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;Economic
Review
FEDERAL RESERVE BANK OF ATLANTA
Conference Highlights
LIBRARY
APR
APRIL 1983
1983
GROWTH " N À R ^
INDUSTRIES Tracking the '80s
I
BANKS
Purchase Accounting and Bank Earnings
,OFF-BUDGET
REGULATION
'HOUSING
Federal Spending Booms
Can Small Businesses Cope?
Manufactured Homes Surge in South
Economic ma
Review f m
m_
FEDERAL
RESERVE
BANK
O F ATLANTA
President:
William F. Ford
Sr. Vice President and
Director of Research:
Donald L. Koch
Vice President and
Associate Director of Research:
William N. Cox
Financial Structure:
B. Frank King, Research Officer
David D. Whitehead
Larry D. Wall
National Economics:
Robert E. Keleher, Research Officer
Mary S. Rosenbaum
Regional Economics:
Gene D. Sullivan, Research Officer
Charlie Carter
William J. Kahley
Database Management:
Delores W. Steinhauser
Payments Research:
Paul F. Metzker
Visiting Scholars:
James R. Barth
George Washington University
James T. Bennett
George Mason University
George J. Benston
University of Rochester
Gerald P. Dwyer
Emory University
Robert A. Eisenbeis
University of North Carolina
John Hekman
University of North Carolina
Paul M. Horvitz
University of Houston
Peter Merrill
Peter Merrill Associates
Communications Officer:
Donald E. Bedwell
Public Information Representative:
Duane Kline
Editing:
Gary W. Tapp
Graphics:
Susan F. Taylor
Eddie W. Lee, Jr.
The E c o n o m i c Review seeks to inform the public
about Federal Reserve policies and the economic
environment and, in particular, to narrow the gap
between specialists and concerned laymen. Views
expressed in the Economic Review aren't necessarily
those of this Bank or the Federal Reserve System.
Material may be reprinted or abstracted if the Review
and author are credited. Please provide the Bank's
Research Department with a copy of any publication
containing reprinted material. Free subscriptions and
additional copies are available from the Information
Center, Federal Reserve Bank of Atlanta, P.O. Box
1731, Atlanta, G a 30301 (404/586-8788). Also contact the Information Center to receive Southeastern
E c o n o m i c Insight a free newsletter on economic
trends published by the Atlanta Fed twice a month.
\
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)
7 *
"IL
Growth Industries
in the 1980s
What will determine which
strong growth in the '80s?
management overcome a lack
advantages? Highlights of a
conference.
4
industries achieve
Can excellence in
of other competitive
recent Atlanta Fed
The Limitations of
Spending Limitation:
Off-Budget Activities and
The Federal Government
23
How effective are legislative restraints on government spending and borrowing? Can constitutionally imposed balanced budget measures or tax
limitation requirements really induce governments
to be more efficient? In recent years, federal "offbudget" spending has grown faster than "onbudget" spending.
Manufactured Housing: A Bright Spot
in the Southeast
40
Why did the manufactured housing industry emerge
as a bright spot for the Southeast during the
recent recession? What are the industry's prospects
for expansion in the region and beyond?
»
i
APRIL 1983 E C O N O M I C R E V I E W • V O L U M E LXVIII, NO. 4
»
*
Purchase Accounting and
the Quality of Bank Earnings
14
The use of "purchase accounting" for mergers
and acquisitions is affecting the earnings of some
bank holding companies that acquire banks in the
Southeast. What is purchase accounting, and
why is its use becoming controversial?
Government Requirements:
How Burdensome to
Small Business?
35
Do regulations hurt small businesses more than
large ones? How are small firms in the Southeast
affected, and what is being done to reduce the
small business reporting burden?
Statistical Supplement
51
M
M s l
Growth Industries
in the 1980s
How do some companies manage to grow and
prosper even during recessions that leave their
competitors struggling to survive? The Federal
Reserve Bank of Atlanta recently invited some of
the nation's most respected corporate thinkers to
share their ideas on how growth companies are
able to transform opportunities into bottom-line
profits. Here's a look at what they had to say.
4
...
APRIL 1983, E C O N O M I C R E V I E W ^
What's the secret to corporate growth?
Business people came from as far away as
California seeking insight into that question as
the Federal Reserve Bank of Atlanta sponsored a
March conference on "Growth Industries in the
1980s."
Encouraged by an economy that appeared to
be gaining strength after a trying recession, more
than 200 chief executive officers, corporate
planners, financial executives and journalists
turned out for the two-day session at the Atlanta
Hilton. Although most hailed from the Southeast,
some signed in from as far away as Los Angeles,
Chicago and New York.
The conference, the Atlanta Fed's fourth on
major economic issues, challenged registrants
with the question of how to achieve growth in a
world of dramatically changing markets.
How is it, questioned Atlanta Fed President
William F. Ford, that some firms manage to
achieve growth even during recessions when
their less fortunate competitors are struggling for
survival? What is the alchemy that permits some
firms to transform dross into gold—or, to put it
into business terms, how do they capitalize on
opportunities and convert them into corporate
success?
"Some people used to say that all it took was a
location in the booming Sunbelt" to achieve
growth, Ford noted. "Tell that to some of the
steel companies around Birmingham, or to the
homebuilders in South Florida—or to some of
the hard-pressed textile and forest products
firms right here in Georgia"
Atlanta Fed Board Chairman William A. Fickling,
Jr. explained that the central bank considers
itself a logical forum for such significant economic
questions of concern to the businesses within its
Sixth Federal Reserve District.
He noted that the Bank had sponsored conferences on the future of the financial services
industry and of the U.S. payments system in
June 1981, then followed with a conference in
March 1982 on "Supply-Side Economics in the
1980s."
The growth industries conference, he added,
"should prove a worthy successor to the supplyside gathering."
Donald L. Koch, the Atlanta Fed's director of
research, characterized the conference's central
questions as critical ones for a nation whose
economy is growing at only marginal rates.
"At such a time, it is vital in terms of national
policy that we learn to identify and to stimulate
FEDERAL R E S E R V E B A N K O F ATLANTA 5
S e s s i o n I:
Key G r o w t h Characteristics
Welcoming Remarks
William A. Fickling, Jr.
Chairman, Board of Directors
Federal Reserve Bank of Atlanta
Moderator
Donald L Koch
Senior Vice President and
Director of Research
Federal Reserve Bank of Atlanta
The Ideal Environment
tor Nurturing Gowth
Mancur Olson
Professor of Economics
of Maryland
Why Growth is Important
Arthur Levitt Jr.
Chairman
American Stock Exchange
Conference Purpose
and Overview
William F. Ford
President
Federal Reserve Bank of Atlanta
What the Investor Looks For
A Panel Discussion with:
Tom Grittin
Chairman
C.T. Management Ltd.
Stephen Lieber
President
The Evergreen Fund
Edward Mathias
President
T. Rowe Price
Management Excellence
and Growth
Robert H. Waterman, Jr.
Author
"In Search of Excellence"
the sectors of our economy with the potential to
provide the largest share of jobs and make the
greatest contribution to GNP," Koch said. " H o w
" H o w do we, as a nation, identify and
encourage the high-performance
sectors likely to make significant
contributions to our national
economic health?"
—Donald
L
Koch
do we, as a nation, identify and encourage the
high-performance sectors likely to make significant contributions to our national economic
health?"
To address such issues, the two-day event
brought together some of the nation's leading
thinkers on the subject of growth and corporate
success.
Leading off the first panel—on "key growth
characteristics"—was Mancur Olson, a professor
of economics at the University of Maryland and
author of a recently published book called The
Rise and Decline of Nations. According to his
premise, mature institutions— as well as mature
industries and geographic areas of our own
nation—find themselves at a surprising disadvantage in competing against less experienced
nations, companies and regions.
Olson cited the emergence of aggressive new
industrial nations such as Japan, Korea and Taiwan
and the contrasting economic stagnation of Great
Britain.
He attributed that malaise to the fact that
stable and mature nations such as Great Britain
have had time to accumulate a host of specialinterest groups—ranging from trade associations
to labor unions—whose lobbyingor"cartelizing"
efforts to help their own constituencies dampen
national efficiency.
"As the group gets a larger slice of the social
pie, the pie will get smaller," declared Olson. He
said special-interest groups have an incentive
Special-interest groups have an
incentive "not to produce but to
engage and persevere in distributional struggles even if the social
costs are a gigantic multiple of the
amount they win."
—Mancur
Olson
"not to produce but to engage and persevere in
distributional struggles even if the social costs are
a gigantic multiple of the amount they win."
Newer industrial nations—or emerging industries—either haven't had time to accumulate the
baggage of such special-interest groups or else
those groups haven't had time to mobilize political
power. In the case of nations defeated in war—or
of the South after the Civil War—special-interest
groups were neutralized, permitting governments
and industries to start with a clean slate.
Another major conference speaker was Arthur
Levitt Jr., chairman of the American Stock Exchange
and a leading spokesman for growth companies
as head of the American Business Conference.
From his strategic vantage point, Levitt emphasized that the United States must take a balanced
approach to its industrial policy, one in which
government provides the climate and incentives
for growth while leaving the mechanics to the
|
marketplace.
Levitt said government"should not plan every- .
thing for us, or abandon everything to us, but
rather should practice a kind of'climate control'
to create the best possible conditions for real
growth."
Noting that it is tempting to oppose any
industrial policy at all, Levitt pointed out that" it is
also futile, because America already has a policy
of sorts." That policy, he explained, is the product
of thousands of government interventions every
day—"in agriculture, in shipbuilding, in defense,
in regulation, in trigger pricing, even in such
things as labeling and pollution standards."
He urged that the government define its central
direction but, like several other speakers, warned
against any attempt to create a Japanese-style
bureaucracy dedicated to encouraging industrial
"winners" and discouraging "losers."
"Let us target our growth," he said. "Instead of
either trying to pick winners or attacking govern- *
ment intervention for ideological reasons, let us >
,
try to give interventions in the economy a theme
"Instead of either trying to pick
winners or attacking government
intervention for ideological reasons,
let us try to give interventions in the
economy a theme and a p u r p o s e planning for growth by removing
the obstacles to growth."
—Arthur
Levitt,
Jr.
and a purpose—planning for growth by removing I
the obstacles to growth."
Government could help, he said, by eliminating A
bias against savings and investment in the tax
system, by increasing tax incentives to encourage "
long-term investment and high risks, and by
supporting vocational training and worker retraining.
Levitt appeared in a session that also featured
a panel of securities experts who outlined what
they look for in assessing a firm's potential for ^
investment opportunities. Panelists, chosen for
!
6
APRIL 1983, E C O N O M I C R E V I E W ,
J
their investment track records, were Edward
Mathias, president of the T. Rowe Price New
Horizons Funds; Stephen Lieber, president of
the Evergreen Fund, and W. Thomas J. Griffin, of
London's G.T. Management, Ltd.
"It seems to us that the key and the main
driving force is the need for productivity," said
Griffin, offering the global perspective of his
international investment firm. "The desperate
need for productivity is driving both companies
and governments into hard decisions."
Many industries, he said, are either in decline
or, at best, static—a dilemma he blamed largely
on over-expansion in the 1960s and 1970s.
"All have a desperate need for productivity,"
said Griffin, "some to compete and some just to
stay alive." For many of these industries, he
added, the threat of Japanese competition has
forced change. He described Japanese businesses
as "ruthlessly competitive" both among themselves and with foreign competitors.
Another powerful force affecting the growth of
high-technology industries, he said, is a shortage
of engineers that, among other things, "will force
the major companies to locate where the engineers want to live."
Despite such challenges facing growth industries,
many speakers expressed optimism over the
new opportunities that often accompany those
challenges. Mathias, for instance, observed that
most people focus too exclusively on America's
industrial problems—what they deplore as economic stagnation, a slipping competitive posture
in world markets and other structural problems.
" W h e n we delve beneath the surface, we see a
different picture," he said. That picture, he said,
includes the emergence of a second-tier industrial structure of largely technical new firms,
oriented toward service, information processing
and knowledge.
Lieber said the Evergreen Fund looks for
simplicity in identifying companies likely to show
strong growth. "The opportunity for consistent
growth performance is greatest in the simplest,
freshest areas," in his view.
Lieber said he and his colleagues analyze an
investment opportunity by looking at five basic
stages of corporate growth.
First, they look for "easy, straightforward
growth," often characterized by a rapidly growing
market or by high penetration of an incompletely
exploited market.
The second key area would include companies
that have added on to their product or service
FEDERAL RESERVE BANK O F ATLANTA
and "are able to consistently do that without a
great variation in their service."
Lieber's third category of growth companies
includes firms that broaden their field by introducing entirely new products and taking larger
risks.
The fourth group encompasses companies
that are able to make a large jump across fields to
become leaders in more than one kind of business. Fewer succeed in this endeavor, Lieber
said, but " w e look at them."
Finally, Lieber examined companies faced
with obsolescence, but which have achieved
"diversity, breadth, and leadership." He cited
Sears, Roebuck as a company that has revitalized
itself from " a great, broad, and in many ways
immobile entity."
Lieber said he focuses on "the risk factors," the
"conceptual opportunities." The key component
in a company/s ability to seize those opportunities
is the vitality of management. He characterized
The key component in a company's
ability to seize those opportunities
is.. . " a n athletic kind of competitive, unrelenting, well-trained,
dedicated mind able to sustain
excitement."
