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December 1990

m i:

FEDERAL
RESERM
RANK o f
SELO US

Will GSEs Go the Way o f S&Ls?
Rollin’ on the Mississippi: The Barge Industry
The Business o f Services in the Eighth District



THE EIGHTH FEDERAL RESERVE DISTRICT

CONTENTS_____________________________________________________________________________

Banking and Finance
Government-Sponsored Enterprises: Safe and S ound?........................................................................................... 1

Agriculture
The Mississippi River System and Barge Industry..................................................................................................6

Business
District Services: What They Are and Why They Have G row n........................................................................ 10

Statistics ........................................................................................................................................................... 14
Pieces of Eight—An Economic Perspective on the 8th District is a quarterly summary of agricultural, banking and
business conditions in the Eighth Federal Reserve District. Single subscriptions are available free of charge by writing:
Research and Public Information Department, Federal Reserve Bank of St. Louis, Post Office Box 442, St. Louis,
MO 63166. The views expressed are not necessarily official positions of the Federal Reserve System.



1

%)vernmentSponsored
Enterprises: Safe and
Sound?
by Michelle A. Clark
Thomas A. Pollmann provided research assistance.

the wake of the costly savings and loan
(S&L) bailout, policymakers are assessing the like­
lihood that the federal government will have to
make good on more of its contingent liabilities. As
part of a comprehensive effort to assess the federal
government’s exposure to losses from federally
assisted credit and insurance programs, Congress
and the Bush Administration are examining ways
to bolster the safety and soundness of governmentsponsored enterprises (GSEs). Credit extended by
^ ^ S E s , private corporations chartered by Congress
|^ « :h a n n e l funds to sectors of the economy deemed
^ ^ r t h y of special support, has been the fastestgrowing component of the almost $6 trillion in
federal insurance programs, direct loans and loan
guarantees outstanding. This article, the second in
a two-part series, describes both the primary con­
cerns policymakers have about GSE operations and
some preliminary recommendations to lessen the
likelihood of another government, and hence, tax­
payer bailout.1

The Reform Effort
A number of government agencies and private
companies are involved in the effort to quantify
the federal government’s potential exposure to
losses from GSE operations. Because of the special
ties GSEs have to the federal government, investors
in GSE-guaranteed securities and debt issues assume
the government will assist a financially troubled
GSE and its debt holders. This well-founded
assumption allows GSEs to borrow funds to
finance their activities at much lower rates than
private-sector corporations with similar risk
Characteristics. Thus, the market discipline that
Peeps borrowing costs consistent with expected
returns and risks for private-sector corporations is
generally absent in GSE operations, and that, most
analysts agree, is the crux of the problem.




As instructed under the Financial Institutions
Reform, Recovery and Enforcement Act of 1989
(FIRREA), the Treasury Department and the Gov­
ernment Accounting Office (GAO) have issued
reports outlining the various risks GSEs face and
how these risks can be mitigated.2 The general
reform proposals of both agencies are similar;
more specific recommendations are expected from
the agencies in 1991. Moody’s and Standard &
Poor’s, two private bond rating agencies, are also
involved in the debate about GSE reform, as some
proposals would require GSE debt securities to
qualify for the agencies’ highest ratings absent the
government’s implicit guarantee (see shaded in­
sert). Congress is expected to tackle the issue of
GSE reform after completing a review of the gov­
ernment’s deposit insurance schemes in early 1991.
In addition to earning profits for their stock­
holders, GSEs, unlike purely private firms, are re­
quired to satisfy a public policy mandate. These
objectives are achieved by taking risks. Like pure­
ly private financial firms, GSEs are confronted
with four major types of risk: changes in market
interest rates (interest rate risk); loan defaults and
other credit problems (credit risk); external business
conditions, such as natural disasters, industry com­
petition, changes in technology, demographics and
legislation (business risk); and poor management
decisions (management risk).
The degree to which each GSE is subjected to
these risks varies substantially. Fannie Mae, for
example, faces much more interest rate risk in its
operations than Freddie Mac because a large por­
tion of the mortgages Fannie Mae purchases are
retained in its portfolio. Both the GAO and the
Treasury Department studies indicated that each
GSE has in place internal methods for evaluating
the current levels of the various types of risk,
although neither agency evaluated the adequacy of
these internal controls.3
Both agencies concluded that, given the con­
tinued close ties between GSEs and the federal
government and a history of government assistance
to troubled GSEs as well as large banks, companies
and municipalities, the federal government would
today undoubtedly assist a financially strapped
GSE.4 The GAO also suggests that closure, the
only alternative to assisting a GSE, is not a viable
option because a GSE failure would threaten its
public policy mission and would possibly threaten
the solvency of other financial institutions that in­
vest in GSE securities.5 Given this likely govern­
ment protection, various proposals are being con­
sidered to establish more control over GSE activi­
ties. In their initial studies, both the Treasury De­
partment and the GAO suggested two primary areas
for reform: minimum (ideally risk-based) capital
regulations and increased government supervision
of GSE activities.

2

Rating the GSEs
Of the various reform proposals outlined in
the Treasury Department and GAO studies on
GSEs, none has garnered more attention than
the Treasury Department’s proposal to require
GSEs to obtain the equivalent of a triple-A rating
from at least two major credit rating agencies,
ignoring the government’s implicit guarantee.
The debt securities of the major GSEs are al­
ready rated by Moody’s and Standard & Poor’s
(S&P); however, the current ratings are highly
dependent on the implicit government guarantee
underlying the debt issues. Given this guarantee,
most GSE debt already is rated Aaa (Moody’s)
or AAA (S&P). Analysts believe that under the
new ratings proposal, only Sallie Mae and the
Federal Home Loan Banks would get the agen­
cies’ top ratings. Fannie Mae’s and Freddie
Mac’s debt securities would probably be rated
at the lower end of investment grade, while
Farm Credit System debt would be rated at the
high end of speculative grade debt.
In making its proposal, the Treasury Depart­
ment asserted that a triple-A rating is appropriate
“ because it represents the most safe and sound
level of credit quality, and thereby the best pro­
tection from potential risk.” The Treasury
Department also believes the ratings requirement
would provide a useful measure of the value of
the government’s implicit subsidy to each GSE.
For instance, if a GSE were rated below triple-A
absent the government’s implicit guarantee, the
interest rate portion of the subsidy would be the
difference between the rate the GSE actually
borrows at and what a private corporation would
have to pay with the same rating. Any GSE not
meeting the triple-A requirement would be re­
quired to submit a business plan to its safety
and soundness regulator outlining the actions it
plans to take to achieve a triple-A rating rating

