Category: World Watching

Economics-Watching: How Green Innovation Can Stimulate Economies and Curb Emissions

[from IMF Blog, by Zeina Hasna, Florence Jaumotte & Samuel Pienknagura]

Coordinated climate policies can spur innovation in low-carbon technologies and help them spread to emerging markets and developing economies

Making low-carbon technologies cheaper and more widely available is crucial to reducing harmful emissions.

We have seen decades of progress in green innovation for mitigation and adaptation: from electric cars and clean hydrogen to renewable energy and battery storage.

More recently though, momentum in green innovation has slowed. And promising technologies aren’t spreading fast enough to lower-income countries, where they can be especially helpful to curbing emissions. Green innovation peaked at 10 percent of total patent filings in 2010 and has experienced a mild decline since. The slowdown reflects various factors, including hydraulic fracking that has lowered the price of oil and technological maturity in some initial technologies such as renewables, which slows the pace of innovation.

The slower momentum is concerning because, as we show in a new staff discussion note, green innovation is not only good for containing climate change, but for stimulating economic growth too. As the world confronts one of the weakest five-year growth outlooks in more than three decades, those dual benefits are particularly appealing. They ease concerns about the costs of pursuing more ambitious climate plans. And when countries act jointly on climate, we can speed up low-carbon innovation and its transfer to emerging markets and developing economies.

IMF research [archived PDF] shows that doubling green patent filings can boost gross domestic product by 1.7 percent after five years compared with a baseline scenario. And that’s under our most conservative estimate—other estimates show up to four times the effect.

The economic benefits of green innovation mostly flow through increased investment in the first few years. Over time, further growth benefits come from cheaper energy and production processes that are more energy efficient. Most importantly, they come from less global warming and less frequent (and less costly) climate disasters.

Green innovation is associated with more innovation overall, not just a substitution of green technologies for other kinds. This may be because green technologies often require complementary innovation. More innovation usually means more economic growth.

A key question is how countries can better foster green innovation and its deployment. We highlight how domestic and global climate policies spur green innovation. For example, a big increase in the number of climate policies tends to boost green patent filings, our preferred proxy for green innovation, by 10 percent within five years.

Some of the most effective policies to stimulate green innovation include emissions-trading schemes that cap emissions, feed-in-tariffs, which guarantee a minimum price for renewable energy producers, and government spending, such as subsidies for research and development. What’s more, global climate policies result in much larger increases in green innovation than domestic initiatives alone. International pacts like the Kyoto Protocol and the Paris Agreement amplify the impact of domestic policies on green innovation.

One reason policy synchronization has a prominent impact on domestic green innovation is what is called the market size effect. There’s more incentive to develop low-carbon technologies if innovators can expect to sell into a much larger potential market, that is, in countries which adopted similar climate policies.

Another is that climate policies in other countries generate green innovations and knowledge that can be used in the domestic economy. This is known as technology diffusion. Finally, synchronized policy action and international climate commitments create more certainty around domestic climate policies, as they boost people’s confidence in governments’ commitment to addressing climate change.

Climate policies even help spread the use of low-carbon technologies in countries that are not sources of innovation, through trade and foreign-direct investment. Countries that introduce climate policies see more imports of low-carbon technologies and higher green FDI inflows, especially in emerging markets and developing economies.

Risks of protectionism

Lowering tariffs on low-carbon technologies can further enhance trade and FDI in green technologies. This is especially important for middle- and low-income countries where such tariffs remain high. On the flipside, more protectionist measures would impede the broader spread of low-carbon technologies.

In addition, and given evidence of economies of scale, protectionism—with ultimately smaller potential markets—could stifle incentives for green innovation and lead to duplication of efforts across countries.

The risks of protectionism are exacerbated when climate policies, such as subsidies, do not abide by international rules. For example, local content requirements, whereby only locally produced green goods benefit from subsidies, undermine trust in multilateral trade rules and could result in retaliatory measures.

Beyond embracing a rules-based approach to climate policies, the advanced economies, where most green innovation occurs, have an important responsibility: sharing the technology so that emerging and developing economies can get there faster. Such direct technology transfers hold the promise of a double dividend for emerging markets and developing economies—reducing emissions and yielding economic benefits.

