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Regional Economist - July 2012

Regional Economist - July 2012

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Check out this quarterly publication for short articles about today's economy and economics in general. In the latest issue, see who's been most affected by the financial crisis in terms of household wealth loss. Other articles written by our economists examine poverty thresholds, trends in labor markets, quantitative easing and growth prospects for the rest of the year.
Check out this quarterly publication for short articles about today's economy and economics in general. In the latest issue, see who's been most affected by the financial crisis in terms of household wealth loss. Other articles written by our economists examine poverty thresholds, trends in labor markets, quantitative easing and growth prospects for the rest of the year.

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Published by: Federal Reserve Bank of St. Louis on Jul 13, 2012
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 A Quarterly Reviewo Business and Economic Conditions
Vo. 20, No. 3
 July 2012
The Federal reserve Bank oF sT. louis
CeNtral to ameriCa’s eCoNomy
Who suffd h mofo h C?
Fnancal Stablty
A Look at Indicatorsand the Callo Update Tem
Arkansas City FindsFormula o AttractDecent-Paying Jobs
3 president’s message4
UnderstandngPerty Measures
By Natalia Kolesnikovaand Yang Liu
Ocial poverty rates are on therise in the United States. Butdoes this necessarily mean thatmore people can’t meet theirbasic needs? Tis article exam-ines how poverty is calculatedand looks at the criticisms o these measures.
Small s. Large Frmsdurng the Recessn
By Lowell R. Rickettsand Juan M. Sánchez 
Conventional wisdom saysthat employment at small rmsdeclines more than employmentat large rms during recessions.However, that doesn’t seem tohave been the case during theGreat Recession o 2007-09.
Quanttate Easng:Lessns We’e Learned
By Brett W. Fawleyand Luciana Juvenal 
During the recent nancialcrisis, numerous central banksturned to unconventionalmonetary policy, includingQE. Understanding QE’s eecton long-term interest rates iscrucial or assessing its long-run viability as an eective monetary policy tool.
10 national overview
Real GDP Grwth fr 2012Shuld Best 2011’s Rate
By Kevin L. Kliesen
Despite numerous headwinds,the economy seems poised togrow this year at a rate asterthan the 1.6 percent recordedor last year.
17 economy at a glance18 district overview
Recery Takes Hldn Labr Markets
By Maria E. Canonand Mingyu Chen
In many ways, the recovery inlabor markets is stronger inthe District than in the nationas a whole. Tree importantindicators are examined: theunemployment rate, householdemployment and job openings.
20 community proile
Paraguld, Ark.
By Susan C. Tomson
Although manuacturing may bein decline in many parts o thecountry, this city in northeast-ern Arkansas has developed awinning ormula or attractingdecent-paying actory jobs. Oneo the ew worries is ndingenough skilled people to takethe jobs.
23 reader exchange
 James Bullard,
p  ceo r Bk  s. l
he Great Recession set in motion numer-ous adverse repercussions, with damageto household balance sheets being especially pronounced. As reported by Bill Emmonsand Bryan Noeth in this issue o 
Te Regional Economist 
, household wealth declined nearly $17 trillion in ination-adjusted terms, or 26percent, rom mid-2007 to early 2009, withonly about two-fhs o that loss recovered by early 2012. Emmons and Noeth ound thatwealth losses hit older, wealthier Americans(who had the most to lose) the hardestin terms o absolute dollars, but aectedyounger, less-educated and minority house-holds the most in terms o percentage.Not surprisingly, the adjustments requiredby the damage to household balance sheetsare ongoing and are likely to take years tocomplete. In act, this is the rst U.S. reces-sion in which household “deleveraging”—theslow, painul process o amilies paying downtheir debts and rebuilding their savings—hasplayed a key role. Steep declines in housingprices, along with historically high levels o household debt beore the crash, made thisrecession particularly severe. Te Interna-tional Monetary Fund recently reported that“housing busts preceded by larger run-upsin gross household debt are associated withsignicantly larger contractions in economicactivity.”