GSE Capitalization
In analyzing ways to improve the safety and
soundness of GSEs, both agencies drew parallels
to financial institution regulation because the gov­
ernment is exposed to similar risk characteristics
with both types of entities. One of the major ele­
ments of bank (and thrift) regulation is minimum
capital requirements. An organization’s capital
usually consists of loan loss reserves and equity
capital. Loan loss reserves include funds set aside
to cover expected losses, while equity capital—the



within five years. This regulator would also be
authorized to levy sanctions such as a limit on
GSE growth, restrictions on dividend payments
and the withdrawal of benefits like the GSE’s
federal charter or the exemption of GSE
securities from SEC registration.
Opponents of this proposal, which include a
number of housing industry supporters, claim
this ratings requirement will have an adverse ef­
fect on the markets GSEs are supposed to sup­
port, namely housing, education and agriculture.
Mortgage lenders argue that borrowers would
ultimately pay higher mortgage rates as the
costs of meeting the requirement are passed
from Fannie Mae and Freddie Mac to lenders.
Some opponents argue that very few banks have
triple-A ratings, and that requiring GSEs to
meet a higher standard than other financial in­
stitutions would put them at a decided competi­
tive disadvantage.
In its GSE study, the GAO did not
specifically endorse the Treasury Department
ratings proposal, stating only that it was an op­
tion worth considering. The House and Senate
Banking Committees, which will be responsible
for drafting legislation on GSE reform, have
sought comment on the proposal from various
groups, including the two ratings agencies. While
Standard & Poor’s has stated it would be able
to rate GSE debt ignoring the government guar­
antee, Moody’s has stated it cannot. In a letter
to House Banking Committee Chairman Henry
Gonzalez, Moody’s Director Thomas McGuire
said, “ a rating formed on the basis of totally
hypothetical and unrealistic assumptions would
be a somewhat spurious product. . . (these
ratings) would not, we believe, have the infor­
mation content or predictive value of real bond
ratings.” The debate on this proposal, in addi­
tion to other private market mechanisms to eval­
uate GSE risk, will continue well into 1991.

owners’ stake in the enterprise that includes stock,
paid-in capital and retained earnings—is held to
cover unexpected losses. For private firms without
ties to the government, the amount of capital held
is influenced by the credit markets; for example,
firms with too little capital to cover their risks pay
higher interest rates to borrow than well-capitalized
firms.
a
The agencies believe, and most financial ana-®
lysts concur, that equity capital represents the best
measure of protection against loss. One of the ma­
jor goals of the recently implemented risk-based
capital requirements for banks and thrifts was to

3

I increase the amount of equity capital these institu­
tions hold. Regulators have been concerned that
the subsidy provided to financial institutions in the
form of deposit insurance encourages excessive
risk-taking; requiring banks to have more of their
own equity at stake lessens the likelihood of in­
solvency, and hence the likelihood that FDIC funds
will be used to pay off depositors.
Commercial bank equity capital ratios are
higher, however, than those of the major GSEs.
As indicated in table 1, only the Federal Home
Loan Banks (FHLBs) had average equity-to-assets
ratios above that of commercial banks during the
past five years. Both Freddie Mac and Fannie Mae
have consistently recorded equity capital ratios
significantly below what many analysts would con­
sider prudent levels. Although Fannie Mae, Fred­
die Mac, the Farm Credit System and the FHLBs
all have minimum regulatory capital requirements,
the GSEs are given wide latitude in deciding what
to include in capital. Senior management within
each GSE determines target capital levels based on
various “ stress tests” run for the current level of
credit and/or interest rate risk.
The GAO concluded that Fannie Mae’s and
Freddie Mac’s capital requirements, in particular,
offer little protection against risk-taking. The two
housing GSEs broadly define capital to include
subordinated debt as well as loan loss reserves, so
that equity capital is a minor portion of total
capital. The GAO argues that GSE subordinated
debt should be treated as a liability, not as equity,

because it protects the government from losses on­
ly if the government responds to a GSE crisis by
allowing subordinated debtholders to suffer losses.
Moreover, these GSEs’ minimum capital re­
quirements do not incorporate the risk of their
substantial off-balance sheet activities, their ex­
posure to interest rate risk or the different risks in­
volved in varying types of mortgage investments.
Without outlining specifics, both agencies assert
that requiring GSEs to boost capital levels—
particularly equity capital—would give the GSEs
stronger incentives to monitor and control their
risk-taking.

Government Supervision
Both the Treasury Department and the GAO
recommend a substantial increase in federal moni­
toring of GSE activities. One of the agencies’ pri­
mary concerns about GSE operations is the sheer
size of the government’s implicit guarantee and the
tremendous growth in this potential liability during
the past 20 years. As indicated in table 2, GSE
presence in U.S. credit markets has grown tremen­
dously since 1970. GSE debt issues increased at a
15.2 percent annual rate during the 1970s and at a
9.5 percent annual rate in the 1980s. Since 1987,
the largest portion of outstanding GSE securities
have been in the form of mortgage-backed securi­
ties (MBSs) issued by Fannie Mae and Freddie
Mac. In 1985, MBSs represented almost 40 per-

Table 1
Capitalization of the Major GSEs

Equity capital as a percent of total assets1
1989

1988

1987

1986

Fannie M ae2

0 .8 8 %

0 .8 0 %

0 .7 6 %

0 .6 1 %

0 .6 6 %

F re d d ie M a c2

0.62

0.61

0.50

0.50

0.67

S allie Mae

2.90

2.80

3.00

3.60

4.70

F H LB s

7.90

8.90

8.90

9.00

9.00

Farm C re d it S yste m 3

5.90

3.30

8.10

8.00

10.50

U .S. bank average

6.21

6.28

6.00

6.17

6.16

1985

1 Equity capital and total assets are as of December 31 of each year.
2 Total assets include mortgage-backed securities not on the balance sheet.
3 Beginning in 1988, protected stock (stock redeemable at par value by borrower/stockholders) was not considered in
calculations of equity capital. The FCS had $3.3 billion in protected capital in 1988 and $1.7 billion in 1989.
SOURCE: "Government-Sponsored Enterprises: The Government’s Exposure to Risks,” GAO Report to Congress
(August 1990); FFIEC Consolidated Reports of Condition and Income, 1985-1989.




I
Table 2
Outstanding GSE Credit Market Borrowing1
(End of Calendar Year, Dollar Amounts in Billions)
Compounded
annual rates
1970-80 1980-89

1970

1980

1986

1987

1988

1989

$15.2

$ 55.2

$ 93.6

$ 97.1

$105.5

$116.1

F reddie M ac

* ★ ★ *

4.6

13.4

17.5

24.8

24.1

S allie M ae

* * ★ ★

12.2

16.5

22.0

28.6

F H LB s

10.5

37.3

88.8

116.4

136.5

136.1

13.5

15.5

Farm C re d it S ystem

13.2

63.0

62.3

55.2

54.6

56.6

16.9

-1 .2

38.9

160.1

270.3

302.7

343.4

361.5

15.2

9.5

D ebt Issues

Fannie Mae

T otal issues

★ ★ * *

1 3 .8 %
★

★ ★ ★

* *

**

8 .6 %
20.2
* ★ ★

*

M o rtg a g e Pools

F annie Mae

* ★ ★ ★

17.1

169.2

212.6

226.4

272 .9

★ ★ ★ ★

F reddie M ac

★ * ★ ★

★ ★ * ★

97.2

140.0

178.3

228.2

★ ★ ★ ★

* it * it

17.1

266.4

352.6

404 .7

501.1

* ★ ★ ★

38.9

177.2

536 .7

655.3

748.1

8 62.6

T otal pools

T otal G SE S e cu ritie s

16.4

36.0
****

45.6

19.2

****GSE not generating credit market debt as of this date.
1From GSE balance sheets and Federal Reserve Board flow of funds data.
SOURCE: “ Report of the Secretary of the Treasury on Government-Sponsored Enterprises.” (May 1990).

