Economic Letter
Brief summaries of SF Fed economic research that explain in reader-friendly terms what our work means for the people we serve.
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What’s in Your Wallet? The Future of Cash
Jeremy Gerst and Daniel J. Wilson
The payment landscape has changed dramatically in recent years as new technologies have been brought to market. Yet, the demand for U.S. currency—cold, hard cash—shows no sign of fading. An empirical analysis indicates that alternative payment technologies have tended to keep cash growth in check, but other factors have more than offset this. Over the next 10 years, cash volume is projected to grow 1.7% per year.
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Recent Trends in Small Business Lending
Liz Laderman and James Gillan
Although bank small business loan portfolios continue to shrink, there are hints of possible stabilization. Among smaller banks, small business lending that is not backed by commercial real estate looks slightly healthier than small business lending that is secured by commercial property. Meanwhile, small commercial and industrial loans at larger banks are showing clear signs of a turnaround. Evidence from the 2001 recession as well as loan performance data suggest that small commercial and industrial loans at smaller banks may not be far behind.
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Unconventional Monetary Policy: Lessons from the Past Three Years
John C. Williams
Researchers have made great strides in improving our understanding of the effects of unconventional monetary policy. Although further study is needed, the evidence from the past few years demonstrates that both forward guidance and large-scale asset purchases are useful policy tools when short-term interest rates are constrained by the zero bound.
The following is adapted from a presentation made by the president and CEO of the Federal Reserve Bank of San Francisco to the Swiss National Bank Research Conference on September 23, 2011. The full text is available at https://www.frbsf.org/news/speeches/2011/john-williams-0923.html
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Recent Layoffs in a Fragile Labor Market
Rob Valletta and Katherine Kuang
Rising layoff rates during the spring of 2011 highlight renewed labor market weakness. Although job cuts among state and local governments have accelerated over the past few years, most of the recent increase occurred among private-sector employers. Following modest improvement in early summer, subsequent labor market performance has been uneven, indicating that labor market conditions remain fragile.
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Cap Rates and Commercial Property Prices
Bart Hobijn, John Krainer and David Lang
Commercial real estate capitalization rates have been found to be good indicators of expected returns in commercial properties. Recent declines in these cap rates appear to be signaling a commercial real estate rebound, indicating improved investor expectations of price growth in the market. Movements in national cap rates are the predominant drivers of changes in cap rates in local markets. Therefore, the anticipated commercial real estate rebound is likely to be widespread across many metropolitan areas.
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Credit Union Mergers: Efficiencies and Benefits
James A. Wilcox and Luis G. Dopico
Mergers tend to improve credit union cost efficiency. When the acquirer is much larger than the target credit union, target members benefit in terms of lower loan rates and higher deposit rates, while acquirer members see little change. When merger partners are more equal in size, these benefits are shared more evenly. Over time, credit union mergers have shifted from, on average, only benefiting targets to also benefiting acquirers to some extent.
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Variable Capital Rules in a Risky World
Òscar Jordà
The recent financial crisis showed that a financial institution’s equity may be sufficient to absorb losses during normal times, but insufficient during periods of systemic distress. In recognition of this risk, the Basel III agreement last year introduced a new element of macroprudential regulation called countercyclical buffers, variable capital requirements that shift based on credit growth. These buffers raise the classic regulatory dilemma of safety versus economic growth, but may provide protection against financial calamity at an acceptable cost.
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Boomer Retirement: Headwinds for U.S. Equity Markets?
Zheng Liu and Mark M. Spiegel
Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.
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The U.S. Content of “Made in China”
Galina Hale and Bart Hobijn
Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the “Made in China” label. Although the fraction is higher when the imported content of goods made in the United States is considered, Chinese imports still make up only a small share of total U.S. consumer spending. This suggests that Chinese inflation will have little direct effect on U.S. consumer prices.
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Does Headline Inflation Converge to Core?
Zheng Liu and and Justin Weidner
Recent surges in food and energy prices have pushed up headline inflation to levels well above its underlying trend. In contrast, core inflation, which excludes food and energy prices, has remained low and stable. Historical data suggest that, since the early 1990s, headline inflation has tended to converge toward core inflation. Thus, high inflation is unlikely to persist as long as inflation expectations remain anchored.