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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Wildfires and Real Estate Values in California
Leila Bengali, Fernanda Nechio, Stephanie A. Stewart
Wildfires have been a concern in California for decades. The intensity of these events has increased recently, with particularly large and destructive fire seasons between 2018 and 2021. Analysis shows that distance from high fire-risk zones had little impact on residential housing values in the past. However, that has changed since the late 2010s, coinciding with more extensive fire damage to land and structures across the state. Insurance availability appears to help little in preserving home values in areas that are considered more at risk.
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Pandemic-Era Liquid Wealth Is Running Dry
Hamza Abdelrahman, Luiz Edgard Oliveira, Adam Shapiro
Households accumulated more liquid assets beginning in 2020 than would have been expected without the pandemic. These “extra” liquid assets have dissipated, but their evolution has differed significantly by income group. While middle- and lower-income households hold substantially less liquid wealth than implied by pre-pandemic projections, the level for higher-income households remains close to its pre-pandemic path. Over the same period, credit card delinquency rates initially dropped and, more recently, have steadily risen as pandemic-era liquid wealth was depleted, especially for middle- and lower-income households.
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Bank Franchise as a Stabilizing Force
Simon H. Kwan, Zinnia Martinez
The banking shock of 2023 stemmed from banks’ exposure to interest rate risk by gathering short-term funds to invest in long-term assets. When interest rates rose rapidly during the monetary tightening cycle, banks incurred significant capital losses on their long-term assets, some of which were unrealized on their financial statements. However, bank franchise value—the present value of all future excess profits—which is also unrecognized, could hedge against the losses and provide some stability. Moreover, the potential loss of franchise value could discourage risk-taking, further stabilizing the banking system.
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Recent Spike in Immigration and Easing Labor Markets
Evgeniya Duzhak
The Congressional Budget Office recently raised its demographic projections for net U.S. immigration. Most of the increase in the projections came from undocumented immigrants. Updating the CBO estimates with recent data points shows a continuing strong inflow of undocumented migrants. Analysis linking the revised estimates for this group to labor market statistics shows that immigrants joining the workforce are likely to have modestly eased labor market tightness.
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Breakeven Employment Growth
Nicolas Petrosky-Nadeau, Stephanie A. Stewart
Employment growth has consistently come in above pre-pandemic estimates of the rate needed for unemployment to stay near its long-run natural rate. Even so, unemployment has held steady, which raises the question of whether the “breakeven” employment growth rate has changed. In the short-run, recent surges in immigration and labor force participation have caused the current breakeven employment growth rate to rise as high as 230,000 jobs per month. However, the long-run breakeven employment growth rate appears unchanged, ranging around 70,000 to 90,000 jobs per month.
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Getting It Right: Meeting Uncertainty with Conditionality
Mary C. Daly
We’ve made a lot of progress in bringing down inflation, but there is more to do. We need to exhibit care and be ready to respond to however the economy evolves, balancing policy to protect full employment while restoring price stability. That is the economy we are striving for and working to deliver. The following is adapted from remarks presented by the president of the Federal Reserve Bank of San Francisco at the Commonwealth Club World Affairs of California, in partnership with the San Francisco Press Club, on June 24.
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Anatomy of the Post-Pandemic Monetary Tightening Cycle
Andrew Foerster, Zinnia Martinez
The Federal Reserve tightened monetary policy rapidly between 2021 and 2023. In addition, a weekly proxy federal funds rate shows that markets perceived the policy stance as tightening significantly even in weeks without explicit policy changes. The proxy rate uses financial market data to infer the broad stance of monetary policy as determined by funds rate changes, forward guidance about projected future rates, and balance sheet changes. Results show that the weekly proxy rate can capture changes that reflect both policy tools and market reactions to changing economic news.
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Why Are Overall Profits Outpacing Financing Costs?
Anton Bobrov, Carter Davis, Alexandre Sollaci, James Traina
Since the 1980s, decreasing interest rates have reduced the cost of financing for publicly traded corporations, which in turn has lowered their cost of capital by more than a third. Data show that their profits have likewise declined. At the same time, however, economy-wide corporate profits have increased substantially. Combining these data indicates that the increase in profits has instead gone to privately held companies. This implies that private companies have either increased their market power or their risk.
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Impact of U.S. Labor Productivity Losses from Extreme Heat
Gregory Casey, Stephie Fried, Matthew Gibson
Extreme heat decreases labor productivity in sectors like construction, where much work occurs outdoors. Because construction is an important component of investment, lost productivity today will slow how much capital is built up for future use and thus can have long-lasting impacts on overall economic outcomes. Combining estimates of lost labor productivity due to extreme heat with a model of economic growth suggests that, by the year 2200, extreme heat will reduce the U.S. capital stock by 5.4% and annual consumption by 1.8%.
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What’s Up with Inflation Expectations in Japan?
Jens H. E. Christensen, Mark M. Spiegel
Both actual inflation and inflation expectations increased recently in Japan after decades of being undesirably low. An estimate based on nominal and real Japanese bond yields adjusted for liquidity and other risk premiums confirms that investors’ long-term inflation expectations have also increased. However, projections indicate that further increases are less likely and that long-term expected inflation in Japan is likely to remain anchored below the Bank of Japan’s 2% inflation target.