cent of total GSE securities; by 1989, that portion
had increased to almost 60 percent. Led by the
spectacular growth in MBS issues, total GSE se­
curities outstanding more than doubled in the latter
half of the 1980s, and stood at $863 billion at yearend 1989. GSE growth is not expected to slow any
time soon: the Treasury Department projects that
borrowing by GSEs will exceed federal govern­
ment borrowing in fiscal 1991.
In evaluating the federal government’s supervi­
sion of GSE operations, the agencies agreed ade­
quate oversight was lacking. The GAO pointed out
that many GSE regulatory bodies have not been
enforcing their existing authorities and that some
GSEs are not subject to any federal oversight. The
Department of Housing and Urban Development



(HUD), the regulatory authority for Fannie Mae
(since 1968) and Freddie Mac (since 1989), has
the authority to audit and examine the books of the
two GSEs, but has never exercised this authority
over Fannie Mae and has only asked for periodic
reports from Freddie Mac. The only specific en­
forcement authority HUD has over the housing
GSEs is the authority to limit dividend payments,
which it has never exercised. In fact, no specific
funds have ever been appropriated by HUD for
regulatory purposes.6
Sallie Mae, on the other hand, has neither a
federal regulator nor regulatory capital require­
ments. The Treasury Department does have audit
authority over Sallie Mae, but like HUD, has not
exercised this authority. Instead, Sallie Mae sub-

5

|nits a report of its annual audit of financial state­
ments to the Treasury Department, which in turn
prepares a report for Congress and the Administra­
tion. The GAO concludes that the federal govern­
ment relies heavily on Sallie Mae’s owners and
managers to avoid undue risk-taking and set
appropriate capital levels.
The most specific recommendation the two
agencies made regarding GSE supervision concerns
the separation of the GSE financial oversight func­
tion from the public policy oversight function.
Both agencies cited the thrift crisis as a case where
a conflict erupted between the two functions; the
Federal Home Loan Bank Board (FHLBB) was
both the financial regulator and the promoter of
the thrift industry, and it appears as if the latter
function took precedence in the Board’s operations.
The Treasury Department recommends that the
current program regulators continue to oversee the
GSEs’ “ fulfillment of purpose,” and that other
federal entities (new or existing) ensure GSEs are
operating in a safe and sound manner. The GAO
concurs with the Treasury recommendation, and
has suggested several possibilities for financial
oversight entities, including placing additional su­
pervisory authority with the Treasury Department,
which already has responsibility for approving GSE
debt issues.

Conclusion
In establishing GSEs, the federal government
sought to influence the flow of credit in private
capital markets. Given the tremendous growth in
GSEs and the popularity of products such as MBSs,
it appears that GSEs are fulfilling their public
policy missions. At the same time, however, the
failure of one or more GSEs would lead to huge
losses, borne ultimately by taxpayers. Based on the
initial studies of GSE operations by the Treasury
Department and the GAO, it does not appear as if
any GSE is in danger of financial collapse.
Nonetheless, both agencies suggested that a number
of measures should be taken to reduce the potential
for large-scale losses as experienced with the S&L
crisis.




While they differ somewhat in their assess­
ments of GSE risk and ways to avoid another thriftlike crisis, the two agencies agree on three central
principles that should guide policymakers tackling
GSE reform. First, GSEs should meet credit and
operations standards that are not based solely on
their federal ties. Second, GSEs should have a
significant amount of their own capital at risk so
that the institutions absorb losses first; having
more owner equity at stake will increase the incen­
tives for GSEs to monitor and control their risks.
Third, GSEs should receive effective federal super­
vision, which implies enforcement of existing
regulatory authorities in addition to some changes
in the structure of the regulatory functions. The
safety and soundness of GSEs will be more likely
if reform is properly undertaken.*123456

FOOTNOTES
1See Michelle A. Clark, “ Government-Sponsored Enter­
prises: A Profile,” Pieces of Eight (September 1990),
pp. 1-5, for a discussion of the various ways the major
GSEs channel credit into the housing, agricultural and
educational markets.
2See United States Department of Treasury, Report of
the Secretary of the Treasury on Government Sponsored
Enterprises (May 1990) and United States General Ac­
counting Office Report to Congress, GovernmentSponsored Enterprises: The Government’s Exposure to
Risks (August 1990).
3The GSEs’ responses to the GAO’s initial evaluation
were printed in an appendix to the GAO report. Most
GSEs defended their internal risk evaluation procedures.
4The GAO study cites assistance given to Fannie Mae
and the Farm Credit System at various times during the
1980s, in addition to the government assistance provided
to Continental Illinois, Chrysler, Lockheed, Conrail and
the City of New York, to support this assertion.
5Federally insured national and state Fed member banks
as well as thrifts are allowed to hold unlimited amounts
of GSE debt and securities in their portfolios; a GSE
failure might imperil the depost insurance fund in addi­
tion to causing losses for private investors.
6Since the agencies released their reports, HUD has
assembled a team of executives to oversee its GSE
financial regulatory responsibilities. HUD has also an­
nounced plans to conduct banklike examinations of Fan­
nie Mae and Freddie Mac.




6

The Mississippi River
System and Barge
Industry

■0

so they can be navigated safely by tows and bargi
The Corps accomplishes this task by dredging an'
using dikes and a system of locks and dams. Most
of the tributaries of the Mississippi River, and the
Mississippi River itself north of St. Louis, contain
a series of locks and dams to maintain 9 feet of
water in the channels.

by Jeffrey D. Karrenbrock
David H. Kelly provided research assistance.

T

he vast Midwestern river network played
a key role in the settlement and subsequent develop­
ment of many U.S. cities.1 Because of mountainous
terrain and poorly developed trails, water was often
the only practical means of transporting people and
goods until as late as the mid-1800s. Since that
time, however, river transportation has been forced
to share its once-dominant role with rail, highway
and air transportation. Despite its decline in relative
importance, water transportation still accounts for
a significant portion of U.S. freight traffic, about
15 percent in 1988.
Much of the river system, ports and barge
lines that serve today’s waterborne commerce is
located in Eighth Federal Reserve District states.
This article describes the Mississippi River system
and the barge industry, and concludes with a brief
outlook for the inland waterways system.