—This blog reflects research by Zeina Hasna, Florence Jaumotte, Jaden Kim, Samuel Pienknagura and Gregor Schwerhoff.

Economics-Watching: FTC Action Leads to $18 Million in Refunds for Brigit Consumers Harmed by Deceptive Promises About Cash Advances, Hidden Fees, and Blocked Cancellation

[from the Federal Trade Commission]

Complaint alleges company violated FTC Act and ROSCA with false promises targeting consumers living paycheck-to-paycheck and by failing to deliver cash advances as advertised

The Federal Trade Commission is taking action against personal finance app provider Brigit, alleging that its promises of “instant” cash advances of up to $250 for people living paycheck-to-paycheck were deceptive and that the company locked consumers into a $9.99 monthly membership they couldn’t cancel.

Brigit, also known as Bridge It, Inc., has agreed to settle the FTC’s charges, resulting in a proposed court order that would require the company to pay $18 million in consumer refunds, stop its deceptive marketing promises, and end tactics that prevented customers from cancelling.

“Brigit trapped those consumers least able to afford it into monthly membership plans they struggled to escape from,” said Sam Levine, Director of the FTC’s Bureau of Consumer Protection.  “Companies that offer cash advances and other alternative financial products have to play by the same rules as other businesses or face potential action by the FTC.”

According to the FTC’s complaint [archived PDF], Brigit advertised its cash advance service online, through social media and through broadcast ads with claims that customers who subscribed to the company’s service would have access to “instant” cash advances of up to $250 “whenever you need it,” and could cancel anytime. Consumers could only access the cash advance features when they signed up for the $9.99 per month “Plus” subscription.

The FTC’s complaint, however, charges that consumers were rarely able to get an advance for the promised $250, and in many cases, consumers were not able to receive a cash advance at all. Despite Brigit’s promises that advances would be available with “free instant transfers,” the complaint notes that the company began charging consumers a 99-cent fee for an instant transfer. Consumers who did not pay the fee had to wait up to three business days for their advances.

In addition, the complaint charges that while Brigit claimed to offer “non-recourse” advances with no fees or interest, the company prevented consumers who had an open advance from cancelling their subscription and continued to withdraw $9.99 monthly from their bank account until the advance was paid off. Such monthly charges created significant additional hardship for consumers already struggling to pay off a cash advance.

Even when consumers without an open cash advance attempted to cancel the paid subscription, the complaint charges that the company employed dark patterns—manipulative design tricks—to create a confusing and misleading cancellation process that prevented consumers from cancelling their subscriptions, instead of offering a simple mechanism to cancel, as required by the Restore Online Shoppers’ Confidence Act (ROSCA) [archived PDF].

The proposed settlement order [archived PDF], which must be approved by a federal judge before it can go into effect, would require Brigit to pay $18 million to the FTC to be used to provide refunds to consumers. In addition, the order would prohibit Brigit from misleading consumers about how much money is available through their advances, how fast the money would be available, any fees associated with delivery, and consumers’ ability to cancel their service. The order would also require the company to make clear disclosures about its subscription products and provide a simple mechanism for consumers to cancel.

The Commission vote authorizing the staff to file the complaint and stipulated final order was 3-0. The FTC filed the complaint and final order in the U.S. District Court for the Southern District of New York.

NOTE: The Commission files a complaint when it has “reason to believe” that the named defendants are violating or are about to violate the law and it appears to the Commission that a proceeding is in the public interest. Stipulated final orders have the force of law when approved and signed by the District Court judge.

The staff attorneys on this matter were Patrick Roy, Mark Glassman and James Doty of the FTC’s Bureau of Consumer Protection.

Science-Watching: Why Do Batteries Sometimes Catch Fire and Explode?

[from Berkeley Lab News, by Theresa Duque]

Key Takeaways
  • Scientists have gained new insight into why thermal runaway, while rare, could cause a resting battery to overheat and catch fire.
  • In order to better understand how a resting battery might undergo thermal runaway after fast charging, scientists are using a technique called “operando X-ray microtomography” to measure changes in the state of charge at the particle level inside a lithium-ion battery after it’s been charged.
  • Their work shows for the first time that it is possible to directly measure current inside a resting battery even when the external current measurement is zero.
  • Much more work is needed before the findings can be used to develop improved safety protocols.

