Podcast

Important Information:
How is the Economy, Really?
Important Information:
Andy Bauer and Renee Haltom talk about why consumers and businesses are telling a different story about the economy than the data suggests. They also discuss how economists reconcile such differences between sentiment and data. Bauer and Haltom are regional executives at the Richmond Fed.
Transcript
Tim Sablik: My guests today are Andy Bauer and Renee Haltom. Both are regional executives at the Richmond Fed. Andy is the regional executive for the Baltimore branch, and Renee is the Richmond regional executive and vice president of research communications.
Andy and Renee, thank you for joining me.
Andy Bauer: Thanks for having me, Tim.
Renee Haltom: Hi, Tim, I'm a big fan of the podcast, so glad to be here.
Sablik: A recurring theme that emerged in the post-pandemic recovery is that economic data and the sentiment of households and businesses haven't always aligned. By many measures, the economic recovery looks strong, but in surveys consumers and businesses have often expressed a less rosy outlook.
You both participated in a District Dialogues event examining this question, and we'll include a link to a video of that event for listeners who are interested. On today's show, I'm excited to continue that conversation with both of you.
As regional executives, you speak with business and community leaders in the Richmond Fed's district every day, and you follow the latest national and regional economic data. So, you must have front row seats to this tension between data and sentiment.
Let's start with the data. What measures do you look at to get a picture of the national economy, and what story are they telling you?
Bauer: What's really important is to have a good sense of how consumers and businesses are doing. So, any data that gives insight into those sectors are really important.
For consumers, that would include metrics on spending — particularly durable good spending — as well as income. Hiring, wage growth, and levels of employment or unemployment are all important for gauging how the consumer sector is faring.
For the business sector, there are areas of business activity, and orders and shipments of capital goods, which is a monthly indicator for investment. There are others as well, but these are the principal indicators that I look at to get a sense of the strength of the economy.
As for the story, these measures have been painting the picture of an economy that has been running somewhat hot and is slowly moderating to a more normal pace of growth. Looking at the tightness of the labor market, for example, it is clear that we haven't gotten there yet.
Sablik: Renee, what data do you use to get a picture of the regional economy in the Richmond Fed's Fifth District, and what story do those numbers tell you?
Haltom: Unfortunately, there is less data available at the state and local level, particularly data released in a timely fashion. The labor market data that come out are very helpful in terms of knowing the pace of hiring and changes in the labor force and unemployment. Those give a good signal for overall growth in the state or regional economy.
Aside from that, our business outreach is a core part of how we track the regional economy. Our Richmond Fed surveys are really useful indicators of the [Fifth] District economy. And there we have three surveys: one of manufacturing firms, one of service providing firms and then the CFO Survey, which is a collaboration with the Atlanta Fed and Duke University. These are incredibly insightful because they're a consistent sample of firms month to month or quarter to quarter, depending on the survey. We also get comments on questions like momentum and hiring and new orders, and we really do read every single comment we get.
We also have a quite robust business outreach program where a handful of us on the team are constantly out in the district talking one on one with business leaders about the economy. That goes all the way up to President Tom Barkin, who is out in the district as much as we are. In 2023 alone, we had more than 2,700 individual touch points with contacts, and that's on top of more than 200 external presentations from our team, eight industry roundtables across the district that each meet several times a year, three boards of directors that each meet eight times a year, and multiple advisory councils on various topics. So, there's a lot of effort put into listening to a diverse set of viewpoints on the ground.
What all that tells us is not only a different take on current conditions than we might see in the data, it can also be more timely than data. It fills in the why behind the data. It can tell us turning points in the data before they happen. And it can help us explain conflicting data. As you might imagine, all of that has been especially helpful since COVID when things have been pretty unprecedented.
Sablik: That's a great segue to talking about sentiment and the ways that it might disagree with the data. One of the areas where there might be some disagreement is in the labor market. By the numbers, the labor market looks quite strong. Andy, what are you hearing from businesses on that?
Bauer: There's been some improvement in the labor market, from the businesses we speak to. For the most part, they're telling us that conditions have eased notably and probably much more than one would expect if they just looked at the data, particularly the unemployment rate.
The unemployment rate is still very low, but according to firms we talked to, it's much easier to attract and retain workers. However, it's not back to where it was pre-COVID. It's still somewhat tighter. For example, many firms say they're still feeling some wage pressure and, as a result, merit increases are still likely to be higher than they were in pre-COVID [times]. They're doing that in order to stay competitive and, in some cases, just to make sure they're able to retain the workers that they have.