The Inland Waterways
The United States has more than 25,500 miles
of navigable rivers, harbors and intracoastal water­
ways. The Mississippi River basin, which more
than encompasses the Eighth Federal Reserve Dis­
trict, has about 8,900 miles of navigable water.2
As the map at right shows, the major rivers in­
cluded in the basin are the Mississippi, Missouri,
Illinois, Ohio, Cumberland, Tennessee and Arkan­
sas. Table 1 indicates that the Mississippi River
has the largest amount of navigable water in the
basin, stretching more than 1,800 miles from Min­
neapolis, Minnesota, to the Gulf of Mexico. The
Ohio River contains the second-largest amount of
navigable water, followed by the Missouri.
Many U.S. waterways would not be navigable
without the continuing efforts of the U.S. Army
Corps of Engineers. In 1824, the Corps was as­
signed the responsibility for improving rivers and
harbors in this country. Today, the Corps builds,
maintains and operates federal river and harbor
projects. The Corps attempts to maintain at least 9
feet of water in designated inland waterway rivers

Commodity Movement
Most of the goods moved on the inland water­
ways are bulky commodities, such as petroleum
products, coal, gravel and grain. In addition, goods
that are too large or too heavy to be moved by rail
or highway move on barges. At times, heavy mili­
tary equipment is moved via the rivers. These
heavy goods move by barge primarily because this
mode of transit offers a relative advantage in fuel
efficiency. A small barge can move 1,500 tons or
more than 450,000 gallons of a commodity, which
is about 15 times greater than one rail car and 60
times greater than one semi-truck. In terms of fuel
efficiency, one gallon of fuel can move one ton of
a commodity by water 2.5 times farther than by rail
and almost 9 times farther than by highway. H o ^ «
ever, movement of goods by barge is often slow^B
than other means of transportation. N o n e th e le ss,^
for commodities that are largely stockpiled, such as
coal, petroleum products and fertilizers, the timing
of shipments is not always crucial.
The amount of freight traffic moved on the
major segments of the Mississippi River system is
shown in table 1. The Mississippi River carries the
largest amount of commodities, with farm pro­
ducts, coal, and petroleum and coal products ac­
counting for most of its freight. The Ohio, Cumber­
land and Tennessee Rivers derive much of their
freight from the vast coal fields on their banks.
Although the Missouri River is the third-longest
in the system, it carries the least amount of freight
of all system rivers. The Missouri’s importance,
however, stems from the fact that it provides a
large portion of the total water flow of the Missis­
sippi River. For example, in 1988, 60 to 80 per­
cent of the total water flow of the Mississippi
River at St. Louis came from the Missouri River.

The Barge and Towing Industry
The amount of cargo handled by the barge
mem
towing industry is dependent on both domestic ah!
international economic activity. Between 1960 and
1979, freight traffic on the Mississippi River system
grew steadily at an average annual rate of 3.6 per-

I
Figure 1

Mississippi River System

9 FEET OR MORE
UNDER 9 FEET
AUTHORIZED EXTENSIONS

cent. This strong growth on the Mississippi River
system and other waterways was expected to con­
tinue throughout the 1980s and 1990s. For exam­
ple, some forecasts were calling for tonnage towed
on U.S. waterways to double or triple by the year
2000. The expected increase in demand for barge
services, in conjunction with favorable tax shelter
laws, resulted in a rapid expansion of barge and
tow production. The number of dry cargo barges
in the United States’ fleet grew 25.4 percent be­
tween 1975 and 1980, while the number of tank
barges grew 18.2 percent. The towboat-tugboat
fleet grew 14.5 percent during this period.



The anticipated boom in demand never material­
ized, however, as agricultural and coal exports fell
and the U.S. economy entered a recession in the
early 1980s. For various reasons, including the
grain embargo of the Soviet Union and slow eco­
nomic growth abroad, U.S. agricultural and coal
exports fell 20 percent and 30 percent, respective­
ly, between 1981 and 1983. This was particularly
hard on Mississippi River system barge firms be­
cause more than 60 percent of all U.S. export
grain goes through New Orleans and 80 percent of
all U.S. export steam coal moves through the
Lower Mississippi Valley.

8

Table 1
Selected Mississippi River System Statistics

Navigable
length1
(miles)

1988
freight
traffic
(million
tons)

445
381
327
1,811
735
981
652
6,934

6.7
14.0
37.8
4 41.6
6.7
192.6
47.1
601.6

A rka n sa s W a te rw a y
C u m b e rla n d R iver
Illin o is W a te rw a y
M ississip p i R iver
M issouri R ive r2
O h io R iver
T e n n e sse e R iver
M ississip p i R iver S ystem

Percent of 1988 Freight Traffic Accounted for by
Farm
products
24%
1
36
27
10
4
7
14

Coal
1%
44
16
14
0
57
50
35

NonChemicals Petroleum
& allied
and coal
metallic
minerals products products
26%
32
6
5
67
13
15
11

24%
3
11
10
9
6
7
8

8%
5
14
16
5
9
7
14

1Channel depth of at least 9 feet.
2Channel depth less than 9 feet.
SOURCES: Lengths and information on freight traffic are the author’s estimates based on information provided in the
Coastguard Light List, Vol. 5, Mississippi River System, 1986, and the U.S. Army Corps of Engineers’ Water­
borne Commerce of the United States, 1988.

In addition to facing contracting demand from
international markets, the barge industry also had
to deal with a domestic economy that was entering
a recession. Partially as a result of the economic
slowdown, domestic demand for petroleum pro­
ducts and the associated transportation services
slowed. The demand for internal shipments of
other heavy commodities slowed as well. As a
result, freight traffic on the Mississippi River
system fell in 1982 and 1983 and grew at an
average annual rate of 0.46 percent between 1980
and 1988, much slower than the 3.6 percent rate
of the 1960 to 1979 period.
The consequence of the rapid construction
period followed by declining freight traffic volume
was an overbuilt industry. Once the industry
realized that the expected demand boom was not
materializing, barge building nearly ceased. For
example, hopper barge construction reached nearly
2,500 units in 1981, but sank to fewer than 250
units in 1984. Tank barge construction peaked at
146 in 1981, but plunged to fewer than five per
year from 1984 to 1988.3
Even though the U.S. economy and exports
resumed their growth in the late 1980s, helping to
revive the industry, the drought of 1988 was a set­
back to the industry. Low water levels slowed
delivery times, tows were required to carry fewer
barges than usual, and temporary groundings tied
up shipping channels. Some firms were hurt finan­
cially because they had contracted earlier in the
year to carry freight at fixed rates and the extra
costs associated with greater travel time between
ports could not be passed along.




The stressful period of the 1980s stimulated
considerable consolidation in the industry. The
American Waterways Operators estimate that the
number of inland waterway operators fell from
1,800 in 1980 to about 800 in 1989. In 1989, these
barge and towing firms employed more than
175,000 workers and operated more than 5,000
tugboats and towboats and more than 30,000
barges on the U.S. inland waterways system.

