Economic Letter
Brief summaries of SF Fed economic research that explain in reader-friendly terms what our work means for the people we serve.
-
Risk of Business Insolvency during Coronavirus Crisis
Sophia M. Friesenhahn and Simon H. Kwan
Many businesses had amassed high levels of debt, or leverage, before the COVID-19 pandemic. Out of precaution or necessity, firms increased their borrowing further after the onset. Although the shock to those firms’ value significantly increased their risk, measured by their distance-to-default, the default risk remains relatively small for most corporate debt. Nevertheless, the amount of outstanding liabilities among firms with elevated risk of insolvency is more than two times higher than at the peak of the global financial crisis.
-
Commercial Banks under Persistent Negative Rates
Remy Beauregard and Mark M. Spiegel
Do extended periods of negative policy interest rates continue to encourage commercial bank lending? A large panel of European and Japanese banks provides evidence on the impact of negative rates over different lengths of time. Analysis suggests that both bank profitability and bank lending activity erode more the longer such negative policy rates continue, primarily due to banks’ reluctance to pass negative rates along to retail depositors. This appears to negate one of the main arguments for moving policy rates below the zero bound.
-
Did the $600 Unemployment Supplement Discourage Work?
Nicolas Petrosky-Nadeau and Robert G. Valletta
People receiving unemployment insurance benefits during the COVID-19 recession were entitled to $600 of additional payments per week through July. This large increase in benefit payments raised a concern that recipients would delay returning to work. However, analysis suggests that the available aid would not outweigh the value of a longer-term stable income in workers’ decisions to accept job offers. Evidence from recent labor market outcomes confirms that the supplemental payments had little or no adverse effect on job search.
-
Adjusting the Unemployment Thermometer
Regis Barnichon and Winnie Yee
Stay-at-home orders issued to slow the spread of COVID-19 may have severely distorted labor market statistics, notably the official unemployment rate. A method to correct the survey biases associated with the pandemic indicates that the true unemployment rate was substantially higher than the official rate in April and May. However, the biases appeared to fade thereafter, making the drop in June even more dramatic than implied by the official data.
-
The Illusion of Wage Growth
Mary C. Daly
Despite a sharp spike in unemployment since March 2020, aggregate wage growth has accelerated. This acceleration has been almost entirely attributable to job losses among low-wage workers. Wage growth for those who remain employed has been flat. This pattern is not unique to COVID-19 but is more profound now than in previous recessions. This means that, in the wake of the virus, evaluations of the labor market must rely on a dashboard of indicators, rather than any single measure, to paint a complete picture of the losses and the recovery.
-
Disruptions to Starting a Business during COVID-19
Huiyu Li and Mitchell G. Ochse
Applications to start new businesses tanked from mid-March through May, contracting more severely than during the 2008–2009 financial crisis. Since then, however, applications have recovered so strongly that the total number filed in 2020 should be similar to that for 2019, even if applications growth reverts to the average lows experienced during the early days of the pandemic. This should result in only a modest loss of new businesses and is not likely to cause much additional strain on overall jobs and productivity gains.
-
Monitoring the Inflationary Effects of COVID-19
Adam Hale Shapiro
Inflation fell dramatically following the onset of the COVID-19 pandemic. Dividing the underlying price data according to spending category reveals that a majority of the drop in core personal consumption expenditures inflation comes from a large decline in consumer demand. This demand effect far outweighs upward price pressure from COVID-related supply constraints. A new monthly data page from the San Francisco Fed tracks how sensitivity to the economic disruptions of COVID-19 affects different categories of inflation over time (discontinued September 2023).
-
Emerging Bond Markets and COVID-19: Evidence from Mexico
Jens H.E. Christensen, Eric Fischer, and Patrick J. Shultz
The pandemic caused by the coronavirus is depressing economic activity and severely straining government budgets globally. Without international support, the ability of emerging economies to weather this crisis will depend crucially on access to and the cost of borrowing in domestic government bond markets. Analyzing bond flows and risk premiums for Mexican government bonds during the pandemic gives some insights into a major emerging economy’s experience. Mexican risk premiums have increased more than 1 percentage point above predicted levels, pointing to tighter funding conditions for the Mexican government.
-
Average-Inflation Targeting and the Effective Lower Bound
Renuka Diwan, Sylvain Leduc, and Thomas M. Mertens
In response to the COVID-19 pandemic, the Federal Reserve cut the federal funds rate to essentially zero. It took further measures to support the functioning of financial markets and the flow of credit. Nevertheless, the economic downturn is putting downward pressure on inflation, which had already been running below the Fed’s 2% target for several years. This raises additional concerns that inflation expectations could decline and push inflation down further, ultimately hampering economic activity. A monetary policy framework based on average-inflation targeting could help address these challenges.
-
The Highs and Lows of Productivity Growth
Andrew Foerster, Christian Matthes, and Lily M. Seitelman
Productivity growth shows evidence of switching between long periods of high and low average growth. Estimates suggest that the United States has been in the low-growth regime since 2004. Assuming this low growth continues, productivity growth in the year 2025 would be 0.6%. By dropping this assumption and allowing for a switch to consistent higher growth, an alternative estimate forecasts that the distribution of possible productivity growth across quarters could average about 1.1% in 2025.