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economic recovery and the costcutting efforts have improved firm
and industry earnings and cash
flow to the point where more
extensive efforts to improve productivity can be undertaken.
The next round of efforts will
require investment of a more
capacity-expanding character.
Financial commitments will be
heavier with a longer-term payoff
than the cost-cutting improvements of the past several years. It
would be much easier to achieve
the next stage of restructuring if
we had the assurance of adequate
savings and a more certain economic environment than exists
today. In my view, that is the
significance of recent financial
developments to the economy of
the Fourth District.
The rise in interest rates, in an
important sense, should be viewed
as a symptom of more basic underlying problems. Unless these problems are resolved, saving simply
will be inadequate to achieve our
purposes. Saving is the part of current income not consumed; it
represents resources available to
build capital and ensure greater
future consumption. Because federal borrowing is insensitive to
interest rates and involves no
credit risk to lenders, the federal
sector generally stands first in the
queue for credit-market funds. Consequently, over time the amount of
Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101

••

Address Correction Requested: Please send
corrected mailing label to the Federal Reserve
Bank of Cleveland, Research Department,
PO. Box 6387, Cleveland, OH 44101.

private investment financed depends
on the growth of private saving
relative to the growth of federal
credit demands.
For much of the period since
1960, the federal sector's appetite
for saving remained fairly subdued. Between 1960 and 1969, net
federal borrowing rarely exceeded
1 percent of GNP; over the next
five years, it averaged only slightly
above 1 percent of GNP. In the past
five years, federal borrowing rose
dramatically to almost 6 percent
of GNP in 1983. The situation is
even more serious if one believes,
as I do, that the huge trade deficit
and the associated inflows of foreign capital cannot safely be extrapolated into the future.
The sharp rise in net federal borrowing has reduced funds available
to finance additions to the private
capital stock. While this may not
have been a major problem when
the economy was in recession, it
could create problems down the
road if current trends continue.
The implications for the standard
of living for future generations are
not encouraging. The true burden
of financing the federal budget deficit lies ahead. If society devotes
more of its resources to the federal
sector, fewer resources are available to the private sector. As the

recovery proceeds, it should become
increasingly clear that our saving
is inadequate to meet both public
and private credit demands in
a low-interest-rate, noninflationaryenvironment.
Stabilizing Economic
Conditions
How the conflict is resolved is of
utmost importance to the restructuring efforts in the Fourth District, because we must deal with
the accumulated problems of past
decades. High interest rates will
not help restore economic vitality;
indeed, high interest rates are
merely symptomatic of other more
basic problems. Saving is inadequate for all our needs, and the
growing fear that more intense
competition in capital markets lies
ahead will severely discourage the
restructuring of older industries.
. As I have indicated, our current
problems are deeply rooted in the
economic environment. An environment marked by inflation, uncertainty, fitful economic expansions,
and sharp recessions does not
encourage risk-taking in pursuit
of long-term productivity objectives. Nor does it encourage wise
and prudent choices. It does not
encourage decisions that are consistent with good economic performance. We are grappling with problems that can be solved only in a
stable economic environment.
BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385

Federal Reserve Bank of Cleveland

econo
co

Seeking a Stable
Economic
Environment
by Karen N. Horn
This Economic Commentary was abstracted
from testimony presented by Mrs. Horn on June 8,
1984, be/ore the U.S. House 0/ Representatives,
Subcommittee on Domestic Monetary Policy 0/ the
Committee on Banking, Finance and Urban Affairs.

