally cleared trades, even without a clearing mandate.</p> <p>All-to-all trading would be a substantial change from the current market structure in which customers trade with their own dealers. (The Treasury market’s nearest equivalents to stock exchanges are IDBs’ electronic trading platforms, but these differ from exchanges because IDBs stand as principals to all transactions on their platforms, creating uncleared trades whenever a FICC non-member transacts. Additionally, as principals, IDBs limit their users’ trading, which may affect market participants’ ability to scale up trading in response to market volatility.) As such, all-to-all trading would likely affect market liquidity and pricing in a variety of ways. These effects would depend on what regulations governed the trading venues and the CCP. In addition, as one of us discussed in recent research on clearing of stock trades, all-to-all trading without segregation of customer positions at the CCP can create large liquidity demands on dealers. </p> <h3>Conclusion</h3> <p>The two possible approaches described here demonstrate that expansion of Treasury clearing is not impossible. Other approaches may also exist. Regardless of the approach, however, expansion is not as simple as merely mandating clearing and would likely require significant adjustments in overall market structure and regulatory approach. These adjustments carry a wide range of additional benefits and costs beyond the direct effect of clearing more trades at a CCP and fewer trades bilaterally. For example, such changes could affect the cash demands on dealers and other market participants and other implicit and explicit costs of trading. Moreover, market structure changes could organically increase the amount of clearing even without a mandate, as has been the case in the Treasury repo market with the growth of sponsored activity. The costs and benefits of broader central clearing in the cash Treasury market therefore depend on the specific method used to increase the amount of clearing.</p> <hr /> <h3>Note</h3> <p>Marta Chaffee is senior associate director in the Division of Reserve Bank Operations and Payment Systems at the Board of Governors of the Federal Reserve System. Sam Schulhofer-Wohl is senior vice president and director of financial policy and outreach at the Federal Reserve Bank of Chicago.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago, the Board of Governors, or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/supporting-chicagos-youth https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/supporting-chicagos-youth Mon, 24 May 2021 00:00:00 -0500 <div class="cfedContent__text"> <p>Chicago Fed staff and community leaders discussed the importance of summer jobs programs for Chicago’s youth and identified ways to strengthen these organized efforts over the coming months in the virtual forum, “<a href="~/link.aspx?_id=FC7B77D7645346909C236AF21A61371D&_z=z">Brighter Prospects for Chicago’s Youth: Strengthening Summer Jobs and Beyond</a>,” on May 5, 2021. Beginning in July 2020, through <a href="~/link.aspx?_id=547F2A1D9D0A4018B614AD4D2DEEE495&_z=z">Project Hometown</a> events, the Chicago Fed has brought focus to bringing about a more inclusive recovery from the pandemic for all the communities we serve.</p> <p>In opening remarks, Charlie Evans, CEO of the Federal Reserve Bank of Chicago, explained that since the pandemic started, youth across the country have had to make sacrifices to keep others safe, and far too many have had to face isolation, housing instability, food insecurity, and uncertain job prospects. “Left unaddressed, these disruptions could leave long-lasting scars and make it even more difficult for youth to achieve their potential,” he said.</p> <p>Sybil Madison, Deputy Mayor for Education and Human Services for the City of Chicago, confirmed these disruptions, reporting first that racial disparities in remote school attendance widened during the pandemic in Chicago’s public high schools. Attendance dropped substantially, particularly for Black and Latinx students. Education leaders have expressed anecdotally that the high absenteeism partially owes to some high schoolers working to help support their families during challenging economic times. However, Madison further explained these were not likely good-quality work experiences.</p> <p>Madison added that the period of remote schooling, which ended on April 13, 2021, has been hard on students, particularly on adolescents, leading to social isolation, the loss of rituals like prom and homecoming, and also the loss of transitional rituals, for example, acclimating to freshman year in high school. Moreover, Madison reported that two- and four-year colleges in the Chicago area experienced significant decreases in the number of students transitioning to college last fall, and given the decline, the number of “opportunity youth”–those that are neither in school nor working is estimated to have increased by over 100%. Iona Calhoun-Battiste, director of opportunity youth and employment strategies at Thrive Chicago, added that based on data for the year ending in the spring of 2020, the unemployment rate among young adults rose from 8% to 24%.</p> <h3>Expanding possibilities</h3> <p>Summer jobs programs help youth develop soft skills and provide access to mentors. Calhoun-Battiste said that Chicago’s organized summer jobs programs are a step in the right direction to help targeted youth reengage in healthy and supportive work experiences this summer and are particularly important in light of the pandemic. Sara Heller, assistant professor of economics at the University of Michigan, who studies the benefits of summer jobs programs, reported that youth typically earn $700 to $900 in summer job programs, most of which is spent in their local communities. Another important finding is that even though neither employment nor earnings among young people increase noticeably two to four years following summer jobs participation, such programs appear to substantially reduce young people’s likelihood of interacting with the criminal justice system, such as by lowering arrests for violent crime by 30–40% during the summer of employment and in the year after. Heller added that these programs may generate other benefits, for example, by improving skills, confidence, and time management outside of employment. Good-quality work experiences provide opportunities to be mentored, Madison reiterated, which is especially important for youth with few (or no) good role models in their personal lives. The research is clear, Madison summarized, “employing youth during the summer pays a lot of dividends. Those dividends pay themselves forward in those young people’s lives, but also in the health and growth of the city.”</p> <h3>Strengthening the value of summer jobs</h3> <p>Panelists explored opportunities for summer jobs programs to build on the important role they already serve for youth. Expanding summer jobs is a way to strengthen resiliency in the face of economic shocks like the Covid-19 pandemic, Evans explained, adding that as part of the Fed’s mandate to maintain full employment, “the Chicago Fed is committed to improving economic opportunities for youth and supporting programs.”</p> <p>Madison emphasized her department’s goal of reconnecting youth to their passions and possibilities, as well as providing material support for youth to find jobs. She noted the critical need for teachers, mentors, employers, and service providers to collaborate on “a warm and sticky handoff” as youth navigate transitions, especially as they go from summer jobs to school and, eventually, careers. For example, the city of Chicago and the City Colleges are working together to reduce “summer melt” (meaning students who do not return to school, enroll in college, or get a job) by placing post-secondary school navigators across Chicago schools in order to support youth transitioning to college, she said.</p> <p>Calhoun-Battiste explained that One Summer Chicago has a one-stop job application process for youth, which is instrumental in more obtaining jobs. The central application process allows youth to have easy access to many different employers, giving them opportunities to try different summer jobs during their young adult and college years, she said. Thrive Chicago is working to streamline the process for young adults seeking jobs this summer and is working to offer more job options. Thrive also provides a pipeline of support services, including helping with the transition back to school in the fall or to further employment. Part of Thrive’s success, she remarked, stems from their “warm and sticky handoffs” offered through their reconnection hubs to help bridge youths, schools, and employers. Through One Summer Chicago, the city of Chicago is offering 26,000 jobs to youths this summer, Madison reported, yet despite this achievement, there is still a large unmet demand for youth jobs. To fill this gap, Madison urged the private sector to support summer jobs programs.</p> <h3>Employer engagement</h3> <p>Michael Chiapetta, director of Chicago market development at Accenture, encouraged employers to offer summer jobs and apprenticeships by connecting with city colleges and nonprofits, remarking “the more employers we have, the more we can funnel opportunities.” Under Chiapetta’s leadership, Accenture has collaborated successfully with One Summer Chicago and Chicago City Colleges to connect students from local colleges and tech-focused nonprofits to job opportunities not only at Accenture but also at more than 50 other companies in the Chicago area. Accenture’s apprentice network gives youth a solid foundation based on real world experiences, Chiappetta said, adding that the apprentice hires at Accenture represent 48 zip codes in Chicagoland, with 40% of its participants coming from the South and West sides of Chicago, where there has traditionally been a lack of opportunity for young people to gain such experience.</p> <p>Heller noted that employers are not often trained to work with young people in youth development programs, so One Summer Chicago and other programs “provide a bridge and a translation in between supervisors and young people in a way that builds youth development that helps not just the youth but also the employers.” Heller suggested that corporate partners can play a role by helping youth overcome barriers (or “frictions”) to accessing jobs, for example, by funding Ubers or bus passes for those youth that lack access to transportation to get to work. Some young people may also need help completing paperwork and obtaining government-issued IDs, which are required for employment. Chiapetta added that efforts are needed to address the stigma associated with jobs programs by educating potential employers about well-designed and successful programs. </p> <p>Madison stressed that “private-public partnerships are the only way that we will ever ensure that every young person, regardless of their zip code, high school, or the jobs that their parents have, [gain] opportunities to discover who they are and what they want to pursue by engaging in meaningful work as teens and young adults.” </p> <p>To join efforts to promote and expand summer jobs for Chicago’s youth, visit <a href="~/link.aspx?_id=627044C76282406C89C5C34D1E847CB1&_z=z">chicagofed.org/summerjobs</a> for more information. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/improving-access-to-capital https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/improving-access-to-capital Tue, 09 Mar 2021 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>Minority-led businesses in Detroit—especially small businesses and microenterprises—face significant barriers in accessing capital. While these obstacles and other inequities facing people of color are longstanding in Detroit, the pandemic has worsened conditions, with many businesses either closed or on the verge of closure. To identify concrete actions to help these businesses access capital, the Chicago Fed hosted a <a href="https://www.chicagofed.org/events/project-hometown/supporting-detroit-minority-businesses">virtual event</a> on March 4, 2021, “Supporting Detroit Minority Businesses: Access to Capital and Lessons Learned.” This event, the latest in the Chicago Fed’s Project Hometown series, brought together business leaders, community organizations, and researchers to discuss the availability of finance and capital to predominantly Black-owned businesses in Detroit.</p> <p>Rick Mattoon, vice president and regional executive of the Chicago Fed’s Detroit Branch, opened the event by explaining that many small businesses and microenterprises in Detroit, particularly minority-run ones, face unequal access to capital. Mattoon remarked that “these firms often make up the very fabric of their neighborhoods, support local employment, and promote wealth accumulation in their communities.” </p> <p>Joseph Anderson, chairman and CEO of TAG Holdings and chairman of the board of the Detroit Branch of the Federal Reserve Bank of Chicago, moderated the event. Anderson discussed that Black-owned small businesses have long faced weaker traditional banking relationships, and their lack of connections made it significantly harder for them to access the early rounds of Paycheck Protection Program (PPP) funding. “Given that the channel for distributing PPP was largely defined by providing incentives for banks to fund their existing clients, unbanked or underbanked businesses were largely shut out of the original distributions,” Anderson said.</p> <p>Extensive studies have found that Black households have significantly lower savings and accumulated wealth than White households, Anderson explained. Promoting small Black businesses in Detroit through greater access to capital provides a key opportunity to build Black household wealth, support local neighborhoods, and create investment opportunities, he added. In addition to obtaining capital, these businesses need access to markets, the ability to develop supply chain relationships, and technical support to help with management challenges and pivoting under changing market conditions, he remarked.</p> <p>Dr. Kenneth Harris, president and CEO of the National Business League, said that historically Detroit has experienced extreme racial inequities. The city’s Black population is largely excluded from the financial capital marketplace, and distrust of financial institutions is rooted in historical experience, he said. Michelle Sourie Robinson, president and CEO of the Michigan Minority Supplier Development Council, reiterated that the hesitance among Black businesses to work with banks is “steeped in centuries of mistrust.” Minority businesses are still being excluded from the banking industry today, more than a half century after the passing of the Civil Rights Act, Harris said. As a result of the mistrust, Black businesses are often unbanked, putting their savings “under the mattress,” relying on borrowing from friends and family, and otherwise operating outside of the traditional banking system, he explained. Anderson added that unfair policies such as redlining and predatory lending have made Black communities wary of both government and financial institutions. Sandy Pierce, senior vice president for Huntington Bancshares and member of the Chicago Fed’s Detroit Branch board of directors, reaffirmed that there is a “trust gap.” Robinson added that this mistrust is reinforced by that fact that Black businesses are often unfairly given lower loan amounts and charged higher rates of interest, and disparities can also be seen in their exclusion from early PPP funding.</p> <p>Blacks represent 80% of Detroit’s population, Harris reported, and almost 80% of the city’s businesses are Black-owned. Most minority businesses in Detroit are microenterprises, with the majority having revenues between $100,000 and $150,000 or less annually, said Pamela Lewis, executive director of the New Economy Initiative (NEI). Most of these Black businesses do not have access to professional advisors and banking relationships, she added. Robinson explained that “minority-owned businesses are twice as likely to report that the cost of capital is prohibitive to the growth of their business.” As a result, the Detroit community suffers in terms of reduced growth potential, lower employment, and reduced opportunities for wealth building, she said. Pierce reported a grim statistic that 60% of the businesses that have closed because of the pandemic will never reopen.</p> <p>In February 2021, Huntington held numerous community-needs listening sessions to better understand the requirements of minority and women-owned businesses, and from this experience “we found out how deep some of these issues were,” Pierce said. While her bank has taken steps to remove barriers for many businesses using a micro loan program, “it is not enough,” she added. Pierce recommended improving communications to better inform Black businesses about the services available from financial institutions, and she expressed the importance of developing partnerships with intermediaries that minority business owners trust. Also, to close the resource gap that exists, banks, nonprofits, charitable foundations, and regulatory agencies need to coordinate efforts to share information more effectively with business owners and help them achieve company sustainability, she said. Beyond taking coordinated action, she added that it is necessary to measure the results and share the information transparently.</p> <p>Robinson reported that nationally only 2% of minority businesses gross over $1 million annually, and she remarked that “in order to solve this capital access issue and support minority businesses, we must all take a different approach and really understand that the systems as they are today will continue to stifle growth.” Lewis emphasized the importance of having “trusted connectors” in the community (for example, community development and faith-based organizations) to help minority businesses find the resources that they need. Looking into how lending programs are designed is also important because many of these programs focus on larger small businesses, which are not as applicable for many of Detroit’s microenterprises, she said. In addition to the grant capital that has been provided by the philanthropic community, Lewis questioned if state dollars could be used to invest in microbusinesses much like they have invested in venture- and innovation-led companies. She also pointed out that financing should match the needs of the various business segments because “how you support a large minority-owned manufacturing supply company is very different than how you support a small service business in a neighborhood.” Moreover, Lewis recommended mentoring on the part of trusted community members to provide technical assistance to small businesses, for example, to assist them with the loan process and business plans.</p> <p>To provide expanded capital access, Harris suggested a “complete institutional and structural change” in the approach to lending to minority businesses. Developing partnerships, providing technical assistance, and focusing on supporting entrepreneurship ventures to promote a “sustainable ecosystem,” are all essential, he said. Banks should be held accountable for not serving the most vulnerable and excluded populations with respect to capital access, he added. Given the changing demographics in this country, Harris noted that Black businesses will become an increasingly large and important client base in the years ahead. Pierce recommended that pushing for appropriate policies at the state and federal level is another avenue worth pursuing to improve access to capital for minority businesses.</p> <p>Robinson concluded that it is time to take action to address the capital access inequities, “without excuse.” In wrapping up the event, Anderson said that this conversation will continue in order to promote a coordinated effort to put specific plans and solutions in place.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/financial-stability-in-detroit https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/financial-stability-in-detroit Mon, 08 Feb 2021 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>The <a href="~/link.aspx?_id=23487DC38B8C403D8A7FFA88E7CA4A86&_z=z">virtual event</a>, “Advancing Household Financial Stability in Detroit,” which was held on February 2, is the latest in a series of Project Hometown events sponsored by the Chicago Fed. These events help to identify ways to meet the challenges facing our communities as a result of the Covid-19 pandemic and to create lasting solutions for equitable recovery and growth. On November 18, 2020, the Chicago Fed hosted a <a href="~/link.aspx?_id=EECE9C7121ED469CB4062EAA2519B3FB&_z=z">Detroit Community Forum</a> to address ways to build a more equitable and strong future for the city, while this latest event focused specifically on ways to help strengthen its households’ financial capabilities.</p> <p>Amy Bickers, assistant vice president of public affairs at the Chicago Fed, moderated the event and explained that Detroit continues to face the dual challenges of the Covid-19 pandemic and a recession, which is taking “a heavy toll on the livelihoods of many people in the city.” “Detroit’s struggles are also rooted in its history of racial inequality,” she said, “which has made it extraordinarily difficult for generations of the city’s Black residents to thrive.” The pandemic is affecting the least-advantaged community members disproportionately, she added, and many of the newly unemployed lack savings to “cushion the blow.” </p> <p>The United Way of Southeastern Michigan’s president and CEO, Darienne Hudson, explained that while the Covid-19 pandemic has exacerbated financial difficulties, the challenges facing many Michiganders were in existence long before the pandemic started. Her organization uses the Asset Limited, Income Constrained, Employed (ALICE) measure, originally developed by Rutgers University in 2010, to identify the minimum household budget required to meet basic needs—including food, utilities, transportation, childcare, and health care. Under ALICE, the minimum annual income required to meet basic needs in Southeastern Michigan is $24,000 for an individual (in contrast, the federal poverty level is $12,000), and for a family of four, the Alice threshold is $74,000, she said. Hudson also reported that 43% of all Michigan families would qualify as ALICE, while that figure is 60% among Black households in the state and 74% among Detroit residents. “These are our neighbors, these are our families,” stressed Hudson. The fastest growing segment qualifying as ALICE are millennials and white seniors, she noted, yet “the most pervasive indicator is race.” Hudson discussed some of the financial barriers facing Michigan residents—61% of all jobs pay $20 per hour or less, and around 33% of families have annual incomes under $30,000. To make ends meet, many people have to work multiple jobs, she said, and furthermore, consumer bankruptcy cases in Detroit are way above average.</p> <p>Kristen Holt, president and CEO of <a href="https://www.greenpath.com/">GreenPath Financial Wellness</a>, explained that this 60-year-old nonprofit organization helps people find solutions to their financial problems, and she expressed that they are “committed to the financial well-being of Detroit.” While her organization is national in scope, their headquarters is in Detroit. She explained that Detroit ranks in the bottom five in median credit scores nationally, and that credit problems, along with a lack of savings are “huge barriers to improving financial resiliency.” She also noted that the financial situation for many in Detroit is worse since the pandemic started in terms of low and unstable incomes, barriers to savings, and high debt levels. The GreenPath organization provides financial advice and access to a wealth of practical resources and information on current programs, such as a <a href="https://www.greenpath.com/how-to-get-your-stimulus-check/">guide to receiving federal stimulus payments</a>. Holt announced that one local source of support is their <a href="https://www.greenpath.com/detroit-voices/">Detroit Voices Project</a>, which allows her team to hear directly from the community, with the goal of helping Detroit’s residents “to better navigate this challenging time.” Holt added “our commitment to inclusion, diversity, equity, and access means that we can't take a one-size-fits-all approach to our work. We have to seek to understand and embrace the differences and adapt and improve our programs and services to reach more equitable outcomes for the people of Detroit.”</p> <p>Kim Trent, deputy director for prosperity at the Michigan Department of Labor and Economic Opportunity, said that her role is to empower people to bring about prosperity. She explained that in Michigan, and in Detroit specifically, there are “disparities that exist and have always existed” in terms of wealth and health. She acknowledged that there is no single solution to eradicate poverty, but their Poverty Task Force (established in December 2019) is addressing this complex issue, and its recommendations will be made public this month. Various programs are underway in her department, including the Safe and Secure program to address people’s basic needs, and Strong Beginnings, which gives mothers better access to the workforce by providing government- and employer-financed childcare subsidies. Trent feels passionate that education is the most effective anti-poverty measure. Today, 46% of Michiganders have received post-secondary education and her department’s goal is to reach 60% by 2030. Other programs under her purview include criminal justice reform, addressing behavioral health needs, a children’s savings account program, as well as integrated programs to address the digital divide, which Trent said is “absolutely critical.”</p> <p>With respect to the barriers people are facing, Holt explained that many people she talks to are stressed—often to the point of being frozen and unable to take concrete actions to move forward to improve their financial situation. She said that her office is surprisingly quiet considering the need for help is so great. She attributes this to the widespread “paralysis.” She is encouraging people to call GreenPath so that they can be of service in providing “concrete steps to take control back in an uncontrollable situation.” Hudson said that the top reasons people are calling her United Way office are to get food and help with housing, to find out about the Covid-19 vaccine, and to get help to cover utility bills. People are frustrated with the process of getting help to cover their power and heating bills, she said, because the assistance can be cumbersome to access and can take up to four weeks to process. In response, Hudson said that they are working with their partners to “better integrate these services.” </p> <p> Bickers asked the panelists to share examples of successful cooperation, Trent said, “one of our major goals is working collaboratively.” She mentioned, for example, that they have a cooperative effort underway with the payday lending industry, whereby her department has made arrangements for information on food and housing assistance as well as eviction diversion opportunities to be made available to people applying for loans. Many people seeking such loans have not faced financial distress before, she said, and her department wants to make sure people are aware of these services. They are also working with the Department of Corrections to ensure that everyone leaving prison receives an ID, which Trent said, “makes a huge difference when entering the workforce.” Holt explained that they are partnering with many credit unions, including one in Detroit, “to not only get the word out about resources, but to look at programs and products that might be put in place that would be more accessible to communities of color.” Hudson added that their Covid-19 relief fundraising efforts have reached $37 million, and that her office has given out 1,000 grants to provide childcare for the families of frontline workers, to fund food pantries and homeless shelters, and to provide micro loans. Hudson added that by leveraging partnerships, they are also working to increase the number of Detroiters who are banked by improving lending practices and financial coaching.</p> <p>On the topic of racial equity, Trent said that the middle class overall in Detroit is growing but not the Black middle class. Furthermore, “homeownership has stalled,” and while not everyone will be a homeowner, homeownership is very important for financial health, she said. Trent also explained that the work of the Poverty Task Force has been undertaken with a “racial equity lens,” and their goal is to dismantle policies that have “prevented particularly people of color in the state from thriving.” Holt also spoke of the problem of housing inequity in Detroit, stating that Black homeownership “is such an important part of building assets.” She explained that her organization has a new “A1” tool to improve credit, as well as a program in place in partnership with Freddie Mac to provide down payment help and coaching. Hudson added that “Covid has blown the cover off racial equality,” and “there is more acceptance and drive for change.”</p> <p>Finally, Bickers asked the panelists to share what brings them hope. Trent said she is inspired by “how much goodwill there is,” that people are now paying attention to the poverty problem, and that it has now become “obvious that what we are doing is not enough.” Holt is optimistic because their clients are able to access financial wellness programs and benefits and become unstuck and move forward. Hudson is encouraged by their partnerships, including national partnerships, and added that, as we look into the future, “we want to make sure we are moving to a better state where we become more resilient and that our families are able to buffer themselves from this type of hardship.” </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/bridging-the-digital-divide https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/bridging-the-digital-divide Wed, 03 Feb 2021 00:00:00 -0500 <div class="cfedStandardSpacing"> <p>A panel of experts advocated for a range of critical actions to address the digital divide in a virtual Project Hometown <a href="~/link.aspx?_id=D5EB39087DC148B198B0286158ED71BA&_z=z">event</a> on January 28, hosted by the Federal Reserve Bank of Chicago. Events in this series are part of a broader effort by the Chicago Fed to help our communities overcome the challenges associated with the Covid-19 pandemic and bring about a more inclusive recovery.</p> <p>In opening remarks, Mike Berry, policy advisor in the Chicago Fed’s Community Development and Policy Studies Division, asked, first of all, “What do we mean by the digital divide?” We mean that there is a division in the country in terms of access to high-speed internet and devices to connect to broadband, as well as widespread digital illiteracy, he said. Also, internet subscription costs are a big obstacle for many people. To frame the discussion, Berry provided key points from a Benton Institute for Broadband and Society report (<a href="https://www.benton.org/publications/broadband-america-now">“Broadband for America Now,”</a> by J. Sallet, October 2020): “Community and economic development experts have long noted that digital exclusion has significant implications for the economic mobility of less-resourced communities, households, and businesses, in both urban and rural settings.” He added that “the strains on our public education system since March [2020] may have impacts lasting a generation or longer.” For example, the report indicates that about 90% of the over 50,000 students in predominantly Black Detroit Public Schools couldn’t participate in online learning, at least initially, because of a lack of internet service, computers, or both. Digital exclusion has also impacted access to government stimulus benefits, he said, and lack of connectivity has created barriers to working from home, shopping and banking online, and connecting with friends and family remotely as people shelter to avoid infection. Also critical for today’s job market, Berry remarked that “digital literacy is a critical gateway in the path to living-wage employment.”</p> <p>David Oppedahl, a senior business economist in the Chicago Fed’s Economic Research Department, moderated the event. He started off the discussion by asking each panelist to provide their perspectives on the current state of the digital divide and its ramifications.</p> <p>Roberto Gallardo, director of the Purdue Center for Regional Development, said that the current state of digital exclusion is “not sustainable.” He stressed that the digital divide is not only a social equity issue, it’s also a ”community and economic development issue.” Gallardo remarked that the Covid-19 pandemic has helped to increase awareness of the problem of digital exclusion and marginalization. However, he said that measuring the extent of the digital divide is difficult because the data on broadband access and digital inclusion are not standardized. According to the center’s measures of digital distress, 20-25% of U.S. households rely on only cellular data or have no household internet access (that number rises to about 35% in rural areas). Census data show that nearly 36% of households making less than $35,000 per year were without internet access, Gallardo added. </p> <p>Gigi Sohn, a distinguished fellow at the Georgetown Law Institute for Technology Law and Policy, remarked that the digital divide is “a national emergency” and that bridging this divide is “vital for full participation in society.” Sohn reported that as of January 2020, “about 141 million Americans did not have access to robust broadband.” Sohn sees this largely as a problem of public investment and oversight, as well as “accountability for the broadband sector generally.” She explained that affordable access was a significant barrier for people of color and those with low incomes. “The primary reason people don’t have internet access is because they can’t afford it,” she said, reporting that the U.S. has some of the highest prices for broadband access in the world, with an average cost of $70 per month. Sohn explained there are currently many unmet digital access needs, including supports for people with disabilities, those requiring help with online job applications, and individuals looking to arrange Covid-19 vaccine appointments.</p> <p>Matt Schmit, director of the Illinois Office of Broadband, mentioned that his office addresses the digital divide from a “well-rounded, holistic perspective.” He said that “we need to do everything that we possibly can to get devices into the hands of households and our young learners and folks who are working from home and wanting to participate in 21st century applications, like telehealth or remote learning.” Schmit explained that 1.1 million people in Illinois lack computers at home, including young learners. There is also a need for “digital skills building and programming,” including for our senior population, he added, “because not everyone is ready to take full advantage of the internet.” </p> <p>Joshua Edmonds, Detroit’s director of digital inclusion, said that broadband in the United States is “in a state of disarray.” For example, 46% of his city’s population remains without high-speed internet. Still, he says he is optimistic, given the number of leaders working on the problem. Affordability is a big issue in Detroit, he emphasized, but it’s more complex than just paying a bill. He said he hopes to increase funding sources to address digital inclusion in Detroit, and noted that there has been interest on the part of financial institutions seeking Community Reinvestment Act credit to help address the digital divide, although no specific plans are as yet in place.</p> <p>Highlighting possible solutions, Sohn suggested there should be an office of broadband connectivity in the White House. Addressing the digital divide requires an “all-hands-on-deck approach,” she said, with the collaboration of many federal agencies. She is hoping Congress will pass the Accessible, Affordable Internet for All Act, which would maintain a $50 per month broadband benefit for low-income households after the pandemic. She supports the benefit because “the free market in broadband does not work.” She also said, “I’d like to see the states reestablish their authority to oversee the broadband market.” Sohn is encouraging the philanthropic sector, consumer advocacy groups, and communications industries to collaborate. She added that over the past ten months, industry has “finally admitted that they’re either not willing or not able to solve this problem themselves.” </p> <p>Gallardo spoke of the need to build local capacity, as well as to get funding at the local level and obtain better data. He also stressed the importance of incentivizing the private sector to expand their broadband networks. Schmit said, while he is thankful for the mapping of broadband access provided by the FCC, it is “significantly flawed,” and therefore the states, including Illinois, need to take up mapping. Schmit also emphasized strengthening partnerships, including at the regional level, and he noted the benefits of using a “train the trainer” model to build out local capacity to address digital exclusion. Edmonds emphasized the importance of taking a holistic approach to finding solutions to address the complexities of the problem—from access to computers and high-speed internet to education and tech support, among others.</p> <p>When asked to highlight some success stories, Sohn said that while there are no communities in the country that have closed the digital divide, Chattanooga, Tennessee has had success in building out broadband areas and has helped all school-age kids in need with free connectivity. Gallardo relayed that his center has helped communities voice their views, including in Indiana, and has provided mechanisms to counterbalance the power of broadband providers. Edmonds and his team are responsible for the creation of Detroit’s sustainable digital inclusion strategy, and they successfully raised $30 million last year. Their funding efforts support areas such as remote learning for public school students and telemedicine initiatives. Edmonds said his department is working with partners in industry. They are also leveraging community participation to propose solutions that can be put into action using Connect 313 funds. Schmit, who oversees the administration of the Connect Illinois Broadband Grant Program (which has $400 million available) said he views Illinois as “getting it right on the broadband front.” His office is working with communities and providers around the state to get everyone connected by 2024.</p> <p>In conclusion, Edmonds expressed that coordinating all of the interrelated aspects to address digital exclusion will require “endurance.” Gallardo reinforced this point by saying that “we need to slowly but surely move forward to not get overwhelmed.” The panelists agreed that bridging the divide will take time and will require coordinated efforts at the local, regional, and federal levels. Oppedahl wrapped up the discussion with a few final thoughts: “Even though the digital divide continues to be a challenge, it sounds like there are solutions in the works and more in the pipeline.” He added that closing the digital divide is “really key to the future, both for the economy and for our own quality of life as individuals.”</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/eos-part-1 https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/eos-part-1 Mon, 21 Dec 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>The Chicago Fed hosted the 34th <a href="~/link.aspx?_id=D15133D61A2149BD9DBC0CABEED7C595&_z=z">Annual Economic Outlook Symposium</a> (EOS) virtually on December 4. Chief economists and senior executives from the banking, auto, steel, and machinery industries provided their perspectives on the economy and the long road to recovery from the pandemic. This blog post summarizes the morning sessions, which focused on participants’ economic outlooks for 2021 and beyond and the monetary policy environment. A second <a href="~/link.aspx?_id=DECBDF117C0F44D0863378D4FE557D3C&_z=z">post</a> will summarize the two afternoon panels on the economic prospects of various industry and business sectors. </p> <p>Anna Paulson, executive vice president, director of research, Federal Reserve Bank of Chicago, opened the program by saying we’re all eager to put 2020 behind us. Paulson noted huge swings in the economy, pointing out that 2020 saw both the best and worst quarters of GDP growth since consistent measurement began in 1947. Joblessness, hunger, and other measures of economic deprivation and subdued economic activity, especially in those areas that require human contact, are of concern to Paulson. “The future of the economy depends on the future of the Covid-19 virus,” she added. </p> <p>Clearly the pandemic was on no one’s radar when the participants in the 2019 EOS predicted what would occur in 2020, said Thomas Walstrum, senior business economist, Federal Reserve Bank of Chicago. In reviewing the consensus economic outlook presented last year, he noted that only two of 31 forecasters in the 2019 Economic Outlook Survey predicted a decline in GDP from 2019:Q3 to 2020:Q3. </p> <p>Walstrum went on to describe what individuals who submitted forecasts for the 2020 EOS predicted for 2021. Predictions call for a solid recovery in GDP in 2021, with an expected recovery to 2019:Q4 levels by 2021:Q4. However, unemployment is expected to stay elevated into 2022. The predictions for unemployment were consistent with continued slack in the economy even to the end of 2021, Walstrum said. </p> <p>Submitted forecasts suggested clear evidence of a slowdown in growth. Industrial production is not anticipated to be where it was at end of 2012, which was a high point. Forecasters expect at most a small increase in overall demand, Walstrum said. By contrast, EOS participants predict that housing starts will be a bright spot, said Walstrum, with 2021 numbers expected to be the highest since 2006. Participants also predict that oil prices will remain low in 2021.</p> <p>Walstrum also presented results from the recent Survey of Business Conditions. Respondents suggest a return to a pre-pandemic economic activity level won’t occur until January–June 2022. </p> <h3>Monetary policy environment</h3> <p>Next, Daniel Sullivan, executive vice president, Federal Reserve Bank of Chicago, discussed how monetary policy has responded to changes in the U.S. economy. He noted that the Federal Reserve System periodically adjusts its strategy to achieve the mandated goals of the central bank, that is, to foster economic conditions that achieve both stable prices and maximum sustainable employment. After a number of “<a href="https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-fed-listens-events.htm">Fed Listens”</a> sessions and much analytical work, the Fed developed a new framework for monetary policy. </p> <p>Sullivan explained the importance and relevance of the new strategy in this complex economic environment. “A new economic environment requires a new strategy to achieve the same goals,” Sullivan said. He highlighted three features of the new strategy statement—an acknowledgment of the risks posed by lower interest rates; a focus on “shortfalls of employment from its maximum level” rather than the previous “deviations from its maximum level” and the use of a wide and inclusive range of indicators to assess maximum employment; and the need to anchor longer-term inflation expectations at 2%.</p> <p>Sullivan went on to explain what this new strategy might mean for the conduct of monetary policy. He said the Federal Open Market Committee (FOMC) likely would not be concerned with what might look like very tight labor markets, so long as they were not generating unwanted inflation or other risks. He also explained how flexible average inflation targeting (FAIT) might help to anchor inflation expectations: Following a period when inflation is persistently below 2%, monetary policy will seek to achieve inflation moderately above 2% to achieve inflation averaging 2% over time.</p> <p>The September and November FOMC statements reflect the principles of the new strategy. The committee will aim to achieve inflation moderately above 2% for some time, so that inflation averages 2% over time, and longer-term inflation expectations remain well anchored at 2%. </p> <p>Sullivan said that while the new framework moved expectations about policy in the desired direction, achieving 2% average inflation is likely still a while off. A more comprehensive look at the new monetary policy strategy is available <a href="https://www.federalreserve.gov/monetarypolicy/guide-to-changes-in-statement-on-longer-run-goals-monetary-policy-strategy.htm#">online</a>. </p> <h3>Long road to recovery</h3> <p>The final morning speaker was Carl Tannenbaum, executive vice president and chief economist, Northern Trust Corporation, Chicago. Tannenbaum said the virus has “created another set of behaviors, and it will take a while before we’re comfortable doing what we used to. Societies will have to learn to live with the virus for a while longer.”</p> <p>Despite the challenging logistics surrounding vaccination and the considerable time to manufacture enough doses to cover populations, vaccination could prove to be a kind of economic passport,” Tannenbaum said.</p> <p>Momentum has slowed, and some industries remain deeply depressed, for example, travel, hospitality, and entertainment. With business activity still well below levels of last December, it’s clear that more fiscal support will almost certainly be required, Tannenbaum said.</p> <p>Although the U.S. has regained about two-thirds of the jobs lost at the peak of the pandemic, labor force participation remains depressed, and Tannenbaum noted that some lasting “scarring” is likely. “About nine million Americans who were working in January aren’t today,” he said.</p> <p>Interest rates around the world are expected to be low/negative for a long time, said Tannenbaum. While lending and liquidity programs are good at stabilizing markets, they are limited, he added, in promoting economic growth. </p> <p>State and local governments face significant revenue shortfalls, particularly in states with economically sensitive revenues weighted to sales taxes on activities like entertainment, tourism, and restaurants. Further, pressure from underfunded pensions in some states have been exacerbated. In addition, government accounts for one in eight U.S. jobs and 13% of U.S. GDP.</p> <p>Tannenbaum concluded with thoughts on the impact of the presidential election, noting that government is likely to remain divided. As a result, little in the way of major legislative movement is likely. In terms of fiscal policy, structural forces will add substantially to the debt over time, and debt levels were escalating rapidly prior to the pandemic. </p> <p>Globalization is in retreat, he said, as economic security is leading a push to shorter supply chains. “The pandemic not a friend to free trade,” said Tannenbaum. </p> <p>Tannenbaum ended his presentation by sharing his economic outlook. He predicted that output won’t fully recover until the middle of next year, and that employment will take much longer, striking a similar note to the consensus outlook from symposium participants. Large sectors of the economy, such as entertainment, travel, and office real estate, may never return to former norms, he said.</p> <p>Some of the long-term consequences of Covid-19 may include increased remote work arrangements, possibly triggering more migration from cities. The pandemic will almost certainly cause paradigm shifts, Tannenbaum said.</p> <p>To end on a more positive note, he added, “If the vaccine works, we all have pent-up spending to do.”</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/eos-part-2 https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/eos-part-2 Mon, 21 Dec 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>The Chicago Fed hosted the 34th <a href="~/link.aspx?_id=D15133D61A2149BD9DBC0CABEED7C595&_z=z">Annual Economic Outlook Symposium</a> (EOS) virtually on December 4. This blog post summarizes the two afternoon panels. First, representatives of auto, steel, and oil discussed their respective industry outlooks. And second, panelists focused on the impact of Covid-19 on their economic sectors: transportation, commercial real estate, state governments, and nonprofits. A previous <a href="~/link.aspx?_id=DD3D396F6B9B40B2BF5A7395EEEAA9D4&_z=z">post</a> summarized the morning sessions, in which economists and senior executives provided their outlooks for 2021 and beyond and the monetary policy environment. </p> <p>Thomas Klier, senior economist and research advisor, Federal Reserve Bank of Chicago, kicked off the afternoon session by introducing representatives of major industrial sectors: autos, oil, and steel. What was clear at the outset is how closely industries are integrated with each other.</p> <h3>Autos</h3> <p>Elaine Buckberg, chief economist, General Motors, shared mixed messages from the auto industry. While year-to-date sales are 17% below 2019’s pace, sales have rebounded from their April lows. Yet, fleet sales remain anemic. Another glass half-full, half-empty story is that while retail activity has substantially recovered, the auto rental market remains at low levels. This is overwhelmingly due to the decline in airport rentals, Buckberg said.</p> <p>Pandemic-induced demand has largely driven the auto sales recovery, though low auto loan interest rates are also a factor. Demand seems to be based on drivers seeing private vehicles as a safe space for both local and long-distance trips, said Buckberg. In addition, some households are likely using savings from foregone vacations, entertainment, and restaurant meals toward a new vehicle, she said. And city residents may have increased interest in owning a vehicle as some seek to move to the suburbs and others want to escape the city on weekends. </p> <p>The sharp rebound in housing permits is a positive signal for overall auto demand, according to Buckberg. “Higher home construction activity along with strong demand for boats and RVs are particularly favorable for heavy-duty pickups,” she said. </p> <p>On the cautionary side, North American inventory remains very lean due to March to May plant shutdowns, Buckberg said. Because of increased demand, dealer incentives are falling, and transaction prices are rising.</p> <h3>Oil</h3> <p>The oil market’s outlook for 2021 is a lot like the outlook for the overall economy, said Mark Finley, fellow, Rice University’s Baker Institute. “It’s getting better but still a long way from fully recovered,” said Finley. OPEC, and the broader group including Russia, which is actively and aggressively managing production, bears watching, he added.</p> <p>The pandemic and policy responses to it caused general economic activity to collapse, but especially the transport sector, Finley noted, where oil demand is focused. In April, oil production fell by 20 million barrels a day, or about 20%, the biggest drop ever recorded. </p> <p>Then there was a brief price war between key producers, most notably Saudi Arabia and Russia, which resulted in U.S. prices (the U.S. benchmark contract WTI) famously, albeit briefly, falling below zero, Finley said. But then, he added, rebalancing began, and the oil industry has slowly begun to improve. Prices have reached new post-pandemic highs, rising with positive news on the availability of a Covid-19 vaccine. Inventories remain well above normal levels, Finley said. </p> <p>Despite rising prices, Finley said he wouldn’t be surprised to see some renewed weakness in oil prices “if the virus bites hard in winter.” Beyond that, the outlook appears better; supply and demand look supportive. </p> <p>The future path to recovery is driven by three issues, said Finley. The first is oil demand, which is largely back to normal around the world but not here, where demand is down 10% versus 5% to 6% globally. Questions remain about consumer habits: Will less commuting and travel continue? Or will people drive more? Will a green stimulus lead to more electric vehicles? </p> <p>Second, OPEC’s moves cause some uncertainty, said Finley. While compliance with the most recent production agreements currently exists, some disagreements are surfacing among OPEC countries and other producers.</p> <p>Third, although the U.S. is oil self-sufficient and became the biggest producer in the world for the first time in 70 years, the drilling rig count fell by 75%. It has begun to recover, Finley said, but it is still only one-third of pre-Covid 19 levels and well below what’s needed to stabilize production.</p> <p>Finley concluded that U.S. production will remain on a year-on-year decline in 2021, but worldwide demand is expected to return to normal in 2022. </p> <h3>Steel</h3> <p>Demand for steel is likely to evolve in the near term, said Tim Gill, chief economist, American Iron and Steel Institute. One of the key measures of the health of the industry is weekly capacity utilization (WCU) in raw steel-making. Data show steel took quite a beating in spring, when the WCU fell about 30% over a period of six or seven weeks. Since early May, Gill said, there has been slow but remarkably steady improvement: from 50% in May to over 70% recently. A similar pattern exists across most steel indicators, such as raw steel production, shipment of finished products, and demand for those finished products. It has been a “painstakingly slow recovery” since spring, said Gill, and “there’s still a big hole to dig out of.” A small silver lining is that the domestic industry has gained a bit of market share; however, concern remains about global overcapacity. </p> <p>Looking ahead, there has been improved demand since April, but steel is still below pre-pandemic levels. After a 15% to 20% decline this year, Gill expects the 10% increase between May and September to carry into 2021. But “it could be a bumpy road until the pandemic is better under control,” perhaps by the middle of next year, Gill said.