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Replicating economic research…on gasoline affordability

Here at the FRED Blog, we believe it’s important to be able to replicate economic analysis, which begins by identifying the data used in that analysis. That’s why FRED Blog posts include a list of the data series used to build the graphs. Moreover, all FRED data series themselves include a suggested citation.

The FRED graph above can help us reproduce some research published in our Economic Synopses series: “Gasoline Affordability.” The essay, published in 2004, compares wages with gasoline prices. To replicate the analysis, we searched for the two series mentioned in the essay: the CPI index for the price of gasoline and the average hourly wage rate of production workers.

The second FRED graph helps us test the robustness of the analysis by extending its conclusion about gasoline affordability and demand for SUVs past the original publication date. (Again, it was published in 2004.)

Between 2004 and 2009, when gasoline became gradually less affordable, the sales of lightweight trucks decreased. Nevertheless, despite the fact that gasoline was unevenly affordable between 2010 and 2020, the sales of lightweight trucks grew at a steady rate. Something other than gas prices must be driving demand for SUVs.

To learn more about auto sales, read Bill Dupor’s Economic Synopses essay “Auto Sales and the 2007-09 Recession.”

How this graph was created: Search for and select “Consumer Price Index for All Urban Consumers: Gasoline (All Types) in U.S. City Average.” From the “Edit Graph” panel, use the “Edit Line 1” tab to customize the data by searching for and selecting “Average Hourly Earnings of Production and Nonsupervisory Employees, Total Private.” Next, create a custom formula to combine the series by typing “a/b” and clicking on “Apply.” Next, use the “Add Line” tab to create a user-defined line. Create a line with start and end values of 10. Last, use the “Add Line” tab to search for “Motor Vehicle Retail Sales: Light Weight Trucks” and click on “Add data series.” To change the line colors, use the choices in the “Format” tab.

Suggested by Diego Mendez-Carbajo.

View on FRED, series used in this post: AHETPI, CUSR0000SETB01, LTRUCKSA

Are we still in a recession?

What to expect from the NBER business cycle dating committee

The Downturn and Rebound

  • April 29, 2020: In its advance estimate, the Bureau of Economic Analysis (BEA) reported that real GDP for the first quarter of 2020 fell at a 4.8% annual rate.
  • May 8, 2020: The Bureau of Labor Statistics reported that nonfarm payrolls fell by 20.5 million in April—the largest one-month percentage decline on record (dating back to 1939).
  • June 8, 2020: The National Bureau of Economic Research Business Cycle Dating Committee (NBER BCDC) announced that the 128-month expansion (the longest in U.S. economic history, dating back to 1854) ended sometime in February 2020.
  • Since then, the U.S. economy has rebounded sharply, posting large increases in real GDP and nonfarm payroll employment and a large decline in the unemployment rate. But the NBER BCDC hasn’t yet announced an end to the recession…

The BCDC’s Methods

The BCDC patiently assesses business cycle peaks and troughs. For example, they announced that the trough of the 2007-2009 recession occurred in June 2009 only on September 20, 2010—which is a lag of 15 months.

The BCDC also emphasizes economywide economic indicators. In their view, dating peaks and troughs is best accomplished by looking at measures of activity that cut across all sectors of the economy, rather than a small number of key sectors (such as the Federal Reserve’s industrial production index, which measures output produced by the nation’s manufacturers, utilities, and mining industry). In their June 8 announcement, the BCDC indicated that real GDP and real gross domestic income (GDI) are the two “most reliable” comprehensive measures of economic activity.

The FRED graph above shows real GDP data from the BEA: Real GDP fell in the first and second quarters of 2020, but then rebounded in the third quarter. However, unlike real GDP, real GDI isn’t yet available for the third quarter because the BEA hasn’t yet reported corporate profits—a key component of GDI. Corporate profits will be reported in the second estimate of GDP, scheduled for release on November 25.

What Else Do They Look At?

Over time, the BCDC has examined several comprehensive monthly indicators, such as real manufacturing and trade sales, nonfarm payroll employment, and civilian employment. In its September 2020 announcement, the BCDC emphasized that real personal consumption expenditures and real personal income excluding current transfer payments are the two broadest measures of aggregate expenditures and aggregate income. Use this FRED dashboard to follow such comprehensive indicators. April 2020 was the trough month of all five of these indicators. Moreover, each of the indicators has since risen sharply, consistent with the increase in real GDP.

What’s Different This Time?

As noted above, the BCDC generally prefers to wait until there’s conclusive evidence that the economy has transitioned from a period of recovery to expansion. The unique features of this pandemic-spawned recession have, as the BCDC noted on June 8, 2020, “resulted in a downturn with different characteristics and dynamics than prior recessions.” So, while the data suggest that an economywide trough in economic activity occurred sometime in the spring, the pandemic remains a key driver of economic policy and the behavior of many governments and individuals worldwide. From that standpoint, the length and strength of the recovery is uncertain.

How this graph was created: Search FRED for real GDP, select the series, and start the sample period on 2014-01-01.

Suggested by Kevin Kliesen.

View on FRED, series used in this post: GDPC1

From inflation targeting to average inflation targeting

The Fed’s new long-run monetary framework

Since 1996, it has been understood among Fed policymakers that the (undeclared) target for inflation was around 2%. In January 2012, Chairman Ben Bernanke made this implicit inflation target explicit and official, thereby aligning the Fed’s inflation target with that of all the major central banks. In this framework, when inflation has approached or exceeded the traditional 2% target, even temporarily as it did in 2018, the FOMC has responded by raising the baseline federal funds rate to combat rising prices.

In August 2020 at the online Jackson Hole conference, Chair Jay Powell announced a revision to the Fed’s long-run monetary policy framework by re-framing this goal as an average inflation target (AIT) of 2% over the long-run. With this new framework, the FOMC is communicating that it will tolerate inflation above its target for a period of time to offset periods when inflation was below its target. In other words, the FOMC is targeting average inflation of 2% in the long run.

So, what does past inflation data say about the feasibility of the new AIT? The FRED graph above plots two lines of data points over the past 25 years:

  • the FOMC’s preferred inflation measure, the core personal consumption expenditures index (core PCE), in blue and
  • the 2% target in red.

Given the recent asymmetric history of inflation, the concept of a symmetric target would represent a substantial change: Since the Great Recession of 2008-2009, there have been only two brief periods when the preferred inflation rate has exceeded the 2% target.

The FRED graph above also demonstrates how the new AIT guidance on inflation represents a substantial shift in thinking. In the past, the Federal Reserve has rarely tolerated rates above 2% and has raised interest rates whenever approaching the target. This new policy suggests that, if inflation can return to a range above 2%, the Federal Reserve will have to tolerate higher inflation than it has for much of the past 20 years—and tolerate it for significantly longer periods. Yet, given the pandemic, it could be challenging at this time to sustain average inflation above 2%.

How this graph was created: Search for and select “Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Index).” Select the time period January 1995 to the present month. Then select “Percent Change from a Year Ago” as the units. Next, use the “Add Line” tab to search for and select the same series. In the formula box type (a*2)/a, which results in a horizontal line of 2% for the target.

Suggested by Matthew Famiglietti and Carlos Garriga.

View on FRED, series used in this post: PCEPILFE

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