Policymakers face many important
decisions that will have a major
effect on national economic performance in the years ahead. Such
decisions will determine whether
we as a nation will succeed in our
efforts to restore prosperity in an
inflation-free environment. The
outcome will have a profound influence on the success of the efforts
under way to improve productivity
and to restore the competitive position of our industries and their
workers in the Fourth Federal
Reserve District.'
I would like to touch on some of
the effects of interest rates on the
economic recovery in the Fourth
Federal Reserve District. I will then
indicate in a general way why rising

••

Karen N. Horn is president 0/ the Federal Reserve
Bank 0/ Cleveland.
The views expressed herein are those 0/ Mrs. Horn
and not necessarily those 0/ the Board 0/ Governors 0/ the Federal Reserve System.

interest rates seem to me to be
symptomatic of some of the underlying issues that confront private
and public decisionmakers. Before I
begin, I want to point out that the
increases in interest rates are quite
recent. It is possible, indeed some (
feel probable, that a significant
moderation in the pace of the economic expansion will result from
rising rates. To date, however, that
moderation is not yet visible in
economic statistics or in the experience of those with whom I speak.
There has, nevertheless, been a
substantial increase in uncertainty
about the future course of the expansion, especially in the traditional capital-goods industries,
residential construction, and industries confronting intense import
competition. People are, in effect,
saying that what we have feared is
here-combined
private and public
credit demands cannot be satisfied within the constraints of a noninflationary monetary policy. Interest rates are therefore rising, and,
unless the basic underlying causes
are dealt with, further increases
cannot be ruled out. This realization
and the uncertainty of the eventual
outcome may have a far more sobering effect on the strength and the
character of the current expansion
in the Fourth District than will
the immediate consequences of the
recent increases in interest rates .

••

1. The Fourth Federal Reserve District includes
the state 0/ Ohio, western Pennsylvania, eastern
Kentucky, and the northern panhandle 0/
West Virginia.

ISSN 0428-1276
June 4, 1984

The District's
Manufacturing Base
As you know so well, the Fourth
District's economic base is concentrated in manufacturing, particularly in the production of producer
and consumer durable goods. In
1983, nearly 18 percent of nonfarm employment in the Fourth
District was dependent on such
production, in contrast to 12 percent nationally. The District's economic recovery so far has been typical of the past recoveries, at least
in an aggregate sense (see chart 1).
Total nonagricultural employment
in Ohio, which is representative of
the Fourth District, has expanded
at virtually the same pace since the
trough in November 1982 as it has
on average over past recoveries.
Our recovery has also maintained
its typical relationship with the
national recovery.
A closer examination of specific
industries, however, discloses that
imbalances in the District's recovery are masked by the total employment data. For instance, the current recovery in capital equipment
investment, while strong nationally, has been less beneficial to the
producers of traditional capital
goods (i.e., motor vehicles and
machine tools) concentrated in the
District. The recovery in capital

Chart 1 Employment Recoveries
Seasonally adjusted
Inder-xa

106
105

-------

--,

U.S. current
U.S. mean
Ohio current
Ohio mean

I

I

I

/

/

/

I

104

0_1

.......;.....

/

/

/

/

0

1
2
3
4
5
6
7
8
Quarters from trough
a. Index as percent of trough quarter employment.
SOURCE: U.S. Department of Labor.

equipment investment has been
largely located in high-technology
or information-processing equipment, a continuation of a trend
firmly in place for at least a decade.
Motor vehicles and machinery, for
example, which once accounted for
about $0.60 of every national equipment investment dollar, now account
for $0.38 of the investment dollar.
Information-processing equipment,
including communication equipment, office machinery, and instruments, currently accounts for $0.47
of every investment dollar, compared with about $0.20 in 1972.
Since there is still a heavy concentration of traditional capital-goods
industries in the District, these
industries have been receiving a
much smaller portion of the investment dollar.
Another disquieting feature of the
recovery, not only from the Fourth
District's vantage point but also
from the nation's, has been the sharp
deterioration in U.S. merchandise
trade. The U.S. trade deficit equaled

