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A Positive Sign for Manufacturers

The Commerce Department report on manufacturers’ new orders for durable goods showed a strong gain in July, the best month since January (Chart 1). Orders for durable goods jumped 4.4 percent following a 4.2 percent decline in June.

Durable goods are items meant to last three years or longer. A sizeable portion of the gain for the month came from nondefense aircraft and parts, which surged 89.9 percent during the month.  This category tends to be quite volatile. Total orders for nondefense aircraft for the first seven months of 2016 are still down 14.9 percent compared to the same period in 2015. Excluding all transportation equipment, durable goods orders rose 1.5 percent, matching the gain from January.

A key gauge of overall business investment, new orders for nondefense capital goods excluding aircraft, posted a 1.6 percent gain for July following a 0.5 percent increase in June.  However, this category is still down 4.3 percent for the year to date versus 2015.

The month-to-month volatility for these data make interpreting the results more challenging. Looking at the overall trends in the key components, total durable goods orders remain in a flat trend for the past three-and-a-half years while orders for nondefense capital goods excluding aircraft drift lower.  The story really comes back to what we have seen in the GDP data: A strong consumer is offsetting weak business investment. July’s bounce back may be the first month in a more favorable trend for capital goods, or it may just be volatility.  We’ll need more data to be sure.

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Reflections on AIER’s 2016 Summer Fellowship

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Picture: AIER Summer Fellows at Tanglewood.
Front row (L to R) Michael Cooper, Ruonan Song, Lan Thi Ngoc Nguyen, Bradley Oerth, Anna Connell; Back row (L to R) Nathaniel Burke, Cheikhou Kane, Zhandos Ybrayev, Ryan Smith, Max Gulker, Brandon Turk, Michelle Ryan


Our seventieth Summer Student Fellowship Program came to a close on August 12, and we are pleased with all our fellows accomplished. This spring, we received 63 applications, and selected a group of 10 students from various colleges and universities around the country.

As we do each year, we carefully examined each applicant’s skills and interests, course work, and practical experience. We ended up with a diverse group in terms of skill sets, fields of study, and educational backgrounds. We applied their skills to our research and to experimenting with ideas for online tools.

Each student was assigned to work with an AIER researcher. Some were selected based on either their familiarity with the concepts, or their quantitative skills, such as the technical ability to build a database or perform economic analyses. Some students, however, found themselves challenged by an assignment to a research project that was unfamiliar to them. We think that an opportunity to tackle something new and researching something outside of one’s comfort zone is typical for an actual workplace practice. This was no longer a continuation of their classroom experience where the syllabus specifies all the details of the course, or where one can select to not even enroll in the class during the “shopping” period at the start of the semester. What we provided was a real-life environment with fluid ideas, open discussion, and hard deadlines. And we knew that the students were up for the task.

Students worked on the topics that are part of our traditional research agenda, such as our business cycle model, Everyday Price Index, inflation scorecard, as well as personal finance. What they got was an introduction to a new data set, a new econometric technique, an additional article on a topic of interest, or more programming skills.

The summer fellows brought great energy to our campus, and the staff and interns learned a lot from each other.

In addition to the research part of the fellowship, students attended our Summer Speaker Series of lectures presented by AIER researchers, as well as research seminars after the talks to delve deeper into the topics.

We also took the fellows to cultural gems of the Berkshires: Tanglewood, the Norman Rockwell Museum, and the Shakespeare & Company theater group.

At the debriefing meetings, which we hold at the conclusion of the fellowship with each student and their supervisor, we heard that it was tough at first for students to adjust to AIER’s research demands. However, as the fellowship progressed, they felt independent and empowered to make their own decisions about the breadth and depth of their research. At the end, fellows produced many useful essays, analyses, and tools.

All students agreed that AIER’s Summer Student Fellowship contributed to their educational growth and career aspirations. We are happy to make a positive impact on young researchers, and to continue to develop a cadre of people interested in economics and economic research.

Business Journals Highlight Our Everyday Price Index

AIER’s innovative Everyday Price Index was featured by the American City Business Journals last week, in a story that reflected upon why some prices, like health insurance and higher education, have gone far up amid an overall mild inflation rate.