How likely would an electric vehicle battery self-combust and explode? The chances of that happening are actually pretty slim: Some analysts say that gasoline vehicles are nearly 30 times more likely to catch fire than electric vehicles. But recent news of EVs catching fire while parked have left many consumers – and researchers – scratching their heads over how these rare events could possibly happen.

Researchers have long known that high electric currents can lead to “thermal runaway” – a chain reaction that can cause a battery to overheat, catch fire, and explode. But without a reliable method to measure currents inside a resting battery, it has not been clear why some batteries go into thermal runaway, even when an EV is parked.

Now, by using an imaging technique called “operando X-ray microtomography,” scientists at Lawrence Berkeley National Laboratory (Berkeley Lab) and UC Berkeley have shown that the presence of large local currents inside batteries at rest after fast charging could be one of the causes behind thermal runaway. Their findings were reported in the journal ACS Nano.

“We are the first to capture real-time 3D images that measure changes in the state of charge at the particle level inside a lithium-ion battery after it’s been charged,” said Nitash P. Balsara, the senior author on the study. Balsara is a faculty senior scientist in Berkeley Lab’s Materials Sciences Division and a UC Berkeley professor of chemical and biomolecular engineering.

“What’s exciting about this work is that Nitash Balsara’s group isn’t just looking at images – They’re using the images to determine how batteries work and change in a time-dependent way. This study is a culmination of many years of work,” said co-author Dilworth Y. Parkinson, staff scientist and deputy for photon science operations at Berkeley Lab’s Advanced Light Source (ALS).

The team is also the first to measure ionic currents at the particle level inside the battery electrode.

3D microtomography experiments at the Advanced Light Source enabled researchers to pinpoint which particles generated current densities as high as 25 milliamps per centimeter squared inside a resting battery after fast charging. In comparison, the current density required to charge the test battery in 10 minutes was 18 milliamps per centimeter squared. (Credit: Nitash Balsara and Alec S. Ho/Berkeley Lab. Courtesy of ACS Nano)
Measuring a battery’s internal currents

In a lithium-ion battery, the anode component of the electrode is mostly made of graphite. When a healthy battery is charged slowly, lithium ions weave themselves between the layers of graphite sheets in the electrode. In contrast, when the battery is charged rapidly, the lithium ions have a tendency to deposit on the surface of the graphite particles in the form of lithium metal.

“What happens after fast charging when the battery is at rest is a little mysterious,” Balsara said. But the method used for the new study revealed important clues.

Experiments led by first author Alec S. Ho at the ALS show that when graphite is “fully lithiated” or fully charged, it expands a tiny bit, about a 10% change in volume – and that current in the battery at the particle level could be determined by tracking the local lithiation in the electrode. (Ho recently completed his Ph.D. in the Balsara group at UC Berkeley.)

A conventional voltmeter would tell you that when a battery is turned off, and disconnected from both the charging station and the electric motor, the overall current in the battery is zero.

But in the new study, the research team found that after charging the battery in 10 minutes, the local currents in a battery at rest (or currents inside the battery at the particle level) were surprisingly large. Parkinson’s 3D microtomography instrument at the ALS enabled the researchers to pinpoint which particles inside the battery were the “outliers” generating alarming current densities as high as 25 milliamps per centimeter squared. In comparison, the current density required to charge the battery in 10 minutes was 18 milliamps per centimeter squared.

The researchers also learned that the measured internal currents decreased substantially in about 20 minutes. Much more work is needed before their approach can be used to develop improved safety protocols.

Researchers from Argonne National Laboratory also contributed to the work.

The Advanced Light Source is a DOE Office of Science user facility at Berkeley Lab.

The work was supported by the Department of Energy’s Office of Science and Office of Energy Efficiency and Renewable Energy. Additional funding was provided by the National Science Foundation.

World-Watching: German Industry: Structural Change Underway

[from Deutsche Bank Research]

Production in major industrial sectors in Germany has developed very differently in recent years under the impact of the coronavirus pandemic and energy price shock. For example, manufacturing in electrical engineering rose by 18% compared with the start of 2015. In the chemical industry, there has been a 20% decline over the same period. The differences are not only cyclical, but also structural. In the future, it will be more important to distinguish between Germany as an industrial location and the German industry.