—Stephen
Lieber
that vitality as "an athletic kind of competitive,
unrelenting, well-trained, dedicated mind able
to sustain excitement."
Lieber cited banking as a particular industry
where forward-looking management and a deregulating environment have combined to create
exciting growth opportunities. The Evergreen
Fund, he said, has participated with both parent
companies and smaller banks in what Evergreen
sees as an industry move toward interstate banking.
The conference featured two best-selling authors
whose books have prompted readers to rethink
their views of corporate success, or their outlook
toward the broader societies in which corporations
operate.
Robert H. Waterman Jr., a leading expert in
business management, discussed the similarities
7
that he and research partner Thomas J. Peters
found in a study of 42 successful American
corporations. Waterman spoke of the common
elements—such as an emphasis on people and a
willingness to take corporate risks—that he found
in successful firms as diverse as IBM, Procter &
Gamble, 3M and Delta Airlines.
Waterman's book outlining his conclusions,
In Search of Excellence, has proven a major bestseller, with 250,000 copies in print. Waterman
collaborated with Peters on the book. That book
"has reminded us that the best-managed American
firms don't have to take a back seat to anyone,"
noted John H. Weitnauer, the Atlanta Fed's
deputy chairman, in introducing Waterman. "That's
a timely reminder we can all take to heart."
Many successful corporations exhibit what
Waterman called " a funny combination" of centralized and decentralized management. They
are centralized around their corporate values,
and "very decentralized around everything else."
Discovering the proper dimensions of this combination is where the "artfulness" of management
lies, according to Waterman.
Calling his book a "study of ambiguity,"
Waterman described how large companies stimulate innovation by creating small working divisions. These small units also promote internal
competition and what Waterman called "action
devices" to "get around the bureaucratic weed
patch."
Another way successful businesses shortcircuit bureaucracy is by forming "adhocracies"—
short-term task forces assigned to solve problems
by cutting across organizational lines.
Waterman's research also found that experimentation was a common thread among top
corporations. In fast-growing or emerging technologies, good market data is not always available.
Innovative companies respond—just as scientists
do—by experimenting, Waterman said. The development of the "zoom" lens for cameras offers
an example of a product where the potential
market was at first thought to be small. Experimentation showed the market to be large enough
to justify further development.
Moving from the mechanisms of growth to the
underlying values that sustain a corporation,
Waterman noted that most companies profess
to maintain some sort of central values, but only a
few practice them.
"It's the fanaticism, the persistence and the
high energy with which these companies pursue
their values that is astonishing," he said. This
8
persistence invariably keeps the company close
to the customer, which in turn stimulates more
innovation. One study showed that, of the major
improvements in the scientific instrument industry,
80 percent had come from the customer.
v
Waterman closed his presentation by emphasizing how important people—rather than systems
or machines—were to the top companies he
;
studied. "These companies believe that productivity originates with people," he said, "and they
treat individuals with respect." He cited IBM as a
corporation where respect for the individual
occupies a major portion of management time. ?
Reinforcing this conclusion were the findings
from Waterman's interviews within the corporations
he studied. Those companies that described
their goals in terms of people and personal
Those companies that described
their goals in terms of people and
personal values performed much
better in the marketplace than did
those that expressed their goals in
terms of earnings.
—Robert
Waterman
values performed much better in the marketplace
than did those that expressed their goals in terms
of earnings.
Another prominent author appearing at the
conference was Alvin Toffler, the futurist and
social critic best known for his analyses of contemporary social change. Toffler, the author of ,
Future Shock and The Third Wave, spoke of the
implications for corporate growth that he foresees in his vision of the future. In that future, he
projects an information-based Third-Wave society
will supplant our Second-Wave industrial society
just as Toffler says the Industrial Revolution
displaced the agrarian First Wave civilization.
i
Toffler noted that some forces—certain labor
unions, companies and policies—are resisting
the transition, fighting to preserve the traditional
industrial economy through protectionist tariffs,
government regulations, even, in some countries,
actual nationalization. "There are people," as he
put it, "who would really love to recreate the
1950s."
APRIL 1983, E C O N O M I C R E V I E W ^
According to Toffler, those holdouts fail to see
that the old ways cannot be—in fact, should not
be—preserved in the face of the irresistible
change he believes is already beginning to take
place in societies around the globe. He urged
business and political leaders not to obstruct the
sweeping movement toward a Third-Wave society
that he contends offers greater promise for
civilization than did the Industrial Revolution.
"Rather than fighting to preserve the past, we
need to face new realities," he said, declaring:
"What is emerging is not an extension of the old
industrial society, but a new system—indeed, a
" W h a t is emerging is not an
extension of the old industrial
society, but a new system—indeed,
a new civilization—based on
principles that sometimes contradict those that w e have lived with
for the past 300 years."
—Alvin
Toffler
new civilization—based on principles that sometimes contradict those that we have lived with for
the past 300 years." He said those changes are
affecting not just America but industrial nations
around the globe. What's more, he added, the
transformation is not limited to economics, but
includes social, political and cultural change as
well.
In ToffleKs vision of global economics, the
world is moving from a Second-Wave manufacturing economy based on automobiles, steel,
textiles, apparel and rubber to a Third-Wave
economy based on communications, genetics,
aerospace, environmental technologies and similar
high-tech activities. As the transformation takes
place, he said, giant, successful Second-Wave
corporations will find themselves struggling to
restructure in response to their changing environment.
He cited American Telephone and Telegraph
and General Motors as two corporate giants
already attempting "to come to grips with new
pressures and new realities." Such corporations,
he noted, may face internal as well as external
pressures to change their time-tested way of
doing business.
FEDERAL R E S E R V E B A N K O F ATLANTA 9
What happens to employees displaced in the
transition away from a blue-collar economy based
on heavy manufacturing? Toffler said the problem
can be dealt with, but he disputed those who say
that nature should be allowed to take its coursethat "an invisible hand will solve the crisis for us
and all those displaced workers will get jobs in
Silicon Valley." He called that a myth because the
problems of unemployment are qualitative as
well as quantitative.
"It's a question," he said, "of matching and
changing skill requirements with a population
that has to be continually retrained. Therefore,
while encouraging a greater emphasis on industries
of the future—optics, lasers, bio-technologies,
software, video, telecommunications—he pointed
out that training could prove to be the crucial
factor in determining how well nations deal with
the transformation.
"Above all", he said, " w e must nurture new
forms of education because you can't have a
Third-Wave economy with a Second-Wave education system."
Session II:
Industries to A c c o m m o d a t e
An E x p a n d i n g Population
Moderator
Gene D. Sullivan
Research Officer and
Senior Economist
Federal Reserve Bank ot Atlanta
Construction:
Changing Family Residences
Howard Katz
President
Ocilla Industries
Retailing: The Impact of
Computerized Shopping
Waller A Forbes
Vice-Chairman and CEO
Comp-U-Card
The Office
of the Future
Donald L Koch
Senior Vice President and
Director of Research
Federal Reserve Bank of Atlanta
Medical Services:
Contributions to Growth
Ray Stevenson
President
Charter Medical Corporation
Even as traditional employers have had to fight
for their lives, other firms have sprung up, or have
expanded, to serve the needs of a growing
population as the World War 1 "baby boomers"
1
move into their most productive years of earning—
and consuming.
" W h e n you start looking at the ingredients that
go into growth, you quickly find that the human
element is the critical one," explained economist
Gene D. Sullivan, who heads the Atlanta Fed's
regional research team and who helped organize
the growth conference.
"Growth opportunities can be rare in a stagnating region where the population is holding
stable, or even declining," he said. " O n the other
hand, the Sunbelt states of the South and Southwest have been fueled by a steady stream of
migrants from less temperate climes."
Sullivan introduced a panel that included Walter
A. Forbes, vice chairman and C E O of Comp-UCard of America in Stamford, Connecticut; Ray
Stevenson, president of Charter Medical Corporation, a $400 million health care services company based in Macon, Georgia, and Howard
Katz, president of Ocilla Industries, a modular
homes manufacturer with headquarters in New
York and manufacturing operations in Georgia.
Forbes, who heads a mail-order retailing firm
that enables consumers to shop via an experimental interactive sales system, said two million
computer and telephone subscribers already
use the service, for which they pay a fee. Those
subscribers can tap into various computerized
data bases that permit them to review products
being offered for sale without going shopping at
a retail establishment.
Through a computer terminal at home or in an
office, potential customers can get up-to-theminute information on prices and specifications
covering more than 50,000 name-brand products.
In just the week before the conference, Forbes
said, Comp-U-Card sold via computer items
ranging from stereos and refrigerators to microwaves, automobiles, crystal, silver and china.
"Within a few months, we'll begin to introduce
financial services, pharmaceuticals, certain food
items, travel and insurance," he said. " W e ' r e on
the way, and I think it will take us only a couple of
years to increase our basic products to over
200,000."
Stevenson cited the success of the health care
management industry as evidence that, for organizations willing to take risks and look at old
problems in fresh ways, "the opportunities still
exist to combine worthwhile public service with
exceptional rewards."
Stevenson noted that his industry had been
relatively slow to apply sound business principles,
but that the adoption of solid management
tactics has inspired the industry's growth in
recent years. That, according to Stevenson, has
done more to revolutionalize the hospital business than any amount of new technology.
10
" Every other growth industry is talking about its
technology," he noted. " O u r technology is just
good management applied to what was a far
flung, dispersed and relatively poorly managed
cottage industry."
Session III:
Emerging Growth Industries
Moderator
Donald L Koch
Senior Vice President and
Director of Research
Federal Reserve Bank ot Atlanta
Automated Office Equipment:
Will Rapid Growth Continue?
James L Bast
President and CEO
Dictaphone Corporation
Electronics: High Technology
is the Wave of the Future
John T Hartley, Jr.
President and CEO
Harris Corporation
Growth in a Changing Future
Speaker: Alvm Jollier
Author
"The Third Wave"
"Future Shock"
Microcomputer Enhancement:
Challenges in an
Exploding Industry
J. Leland Strange
CEO, Quadram Corporation and
Director, Intelligent Systems
Corporation
A panel on "Management Excellence and
Emerging Growth Industries" featured three chief
executive officers of fast-growing firms: John T.
Hartley Jr., president of Harris Corporation in
Melbourne, Florida; Leland Strange, vice president and director of marketing for Quadram
Corporation of Norcross, Georgia, and James L
Bast, president of Dictaphone Corporation, a
wholly owned subsidiary of Pitney Bowes Inc.
Hartley, whose firm manufactures high-technology communication and information-processing
equipment discussed electronics; Strange focused
on mini-computers and telecommunications,
while Bast reviewed the rapid growth of automated
office equipment.
Hartley pointed out that much of the rise to
prominence of the service industries was made
possible by technological developments, especially in electronics.
He singled out six particular technologies he
believes will be the most significant in the '80s
and '90s. VLSI (very large scale integrated
circuits), computer aided design, digital communications, high level software, satellite communications and light wave systems.
A P R I L 1983, E C O N O M I C R E V I E W ,
,
t
•
i
•
I
i
Hartley noted that "it takes unusual organizational techniques and organizational flexibility
to manage these technology based companies."
The rapid rate of change in technologies places
"great stress on management techniques and
means that... we must be very flexible in terms
of our planning process and our direction." He
cited the need for increased quality in math and
science education in our primary and secondary
education system as a key to America's ability to
keep up with foreign competition in the"hightech future."
Bast provided an interesting parallel to Waterman's findings. Even though his company specializes in office automation products, he said
the secret of his success has been a focus on
Even though his company specializes in office automation products,
he said the secret of his success
has been a focus on "workers
themselves, and what they are
doing and the problems they are
confronted with, rather than actual
hardware or products."
—James
L
he added, that business may see a machine
capable of producing hard copy or screen copy
directly from speech within five to ten years.
In spite of all the attention given to office
automation, Bast said the penetration by such
devices of the work environment remains low.
Only 3 percent of managers today have displaybased work stations; by 1986 it is anticipated
that this will have increased to only 8 percent.
Therefore, Bast predicted continued strong
growth for the office automation industry.
Bast said he also expects that American
willingness to innovate will help lead an "American resurgence" over foreign products. All of
the ingredients for rapid growth are in place, he
concluded, and increased efficiency, productivity, and profitability should result.
Session IV:
G r o w t h Prospects for
Traditional Industries
Moderator:
William N. Cox
Vice President and
Associate Director of Research
Federal Reserve Bank ot Atlanta
Apparel: Innovations
That Will Lead to Growth
Thomas N Roboz
Chairman
Stanwood Corporation
Bast
•1
»
)
*
*
4
I
"workers themselves, and what they are doing
and the problems they are confronted with,
rather than actual hardware or products."
The office automation industry is undergoing
a transition, Bast said, from single function
products (like word processors) to multiple
function products and greater interconnection
of devices.
A driving force behind both the people focus
and the multiple use products, in Bast's view, is
the changing nature of the nation's work force.
Within the rapidly expanding white-collar portion of the work force, there are now about five
million secretaries, 11 million managers, and
16 million professionals. Office automation is
just beginning to reach the latter two groups.
Bast predicted that the office automation
industry "will quickly move everyone to multifunction work stations that will combine word
processing, personal computing, data processing and even voice processing." It is possible,
FEDERAL R E S E R V E B A N K O F ATLANTA
Other conference panelists spoke of the implications of growth and change to corporations at
both ends of the spectrum— not only to emerging
and expanding industries such as telecommunications, health care and automated office equipment,but to the traditional industries that have
provided jobs and payrolls in America for generations—industries such as steel, autos, textiles
and apparel.