$69.4 billion in 1983, compared with
$42.7 billion in 1982. In the first
four months of this year, the trade
deficit ran at an annual rate of
$126 billion. Some deterioration in
the trade balance would, of course,
be quite normal because economic
activity recovered sooner and much
more strongly last year in the United
States than in most of our trading
partners. However, the deterioration in the U.S. trade balance
during the current recovery has
been extremely severe because of
international debt problems, economic adjustment programs
adopted abroad, and the dollar
exchange rate.
Intense foreign competition has
had a particularly severe impact on
industries important to the Fourth
District's economy, especially steel,
automobiles, and machine tools.
The competitive position of capital
goods industries has deteriorated
significantly. Since 1972, imports
of capital goods nationwide have
expanded at twice the rate of
exports of similar items. Imports
of machinery have risen, taking
an increasing share of the domestic
market for machinery.
However, we should not ascribe
the competitive problems of the
Fourth District capital-goods producers solely to deterioration in
foreign trade. The growing pressures of competition both from foreign prod ucers and from other parts
of the country have been evident
for a couple of decades now. I will
return to this point a little later.
But the strong dollar, bolstered by
financial and confidence factors,
has made serious problems worse.
In spite of these disquieting
features, the strength of the recovery thus far in the District has
brightened attitudes and given
hope to businesses and to workers.

The recent increases in interest
rates are worrisome, however, less
for their impact today than for
their implications for the effort
under way to resolve the Fourth
District's longstanding problems.
Growth Patterns
in the District
Changes in this region's economy
have been occurring slowly over
the past few decades, but they have
accelerated in recent years. Over
most of the post-World War II period,
industries have grown more slowly
in this District than in the nation
as a whole. The puzzle is why the
longstanding pattern of slower
growth relative to the nation has
accelerated so during the last
two decades.
Regional growth disparities can
be broken into two components.
The first might be called a structural element. Structural changes
cause some industries to expand
faster than other industries. Structural changes include the shift of
the District's economy from manufacturing toward service industries
or the growing importance of computers nationwide. The second
component is a competitive element
that causes some industries in a
region to grow more slowly than
their counterparts elsewhere in the
nation. Differences in costs and
prices, for example, can cause an
industry in Cleveland to underperform that same industry elsewhere
in the United States.
The combined influence of these
factors has been a pronounced lag
in our region's economic growth
relative to the nation, a lag that
can be traced back for more than
three decades. Between 1949 and
1982, total employment in Ohio
increased 1.7 percent a year on
average, 1.5 percentage points
less than the national average of
3.2 percent. Nearly 0.4 percentage

point of the shortfall is associated
with Ohio's industrial structure.
Ohio's industries were not rapidgrowth industries, explaining
about one-third of the disparity.
The shortfall resulting from the
underperformance of Ohio's industries is much larger-about
1.1 percentage points. Simply put, the
competitive weakness of Ohio's
industries relative to their counterparts elsewhere in the country
accounts for about two-thirds of
the shortfall.
Although these trends have
been in place for a long time, they
accelerated markedly in the 1970s.
Ohio's employment growth rates
in the 1970s fell behind national
growth rates by more than 1.5 percentage points. During the 1960s,
employment growth rates in Ohio's
industries were almost equal to the
national rates. The structural shift
away from manufacturing and the
competitive lag of most of Ohio's
industries still were apparent in
the 1960s, but the difference was
much less pronounced (see chart 2).
The causes behind the slowdown
have been studied and disputed
by regional economists for many
years. Some attribute the slowdown to relatively higher costs and
to greater unionization of the labor
force; others blame government
regulations and increasing taxes;
still others argue that unimaginative management and old and obsolete capital stock have been major
contributors. These influences
cannot be neatly separated into
structural and competitive categories or into their relative importances; in any event, the situation
varies among industries and across
the District.