Turning the Bend
Several factors suggest that the 1990s will be a
less-stressful period than the mid-1980s for the
barge industry. First, cargo carried on the inland
waterways system is expected to slowly increase
through 2000. The expected average annual growth
of tonnage to be carried on different segments of
the system between 1986 and 2000 is shown in
table 2. Traffic projections for the Mississippi
River are broken into three segments. The most
rapid traffic growth on the Mississippi is expected
to occur in the upper segment, with the lower
segments expected to grow slightly slower. None­
theless, the Arkansas River has the highest poten­
tial traffic growth at 4.5 percent per annum. On
the other hand, freight traffic on the Missouri
could decline at an annual rate of 0.9 percent. All
other rivers’ expected traffic growth is bracketed
by these values, indicating slow but steady growth
throughout the Mississippi River system. Com­
modities expected to grow the fastest, in terms of

9

ble 2
.S. Internal Waterway Traffic Projections
%
(average annual growth rate: 1986 to 2000)
Selected waterway segments
U p p e r M is s is s ip p i*1
M id d le M ississip p i2
M issouri R iver
Low er M ississip p i3
A rka n sa s R iver
Illinois W a te rw a y
O hio R iver S ystem
O hio R ive r— M ainstem
C u m b e rla n d R iver
T e n n e sse e R iver

Low
1.7%

1.5
-0 .9
1.4
1.0
1.2
1.3
1.3
1.2
1.2

High
3.1%
2.9
2.1
2.9
4.5
2.5
2.8
2.8
3.5
2.6

SOURCE: Derived from the U.S. Army Corps of Engineers,
The 1988 Inland Waterway Review, November
1988, Table 2.4, p. 50.
1 From Minneapolis to the mouth of the Missouri River.
2 Includes the Mississippi River from the mouth of the
Missouri to the mouth of the Ohio, the Missouri River
from Sioux City, Iowa, to its mouth, and theKaskaskia
River from Fayetteville, Illinois, to its mouth. Traffic from
all three rivers is included in the Middle Mississippi
forecast.
3 Extends from the mouth of the Ohio to Baton Rouge.
JThe segment also includes the Arkansas River and
ither waterways. All of these segments are included in
he Lower Mississippi projections.

volumes shipped, are industrial and agricultural
chemicals, farm products and coal.
In addition to expected increases in freight
traffic, a second factor that will help the long-term
outlook of the barge industry is the ongoing im­
provement of the system’s locks and dams. The In­
land Waterways Trust Fund (IWTF) was authorized
by the Inland Waterways Revenue Act of 1978 and
amended by the Water Resources Development Act
of 1986. These laws established a trust fund funded
by fuel taxes on tows operating on 27 waterways.
The fuel tax was originally set at 4 cents per gallon,
but is currently at 11 cents per gallon and will
reach 20 cents per gallon in 1995. The laws state
that monies from the trust fund will be available
for construction and rehabilitation expenditures for
navigation on the inland and coastal waterways.
The fuel tax revenues collected in the trust
fund are allocated to projects on a 50/50 cost­
sharing basis with the federal government. Cur­
rently, nine projects are being funded by the IWTF
to improve or replace locks and dams on the in­
land waterway system. These improvements will
reduce traffic delays and lower the cost of WaterB ay transportation.
W
Thus far, new construction funded by trust fund
money has been relatively small, but outlays are
expected to increase significantly through the end
of the century. Tax revenue collection did not start



until 1981 and the first trust fund appropriations
occurred in 1985. Thus far, $71.8 million from the
Inland Waterways Trust Fund has been used in con­
struction. Between 1980 and 1988, construction
spending on inland waterways navigation projects
fell from $432 million in 1982 to $218 million in
1987, before jumping to $317 million in 1988. Total
federal and IWTF expenditures of $262.8 million
are expected for the nine scheduled projects in
fiscal year 1990. Total construction expenditures
on these projects are expected to remain at or
slightly above $200 million per year through fiscal
year 1998, when expenditures will start to trail
off. Several new projects that would require addi­
tional funding, however, are under consideration.
While the trust fund can currently provide for
partial funding of the nine scheduled projects, its
resources are limited. With federal budget reduc­
tions likely, the amount of money available for
matching trust fund money may fall. At the same
time, more areas will need repair as many of the
locks and dams on the system are more than 50
years old and are inadequate for handling today’s
freight volumes. This implies that the Corps and
industry will have to make some tough choices
and, hopefully, will allocate scarce funds to the
projects providing the highest expected return. An
alternative is to initiate user fees or increase fuel
taxes to make up for potential federal government
expenditure cut-backs.

Conclusion
Although often overlooked by those not direct­
ly involved in the industry, the inland waterways
system serves as a vital method of shipping bulky
commodities at a relatively low cost. Almost half
of the freight traffic on the Mississippi River
system is accounted for by energy-related products.
As the domestic economy expands and industries
become more internationally oriented in the 1990s,
the inland waterways system will play an important
role in serving these markets. Like any type of in­
frastructure, the system needs constant repair and
maintenance to remain cost effective. Current work
on the system will help maintain efficiency, but
more work will be needed for the industry to main­
tain its role in freight transportation.

FOOTNOTES
1See this Bank’s 1989 Annual Report.
2This figure includes the lengths of all navigable chan­
nels, including those with depths of less than 9 feet.
The figures in table 1 are for channels with at least 9
feet of water, except for the Missouri River.
3Figures on barge construction were derived from Jack
Lambert and Leeper, Cambridge & Campbell, Inc.’s
Barge Fleet Profile of Inland River Equipment, March
1990. St. Paul, MN.

usrness

10




District Services:
What They Are and
Why They Have
Grown
by Thomas B. Mandelbaum

Table 1
Percent of Total Output, 1963 and 1986
S e rv ic e -p ro d u c in g
s e c to rs
T o ta l

O th e r
se rv ic e s

G o o d s -p ro d u c in g
s e c to rs
T o ta l

M fg.

u. s.
60.0%
67.4

11.7%
15.3

40.0%
32.6

21.3%
22.1

Eighth Dist.
1963
1986

59.5
63.4

10.8
13.3

40.5
36.6

21.7
26.2

Arkansas
1963
1986

55.8
59.2

10.2
11.1

44.2
40.8

15.7
26.5

Kentucky
1963
1986

51.6
57.9

8.7
10.9

48.4
42.1

25.6
25.7

Missouri
1963
1986

63.1
67.6

11.7
15.0

36.9
32.4

21.0
24.7

Tennessee
1963
1986

63.4
64.7

12.0
14.1

36.6
35.3

21.6
28.2

1963
1986

Thomas A. Pollmann provided research assistance.

T

. jB L h e economy of the Eighth Federal Reserve
District, mirroring the nation, has experienced
more rapid employment growth in the services sec­
tor than in other sectors, such as manufacturing.1
This shift to services has generated considerable
controversy in recent years.2 Some analysts, for
example, suggest that the United States is losing its
industrial base, becoming a nation of fast-food
restaurants and laundries. Prior to examining rea­
sons for the expansion of services, the specific ser­
vice sectors that are important in the Eighth
District are identified.