</p> <p>Increased steel production relies on the health of other industries. Auto has bounced back quite quickly, Gill said, and that’s helped the steel industry. Steel for construction is holding up, but that sector takes longer to recover once the broader economy turns the corner, said Gill. Construction accounts for about 40% of steel industry shipments; that’s a mixed bag in terms of end markets, Gill said. </p> <h3>Panel 2: Sectors hard hit by Covid-19</h3> <p>The second panel, moderated by Chicago Fed Vice President and Detroit Regional Executive Rick Mattoon, highlighted four areas of the economy particularly hard hit by Covid-19: transportation, state governments, commercial real estate, and the nonprofit sector. While the pandemic has negatively affected these sectors overall, significant variation can be seen in some areas, particularly in transportation and commercial real estate.</p> <h3>Transportation</h3> <p>Transportation is one of hardest hit sectors, but also one of most resilient, said Tom Kotarac, vice president, transportation and infrastructure, Civic Committee, Commercial Club of Chicago. Passenger-carrying modes have suffered huge devastation, Kotarac said, essentially being obliterated. For example, train ridership in Chicago is down 85%, 97% from the suburbs. Bus ridership is also down 50% to 60%, less than trains because many essential workers use bus transit.</p> <p>Single-occupancy vehicle traffic was down 50% in March and April, but commercial truck traffic dropped only about 20%. By May that sector was back to pre-Covid-19 traffic, said Kotarac. Single-unit trucks, used for small deliveries are up 15% to 20%, he added.</p> <p>On the freight side, it’s a different picture: Freight rail is up 5% over 2019. Passenger air is at 60% of volume, but air freight is booming. The supply chain and distribution challenges involved with the Covid-19 vaccines are huge, Kotarac said, and federal government support will be necessary for many modes of transportation to recover. </p> <h3>State governments</h3> <p>The next speaker, Shelby Kerns, executive director, National Association of State Budget Officers (NASBO), noted that states entered fiscal year 2020 with significant optimism, but the pandemic changed that outlook.</p> <p>Last year governors prepared budgets that were very positive, anticipating better revenue growth, said Kerns, and predictions were exceeded in 46 states. States saw sizable budget surpluses and grew rainy day funds to 7.3%. In 2020, states have been using those savings to close their budget gap.</p> <p>In fiscal year 2020, state revenue declined 1% for the first time since the Great Recession, and states expect greater revenue declines ahead. While state income tax returns reflected a strong 2019, 2021 will reflect the downturn in 2020, Kerns said. </p> <p>At the same time, she noted, states face increased spending demands as a result of the pandemic, such as Medicaid, adjustments for schools, and temporary medical facilities. </p> <p>To sum up, said Kerns, states see unevenness and uncertainty, which varies from state to state. For example, unemployment levels range from 3% to over 14%. Those states that rely on energy and tourism have been hit particularly hard, Kerns said. But then a handful of states are experiencing revenue growth, year over year, Kerns added. It’s hard to predict what’s next, as states are unsure of forthcoming federal aid, how people will react to the coming Covid-19 vaccine, and other issues.</p> <h3>Commercial real estate</h3> <p>Rick Lackey, chief executive officer, REAL Professionals Network, said the uncertainty surrounding the path of the pandemic is having a significant impact on the commercial real estate sector, which is a lagging economic indicator. Some further decline may be seen when rent relief wears off. No one wants to make a commercial real estate decision in this environment, he said. </p> <p>Rent declines for commercial space are as low as 7% on a national level to a high of 30%. The industrial sector is the least affected, followed by multifamily dwellings, then office, retail, and hospitality. The Midwest is within plus or minus 10% of the national numbers, Lackey said. Some property sectors and markets are doing well, largely in the Sun Belt, but Lackey said he doesn’t expect the overall commercial real estate market to improve until 2022:Q1.</p> <h3>Nonprofit sector</h3> <p>The final speaker of this panel was Robin Newberger, senior business economist, Community Development and Policy Studies, Federal Reserve Bank of Chicago. Newberger shared data from many surveys that show how nonprofits generally have been negatively impacted by Covid-19. Many are reducing staff and losing revenue at the same time there is increased demand for services. Some nonprofits have cut half their staff. From October 2019 to February 2020, 900,000 nonprofit jobs were lost. The biggest drop was in culture and the arts, about 34%; community assistance nonprofits lost about 10% of their workforce.</p> <p>About 60% of nonprofits have destabilizing revenue positions, Newberger reported. All forms of revenue have decreased, and at the same time, many see an increased demand for services. </p> <p>Newberger noted the importance of nonprofits in the overall economy. With approximately 1.5 million nonprofits in the U.S., employment in the sector measures about 12 million, or about 10% of the private workforce. Nonprofits are third behind retail and accommodation and food services.</p> <p>Human services organizations are most affected by the pandemic and face the greatest challenges, as they attempt to serve lower-income households that are having trouble paying expenses. Newberger noted the 50% loss of employment income since the start of the pandemic among those who earn less than $50,000.</p> <p>There is also a concern that we are heading toward a housing crisis, said Newberger, with 20% of households of income less than $50,000 behind on rent. The pandemic may end up lowering the availability of affordable housing. Even if landlords can get mortgage forbearance, they will still have to cover maintenance and taxes. If the rent money doesn’t come in, that can lead to property deterioration and foreclosures or abandonment, Newberger said. </p> <p>Going forward, Newberger sees a dire situation for nonprofits, adding that 10% to 40% may close their doors for lack of funds. About half the nonprofits surveyed have had a significant disruption in their operations. In an October 2020 survey, 56% of entities that serve low- to moderate-income communities said it would take more than a year for the people and communities they serve to return to pre-Covid-19 conditions.</p> <p>At the end of the day, those speaking to the current economic issues facing major industrial, business, and nonprofit sectors made it clear that the U.S. economy faces serious challenges, sparked largely by the Covid-19 pandemic. At the same time, these speakers expressed some optimism. They said they expect to see a slow uptick in economic activity overall in 2021, but believe it will likely be 2022 before economic life returns to what we perceive as normal. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/how-are-consumers-food-preferences-changing https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/how-are-consumers-food-preferences-changing Fri, 04 Dec 2020 00:00:00 -0500 <div class="cfedContent__text"> <!--- Blog content here --> <p>Two themes were repeated by the featured speaker and three panelists at the Chicago Fed’s December 1 <a href="~/link.aspx?_id=2A16409873EE44F399218A3D1728E8EE&_z=z">virtual conference</a> on changes in our food system: Covid-19 has had an impact on how we shop and eat now and perhaps into the future. However, regardless of the pandemic, new consumer expectations are affecting the entire agricultural ecosystem. </p> <p>Disruptions caused by Covid-19 have altered consumption, such as panic grocery buying early in the pandemic, leading to disruptions in the supply chain. The processing sector with fixed assets can’t change quickly, causing frictions in the market, said featured speaker, Jayson Lusk, distinguished professor and head of the department of agricultural economics, Purdue University. As an example, shell egg prices shot up over 200% in a short period of time early in the pandemic, because producers couldn’t change their production and packaging quickly enough to meet greater grocery store demands, Lusk said. Besides a lack of packaging materials, powdered or liquid eggs produced for food services fall under different regulations and couldn’t be moved to retail markets without regulatory relief. </p> <p>Prior to the pandemic, there was a long-term shift from eating food at home to away, noted Leslie McGranahan, vice president and director of regional research, Federal Reserve Bank of Chicago. However, since the start of the pandemic period, consumers have spent around 15% more on groceries after the initial surge from stockpiling. </p> <p>“People are eating at home more, eating in different ways,” said Alexia Elejalde-Ruiz, business reporter, food industry, <em>Chicago Tribune</em>, noting the run on commercial meal kits delivered to homes. </p> <p>The recession caused by the pandemic’s effects on the economy will impact food purchases and food security, which Lusk sees as an economic issue, not a food supply problem. Food insecurity is a huge issue, said Elejalde-Ruiz. Figures for those people who are food insecure normally stand at 10%, but it is reported that currently 20% to 30% of Americans are food insecure. </p> <p>“The challenges this year have had a profound impact on food,” said Nicholas Fereday, executive director, food and agribusiness, RaboResearch, Rabobank. There is the general sense that we all have to think about food more and not take it for granted as we have for a long time, Fereday said. “And once we do something for a long time, like pandemic behavior, it becomes a habit. We’ve all become our own barristas now,” Fereday joked, as people are making their coffee at home instead of picking up a cup on their way to the office. </p> <p>Fereday noted that “uncool products” like favorite cereals from childhood and canned soups are back in vogue. Certainly, what is defined as convenience has changed in pandemic times, like shopping online, but a lot of fundamentals haven’t. Climate change and sustainability are still important to consumers when making food choices, Fereday said. How much will change once vaccines are prevalent remains a big question. </p> <p>Many consumer preferences and habits developed during Covid-19 will likely remain post-pandemic, like online ordering and home delivery of groceries. During the pandemic, food prices have become more important to consumers, especially those with lost income, said Lusk, adding he wonders if this is a long- or short-term phenomenon.</p> <p>Yet, Lusk expected that the supermarket of the future will be smaller and stocked with more fresh food as consumers crave more sustainable products. Lusk suggested some other changes in the food sector will be ambiguous retail price trends, an accelerated trend to e-grocery, and a shift toward labor-saving automation, plus increased scrutiny on concentration and anti-competitive behavior. He also sees a shakeup in the food service sector, more ghost kitchens (restaurants that do only meal delivery), and growing interest among some segments in local, direct farm delivery.</p> <p>Still, Sam Funk, director, agriculture analytics and research, and senior economist, Iowa Farm Bureau Federation, noted that some small farms can market directly, but they need to be near a population center for that to work. “We can’t feed the world by farm-to-table,” Funk said. Commercial processing is necessary to supply larger demand and export markets. Covid-19 has changed a lot of things, but whole systems won’t change, Funk added.</p> <p>Elejalde-Ruiz said some small producers that have found ways to repackage their products to sell to consumers are having their best year ever as their customers are willing to pay more for that connection.</p> <p>The restaurant side, said Elejalde-Ruiz, is “the great unknown.” Takeout is important to restaurants’ survival in the time of Covid-19, and people are growing accustomed to eating that way. Will that persist post-Covid? Will fewer restaurant spaces be needed, fewer workers? Will new patterns of dining affect the real estate sector? </p> <p>McGranahan suggested that one can expect some impact on employment as consumer demand changes, which in turn affects the whole agricultural ecosystem. One question is how the financial sector will evolve as consumer preferences change. </p> <p>The industry is also seeing food system realignments, Lusk said, citing new outside investors and start-ups, like FBN and Indigo. There are notable acquisitions by incumbents or new entrants, such as Amazon’s purchase of Whole Foods Markets, and mergers of input suppliers, for example Bayer and Monsanto. Forward and backward integration is also occurring. Walmart is in the beef business, with acquisition of a packing house in Georgia; Perdue Farms has begun a direct-to-consumer platform. Costco has built a Nebraska supply chain for its $5 rotisserie chickens.</p> <p>Some of the drivers of these realignments are: pressure from investors to meet sustainability initiatives, an attempt to control supply and quality of inputs, a quest to acquire informational advantages, and the need to be more responsive to consumer demands, according to Lusk.</p> <p>There is also a need for increased resiliency, Lusk said. And while there are no easy answers, some steps that might ease food processing bottlenecks or disruptions to the supply chain include processing flexibility, storehousing for emergencies, the dismantling of legal and regulatory barriers that prevent the free flow of food, market mechanisms to facilitate reallocation, and increased automation.</p> <p>David Oppedahl, senior business economist, Federal Reserve Bank of Chicago, and moderator of the program, relayed a question from the audience: How do the panelists think the incoming Biden Administration might affect the nation’s food system? Fereday said what he finds interesting is how little agriculture and food were talked about during the political campaign, especially during a pandemic. </p> <p>Oppedahl suggested we may see a greater focus on climate change from the new Administration. Fereday responded that big food companies had already been lining up to talk about sustainability, such as more recyclable packaging, because that’s what customers want. Funk added that sustainability depends on the location and requires tailoring to site characteristics, citing differences between Iowa and California, for example.</p> <p>Elejalde-Ruiz concurred that the new Administration will bring a larger focus on climate change, and “you can’t talk about that without talking about the food system.” There may also be more conversations about vertical farming and controlled environments, steps to avoid cross-country transport of produce to the Midwest and East.</p> <p>Fereday expressed some excitement around development of more greenhouses. So much more technology exists for innovation; for example, the small island nation of Singapore has designs to become a food tech hub. Fereday also pointed out that there’s much unused real estate for growing produce, such as rooftops, and added, “There never should be a single solution to a problem.”</p> <p>Oppedahl raised the topic of organic foods: Will they be, or remain, profitable? Fereday noted that food labeled organic is seen as a premium product, largely for an elite group of people. However, the amount of land certified organic is tiny, around 1%. Still, organics can be part of a larger solution to food production. There will always be something premium, Fereday said. “Farmers look for value addition, if organic does it, fine.” Fereday mentioned that quinoa is now grown in Colorado, an example of farmers looking for alternative crops. </p> <p>Changes will take place based on the global picture, said Funk. The future of the food system is not totally based on what’s happening in United States. Global changes have and will continue to affect U.S. agriculture, as exports leverage comparative advantages.</p> <p>Oppedahl asked the panel if so-called healthy foods are gaining in the market. Funk suggested that it depends on how you define healthy foods, adding that some see animal proteins as healthy, as they contain zinc, which can boost the immune system. </p> <p>Elejalde-Ruiz said there is already a years-long shift to reading the back of the box. “People want to know what’s in their food. They want less processing and more nutrient-dense products.” </p> <p>The panelists’ final thoughts reflected the current state of the food system brought about by a year of pandemic and changes in consumer preferences. Fereday noted the uncertainty in the world today. Elejalde-Ruiz said this is a moment of major disruption in the food system. “It is exciting to see what happens when life resumes some sort of normalcy,” Elejalde-Ruiz said. Funk had the final word: “The world is going to shift, and we’ll see how we react to the changes.”</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/conversation-with-austan-goolsbee https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/conversation-with-austan-goolsbee Thu, 03 Dec 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>The Chicago Fed hosted the <a href="~/link.aspx?_id=3B94344A4F17454087076B81E19E51BD&_z=z">Seventh Annual Summit on Regional Competitiveness</a> during the week of November 16, 2020. The virtual event kicked off with a conversation about the impact of Covid-19 on the economy between Anna Paulson, director of economic research at the Federal Reserve Bank of Chicago, and Austan Goolsbee, the Robert P. Gwinn Professor of Economics at the University of Chicago Booth School of Business. Here is their conversation. It has been edited for clarity, and some figures and references have been included.</p> <p>Anna Paulson: Can we start by getting your take on the general state of the economy?</p> <p>Austan Goolsbee: The economy is in the deepest downturn we have ever had, even worse than 1932, the worst year of the Great Depression. However, it has snapped back faster than we ever snapped back, but only about half or two thirds of the initial decline (shown in figures 1 and 2). On the one hand, we haven’t had to follow the normal rules of a recovery; in a normal rebound the unemployment rate only comes down about 1.5 points a year. Given that we lost 21 million jobs in a month, if we had to follow the normal rules, it would be eight to ten years before we got back from this. So it’s been great that we have had a faster—unprecedented—rebound. But it wasn’t enough—not even close. If this third wave is as bad as it looks so far, especially as it looks in our region, I’m really quite nervous what that would mean for the economy.</p> <p> <h3>1. Non-farm payroll (January 2018–October 2020)</h3> <img alt="Line chart showing that non-farm payroll employment rate is in the deepest downturn America has ever seen, but that it is recovering faster than we expected." src="~/media/15d881316a1f4ce1ab13db870ee7a053.ashx" /> <figcaption class="caption"> Source: Bureau of Labor Statistics from Haver Analytics </figcaption> </p> <p> <h3>2. Gross Domestic Product (2018:Q1–2020:Q3, indexed relative to 2019:Q4)</h3> <img alt="Line chart showing that the GDP level is in its deepest downturn America has ever seen, but that it is recovering faster than we ever expected." src="~/media/60c422e9e4e246a7af1a9b4ccfa1ee9e.ashx" /> <figcaption class="caption"> Source: Bureau of Economic Analysis from Haver Analytics </figcaption> </p> <p>Research from the Chicago Fed<sup><a href="#ftn1" id="ftnref1">1</a></sup> and a paper I have with a colleague<sup><a href="#ftn2" id="ftnref2">2</a></sup> were some of the first research exploring the link between the virus and economic conditions. This work shows that the recovery is tied very closely to the progression of the virus. There is no tradeoff between the virus and the economy, in my opinion.</p> <p>Paulson: As you mentioned, your research and some of the research from the Chicago Fed suggests that it is personal choice that drives a lot of the decline in economic activity and not so much stay-at-home orders and other policy directives. What does that mean for policymakers?</p> <p>Goolsbee: Well, I don’t think it was lockdown orders that shut down the economy. If we look at the evidence, we can see that it was people staying at home because they didn’t want to get sick. For our paper we looked at (anonymized) phone records for visits to 2.25 million businesses, using consumer visits as a measure of business activity. Beginning in March, you see a collapse of consumer visits to these businesses. For our research, we wanted to look within metro areas where there were different shutdown timings, to see the consumer response. We looked across the whole country—I think there were 502 counties where there was a border on either sides of a policy divide. If you look in the same week, in the same metro area, you would see activity decline by 70%, with the lockdown orders accounting for about one-tenth of that. For example, visits to beauty salons in Bettendorf, IA, where there was no lockdown order, decline by almost the identical amount as they do across the border in Illinois where there is a lockdown order. So it really is not about the lockdown order, it’s about people getting scared. In the counties where the death rate starts to rise, people stop going out to businesses of all different forms because they are afraid of the disease. So, what that tells us now is that if the virus starts really spreading again, it could seriously undermine consumer activity. The only way that it wouldn’t occur is if people are so fatigued by the disease that they no longer care about the risks. </p> <p>Paulson: What does that mean for policymakers as they contemplate a rising case load?</p> <p>Goolsbee: I always say, “The virus is the boss,” which means the most important thing you can do for the economy is to slow the rate of spread of the virus. So, policymakers have got to take every action they can to slow the rate of spread of the virus. The irony is that you don’t need the vaccine in order to do that. Places like Taiwan, Korea, Australia, and New Zealand got control of the virus through public health measures and they’re basically back (to pre-pandemic economic levels). I wish we could put a direct focus on the public health aspect. The CARES Act is a relief bill—not a stimulus bill, as it is often referred to. It was designed to avoid permanent economic damage from what is supposed to be a temporary shock. The thing about relief bills is that they are expensive. It is analogous to burning money so we do not freeze while the furnace is out. It works, but only as long as you are feeding it money. We need to understand that a trillion dollars every six to nine months is the run rate of life support for the biggest economy in the world. So, if the policymakers do not put the focus on slowing the rate of the virus, we’re going to have to pay a lot more in the form of rescue and relief.</p> <p>Paulson: We focus a lot on the government sector and what official policymakers can do, but what about the private sector? Are there things that businesses, nonprofits, and other private sector actors can to do influence behavior? </p> <p>Goolsbee: I think so. When the polio vaccine was introduced, there was a lot of fear and uncertainty about taking it. To dispel this anxiety, Elvis got the polio vaccine on national television. Apparently, that in itself increased the immunization rate by 30 percentage points. People said, “Well if Elvis got it … it must be ok!” In a world where everything is so politicized and partisan, I do feel like the private and nonprofit sectors have credibility. Obviously, the vaccine and medical companies have a role in creating credibility, but I think big, reputable organizations taking actions for themselves is also important. The more organizations model good behaviors and the more they reward their employees for it, the better. For example, we should pay more attention to things that may in the short term erode GDP—paid sick leave, that is, paying people to not come to work—but that in the longer run are better than people coming to work when sick and contributing to the spread of the virus. This does not mean you have to engage in partisan politics, it’s just modelling compliance behavior. I think that would be helpful here.</p> <p>Paulson: Are there lessons from your research about the individual fear of getting infected that might give us some ideas about how businesses ought to behave? </p> <p>Goolsbee: If you are running a business and you are trying to draw a conclusion from my research or the Chicago Fed’s research about what you should do, I think that would be to make your customers feel safe. If you’re a physical business and your customers don’t feel safe, they’re not going to come back. In our data, we were able to look at different sizes of companies and different activity levels in a store. We observed a decided shift as the pandemic raged in an area away from busier stores to less busy stores. There is a parallel with the 2008 crisis: As that crisis began, as a financial crisis, people withdrew from the financial system and that was a disaster. Here, it’s a physical contagion and people withdrawing from the physical, service sector economy. Until now those sectors have largely been recession proof. So we don’t know how to respond. We never anticipated that health care spending or education spending would plunge in a recession. These are the sectors that usually keep chugging along in a recession.</p> <p>Paulson: So, this has been a theme throughout this conversation but I would like to hit it explicitly: What do statements like “the virus is in charge” mean to you and how has that altered your thinking? What might’ve been different if we had really accepted the premise that “the virus is in charge” from the very outset?</p> <p>Goolsbee: The most successful places took protective measures like wearing masks and instituting widespread testing from the start. There is an argument in the U.S. that the people who are most at risk should be the ones to withdraw and that we should not impose on the freedoms of the people who do not feel they are at risk. According to this line of thinking, if you have a pre-existing condition, if you’re old, or are otherwise at risk, you should stay home and let others go about their normal life. And the problem with that, to my mind, is if you take people who are over 65, clinically obese, have diabetes or asthma or heart disease or an autoimmune disease, or are on chemo, even taking out the overlap, more than the majority of the country classifies as one of those at risk categories. To me it’s not a viable strategy to say, let’s have the majority of the country stay home. The fundamental thing is that people have to feel if they go out of their house, they’re not going to get sick. Other countries, Australia and New Zealand for example, have a high degree of personal freedom, but still did very heavy testing. With that amount of testing, they were able to see an increase and stomp it out right away, with a quite strict lockdown. So, according to the epidemiologists, if policymakers had moved quickly and competently more than 100,000 deaths could have been prevented. That’s heartbreaking. And that’s just the deaths, to say nothing about people who are not going to see their families for the holidays, people who are not going to school, the countless other difficult situations that could’ve been prevented. </p> <p>Paulson: As you look forward, even as the progression of the virus is uncertain, what are the various recovery scenarios? What kind of things do you think are likely to be temporary and what are likely to be more permanent?</p> <p>Goolsbee: This is the first recession we have ever had that had nothing to do with the economy. It’s more like a natural disaster, like a hurricane came ashore or we had an earthquake. The economy wants to come back. If the vaccine was available now and everyone could get it, I think the economy could go right back to where it was before this began. I can’t help but remember that period right before the 2008 financial crisis. A shocking number of the most damaging loans were made in the last six months before things fell apart. I feel like if we could’ve just stopped what we were doing six months earlier, the financial crisis would’ve been so much less severe. And I kind of feel that way now. We’ve got to stop this surge here. We can’t let this spiral out of control in the last six months. Otherwise half of the deaths are going to end up being in this last period. </p> <p>On your other point about what is permanent versus temporary, I am skeptical that anything that has happened in the last six months because of Covid is going to reverse some long-standing trend. However, I’m receptive to the idea that Covid has accelerated long-standing trends. For example, over the last 15+ years there has been a huge shift to internet commerce and that has accelerated during this downturn. I think that is going to be permanent. Once this is done, a lot of people are going to have developed a habit for buying groceries on line, for example. So, the implications of that for commercial real estate, for brick and mortar retailers I think are pretty serious. </p> <p>On the other side, I’m more skeptical of these stories that speculate that major metros, like New York or Chicago or Minneapolis, are going to die. Or that Milwaukee is in trouble because everybody is trying to move away from cities to rural and smaller metro areas. That type of shift would reverse a 180-year trend in the United States. I think once this is done, we are going to rediscover why that trend existed in the first place: that productivity is a lot higher when we are together. There might be a little less business travel—going to conventions and that kind of thing—but I think this Regional Summit is going to be in person when you go forward, because we are going to rediscover that the productivity spillovers are bigger when they’re actually agglomerating in the same place. I think that will come back. </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> Diane Alexander and Ezra Karger, 2020, “Do stay-at-home orders cause people to stay at home? Effects of stay-at-home orders on consumer behavior,” Federal Reserve Bank of Chicago, working paper, No. 2020-12, <a href="~/link.aspx?_id=7F397B85A5924AC7915480FCBBC91FDC&_z=z">available online</a>; and Diane Alexander, Ezra Karger, and Amanda McFarland, 2020, “Measuring the relationship between business reopenings, Covid-19, and consumer behavior,” Federal Reserve Bank of Chicago, Chicago Fed Letter, No. 445, <a href="~/link.aspx?_id=B8BEA58EAF404A4A98351E522971D07A&_z=z">available online.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> Austan Goolsbee and Chad Syverson, 2020, “Fear, lockdown, and diversion: Comparing drivers of pandemic economic decline,” June 19, University of Chicago, Becker Friedman Institute for Economics, working paper, No. 2020-80, <a href="https://ssrn.com/abstract=3631180">available at SSRN</a> or <a href="http://dx.doi.org/10.2139/ssrn.3631180">Crossref</a>. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/can-ccps-use-improved-buffers https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/can-ccps-use-improved-buffers Mon, 30 Nov 2020 00:00:00 -0500 <div class="cfedContent__text"> <!--- Blog content here --> <p>In this blog post, we investigate changes in margin at CCPs during the market stress of 2020:Q1 to show how reactive CCP funding demands were to the increase in market volatility.</p> <p>“Save for a rainy day.” This famous old idiom is often used to encourage people to save money in good times in order to better manage through future, unforeseen difficult times. After the global Financial Crisis of 2008–09, the banking regulators at the Basel Committee on Banking Supervision (BCBS) established new guidelines in a similar spirit. BCBS required banks to establish countercyclical buffers<sup><a href="#ftn1" id="ftnref1">1</a></sup> to guard against procyclicality—or the pattern where banks’ balance sheets are stronger in good times but significantly deteriorate in volatile times. The buffers are excess capital that banks could draw down during periods of market stress. These capital buffers are funded during relatively benign credit cycles and ahead of market stress events, providing a build-up of reserves to deploy during volatile times. During the market stress related to the Covid-19 pandemic, many banking regulators have allowed banks to draw down their buffers in order to absorb potential losses as the credit cycle turned negative and financial markets became more volatile.<sup><a href="#ftn2" id="ftnref2">2</a></sup> </p> <p>CCPs are financial institutions that guarantee performance of a financial contract—typically the buying and selling of contracts related to securities or derivatives. Although CCPs are different from banks in many ways,<sup><a href="#ftn3" id="ftnref3">3</a></sup> they also have regulatory requirements to guard against procyclicality. In general, CCPs set funding requirements for two main purposes<sup><a href="#ftn4" id="ftnref4">4</a></sup>—to cover current risk exposures and to cover potential future risk exposures. The main concern with these funding requirements is that CCPs increase funding requirements in times of market stress, potentially exacerbating market liquidity shortages. As part of the lessons learned from the Financial Crisis, procyclicality in funding requirements was identified as a macroprudential concern since it could further exacerbate risks in the financial markets.<sup><a href="#ftn5" id="ftnref5">5</a></sup> As a result, establishing funding requirements that are less sensitive to volatility is now codified in the Principles for Financial Market Intermediaries (PFMI).<sup><a href="#ftn6" id="ftnref6">6</a></sup> Despite these regulatory efforts to mitigate large increases in funding demands in times of market stress, a recent Futures Industry Association (FIA) white paper reported that CCP funding requirements increased when market volatility sharply increased in 2020:Q1. </p> <p>CCPs have two types of funding requirements for clearing members—variation margin and initial margin. I will explain how these operate and how they responded to the market volatility in 2020:Q1. </p> <h3>Variation margin (VM)</h3> <p>VM is the settlement of losses and gains based on the current change in the valuation of the cleared contracts, i.e., VM is a net flow which is passed through the CCP based on losses and gains on cleared contracts. CCPs operate VM cycles daily and often on an intraday basis. In other words, based on the positions of clearing members, they calculate the required increase in variation margin payable to the CCP when the positions deteriorate (or receivable from the CCP when the positions improve in valuation) on a daily basis. The VM process minimizes the need for the CCP to carry debits and credits on its balance sheet. Since VM is driven by changes in positions and prices of cleared contracts held by clearing members, cyclical changes are driven by forces largely outside the control of the CCPs. However, this frequent reconciliation is still a necessary process in order to extinguish credit risk. </p> <p>To provide an illustrative example, figure 1 shows the level of variation margin for one S&P 500 future<sup><a href="#ftn7" id="ftnref7">7</a></sup> contract cleared at the CME from late 2018 to mid-2020. The pattern in the figure shows how VM can fluctuate over time. The VM amounts are shown both as daily amounts and as a moving five-day average for the contract expiring in the nearest month to isolate VM amounts to changes in market volatility. The five-day average helps to show a trend. Both values peak as market volatility increased during March of 2020 in response to the Covid-19 pandemic, denoting large funding demands on CCP clearing members during this time of market stress. </p> <p> <h3>Figure 1. S&P 500 variation margin</h3> <img height="433" alt="Figure 1 is a line chart that tracks variation margin for one S&P 500 future contract to show how VM can fluctuate over time. VM values peak as market volatility increases." width="1045" src="~/media/a3899c4cff7a42148676d819600597e0.ashx" /> <figcaption class='caption'> Source: CME Group. </figcaption> </p> <h3>Initial margin (IM)</h3> <p>In order to cover future risk exposures, CCPs require collateral to cover the potential loss in the event that a member defaults. The collateral required is held at the CCPs.<sup><a href="#ftn8" id="ftnref8">8</a></sup> The requirement is referred to as IM and is derived by forecasting future valuation changes of the contracts cleared to a high degree of certainty—99% or higher. To forecast the risk, CCPs use a variety of risk models.<sup><a href="#ftn9" id="ftnref9">9</a></sup> Within these models, CCPs use techniques to manage procyclicality,<sup><a href="#ftn10" id="ftnref10">10</a></sup> so that the additional demands for collateral do not increase at the same pace as the increase in market volatility. </p> <p>To provide an illustrative example, figure 2 depicts the IM for the same S&P 500 future contract as in figure 1. Unlike VM, the changes in IM are infrequent, because CCPs tend to adjust the IM requirement on a monthly or weekly schedule. Still, there can be ad-hoc changes in anticipation or in reaction to market volatility. Specifically, we can see that as market volatility increased in March of 2020, the IM requirements increased by 81.8% in dollar terms from $33,000 to $60,000 per contract and 108.8% in relative terms from around 4.5% to 9.3% per contract. </p> <p>Taken together, the IM and VM show intense increases in funding requirements at CCPs during a time of market stress. </p> <p> <h3>Figure 2. S&P 500 initial margin</h3> <img height="346" alt="Figure 2 is a line chart that tracks initial margin for one S&P 500 contract as an absolute value and as a percentage of contract value in order to show how IM fluctuates over time. Both IM values peak as market volatility increases. " width="901" src="~/media/aa3f786278324cb095400410f43c7b5c.ashx" /> <figcaption class="caption">Source: CME Group.</figcaption> </p> <h3>Aggregate increases in CCP funding demands for IM and VM </h3> <p>Since one contract may not provide a broad enough view of cyclicality of VM or IM during the recent market stress, it is useful to consider aggregate margin data reported by the different CCPs in public disclosures. Table 1 shows the quarterly increase for average VM calls in 2020:Q1 relative to 2019:Q4 at CCPs that are designated as systemically important in the U.S.,<sup><a href="#ftn11" id="ftnref11">11</a></sup> as well as the quarterly increase in the maximum VM calls in 2020:Q1. Table 2 shows the quarterly increase in aggregate IM required and maximum IM called for a single day at the selected CCPs. </p> <h3>Table 1. Quarterly change in average total VM paid to the CCP and maximum VM</h3> <div class="table-responsive"> <table class="table"> <thead> <tr> <th>CCP/Clearing Service</th> <th class="text-center">Quarterly change of average VM in Q1:2020 (percent)</th> <th class="text-center">Quarterly change of max VM in Q1:2020 (percent)</th> </tr> </thead> <tbody> <tr> <th>CME (all services)</th> <td>55</td> <td>50</td> </tr> <tr> <th>DTCC Government Securities </th> <td>72</td> <td>164</td> </tr> <tr> <th>DTCC Mortgage-Backed Securities </th> <td>243</td> <td>616</td> </tr> <tr> <th>DTCC National Securities Corp</th> <td>294</td> <td>411</td> </tr> <tr> <th>ICE Clear Credit</th> <td>421</td> <td>839</td> </tr> </tbody> </table> </div> <figcaption class="caption mb-3"> Source: Public Quantitative Disclosures by the CCPs. </figcaption> <h3>Table 2. Quarterly change in total IM and maximum IM called</h3> <div class="table-responsive"> <table class="table"> <thead> <tr> <th>CCP/Clearing Service</th> <th style="text-align: center">Quarterly change of IM in Q1:2020 (percent)</th> <th style="text-align: center">Quarterly change on max IM call in Q1:2020 (percent)</th> </tr> </thead> <tbody> <tr> <th>CME Base Product</th> <td>75</td> <td>742</td> </tr> <tr> <th>CME Interest Rate Swaps </th> <td>37</td> <td>721</td> </tr> <tr> <th>DTCC Government Securities </th> <td>9</td> <td>11</td> </tr> <tr> <th>DTCC Mortgage-Backed Securities </th> <td>141</td> <td>455</td> </tr> <tr> <th>DTCC National Securities Corp</th> <td>253</td> <td>291</td> </tr> <tr> <th>ICE Clear Credit</th> <td>44</td> <td>922</td> </tr> <tr> <th>Options Clearing Corp</th> <td>70</td> <td>785</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Source: Public Quantitative Disclosures by the CCPs. </figcaption> <p>The tables denote that both levers that CCPs rely upon to demand funding from members increased substantially over the first quarter of 2020. Given that these demands were increasing during a time of market stress, would it make sense for CCPs to require higher collateral (in the form of buffers) during stable times that could be reduced during a period of volatility? Since, as noted above, VM cyclicality is inherent, CCPs would need to set such cyclical buffers on IM. If these buffers were designed with a countercyclical trigger, similar in spirit to the buffers established in banking regulations, the increase in funding required to cover VM payment could be partially offset by decreases in IM buffers. In theory, this could better support liquidity being available during a period of market stress. </p> <p>However, these buffers would require trade-offs for the market. The buffers could potentially inhibit market depth if participants were less willing to transact due to the higher associated cost of funding. These potential concerns might be abated by CCPs accepting a broader range of high-quality liquid assets to be used as collateral for IM obligations. Still the merits of rainy day funding in the form of buffers could be considered in the context of supporting the broader resilience of the clearing ecosystem. </p> <hr /> <h3>Notes</h3> <p>* I thank John Spence of the Financial Markets Group for his assistance and Federal Reserve colleagues for their helpful comments.</p> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> Details <a href="https://www.bis.org/publ/bcbs187.pdf">online</a>.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> Information <a href="https://www.iif.com/Portals/0/Files/Databases/COVID-19_regulatory_measures.pdf?ver=2020-11-24-140736-500">online</a>.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> More information <a href="~/media/af832e4b45b449c7ababfa5a74ea0e51.ashx">available online</a>.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> For this post, we did not focus on Default Fund contributions, which are assets provided to CCPs to fund a mutualized default pool in the event IM is not sufficient to cover missed VM payments.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> <a href="https://www.bis.org/publ/cgfs36.pdf">Available online</a>.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> Details <a href="https://www.bis.org/cpmi/publ/d101a.pdf">available online</a>, see 3.5.6.</p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> Contract is valued at $250 x S&P 500 Index, so an S&P 500 Index level of 3,500 would equate to a contract value of $875,000. Please see additional details <a href="https://www.cmegroup.com/trading/equity-index/us-index/sandp-500_contract_specifications.html">online</a>.</p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> CCPs may use a third party such as custodian, commercial, or central bank to hold the collateral provided by clearing members.</p> <p><sup><a href="#ftnref9" id="ftn9">9</a></sup> More details and examples <a href="https://ccp12.org/wp-content/uploads/2018/12/CCP12_White_Paper_Primer_on_Initial_Margin.pdf">available online</a>, see section 5.1.</p> <p><sup><a href="#ftnref10" id="ftn10">10</a></sup> For more details, see LaSalle Street: Financial Markets Insights, podcast No. 2, <a href="~/link.aspx?_id=F661226964CE4377967597FD3B99CACA&_z=z">available online</a>. </p> <p><sup><a href="#ftnref11" id="ftn11">11</a></sup> OCC is not included as they do not separate VM calls in public disclosures since changes in valuations of premium style options are combined with changes in IM. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> <style type="text/css"> table tbody td { text-align: center; } </style> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/closure-of-a-paper-mill https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/closure-of-a-paper-mill Tue, 24 Nov 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>Can Wisconsin Rapids reinvent itself once again? This was the central question raised at the November 18 Project Hometown <a href="~/link.aspx?_id=78EE471901EE467FA5BB3F112833EBE3&_z=z">virtual panel</a> moderated by Steven Kuehl, senior advisor on community and economic development at the Chicago Fed. The paper mill in Wisconsin Rapids closed indefinitely on July 31 after 116 years of continuous operation, explained Kuehl. “The pandemic precipitated a sudden and dramatic decline in demand for paper produced at the Rapids mill,” accelerating long-term global trends in the industry, said Kuehl. The closure led to the loss of over 900 jobs to the detriment of the Wisconsin Rapids community and, more broadly, central Wisconsin, he added.</p> <p>The unfortunate circumstances facing the community feel personal to Kuehl, who grew up just down the road from Wisconsin Rapids. Both his grandfathers worked at the paper mill. Kuehl sees the problem through a broader lens as well, remarking that, what Wisconsin Rapids is facing is part of a “transformational change” affecting similarly situated communities across the U.S. </p> <p>Before the Wisconsin Rapids paper mill opened in 1904, there was a sawmill on the site that supported a vibrant lumber industry dating back to the late 1800s, explained Katie Weichelt, learning analyst at the Marshfield Clinic Health System and an independent geographer (her doctoral dissertation included an examination of the historical geography of Wisconsin Rapids and its impacts). With changes brought on by the railroad, the local lumber industry contracted, and Wisconsin Rapids’ sawmill operation ran into trouble, she said, but instead of closing, the company decided to stay and invest in new opportunities. The comeback was accomplished by local businesses getting together—a “group project,” Weichelt said. The newly formed company, Consolidated Papers, was successful, she surmised, because of its ability to collaborate, pool capital, seek out advice, adapt to new technologies, and diversify into new paper lines. This required a willingness to take risks, she added. Based on this historical experience, it is evident that this is not the first time Wisconsin Rapids has had to face significant challenges, Kuehl concluded.</p> <p>Kristopher Gasch, who chairs the Incourage Community Foundation, said that Wisconsin Rapids was proud to be the smallest community in the U.S. to have had a Fortune 500 company headquartered there. Over the 100 plus years in business, including the most recent period of ownership under Verso, the paper mill has provided many benefits to the community, Gasch explained. “The paper mill gave us generations of employment,” he said, but added that “a lot changed in a short window of time requiring our community to change our mindset from one of dependency.” </p> <p>“If we are not paper makers, what are we?” Gasch, asked rhetorically. The challenge facing displaced workers is significant with no quick fixes, and finding a new job can take up to a year, said Daniel Sullivan, executive vice president of the Chicago Fed. Losing jobs is hard on workers not just because of the need to find new employment but because, on average, earnings can be as much as 30% lower in the new positions, Sullivan added. The impact on earnings could continue ten years out, he noted. Younger workers are less affected as they have time to catch up, and those close to retirement are also less impacted because they have fewer working years left. It is the middle-aged folks, from ages 35 to 55, that take the hardest hit to earnings, he explained.</p> <p>It is best when workers can use their existing skills and transfer them to a new setting, Sullivan remarked. Regarding the future of the paper industry, Paul Fowler, executive director of the Wisconsin Institute for Sustainable Technology, stated that “while it is true that graphic paper consumption is in steep decline, the global demand for fiber and paper-based products is increasing.” “Global mega trends” in this rapidly diversifying industry include the expansion of e-commerce, food packaging, hygiene products, and the anti-plastic sentiment, he explained. The demand for cardboard packaging to supply e-commerce giants like Amazon is strong, he noted, citing the example of a previously closed paper mill in Combined Locks, Wisconsin, that successfully restructured its production to take advantage of this brown paper market (as featured in the <em>New York Times</em> article from March 22, 2019, “The Great American Cardboard Comeback”). In regard to revitalizing the Wisconsin Rapids’ mill, virgin fiber production could potentially be a viable “differentiated space” to meet the growing demand for high-end next generation packaging and specialty materials, Fowler said. He concluded by pointing out that “there is a lot of work to do but the industry as a whole is not dying—it has a sustainable future ahead.”</p> <p>The skills that workers at the paper mill possess can also be transferred to other industries that require a similar skill set, explained Sullivan. For example, auto workers who lost jobs in the past successfully pivoted into windmill production given the production similarities. Training workers for new jobs through community colleges and technical institutes can be a good option for some, he commented. While training can be effective, “one can’t really expect miracles” he said, and training is time intensive. Training is less well suited for workers close to retirement age, and it is also less likely to benefit those who do not do well in formal educational settings, he added. For those workers that could benefit from training, it is important that it takes place in fields where job openings exist. The linkages between training programs and employers are important, remarked Sullivan, and it is best if employers can contribute to the cost of this training.</p> <p>Moving forward, Weichelt stressed the need for the community to seek out opportunities that make effective use of their collective resources and strengths and, also, to reach out to industry experts for advice, adapt to new technologies, and take risks. Reaffirming that latter point, Gasch remarked that the community has been asked to take on risks “even though that’s intimidating” in order to address the uncertain future. “Entrepreneurship is a skill set and we needed it in the 1880s and we need it today” added Kuehl. </p> <p>Fowler discussed ways to keep Verso interested in locating a new owner for the paper mill, remarking that the Wisconsin Rapids Task Force has been helpful in negotiating with Verso and trying to get a better handle on the company’s plans. Fowler recommended leveraging Verso’s customers and investors as this was successful in other situations. For example, customers pressured Nestlé to switch to a more sustainable supplier of palm oil, and Proctor and Gamble’s shareholders pressured the company to stop using Canadian boreal forest timber. </p> <p>In downtown Wisconsin Rapids sits the Tribune Building, originally a newspaper printing operation that was purchased by the Incourage Community Foundation in 2012 for use as a community space and resource. It is a “connector” of the region’s assets through the participation of industry, government, non-profits, and education, which Gasch explained is helping to facilitate approaches for economic renewal. Plans are underway to develop its new center for regional collaboration and innovation to further that effort, he added. “The world is run by those that show up” explained Gasch, adding that it is imperative that everyone in the community participates and that their voices are heard in shaping Wisconsin Rapids' path forward. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/rewriting-the-rules https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/rewriting-the-rules Tue, 17 Nov 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>Leaders from government, business, the health sector, and the philanthropic community held a virtual discussion on November 12th on the economic, social, and public health challenges facing Detroit and Michigan as a result of the Covid-19 pandemic. Charlie Evans, president of the Federal Reserve Bank of Chicago, was the moderator of the <a href="~/link.aspx?_id=EECE9C7121ED469CB4062EAA2519B3FB&_z=z">community forum</a>. This forum is part of the Chicago Fed’s Project Hometown, aimed at improving the well-being of communities across the Seventh District. </p> <p>While the pandemic is affecting everyone, Evans said, significant economic disparities exist. Lower paid workers are being impacted the hardest, with those in restaurant, hotel, and entertainment industries experiencing the highest rates of job loss, and a number of these businesses have closed. Many of the newly unemployed have little personal savings to cushion the blow. At the same time, these workers have contracted the virus at disproportionately high rates. The manufacturing sector, Evans added, is faring better as they have successfully altered production methods to get employees back to work safely. Evans advised that if we do not properly address the challenges faced by the pandemic “we risk leaving long-lasting scars” that could adversely affect the economic well-being of vulnerable neighbors. He went on to emphasize the importance of implementing tailored initiatives to address diverse challenges, including those directed at reversing racial inequities that limit economic opportunities for all. Such interventions complement the numerous policies and programs already implemented by the <a href="~/link.aspx?