"This era has also posed problems for our
traditional industries, including those that have
provided jobs and profits since the dawning of
the Industrial Revolution," said William N. Cox,
the Atlanta Fed's associate director of research.
" W e have witnessed the traumatic market
changes that have jolted such industries as auto
manufacturing. And we have seen the trials of
traditional 'smokestack' companies that once
provided the muscle for national economic growth."
Thomas N. Roboz, a Charlotte, N.C. apparel
executive who has headed major industry trade
11
organizations, spoke of the dilemmas facing one
traditional southeastern employer that has found
itself besieged by imports from lower-wage competitors overseas.
To fight back, he said, U.S. textile and apparel
firms will need to automate, diversify, create
export trading companies and become more
market oriented. The industry can survive, Roboz
To fight back,...U.S. textile and
apparel firms will need to automate,
diversify, create export
trading companies and b e c o m e
more market oriented
—Thomas
N.
Roboz
said, "but it will require a blood revolution, with a
lot of casualties along the way."
The conference concluded with a panel of
leading business journalists, who offered their
perspectives on the subject of growth and
technology. Appropriately, one panelist—science and technology editor Richard Shaffer of
The Wall Street Journal—delivered his speech
from notes he had typed on a portable computer flying from New York to Atlanta.
Shaffer spoke as part of a panel that also
featured Malcolm (Steve) Forbes Jr., president
of Forbes magazine; James Russell, financial
editor of The Miami Herald; and David Cook,
Washington economics correspondent for The
Christian Science Monitor.
Despite his enthusiasm for high technology,
Shaffer brought a measure of skepticism with
him from his New York office, warning against
excessive optimism that technology can solve
all economic problems. Noting that computer
manufacturers haven't been immune to the
recession, he observed that "high tech is as
subject to the laws of economics as anything
else." He questioned whether a shakeout isn't
likely in portions of the computer industry,
considering that 150 brands of desk-top models
are now contending for buyers in a crowded
marketplace.
Just the same, Cook quoted an unpublished
Cabinet study that underscores the importance
of the nation's high-tech industries. He said
12
" H i g h tech is as subject to the laws
of economics as anything else."
—Richard
Shaffer
that study, dated October 1982, concluded
that high-tech firms:
1. Boast a growth rate twice that of the
national economy as a whole, with high-tech
industries accounting for nine of the ten fastest
growing industries in recent years.
2. Enjoy labor productivity growth six times as
great as the overall business population.
3. Showed price increases only a third as high
as the nation's inflation rate over the 19701980 period.
Finally, he said high-tech firms since 1975
have produced a cumulative balance-of-trade
surplus totaling $128 billion, while the nation
as a whole was experiencing a cumulative $148
billion deficit in merchandise trade. "Even in
the play-money land of Congress, we are talking
big stakes," Cook observed.
Forbes noted with amazement that some
politicians and editorialists have "begun to
mythologize the blue-collar worker" and to
lobby in favor of protection for smokestack
industries just as an earlier generation sought
to protect a legendary "yeoman farmer" from
industrialization.
"If we resort to protectionism trying to turn
back the clock, it can have serious repercussions," Forbes admonished.
"If w e resort to protectionism trying
to turn back the clock, it can have
serious repercussions."
—Malcolm
Forbes,
Jr.
Russell, whose financial column is carried by
some 100 newspapers around the nation, described business journalism as a "growth industry" that most daily newspapers were slow to
recognize.
APRIL 1983, E C O N O M I C R E V I E W ,
Session V:
Press Perspective
Moderator
William N. Cox
Vice President and
Associale Director of Research
Federai Reserve Bank of Atlanta
James Russell
Financial Editor
The Miami Herald
David T. Cook
Washington Correspondent
The Christian Science Monitor
Malcolm S. Forbes, Jr.
President
Forbes
Richard Shaffer
Science and Technology Editor
The Wall Street Journal
"The traditional American press, the daily
newspaper, did not recognize it until others
had exploited it," he said. " N o w they are trying
to play catch-up by frantically expanding their
business sections."
Newspapers began to shore up their business
sections eight or nine years ago, he said, when
it became obvious that the economy had become a major continuing news story in the
country. The economy emerged as a major
FEDERAL R E S E R V E B A N K O F ATLANTA
story, he added, because inflation forced businesses and the American public alike to learn
more about economics and financial choices.
"People had to make complex economic
choices," according to Russell, "or get run over
by the wave of inflation and high rates."
Atlanta Fed Chairman Fickling, who welcomed
visitors to the conference, expressed hope that
the interest in corporate growth that they had
demonstrated by attending would be rewarded
by a cooperative economy.
"Let's hope," he said, "that we are convening
this conference at a time when our economy is
moving into a more upbeat phase—a phase
that will bring greater prosperity for the firms
within our Sixth Federal Reserve District and
across the nation."
— Donald E. Bedwell
and Gary W. Tapp
PROCEEDINGS F O R T H C O M I N G
Complete proceedings
of the entire conference
will
be available later in the year. See future issues of the
Review for details.
13
f
Purchase Accounting and
the Quality of Bank Earnings
C o n c e r n over w h e t h e r
purchase
accounting
provides a "paper 5 ' boost
to earnings a p p e a r s to be
growing. A study of recent Sixth
District holding c o m p a n y acquisitions s h o w s , however, that
t h e short-term effect of
purchase accounting
is minimal. T h e midto long term effects,
however, c o u l d be significant.
14
Investors, creditors, regulators and others interested in the financial condition of a banking firm
rely heavily on its financial statements. To be
useful, those statements must present the firm's
condition fairly, accurately, and consistently. In
spite of close monitoring of large banks by
security analysts, however, we believe the effects
of one accounting area—called "purchase accounting"—often are not fully understood. In
particular, this method's treatment of "goodwill'
in business acquisitions has proven somewhat
controversial.
Purchase accounting, which deals with mergers
or acquisitions, can have dramatic effects on a
banking firm's reported income. If rising interest
rates reduce the market value of some of a
bank's fixed-rate assets, for example, purchase
accounting could actually produce a temporary
increase in earnings. On the other hand, when a
company ends an aggressive acquisition policy,
earnings growth might show a significant decline.
If such changes reflected actual economic values,
there would be no need for concern. But if they
were attributable to arbitrary accounting decisions, investors, regulators and the general populace would be very interested.
Recently, some accountants have expressed
concern over the "paper" boost to earnings
arising from purchase accounting involving financial institutions. To address this problem the
Financial Accounting Standards Board issued
statement No. 72 "Accounting for Certain Acquisitions of Banking or Thrift Institutions." The
changes in this statement would lessen the boost
APRIL 1983, E C O N O M I C R E V I E W ^
to earnings in certain acquisitions after September
30, 1982; however, there would still exist the
possibility of enhanced earnings. Interestingly,
we found that this "paper" boost to earnings was
not significant in recent holding company acquisitions in the Sixth District FASB No. 72
would appear to be more applicable to the ailing
savings and loan industry where substantial writedowns of the mortgage portfolio often result in
liabilities exceeding the fair market value of
assets by a large margin. The new accounting
statement requires that if, and to the extent that,
the fair value of liabilities assumed exceeds the
fair value of identifiable assets acquired, the
goodwill recognized should be written-off over a
period no longer than the average life of longterm interest bearing assets. In effect, this reduces
the paper boost to earnings but has no effect on
the amount or method of amortization of existing
goodwill on financial statements involving acquisitions prior to September 30, 1982. When
looking at bank acquisitions we found this to be a
more significant issue.
In this article, we explain what purchase accounting is and how it differs from the other
method of accounting for mergers and acquisitions—"pooling-of-interests" accounting. W e
also examine how purchase accounting is being
used and how it is affecting the earnings of bank
holding companies that acquire banks in the
Southeast.
To answer these questions, we recently surveyed
bank holding companies in the Sixth Federal
Reserve District. The results indicate that, in the
short run, the accounting treatment of bank
" T h e accounting treatment
of bank acquisitions in this
District generally d o e s not
produce significant
c h a n g e s in a firm's net
income."
acquisitions in this District generally does not
produce significant changes in a firm's net
income. Under the right circumstances, the potential exists for temporarily enhancing net income
FEDERAL R E S E R V E B A N K O F ATLANTA
substantially. Yet, apparently that has occurred
infrequently because positive effects of asset
write-downs are counteracted by write-offs of
large purchase price premiums. W e found that
the average net effect of purchase accounting on
consolidated income was only 0.6 percent of
total consolidated income in the year of acquisition.
However, looking at the long-run effects, once
the purchase accounting adjustment runs out,
the remaining write-offs of goodwill can have a
significant negative impact on reported earnings.
If this is the case, it may affect management's
future acquisition policies and change the way
outsiders analyze a firm's earnings performance.
Purchase vs. Pooling
Historically, the treatment of goodwill and
purchase accounting for business combinations
has been controversial. Members of the accounting
profession have long debated the appropriateness
of recording goodwill. In October 1970, the
Accounting Principles Board clarified its position
on business combinations in their Opinion No.
16.1 The board simultaneously issued Opinion
No. 17, "Accounting for Intangible Assets," which
addressed the proper treatment of intangible
assets. The accounting principles that govern the
proper method of accounting for various transactions were adopted only after considerable
debate. It is crucial that the accounting principles
accurately reflect the true economics of transactions. Understandably, in many cases it is
unclear just what the "true economics" of a
transaction really are. Thus, some of the controversy surrounding the treatment of goodwill and
purchase accounting remains with us today.
There are two distinct methods of accounting
for business combinations: pooling-of-interests—
which does not revalue assets or liabilities—and
purchase. To better understand how purchase
accounting affects income, it is necessary to look
at both approaches. These two methods of
acquisition accounting are not alternatives with
respect to any particular business combination,
nor is the method used an elective of management. Detailed rules specify conditions under
which the pooling-of-interests method must be
used. If those conditions do not exist the purchase
method is appropriate (see Exhibit 1).
'The Accounting Principles Board was the rulemaking body of the accounting
profession from 1959 to 1973. The A P B was succeeded by the Financial
Accounting Standards Board (FASB).
15
Exhibit 1
Accounting Decision Flow Chart
for Business Combinations
i
i
i
i
A number of conditions must be met to use the
pooling-of-interests method (Box 1). The conditions are designed to assure that the combining
companies are independent and autonomous,
that relative rights and risks of ownership are
combined proportionally, and that transactions
are not contemplated after the combination that
would be inconsistent with the concept of combining the existing interests of independent
stockholder groups.
The pooling-of-interests method recognizes
that two separate businesses are being combined
16
and future operating results are based on original
amounts of assets and liabilities. No revaluation
of assets or liabilities takes place. Assets, liabilities,
stockholders' equity, and net income for the
entire year of the acquisition of the respective
companies are combined. Because the basis of
valuation in a pooling is the book value of net
assets on the books of the acquired company,
goodwill cannot be created at the date of combination. If an acquisition qualifies under the
pooling criteria, the exchange of ownership of
bank stock for holding company stock is eligible
APRIL 1983, E C O N O M I C R E V I E W ,
POOLING OF I N T E R E S T S - CRITERIA
PURCHASE VS. POOLING-OF I N T E R E S T S
Conditions for Pooling of Interest Method—(All must be
met or it is a "Purchase")
A. Combining Companies Criteria:
1. Subsidiaries or divisions of another corporation (if
within two years before the plan of combination is
initiated) are not allowed.
2. Each of the combining companies is independent
of the other combining companies.
a. Thus no more than 10 percent of any company
can be held as intercorporate investments prior
to the initiation of the plan of combination.
B. Combining of Interests Criteria:
1. The combination must be completed within one
year after the plan is initiated.
2. After the date the plan of combination is initiated
the issuing corporation issues voting c o m m o n
stock in exchange for at least 90 percent of the
voting c o m m o n stock of another combining company.
The fundamental differences between the pooling and
purchase methods are:
1. In a "purchase," the net income of a newly acquired
subsidiary will be included in consolidated net income
from the date of acquisition. In a "pooling," net
income of the subsidiary for the entire year is added
to consolidated net income regardless of the date of
"pooling."
2. In a "purchase," only retained earnings from the date
of acquisition are included in consolidated retained
earnings. In a "pooling" all acquired retained earnings
of the subsidiary are added to consolidated retained
earnings.
3. In a "purchase," net book values of a newly acquired
company are adjusted to acquisition date fair values.
In a "pooling" net book values of the "pooled" companies remain the same.
4. In a "purchase," any difference between the amount
paid for the subsidiary and the fair value of assets
acquired would result in positive and negative goodwill which should be amortized over a period not to
exceed 40 years. In a "pooling" no consolidated
goodwill is created.
5. In a "purchase" where newly issued stock was exchanged for a newly purchased company, the shareholders' equity would be increased by the fair market
value of the stock issued. In a pooling when new
stock is issued for a newly acquired "pooled corporation," the shareholders' equity is increased by the
total net book value of the newly pooled corporation.
3. Ratio of interest or predecessor owners must
remain the same.
4. "Voting rights" must remain the same, thus no
"voting trusts" are allowed.
5. "Contingent buy outs" not allowed (e.g., based on
future earnings of either parent or sub, etc.).
C. Absence of "Planned Transactions" Criteria:
1. No future "buy out" agreements allowed (for
example, through treasury stock, to dissident shareholders).