Haltom: Yeah, I agree with Andy. For months now, businesses have not talked about the hiring sprees we seem to be seeing in the national labor market data. That's a great example of where the sentiment behind the data can tell us what's really happening and what might happen in the future.
One factor behind that is that businesses don't seem to be cutting workers as readily as they typically would in a typical business cycle, so net job numbers may be higher. In other words, the minuses aren't there.
Another factor is that, even if some sectors like leisure and hospitality and state and local government are still catching up from COVID-era job losses, more businesses are feeling conservative on hiring. So, while they don't necessarily want to cut workers, they also don't want to get overstaffed in case the economy slows.
In sum, business sentiment on the labor market has indicated moderation for a while now and a little bit of caution. The data seem to now be catching up to that.
Sablik: Inflation seems to be another area where there might be some discrepancies between the data and sentiment. According to the data, inflation has come down from the highs that we saw in 2022, although it's still above the Fed's long-run target of 2 percent. What is the message on inflation that you're hearing from your contacts?
Bauer: There are two perspectives on this to consider, one from businesses and the other from consumers.
From a business perspective, what we hear is that costs are up across the board and that affects how they think about pricing. For businesses, it is about maintaining a margin that allows them to run the business. They're more focused on making sure that their pricing is adjusting to cost increases. Fortunately, the rapid and widespread increase in costs we saw during the pandemic has settled down. So, the firms we talk to, for the most part, are in a wait-and-see mode.
On the consumer side, I think the perspective is quite different. I think consumers are more focused on the change in the price level over the past few years. Their memories are longer. They remember how much it costs to buy groceries or to go out to dinner just a few years ago compared to today.
For consumers, the increase in inflation over the past couple of years outpaced wage increases, so in real terms they are worse off. Even for consumers whose wage increases kept up with inflation, it is tough to accept those cost increases. It feels as if they're being taxed in some way. And for that reason, I think there's a notable negative sentiment among consumers, which you can see that in some of the consumer sentiment surveys that we follow.
Haltom: Adding on to that, when you talk with firms — especially firms that directly serve consumers — you get the feeling that consumers will spend happily on the products or experiences they feel most strongly about. But consumers are cutting back more and more on the stuff that they feel is marginal, and a lot of that is a direct response to inflation. They're just kind of sick of the higher price level.
I'll note that customers pushing back on price increases is exactly what you'd want to see to get inflation down. So, in a sense, that can be good news. It's really fascinating to watch businesses test this out and learn in real time where they can get away with price increases and where they're not willing to sacrifice demand.
The net of all of this is that, while inflation is coming down, businesses are saying we're a ways from being back to our 2 percent target.
Sablik: Are there other examples of things that you're hearing from contacts that aren't showing up in the data?
Bauer: When you talk with businesses, there's always this focus on uncertainty. Uncertainty is tough to capture in the data. Even in some of the national surveys we follow, uncertainty — which can be derived from a variety of sources — drives a lot of the disconnect between what we see going on in the economy and how people and businesses feel about the economy.
One of my favorite charts that I use in presentations to illustrate some of this comes from our CFO Survey that Renee mentioned earlier. We conduct this survey in partnership with the Atlanta Fed and Duke University. It's a national survey of CFOs. One of the questions asked CFOs about how they feel about the outlook for their company, while another asks about how they feel about the outlook for the overall economy. What I find interesting is that there's a very large gap between the two responses at the moment. CFOs feel very optimistic about their own firm [and] their prospects yet much less so for the overall economy, and this is something that's been true since the pandemic hit.
We hear this when we talk to businesses. Often, when you sit down with the CEO or business owner, what'll start the conversation off will be all the risks that exist and all the uncertainty, whether that be industry or economy related, regulatory, political, geopolitical, existential. It's across the board. But then when you ask them how their business is doing, you'll frequently hear, "We just had our best year ever" or "We're off slightly, but the prior year was one of our best years ever."
Haltom: Another thing we're really focused on is the experience of lower-income households. You often can't see that in the data because the top 40 percent of income earners make up more than 60 percent of total spending in the economy. So, a lot of the focus, by default, ends up going on wealthier households.
But the experience of low-income households is really important, both for direct economic activity [and] because it ties to a host of other issues — from labor force participation to overall wellbeing — that even if monetary policy doesn't have the tools to address, other policies might. We have an entire community development function devoted to understanding low- and moderate-income households. A lot of those 2,700 touch points I mentioned were focused on that segment.