_id=60A24AEDDC48437B879D28E658A744AB&_z=z">Federal Reserve System</a>.</p> <p>We can be encouraged by the fact that economic development in Detroit has been “surprisingly resilient” when compared to the experience facing Detroit during the Great Recession, noted Gerard Anderson, executive chairman of DTE Energy. Nevertheless, the economic recovery has been felt unevenly, with the pandemic amplifying economics disparities, Evans pointed out. Even before the pandemic started, disadvantaged groups in Detroit and across the state were experiencing significant hardship, remarked Michigan Lieutenant Governor Garlin Gilchrist. With the arrival of the pandemic, underserved communities that face systemic racial inequities have shouldered the greatest burden, reiterated Gilchrist. To add to the complexity of the problem, local and state governments across Michigan and the nation are experiencing serious budget shortfalls, he added. </p> <p>Covid-19 cases are rising exponentially in Detroit and statewide and “we are squarely in the midst, again, of a full scale public health crisis,” reported Anderson after attending a press conference with public health leaders across Michigan earlier that day. “The health of our economy is inextricably linked to the health of our community,” he added, and “we will not be healthy in either sense until we find ways to slow the spread and reverse it.” The pandemic has taken a toll on the health care industry, explained Wright Lassiter, president and CEO of Henry Ford Health System. The greatest challenge facing the industry is “human capital,” he observed, explaining that health care workers ranging from doctors and nurses to administrators and support staff are highly taxed, and their resiliency is waning. To address this problem, Lassiter explained that the Henry Ford Health System is offering mental health counseling and spiritual support to its employees. Nevertheless, because of the difficult circumstances, shortages of workers are occurring across the health care industry. Some are choosing to retire early and others, particularly the less skilled, are moving on to other occupations, says Lassiter. Still, there is some good news on the Covid-19 treatment and vaccine front. Henry Ford Health System is actively involved in over 100 clinical trials for treatments, and it stands ready to administer Covid-19 vaccines, when approved, including those that require specialty freezers for storage. </p> <p>How are the children? Tonya Allen, president and CEO of The Skillman Foundation, asks this question regularly, arguing that we can learn about how a community at large is doing by how the children are faring. She remarked that some Detroit children are experiencing social and emotional trauma and are disconnected from school, with the pandemic deepening the racial inequities among the city’s youth. Given inadequate support at home and from schools during remote and hybrid learning, she estimates that at best school-aged children in Michigan are six months behind because of learning lost, and some children are as much as two years behind. The education system in Michigan is highly dispersed, Allen explained, with 800 public and charter school districts trying to figure out how best to proceed “without a proactive plan to navigate this.” School teachers are experiencing emotional trauma of their own, she added.</p> <p>Despite continued challenges on both economic and social fronts, effective programs are in place to ameliorate the impacts of the pandemic on Detroit’s diverse neighborhoods. The Coronavirus Task Force on Racial Disparities, chaired by Lieutenant Governor Garlin Gilchrist, has helped to reduce the excessive burden of the disease on people of color, especially Black residents, compared to early in the pandemic. Blacks Michiganders represent 14% of the state population but recorded 41% of the deaths from the virus early on, Gilchrist reported. Thanks to the actions of the task force, for the period between August and October, Covid-19 cases among Black residents have dropped to 8%, and their deaths now account for less than 10% of the total. The success of the program can be attributed to various interventions, including the distribution of 6 million free masks to the public and the launching of a social media campaign to provide critical information, such as testing site locations and isolation guidelines. Also, Detroit was the first in the nation to offer drive-thru Covid-19 testing; and in collaboration with Ford Motor Company, mobile testing has been made available to reach vulnerable community members. With respect to the program’s accomplishments, Gilchrist remarked “where you put your attention really matters.” </p> <p>Despite notable progress, there is much to be done to improve the well-being of vulnerable community members. To overcome the existing challenges, Gilchrist spoke of the importance of addressing problems of food and housing insecurity and the lack of access to technology and the internet. Lassiter added the importance of meeting the transportation needs of poor communities. Anderson discussed pathway jobs, a program to ensure jobs go to people that need them most, stating, “economic development needs to be broad in the sense that it has got to create pathway jobs.” Success will also require future investments in training and support for entrepreneurial ventures, Gilchrist added. Allen emphasized the need to make investments to benefit children, particular Black children, and to build Black wealth to overcome racial inequities. To fund aid and relief programs such as these, Gilchrist stressed the importance of federal assistance to support state and local governments as they work to overcome revenue challenges. </p> <p>Gilchrist also highlighted the significance of representation for Black community members in the decision-making process. In support of that effort, a Black Leadership Advisory Council was just announced earlier that day. Its mandate is to advocate for policy directives directly to the state government. On this point, Allen remarked that the pandemic gives leaders the opportunity to “rewrite the rules so that opportunity will be available to everyone.” </p> <p>The panelists agreed on the importance of trust as leaders work toward ensuring that all citizens have the opportunity to reach their full potential. Leaders need to not only show up, remarked Allen, but be reliable and deliver in the collective self-interest to improve opportunities for Detroit’s citizens. In addition to strong leadership, the panelists described how people in Detroit and across the state were stepping up in important ways at this time of crisis. Lassiter reflected, “it takes a village.”</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/making-innovation-inclusive https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/making-innovation-inclusive Fri, 23 Oct 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>Innovation has been an essential driver of economic growth in Chicago. However, the benefits of that innovation have not been experienced equally across the city’s diverse population. The sustained health and economic crises caused by the Covid-19 pandemic have served as a poignant illustration of the disparities that exist between Chicago’s haves and have-nots. On October 19, Project Hometown <a href="~/link.aspx?_id=051777D85246415E9DB247BAFAA6F084&_z=z">convened</a> thought leaders from the private and public sectors to discuss how Chicago could secure its role as a global hub for innovation in a way that will offer opportunity for all of the city’s residents.</p> <p>Technological innovation has long been an engine of economic growth, a pattern that is likely to continue. Indeed, the world economy could more than double in size by 2050 due to technological-driven improvements, said Rodrigo Garcia, deputy state treasurer and chief investment officer for the Illinois state treasurer. Moreover, innovation leads to a sustained rise in living standards, Garcia noted, which helps to address poverty and hunger. </p> <p>Chicago, then, stands to gain economically if it is home to industries that are engaging in sustained innovation, much as California’s Bay Area has benefited from headquartering tech giants such as Apple, Google, and Facebook. However, Chicago should not try to imitate another region’s path, advised Rumi Morales, partner and head of venture at Outlier Ventures. Rather, Chicago should drive innovation in industries that represent the city’s historical competitive advantages: 1) transportation, distribution, and logistics; 2) industrial manufacturing; 3) food and agriculture; and 4) digital “plumbing”—the technology that supports regulated industries such as legal compliance. </p> <p>Chicago can promote innovation in these industries, Garcia explained, by leveraging its world class educational institutions and the two national laboratories located in its western suburbs, Argonne and Fermi. Chicago should facilitate investments in research and development to continue to increase innovation and technology that can be commercialized, Garcia said. </p> <p>To sustain innovation, companies themselves also have a role to play by committing to innovation as a fundamental corporate mission and not treating it as the task of a single person or department, Morales said. This means making innovation the goal of every employee and department in the company by tying it to performance reviews and compensation. </p> <p>The four industries identified by Morales as having the greatest innovative potential have another advantage, she noted: They are already some of the most inclusive industries in Chicago, with diverse workforces that draw from the city’s many communities of color. This is important because the economic growth generated by the city’s most innovative industries has not encompassed all demographic groups equally. </p> <p>However, much more needs to be done, Morales continued, to ensure that an innovative Chicago is also inclusive. Chicago’s Black and Brown communities are significantly underrepresented in upper management across industries, for instance. Furthermore, the Covid-19 pandemic has shone light on a different pandemic, described by Mel Williams, Jr., chief legal officer of the Chicago Trading Company, as the Covid-1619 pandemic. This phrase, borrowed from Chicago’s Reverend Otis Moss III, captures the idea that racism is a deadly virus, too, one that has caused profound inequities.</p> <p>To help address these disparities, moderator Alessandro Cocco, vice president at the Federal Reserve Bank of Chicago, asked what steps the private sector can take to make sure all the city’s residents participate in the growth that innovative industries generate. Williams emphasized three objectives. First, companies must be <em>intentional</em> in bringing innovation and technology to all zip codes and using it to close the gap in outcomes across Chicago’s neighborhoods. Second, Williams stated that the private sector must be <em>transparent</em> about where opportunity and inclusivity have fallen short. Third, companies must be <em>accountable</em> for improving their performance.</p> <p>One way in which companies can achieve these objectives is by partnering with organizations such as The Greenwood Project, a nonprofit that helps to prepare a diverse pipeline of Black and Brown students for careers in Chicago’s financial technology industry. Bevon Joseph, co-founder and president of The Greenwood Project, pointed out that companies may not be well known in every neighborhood, and so they need to be intentional about promoting themselves to diverse populations. “Students can’t be what they can’t see,” Joseph said. </p> <p>Companies also must recognize that it will take more than one recruiting cycle to build social capital among socio-economically disadvantaged Black and Brown students, who are not starting in the same place in terms of education or social networks as many of their White counterparts. Furthermore, once Black and Brown employees join a firm, companies must be intentional in their retention efforts. Many minority employees move laterally from one firm to another rather than moving upwards within a firm because they do not feel like they belong. Firms must put all their employees in a position to succeed by giving them the opportunity to impact the firm’s bottom line, Joseph said. </p> <p>Public policy too has a role to play in ensuring all of Chicago’s residents have the opportunity to participate in the city’s innovative industries. “People need to be able to access technology and acquire technology skills across their entire education and work lives,” Morales advised. To make this happen, Morales suggested that that foundational courses in science, technology, engineering, and mathematics (STEM) be incorporated into the curriculum earlier on for groups that are underrepresented in tech industries.</p> <p>Public policy can also help promote Black and Brown entrepreneurship, which is “a potent tool to close the wealth gap,” Garcia stated. As it stands, there are deep racial disparities in access to equity capital, which disadvantages Black and Brown entrepreneurs. Garcia reported that nationally, White entrepreneurs attract 17 times more equity capital than minority entrepreneurs. The result: In Cook County, only 8–10% of business owners are Black or Brown—yet these populations comprise 60% of the county’s total population. </p> <p>Garcia said that to address this gap, the state of Illinois would soon announce a new initiative to provide equity investments on Chicago’s south and west sides. Additional state initiatives to augment business loans for Black, Brown, and low-income communities will follow. As an example of existing public support for entrepreneurship, Williams pointed to the Small Business Administration, which provides loan guarantees, offers free business counseling, and encourages government contracting for women- and minority-owned businesses. </p> <p>The key strategies for sustaining innovation and promoting inclusivity will not all be identified in a single day, Cocco observed in closing, but the concrete proposals offered by the panelists are important steps toward a more inclusive society. “This is our opportunity,” Williams said. “Every action that we’re taking—where you’re hiring, where you’re sourcing your talent from, where you’re going to focus your dollars—are decisions we make as individuals and as companies as to what type of Chicago we want to have.” Intentional, transparent decision making on these matters will promote innovative, inclusive growth for all of Chicago.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/closing-racial-economic-gaps https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/closing-racial-economic-gaps Fri, 04 Sep 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>The severe and prolonged economic consequences of the Covid-19 pandemic have stressed the earnings of tens of millions of households. The pandemic has also widened the racial disparities in <a href="https://www.nber.org/papers/w27592">health</a> and economic outcomes for Black and Latinx families. And the existing social safety net <a href="https://www.nber.org/papers/w27431">has not provided sufficient</a> cash and in-kind transfers to support families dealing with the impacts of surging <a href="https://www.nber.org/papers/w27246">unemployment</a>, waning fiscal relief, and extended <a href="https://www.nber.org/papers/w27555">remote learning</a>. These shortfalls are likely to affect not just households’ immediate needs, but also, as <a href="https://www.nber.org/papers/w26942">research</a> <a href="https://academic.oup.com/qje/article/135/3/1209/5781614">suggests</a>, their long-term economic prospects. </p> <p>Policymakers, philanthropists, nonprofits, and business leaders may wish to contemplate interventions that jointly address the immediate economic distress and lay the groundwork to help close economic gaps for Black and Latinx households, who are at heightened risk of falling even farther behind White households as a result of this public health and economic crisis. </p> <p>In this blog post, we highlight evidence-based approaches, that is, approaches based on empirical research, to reducing racial disparities in economic opportunity, particularly in light of the Covid-19 pandemic and economic downturn. Focusing on interventions with high private and social net benefits (or returns) leads us to emphasize strategies in three areas: (1) those related to children’s education and health; (2) those providing support for adults that typically have spillovers to children; and (3) those focused on juvenile and criminal justice. We also briefly discuss interventions that have been evaluated and demonstrate low returns and interventions that have yet to be evaluated, including those targeting gaps in homeownership and wealth accumulation.<sup><a href="#ftn1" id="ftnref1">1</a></sup></p> <p>Even though the interventions we review are wide-ranging, ones with high documented returns share some common characteristics. First, they tend to have benefits that extend over a number of years. Second, they tend to have benefits that spill over, such as to children or surrounding communities. Third, they tend to provide direct material benefit or reinforce noncognitive capabilities (soft skills), rather than giving beneficiaries additional information or complex incentives. Finally, they have been evaluated empirically for both immediate and long-term impacts. </p> <h3>Children’s education and health</h3> <p>Extensive research in economics, neuroscience, and psychology points to large and durable economic impacts of <a href="https://academic.oup.com/qje/article/122/1/159/1924719">early</a> <a href="https://www.sciencedirect.com/science/article/pii/S0272775712001021">childhood</a> <a href="https://www.brookings.edu/wp-content/uploads/2016/07/2013b_cascio_preschool_education.pdf">programs</a> that narrow achievement gaps in older grades; boost earnings and strengthen labor force attachment later in life; and reduce kids’ exposure to the criminal justice system. The specific features of these programs can vary but they often involve addressing: <a href="https://www.journals.uchicago.edu/doi/abs/10.1086/507154">in</a> <a href="https://www.aeaweb.org/articles?id=10.1257/app.1.1.49">utero</a> nutrition and environmental exposure to stress; work/life balance issues of parents/caregivers, as well as their education and training; availability of educational materials; parental habits and behaviors; lead abatement; and <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1311992">access to health care</a>. Still, public investments in young children tend to be lower than for older children, and parents of young kids tend to be at a stage of their career when they are least able to invest in their children using their own income or savings. Today, with the earnings losses and hardships of the pandemic draining private resources, the impact of this funding misalignment is likely to be more serious.</p> <p>Many studies also underscore the high returns from increasing high school graduation rates, improving college readiness, and boosting college completion rates. Greater <a href="https://academic.oup.com/qje/article/131/1/157/2461148">per-pupil spending</a> in K-12 education not only increases low-income students’ educational attainment but also leads to higher wages and lower poverty for them when they grow up. High-performance <a href="https://pubs.aeaweb.org/doi/pdfplus/10.1257/app.3.3.158">charter schools</a> also may have large effects on narrowing achievement gaps for low-income and minority students.<sup><a href="#ftn2" id="ftnref2">2</a></sup> </p> <p>At the college level, high-return interventions include: steering low-income students to selective institutions; providing “last dollar” scholarships to bridge the gap between financial aid and the all-in costs of college; high-touch support services, like comprehensive advising, career services, and tutoring; and even low-touch programs, like personalized text messages reminding students to renew financial aid applications. Today’s strained finances and uncertain job markets make student loans more burdensome, and college enrollment may even <a href="https://www.aeaweb.org/articles?id=10.1257/aer.20151604">rise</a> if high unemployment rates persist and typical recessionary patterns take hold—in the absence of job opportunities, more students may choose to continue their education until labor markets improve. Interventions to increase students’ odds of college completion and to lower their risk of being financially burdened by student loan debt are particularly important for first-generation students, older students living independently from their parents, part-time students, and those attending non-selective institutions.<sup><a href="#ftn3" id="ftnref3">3</a></sup></p> <h3>Support for adults</h3> <p>The private and social returns on interventions targeting adults tend to be substantially smaller than for children, on balance. Among other reasons, the benefits from investing in adults accrue over a shorter horizon. However, there are some notable exceptions, such as: select job training programs, work subsidies to encourage work among low-skilled workers (including add-ons to the earned income tax credit like <a href="https://www.mdrc.org/sites/default/files/PaycheckPlus_FinalReport_0.pdf">Paycheck Plus</a>), and interventions with large spillovers to children, such as subsidized moves to <a href="https://www.aeaweb.org/articles?id=10.1257/aer.20150572">low-poverty neighborhoods</a> and <a href="http://jhr.uwpress.org/content/early/2018/01/25/jhr.54.3.0816.8173R1.abstract">health insurance</a> for pregnant women. In these last two cases, the effects on children include higher educational attainment and earnings long after the interventions have taken place. The pandemic’s sharp employment losses among Black and Latinx workers, especially women, mean that income support for adults is a critical component of economic recovery. Subsidies for affordable and high-quality child- and elder-care may also be needed to allow workers to reenter the labor market. Moreover, the geographical concentration of workers without jobs will likely require new interventions to target the segregated neighborhoods that characterize many cities, especially because high-return neighborhood job creation strategies have been difficult to develop.</p> <h3>Juvenile and criminal justice</h3> <p>Disadvantaged youths are at high risk of becoming victims or perpetrators of crime. Two mechanisms typically apply when juvenile and criminal justice interventions have high returns: (1) Teens build human capital and become less likely to be exposed to the criminal justice system, expanding their future job opportunities; and (2) safety and quality of life improve in disadvantaged neighborhoods where violent crimes disproportionately occur. As one example of a high-return intervention, the <a href="https://academic.oup.com/qje/article-abstract/132/1/1/2724542">Becoming a Man (BAM)</a> program prevents automatic escalation into violent crimes through cognitive behavioral therapy group sessions that help youths reevaluate their automatic responses. Another set of interventions creates <a href="https://science.sciencemag.org/content/346/6214/1219.abstract">summer jobs</a> and transitional employment for teens, which in turn lowers their risk of arrest. At a time when Covid-19 has disproportionately challenged low-income neighborhoods and our society is reexamining the appropriate role of police, we need interventions that can reduce teens’ and young adults’ exposure to the juvenile and criminal justice system.</p> <h3>Interventions with less evidence of high returns</h3> <p>Some interventions have been evaluated and demonstrate low returns, while other interventions have yet to be evaluated. Considering the first case, low-return interventions targeting opportunity gaps typically have some or all of the following distinguishing features: (1) the evidence suggests the economic gains are small or not widespread enough; (2) the intervention is not well-targeted; (3) the intervention is very costly or resource-intensive; and (4) unintended consequences undermine the intent of the intervention and may even lead to harm. Many existing interventions related to gaps in <a href="https://www.sciencedirect.com/science/article/pii/S105113771730205X">homeownership</a> and <a href="https://www.annualreviews.org/doi/full/10.1146/annurev-economics-082312-125807">wealth accumulation</a> (by way of financial literacy programs) have some or all of these features. To narrow racial disparities in these areas, new interventions may be needed to achieve high returns. Economic research suggests there may be more scope for interventions that keep struggling homeowners from losing their homes, such as by providing <a href="https://ig.ft.com/sites/business-book-award/books/2014/shortlist/house-of-debt-by-atif-mian-and-amir-sufi/#:~:text=Definitely%20not.,large%20drop%20in%20household%20spending.">loan relief</a> during periods of falling or stagnant house prices. Another potential intervention might support <a href="https://www.sciencedirect.com/science/article/pii/S0166046217304738">new mortgage</a> <a href="https://press.uchicago.edu/ucp/books/book/chicago/H/bo20832545.html">loan products</a> that help homeowners build equity faster than the amortization schedule of a traditional 30-year fixed-rate mortgage. “<a href="https://journals.sagepub.com/doi/abs/10.1007/s12114-010-9063-1">Baby bonds</a>,” where the federal government creates savings accounts for newborns, also show promise. However, such new interventions would need to be rigorously evaluated and compared against those that offer more certainty of high returns.</p> <h3>Conclusions</h3> <p>In this post, we reviewed three categories of high-return interventions: those related to children’s health and education, income supports for adults that spill over onto children, and youth crime prevention. All of these interventions affect the human capital of young individuals, who have many years over which the benefits can accrue and may be receptive to behavioral “<a href="https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/5055/nudge.pdf">nudges</a>,” as well as material support. Of the wide inequality in wealth and especially of the wealth gap between racial groups, about half can be accounted for by differences in earnings, the main byproduct of human capital. This motivates researchers to understand better how those earnings accumulate into wealth, such as through homeownership and financial-market participation—and especially how that process varies across people. More work is needed to develop and validate interventions in this area. There are also important tradeoffs to consider in dedicating limited resources to new interventions over proven ones that deserve robust debate across our communities.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> There are many possible policy interventions, so we limit our discussion in three ways. First, we only consider interventions that have been sufficiently evaluated, but there may be interventions that have not been evaluated and are still high-return. There may also be new interventions in development. In both cases, greater scrutiny would help broaden our understanding of the high-return interventions that are available. Second, low-return interventions may be worth considering if they help achieve desirable non-economic objectives, but this discussion is outside our scope. Third, the purpose of interventions often is to help people with immediate needs, and such strategies are often worth pursuing without regard to whether they lead to a large or permanent narrowing of opportunity gaps.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> The evidence on the returns for inputs beyond traditional resource-based ones and community programs that are often bundled with charter schools suggests more muted effects.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> This <a href="~/link.aspx?_id=CBCBB92BC7714F6E90B6E6F6084D69FA&_z=z">speech</a> by Chicago Fed President Evans provides a framework for thinking about the risks of attending and financing college, as well as risk-mitigating policy interventions.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/chicago-flood-risk https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/chicago-flood-risk Wed, 26 Aug 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>After the third straight “wettest May on record” for Chicago, if you’re a Chicagoan you may be wondering if your home is at risk for serious flooding. One way to figure this out might be to look at the flood maps provided by the Federal Emergency Management Agency (FEMA), the federal agency in charge of national disaster preparedness and relief. FEMA flood maps say that only 0.3% of properties (three out of every 1,000) should flood more than once every 100 years. If you base your opinion of your home’s flood risk on FEMA flood maps alone, you will probably think your home is safe. However, if you watched the news coverage of the May 2020 storms with images of the Riverwalk underwater, the Willis Tower as a dark obelisk in the skyline after its basement flooded, neighborhood streets turned into rivers, and yards turned into ponds, you may be thinking that risk assessment seems too low, and you’d be right. In this blog, I discuss flooding in Chicago and why FEMA flood maps underrepresent flood risk in Chicago.</p> <h3>What FEMA flood maps miss</h3> <p>Although FEMA performs geological surveys periodically to determine which areas are likely to face flooding during a once-in-100 year flood, the maps FEMA creates from these surveys do not always provide a complete picture of flood risk. In Chicago, there are two primary reasons for this mismatch.</p> <p>First, when designating flood zones, FEMA does not take into account the primary source of flood risk for most Chicago properties, surface flooding. FEMA’s designation process focuses on flood risk from surging coastal tides and overflowing rivers, but does not consider surface floods, which occur when heavy rainfalls overwhelm local drainage and sewer systems independent of an overflowing body of water. The City of Chicago's combined sewer system is only designed to handle runoff from a once-in-five year storm, which leaves many Chicago neighborhoods particularly susceptible to this type of surface flooding. This means that many Chicago properties that face surface flood risk are likely to be left out of FEMA’s calculations; and only properties located adjacent to Lake Michigan or one of Chicago’s many rivers and canals are likely to be in a FEMA once-in-100 year flood zone.</p> <p>Second, FEMA flood maps are often outdated: Most of Chicago’s maps were last updated in 2008 and flood risk can change over time. One expected driver of increased flood risk in the Midwest is climate change. Scientists from the Environmental Policy and Law Center predict that springs in the Great Lakes will become increasingly wetter over the course of the next century, and heavy rainfalls, such as those that produce surface flooding, will occur more frequently and with greater intensity.<sup><a href="#ftn1" id="ftnref1">1</a></sup></p> <p>New land development that increases the amount of impervious cover, such as sidewalks, streets, parking lots, and buildings, and fails to account for stormwater runoff can also increase flood risk. Approximately 60% of Chicago is covered in impervious surfaces, a number that has been increasing marginally over the past decade.<sup><a href="#ftn2" id="ftnref2">2</a></sup> To reduce the impact of development on flood risk, Chicago and the surrounding collar counties have all implemented some form of “green” stormwater infrastructure into their building codes and city planning. Conventional “gray” stormwater infrastructure uses a combination of gutters, curbs, piping, and drains to move stormwater runoff away from impervious surfaces and into collection systems, such as sewers and underground reservoirs. In contrast, green stormwater infrastructure uses systems that mimic nature to capture stormwater where it falls, keeping it out of the sewer system entirely. In Chicago, these green efforts include the installation of rooftop gardens, the use of permeable pavement in alleys and roads, the greening of arterial streets, the planting of native gardens, and the use of rain barrels to capture stormwater. </p> <h3>Other estimates of Chicago flood risk </h3> <p>FEMA flood maps place 0.3% of Chicago properties in a once-in-100 year flood zone, but an alternative measure from First Street Foundation (FSF) estimates that 12.8% of Chicago’s 600,000+ properties may be at risk during a once-in-100 year flood, a difference of 75,623 properties.<sup><a href="#ftn3" id="ftnref3">3</a></sup> So what explains this difference? </p> <p>Well, FSF’s methodology for assessing flood-risk differs from FEMA’s both in terms of how flood risk is measured and what types of flood risk are included in that measurement. To create their flood-risk estimate, FSF uses a variety of hydrologic models that study rainfall and stormwater in connection to an area’s geography and geology and hydraulic models that examine the physics of water and in particular, its behavior in sewer and storm systems. The FSF models incorporate historical flood data, along with current geological and climate data to <em>continually assess</em> flood risk at the individual property level. Compare this to FEMA’s approach, which performs costly hands-on geological surveys to <em>periodically assess</em> the flood risk of a given area. Most importantly, unlike FEMA, FSF includes surface-flood risk from heavy rainfall in their flood-risk model, and this explains much of the increase in Chicago’s flood risk under the FSF methodology.</p> <p>Historical flood-loss data suggests that the FSF methodology more accurately identifies flood risk in Chicago than FEMA flood maps. Two recent studies by the Center for Neighborhood Technology of Cook County (CNT) and the Illinois Department of Natural Resources (IDNR) found little correlation between a property being in a FEMA flood zone and flood damage.<sup><a href="#ftn4" id="ftnref4">4</a></sup> The IDNR study found that 90 percent of flood damage claims between 2007 and 2014 were for properties located outside of the mapped 100‐year floodplain. The overwhelming majority of flood damage claims in Chicago are related to basement flooding, which often occurs when heavy rainfalls overwhelm sewer systems that then back up and send raw sewage into peoples’ homes. </p> <p>While basement flooding doesn’t draw the same media attention as videos of people stuck on rooftops awaiting rescue, the economic costs and impacts on mental and physical health and safety can be significant. Flooding has cost Illinois over $3 billion in damages between 2000 and 2018, more than any other state outside of the hurricane-plagued Gulf Coast.<sup><a href="#ftn5" id="ftnref5">5</a></sup> For homeowners, surface floods that inundate properties can damage foundations, which may require costly remediation to repair. And if basement flooding occurs because of sewage backup, in addition to the costs of replacing damaged items, furniture, and drywall, cleanup costs to remove standing water and sewage can be substantial and the process can be quite distressing. There are harrowing stories from Chicago residents in the Southside neighborhood of Chatham coming home to the stench of knee-deep sewage waste and opening up their basement door to a buzzing swarm of “sewer flies,” whose eggs had washed into their homes during a storm.<sup><a href="#ftn6" id="ftnref6">6</a></sup> Chatham, built in one of the lowest parts of the city, in an area once filled with wetlands known as “Hogs Swamp,” is one of the many Chicago neighborhoods located outside of a FEMA flood zone that shows significant flood risk in the FSF methodology.</p> <p>Table 1 shows the concentration of Chicago’s flood risk by zip code ordered by the number of properties with a once-in-100 year flood risk as modeled by FSF. According to the FSF model, flood risk in Chicago is concentrated in a few zip codes: 75% of Chicago’s once-in-100 year flood-risk properties reside in 15 of Chicago’s 64 zip codes, and these zip codes are home to 43% of Chicago’s total properties. Properties with the highest risk of flooding are even more concentrated; the same 15 zip codes contain 93% of properties with once-in-20 year flood risk, which is equivalent to a 5% chance of flooding in any given year. </p> <p> <h3>1. Chicago zip codes with most properties in 1-100 year flood zone</h3> <div class="table-responsive"> <table class="table table-bordered"> <thead> <tr class="text-center"> <td colspan="4"></td> <th colspan="2"># of properties by yearly likelihood of flooding</th> <th colspan="2">Demographic information</th> </tr> <tr class="text-center"> <th>Zip Code</th> <th>Neighborhood</th> <td></td> <th># of Properties</th> <th>1-in-100</th> <th>1-in-20</th> <th>Median household income ($2016)</th> <th>Estimated % residents that are African American or Hispanic</th> </tr> </thead> <tbody> <tr> <td class="text-right">60618</td> <th>North Center</th> <th>Northwest</th> <td>19,832</td> <td>8,401</td> <td>1,928</td> <td>64,678</td> <td>56.6</td> </tr> <tr> <td class="text-right">60632</td> <th>Brighton Park</th> <th>Near South</th> <td>18,173</td> <td>6,309</td> <td>7</td> <td>42,523</td> <td>89.2</td> </tr> <tr> <td class="text-right">60625</td> <th>Albany Park</th> <th>Northwest</th> <td>12,773</td> <td>4,359</td> <td>1,378</td> <td>62,074</td> <td>56.8</td> </tr> <tr> <td class="text-right">60621</td> <th>Englewood</th> <th>South</th> <td>13,973</td> <td>4,351</td> <td>1,201</td> <td>20,986</td> <td>99.6</td> </tr> <tr> <td class="text-right">60622</td> <th>Bucktown</th> <th>Near West</th> <td>12,058</td> <td>3,944</td> <td>2,888</td> <td>82,366</td> <td>42.2</td> </tr> <tr> <td class="text-right">60609</td> <th>Back of the Yards</th> <th>West</th> <td>21,185</td> <td>3,579</td> <td>1,276</td> <td>34,078</td> <td>85.6</td> </tr> <tr> <td class="text-right">60636</td> <th>West Englewood</th> <th>South</th> <td>15,931</td> <td>3,550</td> <td>1,119</td> <td>28,615</td> <td>99.5</td> </tr> <tr> <td class="text-right">60623</td> <th>Little Village</th> <th>West</th> <td>17,441</td> <td>3,377</td> <td>541</td> <td>31,295</td> <td>98.2</td> </tr> <tr> <td class="text-right">60617</td> <th>Calumet Heights</th> <th>South West</th> <td>31,834</td> <td>3,225</td> <td>40</td> <td>38,799</td> <td>93.3</td> </tr> <tr> <td class="text-right">60608</td> <th>Douglas Park</th> <th>South West</th> <td>17,282</td> <td>3,042</td> <td>1,736</td> <td>39,133</td> <td>83.6</td> </tr> <tr> <td class="text-right">60647</td> <th>Logan Square</th> <th>West</th> <td>14,406</td> <td>2,948</td> <td>2,212</td> <td>63,560</td> <td>64.7</td> </tr> <tr> <td class="text-right">60804</td> <th>Cicero</th> <th>West</th> <td>18,746</td> <td>2,528</td> <td>1,316</td> <td>44,102</td> <td>90.8</td> </tr> <tr> <td class="text-right">60642</td> <th>Goose Island</th> <th>Central</th> <td>4,764</td> <td>2,499</td> <td>1,578</td> <td>101,939</td> <td>30.0</td> </tr> <tr> <td class="text-right">60619</td> <th>Chatham</th> <th>South</th> <td>21,431</td> <td>2,292</td> <td>11</td> <td>33,352</td> <td>99.5</td> </tr> <tr> <td class="text-right">60645</td> <th>West Rogers Park</th> <th>North</th> <td>7,644</td> <td>2,279</td> <td>559</td> <td>51,170</td> <td>54.9</td> </tr> <tr> <td></td> <td># of Properties</td> <td>Top 15</td> <td>247,473</td> <td>56,683</td> <td>17,790</td> <td colspan="2"></td> </tr> <tr> <td></td> <td># of Properties</td> <td>Rest of Chicago</td> <td>326,516</td> <td>18,602</td> <td>1,079</td> <td colspan="2"></td> </tr> <tr> <td></td> <td>% of Properties</td> <td>Top 15</td> <td>43.1%</td> <td>75.3%</td> <td>94.3%</td> <td colspan="2"></td> </tr> </tbody> </table> </div> <figcaption class="caption"> Sources: Flood data from <a href="http://www.floodfactor.com/">First Street Foundation’s Flood Factor</a> and author’s calculations. Demographic data from U.S. Census Bureau, via <a href="http://www.city-data.com/">city-data.com</a> and <a href="http://www.censusreporter.org/">censusreporter.org</a>. </figcaption> </p> <p>Flood risk in Chicago is not just concentrated geographically, but it also has a greater impact on minority neighborhoods, many of which face no “traditional” flood risk from overflowing rivers or surging tides. Chicago’s high-flood risk neighborhoods are clustered in Chicago’s South, West, and Southwest sides. Most of these neighborhoods are predominantly African-American and Hispanic. This finding of concentration of flood risk in minority neighborhoods is further supported by an analysis of flood insurance claims data by the Center for Neighborhood Technology (CFNT), which finds that 72% of Chicago’s total flood damage claims between 2007 and 2016 were from predominantly African American or Hispanic neighborhoods.<sup><a href="#ftn7" id="ftnref7">7</a></sup> In addition, unlike the neighborhoods of Albany Park and North Center, which lie along the Chicago River and are home to properties in a FEMA once-in-100 year flood zone, many of the affected minority neighborhoods are located away from any body of water and have no traditional flood risk. Chatham, Englewood, Douglas Park, and Back of the Yards, all of which have populations that are more than 80% African American or Hispanic (see table 1), are not located near any waterway and have some of the greatest flood risk in the city. According to CFNT, the affected neighborhoods also have median incomes that are lower than average, making it more difficult for households to pay for necessary repairs and cleanup.</p> <h3>What residents can do about flood risk</h3> <p>Most home and renters insurance policies do not cover damages from floods, but a separate flood insurance policy can help with the costs associated with cleanup and repairs following a flood. Homeowners with a mortgage who reside in a designated once-in-100 year flood zone are generally required to purchase flood insurance by their lenders through the National Flood Insurance Program (NFIP). However, even if a home is outside of a FEMA flood zone, a homeowner or renter can still purchase a flood insurance policy through the NFIP, usually at a reduced rate. However, most Chicagoans who insure against the cost of flooding do so by purchasing a rider on their existing home-insurance policy. These riders typically cover sewage backup and basement seepage and provide $5,000 to $10,000 after a deductible for cleanup costs, repairs, and damaged items. As a renter in Chicago, you would likely be on the hook for any damages to electronics, furniture, or other items due to flooding, as well as the costs of alternative lodging like a hotel room, if flooding makes your apartment uninhabitable. For these reasons, renters in Chicago, especially anyone in a “garden” apartment, might want to consider a flood insurance policy.</p> <p>Home flood mitigation infrastructure like basement sump-pumps and drainage systems can help prevent buildup of storm waters in a home, but since everyone shares the same sewer system, flood mitigation in Chicago is largely a community effort. The Metropolitan Water Reclamation District of Greater Chicago has been encouraging investment in green infrastructure to keep stormwater out of sewers. In this vein, some residents have taken to replacing their lawns with native plants and grasses to better absorb rainwater and installing rain barrels to capture rain, but the city is also undertaking some large-scale gray infrastructure projects to increase the capacity of the sewer system during heavy storms.</p> <p>In the mid-1970s, Chicago began one of the nation’s longest running–and most expensive—public works projects that is still under construction today, the 109-mile long Deep Tunnel. The Deep Tunnel is massive snaking labyrinth of subway-sized tunnels that run under the city and is designed to carry storm runoff from local sewer systems into three suburban wastewater reservoirs. The project is expected to be completed in 2029, and parts of the system are already operational. However, the Deep Tunnel will not fix all of Chicago’s flooding problems. Some hydrologists argue that this massive system will still be unable to handle the wastewater from a once-in-50 year storm even after completion. This is because many of the local sewer systems are unable to drain stormwater quickly enough into the Deep Tunnel; one engineer described draining water from some local sewer systems into the Deep Tunnel as “emptying a bathtub with a straw.”<sup><a href="#ftn8" id="ftnref8">8</a></sup></p> <p>The City’s long-running “Rainblocker” program is another (sometimes controversial) attempt to keep stormwater out of the sewer system. The city has installed nearly 200,000 inlet restrictors or “Rainblockers” on street drains, which prevent stormwater from entering sewers, leaving it to pool up in the streets. However, in some areas this has done more than make it annoying to cross the street after a storm. The pooled water has poured over curbs and into residents’ homes. This all highlights the fact that there is no simple solution to preventing surface flooding in Chicago. Managing flood risk is a difficult and interconnected process, requiring coordination and investment across households, neighborhoods, and communities.</p> <h3>The future of Chicago flood risk</h3> <p>Chicago faces far greater flood risk than most parts of the country outside of the Gulf Coast, but FEMA flood maps do not fully capture these risks. Climate change could well exacerbate Chicago’s flooding problems in the coming decades, as storms that quickly drop inches of precipitation capable of overwhelming sewer systems become more frequent and intense. Chicago has undertaken ambitious gray infrastructure projects, such as the Deep Tunnel, that should alleviate some flooding issues, but more work needs to be done in developing green infrastructure to keep stormwater out of the sewer system to begin with. For individual homeowners, rain barrels and native gardens may help to reduce stormwater runoff, and flood insurance can be used to limit the financial loss from flooding.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> More details <a href="http://elpc.org/wp-content/uploads/2019/03/Executive-Summary-GLClimateChange.pdf">online</a>.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> More details <a href="https://www.chicago.gov/content/dam/city/progs/env/ChicagoGreenStormwaterInfrastructureStrategy.pdf">online</a>.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> Data from First Street Foundation and their <a href="https://www.floodfactor.com/">property level flood-risk website</a>.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> <a href="https://www.cnt.org/sites/default/files/publications/CNT_PrevalenceAndCostOfUrbanFlooding2014.pdf">CNT study</a>, and <a href="https://www2.illinois.gov/dnr/WaterResources/Documents/Final_UFAA_Report.pdf">IDNR study</a>.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> Details <a href="https://news.wttw.com/2019/09/26/report-details-human-and-economic-costs-flooding-illinois-us">online</a>.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> Details <a href="https://www.chicagotribune.com/news/breaking/ct-met-chicago-flooding-basement-sewage-20190506-story.html">online</a>.</p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> Details <a href="https://www.cnt.org/sites/default/files/publications/IMPJ-Assessing-Disparities-of-Urban-Flood-Risk-for-Households-of-Color-in-Chicago.pdf">online</a>.</p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> More information <a href="https://slate.com/business/2019/01/chicagos-deep-tunnel-is-it-the-solution-to-urban-flooding-or-a-cautionary-tale.html">online</a>.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> <style type="text/css"> table tbody { text-align: center; } table tbody th { text-align: left; } </style> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/iowas-road-to-recovery-and-growth https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/iowas-road-to-recovery-and-growth Tue, 25 Aug 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>Iowa, like every U.S. state, has been challenged by the sudden health and economic crises caused by Covid-19. Then on August 10, a severe storm with winds exceeding 100-mph swept across the state, damaging crops and leaving hundreds of thousands of residents without power. To discuss Iowa’s road to recovery, the Chicago Fed’s Project Hometown hosted a <a href="~/link.aspx?_id=A33BA24CB0AE4F4EACEF9786C5575142&_z=z">panel discussion</a> on Tuesday, August 18, with experts from the state who examined the roles that governments, businesses, and nonprofits can play in promoting an inclusive economic recovery for all of Iowa’s people and industries.</p> <p>At the start of 2020, Iowa’s economy was relatively flat. Economic growth in the state lagged behind that of the region, a result of job losses in manufacturing and agriculture, two of the largest sectors in the state, said Dave Swenson, a research scientist at Iowa State University. As a state that produces more than it consumes, Iowa’s economy “is a function of how well the rest of the United States and the rest of the world is doing. We sell to them,” Swenson said. The U.S. consumer sector as a whole was looking fairly strong at the start of the year, with increases in wages, low unemployment, and a strong housing market, noted Kanlaya Barr, a senior economist at John Deere, a leading agricultural equipment manufacturer, so Iowa’s economic outlook was fairly positive. Then the pandemic hit, causing the consumer sector to crater, taking Iowa’s economy with it.</p> <p>One of the first casualties was the state’s ethanol production. Ethanol, which is added to gasoline, is a renewable fuel made primarily from corn. When traffic on the nation’s roads plummeted due to school and business closures, around 40% of Iowa’s ethanol producers shut down or reduced their production, Barr said. Producers in agricultural sectors, including hogs and milk, soon followed suit, a consequence of Covid outbreaks at meat processing facilities, as well as the sudden disruption to the country’s wholesale food supply chain as restaurants and schools shuttered for months. In June, Iowa’s unemployment was 8%, more than double what it was the previous June, stated moderator David Oppedahl, a senior business economist at the Chicago Fed.</p> <p>Iowa’s agriculture sector was further harmed by the derecho storm in early August. While the extent of the damage is not yet fully known, Barr estimated that about 3.5 million acres of corn and 2.5 million acres of soybeans lost as much as half of their harvest.</p> <p>The derecho’s damage caused significant human suffering as well, Swenson added, including damage to thousands of homes across the state. This complicates the challenges that Iowa’s smaller towns and cities were already facing. “The agricultural sector has built-in mechanisms that help it out. Cities, not so,” Swenson said. He pointed out that Iowa’s non-metropolitan cities never recovered from the Great Recession of 2007–09, and they have some of the highest unemployment rates in the state. These “micropolitan” areas are often served by small businesses, many of which lack the financial resources to weather prolonged closures caused by the pandemic. </p> <p>The concurrent crises of the past six months have also taken their toll on Iowa’s workforce. The consequences have been particularly acute for minorities, essential workers, and undocumented workers. Minorities have disproportionately high rates of Covid, with repercussions both for their health and their ability to work. Minority-owned small businesses are also particularly vulnerable, as underlying inequalities in the economy mean they often have fewer financial resources, lower credit scores, and lower profitability than non-minority owned businesses, Quentin Hart, mayor of Waterloo, said.</p> <p>Iowa’s essential workforce, many of whom work in the state’s large agricultural sector, has also suffered disproportionately during the pandemic. Johnny Alcivar, director of Workforce Programs at Proteus, Inc., a nonprofit that provides services to farmworkers, partnered with the state of Iowa to perform rapid Covid testing of all farm crews that arrived in the state this spring. Almost every crew had at least one positive case, Alcivar reported. </p> <p>Furthermore, a significant number of agricultural workers are undocumented immigrants who are ineligible for CARES Act funds and often for other forms of government assistance. This population has an immediate need for help with basic needs, such as housing, utilities, and transportation, Alcivar said, and while Proteus has sought additional funding to provide that assistance, the demand exceeds their resources. </p> <p>Given the numerous causes of distress—the Covid pandemic, the derecho, longstanding socioeconomic inequities—the road to recovery is not likely to be fast. But the panel did identify specific measures that will make a difference. </p> <p>To save small businesses, rebuild damaged property, and continue to serve their residents, Iowa’s cities need rapid relief funds from the state and federal government, Hart advised. Iowa’s cities are facing significant revenue losses as proceeds from road use taxes, hotel/motel taxes, and local sales taxes have all declined due to changing consumer behavior caused by the pandemic. The disbursement of relief funds should take into account the disparate impact of Covid, Hart continued, noting that some areas, especially those with meat packing plants, have been impacted to a much greater extent than others. Hart also advocated a federal infrastructure bill, which would help provide jobs, rebuild damaged property, and invest in essential infrastructure.