2. The combined corporation cannot guarantee loans
on stock issued in the combination, thus allowing
some previous stock owners to get cash (in effect
"sell") from their stock.
3. The combined corporation does not intend to
plan or dispose of a significant part of the assets of
the combining companies within two years after
combination, except for disposals of duplicated
facilities.
for a tax-free exchange. The owner of bank stock
merely exchanges his shares for stock of the
holding company and would retain the same
ownership percentage in the holding company
as he had in the bank.2
Unlike a pooling, the purchase method is
similar to the accounting treatment used in the
acquisition of any asset group (Box 2). The fair
market value of the consideration (cash, stock,
debt securities) given by the acquiring firm is
used as the valuation basis of the combination.
Assets and liabilities of the acquired firm are
? This
is generally true for one-bank holding companies, however, multibank
holding companies cannot usually meet the strict pooling-of-interests
criteria and thus a tax-free exchange is more difficult to structure and would
be handled differently.
F E D E R A L R E S E R V E B A N K O F ATLANTA
revalued to their respective fair market values at
the date of combination.3 Any difference betwéen
the value of the consideration given and the
book value of net assets obtained is known as the
"differential" of net assets acquired.
This differential has two components: (1) an
amount representing an adjustment of the book
values of the net assets up (or down) to their
respective fair market values (the purchase adjustment) and (2) an amount representing intangible
assets. Some rules guide the accounting treatment of the differential, but there is considerable
room for subjectivity in the valuation of intangibles.
Depending on management decisions, treatment
of the differential can produce varying results in
the firm's income statement.
An important judgment in the accounting treatment of business combinations is the treatment
3 Book
values often differ from market values because accounting rules
require assets to be recorded at "historical cost." Generally, acquired assets
are recorded at their market value at the acquisition date. This value (now
called "book value") remains constant and is not adiusted with temporary
fluctuations in market value.
17
of intangible assets. There are two types of
intangible assets: identifiable and unidentifiable.
The unidentifiable intangible asset is more commonly known as goodwill. It can be defined as
the differential ability of one business, in comparison with another or an assumed average firm,
" T h e r e is considerable
room for subjectivity in t h e
valuation of intangibles."
to make a profit.4 The amount assigned to goodwill is usually capitalized as an asset and written
off over a period of time. The write-off period
should correlate with the anticipated length of
benefit from the goodwill but in any case cannot
exceed 40 years. Amortization of goodwill reduces net income but is not tax deductible.
The other intangible assets, known as identifiable intangibles, represent expected future
benefits from identifiable assets. Patents, franchises and trademarks are examples of identifiable
intangibles. An identifiable intangible gaining
popularity among financial institutions is "deposit
base valuation" (see Box 3.) If an intangible asset
is identifiable, it may qualify as a tax-deductible
item and is thus preferable over the non-deductible goodwill (unidentifiable).5 For this reason,
most financial institutions would benefit from
allocating a portion of the premium paid in a bank
acquisition to identifiable intangibles instead of
allocating the premium totally to goodwill.
To understand how the differential can actually
affect reported income, lef s discuss the specific
accounting treatment of the purchase adjustment, identifiable and unidentifiable intangible
assets. All three elements of the differential play
an important role in the ultimate effect of purchase
accounting on bank earnings (Exhibit 2).
"Goodwill in Accounting: A History of the Issues and Problems. Hugh
P Hughes, Research Monograph No.80, 1982, p. 7.
^Officially the Internal Revenue Service has been silent on the deductibility of
"deposit base." It is not addressed in the current code, but many financial
institutions across the country have been treating it as a deductible item
18
D E P O S I T BASE VALUATION
Deposit base valuation is an intangible asset which
seems to be gaining popularity with financial institutions.
Its popularity is due principally to the tax advantages it
offera Unlike goodwill, deposit base valuation is an
identifiable intangible asset whose underlying tangible
asset is a bank's low-cost deposit base. If purchase
accounting is used, the low cost deposit base can be
discounted to yield the prevailing interest rates for similar
deposits at the time of acquisition. This discounted value
becomes known as the deposit base valuation and is
written off over a period which reflects the pattern of
expected run-off of the related deposits. As an identifiable
intangible asset, the deposit base valuation's amortization
has been treated as a tax deductible item by many
financial institutions.
Depending on the underlying assets and current
market conditions, the purchase adjustment may
have varying effects on income. If the fair market
value of assets is less than their book value (a
likely condition for a financial institution in a
period of high interest rates), the adjustment
would be accreted over time to consolidated
income. If fair market values are greater than
book values, however, the purchase adjustment
would be written-off over time as an expense
item and have a reverse effect on income.
The write-off period for the purchase adjustment should correspond to the estimated life of
the underlying assets. For investment securities,
we might use the average maturity of the investment portfolio (which may range from several
months to many years depending on the maturity
structure of the portfolio); for premises and
equipment we most likely would use the estimated
remaining useful life of the property. Obviously,
the shorter the estimated life of the underlying
assets the larger the annual write-off of the
purchase adjustment.
The estimated life of underlying assets is generally easy to quantify and thus the purchase
adjustment write-off is based on a somewhat
objective judgment of the economic value of
assets. However, the accounting treatment of
intangible assets requires more subjective judgement Identifiable intangible assets are required
to be written off over the expected life of the
underlying assets. Identifying an amount and
subsequent write-off period is more difficult }
than for the purchase adjustments. The valuation
A P R I L 1983, E C O N O M I C R E V I E W ,
EXHIBIT 2
Income Statement Effects of the Write-off
of Goodwill and Purchase Adjustments
Effect on Income
Item
Positive
Goodwill
Purchase Adjustments
Asset Accounts:
Write-Up
Write-Down
Liability Accounts
Write-Up
Write Down
Negative
X
of a deposit base again serves as a good example
here. The intangible value of possessing a low
cost deposit base is written-off to match the
estimated run-off of the deposits. The anticipated
run-off period then becomes a subjective decision
influenced by anticipated behavior of depositors.
Even though this write-off period is slightly subjective, management can monitor the actual deposit run-offs and adjust the write-off period
accordingly.
The ability to monitor the "activity" of underlying assets is not present when dealing with
unidentifiable assets and therefore the accounting treatment of goodwill is considerably more
presence and name association, the precise
period of benefit is clearly in doubt. This makes
the goodwill amortization period mostly a subjective management decision. Generally accepted
accounting principles call for the amortization to
equal the expected period of benefit but not to
exceed 40 years. The elusive nature of goodwill
forces many firms to write it off over the maximum
period allowed.Only recently, FASB No. 72 removed some (but by no means all) of the
subjectivity in choosing the appropriate write-off
period. It provided limited guidelines for only
that portion of goodwill represented by the
excess of the fair market value of liabilities over
fair market value of identifiable assets. In our
survey this situation existed in 14 out of 21 cases
and averaged 26 percent of total goodwill created
in the acquisitions.
To determine purchase accounting's total effect on the income of a consolidated organization,
you must net the write-off of the purchase
adjustment against the write-off of intangible
assets. This is then adjusted for taxes, if any, and
compared to the consolidated organization's net
income. Potentially, this impact can prove significant if: (1) the purchase adjustment is a large net
write-down of assets, (2) it is written to income
over a relatively short time and (3) intangible
assets are small in relation to the purchase
adjustment and are written off over a much
longer period of time. These conditions could
create a significant, positive effect on earnings—
possibly not reflecting the true underlining value
of the transaction.
Earnings Quality
" S i n c e goodwill represents
the value assigned to future
earnings from s o m e w h a t
ambiguous sources s u c h as
market p r e s e n c e and n a m e
association, the precise
period of benefit is clearly
in doubt."
difficult and really quite subjective. Since goodwill represents the value assigned to future earnings
from somewhat ambiguous sources such as market
FEDERAL RESERVE BANK OF ATLANTA
Many people feel that purchase accounting
and its treatment of intangible assets can affect a
firm's earnings quality. The concept of earnings
quality is somewhat elusive. At first glance a
company's reported net income may look good
compared to past performance, but this can be
deceiving. Were there any unusual or one-time
adjustments that temporarily enhanced income?
If there were, we might determine that reported
earnings are of "poor quality." This means the
income that is reported does not reflect a firm's
earnings potential from ongoing operations. In
most cases earnings quality is a matter of subjective
determination.
A recent survey of accountants, security analysts,
and financial managers uncovered certain earnings
characteristics those people felt resulted in poor
19
quality earnings.6 For example, a company using
the cost method to account for its investee
would have poor quality earnings if it received an
unusually large cash dividend from the investee
in one year. Also, if a significant increase in
earnings is due to the sale of land, most of those
surveyed believed earnings quality would deteriorate. The gain from selling the land was a result
of profits accumulated over a number of years.
Realizing the whole gain in one year makes
earnings unrealistically high.
One of many other characteristics cited in the
survey as exaggerating earnings was a significant
increase in intangible assets. The amount recorded as intangible assets may overstate future
income-producing potential. It can also effect
earnings quality if the intangible should have been
expensed rather than capitalized as an asset. This
is a consideration of earnings quality that should
be analyzed closely when looking at a bank
holding company going through an aggressive
acquisition period. The effects of intangible assets
on the quality of earnings usually arise in the use
of purchase accounting.
Survey Results
To determine the extent of purchase accounting being used in bank acquisitions and its
impact on reported income, we surveyed 180 of
the most recent holding company acquisitions in
the Sixth District7 One hundred thirty-nine (77.2
percent) of the holding companies responded to
our questionnaire. The majority of respondents
(54 percent) used pooling-of-interests, while 64
(46 percent) used the purchase method (Table
1). Most respondents using the pooling method
had formed a new holding company through the
purchase of a bank. This is not surprising since
the recent popularity of one-bank holding company formations is partly attributable to the
ability to use the pooling method and transfer
ownership from the bank to the holding company
without the stockholders incurringany tax liability.
If the purchase method is appropriate in accounting for an acquisition, the acquiring firm
must decide on the issue of "materiality" of the
purchase adjustments. If the dollar amount of
"Joel G. Siegel. "The Quality of Earnings Concept—A Survey," Financial
Analysts Journal. March/April 1982, p. 60+
'The survey included acquisitions consumated between J u n e 1980 and
September 1982.
20
Table: Selected Survey Results
Number Percent
Survey respondents
Method of accounting used for acquisitions:
Pooling-of-interests
Purchase
Number of institutions recording a
purchase adjustment
Average size of the purchase adjustment
as a percentage of average:
Consolidates assets
Acquired bank's assets
Acquired bank's stockholders equity
Net income of consolidated organization
Average write-off period for purchase
adjustments (years):
Loans
Investment securities
Premises and equipment
Other
Average write-off period for intangibles (years):
Identifiable
Unidentifiable
139
77.2
75
64
54.0
46.0
21
15.1
0.3
2.2
31.6
0.6
9.2
5.9
25.7
4.0
12.74
30.88
the adjustments and the effect on current and
future income is small when compared to the
consolidated organization, generally accepted
accounting principles say it is acceptable not to
book the adjustment. However, if the purchase
adjustment is determined to be material it must
be recorded and subsequently written off over
time. Unfortunately, there are no hard and fast
measures of what is material. Most survey respondents cited the fair value of acquired assets
compared to book values. Others cited criteria
such as the impact of the purchase adjustments
on the financial statements of the acquired bank;
size of the purchase adjustment in relation to
expected earnings and its effect on consolidated
net worth-to-assets ratio; and purchase price as a
percentage of consolidated assets. Several respondents recorded the adjustment even though
they did not feel it was a material amount
Thirty-three percent of the institutions using
purchase accounting either considered it material
or recorded the adjustment regardless of materiality. Goodwill was recorded at 81 percent of
these banking firms. Write-off periods for goodwill ranged from as little as 10 years to 40 years,
with an average of 31 years.
The most common purchase adjustments are
made to the loan portfolio, investment securities,
and premises and equipment The survey indicated
APRIL 1983, E C O N O M I C R E V I E W ,
that not all banks had adjusted the carrying value
of their loan portfolios. Forty-three percent of the
banks felt that adjusting their loan portfolios
would be immaterial. Seven of the 12 banks
makingthe adjustment are using the straight line
method of write-off. The other five are using the
interest method. (The interest method differs
from straight line in that annual write-offs are
adjusted to provide a constant yield.) Write-off
periods ranged from 2.5 to 20 years with an
average of 9.2 years.
The largest write-down of assets was found in
the securities portfolio. Eighteen of the 21 banks
using the purchase adjustment adjusted securities
to market value. The average write-down amounted
to 33.8 percent of the acquired banks' stockholders
equity.
The typical adjustment to premises and equipment is a net write-up of book value to market
value. Appreciating values in the real estate
market have caused this adjustment to be quite
large. I n fact, at banks answering our survey it was
large enough on the average to negate writedowns in the loan portfolios. At seven banks it
was large enough to negate all other write-downs
and resulted in a positive (net write-up) purchase
adjustment.
The price paid for an acquisition generally was
substantially above the adjusted book value of
the bank being acquired. The purchase price to
book value ratio ran from 95.7 percent to 244
percent with an average of 156.75 percent.
These substantial purchase price premiums were
allocated to intangible assets and primarily unidentified intangibles (goodwill). However, seven of
the 21 respondents who booked the purchase
adjustment capitalized a portion of the purchase
price as the identifiable intangible "deposit base."