Read the Germany blog [archived PDF].

Economics-Watching: Multivariate Core Trend Inflation

[from the Federal Reserve Bank of New York]

Overview

The Multivariate Core Trend (MCT) model measures inflation’s persistence in the seventeen core sectors of the personal consumption expenditures (PCE) price index.

Whether inflation is short-lived or persistent, concentrated in a few sectors or broad-based, is of deep relevance to policymakers. We estimate a dynamic factor model on monthly data for the major sectors of the personal consumption expenditures (PCE) price index to assess the extent of inflation persistence and its broadness. The results give a measure of trend inflation and shed light on whether inflation dynamics are dominated by a trend common across sectors or are sector-specific.

The New York Fed updates the MCT estimates and share sectoral insights at or shortly after 2 p.m. on the first Monday after the release of personal consumption expenditures (PCE) price index data from the Bureau of Economic Analysis. Data are available for download.

September 2023 Update

  • Multivariate Core Trend (MCT) inflation was 2.9 percent in September, a 0.3 percentage point increase from August (which was revised up from 2.5 percent). The 68 percent probability band is (2.4, 3.3).
  • Services ex-housing accounted for 0.54 percentage point (ppt) of the increase in the MCT estimate relative to its pre-pandemic average, while housing accounted for 0.50 ppt. Core goods had the smallest contribution, 0.03 ppt.
  • A large part of the persistence in housing and services ex-housing is explained by the sector-specific component of the trend.

Latest Release: 2:00 p.m. ET October 31, 2023

View the Multivariate Core Trend of PCE Inflation data here.

Frequently Asked Questions

What is the goal of the Multivariate Core Trend (MCT) analysis?

The New York Fed aims to provide a measure of inflation’s trend, or “persistence,” and identify where the persistence is coming from.

What data are reported?

The New York Fed’s interactive charts report monthly MCT estimates from 1960 to the present. The New York Fed also provides estimates of how much three broad sectors (core goods, core services excluding housing, and housing) are contributing to overall trend inflation over the same time span. The New York Fed further distinguishes whether the persistence owes to common or sector-specific components. Data are available for download.

What is the release schedule?

The New York Fed updates the estimate of inflation persistence and share sectoral insights following the release of PCE price data from the U.S. Bureau of Economic Analysis each month.

What is the modeling strategy?

A dynamic factor model with time-varying parameters is estimated on monthly data for the seventeen major sectors of the PCE price index. The model decomposes each sector’s inflation as the sum of a common trend, a sector-specific trend, a common transitory shock, and a sector-specific transitory shock. The trend in PCE inflation is constructed as the sum of the common and the sector-specific trends weighted by the expenditure shares.

The New York Fed uses data from all seventeen of the PCE’s sectors; however, in constructing the trend in PCE inflation, we exclude the volatile non-core sectors (that is, food and energy). The approach builds on Stock and Watson’s 2016 “Core Inflation and Trend Inflation.”

How does the MCT measure differ from the core personal consumption expenditures (PCE) inflation measure?

The core inflation measure simply removes the volatile food and energy components. The MCT model seeks to further remove the transitory variation from the core sectoral inflation rates. This has been key in understanding inflation developments in recent years because, during the pandemic, many core sectors (motor vehicles and furniture, for example) were hit by unusually large transitory shocks. An ideal measure of inflation persistence should filter those out.

PCE data are subject to revision by the Bureau of Economic Analysis (BEA). How does that affect MCT estimates?

BEA monthly revisions as well as other BEA periodic revisions to PCE price data do lead to reassessments of the estimated inflation persistence as measured by the MCT estimates. Larger revisions may lead to a more significant reassessment. A recent example of the latter case is described on Liberty Street Economics in “Inflation Persistence: Dissecting the News in January PCE Data.”

Historical estimates in our MCT data series back to 1960 are based on the latest vintage of data available and incorporate all prior revisions.

How does the MCT Inflation measure relate to other inflation measures?

The MCT model adds to the set of tools that aim at measuring the persistent component of PCE price inflation. Some approaches, such as the Cleveland Fed’s Median PCE and the Dallas Fed’s Trimmed Mean, rely on the cross-sectional distribution of price changes in each period. Other approaches, such as the New York Fed’s Underlying Inflation Gauge (UIG), rely on frequency-domain time series smoothing methods. The MCT approach shares some features with them, namely: exploiting the cross-sectional distribution of price changes and using time series smoothing techniques. But the MCT model also has some unique features that are relevant to inflation data. For example, it allows for outliers and for the noisiness of the data and for the relation with the common component to change over time.