Unstable Economic Conditions
From my vantage point, however,
there is another factor that is often
overlooked and that seems especially relevant today. The decade of
the 1960s was one of relatively low
and stable inflation and only minor
recessions. The 1970s was a period
of high and accelerating inflation,
severe recessions, and energy price
shocks. The poor economic performance of industries of the Fourth
District in the 1970s coincided with
the most unstable and uncertain
economic conditions of the postWorld War II period.
For many years now, industries
have had to deal with high and
varying rates of inflation and,
consequently, high interest rates.
The Fourth District's industries
are extremely sensitive to interest
rates and inflation. While interest
rates alone undoubtedly have a
negative impact, it seems clear to
me that the important issues of the
problem lie elsewhere. An inflationary environment distorts, indeed
frequently stifles, decisions and the
necessary actions to maintain and
improve productivity. High rates
of inflation have contributed to
increased production costs and
have made it difficult to maintain
profitability. Inflationary expectations found their way into the labor
bargaining process, distorted the
perceived rates of return on longterm capital investment, and confused reported profit figures. Businesses invested less in new plant
and equipment than they probably
would have with lower inflation
and interest rates.
The uncertainty brought on by
varying rates of interest and inflation has been particularly damaging to the Fourth District. Our
heavy manufacturing industries
are capital-intensive and must, of
course, rely on external financing.

Chart 2 Total
Nonagricultural

Employment

Index"

F--------------,

130

......... United States
......... Cleveland SMSA.
-Cincinnati
SMSA
-Pittsburgh
SMSA(

/wV/\

t/

V\"\,(

i

:\:
J

120

/'

/'J

110

100

o~~~~~~~~~~~~~

1970
1975
1980
a. Index 1967:IVQ=100.
SOURCE: U.S. Department of Labor.

When rates in the capital markets
are high and unpredictable, businesses are less willing to make
long-term investments. Instead,
they make short-term investments
that have short-term payouts, neglecting the longer-term investments necessary to reduce costs.
The unstable economic environment since the 1970s has diverted
attention from productivity and the
need to remain competitive.
The need to improve costs and
productivity to restore a competitive position is now recognized. I
believe that much encouraging progress is being made, although it is
not evident in the statistics yet and
may not be for years to come. I see
evidence of that adjustment in the
attitudes of business and of labor.
Although some obsolete plants
have been closed, the process is not
complete. Changes in organization
and practices in offices and on
assembly lines are being made. The

Chart 1 Employment Recoveries
Seasonally adjusted
Inder-xa

106
105

-------

--,

U.S. current
U.S. mean
Ohio current
Ohio mean

I

I

I

/

/

/

I

104

0_1

.......;.....

/

/

/

/

0

1
2
3
4
5
6
7
8
Quarters from trough
a. Index as percent of trough quarter employment.
SOURCE: U.S. Department of Labor.

equipment investment has been
largely located in high-technology
or information-processing equipment, a continuation of a trend
firmly in place for at least a decade.
Motor vehicles and machinery, for
example, which once accounted for
about $0.60 of every national equipment investment dollar, now account
for $0.38 of the investment dollar.
Information-processing equipment,
including communication equipment, office machinery, and instruments, currently accounts for $0.47
of every investment dollar, compared with about $0.20 in 1972.
Since there is still a heavy concentration of traditional capital-goods
industries in the District, these
industries have been receiving a
much smaller portion of the investment dollar.
Another disquieting feature of the
recovery, not only from the Fourth
District's vantage point but also
from the nation's, has been the sharp
deterioration in U.S. merchandise
trade. The U.S. trade deficit equaled

$69.4 billion in 1983, compared with
$42.7 billion in 1982. In the first
four months of this year, the trade
deficit ran at an annual rate of
$126 billion. Some deterioration in
the trade balance would, of course,
be quite normal because economic
activity recovered sooner and much
more strongly last year in the United
States than in most of our trading
partners. However, the deterioration in the U.S. trade balance
during the current recovery has
been extremely severe because of
international debt problems, economic adjustment programs
adopted abroad, and the dollar
exchange rate.
Intense foreign competition has
had a particularly severe impact on
industries important to the Fourth
District's economy, especially steel,
automobiles, and machine tools.
The competitive position of capital
goods industries has deteriorated
significantly. Since 1972, imports
of capital goods nationwide have
expanded at twice the rate of
exports of similar items. Imports
of machinery have risen, taking
an increasing share of the domestic
market for machinery.
However, we should not ascribe
the competitive problems of the
Fourth District capital-goods producers solely to deterioration in
foreign trade. The growing pressures of competition both from foreign prod ucers and from other parts
of the country have been evident
for a couple of decades now. I will
return to this point a little later.
But the strong dollar, bolstered by
financial and confidence factors,
has made serious problems worse.
In spite of these disquieting
features, the strength of the recovery thus far in the District has
brightened attitudes and given
hope to businesses and to workers.