The use of deposit base valuation seemed to be
most prevalent in Florida
The average net effect of purchase accounting
on consolidated earnings in the year of acquisition
was a positive 0.6 percent of total consolidated
income. Any improvement in earnings generally
decreased fairly quickly after the year of acquisition
and in most cases disappeared by the third or
fourth year. This is explained by the short writeoff periods for adjustments to assets that required
write-downs such as loans and securities. Once
these adjustments are written off, the remaining
purchase adjustment typically would be to premises and equipment for which write-offs flow
through the income statement as an expense.
F E D E R A L R E S E R V E B A N K O F ATLANTA
Therefore, once adjustments that represent net
write-downs of assets are written off, remaining
adjustments representing net write-ups of assets
become expense items.
The long-term effect of writing off goodwill
after offsetting purchase adjustments are gone is,
in some cases, significant W e found that earnings
at the particularly large holding companies, over
$1 billion in assets, could be affected significantly
by write-offs of accumulated goodwill from prior
acquisitions. If acquisitions were to slow or stop,
some institutions would be left with write-offs of
goodwill amounting to as much as 12.6 percent
of 1982 consolidated income.
" W e found that earnings at
the particularly large
holding companies, o v e r $ 1
billion in assets, could be
affected significantly by
write-offs of a c c u m u l a t e d
goodwill from prior
acquisitions."
To estimate the real impact on future earnings,
we applied a compounded annual earnings growth
rate of 11.25 percent to current consolidated
income.8 Looking 10 years into the future (after
all the positive effects of purchase accounting
have worn off), goodwill amortization at these
large holding companies could represent from as
much as 4.35 percent of consolidated earnings
to 0.61 percent, with an average of 2.09 percent
The analysis of goodwill amortization only illustrates the potential future impact on earnings.
Because of the small sample size, incomplete
information, and uncertainty about the future,
this data can only serve to illustrate possible
income effects. Our survey did not include all
acquisitions of Sixth District holding companies
but rather only a few of the most recent acquisitions. It is also important to note that for any
"This is the 10-year average earnings growth rate for all insured commercial
banks. Source: FDIC Bank Operating Statistics, 1970-1980.
21
particular holding company, we requested information on not more than two of their recent
acquisitions. Many of these holding companies
negotiated more than two recent acquisitions
and therefore the effect of goodwill write-offs is
probably conservatively stated.
Conclusion
I n the short run, the overall effect of the writeoff of the large purchase price premiums netted
against the accretion of much smaller purchase
adjustments was minimal. The ability to write off
intangibles over such a long period of time versus
accretion of the purchase adjustment over a
much shorter time frame minimized the net
effect on income. Purchase accounting has the
potential to increase net income significantly in
the early years after an acquisition under the
right circumstances, but if our survey is indicative
of all small to medium bank acquisitions, such
windfalls would be rare.
The mid- to long-term effects on income after
purchase adjustments to assets and liabilities are
written-off can be significant W e found that
many large holding companies, especially in
Florida and Georgia, that have been going through
a period of aggressive acquisitions have accumulated significant amounts of goodwill on their
books. If these banking firms slow or halt their
acquisitions, producing no new offsetting purchase adjustments, the future amortization of
goodwill may affect their consolidated earnings
significantly. The accounting treatment of acquisitions then may play an important role in future
management decisions over corporate acquisition
policies. A banking firm that has been acquiring
aggressively might have to look for ways to offset
the future effects of goodwill amortization. This
may force such an institution to seek more
acquisitions with large purchase adjustments or
to plan for other means to smooth otherwise
slightly irregular earnings.
— Donald L Koch
and Robert M. Baker
22
APRIL 1983, E C O N O M I C R E V I E W ,
The Limitations
of Spending Limitation
Off-Budget
Activities and
the Federal
Government
Part O n e of this article ( D e c e m b e r 1982)
examined the illusion of fiscal health created
by "off-budget enterprises" at
t h e state and local level. This
article extends that analysis
to t h e federal level, w h e r e
off-budget loans or guara n t e e d loans m a d e
up 82 percent of
federal credit
outlays in 1980.
Can constitutional spending and taxing limitations
induce governments to be more efficient and
responsive? In a previous issue of this Review we
discussed the shortcomings of such measures at
the state and local levels.1 In that article we
described how, for nearly a century, billions of
dollars of spending and borrowing have been
placed "off-the-books" in off-budget enterprises
(OBEs).
Constitutional spending limitations may represent a first step toward fiscal responsibility, but,
unless strictly enforced, not a long one. In a sense,
state and local government spending and borrowing, instead of being reduced, have simply
"gone underground."
At the federal level of government, off-budget
operations have grown more rapidly than onbudget spending in recent years. As pressures for
a balanced budget mount, they can be expected
to play a major role in the drive for a fiscally
responsible federal government In this article, we
will examine the off-budget activities of the
federal government and discuss the implications
of off-the-books governmental activity for recent
attempts to constrain a burgeoning federal budget
through constitutionally imposed balanced budget and tax limitation requirements.
There are three basic ways in which, through
the credit markets, federal spending is kept off
the budget. First, numerous agencies simply
have been deleted from the budget Second,
government control over resource allocation is
extended by guaranteeing loans made to privileged
individuals, businesses, and governments. Third,
several privately owned, but federally sponsored and controlled, enterprises such as the
Federal National Mortgage Association are also
off-the-books borrowers.
' J a m e s T. Bennett and Thomas J. DiLorenzo, "The Limitations of Spending
Limitation I: The Off-Budget State and Local Public Sector," Federal
Reserve Bank of Atlanta E c o n o m i c Review, December 1982.
23
In addition to expanding their credit market
activities, federal legislators and officials increasingly have recognized that, in principle, anything
that can be accomplished through taxing and
spending can also be accomplished by regulation.
All of these activities must be taken into account
to assess accurately the federal government's
role in the economy.
Thus, while the Congress was publicly proclaiming a need for fiscal discipline in federal
budget matters and enacting legislation to deal
with the problem of "uncontrollable" spending,
it simultaneously was establishing mechanisms
through which spending could be placed offbudget. Off-budget federal outlays since 1973,
Budget Reform and the
Form of the Budget
The Congressional Budget and Impoundment
Control Act of 1974 has been praised by U. S.
News and World Report as a "revolutionary
budget reform intended to give Congress a
tighter grip on the nation's purse strings."2 The
"Budget Reform Act" emerged from a recognition
that existing budgetary procedures generated a
bias toward overspending and budget deficits.
Prior to 1974, federal spending was the product
of many individual appropriation decisions; no
limit was ever placed on the total amount of
public expenditure. Each congressman had then,
as he does now, a strong incentive to maximize
spending on his own voting constituency, while
limiting the extent to which he must pay for the
spending. Yet no congressman was required to
take responsibility for the total federal spending
that resulted from the appropriations process.
The Budget Reform Act created a budget committee for each house responsible for setting
overall targets for revenues, expenditures, and
the resultant deficits (or surpluses). The Congressional Budget Office was created to assist in
this process.
The main impact of the Budget Act is to make
taxing, spending, and deficit levels explicit and to
hold Congress accountable for them; the act
itself does nothing to curb spending. The relatively
mild budgetary discipline set forth in the Budget
Act elicited considerable off-budget activity at
the federal level. In the wake of the Budget Act,
many agencies have been and continue to be
placed off-budget and beyond the purview of
any appropriations process. Most recently, for
instance, the Synthetic Fuels Corporation, which
began operations in 1981, was also placed offbudget. Congress had previously authorized $20
billion for the development of this "industry."
'As quoted in James M. Buchanan and Richard E. Wagner. Democracy in
Deficit: The Political Legacy of Lord Keynes(New York: Academic Press,
1977), p. 156.
24
" T h e estimated $21 billion
in off-budget outlays in 1982
w a s about 2.4 percent of the
federal budget."
by agency, are shown in Table 1. The estimated
$21 billion in off-budget outlays in 1982 was
about 2.4 percent of the federal budget.
The penchant for off-budget federal spending
is obviously non-partisan. Both the Democraticcontrolled House and the Republican-controlled
Senate, at the insistence of the Reagan administration, voted to place the Strategic Petroleum
Reserve "off the books." There have even been
bipartisan proposals for"dealing" with the Social
Security crisis by placingthe entire program, with
over $220 billion in expenditures in 1982, offbudget.
As is evident from Table 1, the Federal Financing
Bank (FFB) is by far the most active off-budget
agency.3 Its visibility has drawn the attention of
congressmen who have proposed to include its
activities in the federal budget under the suggested
balanced budget amendment to the constitution
(S.J. Res. 58). The FFB, a part of the Treasury
Department, does business with both on-and
off-budget agencies. In essence, the FFB serves
as an intermediary which permits federal agencies'
spending to be placed off-budget. The FFB's
predominant activity is purchasing agency debt
from funds obtained by borrowing directly from
the Treasury. FFB borrowing currently is not,
however, included as part of the Treasury's
3 For
background information on the F F B see Congressional Budget Office,
Loan Guarantees: Current Concerns and Alternatives for Control
(Washington, D C.: U.S. Government Printing Office, 1979).
A P R I L 1983, E C O N O M I C R E V I E W ,
T a b l e 1 . Off-Budget Outlays by Agency
($ Billions)
1973
Federal Financing
Bank (1974)
Rural Electrification
and Telephone Revolving F u n d (1973)
Rural Telephone Bank
(1973)
Pension Benefit
Guaranty Corporation (1974)
United States Postal
Service Fund (1974)
United S t a t e s Railway
Association (1973)
Total Off-Budget
Outlays
1974
1975
.1
6.
.1
.5
.5
.2
*
.1
.1
.1
1.1
TO
1977
1978
1979
1980
1981
1982
5.9 2.6
8.2
10.6
13.2
14.5
21.0
14.1
.1
.4
.1
*
.1
.1
.1
.2
.1
.1
.1
-.6
*
*
.8
1976
1.1
*
.7
*
0.1
*
*
.1
1.4
8.1
7.3
•
*
.2
.9
.4
.2
.1
.1
*
-.3
8.7
*
.5
10.3
12.4
14.3
21.0
- *
17.3
* less than $50 million.
TQ = Transition Quarter
Source: B u d g e t of t h e U n i t e d S t a t e s G o v e r n m e n t Office of Management and Budget, 1983.
budget outlays; interest payments from the FFB
to the Treasury are, nevertheless, counted as
deductions from Treasury outlays. Consequently,
FFB borrowing actually results in a reduction in
outlays reported by the Treasury Department.
A second type of FFB activity is purchasing
agency loans or loan assets. When a federal
agency sells a loan to a private entity, the loan is
considered repaid for budgetary purposes. Loans
made by federal agencies are afforded the same
treatment when the FFB is the purchaser. Proceeds
from the sale are counted as loan repayments
rather than as a means of financing and thus are
an offset to the agency's gross expenditures. An
agency can therefore convert an on-budget loan
to an off-budget loan by selling it to the FFB. In
1981, about 90 percent of all federal agency
loans and loan asset sales were sold to the FFB,
resulting in off-budget financing.
Rather than selling individual loans, an agency
sometimes can pool its loans and issue securities
backed by the pooled loans. These securities,
known as "certificates of beneficial ownership,"
are then turned over to the FFB for cash, placing
them off-budget. The agency has cash to lend
again and can repeat the process as many times
as it chooses. This procedure allows federal
agencies to make loans to certain customers with
virtually no budgetary limit.
Another type of FFB activity is the granting of
off-budget loans to guaranteed borrowers. Typically, a loan guarantee occurs when a federal
FEDERAL RESERVE BANK O F ATLANTA
agency sanctions a loan between a private lender
and a private borrower. The result is an interest
subsidy to the borrower at no explicit cost to the
Treasury unless a borrower defaults. Frequently,
however, an agency will ask the FFB to act as the
private lender and purchase the borrower's note.
In this case the loan guarantee becomes, in
effect, a direct loan from the government not
reflected in the budget In 1981, the FFB purchased
over $10 billion worth of loan guarantees.
Economic Implications of FFB Loan Guarantees
Many critics objected when Congress granted
New York City and the Chrysler Corporation
several billion dollars in highly publicized loan
guarantees. Yet, the Chrysler and New York loans
are relatively small in comparison with the offbudget guaranteed loans administered by the
FFB. Whereas these two loan guarantees were
subjected to Congressional oversight, FFB decisions are made by employees at the Treasury
Department.4 That this system provides for more
opportunities for "social engineering" than does
the Chrysler loan can be seen from the example
of $2 billion in off-budget loans recently extended
by the FFB to the Tennessee Valley Authority, a
federally sponsored off-budget enterprise.5
"The FFB is neither listed in the District of Columbia phone book nor in the
current listings of federal agencies
25
In 1979 the TVA decided that its nuclear fuel
inventory had become excessive due to nuclear
power plant construction delays. To remove
from its books the burden of excessive inventories,
the TVA created a wholly owned subsidiary—the
Seven States Energy Corporation—with which
TVA could enter into a leaseback arrangement
Seven States would purchase TVA's nuclear fuel
inventory, and then lease it back as needed. To
finance the arrangement, TVA originally approached
a private investment banking firm which suggested
a $1 billion line of credit. Before the agreement
was completed, however, the Treasury Department suggested that the FFB could provide the
credit, and would increase the loan to $2 billion.
Thus the TVA, in effect, extended a $2 billion line
of credit to itself.