</p> <p>The workforce also needs assistance in the form of health safety and job training. Health safety measures are still needed to protect workers from Covid, all the more so if there is a second wave of the pandemic. For workers who have lost jobs, Hart described a local initiative by Hawkeye Community College to train students to build houses. This teaches useful job skills while also increasing the supply of affordable housing, which is another need for many families, Alcivar observed.</p> <p>Because these are unprecedented times, no one approach will be sufficient to rebuild Iowa’s communities and help them fully recover from the health and economic crises. “We cannot take a one-size-fits all approach,” Hart said. Rather, the moment requires imagination and new ways of doing things. “There’s a lot of hard work ahead,” Oppedahl concluded, “but working together and being innovative will help lead to a better economy for all people.”</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/pace-scale-quality https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/pace-scale-quality Fri, 21 Aug 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>On Monday, August 17, the Chicago Fed’s Project Hometown convened a <a href="~/link.aspx?_id=BD78808D982F48DFAF1B3F7DE8DBD327&_z=z">panel</a> of experts to discuss the past failure and future promise of transportation, urban planning, and architecture to deliver an equitable quality of life across Chicago. </p> <p>Like many cities, Chicago embodies a “tale of two cities: on the one hand, a thriving, glamorous downtown, and on the other hand, the South and West sides plagued by everything from violence to decades of disinvestment,” described Blair Kamin, architecture critic for the <em>Chicago Tribune</em>. This bifurcated landscape, Kamin said, is partly the result of an unfettered capitalism that has led to “ever-more-luxurious private space” rather than “uplifting the public realm that all citizens experience.” At the same time, systemic racist practices and policies have led communities of color to a state of disrepair, poverty, and neglect, observed Kevin Sutton, executive director of the Foundation for Homan Square. </p> <p>But the defining features of 2020—a global health crisis and civil protest of longstanding racial and economic disparities—have led to an awakening, Sutton said, that the challenges faced by Black and Brown communities are ones we must confront together. This provides “an opportunity for thinking differently about how we interact in central cities,” moderator Susan Longworth, a senior advisor for community and economic development at the Chicago Fed, stated. By mobilizing resources from corporate citizens, institutions of higher learning, nonprofit partners, and local, state, and federal government, the pillars of urban design—transportation, urban planning, and architecture—have a significant role to play in making Chicago’s landscape more equitable and inclusive. </p> <p>Transportation plays the vital economic function of bringing people from their homes to their jobs. While Chicago has “excellent transportation bones,” it also suffers from a disjointed, inefficient system that causes long, crowded, and expensive commutes for many riders, noted Sharon Feigon, executive director of the Shared-Use Mobility Center. As a result, many communities on Chicago’s South and West sides “struggle to connect to economic opportunities that exist in job centers just a few miles from where they live,” Longworth observed.</p> <p>The transportation landscape experienced a significant shock as a result of the Covid crisis, making this an opportune moment to design a more efficient and equitable system. Feigon identified four priorities. First, buses, which carry the most people yet move the slowest, need priority on the roads. Second, bikers, scooters, and pedestrians need to be able to travel safely. These modes of transportation, which support social distancing, environmental consciousness, and individual health, have all seen a significant jump in demand. Third, the different parts of Chicago’s transit system need to be integrated so riders need only one payment system and can transfer with ease. And fourth, new mobility hubs should be located in underserved neighborhoods.</p> <p>These underserved communities, often majority Black and Brown, have a history of neglect from the city’s civic leaders. As Kamin noted, when architects Daniel Burnham and Edward Bennet introduced their famous 1909 plan for Chicago, “the business leaders who sponsored the plan crushed draft sections that would have uplifted Chicago's downtrodden neighborhoods.” Since then, too little attention has been paid to the consequences of urban planning for the city’s most vulnerable citizens, Sutton said—for instance, how the placement of features such as viaducts and rail lines cause the destruction of some neighborhoods and the gentrification of others, displacing many people in the process.</p> <p>To redress this historical neglect, Chicago has now launched Invest South/West, an ambitious initiative to revitalize ten of Chicago’s poorest neighborhoods. As Maurice Cox, commissioner of Chicago’s Department of Planning and Development, described, the city seeks to incentivize private investment in areas that have long been ignored by making public land available for development. </p> <p>In each neighborhood, the city collaborated with the community to identify iconic, beloved buildings that will anchor construction of amenities to enhance the community’s quality of life. Cox emphasized that developers who submit proposals must illustrate how the construction will contribute to a vibrant, urban public realm that will provide opportunities for people to work, play, and shop in the neighborhoods where they live. </p> <p>The vision of equitable urban development described by Cox will ultimately be brought to life by architects. Architecture may not at first glance appear likely to remedy economic exclusion. And indeed, as Kamin said, architects cannot change a bigoted mind, convince a banker to provide a loan, or halt violence. </p> <p>But architecture is a ubiquitous element that—literally—shapes how we live. “Because architects are trained to think outside the box, they can help clients recognize and realize the latent potential of a seemingly irredeemable building or piece of land. They can help to ameliorate the effects of urban poverty through such building types as community centers or through public spaces that make communities attractive and safe,” Kamin said. Architecture thus has a significant role to play in elevating a neglected urban landscape. </p> <p>To conclude the discussion, Longworth reflected on the juxtaposition of trust and risk when it comes to urban planning at a time when so many things that we took for granted have changed. Sutton pointed out that communities of color have been making plans for years, with little tangible results. To build trust, Sutton said, requires actual development at a rapid <em>pace</em> and large <em>scale</em>. Equally important, Kamin added, is <em>quality</em>, to avoid development disasters such as Chicago’s high-rise public housing. These three features can be achieved, Cox said, when the risks are shared by the city, the community, and private investment. Including community leaders in the process means people understand that development is something that’s being done <em>with</em> them, not <em>to</em> them, which increases the likelihood of success. This moment, then, despite its uncertainty and tragedy, may be a singular opportunity “to align resources, align jobs with transportation, align public and private investment, align pace and scale and also quality” in such a way as to finally deliver on the promise of equitable urban development for all of Chicago, Longworth concluded.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/the-influence-and-limits-of-central-bank-backstops https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/the-influence-and-limits-of-central-bank-backstops Mon, 17 Aug 2020 00:00:00 -0500 <p class="blurb">The Federal Reserve has deployed a wide array of emergency lending facilities in response to the economic crisis of the Covid-19 pandemic. By regulation, lending facilities created under the Fed’s emergency powers are “backstops,” charging a penalty interest rate that encourages borrowers to obtain funds in the market when possible. Perhaps as a result, as figure 1 shows, many of the Fed facilities have seen little borrowing, and total use has leveled off as financial stresses have diminished.<a href="#ftn2" name="ftnref2"><sup>2</sup></a> In this post, I explain why central banks offer backstop facilities and describe two ways they influence financial conditions: by providing a safety net and by influencing bargaining in private transactions. I also discuss some limitations of backstops. </p> <p>The Federal Reserve has deployed a wide array of emergency lending facilities in response to the economic crisis of the Covid-19 pandemic.<a href="#ftn1" name="ftnref1"><sup>1</sup></a> By regulation, lending facilities created under the Fed’s emergency powers are “backstops,” charging a penalty interest rate that encourages borrowers to obtain funds in the market when possible. Perhaps as a result, as figure 1 shows, many of the Fed facilities have seen little borrowing, and total use has leveled off as financial stresses have diminished.<a href="#ftn2" name="ftnref2"><sup>2</sup></a> In this post, I explain why central banks offer backstop facilities and describe two ways they influence financial conditions: by providing a safety net and by influencing bargaining in private transactions. I also discuss some limitations of backstops. </p> <p> </p> <h3>Figure 1. Federal Reserve 13(3) Facilities</h3> <p><img height="500" alt="Figure 1" width="800" src="~/media/84415e655ff84dbeaacd1f5ba9d8caef.ashx" /></p> <figcaption class="caption">Source: Federal Reserve Board. Amounts shown are asset purchases and credit extended by facilities and do not include Treasury Department contributions. Asset purchases are shown at book or face value, except for CCF exchange-traded fund holdings on and after June 17, which are shown at fair value.</figcaption> <p> </p> <h3>Why backstops charge a penalty rate</h3> <p>In a financial crisis, a central bank confronts a tension between the immediate and longer-term potential effects of its actions. In the short term, the central bank can best preserve the flow of credit to households and businesses by making loans when private lenders do not. But in the longer term, if borrowers grow accustomed to the central bank coming to the rescue whenever there are signs of stress, they may waste the funds, take too much risk, or become unduly reliant on central bank credit.</p> <p> </p> <p>Conventional wisdom among central bankers—dating to the nineteenth-century British essayist Walter Bagehot—calls for balancing these tensions during a crisis by lending freely against good collateral at a penalty interest rate.<a href="#ftn3" name="ftnref3"><sup>3</sup></a> The knowledge that credit is available, even if at a high rate, can calm markets and prevent wider panic. At the same time, the high rate has several benefits:</p> <div class="cfedStandardSpacing"> <ul> <li>In normal times, before a crisis arrives, borrowers understand that central bank credit during a crisis would be expensive. This limits the incentive to take risks in the expectation of a rescue.</li> <li>During the crisis, borrowers are discouraged from coming to the central bank without a genuine need. </li> <li>When market functioning returns to normal, facilities are “self-liquidating”: Borrowers have an incentive to return to markets, preserving the private sector’s long-run role in allocating capital to its most productive use.</li> </ul> </div> <p> </p> <p>The Federal Reserve Board has adopted these principles in its Regulation A, which specifies that the Fed’s emergency credit facilities<a href="#ftn4" name="ftnref4"><sup>4</sup></a> must charge an interest rate that “affords liquidity” but “is a premium to the market rate in normal circumstances” and “encourages repayment … as the unusual and exigent circumstances that motivated the program or facility recede and economic conditions normalize.”<a href="#ftn5" name="ftnref5"><sup>5</sup></a> Similarly, the Fed’s discount window, though it is not an emergency facility, operates as a backstop by lending to banks at a spread above market rates.<a href="#ftn6" name="ftnref6"><sup>6</sup></a></p> <p> </p> <h3>Backstops as a safety net</h3> <p>Because financial markets have mostly returned to functioning smoothly following the extreme volatility experienced in March and April 2020 and because the Fed’s facilities are priced at penalty rates, many potential borrowers can now find credit at more attractive rates in the market. Does this mean the facilities have little effect on financial conditions and the economy? No. I’ll argue that in an uncertain environment like the one we face today, backstop facilities can meaningfully support the economy even though they may see little day-to-day use.</p> <p> </p> <p>One reason backstops make a difference is that they provide a safety net against renewed financial market disruptions. For example, an automaker deciding whether to ramp up production must consider whether families will be able to get car loans by the time the new vehicles roll off the line. If there is a risk that renewed market stresses will make auto loans extremely expensive or hard to come by in the future, the automaker may choose not to increase production, even if loans are readily available right now and there is unmet demand for cars. A backstop that helps to ensure auto loans will keep flowing and provides some certainty about interest rates, such as the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF), can give the automaker the confidence needed to make more cars. This confidence can support the economy even though, at the moment, few borrowers may want TALF loans.</p> <p> </p> <p>Other backstops can provide the confidence that state and local governments and nonprofit organizations need to commit to spending on essential services, that investors need to place funds in the short-term money markets that deliver credit to a wide range of households and businesses, and that small businesses and mid-size corporations need to plan ahead.</p> <p> </p> <p>A backstop can provide a temporary safety net or a permanent one. The Fed’s emergency lending powers are limited to “unusual and exigent circumstances.” Thus, backstops based on these powers must shut down when the crisis has definitively passed. However, backstops based on other authorities, such as the Fed’s discount window, can be available at all times.</p> <p> </p> <h3>Backstops and bargaining</h3> <p>Credit markets often are not perfectly competitive. Borrowers can most easily get credit from lenders who know them well, which gives a borrower’s regular lenders some bargaining power—if the regular lenders demand a higher-than-market rate, the borrower may have few other places to turn. These pressures can be particularly severe during times of financial stress, as some lenders can pull back from the market, leaving borrowers with even fewer options.</p> <p> </p> <p>In these circumstances, backstops can help restore competitive pressure. For instance, a state government whose regular lenders demanded a very high rate could turn instead to the Fed’s Municipal Liquidity Facility (MLF). Knowing this, the lenders may limit their demands, which can help the state continue to obtain market credit at reasonable rates without borrowing from the MLF.</p> <p> </p> <p>A related dynamic arises with the Fed’s non-emergency tools for controlling short-term interest rates to implement monetary policy. The Fed currently offers large-scale repurchase agreement (or “repo”) operations that let securities dealers borrow overnight at slightly above market rates, as well as an overnight reverse repo facility that lets investors lend cash to the Fed at slightly below market rates. Because the repo and reverse repo rates differ slightly from market rates, these operations currently see little transaction volume. However, by giving borrowers and lenders an additional option, these tools can still influence bargaining over the rates on private-sector transactions.<a href="#ftn7" name="ftnref7"><sup>7</sup></a></p> <p> </p> <h3>The limitations of backstops</h3> <p>Although backstops can support the flow of credit without being used, they have limitations. In particular, in setting the interest rate penalty and other parameters of a lending facility, central banks face a tradeoff between supporting the flow of credit and encouraging the use of markets where possible. A smaller interest rate penalty can make the backstop more effective by strengthening the safety net and increasing the facility’s influence on private-sector bargaining, but can also reduce the incentive to seek credit in the market.<a href="#ftn8" name="ftnref8"><sup>8</sup></a> Other dimensions, such as eligibility criteria and the duration of the loans, can also affect how attractive a lending facility is relative to private-sector credit. </p> <p> </p> <p>Further, backstops aim to support normal market functioning—not to make credit cheaper or more plentiful than what a normally functioning market would deliver. So, for example, in normally functioning markets, it is typically difficult for companies to borrow when their business prospects are poor and they do not have collateral. A backstop lending freely against good collateral at a penalty rate has little to offer such a borrower. In the current context, backstops can help households, businesses, state and local governments, and other borrowers smooth over temporary disruptions in market functioning or temporary needs for credit due to the pandemic, but backstops alone cannot replace the severe losses that many have experienced from the economic downturn. As Chair Jerome Powell has said, “the Fed has lending powers, not spending powers.”<a href="#ftn9" name="ftnref9"><sup>9</sup></a> </p> <p> </p> <h3>Notes</h3> <p><sup>*</sup><span> I thank colleagues throughout the Federal Reserve System for helpful comments. </span></p> <p> </p> <p><a href="#ftnref1" name="ftn1" title="Footnote 1"></a><a href="#ftnref1" name="ftn1" title="Footnote 1"><sup>1</sup></a><span> For an overview of the emergency lending facilities and other Federal Reserve actions in response to the Covid-19 crisis, see Lorie K. Logan, <a href="https://www.newyorkfed.org/newsevents/speeches/2020/log200414">“The Federal Reserve’s Recent Actions to Support the Flow of Credit to Households and Businesses,”</a> remarks before the Foreign Exchange Committee, Federal Reserve Bank of New York, April 14, 2020.</span></p> <p> </p> <p><a class="”cfedSubheading"></a><a href="#ftnref2" name="ftn2" title="Footnote 2"></a><a href="#ftnref2" name="ftn2" title="Footnote 2"><sup>2</sup></a><span> In contrast to several other facilities, the Paycheck Protection Program Liquidity Facility (PPPLF) grew gradually in size over the course of the spring, after the period of the largest financial market disruptions. However, the PPPLF differs somewhat in character from the other facilities, as it supports small business loans through a government relief program in response to the pandemic.</span></p> <p> </p> <p><a href="#ftnref3" name="ftn3" title="Footnote 3"></a><a href="#ftnref3" name="ftn3" title="Footnote 3"><sup>3</sup></a><span> See Walter Bagehot, 1873, <a class="”cfedSubheading"><em>Lombard Street: A Description of the Money Market</em>, New York: Scribner, Armstrong & Co., pp. 196–198.</a></span></p> <a class="”cfedSubheading"> </a> <p> </p> <p><a class="”cfedSubheading"></a><a href="#ftnref4" name="ftn5" title="Footnote 4"></a><a href="#ftnref4" name="ftn4" title="Footnote 4"><sup>4</sup></a><span> These facilities are created under section 13(3) of the Federal Reserve Act and require the consent of the Treasury secretary.</span></p> <p> </p> <p><a class="”cfedSubheading"></a><a href="#ftnref5" name="ftn5" title="Footnote 5"></a><a href="#ftnref5" name="ftn5" title="Footnote 5"><sup>5</sup></a><span> Regulation A, 12 CFR §201.4(d)(7).</span></p> <p> </p> <p><a href="#ftnref6" name="ftn6" title="Footnote 6"></a><a href="#ftnref6" name="ftn6" title="Footnote 6"><sup>6</sup></a><span> To support the flow of credit, the Federal Reserve Board reduced this spread near the onset of the Covid-19 crisis.</span></p> <p> </p> <p><a href="#ftnref7" name="ftn7" title="Footnote 7"></a><a href="#ftnref7" name="ftn7" title="Footnote 7"><sup>7</sup></a><span> See Sam Schulhofer-Wohl and James Clouse, 2018, “A sequential bargaining model of the fed funds market with excess reserves,” Federal Reserve Bank of Chicago, working paper, No. 2018–08; and Gara Afonso, Roc Armenter, and Benjamin Lester, 2019, “A model of the federal funds market: Yesterday, today, and tomorrow,” <a class="”cfedSubheading"><em>Review of Economic Dynamics</em>, Vol. 33, pp. 177–204.</a></span></p> <a class="”cfedSubheading"> </a> <p> </p> <p><a href="#ftnref8" name="ftn8" title="Footnote 8"></a><a href="#ftnref8" name="ftn8" title="Footnote 8"><sup>8</sup></a><span> In practice, the interest rate on a backstop facility is often specified as a spread over a risk-free market rate. The size of the penalty then depends on how this spread compares with market credit spreads.</span></p> <p> </p> <p><a class="”cfedSubheading"></a><a href="#ftnref9" name="ftn9" title="Footnote 9"></a><a href="#ftnref9" name="ftn9" title="Footnote 9"><sup>9</sup></a><span> Jerome H. Powell, <a href="https://www.federalreserve.gov/newsevents/speech/powell20200513a.htm">“Current Economic Issues,”</a> remarks at the Peterson Institute for International Economics, May 13, 2020.</span></p> <a class="”cfedSubheading"> </a> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System. </h3> <style> .blurb{ display:none; } </style> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/safety-equity-partnership-strategies-chicago-workforce https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/safety-equity-partnership-strategies-chicago-workforce Fri, 14 Aug 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>On Monday, August 10, the Chicago Fed convened a <a href="~/link.aspx?_id=6949258E711A49CA94810BB669DF824F&_z=z">community forum</a> of business, labor, and education leaders as part of its Project Hometown initiative to consider the challenges facing Chicago’s workforce amidst the health and economic crises triggered by the coronavirus pandemic. </p> <p>In his opening remarks, Charlie Evans, president and CEO of the Chicago Fed, noted that the current economic situation is without modern precedent; practically overnight, nonessential businesses were shuttered, and millions of workers were furloughed. “Tragically, the most affected are our most vulnerable neighbors,” Evans said. “Their future is highly uncertain and will require new policies to help them through this difficult transition.”</p> <p>Moderator Amanda Cage, president and CEO of the National Fund for Workforce Solutions, led with a discussion of the measures that are needed to reopen the economy and get people safely back to work. Jack Lavin, president and CEO at Chicagoland Chamber of Commerce, pointed to three key business needs. First is an expanded testing capacity so that if a worker at a business tests positive for Covid-19, other employees can be tested quickly so the business does not have to shutter again. Second is making it safe to take public transportation—and making sure people know that it’s safe. Around 60% of workers downtown use public transit, Lavin noted. Third, workers need school and childcare for their children or they won’t be able to go to work. </p> <p>Employers also must do their part to protect their employees. Right now there is a lot of fear, stated Elba Aranda-Suh, executive director of the National Latino Education Institute. She described employers that have required employees with pre-existing health conditions to come to work, even when the business had Covid-19 cases. “Your workforce is the backbone of your productivity and your ability to profit,” Aranda-Suh said, “so it is important to really listen to what is happening to your workers.” </p> <p>While such measures are critical to bringing workers back and thus to economic recovery, “simply returning to where we were in February is not enough,” Evans stated, as even during times of economic growth, systematic racism and other barriers limited opportunities for many Chicagoans. Cage added, “There is a lot of uncertainty, vulnerability, and suffering in our communities, but that pain is not being felt equally in our society.” </p> <p>Andrea Kluger, director of Legislation and Politics for the Chicago Federation of Labor, described important worker protections that would promote economic and racial justice. She pointed to the lack of a social safety net for millions of workers who are classified as independent contractors, many of whom are Black and Brown. These workers do not receive the protections other workers do, including being entitled to a minimum wage and protected from discrimination under the Civil Rights Act. </p> <p>Kluger also noted that women have been particularly impacted by schools’ transition to virtual instruction, as they remain primary caregivers for their children. “Because of this, it’s crucial that employers offer flexible and remote work hours because without that, any gains that we’ve made in women’s participation in the workforce will be lost for years to come,” Kluger stated.</p> <p>Another way to make the economic recovery more equitable is to provide workforce development to displaced workers. Even after health concerns subside, some businesses won’t survive and their workers will need to transition to new jobs, as Evans pointed out. Panelist Juan Selgado is Chancellor at City Colleges of Chicago, which educates 77,000 students, 75% of whom are Black and Latinx. In response to the crisis, City Colleges has dedicated millions from the state and private giving to help students struggling with tuition or housing so that students will not have to pause their education, as most students who stop are unlikely to start again, Selgado observed. “We know that as we recover, and we will recover, that people with skills, credentials, and degrees are going to fare better,” Selgado said, which is why it is important that students get the assistance they need now to stay in their programs.</p> <p>Selgado also described City College’s Fresh Start debt relief program, which helps students who left City College with debt but without a degree. If a returning student succeeds through the first semester, the college erases half their debt, and when the student finishes their program, all debt is erased. There are some 21,000 people currently eligible for the program. </p> <p>To prepare workers for a changing economic landscape, workforce development programs are quickly adapting their curricula to prepare students with the skills currently needed by employers. As an example, Selgado described a new contact tracing program that City Colleges is offering in cooperation with Chicago Department of Public Health. Aranda-Suh noted the rapid expansion of telehealth and how training programs at NLEI are evolving to prepare workers for jobs in this field. </p> <p>These workforce development programs will be most successful if businesses commit to hiring locally. Chicagoland Chamber of Commerce asked businesses to make such a commitment by taking the Chicago Pledge to hire locally, procure locally, and invest locally. Lavin described the success of Chamber-supported apprenticeship programs that hire trainees from local programs such as City Colleges, recognizing the diverse pipeline of talent that such institutions produce.</p> <p>Throughout the discussion, panelists addressed actions the federal government should take to assist workers and employers with the many challenges they face. Lavin and Kluger stressed how vital it is that the federal government immediately extend the CARES Act’s enhanced unemployment benefits so that workers have resources to provide for their families and pay rent. For individuals who have lost jobs and so risk losing health insurance in the middle of a global pandemic, Kluger urged the government to help with COBRA payments. And Aranda-Suh stressed the need for federal assistance for workforce training. </p> <p>Selgado concluded that to address historic inequities, all federal policy must start to apply an equity-based lens. Too often, federal policy ends up privileging some groups over others by, for example, supporting homeowners more than renters, or universities more than community colleges. To make this recovery and the future economic landscape equitable for all, federal policy must be guided by the principle of equity. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/reimagining-education https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/reimagining-education Fri, 07 Aug 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>The Covid-19 pandemic has caused unprecedented disruption to in-person education. To discuss the challenges facing Chicago Public Schools, the Chicago Fed convened a <a href="~/link.aspx?_id=A16966A71F084C5CACE890EB44B9C151&_z=z">panel</a> of expert practitioners and researchers as part of its Project Hometown initiative on Monday, August 3. The panel explored the needs of different student populations, while encouraging education leaders to use this disruption to reimagine what schools can look like when in-person education resumes. </p> <p>The event was moderated by Cassie Walker Burke, Chicago bureau chief at Chalkbeat, a nonprofit news outlet that focuses on public education. Burke invited panelists to share their perspectives on the scope and scale of the challenges facing Chicago Public Schools. Maurice Swinney, Chief Equity Officer of Chicago Public Schools, pointed to preexisting inequities in the school system that have long affected Black students, Brown students, English learners, homeless students, and other vulnerable children. “The Covid pandemic is happening in the middle of an ongoing pandemic that is racial injustice,” Swinney stated. As one example, Swinney noted that Black and Brown children are often treated with suspicion, even at school, which impacts their ability to learn and creates opportunity gaps. </p> <p>The abrupt school closures in March exacerbated many of these educational inequities and also made it more difficult, if not impossible, for schools to meet the nonacademic needs of their most vulnerable students, including those experiencing temporary or chronic homelessness. The pandemic has put in relief that schools do much more than teach academics—they provide food, washing machines, dental care, and a haven from stress and trauma, noted Micere Keels, associate professor in the Department of Comparative Human Development at the University of Chicago. She underscored the importance of examining the resources the school system needs to support and engage children in a learning community, both during this period of disruption and when schools reopen their doors. </p> <p>The pandemic has also affected the needs of Latinx students and their families, who face a complexity of health factors, as Rebecca Vonderlack Navarro, manager of education policy and research at the Latino Policy Forum, described. Latinx neighborhoods have some of the highest coronavirus rates in the city, and intergenerational homes mean that children who return to school may put parents and grandparents at risk. For parents working low-wage hourly jobs, she said, taking two weeks off to care for a child who contracts Covid-19 poses a significant economic disruption. Limited access to healthcare magnifies these challenges for many families, and undocumented immigrants may have no access at all. </p> <p>Navarro pointed to another challenge posed by the pandemic: young children, and English learners in particular, need authentic conversation, which is difficult to replicate in remote learning. Many English learners are in preschool through second grade, and their young age means long bouts of screen time may not be appropriate. With the possibility of losing a year or more of in-person instruction, Navarro urged educators to think creatively about how to meet the needs of young English language learners, as acquiring these language skills is critical to later academic success.</p> <p>The shock of losing in-person education means that a lot of effort is going into restoring the system that was lost. But this, Keels pointed out, is “crisis thinking,” in which we focus “on restoring what we think we lost.” Instead, she urged educators not to waste this opportunity to think creatively about how to better serve all students, especially vulnerable students. Shantá Robinson, assistant professor at the University of Chicago, concurred, adding that we shouldn’t aim to get back to “normal” because pre-Covid normal was far from perfect. “Our imaginations shouldn’t be limited to what we know schools to be in the past,” Robinson said. Instead, we have a unique opportunity to “press the pause button on how we do education in this country and who we do education for.” </p> <p>Panelists identified several themes to guide our thinking about how to do better for all students. One, the pandemic has exposed the importance of connection. In the absence of a personal student-teacher relationship, teachers can deliver information but students won’t learn, Keels said. Fostering this connection means attending to the social emotional needs of students, Robinson added, particularly students who have experienced trauma and marginalization. Both Robinson and Navarro encouraged thinking creatively about how these connections can be nurtured. It may mean actually meeting with families and asking them what they need to be successful as they define success, Robinson said. In the case of immigrant communities, Navarro suggested reaching out to trusted community organizations with language abilities to help build the relationship between families and schools.</p> <p>The pandemic also provides an opportunity to reimagine what schools look like by recruiting Black and Latinx teachers, Robinson advocated, who are critical to the academic and social success of Black and Latinx students. Today’s poor job market means that many people in their 20s are out of work. This is an opportunity to go to them and ask if they would consider being a teacher, a school counselor, a school nurse—careers they may not have considered because of their own ambivalent experiences in school.</p> <p>Finally, the panelists emphasized that it is imperative that our reimagining be guided by evidence-based research. Too often, Keels observed, people make decisions about education practices based on intuition or personal experience. Instead, she argued, we should systematically follow evidence about what practices best serve different groups of students. As an example, she pointed to the limited evidence that the presence of police increases safety at school and the considerable evidence that police presence triggers stress and increases students’ exposure to the criminal justice system, particularly for students of color. Keels and Navarro advocated consulting social workers, counselors, psychologists, medical experts, early childhood professionals, and others who can offer evidence-based practices to improve health, safety, inclusion, and learning. </p> <p>Swinney concluded that drawing investment into our schools in service of the whole family and bringing together the learned wisdom from different fields to address historic inequities and current challenges has the ability to transform schooling, for today and tomorrow. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/measuring-recovery-in-economic-activity https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/measuring-recovery-in-economic-activity Wed, 05 Aug 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>In a previous <a href="~/link.aspx?_id=3F7EAC016D104E7CA4C82FF083C2C885&_z=z">blog post</a>, we described several indexes produced by the Federal Reserve Banks of <a href="https://www.chicagofed.org/">Chicago</a>, <a href="https://www.philadelphiafed.org/">Philadelphia</a>, and <a href="https://www.newyorkfed.org/">New York</a> and showed how they could be used to measure the decline in U.S. economic activity in the spring of 2020. Here, we show how they can now be used to track the subsequent recovery. </p> <p>On June 8, 2020, the National Bureau of Economic Research (NBER) issued a <a href="https://www.nber.org/cycles/june2020.html">statement</a> announcing that its Business Cycle Dating Committee determined U.S. economic activity had reached a cyclical peak in February 2020. According to most measures, economic activity plummeted in March and April of this year. Beginning in May 2020, many of the economic indicators tracked by the NBER and others as measures of the U.S. business cycle began to improve. To demonstrate this, figure 1 plots the <a href="~/link.aspx?_id=9DBBCCA58A06408B8A0AA8B1EA5F0766&_z=z">Chicago Fed National Activity Index</a> (CFNAI). </p> <p> <h3>Figure 1. Chicago Fed National Activity Index (CFNAI) versus Aruoba-Diebold-Scotti Business Conditions Index (ADSBCI)</h3> <img alt="Figure 1 is a line chart that plots the Chicago Fed National Activity Index and the average values of the Aruoba-Diebold-Scotti Business Conditions Index in each month, using data through June 2020." src="~/media/6cc67a291d3b4c468ae1ddca509a7832.ashx" /> <figcaption class='caption'> Notes: To compare the daily ADSBCI against the monthly CFNAI, we take the average of the ADSBCI’s values in each month. Shaded periods correspond to U.S. recessions as defined by the National Bureau of Economic Research. <br /> Sources: Federal Reserve Bank of Chicago; and authors’ calculations based on data from the Federal Reserve Bank of Philadelphia from Haver Analytics. </figcaption> </p> <p>The CFNAI is a monthly index designed to gauge overall economic activity for the U.S. based on <a href="~/media/ed87445bf88144e79dcd5c9e7b47ffd3.ashx">85 economic indicators</a> drawn from four broad categories of macroeconomic data: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward a trend growth rate over time, a positive index reading has historically been associated with growth above trend and a negative index reading with growth below trend. With this in mind, note that the units in figure 1 are standard deviations, such that a value of +1.0 indicates that the index was 1 standard deviation above its long-run average. </p> <p>The latest <a href="~/media/ac01b3711f9848e6b72c30b2d886f1ca.ashx">release</a> of the CFNAI—which came out on July 21, 2020, for data through June 2020—reported the index had reached an all-time high in its history extending back to March 1967, just beating out the previous all-time high, set in May 2020. It is important to keep in mind, however, that the CFNAI is a measure of growth. Despite two very strong months of above-trend growth according to the index, the level of economic activity in the U.S. is still far from its pre-pandemic level. This is evident by the fact that the April value of the index alone was nearly two-and-a-half times as negative (–18.09) as the sum of the May value (+4.11) and June value (+3.50).</p> <p>Figure 1 also plots a similar index produced by the Philadelphia Fed called the <a href="https://www.philadelphiafed.org/research-and-data/real-time-center/business-conditions-index">Aruoba-Diebold-Scotti Business Conditions Index</a> (ADSBCI). Both the ADSBCI and CFNAI are shown as standard deviations from their sample means in the figure, but the ADSBCI sample history extends back to January 1960 and covers only six macroeconomic data series.<sup><a href="#ftn1" id="ftnref1">1</a></sup> However, since five of these six series tend to be those that receive large weights in the CFNAI (growth in U.S. real gross domestic product, or GDP, is not among its 85 series), the two indexes tend to mirror each other quite closely. This is clearly evident in the recent values of the ADSBCI, with it too reaching all-time highs in the past two months following a record decline in April. </p> <p>To broadly gauge how far U.S. economic activity remains from its pre-pandemic level, we use an alternative set of indexes produced by the Chicago Fed. The <a href="~/link.aspx?_id=F3A8BEF2F5DB49ED980E1D7B015244E7&_z=z">Brave-Butters-Kelley Indexes</a> (BBKI) are based on <a href="~/media/e1201b4f3227456abda3894a2d8440e7.ashx">500 monthly indicators</a> of growth in U.S. economic activity—almost six times more indicators than used for the CFNAI—and like the ADSBCI include quarterly real GDP growth from the U.S. Bureau of Economic Analysis, with a history extending back to January 1960. We focus on a particular index from this set called BBK Monthly GDP Growth. Because this index is scaled to match official U.S. GDP growth, we can interpret its units as monthly (log) annualized percent changes that will aggregate to match the quarterly (log) annualized percent change in U.S. GDP. This feature is useful in creating the plot in figure 2 showing the cumulative decline in U.S. GDP from February through June 2020. </p> <p> <h3>Figure 2. Cumulative decline in Brave-Butters-Kelley (BBK) Monthly GDP Growth since February 2020</h3> <img alt="Figure 2 is a line chart that plots the running sum of Brave-Butters-Kelley Monthly GDP Growth and shows, in percentage terms, the cumulative decline in U.S. real gross domestic product from February through June 2020." src="~/media/22b43d9ea68549699323af5cb7b5a9d6.ashx" /> <figcaption class='caption'> Note: The running sum of BBK Monthly GDP Growth shows, in percentage terms, the cumulative decline in U.S. real gross domestic product (GDP) from February through June 2020.<br /> Source: Authors’ calculations based on data from the Federal Reserve Bank of Chicago from Haver Analytics. </figcaption> </p> <p>At –11.47% through June 2020, BBK Monthly GDP growth in figure 2 indicates that the U.S. economy still has far to go to reach its pre-pandemic level of economic activity. A similar pattern can also be seen in figure 3—which compares BBK Monthly GDP Growth with the <a href="https://www.newyorkfed.org/research/policy/weekly-economic-index">Weekly Economic Index</a> (WEI), a new economic activity index produced by the New York Fed. The WEI is scaled in terms of year-over-year real GDP growth. Therefore, to make an apples-to-apples comparison in this case, we transform BBK Monthly GDP Growth into year-over-year real GDP growth. Both indexes through June 2020 remained negative, pointing to U.S. GDP being below its level of a year ago.</p> <p> <h3>Figure 3. Brave-Butters-Kelley (BBK) Monthly GDP Growth versus Weekly Economic Index (WEI)</h3> <img alt="Figure 3 is a line chart that plots Brave-Butters-Kelley Monthly GDP Growth, expressed as a year-over-year growth rate, and the average values of the Weekly Economic Index in each month, using data through June 2020." src="~/media/bef6da8b7ee5462588476bca9adb7139.ashx" /> <figcaption class="caption"> Notes: To express BBK Monthly GDP Growth as a year-over-year growth rate, we sum (log) growth rates over a 12-month period. The WEI is available weekly, so to construct a monthly measure, we average its values in each month. Shaded periods correspond to U.S. recessions as defined by the National Bureau of Economic Research.<br /> Sources: Authors’ calculations based on data from the Federal Reserve Bank of Chicago and Federal Reserve Bank of New York from Haver Analytics. </figcaption> </p> <p>With the public health situation rapidly evolving in the U.S., these summary indexes of economic activity should continue to shed further light on the path of the economy in the coming months. More information on the CFNAI and BBKI can be found on the <a href="~/link.aspx?_id=B55A6BCC868D479C92A036282969C126&_z=z">Chicago Fed’s Economic Data page</a>.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> The six indicators are nonfarm payrolls, industrial production, real manufacturing and trade sales, real personal income less transfer payments, initial unemployment insurance claims, and real gross domestic product growth for the U.S.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/begin-with-your-block https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/begin-with-your-block Mon, 03 Aug 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>The Chicago Fed’s Project Hometown initiative hosted a <a href="~/link.aspx?_id=6211407FED8D44E8BBC824C98AC78EAA&_z=z">panel discussion</a> on Wednesday, July 29, that brought together practitioners and researchers to explore the challenges faced by Chicago’s minority neighborhoods. Panelists discussed how these communities can recover from both long-standing inequities as well as the current pandemic, restoring their status as vital and vibrant communities on Chicago’s south and west sides. </p> <p>Moderator Maude Toussaint-Comeau, senior policy economist at the Federal Reserve Bank of Chicago, described how historically Chicago’s minority “middle” neighborhoods have been attractive places to live, with a large base of middle- and working-class residents, active business corridors, affordable housing, and proximity to the city’s center. “They are great places to nurture and support African-American families. They support social cohesion… and [offer] a respite from the structural racism that is so embedded in our society,” panelist Nedra Sims Fears, executive director of the Greater Chatham Initiative, explained. </p> <p>Over the past 40 years, however, the disappearance of manufacturing jobs, discriminatory housing policies, and disinvestment have left minority middle neighborhoods particularly vulnerable to economic shocks, such as the one caused by the current coronavirus pandemic, noted panelist Alex Bartik, assistant professor at the University of Illinois at Urbana–Champaign. This shock has impacted almost every facet of economic life in these neighborhoods.</p> <p>Perhaps the most obvious distress is among small businesses, which experienced a rapid and widespread decline in employment. Bartik presented data showing that the numbers of hours worked at small businesses fell by 70% between January and April 2020. The effect of the downturn was particularly acute among minority-owned businesses, which on average have 20% less cash-on-hand than nonminority-owned businesses. Their limited resources mean that 82% of minority-owned small businesses have or expect to miss a rent payment because of Covid-19, Bartik’s research shows. </p> <p>This data highlights an important economic divide between minority and nonminority-owned businesses: The former have fewer resources than the latter, as Fears pointed out. This reflects disparities in wealth and access to financing between the two communities. Panelist Stacie Young, director of The Preservation Compact, concurred, noting that many minority owners have more difficulty raising equity for their business than nonminority owners and as a result, they face a significant risk of going bankrupt during the current crisis. </p> <p>The loss of small businesses hurts minority middle neighborhoods not only because they become less attractive places to live but also because these businesses employ local residents, many of whom are people of color making less than the average wage, Bartik noted. That 70% reduction in hours worked translates into real wages lost, which in turn affects the housing landscape. “We can’t let this health crisis turn into a housing crisis,” Young stated, noting that people working in job sectors affected by Covid-19 are more likely to be renters and people of color; not surprisingly, rent collections are lowest where affected workers live. This inability to pay rent has at least two consequences.</p> <p>One, it might force families to move, which disrupts children’s education. As Fears described, schools in minority middle neighborhoods see much higher turnover in their student bodies than schools in White neighborhoods. When families move neighborhoods, children must change schools, and this disruption to their education puts them at a disadvantage compared to their White peers.</p> <p>Renters’ inability to pay also puts stress on landlords. In many low- to moderate-income neighborhoods, landlords are not faceless corporations but rather are small business owners who live in the neighborhoods themselves. Indeed, 50% of borrowers at the Community Investment Corporation, a not-for-profit mortgage lender for multi-family housing, are minority-owned businesses. As Young described, these owners know their buildings and their neighborhoods; they provide jobs; they purchase from local vendors; and they provide housing—in other words, they are anchors in their communities. When tenants cannot pay their rent, landlords cannot pay their mortgages or invest in their properties. “These businesses have thin margins and fragile infrastructure. And if the landlords are vulnerable, the buildings are vulnerable. When those buildings start to fail, blocks and neighborhoods could easily follow,” Young stated.</p> <p>The economic stress of the coronavirus crisis on minority middle neighborhoods is compounded by the digital divide. The ability of businesses to pivot to online sales and the ability of students to pivot to online education depends on access to broadband and familiarity with necessary software, Fears pointed out. However, in Chicago’s Greater Chatham communities, 40% of families lack this necessary access, she said.</p> <p>Preserving these important neighborhoods is both simple and complex. In the near term, Jahmal Cole, founder of My Block My Hood My City, is making a difference by asking the question, “What’s something simple I can do to have a positive impact on my block?” This philosophy has inspired programs such as one that hired teenagers to assist elderly neighbors by visiting them, getting them personal protective equipment, food, and medicine, and connecting them with primary medical care. Cole’s organization has also responded to the recent riots by raising money to help small businesses remove graffiti, replace glass, and make the repairs needed to reopen and once again serve their communities.</p> <p>In the medium term, both Fears and Young stressed the need for grant programs to assist small businesses, renters, and home owners. As Fears noted, it is critical that these programs be grants and not loans; owners of small businesses are already heavily leveraged and do not want to take on more loans. Grant programs have the potential to make a deep impact, Young believes: “Help tenants pay rent, then owners can pay expenses, then communities stay strong.”</p> <p>In the long term, panelists described the importance of investing in social networks and social capital, which enhances collective efficacy. This is what Cole does with his Explorers program, which takes teens from under-resourced communities on fieldtrips to experience different cultures and professions. Academic research confirms that social organizations such as churches and Cole’s My Block My Hood My City can improve labor market networks for neighborhoods, Bartik noted. Efforts such as these also contribute to a neighborhood’s self-narrative, which influences residents’ decisions about whether to stay or go. </p> <p>Due to both longstanding inequities and the current crisis, Chicago’s minority middle neighborhoods are in a precarious position. However, the day’s conversation identified specific investments to address the impact of the pandemic on small businesses and essential workers. These include policies to safeguard the housing market, including rental assistance, improving access to broadband to keep communities connected, and creating opportunities to build social capital. These efforts to stabilize Chicago’s minority middle neighborhoods are some of the steps that it will take to preserve them as great places to live for the next generation. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/another-look-google-trends-unemployment https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/another-look-google-trends-unemployment Tue, 07 Jul 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>In a previous <em>Chicago Fed Insights</em> blog <a href="~/link.aspx?_id=E9765678BA644EA493061D439439BB29&_z=z">post</a>, we took a closer look at what drives the correlation between Google Trends unemployment topic indexes<sup><a href="#ftn1" id="ftnref1">1</a></sup> and state initial unemployment insurance (UI) claims at the U.S. metro area level. We found that the positive correlation between Google search intensity for unemployment-related terms and the rate of UI take-up during the Covid-19 pandemic was primarily driven by variation within U.S. metro areas across time (the time series dimension) and less so by variation across U.S. metro areas within weeks (the cross-sectional dimension). In this blog post, we examine how this correlation during the current recession compares with the correlation during the previous recession. We find that differences in the correlations across the two recessions can mostly be explained by the federal Pandemic Unemployment Assistance (PUA) program. </p> <h3>California metro area UI claims past and present</h3> <p>To examine this correlation during the two most recent recessions at the metro area level, we use the state of California as a case study. California is unique in that we can obtain monthly county-level initial UI claims from its state government (via Haver Analytics) over a time period spanning both recessions. As in our previous post, we add to these data Google Trends unemployment topic indexes normalized against the national index at the designated market area (DMA) level, which is the smallest level of geographic disaggregation available that is consistent with the county-level UI claims data.<sup><a href="#ftn2" id="ftnref2">2</a></sup> Then, we aggregate the county-level UI claims data up to the DMA level to obtain a consistent metro-area-by-month panel of data for California.</p> <p>Figure 1 shows a map of initial UI claims per 1,000 residents for California at four different points in time. Panels A and B of the figure are for the months of December 2007 and June 2009, which correspond to the peak and trough months of the Great Recession, as defined by the National Bureau of Economic Research (NBER).