How useful can MCT data be for policymakers?

The MCT model provides a timely measure of inflationary pressure and provides insights on how much price changes comove across sectors.

View the Multivariate Core Trend of PCE Inflation data here.

Economics-Watching: Texas Service Sector Activity Flat, Outlook Continues to Worsen

[from The Federal Reserve Bank of Dallas]

Growth in Texas service sector activity stalled in October, according to business executives responding to the Texas Service Sector Outlook Survey.

“Labor market indicators pointed to no growth in employment and a largely stable workweek,” said Jesus Cañas, Dallas Fed senior business economist. “Price pressures remained unchanged while wage growth eased slightly. Perceptions of broader business conditions continued to worsen in October, as pessimism notably increased.”

Key takeaways from the service sector survey:

  • The revenue index fell eight points to 0.7, with the near-zero reading suggesting little change in activity from September.
  • The employment index fell from 2.7 to 0.1, its lowest level in seven months.
  • The input prices index was flat at 37.3 and the selling prices index remained steady at 9.5.
  • The wages and benefits index fell two points to 17.0, approaching its average reading of 15.8.
  • The general business activity index dropped from -8.6 to -18.2, its lowest level since December of last year, while the company outlook index fell to -12.8, its lowest level in 16 months.

Texas Retail Sales Decline

“Retail sales declined again in October while retail labor market indicators reflected a contraction in employment and workweeks,” Cañas said. “Retail labor market indicators reflected flat employment and workweeks. Retailers’ perceptions of broader business conditions were mixed.”

Key takeaways from the retail survey:

  • The sales index fell from -4.4 to -18.1, marking its sixth consecutive month in negative territory.
  • The employment index fell 13 points to -12.4 while the hours worked index fell from 0.6 to -12.1.
  • The general business activity index dropped from -10.2 to -23.0.

The Dallas Fed conducts the survey monthly to obtain a timely assessment of activity in the state’s service sector, which represents almost 70 percent of the state’s economy and employs about 9.5 million workers.        

For this month’s survey, Texas business executives were asked supplemental questions on credit conditions. Results for these questions from the Texas Manufacturing Outlook Survey, Texas Service Sector Outlook Survey and Texas Retail Outlook Survey have been released together.

Read the special questions results.

Economics-Watching: “Doing Nothing” Is Still Doing a Lot

[from the Federal Reserve Bank of Philadelphia, speech by Patrick T. Harker President and Chief Executive Officer at the National Association of Corporate Directors Webinar, Philadelphia, PA (Virtual)]

Good afternoon, everyone.

I appreciate that you’re all giving up part of the end of your workday for us to be together, if only virtually.

My thanks to my good friend, Rick Mroz, for that welcome and introduction.

I do believe we’re going to have a productive session. But just so you all know, as much as I enjoy speaking and providing my outlook, I enjoy a good conversation even more.

So, first, let’s take a few minutes so I can give you my perspective on where we are headed, and then I will be more than happy to take questions and hear what’s on your minds.

But before we get into any of that, I must begin with the standard Fed disclaimer: The views I express today are my own and do not necessarily reflect those of anyone else on the Federal Open Market Committee (FOMC) or in the Federal Reserve System.

Put simply, this is one of those times where the operative words are, “Pat said,” not “the Fed said.”

Now, to begin, I’m going to first address the two topics that I get asked about most often: interest rates and inflation. And I would guess they are the topics front and center in many of your minds as well.

After the FOMC’s last policy rate hike in July, I went on record with my view that, if economic and financial conditions evolved roughly as I expected they would, we could hold rates where they are. And I am pleased that, so far, economic and financial conditions are evolving as I expected, if not perhaps even a tad better.

Let’s look at the current dynamics. There is a steady, if slow, disinflation under way. Labor markets are coming into better balance. And, all the while, economic activity has remained resilient.

Given this, I remain today where I found myself after July’s meeting: Absent a stark turnabout in the data and in what I hear from contacts, I believe that we are at the point where we can hold rates where they are.