“How can we even think inflation is under control? It’s time to learn about the Everyday Price Index (EPI), a statistical tool developed by the American Institute for Economic Research,” writes business journals author Bryce Sanders.

We calculate the Everyday Price Index each month, shortly after the release of the Consumer Price Index. It reflects price changes felt by Americans on a day-to-day basis, measuring the prices of those items that they buy frequently, such as food, utilities, fuel, and prescription drugs. In July, the EPI dropped 0.4 percent, driven by the first drop in energy prices in five months. By contrast, the non-seasonally adjusted CPI fell by 0.2 percent during that time.

But certain expenses have made a bigger impact on Americans’ budgets than others in recent months. To read more about our latest reading of the EPI, click here.

American City Business Journals runs 43 business weekly publications around the country, including such publications as the Boston Business Journal and Columbus Business First.

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What’s Causing Slow Economic Growth?

We have noted the economy’s slow-growth trajectory in recent months, and as the Federal Reserve meets in Jackson Hole, Wyoming this week for its annual retreat, that’s expected to be a big topic of discussion.

The retreat, “Designing Resilient Monetary Policy Frameworks for the Future,” is sponsored by the Kansas City Fed and starts Thursday.

This story from Sunday’s Wall Street Journal provides the context for that meeting: Officials at the Fed had long thought that economic growth and inflation would have grown at a faster clip, allowing for a quicker increase in interest rates.

But amid sluggish GDP growth and mild inflation, the last rate increase was in December, and further increases in the foreseeable future are expected to be mild. The story quotes San Francisco Fed President John Williams as saying in a research note: “New realities pose significant challenges for the conduct of monetary policy.”

The critical question for policymakers is whether the slow-growth, low inflation, near-zero interest rate environment is a “transitory disruption to long-term growth or a permanent structural shift,” said Bob Hughes, senior research fellow at the American Institute for Economic Research.

“If the former is true, then economic and market forces may already be slowly reversing the disruption, and radical policy could do more harm than good,” Hughes said. “If the latter is true, then policymakers need to develop a new approach, including recognition of exactly what economic dynamics they are able to influence, and what outcomes are achievable.”

The challenge in the short term is answering the question. Answering questions on the changing nature of economic growth is difficult in hindsight and nearly impossible in real time, yet that is the task facing policymakers. The most prudent course, Hughes says, may be to plan for the latter while pursuing for the former.

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The Resilient, Adaptable Travel Agent

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When large businesses expand or enter a new market, we can expect some degree of change, and often, some smaller businesses will go out of business. But observers often overestimate such trends, predicting that small businesses will become obsolete. As I discussed in my recent research brief, there are areas in which small businesses are likely to outperform their competitors, potentially leaving room in the market even as larger businesses grow. The travel agency industry over the past two decades is a prime example.

As more and more consumers booked travel online, many traditional “brick and mortar” agents were forced out of the market, but others found ways to play to their strengths and sustain their business.

I first thought about travel agents in graduate school, when I was interested in how the rise of e-commerce was affecting retail industries. Until the late 1990’s, booking air travel was agents’ bread and butter. But as consumers began to purchase tickets online, traditional agents, typically small and independently owned, had to adjust or leave the market. Many observers predicted the end of the traditional travel agency.

But the industry adapted. It touted its advantages over online platforms in booking packaged tours and other more complex travel. While I couldn’t directly observe brick and mortar agent profits over time from different types of travel, I was able to observe how many agents stayed in business in each local market, and used this along with data on demand for air and more complex travel services to estimate the composition of agents’ profits over time (this statistical technique was developed by economists Tim Bresnahan and Peter Reiss). While estimated profits related to air travel virtually vanished between 1998 and 2003, I found no significant decline in agent profits related to cruises and packaged tours.

A look at the number of travel agents in the U.S. over time helps confirm the idea that many agents were able to weather the storm. The number of agents fell by about 12,000 from 1998 to 2005, but the decline slowed to about 4,000 in the following seven years. While there has been an uptick since 2012, industry employment has remained flat, suggesting a rise in independent contractors related to the sharing economy.