SOURCE: U.S. Department of Commerce (1988)

What Are Services?
Some of the controversy about services stems
from confusion about definitions. The service sec­
tor often is used to refer to all industrial sectors
other than those producing goods—in other words
—all sectors but agriculture, mining, construction
and manufacturing. In most government publica­
tions, these sectors are referred to as “ serviceproducing” sectors and include retail and whole­
sale trade; finance, insurance, and real estate;
government; transportation, communication and
public utilities; and a group simply called “ ser­
vices.” To avoid confusion, “ services” will be
referred to as “ other services” in this article.
Table 1 shows that the share of U.S. output
accounted for by service-producing sectors rose
from 60 percent in 1963 to 67.4 percent in 1986,
while other services’ share rose from 11.7 percent
to 15.3 percent. Although other services accounted
for less than one-fifth of all service-producing sec­
tor output in 1963, its rapid growth caused it to
account for almost half of the 1963-86 rise in the
service-producing sector’s share. In the Eighth
District, the shift toward services was not quite as
dramatic as at the national level. The output share
of service-producing sectors rose between 1963
and 1986 from 59.5 percent to 63.4 percent while

the other services sector’s share rose from 10.8 per­
cent to 13.3 percent.
Table 2 shows that in both the United States
and the Eighth District, health services and
business services were the two largest industries in
the other services sector and were responsible for
most of the sector’s growth. Health services ac­
counted for 4.8 percent of the District’s 1986 total
output, up from 2.6 percent in 1963. Almost half
of health services employees work in hospitals.
Business services, comprising 2.6 percent of Dis­
trict output in 1986, played a smaller role in the
economy of each District state than in the U.S.
economy. The largest business services industries
in the country, in descending order of employment,
are personnel supply services, services to buildings
(mostly cleaning and maintenance), computer and
data processing services, management and public
relations, detective and protective services, equip­
ment rental and advertising.
As output has risen in service sectors, so has
employment. Employment in services generally
refers only to workers in industrial sectors that
produce services rather than to workers in occupa­
tions providing services. A janitor working for a
manufacturer, for instance, is not classified as a
service worker, but as a manufacturing employee.

11

table 2
Other Services Industries as a Percent of Total
Output, 1963 and 1986
United States
Industry
Other services
Health services
Business
services
Miscellaneous
services1
Legal services
Social services
Auto repair,
garages
Personal
services
Hotels and
lodging
Educational
services
Amusement and
recreation
Miscellaneous
repair
Private
households
Motion pictures

District

1963

1986

1963

1986

11.7%
2.7

15.3%
4.5

10.8%
2.6

13.3%
4.8

1.6

3.5

1.1

2.6

0.9
1.0
0.9

1.5
1.0
0.9

0.7
0.9
1.1

0.9
0.7
0.7

0.5

0.8

0.6

0.9

1.1

0.7

1.1

0.8

0.7

0.6

0.6

0.5

0.6

0.6

0.5

0.5

0.5

0.5

0.4

0.4

0.3

0.3

0.3

0.2

0.8
0.2

0.2
0.2

0.9
0.1

0.2
0.1

SOURCE: U.S. Department of Commerce (1988)
Mncludes engineering and architectural services; noncom­
mercial research organizations; accounting, auditing and
bookkeeping; and museums and botanical and zoological
gardens.

In the nation, the District and each state, other ser­
vices’ job growth in the last decade has been the
most rapid of any major sector. As shown in table
3, other services employment in the District grew
at a 4.4 percent annual rate between 1979 and
1989. In comparison, the broader serviceproducing sector employment rose at a 2.4 percent
rate, while total nonfarm employment rose at a 1.6
percent rate. Although other services accounted for
less than one-fifth of total nonfarm employment in
1979, it generated more than half of the new non­
farm jobs during the decade in both the District
and the nation.

The Shift to Services: A Sign of
Deindustrialization ?
The share of the nation’s and the District’s
employment accounted for by manufacturing has
declined at the same time that the share of the
service-producing sectors, and particularly the



other services sector, has risen (see figure 1).
While these relative shifts have actually taken place
throughout the postwar period, they have attracted
considerable attention since 1979, after which not
only manufacturing’s share of employment, but
also the absolute number of manufacturing workers,
declined. This has led some observers to suggest
that other services’ rising share is a symptom of
the eroding U.S. industrial base, or as some have
described it, the “ deindustrialization” of America.
In terms of output rather than employment,
however, manufacturing’s share has not declined in
the postwar period, fluctuating around a 21 percent
average. In 1987, U.S. manufacturing’s share of
real output was 21.8 percent. Table 1 reveals that,
in the Eighth District, manufacturing’s share of
real output has actually expanded, rising from 21.7
percent in 1963 to 26.2 percent in 1986.3 Manu­
facturing’s share of real output rose in Arkansas,
Missouri and Tennessee, while there was little
change in Kentucky.
The contrasting trends of employment and out­
put shares in manufacturing are indicative of the
relatively rapid productivity growth in that sector,
which has allowed a smaller share of workers to
produce a constant share of the national output.
Productivity growth in manufacturing, as well as
in agriculture, and to a lesser extent serviceproducing sectors, has contributed to the rising af­
fluence enjoyed by U.S. consumers. As their in­
comes have risen, consumers have chosen to spend
a higher proportion of their budgets on services.
Rather than a sign of deindustrialization, the
rising share of economic activity devoted to ser­
vices reflects the rising affluence of U.S. con­
sumers, made possible, in part, by the success of
manufacturers in increasing labor productivity.
Without enhancing labor productivity, manufactur­
ing could not have maintained its constant share of
U.S. output and enjoyed the rapid expansion in ex­
ports during the last few years. Productivity gains
in manufacturing and throughout the economy
allowed American consumers to enjoy a rising af­
fluence which enabled them to purchase an in­
creasing quantity of services.

Economic Development and Pur­
chases o f Other Services
Some research indicates that as nations
develop, they move through stages characterized
by changing spending and production patterns.
When incomes are low, consumers devote most of
their budgets to necessities, such as food, but as
incomes rise, a larger proportion is spent on manu­
factured goods. Finally, in the mature stages of
development, consumption shifts more to services-

12

Table 3
Compounded Annual Rate of Change of Employment, 1979-89
U.S.
1.9%
2.7
4.7
-0 .4
-0 .8

N o n a g ric u ltu ra l e m p lo ym e n t
S e rvice -p ro d u cin g
O th e r services
G o o d s-p ro d u cin g
M a n u fa ctu rin g

District

Arkansas Kentucky

1.6 %
2.4
4.4
-0 .3
-0 .2

1.7 %
2.6
4.8
0.1
0.5

Missouri Tennessee

1.4%
2.4
4.3
-0 .9
-0 .5

1.4%
2.0
3.7
-0 .4
-0 .6

1.9 %
2.8
5.0
0.1
0.0

F igure 1

Manufacturing and Other Services’ Employment Shares
Percent of
Nonagricultural Employment

1970

72

74

76

78

producing sectors.4 To the extent one can make in­
ferences regarding changes over time from crosssectional comparisons, evidence suggests such a
pattern of development also can be found for other
services among U.S. states: states with higher per
capita incomes tend to have higher proportions of
their workforce producing other services.5 Since
other services tend to be consumed where they are
produced, this relationship between per capita in­
come and employment in other services reflects the
purchasing patterns of the state’s consumers.
Such a correspondence exists between per
capita income and other services’ employment
share in District states. Each state’s rank in per
capita income among all states is close to its rank
in other services’ employment share. In 1986, for
example, Arkansas and Kentucky ranked 48 and
43 in per capita income and ranked 47 and 43 in
the size of their other services employment share.