<sup><a href="#ftn3" id="ftnref3">3</a></sup> Panels C and D of the figure are for the months of February 2020—the peak of the most recent NBER-defined business cycle for the U.S.—and May 2020—the last full month for which we have UI claims data for California. There are several interesting features of these maps, but the one that really stands out is the large amount of heterogeneity in the labor market conditions of California metro areas both within and across time periods. It is this heterogeneity that we seek to understand with the Google Trends data.</p> <p> <h3>Figure 1. Initial UI claims per 1,000 residents for metro areas in California</h3> <img height="1846" alt="Figure 1 shows heat maps for the level of initial unemployment insurance claims per 1,000 residents for metro areas within California for the months corresponding to the start and end of the 2007–09 recession and the start of the current recession and May 2020. There is a large degree of heterogeneity across metro areas—both across and within the two different recessions." width="2153" src="~/media/6ab11d9b75ed452b971980b0ca8944cc.ashx" /> <figcaption class='caption'> Notes: Regions within the state correspond to Nielsen designated media areas, or DMAs (see note 2 for more information). Darker shaded regions have higher initial unemployment insurance (UI) claims per capita, while lighter shaded regions have lower initial UI claims per capita. County populations and weekly initial claims are aggregated to the DMA level to match the Google Trends search data. <br /> Sources: Authors’ calculations based on data from the State of California and U.S. Census Bureau from Haver Analytics. </figcaption> </p> <h3>Google Trends and California metro area initial UI claims</h3> <p>The five linear regressions<sup><a href="#ftn4" id="ftnref4">4</a></sup> in table 1 each represent different ways of summarizing the relationship between Google search intensity for unemployment-related terms and initial UI claims in California since 2007. Each regresses (log) initial UI claims (the dependent variable) on (log) search intensity as captured by the Google Trends unemployment topic indexes (the independent variable), weighted by population. They are different, however, in the way in which they control for metro area fixed effects or the time periods covered by the regression. These differences allow us to isolate discrepancies in the source and timing of the correlation between Google search intensity and UI take-up. </p> <p> <h3>Table 1. The relationship between initial UI claims and Google search intensity for unemployment-related terms</h3> <div class="table-responsive"> <table class="table"> <thead> <tr class="cfedTable--rowBorderTop"> <td></td> <th colspan="5">Dependent variable</th> </tr> <tr> <td></td> <th colspan="5" style="border-top:solid">log(state claims)</th> </tr> </thead> <tbody> <tr class="cfedTable--rowBorderTop"> <th>log(search)</th> <td>0.15*</td> <td>0.68**</td> <td>0.68***</td> <td>0.90***</td> <td>0.45***</td> </tr> <tr class="cfedTable--rowBorderBottom"> <td></td> <td>(0.08)</td> <td>(0.04)</td> <td>(0.13)</td> <td>(0.06)</td> <td>(0.15)</td> </tr> <tr> <th>Metro area fixed effects</th> <td></td> <td>X</td> <td>X</td> <td>X</td> <td>X</td> </tr> <tr> <th>Sample: Great Recession</th> <td></td> <td></td> <td>X</td> <td>X</td> <td></td> </tr> <tr class="cfedTable--rowBorderBottom"> <th>Sample: Current recession</th> <td></td> <td></td> <td>X</td> <td></td> <td>X</td> </tr> <tr> <th>Observations</th> <td>2,056</td> <td>2,056</td> <td>283</td> <td>231</td> <td>52</td> </tr> <tr class='cfedTable--rowBorderBottom'> <th>Adjusted <em>R</em><sup>2</sup></th> <td>0.08</td> <td>0.71</td> <td>0.56</td> <td>0.83</td> <td>0.19</td> </tr> </tbody> </table> </div> <figcaption class="caption"> *<em>p</em> < 0.10<br /> **<em>p</em> < 0.05<br /> ***<em>p</em> < 0.01<br /> Notes: This table presents the results from regression analyses examining the correlation between Google search intensity for unemployment-related terms and initial unemployment insurance (UI) claims, controlling for metro area fixed effects and weighted by population. Standard errors, which are in parentheses, are clustered at the metro area level. The regressions of the first two columns use the entire data sample over the period January 2007–May 2020. See the text for further details.<br /> Sources: Authors’ calculations based on data from Google Trends and from the State of California and U.S. Census Bureau from Haver Analytics. </figcaption> </p> <p>The regression coefficients in the first and second columns in table 1 are estimated from the entire sample of data, which spans from January 2007 through May 2020. They differ only in that the regression specification of the second column includes metro area fixed effects, whereas the regression specification of the first column does not. In other words, through the second column's regression specification, we are trying to answer this question: Are the months when a California metro area’s residents searched more than normal for unemployment-related terms also the months when we saw above-average initial UI claims in that metro area? This type of regression specification is sometimes referred to as a “within” estimator because it examines only the variation over time within each metro area in our sample. </p> <p>As reported in the second column of table 1, we find an economically and statistically significant relationship between Google search intensity and initial UI claims when including metro area fixed effects (i.e., the <em>p</em>-value associated with the standard error shown in the table is greater than standard levels of significance). This is also true when we do not restrict our attention to just variation within metro areas, but also across them (the cross-sectional dimension), given the regression specification’s result in the first column of table 1. But the magnitude of the relationship is roughly four to five times stronger in the time series dimension. This result matches what we found in our previous post on the correlation between Google Trends search interest in unemployment-related subjects and UI take-up. </p> <p>The longer time series for California than those of the four states in our previous post (New York, Pennsylvania, Texas, and Washington) allows us to go even further in exploring this relationship. For example, the regression of the third column in table 1 asks the following question: Is this relationship between Google search intensity and UI take-up different during recession months versus expansion months? This is achieved in the regression by restricting the sample to only include the months of the Great Recession and since the start of the current recession.<sup><a href="#ftn5" id="ftnref5">5</a></sup> We find that the correlation in this case is identical to that of the full sample, such that the answer to our question is a resounding no. This is important because it implies that Google search intensity is related to UI take-up because of factors other than just those associated with a national recession. In other words, differences in local and regional economic conditions unrelated to national conditions are also reflected in our findings.</p> <p>We can also examine whether this relationship between Google search intensity and UI take-up is different in the current recession versus the Great Recession in the U.S. This is achieved by comparing the regression specifications of the fourth and fifth columns of table 1. Each specification includes the data observed in only one of the two recessions. Using the fourth column’s regression specification, we find that during the Great Recession a roughly 1% increase in search intensity correlates to a 0.9% increase in initial UI claims. In contrast, using the fifth column’s regression specification, we find a correlation that is roughly half of that magnitude. While some differences in the precision of the estimates may be expected based solely on the different number of months included in each sample, the standard errors of our estimates in table 1 indicate that this difference is statistically significant from zero. Therefore, at face value, these results suggest that the relationship between Google search intensity and initial UI claims during the current recession is weaker than it was during the Great Recession. Next, we take a deeper look at the results and show why they are misleading. </p> <h3>Google Trends and Pandemic Unemployment Assistance</h3> <p>What can explain the difference in the correlation between Google search intensity and initial UI claims across the two recessions? We hypothesize that most of the discrepancy is coming from the federal Pandemic Unemployment Assistance program—which permits state governments to extend unemployment benefits to self-employed workers, those seeking part-time employment, and those who would otherwise not be eligible for regular unemployment compensation.<sup><a href="#ftn6" id="ftnref6">6</a></sup> Established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the PUA program substantially increased the number of individuals who qualify for unemployment insurance benefits. However, individuals who claim benefits from the federal PUA program are not included in our measures of state initial UI claims in figure 1 and table 1. With many more individuals eligible to file a UI claim now than during the Great Recession, it is highly probable that these individuals, who likely never filed a claim in the past, would be looking for information on how to do so. These searches for more information about unemployment insurance would be related to PUA claims, which are not included in the dependent variable of table 1. Given this factor and the even greater predominance of internet-based search now compared with a decade or so ago, we surmise that at least some of the recent movement in the Google Trends unemployment topic indexes that is not correlated with traditional state initial UI claims is instead connected to the federal PUA program.</p> <p>Here, though, we reach the limits of what our data for metro areas in California can tell us. PUA claims are not publicly available at the county-level for California, although they are at the state level. In fact, we can look at the PUA data for all states during the current recession to test our hypothesis. Table 2 shows the results from two regressions estimated using a sample of all states (plus the District of Columbia); both include state fixed effects so that we remain focused on variation in the time series dimension. The data have a weekly frequency, and start with the week ending March 14, 2020, and run through the week ending June 27, 2020. For the regression specification of the first column, we only include traditional initial UI claims in our dependent variable; but for the specification of the second column, we add to them the initial PUA claims for each state. </p> <p> <h3>Table 2. The relationship between initial UI claims with and without PUA claims and Google search intensity for unemployment-related terms</h3> <div class="table-responsive"> <table class="table"> <thead> <tr class="cfedTable--rowBorderTop"> <td></td> <th colspan="2">Dependent variable</th> </tr> <tr> <td></td> <th style="border-top:solid">log(state claims)</th> <th style="border-top:solid">log(total claims)</th> </tr> </thead> <tbody> <tr class='cfedTable--rowBorderTop'> <th>log(search)</th> <td>1.00***</td> <td>1.04***</td> </tr> <tr> <td></td> <td>(0.03)</td> <td>(0.02)</td> </tr> <tr class="cfedTable--rowBorderTop"> <th>State fixed effects</th> <td>X</td> <td>X</td> </tr> <tr class="cfedTable--rowBorderBottom"> <th>PUA claims included in dependent variable</th> <td></td> <td>X</td> </tr> <tr> <th>Observations</th> <td>816</td> <td>816</td> </tr> <tr class='cfedTable--rowBorderBottom'> <th>Adjusted <em>R</em><sup>2</sup></th> <td>0.86</td> <td>0.91</td> </tr> </tbody> </table> </div> <figcaption class="caption"> *<em>p</em> < 0.10<br /> **<em>p</em> < 0.05<br /> ***<em>p</em> < 0.01<br /> Notes: This table presents the results from regression analyses examining the correlation between Google search intensity for unemployment-related terms and initial unemployment insurance (UI) claims, controlling for state fixed effects and weighted by population. Standard errors, which are in parentheses, are clustered at the state level. As indicated, the dependent variable of <em>total</em> claims comprises both state UI claims and federal Pandemic Unemployment Assistance (PUA) claims. The sample period for both regressions is the week ending March 14, 2020, through the week ending June 27, 2020. See the text for further details.<br /> Sources: Authors’ calculations based on data from Google Trends and the U.S. Department of Labor and U.S. Census Bureau from Haver Analytics. </figcaption> </p> <p>The regression coefficient in table 2 increases in a modest, but statistically significant way when the PUA claims are included in our dependent variable, consistent with our hypothesis that during the current recession at least part of the Google search activity for unemployment-related terms is indeed tied to the introduction of the PUA program. To see what this implies for California, we show in figure 2 the fit of our regressions for just the state of California. This figure makes clear that accounting for PUA claims substantially increases the correlation between Google search intensity and total take-up for both regular state UI and federal PUA in California. Put more concretely, accounting for the PUA claims reduces the mean absolute error (a measure of model fit) by more than 25%—from 0.31 log points to 0.23 log points. Even this result, however, understates the importance of the PUA program, as it includes those weeks in the program’s infancy when state-level claims were not reported.<sup><a href="#ftn7" id="ftnref7">7</a></sup> These weeks tend to be the weeks with the largest fitting errors. If we use the median absolute error criterion instead to minimize their influence, then accounting for PUA claims improves model fit by more than 50% for California. Overall, we find this to be convincing evidence that once the PUA program is taken into account, the relationship between Google search intensity and UI take-up during the recent recession has remained a strong one. </p> <p> <h3>Figure 2. Fits of the two regressions in table 2 to actual total weekly initial UI claims for California</h3> <img height="1840" alt="Figure 2 shows the predicted values from table 2’s regressions of regular state initial unemployment insurance (UI) claims with and without federal Pandemic Unemployment Assistance (PUA) claims for California on Google search intensity during the period from the week ending March 14, 2020, through the week ending June 27, 2020. The predicted values using the regression coefficient that includes the PUA claims shows a much closer fit to the total weekly initial UI claims data for California." width="2153" src="~/media/a4fe99a9aadb455cb89dd7b65c2273e3.ashx" /> <figcaption class="caption"> Notes: The solid black line corresponds to actual total weekly initial unemployment insurance (UI) claims, which include Pandemic Unemployment Assistance (PUA) claims. The blue dashed line corresponds to the predicted values from the regression of table 2’s first column, which does not include PUA claims, and the red dashed line corresponds to the predicted values from the regression of table 2’s second column, which includes PUA claims.<br /> Sources: Authors’ calculations based on data from Google Trends and from the State of California and U.S. Census Bureau from Haver Analytics. </figcaption> </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> A topic in Google Trends is a categorization or grouping of related search terms.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> See Gaurav Sood, 2016, “Geographic information on designated media markets,” Harvard Dataverse, data set, version 9.0, <a href="https://dataverse.harvard.edu/dataset.xhtml?persistentId=doi:10.7910/DVN/IVXEHT">Crossref</a>; Sood provides a mapping between counties and the Nielsen DMAs that Google uses to define metro areas. For further details on data construction, see our previous related <a href="~/link.aspx?_id=E9765678BA644EA493061D439439BB29&_z=z">post</a>.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> These dates can be found <a href="https://www.nber.org/cycles.html">here</a>.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> Regressions are statistical exercises that estimate the degree of correlation between two variables. In our case, the initial UI claims are the dependent variable (the main factor we are trying to predict) and the Google Trends unemployment topic indexes are the independent variable (the factor we think can be used to predict the dependent variable). Through regression analysis, we come up with a regression coefficient, which represents the mean change in the dependent variable for one unit of change in the independent variable while holding constant the other variables in the analysis that may affect the dependent variable.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> We include the month of the business cycle peak (December 2007 and February 2020) in the recession samples. </p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> Details on this additional relief are <a href="https://www.dol.gov/coronavirus/unemployment-insurance">available online</a>.</p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> These data are also available from Haver Analytics. However, claims data for a few of the weeks in the PUA program’s infancy are not available at the state level. We use the data as reported in each week.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> <style type="text/css"> table thead th, table tbody td { text-align: center; } </style> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/financial-positions-part5 https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/financial-positions-part5 Thu, 18 Jun 2020 00:00:00 -0500 <div class="cfedStandardSpacing"> <em> <p>This blog post<sup><a href="#ftn1" id="ftnref1">1</a></sup> is the fifth in a series that discusses how the current pandemic affects the financial positions of publicly traded U.S. corporations, the potential implications of these financial developments, and the federal policy response.</p> <p>In this post, we study the economic benefits and costs of the Main Street Lending Program, created by the Federal Reserve to support corporations during this crisis. We make four points, which reflect our analysis and are not the views of the Federal Reserve System or the Federal Reserve Bank of Chicago. First, the main potential benefit of this program is to supplement private funding to corporations so that they can avoid financial distress during the pandemic. Private funding may be insufficient either because financial intermediaries’ ability to lend is limited or because the intermediaries do not take into account the broader benefits associated with lending to distressed firms. Second, while the program is quite large, so that it has the potential to provide credit support to many firms, its potential might not be fully realized because all parties involved (borrowers, banks, and outstanding creditors) may not always have sufficient incentives to participate. Third, the program excludes some firms, which may limit its efficacy. And fourth, it is possible that the program may help the economy in the short run but marginally slow economic growth in the medium run by increasing debt overhang for participating firms.</p> </em> <h3>Key Fed actions to support the flow of borrowing</h3> <p>As we discussed in an <a href="~/link.aspx?_id=3E2AB8D6959C4A019914F5A3DBD3A4F5&_z=z">earlier post</a>, the current pandemic has created a large cash flow shock for many firms, which need to raise substantial new funding, on top of rolling over their existing debt, to survive the next few quarters.<sup><a href="#ftn2" id="ftnref2">2</a></sup> The Federal Reserve (Fed) has taken various actions to facilitate credit flows.<sup><a href="#ftn3" id="ftnref3">3</a></sup> In this post, we focus on the potential economic effects of one major new initiative, the <em>Main Street Lending Program</em>. This program consists of three facilities,<sup><a href="#ftn4" id="ftnref4">4</a></sup> which have in common that banks underwrite loans for U.S. businesses and then sell a portion of the loan to an entity (a special purpose vehicle, or SPV) that is funded by the Treasury and the Fed. (Informally, the Treasury funding serves as credit protection for the Fed; to put it another way, it is the “equity,” while the Fed funding is the debt.) The official sources of information, providing all the program details, are <a href="https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm">here</a> and <a href="https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-program.aspx">here</a>. Table 1 provides a high-level summary of some of the key features of the three facilities in the program.</p> <p>The Federal Reserve also recently created the <em>Corporate Credit Facilities</em>, which also aim to support credit flows. These facilities will primarily serve the largest public firms and operate through credit markets by purchasing new or existing corporate bonds, as well as new syndicated loans. While some of our discussion also applies to the <em>Corporate Credit Facilities</em>, we do not discuss these in detail here. More information on them can be found in this <a href="https://libertystreeteconomics.newyorkfed.org/2020/05/the-primary-and-secondary-market-corporate-credit-facilities.html">blog</a> post from the New York Fed.<sup><a href="#ftn5" id="ftnref5">5</a></sup></p> <h3>Why support financial intermediation and corporate credit markets?</h3> <p>What is the purpose of these lending programs? Why support credit flows? Why not, instead, simply let private borrowing—through banks and financial markets—fund firms as needed? After all, firms that are suffering from a temporary shortfall because of the pandemic, but are still solvent, should be able to borrow without any need for government intervention. In our view, there are two main reasons why these actions could be justified and productive.<sup><a href="#ftn6" id="ftnref6">6</a></sup></p> <p>First, <em>financial intermediation and financial markets might not be functioning appropriately in these unusual circumstances</em>. For instance, while banks currently have ample capital due to the financial reforms that followed the Great Recession, their lending capacity might not be sufficient given the unusually large needs.<sup><a href="#ftn7" id="ftnref7">7</a></sup> Credit markets were also disrupted in the early stages of the crisis: The cost of credit for “high-yield” (riskier) corporations experienced a very rapid spike from March 3 to March 23, making it potentially difficult for these companies to obtain funding exactly at the time when it was most necessary. This increase likely reflected, in part, balance sheet constraints at financial intermediaries.<sup><a href="#ftn8" id="ftnref8">8</a></sup> </p> <p>Second, <em>financial intermediation and financial markets, even if they are functioning normally, might under-provide credit in the current situation</em>. There are several reasons for that. Most importantly, some of the gains from reducing inefficient bankruptcies would accrue to employees, customers, suppliers, or outstanding creditors, rather than to a firm’s new lender—i.e., the institution providing the additional credit. This implies that new lenders might be reluctant to extend credit, since they do not take into account these benefits when lending. Another reason is that there might be macroeconomic externalities from lending (for instance, aggregate demand externalities). And yet another reason is that there might be health externalities, to the extent that lending allows companies to take better precautions against the virus. All these factors suggest that offering credit at better terms than the private market could help preserve jobs, the economy, and health.</p> <p> <h3>1. Stylized description of the Main Street Lending Program (as of <em>June 8, 2020</em>)</h3> <div class="table-responsive"> <table class='table'> <thead> <tr class="text-center"> <th></th> <th><strong>Main Street New Loan Facility</strong></th> <th><strong>Main Street Priority Loan Facility</strong></th> <th><strong>Main Street Expanded Loan Facility</strong></th> </tr> </thead> <tbody> <tr> <th>Eligibility</th> <th colspan="3" class="text-center">U.S. businesses with fewer than 15,000 employees or $5 billion 2019 revenue</th> </tr> <tr> <th>Loan terms</th> <td> <p> <ul class="cfedList--bulleted"> <li>New term loan</li> <li>$250,000 to minimum of $35 million or four times 2019 adjusted EBITDA </li> <li>Five-year term, no amortization in first two years</li> <li>Cannot be subordinated to any other debt</li> </ul> </p> </td> <td> <p> <ul class="cfedList--bulleted"> <li>New term loan</li> <li>$250,000 to minimum of $50 million or six times 2019 adjusted EBITDA</li> <li>Five-year term, no amortization in first two years</li> <li>Must be senior to or pari-passu with other debt, except mortgage debt</li> </ul> </p> </td> <td> <p> <ul class="cfedList--bulleted"> <li>Upsized tranche of existing term loan or revolving credit facility</li> <li>$10 million to minimum of $300 million or six times 2019 adjusted EBITDA</li> <li>Five-year term, no amortization in first two years</li> <li>Must be senior to or pari-passu with other debt, except mortgage debt</li> </ul> </p> </td> </tr> <tr> <th>Loan rate</th> <th colspan="3" class='text-center'>LIBOR (1 or 3 months) + 300 basis points</th> </tr> <tr> <th>Bank participation</th> <td> <p> <ul class="cfedList--bulleted"> <li>5% tranche retained by the bank</li> <li>1% origination fee due to the bank</li> <li>1% transaction fee due to the facility</li> <li>Facility pays 0.25% servicing fee each year</li> </ul> </p> </td> <td> <p> <ul class="cfedList--bulleted"> <li>5% tranche retained by the bank</li> <li>1% origination fee due to the bank</li> <li>1% transaction fee due to the facility</li> <li>Facility pays 0.25% servicing fee each year</li> </ul> </p> </td> <td> <p> <ul class="cfedList--bulleted"> <li>5% tranche retained by the bank</li> <li>0.75% origination fee due to the bank</li> <li>0.75% transaction fee due to the facility</li> <li>Facility pays 0.25% servicing fee each year</li> </ul> </p> </td> </tr> <tr> <th>Borrower restrictions</th> <td colspan="3"> <p> <ul class="cfedList--bulleted"> <li>Must be subject to restrictions outlined in CARES Act, including on employee compensation and dividends/buybacks.</li> <li>Must make a commercially reasonable effort to maintain employment.</li> <li>Must certify it has reasonable basis to believe that it has the ability to meet its financial obligations for 90 days following loan inception.</li> <li>Must refrain from using loan to repay other loan balances, except for MSPLF.</li> </ul> </p> </td> </tr> <tr> <th>Size of programs</th> <td colspan="3">Up to $600 billion across the three facilities, with $75 billion equity participation from the Treasury</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Notes: The official sources of information providing for the Main Street Lending Program are <a href="https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm">here</a> and <a href="https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-program.aspx">here</a>. This table provides only a high-level overview of some key features of the program’s three facilities. </figcaption> </p> <h3>Is the scale of the program sufficient to meet firms’ needs?</h3> <p>While it is difficult to estimate confidently firms’ funding needs, we believe the program is sufficiently large to meet these needs. Currently, the Main Street Lending Program has been funded with a $75 billion equity contribution by Treasury, which the Fed can in turn leverage up to $600 billion. Moreover, the Corporate Credit Facilities can provide up to an additional $750 billion.</p> <p>To put these numbers in perspective, consider the following facts. First, the aggregate annual before-tax cash flows (“gross operating surplus”) of nonfinancial businesses is around $6.6 trillion.<sup><a href="#ftn9" id="ftnref9">9</a></sup> So, if the goal is to cover lost earnings, the Main Street program and Corporate Credit Facilities can together cover about 2.5 months worth for <em>all</em> businesses, both public and private. (Of course the pandemic-induced economic shutdowns will last longer than this, but then again some businesses are not drastically affected by the pandemic.) Second, in a <a href="~/link.aspx?_id=3E2AB8D6959C4A019914F5A3DBD3A4F5&_z=z">previous post</a>, we estimated funding shortfalls specifically for public firms and found that the cash crunch could be fully offset if public firms stopped all capital spending. If we take this as a rule-of-thumb—erasing the cash crunch is equivalent to stopping all investment—and apply this to all nonfinancial businesses, the amount needed to offset the shortfall is about $2.4 trillion.<sup><a href="#ftn10" id="ftnref10">10</a></sup> Hence, by this estimate, the Main Street program and the Corporate Credit Facilities jointly cover about half ($1.35 trillion) of the amount needed by all firms (public and private).</p> <p>Two points must be taken into account. First, the scale of these two programs could potentially be expanded significantly if necessary: Treasury can decide to commit more of the funds appropriated under the CARES Act, which included $454 billion for credit support to businesses, states, and municipalities. Second, private lending is also taking place, so the programs are not required to cover all needs. Thus, overall, the scale of the programs seems roughly sufficient to meet most of the funding gap.</p> <h3>However, some features of the Main Street Lending Program may limit take-up </h3> <p>A key risk in the short run is that the program may fail to reach businesses that would benefit from receiving credit support. The main reason is that for a loan to be issued, the borrower, the outstanding creditors, and the lender, all must act—and their incentives might not always be aligned.</p> <p> <ol> <li><strong><em>Firms may not want to participate because of the strings attached to the loans</em></strong>. <p>The financial terms are capped: The interest rate that firms have to pay is set at a relatively low level (LIBOR + 300 basis points) and the fees are rather limited (borrowers must pay 75 to 100 basis points to the bank, and the bank must pay a 75 to 100 basis points participation fee due to the SPV, which it can pass through to the borrower; see table 1).<sup><a href="#ftn11" id="ftnref11">11</a></sup> These terms may entice participation of the firms (and as we discussed earlier, there are some plausible rationales why this credit should be subsidized). However, in order to obtain funding from the Main Street program, borrowers must also comply with several restrictions. Some significant ones are: First, they must suspend stock repurchases and dividend payouts until one year after the loans have been repaid. Second, they must follow certain limits on employee compensation set out in the CARES Act.<sup><a href="#ftn12" id="ftnref12">12</a></sup> Both of these provisions are meant to prevent the funding provided by the loan being diverted to equity owners or executives, but of course this limits the incentives for these actors to participate. Third, they must also make a “commercially reasonable effort to maintain employment.” Fourth, firms cannot use the Main Street program to repay outstanding creditors. (Absent this provision, banks would have an incentive to issue new Main Street loans to their riskier borrowers to allow them to repay their outstanding loans—reducing banks’ risk at the expense of the Fed facility.<sup><a href="#ftn13" id="ftnref13">13</a></sup> Loans issued through one of the three Main Street facilities, the MSPLF, are exempt from this restriction when they are issued, however, and allow refinancing; however, the loan being refinanced must be to a bank different than the one underwriting to the new loan.) Overall, these conditions, while they have their justifications, may deter participation. Finally, some firms may prefer to avoid taking on debt because that would make them insolvent—i.e., they cannot afford to add a debt repayment to their costs once the recovery starts. (For these firms, only a grant would allow them to survive.)</p> </li> <li><strong><em>Banks may not be eager to participate because of limited profitability</em></strong>. <p>The Main Street program relies on banks to underwrite loans, because they have the expertise to evaluate borrowers. But this in turn requires the program to provide banks with incentives to underwrite “good loans” (i.e., to firms that can plausibly repay the loan once the economy recovers), while avoiding having them pass on “bad loans” to the Fed facility. How does the program try to achieve this?</p> <p>First, to ensure that the banks do not make bad loans, they are required to hold onto some of the loans and thereby share the risk with the Fed.</p> <p>Second, as we discussed earlier, banks participating in the Main Street Lending Program will receive a uniform fee for their underwriting costs and a uniform interest rate to compensate for their cost of funds and the risk of default. These limits help avoid interest rates so high that they would deter participation from firms. But the flip side is that this may be viewed as too little for the banks, who may find this lending unprofitable (at least relative to other potential uses of funds): The risk of default is relatively high in the current circumstances, and the fee and interest rate might not be high enough to compensate for this. Moreover, in the event of default, the banks share risk equally with the Fed—they are “pari-passu” lenders—instead of the Fed bearing first losses. Additionally, there is no regulatory capital relief associated with the portion of loans that the banks must keep—they must be treated like regular commercial loans for risk capital purposes—and the tranches kept by the banks cannot be securitized. Overall, it seems plausible that some banks may elect not to participate, or may require significant collateral (which may be problematic, as we discuss next), or may only offer credit to their existing customers—in whose survival they have a direct financial interest (as we also discuss). Other issues, such as capacity constraints in underwriting and possible concerns about public relation implications (“headline risk”) may further reduce the banks’ incentives to participate.</p> </li> <li><strong><em>Firms may not be able to participate because of their current creditors</em></strong>. <p>For firms that already have outstanding debt, the new borrowing may clash with the terms of that debt—technically, may violate covenants on existing debt. The firms will then have to ask outstanding creditors for their permission to take on debt from the facilities. And hence, these actors must also have incentives to act and grant that permission. To understand this point, note that debt contracts often feature restrictions that limit overall borrowing, and/or that prevent the taking of additional debt, especially debt that is not junior to the existing debt or that pledges an asset as collateral (“negative pledge” covenant).<sup><a href="#ftn14" id="ftnref14">14</a></sup> It seems very likely that potential Main Street program loans will clash with some of these covenants. This is clearly the case for covenants that limit additional debt. But perhaps the issues of seniority and security are more important. The Main Street program loans, if they are unsecured, are required to be senior to (or on par with) existing debt. While this encourages banks to participate and protects the government’s funds, it also likely clashes with the covenants on existing senior debt. Relatedly, if program loans are secured by collateral used in existing loans, then the program states that they must be “pari-passu” in terms of security with these existing loans, which may clash with the negative pledge covenant.<sup><a href="#ftn15" id="ftnref15">15</a></sup> While covenants can generally be waived by existing creditors, their incentive to do so may be limited by the fact that the new program debt can generally not be used to pay down or roll over existing non-program debt.</p> <p>Of course, a common case will be when the bank making the loan under the Main Street program is also the main or the sole outstanding creditor to the firm. In that case, the bank may be willing to participate in the new loan—even if unprofitable—because it increases the probability that the preexisting loans will be repaid. On the other hand, if the bank believes the company is likely to go bankrupt eventually, it has little reason to extend its borrower’s life.</p> </li> </ol> </p> <h3>Some firms, especially the riskiest ones, are excluded from the program</h3> <p>The program has been designed in a way that some firms are excluded altogether: Firms with more than 15,000 employees and $5 billion of revenue do not qualify for the Main Street program. (They may be able to quality for the Corporate Credit Facilities, but that requires that they were investment-grade rated on March 22, 2020, and have not been downgraded “too much” since then. This will exclude the riskier firms, especially private firms.)</p> <p>Moreover, the Main Street program imposes limits on the size of the loans, as described in table 1. The minimum loan size may reflect fixed costs to underwriting loans, which make lending small amounts unprofitable; and the maximum loan size may reflect the banks’ (or the Fed’s) unwillingness to carry a large loan for one company. However, these loan size limits could constrain access to the program for either very small firms or firms with very large credit needs but no access to alternative sources of funding, such as the bond market. </p> <p>Finally, the program also requires the firm to have overall debt below a certain multiple of EBITDA: less than 4 for the New Loan facility and less than 6 for the other two.<sup><a href="#ftn16" id="ftnref16">16</a></sup> These constraints protect the Fed against losses by excluding firms that are too risky and for which agency frictions (such as debt overhang and risk shifting) might be severe. However, they also effectively exclude the firms with the highest debt to EBITDA ratios, which are also the least likely to be able to obtain private funding.</p> <h3>There might be adverse consequences of the program in the medium run </h3> <p>Overall, it is plausible that the Main Street program will help support the short-run recovery, compared to a scenario in which the program was not implemented. After all, firms can always choose not to participate—so the program can do no harm to the firms.</p> <p>It is conceivable, however, that in the medium run, after the immediate recovery from the pandemic, incremental debt incurred by firms via these lending facilities might slow the recovery. The principal mechanism is that borrowing from the facilities might marginally increase <em>debt overhang</em>. By debt overhang, we refer to various distortions that arise when a firm has “excessive” leverage: For instance, the firm may underinvest.<sup><a href="#ftn17" id="ftnref17">17</a></sup> As mentioned in our <a href="~/link.aspx?_id=BEF38759FB714DB58ACD40E097E361CE&_z=z">first post in this series</a>, the corporate sector entered this recession with relatively high leverage, compared to historical norms. The Main Street program will add to this leverage by increasing the debt of participating firms. It is possible that the additional leverage will lead to increases in debt overhang with negative effects on the economy. For instance, investment rates could be persistently low after the crisis, relative to a counterfactual where fewer firms emerge from the crisis because of high liquidation rates, but are also, on average, less leveraged because they did not take on program debt. (To be sure, this is uncertain, because it depends on whether the labor and capital working for liquidated firms can be put back to work more quickly than if the firm continues with high leverage.)</p> <p>An additional risk during the recovery is that the programs create so-called <em>zombie firms</em>. These are firms that are unable to return to profitability but are kept alive by the availability of loans. Some researchers have argued that the phenomenon of “zombie firms” was widespread in Japan in the 1990s and in Southern Europe in the 2010s. A similar phenomenon in the U.S. could harm the recovery by slowing the reallocation of capital and labor from unproductive sectors or firms to productive sectors or firms. In principle, the relatively short maturity of the loans reduce this risk—firms have to repay the principal within five years.</p> <h3>Conclusion</h3> <p>The Main Street Lending Program is designed to support the recovery by lending to businesses so they can ride out the pandemic and, hence, avoid inefficiencies associated with financial distress. Its potential size appears to be sufficient to meet the large borrowing needs of corporations in the months to come. However, there is significant uncertainty about take-up, because banks, borrowers, or existing creditors might be unwilling to participate. Moreover, some borrowers will not qualify. And finally, while the short-run effects of the program on economic activity are almost surely positive, the medium-run effects are more uncertain because higher debt might slow down the recovery.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> We thank our colleagues, in particular Jonas Fisher, Leslie McGranahan, and Samuel Schulhofer-Wohl, for their comments on this blog.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> In that post, we tried to quantify the magnitude of this illiquidity problem for publicly traded firms; our simple, and highly uncertain estimate is that perhaps 25%, sales-weighted, of public companies risked running out of cash by the end of the third quarter of 2020 without further borrowing (and without adjusting other margins such as investment or payouts).</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> Some of these actions are taken with the consent of the Secretary of the Treasury and with financial backing from the Treasury and Congress.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> They are the Main Street New Loan Facility (MSNLF), the Main Street Expanded Loan Facility (MSELF), and the Main Street Priority Loan Facility (MSPLF).</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> The Federal Reserve has taken a number of other actions to support the flow of borrowing to corporations more broadly. First, the short-term commercial paper market and money market funds were disrupted in March. To address this, the Fed both purchased commercial paper directly through a new commercial paper facility (CPFF) and offered loans secured by assets sold by money market funds through the money market mutual fund lending facility (MMLF). The Fed is also creating a Term Asset-Backed Securities Loan Facility (TALF) that can provide financing against new issues of various asset-backed securities, including corporate loans that finance businesses. (The TALF will also support borrowing in many other sectors, such as auto or student loans, but our focus here is on businesses.) And finally, on top of all the facilities, the Fed and other banking supervisors have taken a number of <a href="https://www.federalreserve.gov/supervisory-regulatory-action-response-covid-19.htm">supervisory actions</a> to allow banks to increase lending, while maintaining safety and prudence standards. We do not discuss the paycheck protection program (PPP), created by Congress through the CARES Act and managed by the U.S. Small Business Administration, and the associated Fed facility (PPPLF), since they apply to small businesses and our focus here is on public corporations. We also do not cover the special measures affecting the air transportation sector under the CARES Act.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> By <a href="https://www.law.cornell.edu/uscode/text/12/343">law</a>, the Federal Reserve Board must, after invoking its 13(3) lending authority under “unusual and exigent” circumstances, write a report to Congress that includes a justification. The reports are available <a href="https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm">here</a>.</p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> For instance, many companies have drawn down their credit lines as a matter of precaution, which reduces the ability of banks to lend further.</p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> For instance, the “basis” between the credit spread and the corresponding credit default swap (CDS) premium widened; see for instance <a href="~/link.aspx?_id=F5EF21E3BADD4AC79A752EC22DF76AB5&_z=z">this paper</a>.</p> <p><sup><a href="#ftnref9" id="ftn9">9</a></sup> This includes all businesses, public and private, corporate and noncorporate. Source: <a href="https://apps.bea.gov/itable/itable.cfm?reqid=14&step=1">Integrated Macroeconomic Accounts</a> of the Bureau of Economic Analysis.</p> <p><sup><a href="#ftnref10" id="ftn10">10</a></sup> Source: <a href="https://apps.bea.gov/itable/itable.cfm?reqid=14&step=1">Integrated Macroeconomic Accounts</a> of the Bureau of Economic Analysis.</p> <p><sup><a href="#ftnref11" id="ftn11">11</a></sup> As a point of comparison, in July 2019, the Bank Prime Loan Rate—the rate usually charged by banks to their most creditworthy corporate borrowers—stood at 5.50%, or approximately 325 basis points above the three-month LIBOR. Thus, the financial terms offered to all firms via the program correspond, approximately, to terms normally available only to the most creditworthy of them.</p> <p><sup><a href="#ftnref12" id="ftn12">12</a></sup> These compensation limits are described in section 4004 of the CARES Act, which is available <a href="https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf">here</a>. They primarily affect employees and officers of the firm that received high compensation (i.e., in excess of $425,000 per year) in 2019.</p> <p><sup><a href="#ftnref13" id="ftn13">13</a></sup> Technically, at the expense of the SPV funded by the Fed and Treasury, but we will refer to this as the Fed facility for short.</p> <p><sup><a href="#ftnref14" id="ftn14">14</a></sup> Covenants restricting firms’ ability to take on new debt, or restricting new liens on the firm’s assets, are common, particularly in loan contracts of medium-sized and large firms. For instance, <a href="https://www.nber.org/papers/w27316">this recent working paper</a> studies a sample of 1857 credit facilities in the leveraged loan market and finds that 92% of them have restrictions on new liens and 87% on incurring additional debt. <a href="https://onlinelibrary.wiley.com/doi/epdf/10.1111/j.1540-6261.2009.01476.x">This paper</a> studies a sample of 3,603 private credit agreements (loans) of public firms and finds that 97% of them contain covenants, 90% of which imply an effective restriction on borrowers’ total debt. By contrast, in a sample of bond issues, <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2007.01221.x">this paper</a> shows that only 22.4% of issues in the 2000–03 period contain restrictions on total leverage, while only 42.5% contain restrictions on issuance of secured debt.</p> <p><sup><a href="#ftnref15" id="ftn15">15</a></sup> One exception is that loans made through the Main Street New Loan Facility, if they are secured, can be secured using second liens, as stated in section B.3 of <a href="https://www.bostonfed.org/mslp-faqs">this document</a>. In that case, the secured lenders may accept that the collateral is pledged as second lien, since they retain priority, but the security provided to the new lender is of course significantly less, which may reduce the willingness to lend.</p> <p><sup><a href="#ftnref16" id="ftn16">16</a></sup> For these purposes, EBITDA can be calculated with the standard adjustments.</p> <p><sup><a href="#ftnref17" id="ftn17">17</a></sup> The classic debt overhang mechanism is that shareholders/managers may not take advantage of profitable investment opportunities if leverage is too high, because the benefits of investment, if successful, are more likely to accrue to debtholders. More generally, firms with high leverage may face high costs for external finance, which in turn reduces their incentive to take on new investment projects.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> <style type="text/css"> ol li p { margin-left: 15px; } </style> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/closer-look-google-trends-unemployment https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/closer-look-google-trends-unemployment Wed, 17 Jun 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>Since the onset of the pandemic, there has been growing interest in tracking labor market activity with “big data” sources like Google Trends.<sup><a href="#ftn1" id="ftnref1">1</a></sup> Just as an example, one can track how the number of Google searches with the term <em>unemployment office</em> has changed over the past week for the Chicago metro area or <a href="https://twitter.com/GoogleTrends/status/1268604487482011649?s=20">explore how unemployment became one of the top searched issues across the U.S. during the early months of the pandemic here</a>.</p> <p>In this post, we show that at the U.S. metro area level, the positive correlation between the Google Trends unemployment topic index<sup><a href="#ftn2" id="ftnref2">2</a></sup> and the rate of unemployment insurance (UI) take-up during the Covid-19 pandemic is primarily driven by variation within U.S. metro areas across time (the time series dimension) and less so by variation across U.S. metro areas within weeks (the cross-sectional dimension). Furthermore, it also appears likely that at least some of this correlation has been driven by UI policy changes and the news coverage surrounding them as opposed to search activity more directly related to filing a UI claim. </p> <h3>The Covid-19 pandemic’s impact on metro area UI claims</h3> <p>We use two primary data sources in our analysis: weekly county-level initial UI claims and daily Google Trends indexes for the unemployment topic (see note 2). The county-level initial UI claims data are for Pennsylvania, New York, Texas, and Washington, and we get them from their state governments (through the Haver Analytics database). To these data, we then add Google Trends unemployment topic indexes at the designated market area (DMA) level, which is the smallest level of geographic disaggregation available that is consistent with the county-level UI claims data. We normalize the daily Google Trends indexes for each metro area against the national index to obtain data that are comparable across jurisdictions.<sup><a href="#ftn3" id="ftnref3">3</a></sup> We then average the daily indexes using the UI claim reference weeks. Finally, we aggregate the county-level UI clams data up to the DMA level to obtain a consistent metro-area-by-week panel of data.<sup><a href="#ftn4" id="ftnref4">4</a></sup></p> <p>Figure 1 shows maps of initial UI claims per 1,000 residents at two points in time during the Covid-19 pandemic: first, for the week ending March 28, 2020, which is approximately the peak week of initial UI claims, and second, for the week ending May 30, 2020, which is the most recent week that we have county-level claims data for. The maps highlight two things: 1) the significant degree of heterogeneity in unemployment due to the Covid-19 crisis across metro areas, with metro areas in Washington and New York reporting much higher numbers of claims per capita than those in Texas and Pennsylvania (panel A), and 2) how labor market conditions have changed over the past few months in metro areas, with most outside of Texas seeing some improvement (panel B compared with panel A). These are the patterns in UI take-up that we aim to explain with the Google Trends data. </p> <p> <h3>Figure 1. Initial unemployment insurance (UI) claims per 1,000 residents for metro areas in New York, Pennsylvania, Texas, and Washington</h3> <img height="2560" alt="Figure 1 shows heat maps for the level of initial unemployment insurance claims per 1,000 residents for metro areas in the states of New York, Pennsylvania, Texas, and Washington for the weeks ending March 28 and May 30, 2020. There is a large degree of heterogeneity across metro areas, as well as a notable decline in the level of claims per 1,000 residents from the end of March through the end of May for those in New York, Pennsylvania, and Washington." width="1600" src="~/media/03018f26ff43438cabf676513655c7e6.ashx" /> <figcaption class='caption'> Notes: Regions within states correspond to Nielsen designated media areas, or DMAs (see note 4 for more information). Darker shaded regions have higher initial UI claims per capita, while lighter shaded regions have lower initial UI claims per capita. County populations and weekly initial claims are aggregated to the DMA level to match the Google Trends search data.<br /> Sources: Authors’ calculations based on data from the New York Department of Labor, Pennsylvania Department of Labor & Industry, Texas Workforce Commission, Washington State Employment Security Department, and U.S. Census Bureau from Haver Analytics. </figcaption> </p> <h3>Google Trends and metro area initial UI claims</h3> <p>A fundamental hurdle with using Google Trends to explain UI take-up rates is distilling the “signal” from the “noise” of the data. The Google search data are what is often referred to as “unstructured” data. In our context, this means that they are not based on a sampling scheme that was designed expressly for the purpose of measuring UI take-up. Instead, these data are generated without a known sampling structure based on individual actions taken on Google that may or may not reflect the search activity related to how to file a UI claim. This makes identifying how they relate to UI take-up a nontrivial task. </p> <p>The three linear regressions in table 1 summarize this challenge.