The recent increases in interest
rates are worrisome, however, less
for their impact today than for
their implications for the effort
under way to resolve the Fourth
District's longstanding problems.
Growth Patterns
in the District
Changes in this region's economy
have been occurring slowly over
the past few decades, but they have
accelerated in recent years. Over
most of the post-World War II period,
industries have grown more slowly
in this District than in the nation
as a whole. The puzzle is why the
longstanding pattern of slower
growth relative to the nation has
accelerated so during the last
two decades.
Regional growth disparities can
be broken into two components.
The first might be called a structural element. Structural changes
cause some industries to expand
faster than other industries. Structural changes include the shift of
the District's economy from manufacturing toward service industries
or the growing importance of computers nationwide. The second
component is a competitive element
that causes some industries in a
region to grow more slowly than
their counterparts elsewhere in the
nation. Differences in costs and
prices, for example, can cause an
industry in Cleveland to underperform that same industry elsewhere
in the United States.
The combined influence of these
factors has been a pronounced lag
in our region's economic growth
relative to the nation, a lag that
can be traced back for more than
three decades. Between 1949 and
1982, total employment in Ohio
increased 1.7 percent a year on
average, 1.5 percentage points
less than the national average of
3.2 percent. Nearly 0.4 percentage

point of the shortfall is associated
with Ohio's industrial structure.
Ohio's industries were not rapidgrowth industries, explaining
about one-third of the disparity.
The shortfall resulting from the
underperformance of Ohio's industries is much larger-about
1.1 percentage points. Simply put, the
competitive weakness of Ohio's
industries relative to their counterparts elsewhere in the country
accounts for about two-thirds of
the shortfall.
Although these trends have
been in place for a long time, they
accelerated markedly in the 1970s.
Ohio's employment growth rates
in the 1970s fell behind national
growth rates by more than 1.5 percentage points. During the 1960s,
employment growth rates in Ohio's
industries were almost equal to the
national rates. The structural shift
away from manufacturing and the
competitive lag of most of Ohio's
industries still were apparent in
the 1960s, but the difference was
much less pronounced (see chart 2).
The causes behind the slowdown
have been studied and disputed
by regional economists for many
years. Some attribute the slowdown to relatively higher costs and
to greater unionization of the labor
force; others blame government
regulations and increasing taxes;
still others argue that unimaginative management and old and obsolete capital stock have been major
contributors. These influences
cannot be neatly separated into
structural and competitive categories or into their relative importances; in any event, the situation
varies among industries and across
the District.

Unstable Economic Conditions
From my vantage point, however,
there is another factor that is often
overlooked and that seems especially relevant today. The decade of
the 1960s was one of relatively low
and stable inflation and only minor
recessions. The 1970s was a period
of high and accelerating inflation,
severe recessions, and energy price
shocks. The poor economic performance of industries of the Fourth
District in the 1970s coincided with
the most unstable and uncertain
economic conditions of the postWorld War II period.
For many years now, industries
have had to deal with high and
varying rates of inflation and,
consequently, high interest rates.
The Fourth District's industries
are extremely sensitive to interest
rates and inflation. While interest
rates alone undoubtedly have a
negative impact, it seems clear to
me that the important issues of the
problem lie elsewhere. An inflationary environment distorts, indeed
frequently stifles, decisions and the
necessary actions to maintain and
improve productivity. High rates
of inflation have contributed to
increased production costs and
have made it difficult to maintain
profitability. Inflationary expectations found their way into the labor
bargaining process, distorted the
perceived rates of return on longterm capital investment, and confused reported profit figures. Businesses invested less in new plant
and equipment than they probably
would have with lower inflation
and interest rates.
The uncertainty brought on by
varying rates of interest and inflation has been particularly damaging to the Fourth District. Our
heavy manufacturing industries
are capital-intensive and must, of
course, rely on external financing.