80

82

84

86

88

1990

Tennessee ranked 39 in per capita income and 38
in other services’ employment share. Missouri’s
per capita income was substantially higher, ranking
24, while its employment share accounted for by
other services ranked 17.

Why the Rapid Growth in Pro­
ducer Services?
It is easy to see how rising affluence would
increase the demand for some industries within
other services, like personal services and health
services, which are mostly purchased directly by
consumers. (The expansion of health services was
also fueled by the growing number of elderly con­
sumers and the myriad of technological advances

13

iking new treatments available.) One of the the
test growing segments, however, has been
“ producer” services, which are primarily sold to
other businesses rather than to consumers. This
group is usually defined to include business ser­
vices, legal services and miscellaneous professional
services.
Employment in U.S. producer services rose at
a rapid 6.2 percent rate between 1959 and 1982
and accelerated to a 7.5 percent rate of increase be­
tween 1982 and 1989. In comparison, the growth
rate of total nonagricultural employment was below
3 percent in both periods. As table 1 shows, out­
put growth of business services, which accounts
for most of producer services, has been rapid in
the District as well; this sector’s output share more
than doubled to 2.6 percent between 1963 and 1986.
One frequently mentioned cause for the growth
of producer services is “ unbundling.” This refers
to the practice of companies increasingly contrac­
ting for services rather than generating them inter­
nally. For example, a manufacturer may have pre­
viously used its own employees for legal, account­
ing and data processing services, but finds it more
cost-effective to dismiss service employees and
purchase these services from firms in the producer
service industry. If such unbundling were wide­
spread, the rapid rise in producer services employ^M en t might reflect nothing more than the shifting
^^B w orkers in service occupations from non-service
industries like manufacturing to services sectors
with no net increase in service activity in the
economy.
Research indicates, however, that unbundling
accounts for only a negligible proportion of the
growth in producer services. For example, one
study found that unbundling has been only a “ very
small factor” in the 1972-85 employment growth
of producer services.6 Of the 6 percent annual rate
of increase in producer services during the 1972-85
period, 2.6 percentage points were found to be due
to the overall expansion of the U.S. economy,
while 3.3 percentage points of the growth were
due to changing business practices. Specifically,
businesses have chosen to use services to a greater
extent in their production processes. Rather than
replacing internally generated services with pur­
chased services as implied by the unbundling no­
tion, businesses are purchasing additional services.
To a small extent, rising affluence and the
associated shift to luxury goods, which require
more producer services such as advertising, may
be responsible for the rapid growth of producer
services. More likely, the increased demand stems
from technological changes that have allowed firms
specialize in particular services and, by spreading
^ ^ H t s among many customers, provide their ser^ ^ c e s at a low cost. Data processing firms, for in­
stance, allow the cost of computer-related technolo­
gy to be divided among many users. This is espe­
cially helpful for small businesses that have pro­

•




vided much of the economy’s growth in the last
decade. Telecommunications innovations have per­
mitted the delivery of some services, like data pro­
cessing, to increasingly distant markets.

Summary
The nation and Eighth District have increas­
ingly used more of their resources to produce ser­
vices because, as consumers have become wealthier,
they have chosen to purchase proportionately more
services. This rising affluence, in part, stems from
relatively rapid productivity gains in the manufac­
turing sector that have allowed it to produce a
stable share of the nation’s output with a declining
share of the nation’s workers. Rather than a sign
of a deteriorating industrial base, these develop­
ments appear to be a response to the evolving
demands of consumers.
To a surprising extent, the rapid job growth in
service-producing sectors reflects growth in the
single sector referred to as other services. Much of
the growth of this sector is accounted for by the
growth in health services and business services. To
varying degrees, rising consumer affluence and
technological innovations have contributed to the
growth of these sectors.*123456
FOOTNOTES
1See Thomas B. Mandelbaum, “ In Search of a Regional
Economic Identity,” Pieces of Eight - An Economic
Perspective on the Eighth District (September 1989). Due
to data limitations, data for Arkansas, Kentucky,
Missouri and Tennessee are used to represent the
Eighth District, which actually includes Arkansas and
portions of six other states, as depicted on the inside
front cover of this publication.
2Concerns about the relatively low level and unequal
distribution of earnings in Eighth District service sectors
will be discussed in a forthcoming article in this publica­
tion. Earnings in U.S. services are discussed in Lynn
Browne, “ Taking in Each Other’s Laundry — The Ser­
vice Economy,” New England Economic Review, Federal
Reserve Bank of Boston (July/August 1986), pp. 20-31.
3The increase of both the District manufacturing and
service-producing shares was possible because of a
substantial contraction in nonmanufacturing goodsproducing sectors: agriculture, forestry, fisheries, mining
and construction.
4For 47 countries, for example, the correlation coefficient
between 1982 per capita GNP and the 1980 proportion
of workers in service-producing industries was 0.62. See
Browne (July/August 1986) op. cit., p. 31. The relation­
ship between economic development and changing pat­
terns of industrial composition is discussed by Colin
Clark in Conditions of Economic Progress (1940).
5Browne (1986) op. cit., p. 26.
6See John Tschetter, “ Producer Services Industries: Why
Are They Growing So Rapidly?,” Monthly Labor Review,
(December 1987), pp. 31-40. Bobbie H. McCrackin,
“ Why Are Business and Professional Services Growing
So Rapidly?” Federal Reserve Bank of Atlanta,
Economic Review (August 1985), pp. 14-28 also finds un­
bundling is not a major reason for the growth of pro­
ducer services.




14

Eighth District Business
Level
111/1990

Payroll Employment (thousands)
United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis
M anufacturing
Employment (thousands)
United States
District
Arkansas
Kentucky
Missouri
Tennessee
District Nonmanufacturing
Employment (thousands)
Mining
Construction
FIRE2
Transportation3
Services
Trades
Government

Unemployment Rate
United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis

111/1989111/1990

19891

19881

110,638.0
6,894.7
918.0
248.4
1,477.5
485.0
2,323.7
1,183.0
2,175.5
466.2

0.4%
0.9
1.2
-0 .7
4.4
4.6
-0 .6
-0 .5
0.2
1.0

1.8%
1.1
2.7
1.2
2.3
3.2
0.4
0.6
0.5
1.6

2.7%
2.9
3.0
3.0
3.8
4.1
2.2
2.3
3.0
1.5

3.3%
3.5
3.5
3.5
4.0
3.1
2.8
2.3
4.0
7.3

19,077.0
1,470.0
232.6
285.3
432.5
519.5

- 1 .9 %
-1 .0
2.7
0.1
-4 .0
-0 .6

- 1 .7 %
-0 .7
1.1
0.4
- 1 .5
-1 .3

0.4%
1.9
1.6
3.6
1.2
1.9

1.7%
3.2
3.1
4.5
2.3
3.4

- 1 .2 %
0.0
0.1
-0 .5
3.1
0.9
2.5

- 4 .8 %
1.0
0.3
3.5
5.1
3.0
2.2

- 5.3%
0.3
0.5
4.3
6.3
3.7
2.4

19891

19881

2.7%
1.9
1.6
2.5
1.8
1.7

3.9%
2.8
2.5
2.8
1.7
4.4

1988

1987

5.5%
6.5
7.7
6.4
7.9
6.3
5.7
5.9
5.8
5.2

6.2%
7.2
8.1
7.1
8.8
6.9
6.3
6.5
6.6
5.7

49.2
295.0
337.7
397.5
1.555.3
1.648.3
1.139.4
11/1990

Real Personal Income4 (billions)
United States
District
Arkansas
Kentucky
Missouri
Tennessee

