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The current economic expansion is now the third-longest expansion in U.S. history (based on National Bureau of Economic Research [NBER] dating of U.S. business cycles). Even so, average growth in this expansion—a 2.1 percent annual rate—has been extraordinarily weak. In this post, I return to previous analysis on a specific portion of consumer spending—household discretionary services expenditures—that has displayed unusual weakness in the current expansion (see this post for the definition of discretionary versus nondiscretionary services expenditures, and these posts from 2012 and 2014 for previous updates). Even though these expenditures have picked up over the past couple of years, such that they have finally exceeded their previous peak, their recovery remains well behind that of other major categories of consumer spending. One explanation for the slow growth of spending on discretionary services is that households are concerned about their future income.
Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw
Today, the New York Fed’s Center for Microeconomic Data released its Quarterly Report on Household Debt and Credit for the first quarter of 2017. The report shows a rise in household debt balances in the quarter of $149 billion, the eleventh consecutive quarterly increase since the long period of deleveraging following the Great Recession. As of March 31, 2017, household debt balances stood at $12.73 trillion, surpassing the previous 2008 peak and hitting a level 14 percent above the trough seen in the second quarter of 2013. With this report’s release, we’re adding two new charts which show both early and severe delinquency trends by loan product type. The report and the analyses presented here are based on the New York Fed’s Consumer Credit Panel (CCP), which is sourced from Equifax credit report data.
Viral V. Acharya, Michael J. Fleming, Warren B. Hrung, and Asani Sarkar
During the 2007-08 financial crisis, the Fed established lending facilities designed to improve market functioning by providing liquidity to nondepository financial institutions—the first lending targeted to this group since the 1930s. What was the financial condition of the dealers that borrowed from these facilities? Were they healthy institutions behaving opportunistically or were they genuinely distressed? In published research, we find that dealers in a weaker financial condition were more likely to participate than healthier ones and tended to borrow more. Our findings reinforce the importance of Bagehot’s principle that the lender-of-last resort should lend only against high-quality collateral and at a penalty rate so as to discourage unneeded or opportunistic borrowing.
The global financial crisis has put financial stability risks—and the potential role of macroprudential policies in addressing them—at the forefront of policy debates. The challenge for macroeconomists is to develop new models that are consistent with the data while being able to capture the highly nonlinear nature of crisis episodes. In this post, we evaluate the impact of a macroprudential policy that has the government tilt incentives for banks to encourage them to build up their equity positions. The government has a role since individual banks do not internalize the systemic benefit of having more bank equity. Our model allows for an evaluation of the tradeoff between the size of such incentives and the probability of a future financial crisis.
This series examines the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (FRBNY DSGE) model—a structural model used by Bank researchers to understand the workings of the U.S. economy and provide economic forecasts.
The severe recession experienced by the U.S. economy between December 2007 and June 2009 has given way to a disappointing recovery. It took three and a half years for GDP to return to its pre-recession peak, and by most accounts this broad measure of economic activity remains below trend today. What precipitated the U.S. economy into the worst recession since the Great Depression? And what headwinds are holding back the recovery? Are these headwinds permanent, calling for a revision of our assessment of the economy’s speed limit? Or are they transitory, although very long-lasting, as the historical record on the persistent damages inflicted by financial crisis seems to suggest? In this post, we address these questions through the lens of the FRBNY DSGE model.
Marco Del Negro, Marc Giannoni, Raiden Hasegawa, and Frank Schorfheide
GDP contracted 4 percent from 2008:Q2 to 2009:Q2, and the unemployment rate peaked at 10 percent in October 2010. Traditional backward-looking Phillips curve models of inflation, which relate inflation to measures of “slack” in activity and past measures of inflation, would have predicted a substantial drop in inflation. However, core inflation declined by only one percentage point, from 2.2 percent in 2007 to 1.2 percent in 2009, giving rise to the “missing deflation” puzzle. Based on this evidence, some authors have argued that slack must have been smaller than suggested by indicators such as the unemployment rate or deviations of GDP from its long-run trend. On the contrary, in Monday’s post, we showed that a New Keynesian DSGE model can explain the behavior of inflation in the aftermath of the Great Recession, despite large and persistent output gaps. An implication of this model is that information about the future stance of monetary policy is very important in determining current inflation, in contrast to backward-looking Phillips curve models where all that matters is the current and past stance of policy.
A key institution that was significantly affected by the Great Recession is the school system, which plays a crucial role in building human capital and shaping the country’s economic future. To prevent major cuts to education, the federal government allocated $100 billion to schools as part of the American Recovery and Reinvestment Act of 2009 (ARRA), commonly known as the stimulus package. However, the stimulus has wound down while many sectors of the economy are still struggling, leaving state and local governments with budget squeezes. In this post, we present some key findings on how school finances in New York State fared during this period, drawing on our recent study and a series of interactive graphics. As the stimulus ended, school district funding fell dramatically and districts across the state enacted significant cuts across the board, affecting not only noninstructional spending but also instructional spending—the category most closely related to student learning.
In the state of New Jersey, any child between the ages of five and eighteen has the constitutional right to a thorough and efficient education. The state also has one of the country’s most rigid policies regarding a balanced budget. When state and local revenues took a big hit in the most recent recession, officials had to make tough decisions about education spending. In this post, we analyze education financing and spending in two groups of high-poverty districts during the Great Recession and the ARRA (American Recovery and Reinvestment Act of 2009) federal stimulus period—the Abbott and Bacon districts. Analysis in our recent New York Fed staff report shows that the Abbott districts exhibited the sharpest declines—relative to trend—in both total funding and total spending per pupil during the post-recession era. Additionally, the Abbott districts were the only group of districts in New Jersey to present statistically significant negative shifts in instructional spending, even with the federal stimulus.
The Great Recession of 2007-09 was a dramatic macroeconomic event, marked by a severe contraction in economic activity and a significant fall in inflation. These developments surprised many economists, as documented in a recent post on this site. One factor cited for the failure to anticipate the magnitude of the Great Recession was a form of complacency affecting forecasters in the wake of the so-called Great Moderation. In this post, we attempt to quantify the role the Great Moderation played in making the Great Recession appear nearly impossible in the eyes of macroeconomists.
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan, all economists in the Bank’s Research Group.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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