In barely more than a year, we increased the policy rate by more than 5 percentage points and to its highest level in more than two decades — 11 rate hikes in a span of 12 meetings prior to September. We not only did a lot, but we did it very fast.

We also turned around our balance sheet policy — and we will continue to tighten financial conditions by shrinking the balance sheet.

The workings of the economy cannot be rushed, and it will take some time for the full impact of the higher rates to be felt. In fact, I have heard a plea from countless contacts, asking to give them some time to absorb the work we have already done.

I agree with them. I am sure policy rates are restrictive, and, as long they remain so, we will steadily press down on inflation and bring markets into a better balance.

Holding rates steady will let monetary policy do its work. By doing nothing, we are still doing something. And I would argue we are doing quite a lot.

Headline PCE inflation remained elevated in August at 3.5 percent year over year, but it is down 3 percentage points from this time last year. About half of that drop is due to the volatile components of energy and food that, while basic necessities, they are typically excluded by economists in the so-called core inflation rate to give a more accurate assessment of the pace of disinflation and its likely path forward.

Well, core PCE inflation has also shown clear signs of progress, and the August monthly reading was its smallest month-over-month increase since 2020.

So, yes, a steady disinflation is under way, and I expect it to continue. My projection is that inflation will drop below 3 percent in 2024 and level out at our 2 percent target thereafter.

However, there can be challenges in assessing the trends in disinflation. For example, September’s CPI report came out modestly on the upside, driven by energy and housing.

Let me be clear about two things. First, we will not tolerate a reacceleration in prices. But second, I do not want to overreact to the normal month-to-month variability of prices. And for all the fancy techniques, the best way to separate a signal from noise remains to average data over several months. Of course, to do so, you need several months of data to start with, which, in turn, demands that, yes, we remain data-dependent but patient and cautious with the data.

Turning to the jobs picture, I do anticipate national unemployment to end the year at about 4 percent — just slightly above where we are now — and to increase slowly over the next year to peak at around 4.5 percent before heading back toward 4 percent in 2025. That is a rate in line with what economists call the natural rate of unemployment, or the theoretical level in which labor market conditions support stable inflation at 2 percent.

Now, that said, as you know, there are many factors that play into the calculation of the unemployment rate. For instance, we’ve seen recent months where, even as the economy added more jobs, the unemployment rate increased because more workers moved off the sidelines and back into the labor force. There are many other dynamics at play, too, such as technological changes or public policy issues, like child care or immigration, which directly impact employment.

And beyond the hard data, I also have to balance the soft data. For example, in my discussions with employers throughout the Third District, I hear that given how hard they’ve worked to find the workers they currently have, they are doing all they can to hold onto them.

So, to sum up the labor picture, let me say, simply, I do not expect mass layoffs.

I do expect GDP gains to continue through the end of 2023, before pulling back slightly in 2024. But even as I foresee the rate of GDP growth moderating, I do not see it contracting. And, again, to put it simply, I do not anticipate a recession.

Look, this economy has been nothing if not unpredictable. It has proven itself unwilling to stick to traditional modeling and seems determined to not only bend some rules in one place, but to make up its own in another. However, as frustratingly unpredictable as it has been, it continues to move along.

And this has led me to the following thought: What has fundamentally changed in the economy from, say, 2018 or 2019? In 2018, inflation averaged 2 percent almost to the decimal point and was actually below target in 2019. Unemployment averaged below 4 percent for both years and was as low as 3.5 percent — both nationwide and in our respective states — while policy rates peaked below 2.5 percent.

Now, I’m not saying we’re going to be able to exactly replicate the prepandemic economy, but it is hard to find fundamental differences. Surely, I cannot and will not minimize the immense impacts of the pandemic on our lives and our families, nor the fact that for so many, the new normal still does not feel normal. From the cold lens of economics, I do not see underlying fundamental changes. I could also be wrong, and, trust me, that would not be the first time this economy has made me rethink some of the classic models. We just won’t know for sure until we have more data to look at over time.

And then, of course, there are the economic uncertainties — both national and global — against which we also must contend. The ongoing auto worker strike, among other labor actions. The restart of student loan payments. The potential of a government shutdown. Fast-changing events in response to the tragic attacks against Israel. Russia’s ongoing war against Ukraine. Each and every one deserves a close watch.