<sup><a href="#ftn5" id="ftnref5">5</a></sup> Each regresses (log) initial UI claims (the dependent variable) for the 12 weeks from the week ending March 14 (just before the implementation of the first state public health orders in the U.S.) through the week ending May 30, 2020, on (log) search intensity as captured by the Google Trends unemployment topic indexes (the independent variable) while controlling for state-time fixed effects or metro area fixed effects or both. The sign and magnitude of the regression coefficient on search intensity vary considerably depending on the underlying assumptions of the three specifications in the table. In the rest of this post, we discuss these assumptions in more detail and what they imply for the relationship between initial UI claims and search intensity. </p> <p> <h3>Table 1. The relationship between metro-area-level initial unemployment insurance (UI) claims and Google search intensity for unemployment-related terms</h3> <div class="table-responsive"> <table class="table"> <thead> <tr class="cfedTable--rowBorderTop"> <th></th> <th style="border-bottom:solid" colspan="3">Dependent variable</th> </tr> <tr class="cfedTable--rowBorderBottom"> <th></th> <th colspan="3">log(claims)</th> </tr> </thead> <tbody> <tr> <th>log(search)</th> <td>–0.20</td> <td>0.91***</td> <td>0.37***</td> </tr> <tr class="cfedTable--rowBorderBottom"> <th></th> <td>(0.90)</td> <td>(0.06)</td> <td>(0.06)</td> </tr> <tr> <th>State-time fixed effects</th> <td>X</td> <td></td> <td>X</td> </tr> <tr class="cfedTable--rowBorderBottom"> <th>Metro area fixed effects</th> <td></td> <td>X</td> <td>X</td> </tr> <tr> <th>Observations</th> <td>508</td> <td>508</td> <td>508</td> </tr> <tr class="cfedTable--rowBorderBottom"> <th>Adjusted <em>R</em><sup>2</sup></th> <td>0.31</td> <td>0.90</td> <td>0.99</td> </tr> </tbody> </table> </div> <figcaption class="caption"> *<em>p</em> < 0.10<br /> **<em>p</em> < 0.05<br /> ***<em>p</em> < 0.01<br /> Notes: This table presents the results from regression analyses examining the correlation between Google search intensity for unemployment-related terms and initial UI claims, controlling for state-time fixed effects, metro area fixed effects, or both and weighted by population. Standard errors, which are in parentheses, are clustered at the state level.<br /> Sources: Authors’ calculations based on data from Google Trends and from the New York Department of Labor, Pennsylvania Department of Labor & Industry, Texas Workforce Commission, Washington State Employment Security Department, and U.S. Census Bureau from Haver Analytics. </figcaption> </p> <p>With our data, we can explore the nature of the correlation between Google search intensity and initial UI claims along both the cross-sectional and time series dimensions. To isolate the variation in one of these two dimensions, we include a particular set of fixed effects to control for the variation present in the other. For example, the regression coefficient estimate in the first column of table 1 is based off of the cross-sectional variation in our panel of 42 metro areas. It controls for state-specific trends over the sample period that might result from differences in implementing lockdown measures (e.g., not all states had nonessential businesses close down at the same time) or in processing UI claims (e.g., the <a href="https://www.spokesman.com/stories/2020/apr/20/clunky-state-website-struggles-with-record-applica/">State of Washington’s new website for submitting claims faced many technical challenges initially, which delayed UI benefits for some</a>).</p> <p>Through this regression specification we are trying to answer this question: Are the metro areas in a particular state where we saw the most Google searches for unemployment-related terms in our panel also the metro areas where we saw the most initial UI claims? Examining only the cross-sectional variation, we find that there appears to be a very limited relationship between Google search intensity and initial UI claims in our data; i.e., the estimated effect of Google search intensity on claims is statistically indistinguishable from zero (the <em>p</em>-value associated with the standard error shown in the table is greater than standard levels of significance).</p> <p>Why does this exercise reveal mostly noise in the data? We conjecture that it is because metro areas are inherently different for many other reasons (e.g., the makeup of the workforce differs from one metro area to another); and these other factors are likely to also affect how the constituents of a particular metro area engage with Google, as well as how they do in the labor market. To control for this possibility, we instead estimate the relationship using only time series information for each metro area by including metro area fixed effects in the regression instead of state-time fixed effects. </p> <p>Through this alternative specification, we examine how deviations of search intensity and initial UI claims from the metro area’s average levels relate to each other. In other words, through this regression specification, we are trying to answer this question: Are the weeks when a metro area’s residents searched more than normal for unemployment-related terms also the weeks when we saw above-average initial UI claims in that metro area? The second column of table 1 reports the regression coefficient estimate from this specification, and it is quite different from the first specification’s estimate. There is an economically large (and statistically significant) positive relationship between Google Trends search interest in unemployment-related subjects and UI take-up. The size of this estimate is similar to that found in recent research by Aaronson et al.,<sup><a href="#ftn6" id="ftnref6">6</a></sup> which serves as the basis for their forecasts of state and national initial UI claims during the pandemic.</p> <p>However, even in this case there remain some reasons to question the source of this correlation. The pandemic has also led to large changes in who is eligible to receive UI benefits and the magnitude of these benefits. These changes, along with the substantial news coverage about them and the historic take-up of UI during the pandemic, might have led to very different Google search behavior, at least in terms of how it relates to the take-up of UI over time across different U.S. states. Our final specification attempts to recover the extent to which this may be true by incorporating both sets of previously used fixed effects. </p> <p>Through the final regression specification, we are trying to answer this question: After overall trends within the state are taken into account, are the weeks when search activity related to filing a UI claim was most pronounced the same weeks when the labor markets in metro areas were most affected by Covid-19? The third column of table 1 reports this specification’s regression coefficient estimate—which is smaller than the estimate reported in the second column, but still positive and economically large (and statistically significant). This result implies that there is scope for the possibility that the news surrounding unemployment and UI eligibility during the pandemic could have driven some of the correlation between Google search activity for unemployment-related subjects and initial UI claims. </p> <p>In effect, this final specification is the most conservative one that we consider because it measures the relationship between Google search activity and UI take-up in a metro area independent of state-specific trends such as UI policy changes—or even national changes such as the introduction of Pandemic Unemployment Assistance (PUA)<sup><a href="#ftn7" id="ftnref7">7</a></sup>—and related-news-driven search. In doing so, we find that a 1% increase in Google search intensity for unemployment-related terms translates to a 0.4% increase in initial UI claims. On this basis, the search activity captured in Google Trends can help explain the patterns in the metro-area-level initial UI claims data seen in figure 1. </p> <p>For further analysis on the correlation between Google Trends and initial UI claims, please read this <a href="~/link.aspx?_id=6FBB66CBE91D4B0BB778B199131E4BAD&_z=z">follow-up post</a>.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> See Hyunyoung Choi and Hal Varian, 2012, “Predicting the present with Google Trends,” <em>Economic Record</em>, Vol. 88, No. s1, June, pp. 2–9, <a href="https://doi.org/10.1111/j.1475-4932.2012.00809.x">Crossref</a>; Choi and Varian show that Google Trends search interest for the unemployment topic can predict changes in labor market conditions, as measured by weekly initial UI claims.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> A topic in Google Trends is a categorization or grouping of related search terms.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> See Aaron Sojourner and Paul Goldsmith-Pinkham, 2020, “The coronavirus crisis led to a record-breaking spike in weekly unemployment insurance claims,” <em>Working Economics Blog</em>, Economic Policy Institute, March 24, <a href="https://www.epi.org/blog/coronavirus-record-breaking-spike-in-ui-claims/">available online</a>; Sojourner and Goldsmith-Pinkham discuss in detail the need to normalize Google Trends data given its structure.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> See Gaurav Sood, 2016, “Geographic information on designated media markets,” Harvard Dataverse, data set, version 9.0, <a href="https://doi.org/10.7910/DVN/IVXEHT">Crossref</a>; Sood provides a mapping between counties and the Nielsen DMAs that Google uses to define metro areas.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> Regressions are statistical exercises that estimate the degree of correlation between two variables. In our case, the initial UI claims are the dependent variable (the main factor we are trying to predict) and the Google Trends unemployment topic indexes are the independent variable (the factor we think can be used to predict the dependent variable). Through regression analysis, we come up with a regression coefficient, which represents the mean change in the dependent variable for one unit of change in the independent variable while holding constant the other variables in the analysis that may affect the dependent variable.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> Daniel Aaronson, Scott A. Brave, R. Butters, Daniel W. Sacks, and Boyoung Seo, 2020, “Using the eye of the storm to predict the wave of Covid-19 UI claims,” <em>Covid Economics: Vetted and Real-Time Papers</em>, No. 9, April 24, pp. 59–76, <a href="https://cepr.org/sites/default/files/news/CovidEconomics9.pdf">available online</a>.</p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> Details on this additional relief are <a href="https://www.dol.gov/coronavirus/unemployment-insurance">available online</a>.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> <style type="text/css"> table thead th, table tbody td { text-align: center; } </style> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/measuring-decline-in-economic-activity https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/measuring-decline-in-economic-activity Mon, 15 Jun 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>On June 8, 2020, the National Bureau of Economic Research (NBER) issued a <a href="https://www.nber.org/cycles/june2020.html">statement</a> announcing that its Business Cycle Dating Committee determined U.S. economic activity had reached a cyclical peak in February 2020. Beginning in March 2020, a multitude of economic indicators declined sharply as public health orders that required nonessential businesses to close were implemented during the early stages of the Covid-19 pandemic here in the U.S. The declines then accelerated in April as these orders were expanded to cover nearly the entire country. However, the data for May released so far seem to indicate that once the orders were eased or lifted, the rates of decline slowed. Here, we take a closer look at these changes using several summary indexes of economic activity.</p> <p>The first index we examine is the <a href="~/link.aspx?_id=9DBBCCA58A06408B8A0AA8B1EA5F0766&_z=z">Chicago Fed National Activity Index</a> (CFNAI). The CFNAI is a monthly index designed to gauge overall economic activity for the U.S. based on <a href="~/media/ed87445bf88144e79dcd5c9e7b47ffd3.ashx">85 economic indicators</a> drawn from four broad categories of macroeconomic data: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. Each indicator measures some aspect of macroeconomic activity. The derived index then provides a single summary measure of the most important factor common to all of them. To arrive at this factor, a statistical technique referred to as <a href="~/media/eb90befa8a324f1f953c3caca46b0193.ashx">principal components analysis</a> is used. </p> <p>The CFNAI is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward a trend growth rate over time, a positive index reading has historically been associated with growth above trend and a negative index reading with growth below trend.<sup><a href="#ftn1" id="ftnref1">1</a></sup> The latest <a href="~/media/962939a6a77f417a9e34390e902983f9.ashx">release</a> of the CFNAI—which came out on May 26, 2020, for data through April 2020—reported the index had reached an all-time low in its history extending back to March 1967. Many of the underlying data series that make up the index similarly experienced record declines. For example, industrial production dropped by roughly 11% in April—its largest single monthly decline on record since 1921, when it started to be tracked. Similarly, nonfarm payrolls fell by almost 14% in April—its largest single monthly decline in its history going back to 1939. </p> <p>Figure 1 plots the CFNAI along with a similar index produced by the Federal Reserve Bank of Philadelphia called the <a href="https://www.philadelphiafed.org/research-and-data/real-time-center/business-conditions-index">Aruoba-Diebold-Scotti Business Conditions Index</a> (ADSBCI). Both indexes are shown as standard deviations from their sample means. While the ADSBCI covers only six macroeconomic data series, five of them are also in the CFNAI and they tend to be those that receive large weights in that index.<sup><a href="#ftn2" id="ftnref2">2</a></sup> Accordingly, a close correspondence with the CFNAI is evident in the figure. At –17.07 standard deviations from trend, the ADSBCI’s value in April was slightly lower than the CFNAI’s, which stood at –16.74 standard deviations from trend. However, both values represent record lows for their respective indexes and far exceeded what was experienced during any recent recession in the U.S. (the shaded regions in the figure). </p> <p> <h3>Figure 1. Chicago Fed National Activity Index (CFNAI) versus Aruoba-Diebold-Scotti Business Conditions Index (ADSBCI)</h3> <img height="875" alt="Figure 1 is a line chart that plots the Chicago Fed National Activity Index and the average values of the Aruoba-Diebold-Scotti Business Conditions Index in each month, using data through April 2020. " width="1286" src="~/media/426cc1641d9b4b9ea0d0b22e33da59ac.ashx" /> <figcaption class='caption'> Notes: To compare the daily ADSBCI against the monthly CFNAI, we take the average of the ADSBCI’s values in each month. Shaded periods correspond to U.S. recessions as defined by the National Bureau of Economic Research.<br /> Sources: Federal Reserve Bank of Chicago; and authors’ calculations based on data from the Federal Reserve Bank of Philadelphia from Haver Analytics. </figcaption> </p> <p>The ADSBCI uses a different statistical technique referred to as <a href="~/link.aspx?_id=E3989D0E43A64DA2B6E7250382D5C190&_z=z">dynamic factor analysis</a> to weight up its weekly and monthly data series along with quarterly U.S. gross domestic product (GDP). An advantage of this technique is that the index can be easily updated in real time as new data are released. Data releases for May (such as the <a href="https://www.bls.gov/news.release/empsit.nr0.htm">Employment Report</a> from the U.S. Bureau of Labor Statistics) suggest that the nadir for economic activity might have been in April. The more recent history of the ADSBCI using the data available through June 11, 2020, shown in figure 2, suggests some improvement in economic activity in May. Yet, it is worth pointing out that the available data for May used in the ADSBCI was limited to initial unemployment insurance (UI) claims and nonfarm payrolls at the time of writing this post. Initial UI claims decreased by almost 2 million in May, and nonfarm payrolls increased by a record 2.5 million jobs in May. As additional May data become available, the ADSBCI will be updated to incorporate this information. </p> <p> <h3>Figure 2. Brave-Butters-Kelley (BBK) Coincident Index versus Aruoba-Diebold-Scotti Business Conditions Index (ADSBCI)</h3> <img height="875" alt="Figure 2 is a line chart that plots the Brave-Butters-Kelley Coincident Index and the average values of the Aruoba-Diebold-Scotti Business Conditions Index in each month, using data through May 2020." width="1286" src="~/media/e6f4f879a9cd4bb19bed75a8414d126d.ashx" /> <figcaption class="caption"> Notes: To compare the daily ADSBCI against the monthly BBK Coincident Index, we take the average of the ADSBCI’s values in each month. Shaded periods correspond to U.S. recessions as defined by the National Bureau of Economic Research.<br /> Sources: Authors’ calculations based on data from the Federal Reserve Bank of Chicago and Federal Reserve Bank of Philadelphia from Haver Analytics. </figcaption> </p> <p>Besides the CFNAI, the Chicago Fed also produces the <a href="~/link.aspx?_id=F3A8BEF2F5DB49ED980E1D7B015244E7&_z=z">Brave-Butters-Kelley Indexes</a> (BBKI)—economic activity indexes constructed using <a href="~/link.aspx?_id=E3989D0E43A64DA2B6E7250382D5C190&_z=z">collapsed dynamic factor analysis</a>. This technique combines elements of principal components analysis and dynamic factor analysis, and allows us to easily update the indexes as data become available. The Brave-Butters-Kelley Indexes are based on a set of <a href="~/media/e1201b4f3227456abda3894a2d8440e7.ashx">500 monthly indicators</a> of growth in U.S. economic activity and quarterly GDP growth—almost six times more indicators than used for the CFNAI. Figure 2 plots a <em>preliminary</em> estimate for May of one of the BBKI—the <a href="~/link.aspx?_id=D2ACEBD51A214398BA0E989E0F16F04A&_z=z">BBK Coincident Index</a>—along with the ADSBCI. This estimate of the BBK Coincident Index is based on 200 of 500 data series that were available through May as of June 12, 2020. The BBK Coincident Index is scaled similarly to the ADSBCI in the figure, capturing growth in standard deviations from trend. Trend growth for the BBK Coincident Index is explicitly measured by trend U.S. real GDP growth since January 1960. </p> <p>Given the limited amount of data available for May at this time, the May value for the BBK Coincident Index in figure 2 should be treated as a first read on the macroeconomic data. The official release of the BBKI for May will not come out until July 1, 2020. With that caveat aside, one can see from the figure that the BBK Coincident Index and ADSBCI track each other fairly closely and <a href="~/link.aspx?_id=E3989D0E43A64DA2B6E7250382D5C190&_z=z">align quite well with historical U.S. recessions</a>. Both indexes declined sharply in March and April of this year and have improved some so far in May based on the available data; but the decline in April was less steep and the increase in May less pronounced for the broader BBK Coincident Index.</p> <p>A similar pattern can also be seen in figure 3—which compares one of the BBKI with the <a href="https://www.newyorkfed.org/research/policy/weekly-economic-index">Weekly Economic Index</a> (WEI), a new economic activity index produced by the Federal Reserve Bank of New York. Like the ADSBCI, the WEI is published on a weekly basis. It is scaled in terms of year-over-year GDP growth. To make an apples-to-apples comparison in this case, we transform BBK Monthly GDP Growth (an index estimated from the BBKI model) into year-over-year GDP growth. Unlike the other indexes described previously, the WEI through May (using data available as of June 12, 2020) has yet to show much improvement in economic activity from April. In contrast, BBK Monthly GDP Growth on a year-over-year basis (using data available as of June 12, 2020) declined less in April than the WEI, and was much less negative in May than the WEI. It should be noted, however, that unlike the WEI, BBK Monthly GDP Growth includes actual GDP data as one of its indicators. Official GDP data will not be made available for the second quarter of 2020 until the end of July. As such, BBK Monthly GDP Growth could be revised when this information becomes available from the U.S. Bureau of Economic Analysis. </p> <p> <h3>Figure 3. Brave-Butters-Kelley (BBK) Monthly GDP Growth versus Weekly Economic Index (WEI)</h3> <img height="875" alt="Figure 3 is a line chart that plots Brave-Butters-Kelley Monthly GDP Growth, expressed as a year-over-year growth rate, and the average values of the Weekly Economic Index in each month, using data through May 2020." width="1286" src="~/media/310a851ff0e64a549242b8375d1064bd.ashx" /> <figcaption class="caption"> Notes: To express BBK Monthly GDP Growth as a year-over-year growth rate, we sum (log) growth rates over a 12-month period. The WEI is available weekly, so to construct a monthly measure, we average its values in each month. Shaded periods correspond to U.S. recessions as defined by the National Bureau of Economic Research.<br /> Sources: Authors’ calculations based on data from the Federal Reserve Bank of Chicago and Federal Reserve Bank of New York from Haver Analytics. </figcaption> </p> <p>Based on the data through June 12, 2020, the speed and magnitude of the decline in economic activity during the Covid-19 pandemic have no parallels in the recent past. Table 1 contains the recent values of all of the indexes discussed here since the beginning of the current recession in March 2020. With the public health orders in the U.S. having been relaxed or lifted altogether in recent weeks, economic activity is changing across the country. These summary indexes of activity should continue to shed further light on the path of the economy in the coming months. More information on the CFNAI and BBKI can be found on the <a href="~/link.aspx?_id=B55A6BCC868D479C92A036282969C126&_z=z">Chicago Fed’s Economic Data page</a>. </p> <p>For further analysis on how all these summary indexes tracked the subsequent recovery in economic activity, please read this <a href="~/link.aspx?_id=09E1A09634AD4450A586A63B9B6863FC&_z=z">follow-up post</a>.</p> <p> <h3>Table 1. Recent index values, 2020 </h3> <div class="table-responsive"> <table class="table cfedTable--fixed"> <thead> <tr class="cfedTable--rowBorderBottom"> <th></th> <th>Mar</th> <th>Apr</th> <th>May</th> </tr> </thead> <tbody> <tr> <td></td> <th colspan="3" class='text-center' style="border-bottom: solid"><em>std. dev. units</em></th> </tr> <tr> <th>CFNAI</th> <td>–4.97</td> <td>–16.74</td> <td></td> </tr> <tr> <th>ADSBCI</th> <td>–11.51</td> <td>–17.07</td> <td>–2.97</td> </tr> <tr> <th>BBK Coincident Index</th> <td>–5.83</td> <td>–10.05</td> <td>–5.06*</td> </tr> <tr> <td></td> <th colspan="3" class='text-center' style="border-bottom:solid"><em>y/y GDP growth rate</em></th> </tr> <tr> <th>BBK Monthly GDP Growth</th> <td>–1.04</td> <td>–3.39</td> <td>–4.59*</td> </tr> <tr> <th>WEI</th> <td>–1.98</td> <td>–10.69</td> <td>–10.37</td> </tr> </tbody> </table> </div> <figcaption class="caption"> * These are preliminary estimates based on data available through June 12, 2020; the official BBKI values will be released on July 1, 2020. <br /> Notes: This table shows recent values for each series presented in figures 1–3. The values for the Chicago Fed National Activity Index (CFNAI), Aruoba-Diebold-Scotti Business Conditions Index (ADSBCI), and Brave-Butters-Kelley (BBK) Coincident Index are in standard deviation units, and the values for BBK Monthly GDP Growth and the Weekly Economic Index (WEI) are scaled to year-over-year GDP growth.<br /> Sources: Authors’ calculations based on data from the Federal Reserve Bank of Chicago, Federal Reserve Bank of Philadelphia, and Federal Reserve Bank of New York from Haver Analytics. </figcaption> </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> The index was first developed as a method of better predicting inflationary pressures, but over time, it has primarily been used instead to capture turning points in the U.S. business cycle; see, e.g., “<a href="~/media/4f937260a8c74353831291859b6dc429.ashx">The 2001 recession and the Chicago Fed National Activity Index: Identifying business cycle turning points</a>” and “<a href="~/media/9a1902135f9f457da6d299dc5ea3b3ac.ashx">The Chicago Fed National Activity Index and business cycles</a>.”</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> The six indicators are nonfarm payrolls, industrial production, real manufacturing and trade sales, real personal income less transfer payments, initial unemployment insurance claims, and real gross domestic product growth for the U.S. The last series is not used to construct the CFNAI.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> <style type="text/css"> table thead th, table tbody td { text-align: center; } </style> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/financial-positions-part4 https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/financial-positions-part4 Tue, 19 May 2020 00:00:00 -0500 <div class="cfedContent__text"> <p><em>This blog post is the fourth in a series that discusses how the current pandemic affects the financial positions of publicly traded U.S. corporations, the potential implications of these financial developments, and the federal policy response. </em></p> <p><em>In this post, we discuss the adjustments to federal tax policy that have been initiated to support U.S. businesses and their possible effects. These measures represent a significant fiscal cost ($280 billion over ten years) and an even larger positive cash flow effect for businesses in 2020 (over $700 billion), because some measures are effectively loans. However, the measures are also relatively untargeted, i.e., they are not restricted to the industries or firms most significantly impacted by the pandemic. Because of this, we expect that they are unlikely to reduce substantially the number of firms facing illiquidity or insolvency, and as a result their aggregate effects on investment or employment could be relatively small.</em></p> <h3>Why use business tax policy in response to the pandemic?</h3> <p>One important aspect of the federal policy response has been to use tax policy to support corporations. In normal times, tax policy affects corporate decision-making primarily by altering firms’ incentives to undertake investment and other value-creating projects, for example, by affecting the user cost of capital. In this instance, however, measures taken have had essentially no effect on these incentives. Rather, tax policy has been deployed to reduce the risks of illiquidity or insolvency resulting from the huge negative cash flows currently being experienced by some corporations, and which we discussed in our <a href="~/link.aspx?_id=3E2AB8D6959C4A019914F5A3DBD3A4F5&_z=z">previous post</a>.</p> <p>Tax policy can address these risks in two ways: First, it reduces liquidity problems by reducing tax payments due now or in the near future (and sometimes rescheduling them to a later date); second, it improves the financial positions of corporations by reducing their tax payments overall (i.e., taxes due at any point in time), thereby reducing their risk of insolvency.</p> <p>Theoretically, for firms that are not facing significant liquidity shortfalls, we would expect little change in real outcomes from a tax change that does not affect incentives. For instance, delaying tax payments for a company with large liquidity should have negligible effects on its investment or employment decisions. However, for firms that are cash-constrained (or expect to be cash-constrained soon) an infusion of cash may increase investment or employment. For tax policy to be effective at increasing investment or employment then, it ought to target the firms most affected by the Covid-19 pandemic.<sup><a href="#ftn1" id="ftnref1">1</a></sup> The difficulty, from the policymaking standpoint, is that it is not perfectly clear which firms are most affected, and designing policies to target certain firms is difficult. An additional problem is that reductions in tax payments must also reach the firms they target in a timely manner. For example, a tax refund that is only paid to a firm at the end of the (fiscal) year will not immediately help improve its liquidity position. </p> <h3>Overall effect of the tax measures</h3> <p>Most of the business tax measures so far have been implemented as part of the CARES act, passed on March 27, 2020.<sup><a href="#ftn2" id="ftnref2">2</a></sup> We estimate that the incremental cash flow generated by these business tax measures for 2020 is approximately $700 billion. On top of that, the Department of the Treasury extended tax payment deadlines, which we estimate generates around $90 billion in additional cash flow until July 15 for C-corporations<sup><a href="#ftn3" id="ftnref3">3</a></sup> and a similar-order-of-magnitude amount for other businesses.<sup><a href="#ftn4" id="ftnref4">4</a></sup> </p> <p>These numbers can be compared to an annual cash flow from operations of about $3 trillion for nonfinancial corporations in the U.S. in 2019. Thus, the direct cash flow relief provided by this part of the policy response is substantial.<sup><a href="#ftn5" id="ftnref5">5</a></sup> However, only about $70 billion is directly targeted toward the most affected businesses, and some of this relief may not reach them very quickly. </p> <p>Because of this limited targeting and lack of timeliness of the most targeted measures, and because the incentive effects are small, we would expect these measures to have a positive but limited macroeconomic effect. The macroeconomic effect arises because some companies may be cash-constrained, and hence will react positively to a cash injection; moreover, these measures may reduce somewhat the number of firms affected by illiquidity or insolvency. </p> <p>Finally, it is worth noting that, since several of the tax measures simply reschedule taxes, rather than reducing or canceling them, the expected cost to the taxpayer is much lower than the face value of the measures—about $280 billion.</p> <p>Before we discuss the main measures, note that although our blog series so far has focused on public nonfinancial corporations, here we are reporting the overall tax policy effect on all businesses—including financial businesses, private businesses, and businesses that are not corporations (e.g., partnerships or sole proprietorships). This is because we do not have detailed information for public nonfinancial firms alone.</p> <h3>Tax measures affecting corporations taken so far</h3> <p>Table 1 summarizes the key measures,<sup><a href="#ftn6" id="ftnref6">6</a></sup> which we now describe: <ol> <li><span style="text-decoration: underline">Delaying payment of payroll taxes</span> <p>All companies<sup><a href="#ftn7" id="ftnref7">7</a></sup> are now authorized to stop paying their (employer) share of social security taxes, starting March 27 and until the end of 2020. (For most employees, this share is 6.2% of compensation, subject to the social security cap.) Half of the taxes due will have to be paid by the end of 2021 and half by the end of 2022. This amounts to about $350 billion, at a low fiscal cost of $12 billion since this is essentially a short-term loan to all companies.<sup><a href="#ftn8" id="ftnref8">8</a></sup> This measure is large, and it is timely since it starts immediately. However, it is also completely untargeted: It applies to almost all companies, regardless of how much they are affected by the pandemic.</p> </li> <li><span style="text-decoration: underline;">Extending corporate and personal income tax deadlines</span> <p>The deadline for paying corporate and personal income taxes has been extended from April 15 or June 15 to July 15.<sup><a href="#ftn9" id="ftnref9">9</a></sup> We estimate<sup><a href="#ftn10" id="ftnref10">10</a></sup> that this generates roughly $90 billion of temporary cash flow for C-corporations and probably a roughly similar amount for other businesses. Similar to the payroll tax delay, this is a large measure, with little fiscal cost, that is timely, but not targeted.</p> </li> <li><span style="text-decoration: underline;">Deducting past and present losses</span> <p>This measure temporarily increases the deductibility of past and present losses. Specifically, companies that lost money in either 2018, 2019, or 2020, but had a taxable profit in any of the five years prior to that loss (so back to 2013 for 2018 losses), will be able to get a tax refund by refiling their 2018 or 2019 taxes, or when filing their 2020 taxes, by using the losses to offset their previous income. Hence, the potentially large 2020 losses can carryback against 2015–19 income.) The overall cash flow effect is about $239 billion (combining C-corporations and other businesses), with a total fiscal cost of around $195 billion, so this is also a large measure.</p> <p>In terms of effectiveness, this measure is timely because businesses that had losses in 2018 or 2019 but taxable income prior to that may get very quick relief by refiling their past taxes. However, it is not well targeted: There is no reason to believe that these businesses are the most affected by the pandemic. On the other hand, businesses that were profitable before the pandemic and will lose large amounts in 2020 will get a significant refund. For these companies, this change is well targeted, but it is not timely, because companies will receive a refund only after filing their 2020 taxes (though some companies might be able to borrow against the anticipated refund).<sup><a href="#ftn11" id="ftnref11">11</a></sup></p> </li> <li><span style="text-decoration: underline;">Refundable payroll tax credit</span> <p>Companies that have been significantly affected by the pandemic<sup><a href="#ftn12" id="ftnref12">12</a></sup> are entitled to a refundable payroll tax credit of up to 50% of wages (up to a wage of $10,000 per worker) for the period March 12, 2020 to January 1, 2021. This provides a little over $50 billion in targeted support, though the eligibility requirement may delay processing. </p> </li> <li><span style="text-decoration: underline;">Increasing deductibility of interest payments</span> <p>Finally, the CARES act temporarily increases the deduction for interest payments on debt. This is expected to increase cash flows by about $12 billion, and it will benefit highly indebted companies. So it is reasonably well-targeted, but this is a fairly small program from a macroeconomic point of view.<sup><a href="#ftn13" id="ftnref13">13</a></sup></p> </li> </ol> </p> <p> <h3>Table 1. Summary of key tax relief measures</h3> <div class='table-responsive'> <table class="table"> <thead> <tr> <th><strong>Tax relief measure</strong></th> <th><strong>Which businesses are affected?</strong></th> <th><strong>Cash flow effect in 2020</strong></th> <th><strong>Fiscal cost (over ten-year window)</strong></th> </tr> </thead> <tbody> <tr> <td>Defer payment of payroll taxes</td> <td>Everyone (except PPP participants)</td> <td>$351 billion</td> <td>$12 billion</td> </tr> <tr> <td>Delaying income tax payments until July 15</td> <td>Everyone</td> <td>$90 billion for C-corps<br /> Unknown but roughly similar for other businesses </td> <td>Small</td> </tr> <tr> <td>Payroll tax credits</td> <td>Highly affected companies</td> <td>$54 billion</td> <td>$54 billion</td> </tr> <tr> <td>Change in loss deductibility</td> <td>All businesses with losses in 2018–20 and taxable income in previous five years </td> <td>For C-corps: $89 billion<br /> For other businesses: $140 billion </td> <td>For C-corps: $25 billion<br /> For other businesses: $170 billion </td> </tr> <tr> <td>Change in interest deductibility</td> <td>All businesses with high leverage and taxable income</td> <td>$12 billion</td> <td>$12 billion</td> </tr> </tbody> </table> </div> </p> <h3>Conclusion</h3> <p>In this blog post, we reviewed five recent important tax changes affecting corporations. These have substantial cash flow impacts in 2020. However, few are targeted toward the firms most directly and substantially impacted by the Covid-19 pandemic. Because of this, we expect that they are unlikely to reduce substantially the number of firms facing illiquidity or insolvency.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> We assume here that tax policy should target companies at risk of insolvency or illiquidity due to the pandemic, but not necessarily companies at risk for other reasons.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> More details on the Coronavirus Aid, Relief, and Economic Security Act <a href="https://home.treasury.gov/policy-issues/cares">available online</a>.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> The U.S. tax code distinguishes C-corporations, which are taxed directly, from S-corporations, which are not taxed, but whose owners are taxed based on the income of the corporation (“pass-through” entities). On top of that, there are businesses that are not corporations (e.g., partnerships and sole proprietorships).</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> These numbers are based on our interpretation of the <a href="http://www.jct.gov/publications.html?func=startdown&id=5252">analysis</a> by the Joint Committee on Taxation (JCT). The Congressional Budget Office has also published an <a href="https://www.cbo.gov/system/files/2020-04/hr748.pdf">analysis</a> that is very similar to that of the JCT.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> Note, however, that nonfinancial corporations do not include all businesses.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> We do not consider the payroll protection program (PPP) in what follows since it does not apply to the large public corporations that are our focus. </p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> Except those that used the payroll protection program (PPP).</p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> There is, in principle, some credit risk if the corporations became insolvent, however.</p> <p><sup><a href="#ftnref9" id="ftn9">9</a></sup> Personal income taxes are relevant, since many corporations in the U.S. elect to “pass through” their taxable income to their owners (e.g., S-corps).</p> <p><sup><a href="#ftnref10" id="ftn10">10</a></sup> This estimate is based on last year’s daily Treasury statements (available online, <a href="https://fsapps.fiscal.treasury.gov/dts/files/19041500.txt">here</a> and <a href="https://fsapps.fiscal.treasury.gov/dts/files/19071500.txt">here</a>). </p> <p><sup><a href="#ftnref11" id="ftn11">11</a></sup> To understand better the mechanics of the change, note that prior to the TCJA tax reform of 2017, corporations could deduct losses against future income for 20 years (carryforwards), and could also deduct losses against the past two years of income (carrybacks). TCJA changed this: Corporations can now deduct losses against future income for an unlimited period, rather than 20 years, but losses can offset at most 80% of your income. Moreover, carrybacks were disallowed. The CARES act temporarily releases these constraints. First, carrybacks are allowed again for 2018–20, and going back five years. Second, the 80% cap is lifted during 2018–20. These changes are potentially quite valuable (hence the large fiscal cost) as losses can be deducted against past income, which was taxed at a 35% marginal rate. There are some complications, however, in particular interactions with international minimum taxes, so multinationals might get less relief. CARES also corrects a “typo” in TCJA that made it impossible for companies with fiscal years straddling Dec 31, 2017, to use carrybacks for that year.</p> <p><sup><a href="#ftnref12" id="ftn12">12</a></sup> To be eligible, companies must either (1) have been ordered by a government to suspend or reduce business operations, or (2) have their sales fall by over 50%. This program is subject to various conditions, and it is not available for companies that receive a loan under the PPP.</p> <p><sup><a href="#ftnref13" id="ftn13">13</a></sup> To understand the mechanics, note that the TCJA tax reform limited the deductibility of interest payments to (approximately) 30% of EBITDA. The CARES act increases this limit to 50% for 2019 and 2020 tax years. Moreover, corporations are free to use their 2019 income rather than 2020 income as a way to calculate the limit (if 2020 income is low, this increases the limit and avoids running into the cap). However, this holds only for the 2019 and 2020 tax years, so interest that is paid in 2021 will be subject to the usual cap. (Moreover, under current law, this cap is scheduled to fall further in 2022, because the limit will be calculated as a function not of EBITDA but of earnings after depreciation allowances.)</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/financial-positions-part3 https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/financial-positions-part3 Thu, 14 May 2020 00:00:00 -0500 <div class="cfedContent__text"> <p><em>This blog post is the third in a series that discusses how the current pandemic affects the financial positions of publicly traded U.S. corporations, the potential implications of these financial developments, and the federal policy response.</em></p> <p><em>In this post, we attempt to quantify the risk to the solvency and to the liquidity of U.S. public corporations, and how this risk can be reduced or eliminated by firms’ decisions. These calculations should be taken as illustrative only, given the high uncertainty about the evolution of the economy; they do not constitute a forecast, and reflect only the views of the authors and not of the Federal Reserve Bank of Chicago or the Federal Reserve System. First, our calculations suggest that, if firms were to keep dividend payouts, borrowing, and investment at their pre-pandemic levels, our estimate of the shock to earnings caused by the pandemic is large enough that one-fourth of public firms would run out of cash by the third quarter of 2020. Second, if firms solely increase borrowing in response to this liquidity shortage, the additional debt needed to offset the decline in earnings could lead to a doubling of the share of highly levered firms by the middle of 2021 (i.e., firms with a net book leverage above 60%). Third, reducing investment (capital expenditures) and payouts are powerful tools to avoid over-indebtedness. For instance, entirely eliminating investment in 2020 and 2021 would be roughly sufficient to keep the fraction of highly levered firms at the pre-pandemic level. </em></p> <h3>What do we mean by liquidity risk and by solvency risk?</h3> <p>The pandemic (and the associated social distancing and government-directed shutdowns) has led to sudden large drops in sales at many firms. As a result, many are experiencing negative cash flows. Negative cash flows imply, mechanically, that firms’ cash balances are shrinking. A few firms might be able to get through the pandemic-induced cash flow crunch solely by drawing down their cash balances without any other adjustments. Some firms may also choose to cut back on certain economic activities, such as investing or paying out dividends, so as to conserve cash. And for some firms, these two actions may not be sufficient. Their initial cash balance might be too small or the shock might be too large or too persistent. The firm would then run out of cash. We refer to this eventuality as “liquidity risk.” How widespread is this risk? Or more specifically, how long will it take for firms to run out of cash? And how does this depend on the actions companies might take to reduce cash outflows? This is the first set of questions we tackle in this post.</p> <p>Once a firm has run out of cash, its only option is to raise additional funding, most likely in the form of debt, to continue operating. This strategy may work for a while, but if debt piles up too high before the recovery starts, the firm might not be able to continue borrowing. At this stage, it may have to stop servicing its obligations. It may then try to renegotiate or delay payments on some of them. At the extreme, the firm may have to enter bankruptcy. Either way, the viability of the firm as a business concern would be called into question. We refer to this as “solvency risk.” Note that it emerges following a continued lack of “liquidity”: It is <em>because</em> the firm has run out of cash and has had to borrow to continue operating that it reaches high levels of indebtedness. Now, we ask a second set of questions: How widespread might the insolvency problem become? How long until firms reach unsustainable debt levels and are forced to default? And again, how does this depend on what actions firms might take to reduce cash outflows?</p> <h3>What are the consequences of illiquidity or insolvency?</h3> <p>Before going into the calculations, we want to discuss the economic consequences of illiquidity or insolvency. The fundamental concern is that either could lead to inefficient exits of businesses, with some loss of intangible or human capital.</p> <p>In general, illiquidity is not in itself a problem if financial intermediaries or financial markets are well functioning. In that case, a firm without liquidity, but with good future prospects, would be able to raise funds as needed to continue operating. (Of course, financial disruptions could force the firm to exit regardless of its prospects.)</p> <p>Insolvency carries potentially heavy economic costs. The firm’s counterparties (creditors, but also workers, customers, suppliers, and landlords) would experience losses in case of default. These might be mitigated by transfers (for instance, creditors could repossess some of the firm’s assets), but these transfers themselves could be complicated, costly, and lead to losses of value. In fact, the mere prospect of insolvency might have its own negative effects: For example, suppliers might withdraw trade credit.<sup><a href="#ftn1" id="ftnref1">1</a></sup> These costs are hard to evaluate and to some extent, they depend on the business model of the firm.<sup><a href="#ftn2" id="ftnref2">2</a></sup> </p> <h3>How can we project liquidity and solvency risk? </h3> <p>To analyze how the current pandemic might impact firm liquidity and solvency, we use the simple cash flow accounting identity:</p> <p style="padding-left: 25px">Change in cash balances<sub><em>t</em></sub> = Operating cash flow<sub><em>t</em></sub> – Investing cash flow<sub><em>t</em></sub> – Financing cash flow<sub><em>t</em></sub>.</p> <p>Here, the index <em>t</em> refers to an accounting period—one quarter. Operating cash flow consists primarily of earnings, plus the change in working capital,<sup><a href="#ftn3" id="ftnref3">3</a></sup> minus taxes and interest payments. The investing cash flow consists primarily of capital expenditures on productive assets. The financing cash flow consists primarily of payouts to shareholders (in the form of dividends or share buybacks), plus any net reduction in debt.</p> <p>In our <a href="~/link.aspx?_id=4FD3B4266F3046399BD413C9D840096C&_z=z">previous post</a>, we proposed a simple approach to projecting the earnings path of each U.S. public corporation.<sup><a href="#ftn4" id="ftnref4">4</a></sup> Our strategy is to combine this projection for earnings with the cash flow identity. We can plug the earnings that we estimated into the cash flow identity. Using this, we can then compute the change in cash balances that firms might experience going forward. This can be done firm by firm. And we can iterate this procedure over time to project the entire path of cash balances. This calculation does require some assumptions about firms’ investing and financing cash flows, which in turn depend on what economic decisions—such as reducing working capital, reducing investment, or stopping payouts to shareholders—the firm might take in order to offset the shock itself. We will project cash and debt using various assumptions about these firm decisions.<sup><a href="#ftn5" id="ftnref5">5</a></sup> Overall, by projecting the change in cash balances, we can compute—given information on firms’ initial, 2019:Q4 cash balances—how long it will take each of them to run out of cash. This provides an answer to our set of questions on liquidity. </p> <p> <h3>1. Projected shares of firms with zero cash and net leverage above 60% of book assets for alternative adjustment scenarios </h3> <img alt="Figure 1 comprises two line charts. Each panel shows six lines from fourth quarter 2019 to fourth quarter 2022. Each line projects the share of firms that reach zero cash (top panel) or net leverage above 60% (bottom panel) for a certain adjustment scenario with the earnings shock and without the earnings shock. In the top panel, the line with 'no earnings shock' increases slowly, while the line with 'shocks and no adjustment' increases steeply. The other lines lie in between these two extreme lines. In the bottom panel, the line with 'no earnings shock' is roughly flat, while the line with 'shocks and no adjustment' increases steeply. The other lines lie in between these two extreme lines." src="~/media/c4d879af51904dc1bb1e362c8d5b0691.ashx" /> <figcaption class="caption"> Notes: Adjustment scenarios with our assumed earnings shock and without the earnings shock. The dashed line indicates the last quarter observed (2019:Q4). Net leverage is defined as debt minus cash, divided by assets. Firm-level observations are weighted by 2019 firm sales. </figcaption> </p> <p>Once a firm has run out of cash according to our projection, we assume it fills the shortfall by issuing debt,<sup><a href="#ftn6" id="ftnref6">6</a></sup> and we calculate how indebted the firm might become over time as it does so. This provides an answer to our set of questions on solvency.</p> <p>It should be kept in mind that there is substantial uncertainty in these projections—chiefly because our assumed path for earnings is highly uncertain.</p> <h3>Liquidity and solvency risk can be avoided, but at the expense of severe cuts to investment... or payouts</h3> <p>What does our simple approach say about the liquidity risk and the solvency risk faced by firms due to the pandemic shock? We find that these risks are significant unless firms sharply adjust their investment or their payout policies during the shock period.<sup><a href="#ftn7" id="ftnref7">7</a></sup></p> <p>Consider first the case in which firms make no adjustments in payouts or investment (relative to 2019:Q4) in response to the shock. This is represented by the red lines in the two panels of figure 1. Under this scenario, the top panel shows that approximately 30% of firms would exhaust their cash buffers by 2020:Q3. Compare this to a “baseline” rate (represented by the green line) of 5% if there was no earnings shock.<sup><a href="#ftn8" id="ftnref8">8</a></sup> Relative to this baseline, an additional 25% of firms face liquidity risk within two quarters if no adjustments to investment and financing are made. These numbers are sales-weighted, so they suggest that about 25% of economic activity of public firms could potentially be affected. Of course, many companies may simply draw down credit lines or borrow more (as many have already done since March) to improve their liquidity position.</p> <p>What about solvency risk? This takes more time to build up, but the bottom panel of figure 1 shows that in the “no-adjustment” scenario, by 2021:Q2, the fraction of firms with very high leverage (more than 60% of net debt relative to book assets) would have doubled. This assumes, of course, that these firms have managed to convince creditors to keep lending to them throughout 2020, in order to make up for the shortfall between their operating cash flows and their investment and financing costs.</p> <p>These large numbers suggest that public firms will have to make significant adjustments to their investment and financing policies in response to the pandemic. Figure 1 shows the effects of different potential adjustment strategies.</p> <p>One adjustment that can help offset the cash crunch and its knock-on effects on liquidity and solvency is to eliminate dividend payouts to shareholders. In this scenario, the fraction of firms that run out of cash by the end of 2020:Q3 declines by about two-thirds, and the fraction of firms that reach very high leverage drops by a similar amount. So, while cutting payouts is helpful, it does not eliminate liquidity and solvency risk entirely.</p> <p>However, eliminating capital expenditures—investment—would be enough to offset the decline in operating cash flow. Under this scenario, the fractions of firms that run out of cash by 2022:Q4 and that reach very high levels of leverage are virtually undistinguishable from the “baseline” scenario of no shock. Firms could therefore weather the storm by making substantial cuts to capital spending. </p> <p>This is somewhat reassuring, as it suggests that there are ways for firms to avoid insolvency. But it is also problematic. As highlighted in our first post of the series, public firms tend to be large and contribute a significant share of aggregate investment. If these firms were to indeed eliminate capital spending, it could put a very large dent in aggregate investment for years to come.</p> <p>This calculation abstracts from government policies that were designed to reduce the risk of this scenario. We will examine these policies in our future posts.