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I’ve discussed how small businesses are often better positioned than their rivals to form relationships with customers and understand the specifics of demand in their local market. These are exactly the type of traits that help traditional travel agents book complex travel arrangements for their customers. Growth in large businesses, whether enabled by technology or simple expansion, will inevitably change markets and force some firms out of business. But many firms can and do survive by playing to their strengths.

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American Education’s Misunderstood “Dropout Crisis”

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Workers with a high school diploma have better success in the job market than those who have dropped out.  According to the Bureau of Labor Statistics, individuals with only a high school diploma earned $678 per week in 2015, while individuals without a diploma only earned $493. Similarly, high school graduates (without any college) have a 5.4 percent unemployment rate while non-graduates have eight percent unemployment.

President Obama claimed in 2010 that high school dropouts are “a problem we can’t afford to accept or ignore.”  In order to “end America’s dropout crisis,” he committed $3.5 billion to improve low performing schools. However, dropout rates in America have fallen steadily for over 40 years and continue to fall – hardly indicative of a national crisis. Today, less than one in 14 students drop out.  Lower-income students contribute the most to the high school drop-out rate, and these low-income dropouts are concentrated in a small number of schools dubbed “dropout factories.”  The true crisis that the president is referencing stems from these dropout factories and the disparity between dropout rates for low and high income students.

Nearly 11 percent of students from families in the lowest income quartile dropped out in 2013, compared to only three percent for students from the highest quartile, according to the Census Bureau.  But we have made progress in this area. The dropout rate continues to fall for all income levels, but it has fallen fastest for lower-income Americans, in both absolute and percentage terms.  The dropout rate for the highest-income Americans fell by 35 percent since the 1970’s. The middle quartiles have about half as many dropouts now as in the 1970s, and the lowest quartile has seen a 60 percent reduction in dropout rates. The chart below shows that the sharp reduction for lowest-income Americans has come mostly in the last ten years. Until 2003, the trends were similar across quartiles.

                                                         Income Level Dropout Rates (%)*
Year Total Lowest Quartile Middle Low Quartile Middle High Quartile Highest Quartile
1973 14.1 28 19.6 9.9 4.9
1983 13.7 26.5 17.8 10.5 4.1
1993 11.0 22.9 12.7 6.6 2.9
2003 9.9 19.5 10.8 7.3 3.4
2013 6.8   10.7 8.8 5.0 3.2

*dropout rate data from the U.S. Census Bureau, School Enrollment in the United States: October 2014

Recent gains may be due to an emphasis on reforming “dropout factories,” a term that describes high schools where fewer than 60 percent of freshmen graduate after four years.  Dropout factories account for more than 50 percent of the nation’s dropouts, even though they represent less than 10 percent of all high schools.  These schools are commonly characterized by poor leadership and poor administrative practices, such as high suspension rates, apathetic teachers, and disruptive environments.

When many students leave, a school can begin to develop a “dropout culture” where students begin to think that it is normal, or even cool, to drop out.  These schools also tend to have larger percentages of students from lower-income backgrounds.  For example, Theodore Roosevelt High School in New York City had a student body of more than 1500 students, and more than 80 percent of these students were eligible for free lunch because of low family income.  Theodore Roosevelt High School shut down in 2006 after only 3 percent of students graduated.  The graduation rate had been below 10 percent for many years before that.

Recent reforms actively target these dropout factories in the hopes of keeping more students in school.  The reforms seek to reduce dropout rates by targeting the lowest performing schools while also funding programs that engage disconnected youth.  For the lowest performing schools, school districts are given four options: replace the principal and a large number of staff, reopen the school under a new charter operator, transform the school’s teaching programs and teacher training, or close the school.   These programs have seen results, since between 2002 and 2013 the number of students attending a dropout factory has been halved.

The “American dropout crisis” is not the national dropout rate. The crisis is the existence of dropout factories: a minority of schools where the majority of students drop out. However, the detrimental impact of these schools is falling.  Dropout factories are being improved each year, and the dropout rate for the lowest income quartile has seen a sharp improvement.

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Student Loans 101: Understanding the Basics

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Skyrocketing higher education costs are forcing young American adults to take out even more loans.  The total amount of U.S. student loan debt is just over $1.2 trillion, with an average amount of $30,200 spread across 43 million Americans.