These are the broad economic signals we are picking up at the Philadelphia Fed, but I would note that the regional ones we follow are also pointing us forward.

First, while in the Philadelphia Fed’s most recent business outlook surveys, which survey manufacturing and nonmanufacturing firms in the Third District, month-over-month activity declined, the six-month outlooks for each remain optimistic for growth.

And we also publish a monthly summary metric of economic activity, the State Coincident Indexes. In New Jersey, the index is up slightly year over year through August, which shows generally positive conditions. However, the three-month number from June through August was down, and while both payroll employment and average hours worked in manufacturing increased during that time, so did the unemployment rate — though a good part of that increase can be explained as more residents moved back into the labor force.

And for those of you joining us from the western side of the Delaware River, Pennsylvania’s coincident index is up more than 4 percent year over year through August and 1.7 percent since June. Payroll employment was up, and the unemployment rate was down; however, the number of average hours worked in manufacturing decreased.

There are also promising signs in both states in terms of business formation. The number of applications, specifically, for high-propensity businesses — those expected to turn into firms with payroll — are remaining elevated compared with pre-pandemic levels. Again, a promising sign.

So, it is against this full backdrop that I have concluded that now is the time at which the policy rate can remain steady. But I can hear you ask: “How long will rates need to stay high.” Well, I simply cannot say at this moment. My forecasts are based on what we know as of late 2023. As time goes by, as adjustments are completed, and as we have more data and insights on the underlying trends, I may need to adjust my forecasts, and with them my time frames.

I can tell you three things about my views on future policy. First, I expect rates will need to stay high for a while.

Second, the data and what I hear from contacts and outreach will signal to me when the time comes to adjust policy either way. I really do not expect it, but if inflation were to rebound, I know I would not hesitate to support further rate increases as our objective to return inflation to target is, simply, not negotiable.

Third, I believe that a resolute, but patient, monetary policy stance will allow us to achieve the soft landing that we all wish for our economy.

Before I conclude and turn things over to Rick to kick off our Q&A, I do want to spend a moment on a topic that he and I recently discussed, and it’s something about which I know there is generally great interest: fintech. In fact, I understand there is discussion about NACD hosting a conference on fintech.

Well, last month, we at the Philadelphia Fed hosted our Seventh Annual Fintech Conference, which brought business and thought leaders together at the Bank for two days of real in-depth discussions. And I am extraordinarily proud of the fact that the Philadelphia Fed’s conference has emerged as one of the premier conferences on fintech, anywhere. Not that it’s a competition.

I had the pleasure of opening this year’s conference, which always puts a focus on shifts in the fintech landscape. Much of this year’s conference centered around developments in digital currencies and crypto — and, believe me, some of the discussions were a little, shall we say, “spirited.” However, my overarching point to attendees was the following: Regardless of one’s views, whether in favor of or against such currencies, our reality requires us to move from thinking in terms of “what if” to thinking about “what next.”

In many ways, we’re beyond the stage of thinking about crypto and digital currency and into the stage of having them as reality — just as AI has moved from being the stuff of science fiction to the stuff of everyday life. What is needed now is critical thinking about what is next. And we at the Federal Reserve, both here in Philadelphia and System-wide, are focused on being part of this discussion.

We are also focused on providing not just thought leadership but actionable leadership. For example, the Fed rolled out our new FedNow instant payment service platform in July. With FedNow, we will have a more nimble and responsive banking system.

To be sure, FedNow is not the first instant payment system — other systems, whether operated by individual banks or through third parties, have been operational for some time. But by allowing banks to interact with each other quickly and efficiently to ensure one customer’s payment becomes another’s deposit, we are fulfilling our role in providing a fair and equitable payment system.

Another area where the Fed is assuming a mantle of leadership is in quantum computing, or QC, which has the potential to revolutionize security and problem-solving methodologies throughout the banking and financial services industry. But that upside also comes with a real downside risk, should other not-so-friendly actors co-opt QC for their own purposes.

Right now, individual institutions and other central banks globally are expanding their own research in QC. But just as these institutions look to the Fed for economic leadership, so, too, are they looking to us for technological leadership. So, I am especially proud that this System-wide effort is being led from right here at the Philadelphia Fed.