Compounded Annual Rates of Change
N/1990111/1990

- 4 .0 %
-0 .1
- 0 .4
- 0 .7
2.3
0.8
3.3
1/199011/1990

11/198911/1990

1.5%
-0 .2
-3 .1
0.0
0.6
0.0

1.2%
1.1
2.0
2.2
0.4
0.7
Levels

111/1990

11/1990

1989

5.6%
5.8
7.0
6.0
5.5
5.0
6.1
6.4
5.1
4.6

5.3%
5.3
6.8
5.9
5.7
4.9
4.8
5.1
5.0
4.6

$3,556.5
194.2
25.5
42.0
67.9
58.8

5.3%
5.8
7.2
6.3
6.2
5.6
5.5
5.5
5.1
4.7

Note: All data are seasonally adjusted. On this page only, the sum of data from Arkansas, Kentucky, Missouri and Tennessee
is used to represent the District.
1Figures are simple rates of change comparing year-to-year data.
2Finance, Insurance and Real Estate
^Transportation, Communications and Public Utilities
4Annual rate. Data deflated by CPI-U, 1982-84=100.

15

fl. S. Prices
Level

Compounded Annual Rates of Change
11/1990111/1990

111/1989111/1990

19891

1988'

131.1
133.1

7.0%
5.0

5.5%
5.7

4.7%
5.8

4.0%
4.1

150.3
173.3
126.3

- 4.4%
3.1
-14.4

3.7%
8.8
-3 .1

6.8%
6.8
6.9

9.0%
2.6
18.6

170.0
184.0

2.4%
2.2

1.2%
3.4

6.2%
4.4

6.9%
4.4

111/1990

Consumer Price Index
(1982-84 = 10 0 )

Nonfood
Food

Prices Received by Farmers
(1 9 7 7 = 100 )

All Products
Livestock
Crops

Prices Paid by Farmers
(1 9 7 7 = 100 )

Production items
Other items2

Note: Data not seasonally adjusted except for Consumer Price Index.
1Figures are simple rates of change comparing year-to-year data.
2Other items include farmers’ costs for commodities, services, interest, wages and taxes.

Eighth District Banking
Wianges in Financial Position for the year ending
June 30, 1990 (by Asset Size)
Less than
$100 million

SELECTED ASSETS
Securities
U.S. Treasury &
agency securities
Other securities1

Loans & Leases
Real estate
Commercial2
Consumer
Agriculture
Loan loss reserve

Total Assets
SELECTED LIABILITIES
Deposits
Nontransaction accounts
MMDAs
$100,000 CDs
Demand deposits
Other transaction accounts3

Total Liabilities
Total Equity Capital

- 1 .3 %
5.2
- 1 0 .4
0.5
3.0
- 6 .9
-0 .7
6.1
-0 .4
0.5
0.6%
1.5
- 7 .3
5.3
- 6 .0
1.7
0.5
0.2

$100 million $300 million

15.2%

$300 million $1 billion

More than
$1 billion

7.8%

20.1
3.1
8.9
13.2
0.4
6.4
13.2
11.1
11.3

13.4
-5 .1
5.5
14.0
-6 .1
10.3
21.4
-1 .5
5.0

12.5%
14.4
6.4
8.2
2.4
12.0
11.4
10.6

5.9%
8.0
2.2
-6 .0
-6 .0
10.9
5.0
5.0

e: All figures are simple rates of change comparing year-to-year data. Data are not seasonally adjusted.
includes state, foreign and other domestic, and equity securities
includes banker’s acceptances and nonfinancial commercial paper
includes NOW, ATS and telephone and preauthorized transfers




17.0%
28.3
- 7 .0
5.3
17.2
0.1
4.6
- 1 2 .0
19.2
3.9
6.0%
8.8
29.8
9.5
- 1 .9
4.3
3.6
26.3

16

Performance Ratios

(by Asset Size)
Eighth District

EARNINGS AND RETURNS
Annualized R eturn on Average
Assets
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks
Annualized R eturn on Average
Equity
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks
Net Interest M argin1
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks
ASSET QUALITY2
Nonperforming Loans3
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks
Loan Loss Reserves
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks
Net Loan Losses4
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks

United States

11/90

11/89

11/88

11/90

11/89

11/88

1.070/o
1.06
1.03
.80

1.13%
1.08
1.03
.74

1.06%
1.04
1.04
.84

1.22

1.23

1.14

.820/0
.95
.81
.66
.60
1.04

.88%
.98
.91
.85
.93
1.14

.710/0
.85
.65
.69
.64
1.00

11.51%
12.80
12.93
12.13

12.220/0
13.08
13.01
11.21

11.66%
12.66
13.13
12.74

8.940/o
11.73
10.68
10.04
12.06
10.76

9.640/0
12.28
12.56
13.00
17.83
11.71

8 .O30/0
10.89
9.44
10.87
14.03
10.56

3.920/0
3.92
3.98
3.67
—
3.83

4.10%
4.34
4.32
4.19
3.24
4.01

4.390/0
4.54
4.47
4.20
3.42
4.17

4.22o/o
4.20
4.13
4.03
3.34
4.03

1.95%
1.98
2.31
2.68
4.58
2.03

2.18%
1.95
2.55
2.06
4.78
2.29

2.49o/o
2.07
2.28
2.23
5.12
2.84

1.51%
1.48
1.69
2.04
3.34
1.99

1.58o/o
1.48
1.63
1.73
3.32
2.08

1.630/0
1.50
1.63
1.78
4.25
2.09

.230/o
.28
.36
.66
1.09
.19

.29o/o
.28
.32
.41
.55
.22

.36%
.31
.39
.56
.54
.32

—

12.38
3.98%
3.90
4.03
3.70
—

—

12.45
4.04%
4.06
4.13
3.65
—

3.89

3.96

1.63o/o
1.75
1.39
1.84

1.66%
1.76
1.49
2.18

—

11.85

1.79

1.87

1.99o/o
1.78
1.48
2.29
—
2.26

1.44%
1.49
1.36
1.75

1.45%
1.47
1.48
1.72

1.490/o
1.33
1.32
1.93

—

—

1.65
.16%
.19
.23
.37

—

—

1.82
.140/o
.21
.17
.33

—

1.80
.18%
.18
.19
.56

—

—

—

.10

.12

.16

Note: Agricultural banks are defined as those with 25 percent or more of their total loan portfolio in agriculture loans.
interest income less interest expense as a percent of average earning assets
2Asset quality ratios are calculated as a percent of total loans.
3Nonperforming loans include loans past due more than 89 days, nonaccrual, and restructured loans.
4Loan losses are adjusted for recoveries.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102