Chart 2 Total
Nonagricultural

Employment

Index"

F--------------,

130

......... United States
......... Cleveland SMSA.
-Cincinnati
SMSA
-Pittsburgh
SMSA(

/wV/\

t/

V\"\,(

i

:\:
J

120

/'

/'J

110

100

o~~~~~~~~~~~~~

1970
1975
1980
a. Index 1967:IVQ=100.
SOURCE: U.S. Department of Labor.

When rates in the capital markets
are high and unpredictable, businesses are less willing to make
long-term investments. Instead,
they make short-term investments
that have short-term payouts, neglecting the longer-term investments necessary to reduce costs.
The unstable economic environment since the 1970s has diverted
attention from productivity and the
need to remain competitive.
The need to improve costs and
productivity to restore a competitive position is now recognized. I
believe that much encouraging progress is being made, although it is
not evident in the statistics yet and
may not be for years to come. I see
evidence of that adjustment in the
attitudes of business and of labor.
Although some obsolete plants
have been closed, the process is not
complete. Changes in organization
and practices in offices and on
assembly lines are being made. The

economic recovery and the costcutting efforts have improved firm
and industry earnings and cash
flow to the point where more
extensive efforts to improve productivity can be undertaken.
The next round of efforts will
require investment of a more
capacity-expanding character.
Financial commitments will be
heavier with a longer-term payoff
than the cost-cutting improvements of the past several years. It
would be much easier to achieve
the next stage of restructuring if
we had the assurance of adequate
savings and a more certain economic environment than exists
today. In my view, that is the
significance of recent financial
developments to the economy of
the Fourth District.
The rise in interest rates, in an
important sense, should be viewed
as a symptom of more basic underlying problems. Unless these problems are resolved, saving simply
will be inadequate to achieve our
purposes. Saving is the part of current income not consumed; it
represents resources available to
build capital and ensure greater
future consumption. Because federal borrowing is insensitive to
interest rates and involves no
credit risk to lenders, the federal
sector generally stands first in the
queue for credit-market funds. Consequently, over time the amount of
Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101

••

Address Correction Requested: Please send
corrected mailing label to the Federal Reserve
Bank of Cleveland, Research Department,
PO. Box 6387, Cleveland, OH 44101.

private investment financed depends
on the growth of private saving
relative to the growth of federal
credit demands.
For much of the period since
1960, the federal sector's appetite
for saving remained fairly subdued. Between 1960 and 1969, net
federal borrowing rarely exceeded
1 percent of GNP; over the next
five years, it averaged only slightly
above 1 percent of GNP. In the past
five years, federal borrowing rose
dramatically to almost 6 percent
of GNP in 1983. The situation is
even more serious if one believes,
as I do, that the huge trade deficit
and the associated inflows of foreign capital cannot safely be extrapolated into the future.
The sharp rise in net federal borrowing has reduced funds available
to finance additions to the private
capital stock. While this may not
have been a major problem when
the economy was in recession, it
could create problems down the
road if current trends continue.
The implications for the standard
of living for future generations are
not encouraging. The true burden
of financing the federal budget deficit lies ahead. If society devotes
more of its resources to the federal
sector, fewer resources are available to the private sector. As the