Before you start down this road, you should know what you’re getting into. Understanding the differences between federal and private loans is one of the first steps in deciding the right type of loan for you.

Generally, it is advisable to seek out federal loans first. These are government-funded and have fixed interest rates. Currently, both direct subsidized and unsubsidized loans have a rate of 4.29 percent for undergraduates. Additionally, federal loans allow you to postpone repayment until you leave school entirely or are enrolled less than half-time.

Private loans are funded by lenders such as banks, credit unions, state agencies, or schools, and typically will allow you to borrow more than you would under a federal loan. But because these loans are often run by for-profit corporations, they tend to be stricter than federal loans, and usually charge higher interest rates. These rates can range anywhere from 2 to 14 percent, with the average rate between 9 and 12 percent.

Rates are usually subject to change and are primarily determined by your credit rating. However, many students entering college have little or no credit history, so they are considered high risk borrowers. In these scenarios a cosigner (an adult with an existing credit history) must agree to share the loan with you. If the cosigner has a good credit score, it can actually help you receive a lower interest rate and improve the chances of your loan being approved. In the case of missed payments or default, the cosigner is on the line.

If you have the opportunity to use a federal subsidized loan, go for it. This means that the Department of Education will pay any interest accrued while you are still enrolled in school at least half-time, as well as “for the first six months after you leave school [and] during a period of deferment,” according to the Department of Education.

Subsidized loans are available to undergraduate students that demonstrate financial need. Unsubsidized loans require no demonstration of financial need, and are available to both undergraduate and graduate students. But like private loans, you will have to pay the interest that will begin accruing the day you take out the loan.

When it eventually comes time to repay your loans, there are a few different plans to consider. For most federal loans you have six months after you graduate before you must start repaying.

The standard plans constitute the first and most basic category, with fixed rates for either 10 or 25 years, depending on your personal situation.

The graduated plans make up the next category, offering monthly payments that gradually increase over a period of either 10 or 25 years.

Finally, the income-based repayment plans make up the third category. These plans are all tied directly to your discretionary income (your net income after taxes and other mandatory charges), and can last anywhere from 12 to 25 years.

If you have multiple federal loans, you may have the option to consolidate them into a single monthly payment at no additional expense. For private loans, your repayment is determined by the plan to which you agreed with your loan provider. If this plan does not suit your needs, it may be worth considering refinancing through another company.

Good luck moving forward!

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Elections, Presidents, and the Economy

The election season will soon be heading into the final stretch. The state of the economy and economic policies, actual or proposed, are almost always major topics of discussion and debate. This election cycle is no exception. Donald Trump gave his major economic speech last Monday.  Hillary Clinton has criticized his proposed policies.

But how much can a president really affect the country’s economic performance? The forces that affect the economy act over long periods of time, and in many cases there is not much that a president can do, no matter his or her economic agenda.

Robert Gordon, a prominent economist whose research focuses on issues of economic growth, suggests as much. In a recent op-ed he argues that the slower growth and wage stagnation that make so many voters worried about their economic prospects are “trends that are decades in the making,” and they may not be easily changed by presidential policies.

For example, in the past four years, GDP has averaged only 2 percent per year, much below the over-3-percent growth seen for decades prior to 2007. But that is constrained by deep economic undercurrents. The labor force is not expanding as quickly as it did in decades past because, among other things, female labor force participation has likely reached its peak, and has levelled off. The aging of the population and the anticipated retirement of the Baby Boomers is slowing labor force growth as well. It is unlikely that any president or any policy can alter these trends.

With the labor force growing slowly, the only way to increase output is to somehow generate faster productivity growth. Productivity growth is also crucial for wages, because wages can grow only if output per hour is rising. But here, too, the U.S. economy is facing difficulties. The latest productivity numbers show that productivity (output per hour in the nonfarm business sector) declined in the second quarter of 2016. In recent years, productivity has grown slowly, averaging just one percent annual growth since 2010. This contrasts with much faster productivity growth in earlier decades (see chart).