Andy mentioned the question of whether wage growth has kept up with inflation. On balance, it has. We know that for every income quintile, there's higher real net worth relative to pre-COVID. But that definitely doesn't tell the whole story. Not every household experiences the average. Lower-income households spend a greater share of their incomes on necessities, and important expenses like housing and childcare have grown way more than inflation. So, that gives us a much more nuanced view on inflation and how it's affecting households by income segment.
The trends of recent years mean that lower-income households are an important bellwether for the overall economy. Businesses that cater to those markets are really feeling the pinch now and are bringing back things like promotions and value menus to help win back that business and help those consumers stay in the market. All this matters because we hear pervasively that the consumer is softening and it looks different across income levels.
At the high-income end, people are still spending on the things they care about, like experiences, meals out and vacations. But they're pulling back in more marginal areas, not because they can't afford it but because they're sick of inflation, and I mentioned that earlier. That tells me they could come back into the market if inflation chills out.
Lower-income households are facing much tougher choices. Overall, spending so far is fine on balance. But a lot more of their baskets are taken up by necessities because of inflation, so they're cutting back as well. Just yesterday, I talked with a hotel who said they're still seeing the lower-income segment take trips, but they're hearing that add-ons at restaurants and souvenir shops is down. So, the lower-income household is much closer to a sharp pullback. In many cases, that's happening already, especially at the lowest end.
Sablik: Renee, does the sentiment you hear from your contacts also vary by geography or industry?
Haltom: It does differ dramatically by geography. That's part of the challenge with anecdotal outreach. The underlying foundation is always national conditions. That's sort of always our starting point. But Andy and I and our colleagues always have to have a mental model of what's going on in the region we're talking to [in order] to understand the stories we're being told and their relevance to the overall economy.
I'd extend that to industry sectors as well. You have to understand the bones of a sector to put the story you're hearing in context. For example, to give an obvious example, Washington, D.C., is one of the hardest hit markets now in terms of commercial real estate in central business districts and remote work. So, that's always going to color the experience of the businesses there. By contrast, central Virginia, where we are right now, is seeing an influx of population like many mid-sized markets. So, the sentiment here feels a little stronger than some other places.
All of this makes anecdotal data collection a very fun intellectual exercise on top of a huge honor, really, to give contacts a voice in Fed policymaking.
Sablik: What do you do when the data and your contacts are telling different stories?
Haltom: Well, technically, it's Tom that has to do something with it, not me or Andy. That's the challenge for the policymakers.
But I think you're asking a deeper question, which is how do economists and policymakers come to a conclusion on the economy when there are so many potentially conflicting sources of information?
One answer is simply [to] accept complexity. Interest rates are a blunt tool and they affect the economy all at once in a way that we can't really well target to individual sectors or income groups or geographies.
Another answer is that we can lift up these stories about what's really going on in the economy, including how things can be really different by sector and region or racial and demographic group. We can use the tools of economics to clarify what's really going on so that other policymakers with narrower tools can make the best policies possible.
Sablik: Andy, how does the sentiment that you and all your teams, Renee and others collect factor into the monetary policymaking process?
Bauer: Renee [did] a really good job of talking about all the different ways that we're out trying to get an idea of what's going on in the economy. This sentiment collection, or just sensing as we call it, is just an ongoing process. We're continually out speaking with businesses and community leaders. As Renee mentioned, we hear from our board of directors. We have industry roundtables. All of this is designed to help our understanding of the economy. So, part of the process is just continually updating our perspective, given what we're hearing.
However, as we prepare for the FOMC meeting — that's the Federal Open Market Committee meeting that happens eight times a year, where policy is decided — among the research team that advises Tom, our bank president, we review the survey data and what we're hearing from our industry roundtables and CEO contacts along with the economic data. At that meeting, there's a broad discussion about where the economy is headed. Then, there's an additional meeting where it's just the regional team — that's the regional executives: Renee, our colleague Matt Martin in Charlotte and myself — along with our colleagues that run the surveys. There, we focus on what we're hearing from the surveys as well as some of the key themes from our contacts.
When we discuss the survey results and the key messages from our contacts, we're trying to relate what those messages from the surveys are as well as the themes [and] how those relate to ongoing questions in the economy. That is, what is the strength of the labor market? What [do we] expect with pricing and inflation, as well as the underlying pace of growth?
Sablik: Andy and Renee, thanks so much for joining me today.
Bauer: Tim, it was a pleasure. Thanks for having us.
Haltom: Thanks, Tim. It's so much fun to be here with you.