This has far-reaching implications for the future
role of the federal government in allocating
credit. According to the FFB Act, any entity
wholly owned by the federal government enjoys
" A c c o r d i n g to t h e F F B Act,
any entity wholly o w n e d by
the federal government
enjoys this a c c e s s to
off-budget federal
financing."
this access to off-budget federal financing. Several
such entities have the legal authority to order the
FFB to lend money to anyone, provided they
guarantee the loan.6
5 TVA
is a regional OBE, obtaining most of its revenue from the sale of
revenue bonds. It does, however, receive federal aid in the form of
appropriations, grants, and guaranteed loans. The following example is
found in C. Hardin and A Denzau, The Unrestrained Growth of Federal
Credit Programs (St. Louis: Washington University Center for the Study of
American Business, December 1981).
6 There are at least 20 such agencies, including the Commodity Credit
Corporation, the Export-Import Bank, Corporation for Public Broadcasting,
Government National Mortgage Association, Community Development
Corporation, U.S. Railway Association, Pension Benefit Guarantee Corporation, and the Legal Services Corporation.
26
In addition to diminishing the more efficient
market allocation of capital, the FFB also increases
the federal government's borrowing costs, despite
the argument that, by pooling agency borrowing,
financing costs are reduced. The increased interest
rate on federal debt resulting from FFB borrowing
from the Treasury is far more expensive than the
minimal savings to federal agencies. Agency debt
appeals to a different market than does Treasury
debt, as the difference in interest rates attests.
When the Treasury issues more debt to finance
the FFB, it crowds the market segment to which
its issues appeal, forcing up rates on Treasury
debt This would seem to undermine the economic
rationale for the FFB.7
Loan Guarantees and the
Allocation of Credit
In addition to the FFB's functions, over 150
other federal loan guarantee programs are administered by federal agencies which comprise
yet another category of off-budget operations.
Loan guarantees to individuals, businesses, state
and local governments, or foreign governments
are reflected in the budget only if the borrower,
dealing through a private bank, defaults. In that
case, the federal government is liable for part or
all of the principal and interest. Although not
reflected in the budget document loan guarantees
serve the same purpose as direct, tax-financed
appropriations: They provide transfer payments
to certain groups at the expense of the general
public The major difference between tax-financed
subsidies and loan guarantees, of course, is that
the latter are far less visible and arouse less
taxpayer resistance than would the former, in
many instances. For example, a tax-financed
subsidy to a college student whose parents earn
$100,000 a year might meet more resistance than a
guaranteed loan not considered to entail a subsidy.
Because of the low profile of these "interest
subsidies," loan guarantees have become the
largest component of federal credit activity. That
is shown in Table 2, which lists the growth of
federal loan guarantees, as well as on- and offbudget direct loans, from 1974 to 1982. Loan
guarantees are by far the largest component of
federal credit activity, comprising over 65 percent
of all credit activity and about four times the
'This point was brought to our attention by Professor Vale Brozen of the
University of Chicago in personal correspondence.
A P R I L 1983, E C O N O M I C R E V I E W ,
T a b l e 2 . Annual F e d e r a l Credit O u t l a y s
Fiscal Y e a r s 1974-1982
( $ Billions)
Loan Category
Year
1974
1975
1976
1977
1978
1979
1980
1981a
1982a
Direct Loans,
On Budget
Direct Loans,
Off B u d g e t
Guaranteed
Loans
$12.3
12.9
$3.5
10.8
invest in only the most productive projects
promising very high yields, federally assisted
borrowers may continue to invest in projects
yielding only a fraction of the nonguaranteed
investments. Thus, the federal government may
indirectly subsidize inefficient investments which
$31.8
18.8
14.7
23.5
21.0
25.7
24.6
28.1
10.2
13.6
16.4
17.3
23.6
32.2
26.2
31.1
31.8
43.3
45.5
60.5
68.7
90.5
101.5
a=estimates
Source: Budget of the U.S. Government Special Analyses, various y e a r s
volume of direct, on-budget loans. They are also
the fastest-growing type of federal credit activity,
having increased by 320 percent since 1974.
The major costs of federal loan guarantee
programs, like the benefits, are indirect A major
difference, however, is that the benefits accrue
to well-organized interest groups, while the costs
are widely dispersed among the general public.
The predominant indirect cost of federal loan
guarantees is borne by less-favored borrowers
who are crowded out of the credit market or who
must pay higher interest rates on the loans they
do obtain. Loan guarantees tend to increase the
overall demand for credit while reducing the
supply of credit available to nonguaranteed borrowers. The effect is to increase the rates charged
to nonguaranteed borrowers, crowding out much
private borrowing by businesses, individuals,
and state and local governments. This distorts
the market process whereby unregulated markets
allocate credit to their most highly valued uses,
thus enhancing economic growth.
Credit markets serve the role of evaluating the
riskiness of alternative projects, and those with
higher probabilities of failure (to meet consumer
demands) are charged higher borrowing costs. In
this way, the credit markets provide consumers
and producers with invaluable information regarding the most productive uses of resources.
Loan guarantees, by socializing risk, make it
impossible for consumers and producers to make
accurate benefit-cost calculations, and resources
are directed toward lower-valued uses. At times
when high interest rates force private firms to
FEDERAL RESERVE B A N K O F A T L A N T A
" T h u s , t h e federal
government may indirectly
subsidize inefficient
investments w h i c h r e d u c e
the productivity of the
nation's capital stock . . .
reduce the productivity of the nation's capital
stock and consequently weaken its economic
growth.
It is difficult, if not impossible, to gauge the
extent of crowding out caused by federal loan
guarantees, but some preliminary estimates have
been made. Economist Herbert M. Kaufman of
Arizona State University studied federal loan
guarantees and estimated that, for every $1
billion in loan guarantees, between $736 million
and $1.32 billion in private investment is crowded
out 8 These rough estimates indicate that loan
guarantees, which are being extended at a rate of
over $100 billion a year, are likely to have a
negative impact on economic growth, employment, and inflation. The effect on inflation is
unlikely to be significant however, since changes
in aggregate output occur relatively slowly as
private investment spending is reduced.
Equity Aspects of Federal
Loan Guarantees
In addition to fostering a less-efficient allocation
of resources and hindering economic growth,
critics say many loan guarantee programs appear
to be inequitable. An extreme example is the
student loan program which, with few eligibility
(continued
on
p.
30)
"Herbert M. Kaufman, "Loan Guarantees and Crowding O u r in Congressional
Budget Office, E c o n o m i c s of Federal Credit Activity (Washington, D C.:
CBO, April 1980), pp. 35-39.
27
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requirements, creates generous subsidies for
benefitting households. With such loans available
to students and their parents at 7 percent interest
regardless of financial need, the high market
interest rates of the late 1970s and early 1980s
have created investment opportunities for some
families. As the spread between interest rates on
student loans and market rates widened, new
student loans rose from $2.7 billion in 1979 to
$7.2 billion in 1981. Some families may have
been able to borrow at 7 percent and invest the
proceeds in long-term bonds or money market
funds paying 14-16 percent9 Furthermore, hundreds of millions of dollars in student loans are
now in default.
In sum, many federal loan guarantee programs
provide subsidies to individuals not generally
considered to be financially disadvantaged. Eliminating many, if not all, loan guarantees would
inflict short-term losses on privileged groups, but
would increase the productivity of the nation's
capital stock. It also would limit the negative-sum
transfers of wealth to higher-income groups at
the expense of the general public
Debt Collection, Default, and
Debudgeting the Budget
The huge indirect costs of federal loan guarantees
and off-budget lending are accompanied by
billions of dollars of direct costs from loan defaults.
When a borrower defaults, the loan or loan
guarantee becomes a gift to the borrower.
It is difficult, if not impossible, to obtain an
accurate account of loan defaults, for federal
agencies are reluctant to make such data available.
The General Accounting Office (GAO) in 1979
conducted a limited survey of debts owed the
federal government and found that as of the end
of 1978 over $140 billion in overdue loans were
outstanding, a $22 billion increase from the
previous year.10
GAO surveyed 12 federal agencies and found
that many of their debts are not collected. Nine
major agencies simply wrote off $428 million in
^Budget of the U.S. Government, Special Analyses, various years
'"General Accounting Office, The Government Can Be More Productive in
Collecting Its Debts by Following Commercial Practices (Washington,
DC.: Government Printing Office, February 23, 1979). GAO recently
reported that the number of foreign governments in default for loan
guarantees to purchase military supplies increased from two in 1978 to 13
as of February 1982. This type of guarantee permits Congress to extend
military aid to selected countries without going through the appropriations
process and being subjected to wide publicity. S e e D. Morgan, "1 3 Arms
Buyers in Default Interest to U.S.," Washington Post July 17, 1982, p. 1.
30
uncollected debts in 1978, and many agencies
don't even report their "uncollectibles" at all.
Among the agencies failing to collect debts were
the Small Business Administration, the Veterans
Administration, and the Farmers Home Administration, which together wrote off $274 million in
bad debts in 1978, a 66 percent increase from
1976. The Small Business Administration has a
particularly high default rate, partly because a
borrower is eligible for a direct SBA loan only if he
can prove he was turned down by at least two
banks and that his loan is too risky for SBA'sloan
guarantee program. The SBA direct loan program
wrote off $166 million in loans in 1980, topped
by the SBA's $368 million in guaranteed loan
defaults during that year.11
^
•
The Office of Education in the Department of
Health, Education, and Welfare was another
agency surveyed by GAO with severe debtcollection problems. Defaulted guaranteed student loans soared from $52 million in 1974 to
$1.7 billion in 1982, a 3,300 percent increase in
just eight years. The Office of Education also has
a collection problem with direct loans. As of last
July, an estimated 1.2 million students had defaulted on direct loans amounting to about $600
million. What's more, the Congress recently
passed legislation making it illegal for personal ,«
credit checks to make any mention of student
loan defaults.
In sum, billions of dollars of loans and loan
guarantees which distribute indirect off-budget
subsidies are being turned into direct gifts because federal entities do not enforce terms of the
loan.
Federally Sponsored
Off-Budget Enterprises
A third category of federal off-budget operations
consists of "government-sponsored enterprises,"
of which there are many. The major federally
sponsored OBEs are those that engage in credit
activity. Included among them are the Federal
National Mortgage Association (FNMA), the Farm
Credit Administration (FCA), the Federal Home
Loan Bank (FHLB), the Federal Home Loan
Mortgage Corporation (FHLMC), and the Student
Loan Marketing Association (SLMA). These agencies were at one time on-budget, but their large
" C . Harden and A Dengan, The Unrestrained Growth of Federal Credit
Programs, p. 25.
A P R I L 1983, E C O N O M I C R E V I E W ^
•J
i
and rapidly expanding borrowings became an
embarrassment and they were omitted from the
budget in 1968.12 Originally chartered by the
federal government they are now privately owned.
They are, however, subject to governmental
supervision and by law must consult with the
Treasury Department in planning the marketing
of their debt. In addition, many of their board
members are presidential appointees and various
decisions must be cleared by other government
agencies as well as the Treasury. For example,
many of the FNMA's decisions must be approved
by the secretary of Housing and Urban Development These agencies also are granted special
preferences and certain tax exemptions. Such
attributes permit federally sponsored OBEs to
borrow funds for governmentally authorized purposes at rates only slightly above the Treasur/s
own rates and then lend the money to specified
groups.
Thus, federally sponsored enterprises are private
in name only. They are yet another way in which
the federal government directs the allocation of
billions of dollars of credit without being subject
to the budget review process. Furthermore, the
special assistance granted federally sponsored
enterprises hinders the development of private
firms which might perform these same tasks
more efficiently. A case in point is the FNMA,
which in 1980 owned $56 billion of mortgages
with an average life of over 14 years and an
average yield of about 9.5 percent.13 While
betting on long-term rates to drop, "Fannie Mae"
relied heavily on short-term financing, accumulating
$17 billion in short-term debt that must be rolled
over within a year. About half of that $17 billion
was costing Fannie Mae 17 percent The remainder
was costing only around 9.7 percent, but that
would have to be refinanced at about 17 percent
Consequently, Fannie Mae lost $146 million in
the first half of 1981.
Despite these huge losses, Fannie Mae has
had no trouble in rolling over its debt, which has
been trading at less than a percentage point
above short-term Treasury bills. The reason, of
course, is the guarantee of the federal government. Unlike a private firm, Fannie Mae has the
right, by law, to ask the Treasury to purchase $2.5
billion of its debt to provide it with liquidity.
Unlike a private firm, which bears the brunt of
"Budget of the U.S. Government, Special Analyses, Appendix E "Borrowing and Debt." 1982.
I3 A Sloan, "Saving Fannie," Forbes, October 26, 1981, pp 54-55.
FEDERAL R E S E R V E B A N K O F ATLANTA
hundreds of millions of dollars in losses, Fannie
Mae and the other federally sponsored OBEs are
protected from such losses by law, and therefore
have less incentive to reduce them.
The total estimated borrowing by federally
sponsored enterprises during 1980-1983 is shown
in Table 3. Estimated borrowing is expected to
nearly double in 1983, to over $52 billion, with
$31 5 billion in debtoutstandingatthattime. This
would continue the recent expansion in borrowing
by federally sponsored enterprises which, up
until 1974, had never borrowed more than $14.9
billion in a year. This amount increased sharply to
$24.1 billion by 1978, to $27.5 billion in 1980,
and exceeded $38 billion in 1981. Thus, during
periods of high and rising interest rates which
crowded out many private-sector borrowers,
federally sponsored and controlled borrowing
expanded at a rapid pace. Nearly three-fourths
of all federally sponsored borrowing during the
" N e a r l y three-fourths of all
federally sponsored
borrowing during the
1981-1983 period will be
used to support the
mortgage market."