I could go on and talk about fintech for much longer. After all, I’m actually an engineer more than I am an economist. But I know that Rick is interested in starting our conversation, and I am sure that many of you are ready to participate.

But one last thought on fintech — my answers today aren’t going to be generated by ChatGPT.

On that note, Rick, thanks for allowing me the time to set up our discussion, and let’s start with the Q&A.

[archived PDF of the above speech]

Economics-Watching: Putting Out the NBFIRE: Lessons from the UK’s Liability-Driven Investment (LDI) Crisis

[from the International Monetary Fund Working Paper 2023/210]

by Ruo Chen & Esti Kemp

Liability-Driven Investment (LDI) funds were at the center of the severe stress that emerged in the UK gilt market in the aftermath of the September 2022 UK “mini-budget.” The episode, which came on the heels of the “Dash for Cash” and “Archegos” stress episodes in the previous two years, highlights underlying vulnerabilities in the large and diverse non-bank financial institution (NBFI) sector. This paper seeks a deeper understanding of the factors that amplified the gilt market turmoil which ultimately led the Bank of England (BoE) to undertake temporary gilt purchases on financial stability grounds in late September/early October 2022 to restore orderly market conditions and enable LDI funds to build their capital positions. With the gilt market stress and the BoE’s purchases now fully unwound, this paper identifies the key reasons for the success of the BoE’s intervention. Then, drawing also on findings of the 2022 UK Financial Sector Assessment Program (FSAP), the paper discusses key gaps and policy issues related to the monitoring of financial stability risks in the broader NBFI sector for both individual jurisdictions and international standard-setting bodies.

[read the working paper (archived PDF)]

Economics-Watching: Global Data Tracks Decade-Long Decline in Check Payments

[by Claire Greene, payments risk expert in the Retail Payments Risk Forum at the Federal Reserve Bank of Atlanta]

From around the world, we have more evidence that people are shifting from checks to other means of non-cash payments. Using data from the Bank for International Settlements (BIS), my Atlanta Fed colleagues Antar Diallo and Oz Shy found that from 2012 to 2021, in all 20 countries they examined, the number of checks declined as the number of cashless payments increased. Since checks are cashless payment instruments, it’s notable that the total of cashless payments increased even as a component of this calculation declined.

Among the 20 countries that reported the number and value of these payments to the BIS, the United States had by far the highest per capita use of checks per year in 2021: 30 checks. Only six countries reported more than two per capita (chart below), another 12 between zero and two. Belgium and South Africa reported zero.

Yikes, you say, 30 checks per person per year in 2021! How is that possible? Most checks in the United States—about two-thirds—are estimated to be written by businesses, according to the Atlanta Fed’s Check Sample Survey. That would put the average number of checks that U.S. consumers write at about 10 per year on average, which is in line with the findings of the 2021 Survey and Diary of Consumer Payment Choice.

Given the high per capita use in the United States, it makes sense that our year-over-year decline from 2012 has been slower than that for other countries. The per-year decline in the number of U.S. checks from 2012 to 2021 was slower than the decline for all the other high-use countries listed in the chart. The United States was down 6.7 percent per year from 2012 to 2021, compared to down 8.8 percent per year for Canada at the slow end and down 17.4 percent per year for Austria at the quick end.

No way around it: we love our checks, and our response to innovation has been tepid compared to that of other countries.

Economics-Watching: Third-Quarter GDP Growth Estimate Increased

[from the Federal Reserve Bank of Atlanta’s GDPNow]

The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. The Federal Reserve Bank of Atlanta’s GDPNow forecasting model provides a “nowcast” of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis.

GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 4.1 percent on August 8, up from 3.9 percent on August 1. After recent releases from the U.S. Census Bureau, the Institute for Supply Management, the U.S. Bureau of Economic Analysis, and the U.S. Bureau of Labor Statistics, an increase in the nowcast of third-quarter real gross private domestic investment growth from 5.2 percent to 8.1 percent was slightly offset by decreases in the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real government spending growth from 3.5 percent and 2.9 percent, respectively, to 3.2 percent and 2.7 percent, while the nowcast of the contribution of the change in real net exports to second-quarter real GDP growth increased from 0.08 percentage points to 0.11 percentage points.

The next GDPNow update is Tuesday, August 15.