</p> <h3>Conclusion </h3> <p>How will the shock to earnings brought on by Covid-19 affect the cash and debt positions of public firms? We used simple computations to highlight two potential risks. First, if firms were to keep dividend payouts, borrowing, and investment at their pre-pandemic levels, the shock to earnings caused by the pandemic could make one-fourth of public firms run out of cash by the third quarter of 2020. Second, if firms solely increase borrowing in response to this liquidity shortage, the additional debt needed to offset the decline in earnings could lead to a doubling of the share of highly levered firms by the middle of 2021 (i.e., firms with a net book leverage above 60%), potentially putting the continuation of their operations at risk. To counteract these risks, cutting shareholder payouts and investment can be powerful tools, but these actions (as well as the employment reductions that underlie our earnings forecast) are themselves likely to have negative macroeconomic consequences.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> The prospect of financial distress can also misalign incentives between creditors and owners/managers of the firm, leading, for example, to debt overhang or risk shifting.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> For instance, airlines have faced numerous solvency crises over the past three decades, but most of them have been able to successfully reorganize using Chapter 11 bankruptcies.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> Working capital is defined as inventories, plus trade receivables, minus trade payables, plus other short-term assets (excluding cash).</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> To do so, we used observed stock returns during the period from February 20 to March 13, 2020, when it became clear that the pandemic would affect the United States directly, and combined this with the historical relationship between stock returns and future earnings (and made a special adjustment for the transitory nature of the shock). The advantage of this process is that it generates an earning path for all public companies, the weakness is that it may be sensitive to the dates chosen and assumes that historical relationships continue to hold.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> Another potential adjustment for firms is through layoffs or other employment reductions. The projections for earnings that we construct implicitly take into account potential reductions in employment, as earnings are net of labor costs. Hence, we do not separate out the effects of employment reductions on the liquidity and solvency positions of firms. If firms choose to cut employment more than normal in response to the shock, our results on solvency and liquidity would be mitigated. (Of course, this might also have negative aggregate demand consequences.) </p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> Technically, we add the shortfall between operating cash flow and investing cash flow plus financing cash flow to the existing stock of debt.</p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> In all scenarios, we assume that firms roll over all existing debt, and that interest payments remain fixed to their average 2019 value. That is, all our scenarios assume well-functioning corporate debt markets. We also assume that corporate taxes are unchanged relative to 2019. That assumption does not affect the results significantly, as firms experiencing large negative cash flow shocks in our exercise typically have small tax bills to begin with. Last but not least, our scenario does not take into account the federal policy response, which we will discuss in future blog posts.</p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> The fact that 5% of firms run out of cash by 2020:Q3 in these baseline projections might seem surprising. In order to construct the green line (no shocks), we “freeze” cash flows and other policies at their 2019:Q4 value. Firms whose cash flows during 2019:Q4 fell short of investment and payouts will mechanically exhaust their cash buffers, leading to the slow rise in the share of firms with no cash.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/financial-positions-part2 https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/financial-positions-part2 Tue, 12 May 2020 00:00:00 -0500 <div class="cfedContent__text"> <!--- Blog content here --> <p>This blog is the second in a series that discusses how the current pandemic affects the financial positions of publicly traded U.S. corporations, the potential implications of these financial developments, and the federal policy response. The <a href="~/link.aspx?_id=BEF38759FB714DB58ACD40E097E361CE&_z=z">first blog</a> discussed the financial positions before the pandemic started. It documented that many nonfinancial publicly traded companies entered 2020 with historically elevated levels of leverage. This second blog explains how we use stock returns to project the potential earnings losses due to Covid-19; this will be used in our next blog to project the evolution of firms’ financial positions.</p> <h3>The Covid-19 earnings shock</h3> <p>The health emergency and the ensuing shutdowns have led to a sharp drop in sales for many firms. Because firms’ costs are in part fixed or prepaid, cash flow from operations suddenly turned negative. We are interested in estimating these “Covid-19 cash flows shocks” to understand how firms’ financial positions would evolve—and in particular, how many of them might end up in financial distress.</p> <p>The challenge in estimating these cash flow shocks is that much is unknown about the severity of the shock, its duration, and how it will affect each business. Corporations are only starting to understand the effects of the pandemic on their ability to operate and be profitable. Indeed, many corporations have chosen not to provide estimates of their earnings this year due to the level of uncertainty.</p> <p>We circumvent this problem by using the stock price reaction to gauge the effect of the pandemic on future cash flows. The underlying logic is that, in general, lower stock prices reflect lower expected cash flows. Moreover, stock prices can aggregate the opinions of many investors and hence provide a reasonable benchmark for future earnings, even if each investor is highly uncertain—the so-called wisdom of crowds.<sup><a href="#ftn1" id="ftnref1">1</a></sup></p> <p>Concretely, we calculate for each firm the change in equity value between February 20 and March 13—the period during which it became clear that the U.S. economy would be directly affected by the pandemic. We then use a statistical model that infers the likely change in future earnings, using the historical relationship between stock returns and future earnings. Figure 1 illustrates this historical relationship using data from 1995 through 2019 for all public firms.<sup><a href="#ftn2" id="ftnref2">2</a></sup> (This graph shows only 20 points for clarity, but is based on thousands of firms during this 25-year period.)</p> <p>One peculiarity of the current shock is that it is likely to have dramatic effects in the very short term, but these effects might then reverse fairly quickly, rather than being more persistent over time as would be typical for a macroeconomic shock. To take the potentially transitory nature of the shock into account, we mechanically adjusted the earnings path implied by our statistical model to redistribute 75% of the impact due to happen over the next eight quarters to only two quarters: 2020:Q2 and 2020:Q3.</p> <p> <h3>1. Historical relation between change in equity value in a quarter and cumulated growth rate of earnings over next four years</h3> <img alt="The scatter plot in figure 1 shows the relationship between a company’s change in equity value in a quarter and the growth rate of the company’s earnings over the following four years. This relationship is positive on average." src="~/media/3315b02384cd4d7380b98a2d5dc94aa1.ashx" /> <figcaption class="caption"> Note: Bin-scatter plot with 20 ventiles. The growth rate of earnings is measured from quarter t–1 to t+19. Each variable is winsorized at 1%. Data from S&P Compustat through WRDS for 1995–2019. </figcaption> </p> <p>There are a number of caveats to our approach, which is of course a rough approximation at best. First, it is not always true that stock returns predict future earnings. Indeed, for the entire U.S. stock market (the index), this relationship is notoriously weak.<sup><a href="#ftn3" id="ftnref3">3</a></sup> However, this relationship is much stronger at the individual company level.<sup><a href="#ftn4" id="ftnref4">4</a></sup> Second, our adjustment for the transitory nature of the shock is judgmental. Third, it is possible that the stock return reaction reflects not just the raw earnings but the expectation of specific liquidity or solvency problems. And finally, a firm’s stock return might be affected by a change in the discount rate used by investors to value its future cash flows, perhaps owing to a change in its perceived riskiness.</p> <h3>Were more fragile firms hit more by the Covid-19 shock?</h3> <p>In our previous blog, we noted that many firms were already highly indebted before the pandemic. Were these firms hit especially hard by Covid-19? At first, it seems that the exceptional, unanticipated nature of the shock makes it unlikely: While the virus hit certain sectors, or certain companies, disproportionately, there is no obvious reason to expect that these companies would have had more debt before the pandemic started. Figure 2, however, shows that, on average, companies that had initially more debt also had larger declines in their stock return during the February–March period that we study. (Here debt is measured as net book leverage, i.e., debt, net of cash and short-term equivalents, divided by the book value of assets.) In this sense, the Covid-19 shock seems to have hit the more fragile firms more severely.<sup><a href="#ftn5" id="ftnref5">5</a></sup> Of course, this means that these firms are now at an elevated risk of becoming financially distressed, since they are combining a weak initial position with a very negative shock.<sup><a href="#ftn6" id="ftnref6">6</a></sup> Our next blog post will study this issue, using the earnings projections generated using stock returns to project the future cash and debt position of each U.S. public firm.</p> <p> <h3>2. Relation between companies’ net book leverage as of 2019:Q4 and change in equity value, February 20–March 13</h3> <img height="760" alt="The scatter plot in figure 2 shows the relationship between the change in equity value during the period February 20 and March 13 of 2020, and the net book leverage as of 2019:Q4. This relationship is negative on average." width="1045" src="~/media/9f00202b2fcc4e55928ec5efada8e180.ashx" /> <figcaption class="caption"> Note: Bin-scatter plot with 20 ventiles. Each variable is winsorized at 1%. Data from S&P Compustat through WRDS. </figcaption> </p> <h3>Conclusion</h3> <p>In this blog, we explain how we use the change in individual stock prices between February 20 and March 13 combined with the historical relationship between stock market changes and earnings to project each firms’ future earnings. We will use this in our next post to project financial distress. As a side note, we find that firms that were more highly levered before the pandemic experienced a stronger decline in their stock prices.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> For an amusing example of the ability of the stock market to reveal hidden information, see <a href="https://slate.com/business/2003/08/the-disaster-market.html">this article</a>.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> To handle negative earnings, our statistical model uses profitability (the return on assets, i.e., (EBITDA) earning over assets) rather than the growth rate of earnings, which is what is displayed in figure 1 for simplicity. Our model is a simple linear regression of future profitability on lagged profitability and the change in the firm’s equity value.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> This is the point of Shiller’s Nobel-prize winning <a href="https://www.jstor.org/stable/1802789?seq=1#metadata_info_tab_contents">1980 paper</a> and the vast literature that follows it on “return predictability.”</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> See for instance <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1540-6261.00421">one</a> <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=348180">of</a> <a href="http://pages.iu.edu/~walkertb/CRW_SamDictum_January_2019.pdf">these</a> papers. </p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> Similar results are obtained using the other financial measures we showed in our previous blog, such as debt to EBITDA, interest coverage, and cash to assets.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> To be sure, it is possible that the low stock returns experienced by highly levered firms in part reflects this anticipated financial distress (or even the direct effect of financial leverage).</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/financial-positions-part1 https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/financial-positions-part1 Fri, 08 May 2020 00:00:00 -0500 <div class="cfedContent__text"> <p><em>This blog is the first in a series that will discuss how the current pandemic affects the financial positions of publicly traded U.S. corporations, the potential implications of these financial developments, and the federal policy response. This first blog discusses the financial positions before the pandemic started. We document three facts: (1) the share of nonfinancial public companies with large amounts of leverage was elevated, suggesting financial fragility; however, (2) interest expenses were small for most firms due to the low level of interest rates; and (3) most firms had significant liquidity. </em></p> <h3>Why are we interested in the financial positions of U.S. public corporations?</h3> <p>The economic shutdowns necessitated by the Covid-19 pandemic are having a large impact on the financial position of many firms in the United States. Most importantly, they are dramatically reducing revenue and cash flow, albeit very unevenly across sectors. Even though the shutdowns are not expected to be long-lasting in most areas, these cash flow shocks have the potential to lead to widespread illiquidity or insolvency. This in turn would reduce the productive capacity of the economy due to the loss of human and intangible capital and slow down the recovery after the economy is able to reopen. </p> <p>In this first blog, we discuss the financial situation of publicly traded U.S. corporations before the pandemic started.</p> <p>Throughout this series, we focus on public corporations because their financial reporting requirements make it possible for us to measure their financial positions and compare them to historical precedent. We also focus on nonfinancial corporations, i.e., we exclude banks and other financial institutions, whose business consists of borrowing and lending. Public nonfinancial corporations account for a significant share of U.S. economic activity, particularly business investment. In 2018, the latest year for which we have reliable and comparable data across firms, public nonfinancial corporations made up about 40% of all U.S. investment in tangible assets (structures and equipment) and about 44% of all R&D, as illustrated in figure 1.<sup><a href="#ftn1" id="ftnref1">1</a></sup></p> <p> <h3>1. Contribution of public nonfinancial corporations to business investment</h3> <img alt="Figure 1 comprises two line charts. The top panel shows the evolution of investment in structures and equipment for all U.S. firms, for the subset of nonfinancial corporations and for the subset of public nonfinancial corporations from 1975 to 2019. Generally, the three lines grow roughly in parallel fashion. The bottom panel shows the evolution of investment in research and development for all U.S. firms, for nonfinancial corporations, and for public nonfinancial corporations. Generally, the three lines grow roughly in parallel fashion. " src="~/media/b0420a229f2845e696c8c6af4b9b76a3.ashx" /> <figcaption class="caption"> Sources: for all firms, NIPA table 1.5.5; for non-financial corporations, BEA fixed asset table 4.7; for public non-financial corporations, Compustat. For all firms and for non-financial corporations, we use investment in intellectual property products as a measure of research and development expenditures. Note that Compustat data on capital expenditures and on research and development are not limited to domestic expenditures, whereas BEA/NIPA are. </figcaption> </p> <h3>Financial positions pre-Covid 19: a high fraction of significantly levered firms…</h3> <p>While the U.S. economy entered 2020 on a strong footing, there have been concerns for some time about the financial fragility of the corporate sector. For instance, the Federal Reserve’s <a href="https://www.federalreserve.gov/publications/financial-stability-report.htm">financial stability report from May of 2019 highlighted growing risky business debt</a>. Rather than look at broad aggregates, such as the overall ratio of nonfinancial corporations’ debt to GDP, we prefer to study the cross-sectional distribution of firms and gauge how many firms might be in financial distress.</p> <p>The top panel of figure 2 depicts the evolution of the distribution of a commonly used measure of leverage, the ratio of <strong>gross debt to earnings</strong>. (Earnings are measured as earnings before interest, taxes, debt and amortization (EBITDA), a standard measure of profitability.) The different lines show the fractions of firms (weighted according to their sales) with a ratio above 4, 5, and 6.<sup><a href="#ftn2" id="ftnref2">2</a></sup> Looking at the top (blue) line, we see that the fraction was elevated in 2019, with almost 20% of the sales of publicly traded firms in firms with a debt/EBITDA ratio above 4. The share of firms with very high leverage (i.e., debt to EBITDA over 5 or 6) was also high, but not as dramatically elevated.</p> <p>The bottom panel of figure 2 displays the evolution of the distribution of <strong>net debt to earnings</strong>. Net debt is gross debt less cash and other short-term equivalents. Offsetting debt with cash arguably presents a more accurate measure of the firms’ financial commitments. Here too, we see that the leverage ratios were high, comparable to previous peaks.<sup><a href="#ftn3" id="ftnref3">3</a></sup></p> <p> <h3>2. Evolution of (sales-weighted) share of U.S. nonfinancial public corporations with gross debt to EBITDA, or net debt to EBITDA above given thresholds</h3> <img alt="Figure 2 comprises two line charts. The top panel has three lines, which show the fraction of firms (weighted according to their sales) that have a ratio of debt to EBITDA above 6, 9, or 12 from 1985 until 2019. Generally speaking, these lines move up and down, depending on the state of the economy, but in 2019 they were at a high level. The bottom panel has three lines, which show the fraction of firms that have a ratio of net debt to EBITDA above 4, 7, or 10. Generally speaking, these lines move up and down with the state of the economy and other factors, but in 2019 they were at a high level." src="~/media/498c560e00f1414aa007620472c0a559.ashx" /> </p> <p>Relatedly, the share of outstanding bonds of nonfinancial public firms with an S&P rating of BBB or BBB– (the lower tier of the investment grade group) increased from 34% to 44% (on a par-weighted basis) between January 2015 and January 2019. Many of these companies may lose their investment grade rating due to the effects of the pandemic, becoming so-called fallen angels. Because many investors are not allowed to purchase bonds issued by non-investment-grade rated firms, this can potentially increase these companies’ funding costs significantly.</p> <h3>… but low interest expense and significant liquidity.</h3> <p>One important caveat to concerns about these high leverage levels is that the historically low cost of borrowing, combined with high profits, made this leverage easily sustainable for many firms. The top panel of figure 3 depicts the distribution of the <strong><em>interest coverage ratio</em></strong>, i.e., interest payments divided by (EBITDA) earnings. The share of companies that use more than 30%, 40%, or 50% of their earnings in interest payments has been declining for some time, and was quite low. Of course, a sudden decline in earnings may now reverse this trend.<sup><a href="#ftn4" id="ftnref4">4</a></sup></p> <p> <h3>3. Evolution of (sales-weighted) share of U.S. nonfinancial public corporations with interest coverage (interest/earnings) and cash-asset ratios above given thresholds</h3> <img alt="Figure 3 comprises two line charts. The top panel shows three lines. Each line represents the fraction of firms whose interest expenses exceed 30%, 40%, or 50% of their earnings from 1985 to 2019. These lines are generally declining, and the 2019 level was low. The bottom panel shows three lines. Each line represents the fraction of firms whose cash-to-asset ratio was above 2%, 5%, or 10%. These lines increase after 2000 and overall stay at a relatively high level." src="~/media/94191c5f86f04dadaca391fac16a1101.ashx" /> </p> <p>Firms were also holding relatively large cash buffers. The bottom panel of figure 3 depicts the evolution of the <strong><em>cash-to-asset ratio</em></strong>. (These data do not include lines of credit, which provide a further liquidity buffer.) The fraction of firms with a cash-to-asset ratio above 2% or 5% increased post 2000 and remained high from then on.<sup><a href="#ftn5" id="ftnref5">5</a></sup> Corporations entered this crisis with significant liquidity. </p> <h3>Conclusion</h3> <p>In this blog, we showed that many nonfinancial publicly traded companies entered 2020 with historically elevated levels of leverage. However, this fragility is somewhat tempered by their low level of interest expense and their high liquidity. Our next two posts will project the evolution of the financial positions of these companies.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> Figure 1 also shows that public nonfinancial firms make up 58% of tangible investment and 60% of all R&D of nonfinancial corporations. </p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> Firms with negative EBITDA are defined to be above any threshold.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> We obtain similar results if we use other measures of leverage, such as gross or net book leverage (i.e., debt or net debt, divided by assets rather than earnings) or gross or net market leverage (i.e., dividing by the market value of the firm (proxied as market value of equity plus book value of other liabilities) rather than the book value.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> A rise in the interest rate could also reverse this trend, but it is less likely since most corporations’ interest rates are either fixed, or floating and tied to short-term rates (LIBOR) which have, on net, fallen since February.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> The decline toward the end of the sample may have been driven by the recent corporate tax reform (TCJA) that repatriated all cash held abroad, allowing it to be distributed to shareholders.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/financial-positions-series https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/financial-positions-series Thu, 07 May 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>A series that discusses how the current pandemic affects the financial positions of publicly traded U.S. corporations, the potential implications of these financial developments, and the federal policy response.</p> <p><a href="~/link.aspx?_id=BEF38759FB714DB58ACD40E097E361CE&_z=z">Part 1, Before the Pandemic</a></p> <p><a href="~/link.aspx?_id=4FD3B4266F3046399BD413C9D840096C&_z=z">Part 2, The Covid-19 Earnings Shock</a></p> <p><a href="~/link.aspx?_id=3E2AB8D6959C4A019914F5A3DBD3A4F5&_z=z">Part 3, Projecting Liquidity and Solvency Risks</a></p> <p><a href="~/link.aspx?_id=E62BFB8D0F24494293BDB32FF7649688&_z=z">Part 4, Tax Relief</a></p> <p><a href="~/link.aspx?_id=199708F939204901BC84812B03EC30CF&_z=z">Part 5, The Main Street Lending Program: Potential Benefits and Costs</a></p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/unemployment-rate-good-measure-of-out-of-work https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/unemployment-rate-good-measure-of-out-of-work Tue, 05 May 2020 00:00:00 -0500 <div class="cfedContent__text"> <p><em>Update #2, June 12, 2020: Following the release of the latest </em>Current Population Survey<em> estimates and related micro data, we are able to calculate the U-Cov rate for May, which was 27.6% (not seasonally adjusted). This was a 3.1 percentage point decrease from April, but still 17.0 percentage points above its February 2020 rate. In comparison, the official “U3” unemployment rate fell by 1.4 percentage points between April and May to 13.0% (not seasonally adjusted), and remains 9.2 percentage points above its February 2020 rate. A 257,000 decrease in the number of people working part-time for economic reasons, a 2.0 million decrease in those on unpaid leave, and a 345,000 decrease in those out of the labor force that want a job all contributed to the change in the U-Cov rate. These were in addition to the 2.0 million decrease in the unemployed, which also contributed to the decline in the U-Cov rate. Notably, the decline in unemployment reflected a 2.9 million decline in those on temporary layoff and an 875,000 increase in those actively looking for new work.</em></p> <p><em>Update, May 15, 2020: Following the release of the latest</em> Current Population Survey<em> estimates and related micro data, we are able to calculate the actual value of our U-Cov rate for April, which was 30.7% (not seasonally adjusted). This was over a 17 percentage point increase from March, significantly higher than the 10 percentage point increase in the official “U3” unemployment rate (to 14.4% in April). A 4.8 million increase in the number of people working part-time for economic reasons, a 4.3 million increase in those on unpaid leave, and a 4.5 million increase in those out of the labor force that want a job all contributed to this increase. These were in addition to the 15.1 million increase in the unemployed, which also contributed to the increase in the U-Cov rate.</em></p> <h3>Summary</h3> <p>We know that tens of millions of people are currently out of work in the United States. More than 26 million workers filed for unemployment benefits between mid-March and mid-April alone. The most popular measure of the strength of the labor market is the unemployment rate. Forecasts for how much it will rise in the coming months vary widely, but many economists now expect an increase to at least 15%, and perhaps much more.</p> <p>Despite its popularity, the official unemployment rate does not capture all workers facing adverse employment conditions. To count as unemployed, one must be out of work and either on temporary layoff or actively looking and available for new work. This leaves out many people who want to work but did not look for work in the period covered by the data, as well as people who may remain employed but at substantially reduced hours.</p> <p>The Labor Department has alternative, broader measures of labor market underutilization that track these individuals, too, but the unique nature of the downturn caused by the Covid-19 crisis and the subsequent stay-at-home directives has put people out of work in ways that even these alternative measures may miss. For example, the evidence suggests that employment losses are likely in the tens of millions, but many individuals are finding it hard to actively look or be available for work and therefore be classified as unemployed. </p> <p>We have developed a new measure of labor market <em>underutilization</em> that is tailored to the Covid-19 crisis. Between February and March, the official unemployment rate rose by 0.8 percentage points, from 3.8% to 4.5%, representing an increase of 1.2 million workers.<sup><a href="#ftn1" id="ftnref1">1</a></sup> But our measure rose by 2.5 percentage points, from 10.4% to 12.9%, representing an increase of about 4.1 million workers. If we project these changes under different scenarios to get an idea of what we might expect for the April employment report, we get unemployment rates ranging from 8.2% to 16.0%, marking an additional rise ranging from 3.7 to 11.5 percentage points in the official unemployment rate. These are staggeringly large increases, but they pale in comparison to the projected increases in our new measure of between 12.2 and 21.7 percentage points. We project our new measure will rise to between 25.1% and 34.6%.</p> <h3>Labor Market Changes through March</h3> <p>We start with a deeper examination of the latest estimates from the Labor Department’s household survey, known as the <em>Current Population Survey</em>. We tabulate the most recent two months of data by more detailed labor force categories than what the Labor Department reports in its monthly Employment Situation report. Specifically, we separate the employed by whether they were at work in the prior week or on leave, and if on leave, whether the leave was paid or unpaid. We also separate those out of the labor force based on whether they reported wanting work (despite not searching or reporting themselves available for work). We also tabulate other detailed categories that appear in the Employment Situation report, such as those who are working part time for economic reasons, those who are on temporary layoff, and those who are “marginally attached” to the labor force.<sup><a href="#ftn2" id="ftnref2">2</a></sup></p> <p>Table 1 reports the over-the-month changes in these categories on a seasonally unadjusted basis. Between February and March, the labor force shrank by 1.7 million and employment fell by almost 2.9 million. Unemployment rose by nearly 1.2 million. Table 2 shows that these changes caused the labor force participation rate to fall by 0.7 percentage points, the employment-to-population rate to fall by 1.1 percentage points, and the official unemployment rate—technically referred to as the “U3” unemployment rate—to rise by 0.8 percentage points.</p> <p>Table 1 also shows that the changes in these headline numbers mask important underlying changes. Total employment fell by 2.9 million, but the number of people actually paid and at work fell by 5.1 million. The difference is due to a rise in those on paid leave by over 900,000 and a rise in those on unpaid leave by nearly 1.4 million. Furthermore, an increase in those on temporary layoff, which more than doubled over the month, accounts for nearly all of the rise in unemployment. Finally, the number of people out of the labor force rose by more than the number of unemployed, increasing by over 1.8 million, with over 300,000 of the rise accounted for by those who wanted work but did not actively search for it.</p> <p>These figures represent labor market changes through mid-March. Thus, they occurred <em>before</em> many of the stay-at-home directives were put in place. We expect much larger changes between March and April.</p> <p> <h3>Table 1. Detailed labor force changes, in thousands, February–March 2020</h3> <div class="table-responsive"> <table class='table'> <thead> <tr> <th><strong>Category</strong></th> <th><strong>Feb 2020</strong></th> <th><strong>March 2020</strong></th> <th><strong>Net Change</strong></th> </tr> </thead> <tbody> <tr> <th><strong><em>Total Population</em></strong></th> <td><strong><em>259,628</em></strong></td> <td><strong><em>259,758</em></strong></td> <td><strong><em>130</em></strong></td> </tr> <tr> <th><strong><em>Total Labor Force</em></strong></th> <td><strong><em>164,235</em></strong></td> <td><strong><em>162,537</em></strong></td> <td><strong><em>–1,698</em></strong></td> </tr> <tr> <th><strong>Total Employed</strong></th> <td><strong>158,017</strong></td> <td><strong>155,167</strong></td> <td><strong>–2,850</strong></td> </tr> <tr> <th>Paid, at work</th> <td>153,868</td> <td>148,727</td> <td>–5,141</td> </tr> <tr> <th style="padding-left:25px">Full-time employed</th> <td>118,052</td> <td>113,895</td> <td>–4,156</td> </tr> <tr> <th style="padding-left:25px">Part-time for economic reasons</th> <td>4,609</td> <td>5,877</td> <td>1,268</td> </tr> <tr> <th style="padding-left:25px">Part-time for noneconomic reasons</th> <td>31,207</td> <td>28,954</td> <td>–2,253</td> </tr> <tr> <th>On paid leave</th> <td>1,932</td> <td>2,870</td> <td>938</td> </tr> <tr> <th>On unpaid leave</th> <td>2,218</td> <td>3,571</td> <td>1,353</td> </tr> <tr> <th><strong>Total Unemployed</strong></th> <td><strong>6,218</strong></td> <td><strong>7,370</strong></td> <td><strong>1,152</strong></td> </tr> <tr> <th>Actively looking for work</th> <td>5,147</td> <td>5,149</td> <td>3</td> </tr> <tr> <th>On temporary layoff</th> <td>1,071</td> <td>2,221</td> <td>1,149</td> </tr> <tr> <th><strong>Total Not in Labor Force</strong></th> <td><strong>95,393</strong></td> <td><strong>97,221</strong></td> <td><strong>1,828</strong></td> </tr> <tr> <th>Want work but did not look for work</th> <td>4,472</td> <td>4,797</td> <td>325</td> </tr> <tr> <th style="padding-left:25px">Marginally attached</th> <td>1,071</td> <td>865</td> <td>–207</td> </tr> <tr> <th> All others out of the labor force</th> <td>90,921</td> <td>92,424</td> <td>1,503</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Source: Authors’ calculations from the <em>Current Population Survey</em>. Estimates are in the thousands and are not seasonally adjusted. </figcaption> </p> <p> <h3>Table 2. Changes in selected labor force measures, February–March 2020</h3> <div class="table-responsive"> <table class="table"> <thead> <tr> <th><strong>Category</strong></th> <th><strong>Feb 2020</strong></th> <th><strong>March 2020</strong></th> <th><strong>Net Change</strong></th> </tr> </thead> <tbody> <tr> <th>Labor force participation rate</th> <td>63.3</td> <td>62.6</td> <td>–0.7</td> </tr> <tr> <th>Employment-to-population ratio</th> <td>60.9</td> <td>59.7</td> <td>–1.1</td> </tr> <tr> <td></td> <td></td> <td></td> <td></td> </tr> <tr> <th>U3 official unemployment rate</th> <td>3.8</td> <td>4.5</td> <td>0.8</td> </tr> <tr> <th>U6 alternate underutilization rate<sup><a href="#tabref1" id="tbrn1">1</a></sup></th> <td>7.2</td> <td>8.6</td> <td>1.4</td> </tr> <tr> <th>U-Cov underutilization rate<sup><a href="#tabref2" id="tbrn2">2</a></sup></th> <td>10.4</td> <td>12.9</td> <td>2.5</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Source: Authors’ calculations from the <em>Current Population Survey</em>. Estimates are not seasonally adjusted.<br /> <sup><a href="#tbrn1" id="tabref1">1</a></sup> The “U6” rate includes all individuals who are unemployed, marginally attached to the labor force, or part-time for economic reasons, as a percentage of the labor force plus the marginally attached.<br /> <sup><a href="#tbrn2" id="tabref2">2</a></sup> The “U-Cov” rate includes all individuals who are unemployed, out of the labor force but want work, on unpaid leave, or part-time for economic reasons, as a percentage of the labor force plus those who are not in the labor force but want work. </figcaption> </p> <h3>A Broader Measure of Labor Market Underutilization</h3> <p>Tables 1 and 2 show that the official U3 unemployment rate did not capture millions of individuals who were not at work. It also did not capture people working <em>part-time for economic reasons</em>, a number that rose by nearly 1.3 million between February and March. These are individuals who report that they would rather work full-time if such work were available to them. </p> <p>To deal with these issues, the Labor Department reports several other measures of labor market underutilization. One such measure is the “U6” underutilization rate, which counts all unemployed, plus those who are part-time for economic reasons and those who are marginally attached to the labor force (as a percentage of labor force plus the marginally attached). However, even the U6 measure fails to capture some of the largest changes reported in table 1. For example, it does not capture the large rise in people on unpaid leave and only captures the <em>decline</em> in those marginally attached to the labor force between February and March, missing the overall increase in those who wanted work but did not actively search, as well as those who left the labor force in other ways.</p> <p>As an alternative, we introduce the “U-Cov” measure of unemployment. Our measure builds on the U6 measure of underutilization. It adds to it the total number of individuals still employed but on unpaid leave. It also adds individuals who are out of the labor force and want work but do not meet the criteria to classify as marginally attached. We express our U-Cov underutilization rate as a percentage of the labor force plus those out of the labor force that want work.</p> <p>There are several reasons we think this broader measure is a more relevant measure of labor market underutilization during the current crisis. First, unpaid leave normally has little to do with the business cycle, but figure 1 shows that the share of the employed on unpaid leave spiked in March, and we believe this spike is related to the Covid-19 crisis.<sup><a href="#ftn3" id="ftnref3">3</a></sup> There was a similar spike in the share of the labor force on temporary layoff. These spikes likely represent the wave of individuals placed on furlough or other types of temporary leave due to the stay-at-home directives. Second, there is a high chance that many workers may be <em>misclassified</em> in the official statistics. For example, according to the Labor Department, those on furlough should count as temporarily laid off, but the spike in unpaid leave suggests that not all of them are counted that way. Third, some of those who have lost their jobs due to the crisis may not meet the criteria for counting as unemployed because they did not search for new work, either because they believed the stay-at-home directives have halted hiring or because they believed the directives made them unavailable to start a new job (being available to start work is an additional criterion one must meet to officially count as unemployed). These individuals would be counted as out of the labor force. Figure 1 shows a spike in the fraction of employment that exited the labor force in March, suggesting that the crisis led more individuals to exit the labor force as well.<sup><a href="#ftn4" id="ftnref4">4</a></sup> Finally, figure 1 shows that the fraction of employment that is part-time for economic reasons also spiked in March. This share is historically highly cyclical, and is part of both the U6 and U-Cov measures of underutilization. </p> <p> <h3>Figure 1. Selected labor force measures over time</h3> <img alt="Figure 1 is a line chart that shows the time series, back to 1995, of those who transitioned from employment to out of the labor force, those who are employed but on unpaid leave, and those who are working part-time for economic reasons, all as a percentage of employment. It also shows the time series of those who are temporarily laid off, as a percentage of unemployment. The figure shows that all four statistics had a historically sharp increase in March." src="~/media/04be0e657306462b860fa9e097b8f16d.ashx" /> <figcaption class="caption"> Notes: Estimates are the monthly percentages of total employed or unemployed (as listed), seasonally adjusted. “PTER” refers to those who are part-time for economic reasons. </figcaption> </p> <p>Figure 2 shows the behavior over time of the official U3 unemployment rate, the broader U6 underutilization rate, and our even broader U-Cov underutilization rate. Since 1995, all three measures have behaved similarly over time. During the Great Recession, the U6 and U-Cov measures rose relatively more than the official unemployment rate, mostly because of the historically large rise in those working part-time for economic reasons (observed in figure 1). All three measures spiked in March, but to different degrees. The official unemployment rate rose by 0.8 percentage points. The U6 measure rose even more, by 1.4 percentage points. The rise in those working part-time for economic reasons accounts for the entire difference, since the number of those marginally attached to the labor force fell somewhat in March. Our U-Cov measure, however, rose by 2.5 percentage points. The larger increase reflects the rise in the number of workers on unpaid leave and in those who are out of the labor force but want work.</p> <p> <h3>Figure 2. Measure of labor market underutilization over time</h3> <img alt="Figure 2 is a line chart that shows the time series, back to 1995, of the official U3 unemployment rate, the U6 underutilization rate, and our U-Cov underutilization rate. The figure shows that all three measures vary with the business cycle, each rising during and after the past two recessions. All three measures also spike in March, with the U-Cov rate increasing the most." src="~/media/83f3b33328224b0eaa781aa8b4f58df8.ashx" /> <figcaption class="caption"> Notes: The “U3” unemployment rate is measured as a percentage of the labor force; the “U6” underutilization rate is measured as a percentage of the labor force plus those identified as “marginally attached” to the labor force; and the “U-Cov” underutilization rate is measured as a percentage of the labor force plus those identified as out of the labor force but wanting work. </figcaption> </p> <h3>Projecting Changes into the Future</h3> <p>A big question is what these observations on the effects of the Covid-19 crisis in March imply for what we can expect in the coming months. To answer this question, we project the distribution of labor market changes we observe in table 1 into April, assuming three different scenarios for employment losses. Our baseline scenario assumes that total employment falls by 20 million between February and April (implying a loss of 17.1 million in April in addition to the 2.9 million lost in March). We also explore a more optimistic scenario where total employment falls by 16 million and a more pessimistic scenario where total employment falls by 24 million. This range mostly captures the estimates reported in recent labor market studies that use special surveys or statistical predictions.<sup><a href="#ftn5" id="ftnref5">5</a></sup> To generate projections for the remainder of the labor force categories, we scale up the changes observed in table 1 to be consistent with the assumed employment loss. We also ensure that the changes in employment, unemployment, and those out of the labor force all add up in a consistent manner.</p> <p>We also evaluate two alternative assumptions for each scenario. These assumptions allow for the possibility that some of the misclassification and survey reporting issues we noted earlier may be addressed in the April survey, or that some of the employment losses that were temporary become permanent while some people who were already out of work begin to look for new work. First, we assume that 25% of the March increases in those on unpaid leave and those out of the labor force that did not report wanting work are counted as unemployed in April. And second, we assume that 50% of the March increases in these groups are counted as unemployed in April. </p> <p>The results of these projections are in table 3. In our baseline scenario, the exercise predicts that the official unemployment rate would rise to 9.4%, an increase of 7 million individuals. In contrast, if one naively assumed that all 26.5 million individuals who filed a claim for unemployment benefits during the survey month were counted as unemployed, it would imply a 16 percentage point increase in the unemployment rate, to nearly 21%. Such a rise is closer to, but still considerably larger than, the 10.3 percentage point increase we predict for the U6 underutilization rate, which would rise to 18.9%. Keep in mind that the U6 rate includes both those out of work and those who are part-time for economic reasons, and therefore starts from a higher initial value. The increase is more comparable to the 17.1 percentage point increase we predict for the U-Cov rate, which would rise to 29%. Keep in mind that the U-Cov rate additionally includes those on unpaid leave and those who want work but are counted as out of the labor force, and so starts from even higher initial value. The predicted increase in the U-Cov rate represents an increase of more than 24 million individuals.</p> <p>Assuming that more individuals will instead count as unemployed increases our prediction of the official unemployment rate by 2.2 or 4.4 percentage points, to 11.6% or 13.8%, depending on the assumption used. Since these assumptions reflect a reclassification of individuals mostly captured by the U-Cov measure already, our measure only rises an additional 0.7 or 1.4 percentage points, depending on the assumption used, from 29% to either 29.7% or 30.4%.<sup><a href="#ftn6" id="ftnref6">6</a></sup> In our more optimistic scenario of 16 million jobs lost, the official unemployment rate rises to 8.2%, while the U-Cov rate still rises more than 12 percentage points to 25.1%. So the U3 and U-Cov rates rise to 11.5% and 26.2%, respectively, under our assumptions of a higher share of those out of work being classified as unemployed. In our more pessimistic scenario of 24 million jobs lost, the official unemployment rises to 10.6% and the U-Cov rate rises over 20 percentage points to 33%, with the U3 and U-Cov rates rising up to 16% and 34.6%, respectively, under our assumptions of a higher share of those out of work being classified as unemployed.</p> <p>In summary, more than 26 million new unemployment claims are already reported between mid-March and mid-April, and job losses could exceed 20 million through April. The official unemployment rate may only capture a fraction of these losses. This is because the unique nature of the Covid-19 crisis has led to the furlough of many workers and has also made it difficult for people to look for new work, even if jobs are available. In this blog, we have proposed an alternative measure of underutilization, the U-Cov rate, which captures a broad range of workers affected by the crisis. This rate reached 12.9% in March, up 2.5 percentage points from its February level. We predict that it could reach between 25.1% and 34.6% in April, an increase of 16 to 21 percentage points, reflecting the breadth of the sharp contraction currently affecting the labor market.</p> <p> <h3>Table 3. Projected estimates of underutilization </h3> <div class="table-responsive"> <table class="table"> <thead> <tr> <th></th> <th><strong>U3 Unemployment Rate</strong></th> <th><strong>U6 Underutilization Rate</strong></th> <th><strong>U-Cov Underutilization Rate</strong></th> </tr> </thead> <tbody> <tr> <th>March 2020 Estimate</th> <td>4.5</td> <td>8.6</td> <td>12.9</td> </tr> <tr> <td colspan="4"><em>April 2020 Scenarios</em></td> </tr> <tr> <th>Baseline, assuming a loss of 20 million workers</th> <td>9.4</td> <td>18.9</td> <td>29.0</td> </tr> <tr> <th style="padding-left:25px">Further assuming a 25% shift to unemployment</th> <td>11.6</td> <td>20.9</td> <td>29.7</td> </tr> <tr> <th style="padding-left:25px">Further assuming 50% shift to unemployment</th> <td>13.8</td> <td>23.1</td> <td>30.4</td> </tr> <tr> <td colspan="4"></td> </tr> <tr> <th>More optimistic, assuming a loss of 16 million workers</th> <td>8.2</td> <td>16.4</td> <td>25.1</td> </tr> <tr> <th style="padding-left:25px">Further assuming a 25% shift to unemployment</th> <td>9.9</td> <td>18.0</td> <td>25.7</td> </tr> <tr> <th style="padding-left:25px">Further assuming 50% shift to unemployment</th> <td>11.5</td> <td>19.6</td> <td>26.2</td> </tr> <tr> <td colspan="4"></td> </tr> <tr> <th>More pessimistic, assuming a loss of 24 million workers</th> <td>10.6</td> <td>21.5</td> <td>33.0</td> </tr> <tr> <th style="padding-left:25px">Further assuming a 25% shift to unemployment</th> <td>13.4</td> <td>24.1</td> <td>33.8</td> </tr> <tr> <th style="padding-left:25px">Further assuming 50% shift to unemployment</th> <td>16.0</td> <td>26.6</td> <td>34.6</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Notes: The table reports three different scenarios, where total employment between February and April 2020 falls by 16 million, 20 million, or 24 million workers, respectively. Within each scenario, the initial projection assumes that all labor force states change between March and April in proportion to their February-to-March change. The second projection assumes that 25% of the February-to-March change in those on unpaid leave and those transitioning from employment to out of the labor force (who do not report wanting work) become classified as unemployed in April. The third projection assumes that 50% of the February-to-March change in those on unpaid leave and those transitioning from employment to out of the labor force (who do not report wanting work) become classified as unemployed in April. </figcaption> </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> These numbers represent the changes in the seasonally unadjusted February and March estimates. </p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> The marginally attached are defined as those who want work, did not look for work in the last month, but did look within the past year.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> Table 1 shows that <em>paid</em> leave also spiked in March, which is also likely related to the Covid-19 crisis. These individuals are likely not producing at their usual levels, but at the same time, they are compensated in their employment relationship and therefore do not align with the traditional notion of labor market “slack” that measures like the unemployment rate are designed to capture. We exclude them from our U-Cov measure but note that many more individuals may also be on paid leave in the coming months.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> Arguably, we could include all individuals who transitioned from employment to out of the labor force in our U-Cov measure, but many of these individuals may have done so for reasons that have nothing to with the Covid-19 crisis (e.g., retirement). Consequently, we only include the narrower subgroup of individuals who are out of the labor force but specifically report wanting to work.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> See Dan Aaronson, Helen Burkhardt, and Jason Faberman, 2020, “Potential jobs impacted by Covid-19: An update,” <em>Chicago Fed Insights</em> blog, April 9, <a href="~/link.aspx?_id=05D4EEF2EABB4832B51D099C84815422&_z=z">available online</a>; Alexander Bick and Adam Blandin, 2020, “Real-time labor market estimates during the 2020 coronavirus outbreak,” working paper, April 24, <a href="https://sites.google.com/view/covid-rps/home">available online</a>; and Olivier Coibion, Yuriy Gorodnichenko, and Michael Weber, 2020, “Labor markets during the Covid-19 crisis: A preliminary view,” <em>Becker Friedman Institute</em> Working Paper No. 2020-41, <a href="https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_202041.pdf">available online</a>, for examples. </p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> We get a rise in the U-Cov rate because we allow our initial assumption of a 17.1 million employment loss to adjust in response to our additional assumptions on who becomes classified as unemployed.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/nfci-revisions https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/nfci-revisions Mon, 04 May 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>In this blog post, we document that recent revisions to the Chicago Fed’s National Financial Conditions Index (<a href="~/link.aspx?_id=7EE041AAF9D7425CA220A1B067F26AC6&_z=z">NFCI</a>) have been large and clustered in time—a pattern not seen since the 2007–09 global financial crisis. As financial conditions tightened early on during the Covid-19 outbreak here in the U.S., there were large positive revisions to the NFCI through much of March. We show that revisions of this magnitude and in this direction have often preceded substantial increases in stock market volatility. More recently, in late March and April, the large negative revisions to the NFCI suggest that financial conditions are improving faster than expected by the historical relationships underpinning the index. </p> <h3>Sources of NFCI revisions </h3> <p>The NFCI provides a <a href="~/media/6abc7179af63483eb0436f36e7e972da.ashx">comprehensive weekly update on U.S. financial conditions</a> in money markets, debt and equity markets, and the traditional and “shadow” banking systems based on <a href="~/media/d3d801bf6ae24e28bafaca5e154316d9.ashx">105 weekly, monthly, and quarterly indicators of financial activity</a>.<sup><a href="#ftn1" id="ftnref1">1</a></sup> The weekly index is constructed to have an average value of zero and a standard deviation of one over a sample period extending back to 1971. With this construction, positive values of the NFCI have been historically associated with tighter-than-average financial conditions, while negative values have been historically associated with looser-than-average financial conditions. (See the <em>Economic Perspectives</em> article titled “<a href="~/media/fda3bc8d32a046d8b0c06168c097dce7.ashx">Monitoring financial stability: A financial conditions index approach</a>” for further details.)</p> <p>Previous weeks’ readings of the NFCI can be revised with each new release of the index. Revisions occur when the NFCI is reestimated each week, and their size and direction depend upon 1) incoming data for the current and past weeks, 2) revisions to already included data, and 3) changes in the estimated parameters of the mixed-frequency dynamic factor model used to construct the index. For the vast majority of data series in the NFCI, data revisions are not an issue, and the long history of the index means that changes in estimated model parameters tend to be very small from week to week. Thus, sizable revisions to the NFCI are most often driven by incoming data.</p> <p>Not all of the 105 data series used to construct the NFCI are available through the current week. For those series that are missing, the model for the NFCI uses the available data and the historical dynamics of the index to form a prediction of what any missing data series are likely to show when constructing the most recent values of the index.