1981-83 period will be used to support the
mortgage market.
Numerous other federally sponsored enterprises across the country provide various services
to federally specified constituent groups but
bypass the federal appropriations process. Two
of the best-known are the TVA and the Bonneville
Power Administration, both federally chartered
OBEs that obtain most of their funds by issuing
revenue bonds but are also the recipients of
federal grants and appropriations.
Fiscal Discipline and
Government Regulation
Off-budget activities are by no means the only
way in which fiscal discipline can be undermined.
31
Table 3. Borrowing by Federally Sponsored Enterprises
($ Millions)
1980
actual
1981
actual
1982
estimate
1983
estimate
Debt
outstanding
at end of
1983
estimate
6,347
4,342
11,646
11,657
79,991
1,542
3,536
7,076
737
1,921
6,819
1,093
2,882
6,842
1,126
3,502
7,494
11,351
27,666
55,411
6,454
21,029
3,662
4,075
65,365
3,141
1,847
20,948
23,460
67,752
1,070
2,223
1,603
1,543
7,713
29,165
38,917
48,676
52,867
315,249
1,691
230
-882
-500
3,170
27,473
38,687
49,558
53,367
312,079
Borrowing or repayment
Description
Housing and Urban Development:
Federal Nat'l Mortgage Assoc.
Farm Credit Administration:1
Banks for Cooperatives
Federal Intermediate Credit Banks
Federal Land Banks
Federal Home Loan Bank Board:
Federal Home Loan Banks
Federal Home Loan Mortgage
Corporation
Foundation for Education Assistance: Student Loan Marketing
Association
Total
Less increase in holdings of
debt issued by Governmentsponsored enterprises
Total borrowing by Governmentsponsored enterprises
(")
'The debt represented by consolidated bonds is attributed to the respective Farm Credit Banks.
Source: Budget o t t h e U.S. Government, Special Analyses Appendix E, "Borrowing and Debt," 1982.
Government regulatory actions often are not
subject to the appropriations process. For example,
import quotas on automobiles would restrict the
supply of automobiles, increasingthe prices paid
by consumers and the industry's profits. The
effect is the same as a tax-financed subsidy—a
special interest benefit at the expense of the
general public.
A second type of regulation that entails significant non-budgeted costs is the direct regulation
of industry by various agencies such as the
Interstate Commerce Commission (ICC), the
Federal Trade Commission (FTC), and the Federal
Communications Commission (FCC). For example,
trucking firms have been able to exert considerable force in setting their rates. Representatives
of the regulated firms meet periodically to set
freight rates. These rate bureaus have been
exempted specifically from the antitrust laws
regarding price fixing. The Teamsters union has
also benefitted from the ICC's policies of entry
32
restriction, because such restrictions prevent
nonunion firms from entering the industry and
competing for traffic carried by unionized firms.14
Regulation of this sort imposes added costs on
taxpayers and consumers even though there are
no budget entries to reflect such costs. In addition,
industry groups spend millions of dollars each
year lobbying for their causes; such expenses
represent an additional cost to society since the
resources could have been used to produce
additional goods and services, rather than merely
redistributing income.15
'"Rayburn M. Williams, Inflation: Money, Jobs, and Politicians (Arlington
Heights, IL: AHM Publishers, 1980), p. 105.
lobbying activities, termed "rent-seeking," are discussed in detail in
James Buchanan, Robert Tollison, and Gordon Tullock, editors Toward a
Theory of the Rent-Seeking Society (College Station: Texas A&M Press,
1980).
15 These
A P R I L 1983, E C O N O M I C R E V I E W ,
A third way in which government conducts its
business without explicitly taxing or spending is
by regulating the day-to-day activities of businesses regarding working conditions, finances,
consumer safety, the environment, hiring practices,
and so on. Economist Murray Weidenbaum has
conservatively estimated that the direct, measurable cost of federal business regulation was
$102.7 billion in 1979, of which only $4.8 billion
or approximately 5 percent was budgeted as
administrative costs; the remaining S97.9 billion
was the cost of compliance, largely paid by
consumers.16
Regulation and Labor
Government regulation has major allocative
and distributive effects not only on product
markets, but also on labor markets.17 Occupational licensing requirements, for example,
offer a means of subsidizing special interest
groups without resorting to explicit taxation.
One visible example—on the local level—of
licensing's effects is the taxicab business. To own
and operate a cab in New York City, an applicant
must purchase a license costing $65,000. Consequently, the supply of taxi services is severely
restricted, increasing cab fares to the benefit of
existing owners at the expense of potential
operators and customers. Across the nation,
more than 3,000 statutory provisions require
occupational licenses for various practices from
fortune telling to funeral directing.18
A second way government regulation of labor
markets redistributes wealth is through enforcement of the minimum wage law. Regardless of
good intentions, the effect of the minimum wage
law apparently is to hurt precisely the group that
the law is supposed to help—those with the least
skills, seniority, and income.19 For example, if an
unskilled worker can contribute $2.50 per hour
to a firm's profits, and the law mandates a $3.50
per hour minimum wage, it will be more profitable
forthe firm not to hire the unskilled worker. Thus,
increases in the minimum wage may increase
unemployment of unskilled workers, predominantly teenagers.
"Equal employment opportunity" regulation is
another way in which the government can affect
"Murray Weidenbaum. The Future of Business Regulation (New York
American Management Association, 1979)
' For a discussion of labor market regulation see James T. Bennett. Dan C.
Heldman, and Manuel H Johnson, Deregulating Labor Relations(Dallas
The Fisher Institute. 1981)
"Walter E. Williams, "Government Sanctioned Restraints that Reduce
Economic Opportunities for Minorities," Policy Review. Fall 1 977, pp 1-29
•Bennett, et al.. Deregulating Labor Relations, pp. 86-98.
FEDERAL R E S E R V E B A N K O F ATLANTA
the allocation of labor resources without explicit
taxing or spending. One example is the "equal
pay for equal work" rule, which we may argue
increases employment discrimination. If an employer discriminates by paying male workers $10
an hour and equally qualified female workers $5
an hour, in a competitive labor market the firm's
female workers will be bid away at wages greater
than $5 an hour. Eventually, all of the firm's
female labor may be bid away, leaving the firm at
a competitive disadvantage, reducing its profits.
Equal pay for equal work rules lower the costs
of discrimination in employment since an employees profits are no longer lowered by passing
over equally qualified women to hire men. Therefore, enforcement of such laws actually may lead
to more discrimination, not less. American labor
unions comprised mostly of white males are
among the most vocal advocates of laws dictating
equal pay for equal work.
Finally, government influences labor markets
by enhancing the market power of labor unions
via actions of the National Labor Relations Board.
A recent study has shown that the NLRB's regulation of collective bargaining has tended to favor
labor unions and may have contributed to reduced
economic efficiency and higher inflation.20
" I n addition to off-budget
activities, regulatory
m e c h a n i s m s permit the
allocation of hundreds of
billions of dollars of
resources without taxing or
spending."
In summary, it is important to recognize that in
addition to off-budget activities, regulatory mechanisms permit the allocation of hundreds of
billions of dollars of resources without taxing or
spending.
"Bennett, et al., pp 112-19
33
Some Concluding Observations
Following precedents established at the state
and local levels, the federal government has
broadened the range of its spending and taxing
activities. It has accomplished this largely through
credit market activity conducted via off-budget
agencies such as the Federal Financing Bank,
through the issuance of hundreds of billions of
dollars in loan guarantees, and through the activities
of privately owned but governmentally controlled
enterprises such as Fannie Mae.
The Budget Reform Act of 1974 and the
taxpayer revolt of the 1970s have been accompanied by a tremendous expansion in off-budget
activities, so that of total federal credit outlays of
$1 55.8 billion in 1982, fully 82 percent ($127.7
billion) was in the form of either off-budget loans
or guaranteed loans, neither fully reflected in the
budget or subject to budgetary review by the
Congress. In addition, borrowing by "government
sponsored enterprises" was estimated at about
$50 billion for 1982, meaning that the federal
government was responsible forover40 percent
of all credit advanced in U. S. credit markets in
that year compared to 11 percent in 1969.21 The
crowding out of the private sector and the
subsidization of economically inefficient investment projects will probably lead to slower economic growth, higher unemployment, and, possibly, higher inflation.
In addition to off-budget credit activities, government regulation entails another way of directing
resources without appropriating funds. In principle, virtually anything that can be accomplished
through the taxing and spending aspects of the
budget can be accomplished instead through
government regulation.
In sum, as pressures for a balanced budget and
restrictions on federal spending mount, we may
expect an accelerated use of the federal government's off-budget mechanisms. The proposed
balanced budget amendment does take into
consideration the FFB's activities and proposes
to include them within the budget The proposed
amendment does not, however, address the
larger problems created by loan guarantees,
federally sponsored enterprises, and regulation.
—James T. Bennett
and Thomas J. DiLorenzo*
"George
Mason
University
Budget of The U.S. Government, Special Analyses, Appendix F.
" F e d e r a l Credit Programs," 1982. p. 6
34
A P R I L 1983, E C O N O M I C R E V I E W ,
Government Requirements
How Burdensome to
Small Business?
Despite the frequently noble motivation behind business
reporting requirements, the cost is high—with the average
small business spending $1,270 annually to comply. This
drain on revenues has proven painful to the many
small businesses concentrated in the Southeast. B u t governments at all levels are beginning to take steps to r e d u c e the
regulatory burden w h e n they c a n e a s e requirements without
compromising the public benefits sought through the reports.
As the once rural Southeast has been transformed
into a rapidly growing commercial and industrial
area, government regulation is taking on added
importance. That is especially true for the region's
many small businesses as they seek to comply
with costly regulations even though those regulations may have been imposed to achieve
worthwhile public benefits ranging from combating
discrimination to alleviating pollution. Increasingly,
government officials appear to be recognizing
that regulations designed to control the behavior
of large firms can work unusual hardships on
small businesses in the same industry. At the
same time, regulators are sensitive to the fact
that the goals sought through reporting requirements often transcend corporate size; that some
restrictions, for instance, were legislated specifically to protect all workers notwithstanding the
size or social responsibility of their employers.
The dilemma, then, is to lighten the regulatory
burden without compromising legislative and
regulatory goals.
Why are Small Businesses a Special Case?
All firms, large and small, are affected to some
degree by the costs associated with government
regulation. In fact, the visibility of a large firm can
FEDERAL R E S E R V E B A N K O F ATLANTA
make it an obvious target for regulations. However, the special characteristics of a small firm often
make compliance difficult. Large businesses are
usually able to absorb the added burden by spreading the fixed cost of compliance over a larger
number of productive units. On the other hand,
for the small firm, the costs per dollar of revenue
are higher.
Itcan bedifficultforasmall businesstopasson
its costs to its customers without pricing itself out
of the market. A recent National Federation of
Independent Business (NFIB) survey ranked
government regulation and red tape (excluding
taxes) as the fifth most important problem facing
their highly diversified small business survey
group.1 The top four rankings went to interest
rates and financing, inadequate product demand,
taxes, and inflation respectively.
The costs of regulation are hard to quantify.
The number of pages of a report, the percent of
accounting time used in its preparation, the
number of staff days devoted to fulfilling regulatory requirements, or measurement on a caseby-case basis are typical methods of accounting
for regulatory costs. A U. S. Senate study group
' N F I B Quarterly Economic Report for Small Business. October 1982
35
The nature of regulatory agencies has been changing
recently, according to an interesting study done for the
Small Business Administration by Puyear and Wiggins*
They argue that, in the past, an agency like the Civil
Aeronautics Board attempted to promote the welfare of
an industry. Now, the relatively new agencies such as the
Environmental Protection Agency, Occupational Safety
and Health Administration, and Equal Employment Opportunity Commission affect all sizes and types of businesses appealing to wider ranging social goals such as
air pollution, working conditions, and equal opportunity.
Issues today have become complex. While most businessmen recognize the right of government to regulate
business for the public good, an equitable balance between economic and social values is difficult to attain in
the fast-changing business environment.
•Impact of Federal Regulation on Small Business, Alvin Puyear and
Catherine Wiggins, Small Business Administration, 1980
estimates that it costs the average small business
$1,270 annually to comply with federal, state,
and local government reporting requirements.2
The first-time expense to design, develop, and
implement a system to furnish information required by the government can be excessive for a
small business.
Regulation's impact on small business is especially evident in its demands on an owner/
manager's valuable time. The owner of a
small business must make most of the decisions
for the firm. Keeping records and submitting
reports are only part of the cost of complying
with government requirements. Costs in learning
what the requirements are and deciding how to
respond to them—often at the expense of the
owner/manager's time—also play a major role.
These indirect costs—opportunity costs—can
divert capital and time from productive operations,
a cost that many small businesses cannot afford.
Unlike a large business, small firms usually
do not have the administrative apparatus to deal
with the "paperwork" involved. Without a legal
department or technical expertise, a small firm
must often hire expensive consultants to figure
taxes, make reports, or interpret regulations that
may initiate a change in product mix, plant
location, work routine, or capital equipment. The
cost of such assistance is greater proportionately
; 3 1 st
Annual Report of Select Committee on Small Business." U S Senate, p
134
What are These Requirements?
To manage and evaluate their programs, federal,
state, and local governments require many types
of reporting. A beginning business must obtain
from the local government the appropriate business licenses and permits allowing it to operate.
