Hutchins Roundup: Firm uncertainty, standardized test scores, and more 


What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday. 

Firm-level uncertainty about future sales growth roughly doubled in response to the pandemic  

In a survey of U.S. and U.K. business executives, Philip Bunn of the Bank of England and co-authors find that firms’ average uncertainty in the spring of 2020 about sales growth over the coming year (measured by the standard deviation of the distribution of their sales growth forecasts) roughly doubled due to COVID-19, rising in the U.S. from about 3% pre-pandemic to 6.4% in May 2021 and in the U.K. from 4.9% to 8.5%. Firm-level uncertainty has since fallen as the COVID shock recedes, but remains elevated compared to pre-pandemic levels. The distribution of firms’ uncertainty has shifted considerably, however. At the beginning of the pandemic, firms weighted the probability of sharply negative growth rates as highly likely, but in recent months, firms report more uncertainty about high sales growth. “In short,” the authors say, “business executives went from worrying about how bad COVID might get to wondering about how strongly they might bounce back.”  

Test scores declined in the 2020-21 school year  

Using data on standardized test scores from school districts in 12 states, Clare Halloran of Brown University and co-authors find that, on average, math test passage rates declined by 14.2 percentage points in the 2020-21 school year compared to the 2015-16 through 2018-19 school years. They estimate that for school districts offering fully in-person instruction (rather than partially or entirely virtual), the decline was 10.1 percentage points smaller. In addition, they note that school districts with larger Black and Hispanic student populations were less likely to offer in-person learning, and suffered larger declines in test scores. The authors caution that it is difficult – if not impossible – to disentangle the extent to which the in-person learning itself caused differential outcomes, as opposed to the additional pandemic-related changes in students’ lives that correlate with access to in-person learning.   

Supply constraints in the US manufacturing sector began easing in June  

Using the deviations of unfilled orders and inventories from their long-term relationships with shipments to estimate output losses caused by supply chain bottlenecks, Charles Gilbert, Maria Tito, and Cynthia Doniger of the Federal Reserve Board find that supply chain bottlenecks lowered monthly production growth in manufacturing industries excluding transportation by 0.2 percentage point in the first half of 2021, but began easing in June. Nonetheless, production in September 2021 was 0.6 percentage point below what it would have been had there been no bottlenecks. The authors note that their findings are correlated with reports of materials shortages in the manufacturing sector, a prevailing indicator of bottlenecks.   

Chart of the week: Japan’s price levels remain steady while inflation climbs in the US and in Europe 

Line graph showing the change in consumer prices, year over year, for Japan, the U.S. and Europe from November 2019 to October 2021

Source: The Wall Street Journal

Quote of the week: 

“[I]nflation has escalated substantially this year, along with a significant rise in inflation expectations … I expect that these pressures are related to both supply constraints, which may be beginning to improve, and strong demand, which shows no sign of abating. Wages continue to grow quickly on a more sustained basis than they have in more than 20 years, most recently reflected in a striking increase in the employment cost index, which considers both pay and benefits. Wages and employment costs seem to be widespread across industries and among businesses of different sizes. Crucial to the path of inflation will be whether we see input cost increases consistently reflected in final goods prices. Our business contacts report that companies are comfortable passing along these cost increases to their customers,” says Christopher Waller, Member, Federal Reserve Board. 

“It has been argued that because price pressures connected to supply constraints are transitory, they will come to an end, so monetary policy does not need to respond to temporary price pressures. I find this argument puzzling for a few reasons. First, all shocks tend to be transitory and eventually fade away; by this logic, the Fed should never respond to any shocks, but it sometimes does, as it should. Second, the macroeconomic models we use to guide policy typically have cost shocks built in that cause inflation to move. In those models, appropriate monetary policy responds to these inflation movements; it doesn’t ignore them, even though they are transitory. Finally, the choice to take a policy action depends on how large the shocks are and how long they are expected to persist … To me, the inflation data are starting to look a lot more like a big snowfall that will stay on the ground for a while, and that development is affecting my expectations of the level of monetary accommodation that is needed going forward.” 

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