<sup><a href="#ftn2" id="ftnref2">2</a></sup> Large revisions to the NFCI can then occur if there is a substantial deviation between what the model expected and the actual data when they are incorporated at a later date. In this sense, revisions are informative of unexpected changes in financial conditions. </p> <h3>Recent NFCI revisions in historical context</h3> <p>Table 1 summarizes the magnitude of historical revisions to the NFCI since 2011.<sup><a href="#ftn3" id="ftnref3">3</a></sup> On average, revisions tend to be very small for the previous eight weeks, at less than 0.02 of a standard deviation unit for the index; moreover, the revisions shrink in size the further back in time over the course of the index’s history that one goes. Over the past two months, however, the NFCI’s recent values have been subject to historically large week-to-week revisions. While not outside of the range that occurred during the global financial crisis of 2007–09, these revisions to the NFCI have nonetheless been large compared with other revisions since 2011. (See “<a href="https://www.ijcb.org/journal/ijcb12q2a6.htm">Diagnosing the financial system: Financial conditions and financial stress</a>” for more details on revisions during the 2007–09 period.) </p> <p> <h3>Table 1. Mean absolute values of revisions to the National Financial Conditions Index (NFCI)</h3> <div class="table-responsive"> <table class="table"> <thead> <tr> <th><strong>Series</strong></th> <th><strong>T–1</strong></th> <th><strong>T–2</strong></th> <th><strong>T–3</strong></th> <th><strong>T–4</strong></th> <th><strong>T–5</strong></th> <th><strong>T–6</strong></th> <th><strong>T–7</strong></th> <th><strong>T–8</strong></th> </tr> </thead> <tbody> <tr> <th>NFCI</th> <td>0.017</td> <td>0.011</td> <td>0.007</td> <td>0.005</td> <td>0.005</td> <td>0.004</td> <td>0.003</td> <td>0.002</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Note: T denotes the last week of the index at the time of release.<br /> Sources: Authors’ calculations based data from the Federal Reserve Bank of Chicago; and Federal Reserve Bank of St. Louis, ALFRED database. </figcaption> </p> <p>Panel A of figure 1 plots the NFCI revision to the previous week’s value (i.e., the T–1 value) in real time for every weekly release since May 2011, highlighting in pink when the absolute value of the revision was greater than 0.05.<sup><a href="#ftn4" id="ftnref4">4</a></sup> Positive revisions correspond to financial conditions that are tighter than what was previously estimated, and negative revisions point to looser financial conditions than what was previously estimated. As shown in panel A, there have been week-to-week revisions to the NFCI in parts of its history that are similar in scale to those of recent months. That said, the clustering of such revisions, as seen in late March and April of this year, is rare. </p> <p>To demonstrate this further, we present a histogram of these NFCI revisions in panel B of figure 1. Revisions to T–1 values are typically small and clustered tightly around zero (mean = 0.001; standard deviation = 0.026). The dashed pink vertical lines overlaid on the histogram correspond to recent revisions, starting with the NFCI release for the week ending February 21, 2020. Panel B shows that the magnitudes of these recent week-to-week revisions have been extremely large by historical standards—coming in at two to six standard deviations from the average NFCI revision every single week.</p> <p> <h3>Figure 1. Revisions to the T–1 values of the National Financial Conditions Index (NFCI)</h3> <img alt="Panel A of figure 1 is a bar chart that plots the NFCI revision to the previous week’s value in real time since May 2011. Pink bars highlight weeks when the absolute value of the revision was greater than 0.05. Panel B of figure 1 is a histogram chart that plots the density, or frequency distribution, of revisions to the previous week’s NFCI values at the time of the release. The pink dashed lines correspond to recent revisions." src="~/media/42cf5be3c4164496afae1d82fba9fac2.ashx" /> <figcaption class="caption"> Notes: The T–1 value of the NFCI is the previous week’s value at the time of release (which reports the most recent week’s value). In panel A, the pink lines represent weeks when the absolute value of the revision was greater than 0.05. In panel B, the pink dashed lines correspond to recent revisions for T–1; see the text for further details.<br /> Sources: Authors’ calculations based on data from the Federal Reserve Bank of Chicago; and Federal Reserve Bank of St. Louis, ALFRED database. </figcaption> </p> <h3>The connection with stock market volatility</h3> <p>In recent weeks, NFCI values beyond the previous week have also been revised more than normal. Figure 2 plots the real-time history of the NFCI since the beginning of December 2019, starting with the release for the week ending February 21, 2020. From February 21 through March 20, 2020, the NFCI had large positive week-to-week revisions, as financial markets tightened in the early stages of the Covid-19 outbreak in the U.S. However, since March 20, there have been large week-to-week revisions in the opposite direction, as financial markets have started to stabilize.</p> <p> <h3>Figure 2. National Financial Conditions Index revisions since February 21, 2020</h3> <img alt="Figure 2 is a line chart that plots the real-time history of the NFCI since the beginning of December 2019, starting with the release for the week ending February 21, 2020." src="~/media/08e5ae9e74224a6e8c3bb5550ffeb602.ashx" /> <figcaption class="caption"> Sources: Authors’ calculations based on data from the Federal Reserve Bank of Chicago; and Federal Reserve Bank of St. Louis, ALFRED database. </figcaption> </p> <p>Interestingly, the recent pattern of revisions mirrors that of U.S. stock market volatility. For instance, the Chicago Board Options Exchange’s (CBOE) measure of implied volatility—its Volatility Index (<a href="http://www.cboe.com/vix">VIX</a>), based on call and put options for the Standard & Poor’s (S&P) 500 stock market index—increased from 15 in mid-February to 75 in mid-March before pulling back to 40 or so by mid-April.<sup><a href="#ftn5" id="ftnref5">5</a></sup> The VIX is among the 105 financial indicators included in the NFCI, so the apparent correlation between recent NFCI revisions and the VIX’s movements may be somewhat surprising. However, periods of elevated stock market volatility have in general been more likely to correspond with larger-than-normal NFCI revisions.</p> <p>To demonstrate this, we categorize revisions to T–1 values of the NFCI, again in real time, since May 2011 by the level of the VIX and present the results as a box and whisker plot in panel A of figure 3.<sup><a href="#ftn6" id="ftnref6">6</a></sup> The plot shows that the absolute values of T–1 revisions to the NFCI are on average twice as large (0.041 versus 0.016, with the difference being statistically significant given the <em>p</em>-value = 0.009) when the index was released in a week where the VIX was high—defined as exceeding 31.25, its 95th percentile value since May 2011. In fact, large positive T–1 revisions to the NFCI have tended to <em>lead</em> by a few weeks periods where stock market volatility was elevated. This can be seen in panel B of figure 3, which plots each T–1 revision to the NFCI (by the date the revision occurs) and VIX value since May 2011 (see note 3). Panel B also makes clear, however, that there have been some instances of large positive T–1 NFCI revisions when stock market volatility was not particularly elevated (notably, January 2013). Moreover, there have even been a few large positive NFCI revisions that lagged the initial spike in volatility (mostly early in the sample). </p> <p>To understand why some instances of large positive revisions to T–1 values of the NFCI did not precede stock market volatility, we have to look at what precisely drove these revisions. For instance, the large spike in revision in January 2013 was due to a change in the composition of data series in the NFCI (five series were added and two were replaced). Obviously, we wouldn’t expect this kind of revision to be correlated with stock market volatility. We may, however, reasonably expect revisions driven by volatility in the incoming data to be related to the level of the VIX. In this case, the NFCI model’s estimates are likely to be especially imprecise, which in turn leads to larger revisions as incoming data are incorporated. If the volatility originates at first outside of equity markets, then NFCI revisions that precede increases in the VIX may reflect the spread of uncertainty throughout the financial system. </p> <p> <h3>Figure 3. Revisions to the T–1 values of the National Financial Conditions Index (NFCI) and the CBOE Volatility Index (VIX)</h3> <img alt="Panel A of figure 3 is a box and whisker plot that categorizes each revision to the previous week’s NFCI value in real time since May 2011 by the level of the Chicago Board Options Exchange’s (CBOE) Volatility Index (VIX). Panel B of figure 3 is line chart that plots each revision to the previous week’s NFCI value in real time and each VIX value since May 2011." src="~/media/1ceca3a347f2482aa4dedcb7c2c310a4.ashx" /> <figcaption class="caption"> Notes: The T–1 value of the NFCI is the previous week’s value at the time of release (which reports the most recent week’s value). Shaded areas in panel B correspond to periods where the VIX was above its 95th percentile value (periods of high stock market volatility) since May 2011.<br /> Sources: Authors’ calculations based on data from the Federal Reserve Bank of Chicago; Federal Reserve Bank of St. Louis, ALFRED database; and Chicago Board Options Exchange (CBOE) from Haver Analytics. </figcaption> </p> <p>Figure 4 further quantifies the relationship between NFCI revisions and stock market volatility through a receiver operating characteristic (ROC) analysis (excluding the January 2013 revision, given what we just noted about it) at leads and lags of periods in time where the VIX exceeded its 95th percentile value. ROC analysis is a nonparametric classification method used to assign a score (the area under the ROC curve, or AUC) to a variable based on its ability to correctly classify, in this case, periods of high and low stock market volatility. An AUC value statistically significantly different from 0.5 indicates that NFCI revisions have a better chance at correctly classifying both types of periods than a random guess made on the basis of their historical frequency.<sup><a href="#ftn7" id="ftnref7">7</a></sup></p> <p>In figure 4, we see a statistically significant leading relationship (peak AUC values to the left of zero and distinct from 0.5) between NFCI revisions and elevated stock market volatility. The AUC values reflect a 70–80% rate of accuracy in classifying periods of both low and high stock market volatility correctly at leads of up to three weeks. The VIX is often used as a proxy for <a href="https://nbloom.people.stanford.edu/sites/g/files/sbiybj4746/f/uncertaintyshocks.pdf">economic uncertainty</a>. In this light, the timing of its correlation with NFCI revisions shown in figure 4 likely reflects an increase in general economic uncertainty, manifested in revisions to the NFCI, working its way into broad financial conditions through equity markets. Recent large negative revisions to the NFCI that have tracked along with the decline in the VIX (see panel B of figure 3) in this case are then a potential sign of improvement for both financial conditions and economic uncertainty.</p> <p> <h3>Figure 4. Receiver operating characteristic (ROC) analysis of National Financial Conditions Index T–1 revisions’ ability to classify periods of elevated stock market volatility</h3> <img alt="Figure 4 is a line chart that plots AUC values for revisions to the previous week’s NFCI readings made in real time at leads (negative horizontal axis values) and lags (positive horizontal axis values) of up to six weeks with respect to periods of elevated stock market volatility." src="~/media/51536f245a98424294acc0c4f7b25ff3.ashx" /> <figcaption class="caption"> Notes: AUC means area under the ROC curve for periods of elevated stock market volatility, denoted by periods where the CBOE Volatility Index (VIX) exceeded its 95th percentile since May 2011. The gray bands correspond to 95% confidence intervals. See the text and note 7 for further details. The T–1 value of the NFCI is the previous week’s value at the time of release (which reports the most recent week’s value).<br /> Sources: Authors’ calculations based on data from the Federal Reserve Bank of Chicago; Federal Reserve Bank of St. Louis, ALFRED database; and Chicago Board Options Exchange (CBOE) from Haver Analytics. </figcaption> </p> <h3>Conclusion</h3> <p>Over the past two months, the NFCI’s revisions, with their abnormal size and temporal clustering, are far different than anything we’ve seen since the global financial crisis of 2007–09. That said, they still exhibit some features we have seen in the recent past, such as a close connection with general economic uncertainty and a tendency to lead substantial increases in stock market volatility. Tracking week-to-week revisions to the NFCI can, therefore, be a useful leading indicator of the trajectory of financial markets and the broader economy. The recent streak of large negative revisions to the NFCI suggests that amid the Covid-19 pandemic, financial conditions are improving faster than expected by the historical relationships underpinning the NFCI. </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> Additional background information on the NFCI is <a href="~/link.aspx?_id=BA43C98C1D4C4C15B010AF535DDB5E84&_z=z">available online</a>.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> The mechanics of the revision process are as follows: The model is estimated using the Kalman filter, which concentrates out missing data at each point in time and smooths through the index history based on its historical dynamics. This process produces an implicit estimate of any missing data. When these data are eventually observed, the filter instead takes any new information in them into account when updating the value of the index. </p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> We construct revisions by using the archived NFCI releases from the St. Louis Fed’s ALFRED database, <a href="https://alfred.stlouisfed.org/series?seid=NFCI">available online</a>.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> Two weeks during this period are omitted because of a lack of historical NFCI information on the ALFRED database. </p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> The numbers reported here and in the remainder of the blog post refer to weekly averages of the VIX. </p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> The bottom and top edges of the boxes in panel A of figure 3 correspond to first and third quartiles of the data in each category, and the bold line between them is the median value. The lines extend out from the box to 1.5 times the interquartile range, or IQR (Q3 minus Q1); and the dots are outliers that are more than 1.5 times the IQR away from the median value.</p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> The statistical significance of AUC values is judged relative to a benchmark of 0.5; variables that are positively correlated with stock market volatility in our example will have AUC values greater than 0.5, and variables that are negatively correlated with stock market volatility will have AUC values less than 0.5. The 95% confidence intervals (CIs) for AUC values shown in figure 4 are estimated from 500 bootstrap replications and are small-sample-bias-corrected.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/impacted-jobs-update https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/impacted-jobs-update Thu, 09 Apr 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>This blog post updates our earlier analysis of the <a href="https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/impacted-jobs">potential jobs impacted by Covid-19</a>. The update reflects three adjustments to the original analysis. First, we updated our guesses on the shares of each industry employed and working at still-operating businesses based on the Labor Department’s March Employment Situation report. Second, we use an updated model to estimate the possible June unemployment rates from initial unemployment insurance claims data (the model details are found <a href="~/link.aspx?_id=B92E476E0D4E4B69AAC9C313E2286A11&_z=z">here</a>. Finally, we use unemployment rate predictions that incorporate the data from the April 2 report on unemployment insurance claims.</p> <p>Table 1 reports our updated estimates. Our baseline estimate is now that 17 million jobs will be impacted through April. If all those jobs are lost, the unemployment rate would rise to 14.4% in June.</p> <p>With regard to alternatives, using the telecommute shares from Dingel and Neiman (2020) instead of ours results in somewhat less damage. Our “low” projection reduces those at work by 10 percentage points relative to the baseline, subject to the 20% of February employment floor for non-essential industries. The high projection assumes 10 percentage points more individuals are at work than what is guessed in the baseline, subject to a cap at 100%. These scenarios result in nine to 29 million jobs impacted and, if all are lost, a June unemployment rate between 12% and 18%.</p> <p> <h3>1. Jobs impacted and potential June unemployment rate</h3> <div class="table-responsive"> <table class="table"> <thead> <tr> <th><strong>Scenario</strong></th> <th><strong>Jobs impacted</strong></th> <th><strong>Possible June unemployment rate</strong></th> </tr> </thead> <tbody> <tr> <td>Baseline</td> <td>–16.8 million</td> <td>14.4%</td> </tr> <tr> <td>Baseline using Dingel-Neiman telecommute</td> <td>–14.8 million</td> <td>13.8%</td> </tr> <tr> <td>Low</td> <td>–29.1 million</td> <td>18.0%</td> </tr> <tr> <td>High</td> <td>–9.3 million</td> <td>12.4%</td> </tr> </tbody> </table> </div> </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/unemployment-rate https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/unemployment-rate Tue, 07 Apr 2020 00:00:00 -0500 <div class="cfedContent__text"> <h3>Summary</h3> <p>Economists forecast the unemployment rate all the time. Usually, though, they use data over the previous months and quarters to forecast the unemployment rate out several years. Since the relationships between the unemployment rate and things like GDP growth and employment are mostly stable over time, and since month-to-month movements in the unemployment rate are usually small, these forecasts usually work well.</p> <p>The current Covid-19 crisis, however, has caused a rapid contraction in economic activity and a sharp deterioration in labor market conditions. Policymakers need a plausible estimate of what unemployment may look like over the next several months rather than the next few years. Generating such an estimate is not easy—there are limited data available to generate such a short-term estimate, and nearly all of the available data are for a time prior to many of the stay-at-home directives and moves to essential services that have led to the contraction. </p> <p>In this blog, I present an unemployment projection exercise that uses the most up-to-date, frequent, and well-measured labor market data that are widely available: initial unemployment insurance (UI) claims. The U.S. Labor Department reports these data weekly and they represent the universe of all individuals that have applied for UI in the preceding week. The projection uses these data, in conjunction with the most recent data on payroll employment, real earnings, and transitions from employment to unemployment, to produce estimates of the unemployment rate over the next several months.<sup><a href="#ftn1" id="ftnref1">1</a></sup> The projection exercise relies on a series of assumptions based on my best guesses of how these labor market variables will evolve over the coming months; these guesses in turn rely heavily on past experiences during the height of the Great Recession. Moreover, the exercise currently only has two weeks of initial UI claims since the start of the stay-at-home directives, though I hope to update the exercise as more data become available. Given these caveats, the projection exercise is admittedly more ad hoc than a traditional unemployment rate forecast, and therefore subject to greater uncertainty. For example, the exact timing of the response is somewhat sensitive to particular assumptions on smoothing and other transformations of the data that are somewhat arbitrary but are needed to generate the unemployment estimates at the monthly frequency. The projection also cannot account for differences in how individuals are categorized as unemployed or out of the labor force during the crisis. Specifically, some individuals may be laid off yet not count as unemployed because they view actively looking for work—a requirement in most cases for one to count as unemployed—as pointless during the stay-at-home directives.<sup><a href="#ftn2" id="ftnref2">2</a></sup> The projection nevertheless gives us a disciplined picture of what we can expect the unemployment rate to do in the short-term given the available data.</p> <h3>Analysis</h3> <p>The unemployment rate projection exercise has two parts. The first part uses econometric techniques to estimate the relationship of the change in the unemployment rate with the UI initial claims and other labor market variables between February 1990 and March 2020. The second part then uses these estimated relationships, along with assumed paths for the key labor market variables, to forecast changes in the unemployment rate going forward.</p> <p>A critical assumption in the exercise is the path of the UI <em>take-up rate</em>. Not all people who are eligible for UI apply for it. This is especially true when the economy is doing well. For example, if we measure job losers as those who transition from employment to unemployment in a given month, only about 60% of these job losers filed an initial UI claim over the 2017–19 period. Research shows, however, that as economic conditions worsen, this number quickly rises toward 100%.<sup><a href="#ftn3" id="ftnref3">3</a></sup> </p> <p>The key assumptions for the exercise are those concerning its labor market variable inputs from April 2020 forward, particularly the assumptions made for initial UI claims and the UI take-up rate. In general, the exercise uses the most recent available data, in conjunction with paths for UI take-up rates, payroll employment losses, and real earnings growth that mimic what occurred during the worst of the Great Recession (spring to summer 2009). Since the UI take-up rate is such an important part of the exercise, the estimation takes two approaches. The first uses a direct assumption that the take-up rate follows the same path as it did in early 2009. The second instead statistically predicts the take-up rate using its historical relationship with payroll employment growth and the job loss rate (as measured by employment-to-unemployment transitions).</p> <p>Table 1 lists these assumptions for the baseline version of the exercise. The numbers in bold represent actual data available at the time of the exercise. The remainder are assumptions based on the worst we saw during the Great Recession. April initial UI claims (which cover mid-March through mid-April) use the initial 3.28 million spike in claims observed for the week of March 21, followed by the larger spike of 6.65 million claims the following week. In the baseline estimate, I assume that these spikes in claims gradually decline to levels comparable to their 2009-era levels by the middle of May 2020. I assume that the take-up rate almost immediately goes to 100% and rises slightly above this level in May—differences in how UI claims and employment-to-unemployment transitions measure job loss can cause the rate to go above 100%.<sup><a href="#ftn4" id="ftnref4">4</a></sup> Finally, I assume a drastic drop in employment growth, from an average of just over 1% annually during the first three months of 2020 to a –12.5% annual rate in April. I obtain this value by choosing the growth rate that matches the predicted rise in the April UI take-up rate as closely as possible to the take-up rates reported in the table below, given my assumption on the path of initial UI claims. The last column shows that this drop implies a net loss of 19.7 million payroll jobs between February and April, with an additional million jobs lost in the subsequent months.<sup><a href="#ftn5" id="ftnref5">5</a></sup></p> <p> <h3>Table 1. Key assumptions of the unemployment rate forecast</h3> <div class="table-responsive"> <table class="table cfedTable--fixed"> <thead> <tr> <th><strong>Month</strong></th> <th><strong>Avg. weekly initial UI claims</strong></th> <th><strong>UI take-up rate</strong></th> <th><strong>12-month employment growth (pct)</strong></th> <th><strong>Implied payroll employment (millions)</strong></th> </tr> </thead> <tbody> <tr> <th>January</th> <td><strong>215,400</strong></td> <td><strong>0.53</strong></td> <td><strong>1.37</strong></td> <td><strong>152.2</strong></td> </tr> <tr> <th>February</th> <td><strong>208,000</strong></td> <td><strong>0.54</strong></td> <td><strong>1.55</strong></td> <td><strong>152.5</strong></td> </tr> <tr> <th>March</th> <td><strong>232,500</strong></td> <td><strong>0.35</strong></td> <td><strong>0.99</strong></td> <td><strong>151.8</strong></td> </tr> <tr> <th>April</th> <td>3,525,730</td> <td>0.99</td> <td>–12.52</td> <td>132.8</td> </tr> <tr> <th>May</th> <td>933,280</td> <td>1.04</td> <td>–12.87</td> <td>132.4</td> </tr> <tr> <th>June</th> <td>707,740</td> <td>0.93</td> <td>–13.50</td> <td>131.7</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Note: Values that use actual data are in bold. </figcaption> </p> <h3>Results of the exercise</h3> <p>Table 2 reports the results for both versions of the unemployment rate projection model. Both versions predict a massive increase in the unemployment rate of 6.6 to 10.5 percentage points in April, a still-large increase of 3.1 to 4.0 percentage points in May, and a further increase of 0.2 to 1.2 percentage points in June. To put these changes into context, the monthly increases in the unemployment rate during the 1980–82 and 2008–09 recessions, among the sharpest in modern history, were 0.3 to 0.6 percentage points per month. The forecast I present here suggests that the unemployment rate could rise to 15.2% to 19.2% by June.</p> <p> <h3>Table 2. Near-term unemployment forecasts</h3> <div class="table-responsive"> <table class="table cfedTable--fixed"> <thead> <tr> <th><strong>Month</strong></th> <th><strong>Using an assumed path for the UI take-up rate</strong></th> <th><strong>Using a predicted path for the UI take-up rate</strong></th> </tr> </thead> <tbody> <tr> <th>March*</th> <td>4.4%</td> <td>4.4%</td> </tr> <tr> <th>April</th> <td>14.9%</td> <td>11.0%</td> </tr> <tr> <th>May</th> <td>18.0%</td> <td>15.0%</td> </tr> <tr> <th>June</th> <td>19.2%</td> <td>15.2%</td> </tr> </tbody> </table> </div> <figcaption class="caption"> * The 4.4% March unemployment rate represents the most recent official government estimate. </figcaption> </p> <p>Figure 1 puts these sharp and drastic predicted increases in the unemployment rate into historical perspective. It shows the actual unemployment rate and the forecast from the predicted UI take-up rate from above, along with three-month moving averages of the actual and assumed UI take-up rate and initial UI claims rate (initial claims as a percentage of employment). Dashed lines represent the assumed or predicted values. As you can see, the rise in the unemployment rate is sharp and dramatic, even when compared with the rise observed during the Great Recession. The rise in initial claims is also sharp. They rise to record levels almost immediately, while initial UI claims during the Great Recession took months to reach their (much lower) peak. The UI take-up rate also rises almost immediately to one (i.e., 100% take-up), whereas it took several months to rise to that point during the Great Recession. </p> <p> <h3>Figure 1. Actual and predicted unemployment rates, initial UI claims, and UI take-up rates</h3> <img alt="Figure 1 is a line chart that shows the actual unemployment rate and the forecast from the predicted UI take-up rate, along with three-month moving averages of the actual and assumed UI take-up rate and initial UI claims rate since 2007. During the Covid-19 pandemic, the unemployment rate and initial claims rose to record levels much more quickly than in the Great Recession." src="~/media/45b2a30782254cd7b5067d03161c4228.ashx" /> <figcaption class="caption"> Notes: Solid lines represent actual data, while dashed lines represent assumed or predicted estimates. The unemployment rate is measured as a percent of the labor force; the UI initial claims rate is measured as a percent of employment; and the UI take-up rate is the ratio of UI initial claims to employment-to-unemployment transitions. </figcaption> </p> <p>These results are based on what I consider to be a reasonable guess of how UI claims may evolve in the coming months. Alternative assumptions on their evolution will affect the results considerably. To see how much, I consider two alternative paths for UI claims going forward. The more pessimistic path assumes that the spike in claims observed in March remains more elevated than in the baseline and does not fall to levels comparable to 2009 until the end of May. It calibrates the predicted UI take-up rate to be the same as in the baseline scenario and adjusts the assumption of employment growth to be consistent with both this take-up rate and the new UI claims path. In this scenario, the exercise predicts a June unemployment rate of 18.2%, compared with 15.2% in the baseline, and job losses in April of 21.5 million jobs, compared with 19.7 million jobs in the baseline. The more optimistic path assumes that the spike in claims observed in March falls from its elevated level faster than the baseline, returning to levels comparable to 2009 by the end of April, and adjusts the remainder of the assumptions in a similar fashion. In this scenario, the exercise predicts a June unemployment rate of 13.8% and job losses in April of 18.5 million jobs.<sup><a href="#ftn6" id="ftnref6">6</a></sup></p> <p> <h3>Table 3. Alternative unemployment predictions</h3> <div class="table-responsive"> <table class="table cfedTable--fixed"> <thead> <tr> <th><strong>Month</strong></th> <th><strong>June unemployment rate</strong></th> <th><strong>Implied employment change (millions)</strong></th> </tr> </thead> <tbody> <tr> <th>Baseline scenario</th> <td>15.2%</td> <td>–19.7</td> </tr> <tr> <th>More pessimistic scenario</th> <td>18.2%</td> <td>–21.5</td> </tr> <tr> <th>More optimistic scenario</th> <td>13.8%</td> <td>–18.5</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Notes: All three scenarios report results of the projection exercise that uses a predicted estimate of the UI take-up rate. The baseline scenario assumes that initial UI claims return to levels comparable to those in 2009 by mid-May. The more pessimistic scenario assumes that UI claims return to levels comparable to those in 2009 by the end of May. The more optimistic scenario assumes that UI claims return to levels comparable to those in 2009 by the end of April. </figcaption> </p> <p>One caveat for this projection exercise is that the estimation uses a mix of moving averages and lags to smooth the monthly data used in the forecast. This may skew the timing of the unemployment rate increases. </p> <p>Another caveat is that it is not clear how well the historical relationship between employment losses, UI claims, and the unemployment rate will hold up over the next several months. One issue is how an individual is classified as unemployed in the official government statistics—one must be out of work and actively searching for new work, or on temporary layoff (regardless of search efforts) to count as unemployed. Individuals on furlough will qualify under the temporary layoff definition. However, it is unclear how many job losers will qualify as actively searching for new work, as many states and localities have imposed stay-at-home restrictions that will make job search difficult. This will not only affect the official unemployment rate estimate that I am trying to predict, but also the measured UI take-up rate, since it may appear in the official statistics that there are fewer newly unemployed people eligible to claim benefits. Another is the simple issue that changes in labor market data, particularly initial UI claims, are so much larger than anything we have seen before, that past episodes may do a poor job of capturing their dynamics.</p> <p>Overall, given the available data and the most recent numbers on the drastic increase in initial UI claims, this exercise predicts a sharp rise in the unemployment rate that would eclipse peak unemployment observed during the Great Recession in just a few months. This is true even if I assume the unprecedented million-plus levels of initial claims last only a few weeks. What happens to the unemployment rate, and the labor market more generally, after that is anyone’s guess. It will depend strongly on the spread of Covid-19, the government’s response, and the economy’s ability to return to normal operations.</p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> Payroll employment and real earnings growth come from the establishment survey (<em>Current Employment Statistics</em>) of the monthly Bureau of Labor Statistics employment situation report, with nominal earnings transformed into real earnings using the Consumer Price Index. Transitions from employment to unemployment are derived from the household survey (<em>Current Population Survey</em>) of the employment situation report. Data on UI claims come from the Labor Department’s Employment and Training Administration.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> The March BLS Employment Situation Report underscores this concern. The report notes that about 1% of the labor force reported themselves as employed but on leave rather than on temporary layoff (as BLS would have preferred to classify them), and nearly 0.8% of the labor force were individuals who transitioned from employment to out of the labor force rather than to unemployment.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> For more on the UI take-up rate, see the article by Bart Hobijn and Aysegul Sahin, 2011, “Do initial claims overstate layoffs?,” <em>Federal Reserve Bank of San Francisco, Economic Letter</em>, 2011-04, <a href="https://www.frbsf.org/economic-research/files/el2011-04.pdf">available online</a>.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> Note that these measurement differences, especially when it comes to timing, can move in both directions. The implied take-up rate for March actually fell from 0.54 to 0.35 because the rise in initial UI claims through mid-March was nowhere near as high as the increase in employment-to-unemployment transitions for March. This exercise assumes those timing issues revert themselves by April.</p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> These employment losses are comparable to a similar exercise produced by the <em>Economic Policy Institute</em>. See David Cooper and Julia Wolfe, 2020, “Nearly 20 million workers will likely be laid off or furloughed by July,” <em>Economic Policy Institute, Working Economics Blog</em>, April 1, <a href="https://www.epi.org/blog/nearly-20-million-jobs-lost-by-july-due-to-the-coronavirus/">available online</a>.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> If I were to use these alternative paths for initial UI claims but my assumed rather than predicted UI take-up rates, the pessimistic path would predict a June unemployment rate of 25.8% and the optimistic path would predict a June unemployment rate of 18.0%, compared with 19.2% in the baseline.</p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div> https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/impacted-jobs https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2020/impacted-jobs Wed, 01 Apr 2020 00:00:00 -0500 <div class="cfedContent__text"> <p>In this blog, we conduct an exercise to determine the potential consequences of the Covid-19 pandemic on near-term labor market outcomes. This is not a forecast, but an attempt to provide some discipline around potential bounds of the number of jobs impacted by the crisis. We estimate that between nine and 26 million jobs are potentially affected,<sup><a href="#ftn1" id="ftnref1">1</a></sup> with a best guess of around 15 million. If these jobs are lost, the June unemployment rate could reach between 14% and 18%, with a best guess of around 15%. </p> <p>This exercise is limited in a number of ways that we discuss a little later. In particular, some of the key parameters used for our calculations require significant guesswork given the unusual environment we are in. We also ignore a few issues in our calculations that may have an impact on our projections, including most importantly the recently passed $2 trillion fiscal package (the CARES Act),<sup><a href="#ftn2" id="ftnref2">2</a></sup> which provides significant incentives to keep employees on payrolls.</p> <h3>Methodology</h3> <p>Our calculation has two basic parts. First, we estimate the share of workers in each occupation that may be working from home. We then use occupation-by-industry shares prior to the outbreak to infer the share of workers in an industry that can work from home. Second, we use the list of essential services from the Massachusetts shelter-at-home declaration to infer which industries might be considered essential, partially essential, or not essential. We chose Massachusetts because it was among the first to publish its list, and it is unlikely that differences across states are substantial enough to affect the estimates. We use these categorizations to guess what share of the not-working-from-home workforce in each industry may be able to work at still-operating establishments. This last piece requires significant guesswork, and therefore we tweak estimates for plausible low and high ranges.</p> <h3><em>Work from home</em></h3> <p>We infer telecommuting from the 2016 National Longitudinal Survey of Youth (NLSY79), which asks how many hours per week respondents typically work from home in their primary job. The NLSY79 is a nationally representative sample of individuals 14 to 22 when they were first interviewed in 1979; therefore, in 2016, this cohort is 51 to 59. We include individuals who worked at least one hour per week, had a non-missing number of hours working from home, and had a valid occupation classification. We classify individuals who worked more than five hours per week as potential telecommuters. </p> <p>We then aggregate these responses to the occupation level. This allows us to identify “high telecommute” occupations, which we operationalize as those where more than 13% of workers worked from home at least five hours per week.<sup><a href="#ftn3" id="ftnref3">3</a></sup> These are mainly high-skill occupations. We then consider two scenarios, one in which 50% of the workers in high telecommute occupations will actually work from home, and one in which 75% will telecommute. To provide a further range of estimates, we repeat this exercise classifying individuals who worked more than one hour a week from home as potential telecommuters. Our estimates of the aggregate share of workers who could telecommute are shown in the first column of table 1. We estimate between 25.4% and 39.0% of the workforce telecommutes. Our baseline estimate uses the greater-than five hour, 75% category, or 36.7%. </p> <p>Our occupation-specific estimates have a 0.79 to 0.87 correlation with those made by Dingel and Nieman (2020), who use task data from the O*NET database to infer telecommuting. Moreover, our baseline aggregate estimate of 36.7% is similar to Dingel and Nieman’s aggregate estimate of 34%.<sup><a href="#ftn4" id="ftnref4">4</a></sup> We also show how our labor market projections vary if we use the Dingel and Nieman occupation-specific telecommute shares.</p> <p>Lastly, we calculate telecommuting by three-digit NAICS industry as the employment-weighted average share of work from home across two-digit SOC occupations within each industry. Using each industry’s value added share in GDP produces an estimate of the share of GDP that would be produced by telecommuters under our alternatives (column 2 of table 1).</p> <p> <h3>1. Telecommute shares, by share of workers and share of GDP</h3> <div class="table-responsive"> <table class="table"> <thead> <tr> <th><strong>Scenario</strong></th> <th><strong>Share of workers<sup><a href="#ftn5" id="ftnref5">5</a></sup></strong></th> <th><strong>Share of GDP<sup><a href="#ftn6" id="ftnref6">6</a></sup></strong></th> </tr> </thead> <tbody> <tr> <th><strong>>5 hours/week telecommute</strong></th> <td></td> <td></td> </tr> <tr> <td>Actual occupation shares</td> <td>13.7</td> <td>14.0</td> </tr> <tr> <td>50% of high telecommute work from home</td> <td>25.4</td> <td>27.0</td> </tr> <tr> <td>75% of high telecommute work from home</td> <td>36.7</td> <td>39.1</td> </tr> <tr> <th><strong>>1 hours/week telecommute</strong></th> <td></td> <td></td> </tr> <tr> <td>Actual occupation shares</td> <td>23.8</td> <td>24.1</td> </tr> <tr> <td>50% of high telecommute work from home</td> <td>27.7</td> <td>29.2</td> </tr> <tr> <td>75% of high telecommute work from home</td> <td>39.0</td> <td>41.4</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Source: 2016 NLSY79 and author calculations. </figcaption> </p> <h3><em>Work outside the home</em></h3> <p>With over three-quarters of the working age population living in states or localities under “stay-at-home” orders as of March 30, and much of the rest of the country under voluntary self-quarantine,<sup><a href="#ftn7" id="ftnref7">7</a></sup> we next attempt to estimate the share of workers that cannot telecommute but might be able to work at still-operating establishments. </p> <p>We start with the list of essential services from the stay-at-home order made by the state of Massachusetts.<sup><a href="#ftn8" id="ftnref8">8</a></sup> We then classify each three-digit NAICS industry as either fully essential, partially essential, or non-essential.<sup><a href="#ftn9" id="ftnref9">9</a></sup> In the case of partially essential three-digit industries, we match industry descriptions in the Massachusetts order to four-, five-, or six-digit NAICS industries and then sum up employment in these detailed industries to get an “essential share” for the three-digit industry. </p> <p>The last step is to try to guess the share of workers not able to telecommute that are still able to work in each industry. This is by far the least disciplined part of our exercise. We make some educated guesses based on the fraction of each three-digit NAICS industry that we identify as essential, and the degree to which we think particular industries likely require workers on site. To reflect its extreme uncertainty, we also report low and high scenarios that essentially vary industry work-away-from-home employment by 10 percentage points in either direction.<sup><a href="#ftn10" id="ftnref10">10</a></sup></p> <p>To come up with an estimate of total workers potentially on the job, we then sum up the share of telecommuters and the share working away from home in each industry, capping each industry at between 20% and 100% of its February 2020 employment level. </p> <h3>Results</h3> <p>Table 2 reports our estimates of the number of jobs in which people are potentially unable to work because of the virus. Our baseline estimate is that 15 million jobs will be impacted through April. If all those jobs are lost, the unemployment rate would rise to 11.6% in June.<sup><a href="#ftn11" id="ftnref11">11</a></sup> </p> <p>With regard to alternatives, using the Dingel-Nieman telecommute shares instead of ours results in somewhat less damage. Our “low” projection reduces those at work by 10 percentage points relative to the baseline, subject to the 20% of February employment floor for non-essential industries. The high projection assumes 10 percentage points more individuals are at work than what is guessed in the baseline, subject to a cap at 100%. These scenarios result in nine to 26 million jobs impacted and, if all are lost, a June unemployment rate between 14 and 18%.</p> <p>That said, it is possible that many people included in our estimates will not be counted as unemployed if they are being paid while not working. This number could be large, especially in light of the CARES Act, which provides incentives to firms to keep employees on payrolls. Moreover, it is unclear how the Bureau of Labor Statistics’ employment questions will categorize those who are not getting paid if they expect to return to their jobs when the quarantines are lifted and therefore are not making any effort to find a new job.<sup><a href="#ftn12" id="ftnref12">12</a></sup></p> <p> <h3>2. Jobs impacted and potential June unemployment rate</h3> <div class="table-responsive"> <table class="table"> <thead> <tr> <th><strong>Scenario</strong></th> <th><strong>Jobs impacted</strong></th> <th><strong>Possible June unemployment rate</strong></th> </tr> </thead> <tbody> <tr> <td>Baseline</td> <td>–14.8 million</td> <td>15.1%</td> </tr> <tr> <td>Baseline using Dingel-Neiman telecommute</td> <td>–13.1 million</td> <td>14.8%</td> </tr> <tr> <td>Low</td> <td>–25.5 million</td> <td>17.9%</td> </tr> <tr> <td>High</td> <td>–8.6 million</td> <td>13.7%</td> </tr> </tbody> </table> </div> </p> <p>There are a number of issues that we ignore. <ul class="cfedList--bulleted"> <li>We do not account for the impact of the CARES Act. Including this impact will change the size of our June unemployment projection. </li> <li>We do not explicitly distinguish localities by whether they are under a stay-at-home order. We informally try to adjust the total industry-specific share working away from home to account for the lost activity due to quarantining. </li> <li>We cap three-digit industry-specific employment at February 2020 levels. There are a few selected industries—e.g., hospitals, ground transportation and distribution, retail grocers—that are presumably ramping up employment. On the other side, we put a floor on three-digit industry-specific employment of 20% of February 2020 levels; some industries, e.g., restaurants, could fall below that level.</li> <li>We ignore any productivity implications associated with new working arrangements. </li> <li>We calculated the unemployment rates associated with our projected job losses prior to the most recent announcement of 6.65 million new unemployment insurance claims, and so may underestimate the true values.</li> </ul> </p> <hr /> <h3>Appendix</h3> <p> <h3>Appendix 1. Share of workers that work from home at least 5 hours, by occupation</h3> <div class="table-responsive"> <table class="table cfedTable--fixed"> <thead> <tr> <th>Occupation</th> <th>Share work from home</th> <th>Assume 50% of high telecommute work from home</th> <th>Assume 75% of high telecommute work from home</th> <th>Occupation share (Feb 2020)</th> </tr> </thead> <tbody> <tr> <td>Architecture and engineering*</td> <td>0.136</td> <td>0.500</td> <td>0.750</td> <td>0.021</td> </tr> <tr> <td>Arts, design, entertainment, sports, media*</td> <td>0.198</td> <td>0.500</td> <td>0.750</td> <td>0.021</td> </tr> <tr> <td>Building and grounds cleaning, maintenance</td> <td>0.043</td> <td>0.043</td> <td>0.043</td> <td>0.034</td> </tr> <tr> <td>Business and financial operations*</td> <td>0.196</td> <td>0.500</td> <td>0.750</td> <td>0.058</td> </tr> <tr> <td>Community and social service*</td> <td>0.209</td> <td>0.500</td> <td>0.750</td> <td>0.018</td> </tr> <tr> <td>Computer and mathematical*</td> <td>0.427</td> <td>0.500</td> <td>0.750</td> <td>0.036</td> </tr> <tr> <td>Construction and extraction</td> <td>0.066</td> <td>0.066</td> <td>0.066</td> <td>0.052</td> </tr> <tr> <td>Education, training, and library*</td> <td>0.311</td> <td>0.500</td> <td>0.750</td> <td>0.061</td> </tr> <tr> <td>Farming, fishing, and forestry</td> <td>0.000</td> <td>0.000</td> <td>0.000</td> <td>0.007</td> </tr> <tr> <td>Food preparation and serving related</td> <td>0.034</td> <td>0.034</td> <td>0.034</td> <td>0.053</td> </tr> <tr> <td>Healthcare practitioners and technical</td> <td>0.069</td> <td>0.069</td> <td>0.069</td> <td>0.063</td> </tr> <tr> <td>Healthcare support</td> <td>0.054</td> <td>0.054</td> <td>0.054</td> <td>0.033</td> </tr> <tr> <td>Installation, maintenance, and repair</td> <td>0.028</td> <td>0.028</td> <td>0.028</td> <td>0.031</td> </tr> <tr> <td>Legal*</td> <td>0.183</td> <td>0.500</td> <td>0.750</td> <td>0.012</td> </tr> <tr> <td>Life, physical, and social science*</td> <td>0.210</td> <td>0.500</td> <td>0.750</td> <td>0.010</td> </tr> <tr> <td>Management*</td> <td>0.248</td> <td>0.500</td> <td>0.750</td> <td>0.119</td> </tr> <tr> <td>Office and administrative support</td> <td>0.066</td> <td>0.066</td> <td>0.066</td> <td>0.103</td> </tr> <tr> <td>Personal care and service</td> <td>0.110</td> <td>0.110</td> <td>0.110</td> <td>0.026</td> </tr> <tr> <td>Production</td> <td>0.036</td> <td>0.036</td> <td>0.036</td> <td>0.053</td> </tr> <tr> <td>Protective service</td> <td>0.074</td> <td>0.074</td> <td>0.074</td> <td>0.020</td> </tr> <tr> <td>Sales and related*</td> <td>0.192</td> <td>0.500</td> <td>0.750</td> <td>0.095</td> </tr> <tr> <td>Transportation and material moving</td> <td>0.024</td> <td>0.024</td> <td>0.024</td> <td>0.075</td> </tr> </tbody> </table> </div> <figcaption class="caption"> Notes: Calculated from the 2016 NLSY 2016 and the February 2020 CPS.<br /> * indicates a “high telecommute” occupation” (i.e. more than 13% of workers worked from home at least 5 hours per week). </figcaption> </p> <hr /> <h3>Notes</h3> <p><sup><a href="#ftnref1" id="ftn1">1</a></sup> We realize that nearly every job has been affected by the virus in one way or another. We are measuring those at risk of being lost.</p> <p><sup><a href="#ftnref2" id="ftn2">2</a></sup> More details are <a href="https://www.forbes.com/sites/michaelstudenka/2020/03/30/the-cares-act-and-its-impact-on-employers-considering-mass-layoffs-or-furloughs/#f4b8ea6104fa">available online</a>.</p> <p><sup><a href="#ftnref3" id="ftn3">3</a></sup> A list of the occupations, and their telecommuting shares, is in Appendix Table 1. The 13% threshold was judgmentally determined by the degree to which the occupation seemed to rely on computer usage.</p> <p><sup><a href="#ftnref4" id="ftn4">4</a></sup> 29% of workers reported being able to work at home and 25% actually worked from home in the 2017 American Time Use Survey (ATUS, <a href="https://www.bls.gov/news.release/pdf/flex2.pdf">available online</a>). Roughly 28% of 45–64 year old respondents in that survey worked from home, pretty similar to the aggregate and suggesting the NLSY age cohort we rely on is reasonably representative of the labor force more broadly. </p> <p><sup><a href="#ftnref5" id="ftn5">5</a></sup> Occupation weights are derived from the February 2020 CPS.</p> <p><sup><a href="#ftnref6" id="ftn6">6</a></sup> We calculate industry*occupation shares of workers from the 2018 ACS. We then assign the same occupation-specific telecommute shares to each industry and finally aggregate the industries using weights from the BEA’s estimate of value-added output by industry for Q3 2019.</p> <p><sup><a href="#ftnref7" id="ftn7">7</a></sup> Most populated areas that are not under stay-at-home orders appear to be reducing residential movement somewhat, similar to the rest of the country, at least according to <a href="https://www.unacast.com/covid19/social-distancing-scoreboard">phone usage reported online</a>. Some rural areas, especially in the mountain and upper Midwest region, appear to be restricting movement less than the country as a whole.</p> <p><sup><a href="#ftnref8" id="ftn8">8</a></sup> <a href="https://www.mass.gov/info-details/covid-19-essential-services">Available online</a>.</p> <p><sup><a href="#ftnref9" id="ftn9">9</a></sup> According to our reading of the Massachusetts order, of the 83 three-digit NAICS industries, 17 are non-essential, 24 are partially essential, and 42 are fully essential.</p> <p><sup><a href="#ftnref10" id="ftn10">10</a></sup> In general, we assume that all workers are at work in industries that we identify as fully essential. For those that are partially essential, we assume that the fraction essential plus some remaining share of non-essential workers are at work. This remaining share reflects a best guess of the required workers that need to be on site. For those that are non-essential, we make our best guess of workers that actually are on site given the nature of the industry and anecdotal reports of the employment situation in that industry, if available. An alternative set of such assumptions are produced in a March 27 report by Nomura Global Markets Research. If we use a version of their assumptions in our model, they imply job losses of 24 to 27 million jobs, close to our more pessimistic projection.</p> <p><sup><a href="#ftnref11" id="ftn11">11</a></sup> Briefly, the unemployment rate forecasts come from a model that estimates the relationship between unemployment insurance (UI) claims, the UI take-up rate, employment growth, and earnings growth and the change in the unemployment rate between 1990 and 2019. It then feeds in an assumed path for the explanatory variables into the estimated relationships to generate a forecasted unemployment rate path. The UI claims path includes the 3.28 million claims for the week ending March 21 and assumes 4.75 million claims for the week ending March 28.</p> <p><sup><a href="#ftnref12" id="ftn12">12</a></sup> This may include the 10 million workers over the age of 65 and many others under 65 who are at high risk and may choose to stay at home rather than work away from home in an essential industry. 22% of individuals over the age of 65 telecommute, according to the ATUS. </p> <hr /> <h3 class="text-center">The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.</h3> </div>