Te unprecedented debt overhangleaves the Federal Reserve with a seemingly paradoxical policy, at least with respect tomany households: Monetary policy has keptinterest rates low to encourage borrowing inthe context o an economy with too muchborrowing.As Fed policymakers continue to work through this paradox, a clear challengeremains to dene mechanisms whereby Americans, especially low- and moderate-income Americans, can rebuild their balancesheets, which will help both strugglingamilies and the stagnant economy move or-ward. oo many Americans were unbankedor underbanked, too many did not saveenough, too many ran up their debts oraccumulated risky debt, and too many didnot diversiy their assets beyond housing.How can we turn each o these balance sheetailures around? How can we help amiliesconsider their
balance sheet?o help meet these challenges, I am pleasedto report that the St. Louis Fed has begun aresearch initiative on the topic o householdnancial stability. Tis new initiative willocus on three key questions:1. What is the state o household balancesheets in this country—what can we say,quantitatively, about the health o householdbalance sheets in aggregate but, especially,by age, race, education level, income andother demographic actors?2. Why does it matter—what are theeconomic and social outcomes, at both thehousehold and macro levels, associatedwith varying levels o savings, assets andnet worth?3. What can we do to improve householdbalance sheets—what are the implications o our research or public policy, community practice, nancial institutions and households?Many in the Federal Reserve System havebeen studying amily balance sheets or years.What we hope to oer is a broad conceptualramework, a common table where thosethroughout the System and beyond learnand work together. We also plan to publishresearch oering new perspectives on bal-ance sheets and why they matter. In addi-tion, we are constructing a balance sheet dataclearinghouse, modeled on the St. Louis Fed’sFRED® (Federal Reserve Economic Data)database; creating a balance sheet indexto gauge the health o American balancesheets; and organizing research symposia,practitioner orums, a speaker series andother activities to understand and improveamily balance sheets.Ray Boshara, who joined the St. LouisFed last year as a senior adviser, will lead theinitiative. Ray brings more than 20 yearso national experience to this eort; he hasadvised leading policymakers worldwide onthis issue, and, most recently, he was invitedto testiy last October beore the U.S. SenateBanking Committee on rebuilding householdbalance sheets.
We have a high-quality teamthat will contribute to the project. However,the success o this initiative requires theeorts o many more researchers. As such,our team will work with colleagues through-out the Federal Reserve System and beyondto increase substantially our understandingo household balance sheets.As we continue to recover rom theeconomic crisis, and as the Federal Reserveapproaches its centennial commemorationin 2013, we are challenged to innovate andto think about new ways to help Americanamilies and the U.S. economy thrive. We areexcited about the contribution that our newhousehold nancial stability research initia-tive can make to this important challenge.
The Fnancal Crss and Husehld BalanceSheets: A New Research Effrt Under Wayat the St. Lus Fed
 AQuarterlyReviewofBusinessand Econ
Who Suffered the Mostfrom the Crisis?
Financial Stability
presidenT’s message
Husehld Fnancal Stablty
By William R. Emmons and Bryan J. Noeth
Te nancial crisis and ensuing recession took a toll on justabout everybody’s household wealth. Not surprisingly, thepain wasn’t evenly distributed. Tose groups that are usually the most vulnerable in our society—young and middle-agedminority households—suered the most, percentage-wise.
The Regional
 JULY 2012
The Regional Economist 
 bq b  r  pb a    r Bk s.l. i   ,-       ,       e  r d. v      s.lrs.
dt  r
s py a
dty dt  r
dt  pb a
m et
at dt
T et F r dtt
  ak, m,i  i, Kk t, m.ted   l rk,l,m  s.l.
p t y tt sby Byyyt 314-444-7425  by - tby.byyy@t.b..Y   wt t  t t bw. sb  tt t t t   t tt t t t  wb t /b t 
The Regional Economist 
  t wt tt tw.W  t t t t tt ty  t.s-y bt  bt b y t t wtu.s.. T bb,-..@t.b.   www.t./btY   wt t
The Regional Economist 
,pb a of,F r Bk  st.l,Bx 442,st.l,mo 63166.
cover illustration: © phil oster
t  .
See International Monetary Fund.
World EconomicOutlook: Growth Resuming, Dangers Remain,
April2012, p. 91. 
For Boshara’s ull testimony, see http://www.stlouised.org/publications/br/articles/?id=2213
is a registered trademarko the FederalReserve Banko St.Louis.
th rgon econo
 July 2012
th rgon econo
The poor
See Chen and Ravallion.
For more details, see http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary: At-risk-o-poverty_rate
Tese estimates are provided by the Small AreaIncome and Poverty Estimates (SAIPE) programo the U.S. Census Bureau. Te program wascreated to provide estimates or school districts,counties and states. For more inormation, seewww.census.gov/did/www/saipe/
See U.S. Department o Health andHuman Services.
See Coer, Grossman and Clark.
See O’Brian and Pedulla.
See Dinan.
See Cauthen and Fass.
See Levitan et al.
See Alkire and Foster.
See Fisher.
See Citro and Michael.
See New York City.
See Short.
Alkire, S.; and Foster, J. “Counting and Multidimen-sional Poverty Measurement.” OPHI WorkingPaper Series No. 7, 2007.Cauthen, Nancy; and Fass, Sarah. “MeasuringPoverty in the United States.” National Centeror Children in Poverty, June 2008.Chen, Shaohua; and Ravallion, Martin. “Te Devel-oping World Is Poorer than We Tought, ButNo Less Successul in the Fight against Poverty.”World Bank Policy Research Working PaperNo. 4703, August 2008.Citro, Constance; and Michael, Robert.