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In his op-ed, Gordon discusses several reasons for the slowdown in productivity. He is known in the economic profession for putting forward a view that most of the “low hanging fruit” of productivity enhancing inventions have already been picked. Gordon says we are in for a long period of much slower productivity growth. If this is the case, policies, or presidents, have limited ability to affect such trends.

Nevertheless, presidents will forever continue to claim credit for the economic successes that happen during their tenure, and their opponents will point out economic calamities that occur on their watch. And the presidential candidates will always claim that they have the recipe for improving the economy. This happens because the voters would like to hear it, not because it is, or can be, supported by data.

Here is a look at the economic performance under past presidential administrations.

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Many comparisons can be made, but overall it is difficult to argue that one party systematically performs better than the other as far as the economy is concerned.

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OLLI’s University Day at AIER

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The sorts of lectures and discussions enjoyed by participants of the Osher Lifelong Learning Institute at Berkshire Community College will be offered to the general public at OLLI’s “University Day” on Wednesday. The event will be held in partnership with the American Institute for Economic Research, and will take place on AIER’s scenic campus in Great Barrington, Massachusetts.

The speakers will include Adam Segal, senior fellow at the Council of Foreign Relations, who will speak about cyberwarfare. He is the council’s director of the Digital and Cyberspace Policy Program. AIER’s Polina Vlasenko, a senior research fellow, will discuss the phenomenon of the “jobless recovery.” Also speaking will be state Senator Ben Downing, D-Pittsfield.

For its more than 1,000 members, OLLI offers over 80 programs a year, including four semesters a year of thought-provoking classes, a Distinguished Speaker Series, and special events and trips.

“OLLI’s University Day is designed to offer OLLI members and non-members alike a taste of the stimulating lectures and discussions that distinguish OLLI’s classes and talks,” said OLLI Board President Leonard Tabs. “We’re very happy to be partnering with AIER on this new initiative.”

AIER President Stephen J. Adams said, “AIER is delighted to partner with OLLI on the University Day project.  AIER’s objective has always been to provide independent economic analysis and insights that enable all Americans to understand the issues that impact their lives.”

The event begins at 10 a.m. with coffee and refreshments, and runs to 3:30 p.m. The event is ticketed ($35 for OLLI and AIER members, and $50 for the general public), and includes lunch. Tickets can be purchased online at or by calling 413-236-2190.

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Our Summer Economics Education Road Trip


Picture: Participating teachers watched a video segment about the Federal Reserve, and were asked to write true and false statements about the Fed’s structure and functions, and put them on the board. The statements would be used in building multiple choice questions on tests for their students.


AIER’s Teach-the-Teachers Initiative went on the road this summer, and I’d like to report the results. Our Economics-Across-the-Curriculum approach encourages teachers to incorporate economic concepts as well as engaging teaching strategies into their classes on a variety of subjects.

This summer we collaborated with the Federal Reserve Banks of Boston, Chicago, and Philadelphia on this program. Our partners also included the Massachusetts and Illinois Councils for Economic Education.

Eighty-three teachers attended our workshops this summer. This is a four-fold increase in the number of participating teachers as compared to our pilot programs at the AIER campus during the past two years.

One of our program’s distinctive features is the development of a lesson idea for implementation in the classroom. As we present our material, we demonstrate and discuss active learning techniques. Participants are challenged to think about how they can use these to support their students’ learning process. We devote some time to this task during the workshop and give this assignment as homework.

The lesson ideas include adding an interactive component on the subject of calculating the unemployment rate to a high school economics class; introducing students to data gathering in algebra class by creating a price index with items teenagers often buy; or introducing the concept of inflation to a Spanish class by demonstrating how prices are set in a roadside market in a Latin American country. The possibilities for engaging students are endless, and our participants continue to amaze us with their creativity.

We go even further to find out the impact of our program on students. We encourage teachers to consider field testing their lesson idea in the classroom. This year, we expect interesting lessons that bring economic concepts to such classes as family and consumer science, geography, entrepreneurship, life skills, graphic design, biology, and civics. These will be in addition to economics, social studies, history, math, government, politics, as well as financial literacy fields of study.

We hope to hear from the participants during the upcoming semester. As we hear their stories, we will bring them to you.


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