recovery proceeds, it should become
increasingly clear that our saving
is inadequate to meet both public
and private credit demands in
a low-interest-rate, noninflationaryenvironment.
Stabilizing Economic
Conditions
How the conflict is resolved is of
utmost importance to the restructuring efforts in the Fourth District, because we must deal with
the accumulated problems of past
decades. High interest rates will
not help restore economic vitality;
indeed, high interest rates are
merely symptomatic of other more
basic problems. Saving is inadequate for all our needs, and the
growing fear that more intense
competition in capital markets lies
ahead will severely discourage the
restructuring of older industries.
. As I have indicated, our current
problems are deeply rooted in the
economic environment. An environment marked by inflation, uncertainty, fitful economic expansions,
and sharp recessions does not
encourage risk-taking in pursuit
of long-term productivity objectives. Nor does it encourage wise
and prudent choices. It does not
encourage decisions that are consistent with good economic performance. We are grappling with problems that can be solved only in a
stable economic environment.
BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385

Federal Reserve Bank of Cleveland

econo
co

Seeking a Stable
Economic
Environment
by Karen N. Horn
This Economic Commentary was abstracted
from testimony presented by Mrs. Horn on June 8,
1984, be/ore the U.S. House 0/ Representatives,
Subcommittee on Domestic Monetary Policy 0/ the
Committee on Banking, Finance and Urban Affairs.

Policymakers face many important
decisions that will have a major
effect on national economic performance in the years ahead. Such
decisions will determine whether
we as a nation will succeed in our
efforts to restore prosperity in an
inflation-free environment. The
outcome will have a profound influence on the success of the efforts
under way to improve productivity
and to restore the competitive position of our industries and their
workers in the Fourth Federal
Reserve District.'
I would like to touch on some of
the effects of interest rates on the
economic recovery in the Fourth
Federal Reserve District. I will then
indicate in a general way why rising

••

Karen N. Horn is president 0/ the Federal Reserve
Bank 0/ Cleveland.
The views expressed herein are those 0/ Mrs. Horn
and not necessarily those 0/ the Board 0/ Governors 0/ the Federal Reserve System.

interest rates seem to me to be
symptomatic of some of the underlying issues that confront private
and public decisionmakers. Before I
begin, I want to point out that the
increases in interest rates are quite
recent. It is possible, indeed some (
feel probable, that a significant
moderation in the pace of the economic expansion will result from
rising rates. To date, however, that
moderation is not yet visible in
economic statistics or in the experience of those with whom I speak.
There has, nevertheless, been a
substantial increase in uncertainty
about the future course of the expansion, especially in the traditional capital-goods industries,
residential construction, and industries confronting intense import
competition. People are, in effect,
saying that what we have feared is
here-combined
private and public
credit demands cannot be satisfied within the constraints of a noninflationary monetary policy. Interest rates are therefore rising, and,
unless the basic underlying causes
are dealt with, further increases
cannot be ruled out. This realization
and the uncertainty of the eventual
outcome may have a far more sobering effect on the strength and the
character of the current expansion
in the Fourth District than will
the immediate consequences of the
recent increases in interest rates .

••

1. The Fourth Federal Reserve District includes
the state 0/ Ohio, western Pennsylvania, eastern
Kentucky, and the northern panhandle 0/
West Virginia.

ISSN 0428-1276
June 4, 1984

The District's
Manufacturing Base
As you know so well, the Fourth
District's economic base is concentrated in manufacturing, particularly in the production of producer
and consumer durable goods. In
1983, nearly 18 percent of nonfarm employment in the Fourth
District was dependent on such
production, in contrast to 12 percent nationally. The District's economic recovery so far has been typical of the past recoveries, at least
in an aggregate sense (see chart 1).
Total nonagricultural employment
in Ohio, which is representative of
the Fourth District, has expanded
at virtually the same pace since the
trough in November 1982 as it has
on average over past recoveries.
Our recovery has also maintained
its typical relationship with the
national recovery.
A closer examination of specific
industries, however, discloses that
imbalances in the District's recovery are masked by the total employment data. For instance, the current recovery in capital equipment
investment, while strong nationally, has been less beneficial to the
producers of traditional capital
goods (i.e., motor vehicles and
machine tools) concentrated in the
District. The recovery in capital