 Measuring Poverty: A New Approach.
National Academy Press, Washington, D.C., 1995.Coer, E.; Grossman, E.; and Clark, F. “Family FoodPlans and Food Costs.” U.S. Department o Agri-culture, Agricultural Research Service, Consumerand Food Economics Research Division, HomeEconomics Research Report No. 20, 1962.Dinan, Kinsey. “Budgeting or Basic Needs—AStruggle or Working Families.” National Centeror Children in Poverty, Mach 2009.Fisher, Gordon. “Te Development and History o the U.S. Poverty Tresholds—A Brie Overview.”
Social Security Bulletin
, 1992, Vol. 55, No. 4.Levitan, Mark; D’Onorio, Christine; Krampner,John; Scheer, Daniel; and Seidel, odd. “Under-standing Local Poverty—Lessons rom NewYork City’s Center or Economic Opportunity.”
, Fall 2011.New York City. “New York City Mayor BloombergAnnounces New Alternative to Federal Poverty Measure.” July 13, 2008. See www.nyc.gov/portal/site/nycgov/menuitem.b270a4a1d51bb3017bce0ed101c789a0/index.jsp?doc_name=/html/om/html/recent_events.htmlO’Brian, Rourke; and Pedulla, David. “Beyondthe Poverty Line.”
Stanord Innovation Review
,Fall 2010.Orshansky, Mollie. “Counting the Poor: AnotherLook at the Poverty Prole.”
Social SecurityBulletin
, 1965, Vol. 28, No. 1, pp. 3-29.Short, Kathleen. “Te Research SupplementalPoverty Measure: 2010.”
Current PopulationsReports
, November 2011.U.S. Department o Health and Human Services. Seehttp://aspe.hhs.gov/poverty/aq.shtml#dierences
ut ptym  t cT ut T
By Natalia Kolesnikova and Yang Liu
overty means dierent things in dierentregions. Te World Bank ofen denesliving on less than $2 per day per person asthe main poverty indicator in developingcountries.
Te European Union considers60 percent o the national median disposableincome afer social transers as the thresholdo being at risk or poverty.
In the United States, individuals whoseamily income is less than the ocial poverty threshold are in poverty. Te threshold itsel depends on the size o the amily, as well asthe number o those in the amily who areunder 18 or are at least 65. For example, in2010 a amily o two adults with two childrenunder 18 was living in poverty i its annualincome was below $22,113; a amily o ouradults was living in poverty i its annualincome was below $22,491.As the table shows, the poverty rate in theUnited States rose to 15.3 percent in 2010, up4 percentage points rom a decade earlier.
 In the Eighth Federal Reserve District, whichis served by the Federal Reserve Bank o St. Louis, all seven states and major metro-politan areas saw a similar trend—the poverty rate rose between 3.6 percentage points and6.5 percentage points rom 2000 to 2010. Teincrease was even bigger or the populationunder 18 years old.Does the increase in the poverty rate meanmore Americans all short o a desired stan-dard o living? Or does the increase meanmore people lack the resources necessary or basic needs? o be able to answer thesequestions, we need a better understanding o poverty threshold.
History o U.S. Poverty Gauges
Te ocial U.S. poverty measures are basedon studies conducted by Social Security programs use 125 percent, 150 percent oreven 200 percent o a poverty guideline as aneligibility benchmark.Te poverty level o amilies with childrenis urther underestimated. One study oundthat American amilies with two young chil-dren need an income that is 150 percent to 350percent o the ocial poverty level, dependingon location, to cover their basic needs.
 On the other hand, the government’s taxprograms and other noncash benets increaseamilies’ disposable income; poverty mea-sures should be adjusted to reect the actualresources that amilies have or basic needs.
 Finally, the ocial poverty threshold isthe same or the entire contiguous UnitedStates. Tus, New York City has the samepoverty threshold as St. Louis, despite thecost o living being much higher in New York City than in St. Louis. Tis unied poverty measure without geographic adjustment may present a distorted picture o local poverty levels.
Additionally, some argue that otheraspects, such as access to education and levelo health care, might need to be considered todene poverty beyond income.
Attempts To Improve Poverty Measures
U.S. policymakers have long been awareo these criticisms. Even though the currentocial U.S. poverty threshold and poverty guidelines are still based on 1960s’ construc-tion, numerous attempts have been made tocome up with a better measure.
In 1968, thePoverty Level Review Committee decided toadjust the poverty level by cost o living (usingthe Consumer Price Index) but not by stan-dard o living. In 1973, the Subcommittee onUpdating the Poverty Treshold recommendeddecennial revisions o ood plans and multipli-ers, as well as o the denition o income usedor calculating the poverty threshold. Yet, nochanges in the poverty denition were made inresponse to these recommendations.In the 1980s, there was extensive debateover whether to count government noncashbenets, such as ood stamps, as income.Once again, no changes in the denition o poverty were made. In the 1990s, Congresscommissioned the National Academy o Sciences (NAS) to research possible revisionsto the poverty measurement. A nal report,“A New Approach o Developing Poverty Measurement,” was published in 1995.
Tis report conducted a thorough analysisAdministration economist Mollie Orshansky.In the 1960s, Orshansky created a poverty threshold using the cost o the Department o Agriculture’s economical ood plan. Orshan-sky assumed that U.S. amilies spent a thirdo their income on ood and, thus, she usedthree as the multiplier to obtain the poverty threshold. It indicates the minimal monetary income required to pay or basic needs. I a amily’s total pretax monetary income isbelow the poverty threshold, then the am-ily has inadequate resources or day-to-day necessities; every member in the amily isconsidered in poverty.In 1969, the U.S. government adopted thispoverty threshold as the ocial statisticaldenition o poverty. Te poverty thresholdis used, or example, to estimate the num-ber o Americans living in poverty. Te U.S.Department o Health and Human Servicesuses a somewhat simplied version o Orshansky’s poverty threshold as the ocialpoverty guidelines.
Te poverty guidelinesare commonly used or government admin-istrative purposes, such as determining theeligibility or public assistance programs.
Limits o the Ocial Measures
For decades, the poverty measures havebeen criticized or their limitations. Com-plaints include that these measures are out-dated, provide incomplete inormation andare not location-specic.In addition, the U.S. economy has changedsignicantly since the 1960s, and the standardo living has been substantially improved. Yetthe methodology behind the poverty thresholdhas remained unchanged. Te 1960s econom-ical ood plan was “designed or temporary and emergency use when unds are low.”
Tenutrition oered by this plan no longer reectswhat is considered to be adequate nutrition orAmericans in the 2010s. As American amiliesspend a much smaller portion (about one-eighth)o their income on ood than they did 45 yearsago, Orshansky’s assumption and multiplier o three used or calculating the poverty thresh-old also have become outdated.
 Te act that the poverty threshold does nottake into account other living costs and socialbenets also raises some concerns. Poor ami-lies spend a substantial portion o income onclothing, shelter, utilities and out-o-pocketmedical expenses. Te ocial poverty measures are likely underestimating the truepoverty level because they do not reect suchcosts. Consequently, many public assistance
Poverty Rates
o a new methodology to construct a poverty threshold and to measure amily resources.Te report recommended taking noncashincome, tax programs, housing status, work-related expenses and out-o-pocket medicalexpenses into account, but the report did notpropose any specic numbers or new poverty guidelines or poverty thresholds.Although the 1995 NAS report did not resultin immediate changes in the ocial measures, itdid become the oundation or creating severalalternative poverty measures in the ollowingdecade. Beginning in the late 1990s, the CensusBureau conducted a series o studies based onrecommendations o the 1995 NAS report. Asa result, NAS-based annual poverty estimateshave been published by the Census Bureau since1999. In 2008, the New York City governmentocially adopted a new poverty measure basedon the 1995 NAS report to “devise eectivestrategies or tackling poverty.”
Moreover, in 2011, the Census Bureau beganto publish the Supplemental Poverty Measure(SPM).
Te SPM urther improves the con-cept o the poverty threshold and the deni-tion o amily resources. Te SPM thresholdis based on the out-o-pocket spending onood, clothing, shelter and utilities (FCSU).Te SPM uses the 33rd percentile o FCSUexpenditure distribution o amilies with twochildren to reect a typical American am-ily’s basic needs. Te SPM threshold is thencalculated by adding another 20 percent tothis number to account or additional basicneeds; it is also adjusted or geographic di-erences, amily size and amily composition.SPM redenes amily resources as all cashincome, plus in-kind benets that amilies canuse to meet their FCSU needs, minus net taxpayments, work-related expenses and out-o-pocket medical expenses.As an ongoing research project, the SPMwill continue to be updated and improved. Itwill probably not be used as an ocial pov-erty measure or or program eligibility in thenear uture. However, the SPM solves severallimitations in the ocial poverty measures.It is a big step orward to better understand-ing and accurately measuring poverty.
Natalia Kolesnikova is an economist and Yang Liuis a senior research associate, both at the Federal Reserve Bank o St. Louis. See http://research.stlouised.org/econ/kolesnikova/ or more onKolesnikova’s work.
th rgon econo
 July 2012
th rgon econo

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