It must file an application for a federal employer
I.D. number with the IRS. The business must, in
most states, apply for a state sales tax license.
Employers must maintain on file up-to-date federal and state Employee's Withholding Exemption
Certificates. Taxes are frequent sources of paperwork requests at the federal, state and local level.
Labor issues also generate paperwork at all
levels of government, with reports on employee
safety and health, statistics on employment levels,
wages, equal opportunity, Social Security, and
unemployment. Under general trade and commerce fall reports on plant equipment, census,
and business licenses. Finally, there are environmental reports on matters such as air and water
pollution, waste, and energy use. An excellent
source of government requirements for Tennessee has been compiled by the Tennessee
Department of Economic and Community Development (see Table 2). The small businessman not
only needs to be aware of what is required of him
but also has to be knowledgeable in many fields
to be able to comply with requirements for the
best interest of his firm.
How are Firms in the Southeast Affected?
Table 1 shows that employment per company
is considerably lower in the region than in the y
nation as a whole. Differences in each District
state are reflected partly in their industry composition. Concentrations of a particular industry .
have important regulatory implications. Areas
A P R I L 1983, E C O N O M I C R E V I E W ,
36
for a small business than for a large one. Also,
small firms that typically produce one or a few »
products can feel the regulatory pinch of product
standards more than larger, diversified firms.
Small businesses are also disadvantaged by the
rule making process. Manpower and resource
restraints make appearing in Washington prohibitive. The trade and industry associations that
small businesses often rely on for representation
sometimes represent the viewpoints of their
larger members. It is also time consuming and
costly for small businessmen to turn to the courts
to settle disputes with an agency.
t
T a b l e 1 . Companies, Employees, Employment Per Company
and Relative Concentration Per State - 1980
Companies
United States
Alabama
Georgia
Florida
Louisiana
Mississippi
Tennessee
District
Percent
of U.S.
Employment
100.0
1.5
2.3
4.8
1.7
.9
1.8
13.0
74,835,525
1,073,006
1.717,602
2,975,177
1,266,337
612,256
1,440,865
9,085,243
4,543,167
65,880
104,216
217,609
77,352
43,122
83,256
591,435
Employment
per Company
Percent
of U.S.
Relative
Concentration
Col. 4/Col. 2
100.0
1.4
2.3
4.0
1.7
0.8
1.9
12.1
1.00
.93
1.00
.83
.99
.86
1.1
.93
16.5
16.3
16.5
13.7
16.4
14.2
17.3
15.4
Relative concentration is defined as the percentage of employees in a state relative to the percentage of companies in that state.
Source: County Business Patterns, U.S. Department of Commerce, May 1982.
T a b l e 2 . General Business Operating Requirements in Tennessee*
I. R e g u l a t i o n s a n d P e r m i t s to c o m p l y with:
Federal
A
B.
CD.
E.
Occupational Safety and Health Act
Social Security
Employees Federal Identification Number Application
Federal Minimum W a g e - Hour Law
Child Labor Provision
State
A T e n n e s s e e Application for Employer Account Number
B. Worker's Compensation Insurance
C. S a l e s and Tax Certificates of Registration
D. Corporate License Application
E Commercial Driver's Licenses
F. Certification for businesses that deal with
or transport plants
G. Pollution Control Permits
H. Licensing requirements for businesses
and professionals such as contractors
II. T a x e s
A.
B.
C.
D.
E.
Corporate Filing F e e s
Excise and Franchise Tax
Business Tax
S a l e s and U s e Tax
Property Tax
Employer Tax Requirements
A Form W-2 - W a g e and Tax Statement
B. Form W-3 - Reconciliation of Withheld Income Tax
C. Form 941 - Federal Tax Return
D Form 940 - Federal Unemployment Tax Return
E. Form 220.5 - Employer's Contribution Report
F. Form 220.1a - Employer's W a g e Report
G. Other Taxes - pertaining to a specific
product such as gasoline
Local
A Zoning Ordinances
B. Building Codes
C. Licenses for eating places
D. City Business License
E County Business License
F. Fire Ordinance
G. Permit for use of city street, sidewalk
"Source "A guide to doing business in Tennessee," Tennessee Department of Economic and Community Development, October 1981.
composed mainly of smaller firms may have
unusual problems adhering to policies designed
for a different type of region, such as one with
larger industries.
The type of business predetermines the paperwork of the firm. Any company dealing in a
heavily regulated product or service (e.g., chemical
waste or construction) will bear a heavier-thannormal reporting burden. The small business that
FEDERAL RESERVE BANK OF ATLANTA
expands into another state or enters a foreign
market assumes additional reporting requirements. Entering the procurement market incurs
complex reporting forms. The special reporting
cases mentioned above are applicable to various
areas of the region.
Because Louisiana is rich in natural resources,
firms with energy-intensive production processes
have located there. Small (as well as large)
37
chemical and oil companies in the state have
come under increasing pressure from environmental agencies because of the hazardous nature
of the industry. Small business owners feel that
purchases of required pollution control devices
are especially burdensome because they do not
add to production, they cost a lot, and they are
hard to finance.3
Barriers that prohibit small business participation
in foreign trade also powerfully affect the region.
Over one-fourth of U.S. waterborne exports are
now shipped from southeastern ports, and that
share is expanding.4 Exportation of certain products is governed by trade agreements that are
difficult to interpret without skills in international
law. The U.S. Customs Bureau administers complex regulations that must be followed to import
products. Assistance from the government is
available but involves time-consuming bureaucratic procedures.
Regulation of government purchases of goods
and services also is important to small business in
the Southeast. The existing procurement system
has become exceedingly complex, discouraging
participation by small contractors. The Department of Defense estimates that about half of its
prime contract dollars for major hard goods are
subcontracted by prime contractors mainly to
small firms. In fiscal year 1981, each of the
southeastern states ranked among the top five
nationally in at least one of the 25 major procurement programs.5
The Southeast claims a large number of small,
labor-intensive firms such as apparel producers,
textile manufacturers, construction contractors
and food processing plants. This makes them
especially susceptible to labor regulations.
A survey of a broad spectrum of small and large
firms in Georgia conducted by the Battelle Research Center reveals the perceived level of
impact by level of government6 Financial reports
(taxes) are high on the impact list at both the
federal and state level for both small and large
businesses, and labor reports such as statistics on
employment, wages, and equal opportunity lead
state level impact. Finally, business licensing
leads the local impact list for small businesses.
'"Small Firms Hurt by Changes on Pollution-Control Bonds.' Wall Street
Journal. October 4 1982
' E c o n o m i c Review May 1982. "Southeast's Ships Come In: Bright Outlook
lor Exports."
E c o n o m i c Review December 1982. "Southern Fireworks: Will Defense
Spending Light Up the South'"
""Complying with Government Requirements," Battelle Research Center
September 1981
38
States and localities have significant licensing
authority with the power to administer examinations and issue complex requirements including a requirement to complete detailed forms.
License fees and reporting requirements tend to
be the same for every firm regardless of size.
Rules and regulations for construction licensing
are especially interesting. Contractors must typically either hold a registered or certified license
issued by a state licensing board before engaging
in construction and comply with city or county
local licensing requirements. Examinations in the
contractor's field are required to be taken before
state licensing. In Florida, a contractor is required
to subcontract the electrical, mechanical, plumbing,
roofing, sheet metal, and air conditioning work
for which a local examination or a certificate of
competency is required unless the contractor
holds a state license of the respective trade
category. Mississippi lists 67 specialty contractors
from acoustical treatment, fencing, and painting
to industrial pipe work and insulation. This seems
to favor a large organization with a large number
of "specialties" under one roof to deal with an
entire project.
Recent Developments are Putting Small
Businesses on a More Equal Footing with
Larger Firms
¿1
.
'i
By establishing small business assistance offices,
ombudsmen, statewide small business conferences, standing legislative committees, and governors advisory councils (see Table 3), many
jj
states are encouraging small businesses by providing reliable information that can save business *
operators time and money.
Requirements for reporting on hazardous wastes
have caused many small firms to turn to com- ,4
puterized systems as a more cost-effective method
of handling the paperwork required. The systems
can save money by cutting the time required to
get reports to environmental protection agencies.
Information can be stored, processed, and reported,
giving managers necessary input for control.
Similarly, computer technology is helping small
financial institutions prepare numerous reports
/
required by regulators and helping them remain
flexible as the environment changes. The required *
withholding of interest and dividends to reduce
noncompliance (under the Tax Equity and Fiscal
*
Responsibility Act of 1982) will most likely test j *
the paperwork handling abilities of small banks.
1
A P R I L 1983, E C O N O M I C R E V I E W
^
>
Table 3 . District Small Business Assistance
Alabama
Florida
Georgia
Louisiana
Mississippi
Tennessee
OM
AO
AO
AO
AO
AO
sc
OM
OM
PS
LC
AC
sc
PS
OM
OM
AC
AC
sc
LC
sc
LC
PS
AO = Advisory Office
O M = Ombudsman
AC = Advisory Council
L C = Legislative Committee
S C = Statewide Conference
P C = Procurement
Source: U.S. Small Business Administration
At the national level, a need to ease the
regulatory burden has recently been recognized
and several programs have been instituted; however, the results have yet to be measured. The
Paperwork Reduction Act, for example, is significant in that it attempts to impose uniform standards, eliminate overlapping agency collection
requirements, and set goals for the reduction of
paperwork burdens. The Regulatory Flexibility
Act ("Reg. Flex.") requires agencies to consider
paperwork burdens of proposed regulations before issuing the rules.
The U.S. Labor Department has initiated an
experimental program that excludes 12.3 million
people from normal Occupational Safety and
Health Administration (OSHA) inspections in
Georgia and six other southern states. The program provides that in order to get a waiver from
OSHA's "general schedule" inspections, an employer must first undergo a comprehensive consultation.
Are Regulatory Roles Changing?
A major shift appears to be taking place in
areas of regulatory responsibility. The federal
government, as previously noted, has made efforts
to reduce "paperwork" emanating from Washington; however, state and local governments appearto be assuminga greater role in the regulatory
process. As John Naisbitt says in his Megatrends,
smaller political units are taking responsibility for
issues that hit hard atthe local level, and"bottom
up" approaches to policymaking, especially for
environmental issues, are going to be the wave of
the future as society moves toward decentralization. More frequently, standards may be based
on local conditions instead of national requirements set in Washington.
The upshot of these changing roles may be
that, on balance, there may not be fewer rules for
small business but that rule making and enforcement agencies will be more aware of local and
regional conditions and firms. Also, the small
businessman could more easily have close contact
with the regulatory agencies and therefore participate more in the rule making process. Local
requirements may well be more acceptable to
firms than requirements emanating from a more
distant state or federal government.7
Conclusion
Government regulation of business can benefit
society and individual firms, but often government regulations produce heavy costs. The
fact that a small business with severely limited
resources of time and money (especially if it is
just starting up) must usually go through the
same regulatory process as a large firm demonstrates the regressive nature of the regulatory
burden. With its flexibility reduced, a small firm is
at a competitive disadvantage compared to large
resource-rich firms. The disproportionate share
of small firms in the Southeast adds to the
importance of this issue for the region.
— David Avery
and Gene D. Sullivan
'"Complying with Government Requirements," op. cit.
FEDERAL RESERVE BANK OF ATLANTA
39
Manufactured Housing:
A Bright Spot for the Southeast
The manufactured housing
industry in the Southeast
weathered the recession
fairly well. Mobile home
producers, in particular,
have parlayed higherquality
construction and a
refurbished image into
strong growth in the region.
For the United States, privately owned housing
starts and new one-family houses sold fell 47 and
50 percent, respectively, from 1977 to 1982. On
the other hand, mobile home shipments in the
United States and the Southeast showed considerable strength overthis period. Mobile home
shipments have shown greater relative strength
during the recent recession than have new onefamily houses sold (see Chart 1).
During the past two years, some companies in
manufactured housing have performed extremely
well compared to the "recession-sensitive" auto
industry (see Table 1). In fact, some of the
producers have substantially increased sales in
absolute dollar terms during the last two years.
This article examines why the manufactured
housing industry emerged as a bright spot for the
Southeast during the recent recession.
40
The size of the manufactured housing industry
is impressive; partially or completely manufactured
housing (mobile homes, conventional with components, modular/sectional, and pre-cut) accounted for 90 percent of all residential housing
units produced in the United States duringl 981.
Mobile homes accounted for 26 percent of all
residential units produced.1 What is even more
significant for industrial growth in the Southeast
is that this region in recent years has consistently
been increasing its share of overall manufactured
housing produced in the United States. Manufactured housing is a growing industry in the
region, but it is propelled almost entirely by
'The '82 Red Book of Housing Manufacturers, South Edition, C M R
Associates, Inc., 1982, Crofton, Maryland.
A P R I L 1983, E C O N O M I C R E V I E W ,
T a b l e 1 . Manufactured Housing S a l e s and Net Income
Compared with Recession-Sensitive Industries
(Millions of Dollars)
Sales
Net Income
1980
Manufactured Housing *
Automotive
Chemicals
Paper and Forest Products
Steel
Textiles and Apparel
Tire and Rubber
1981
1982
1,638.2
132,445.3
95,202.3
49,967.4
45,247.7
28.500.9
22,975.1
1,861.7
142,254.3
108,015.6
52,640.7
49,711.5
31,592.3
23,231.8
1,991.8
128,147.3
105,226.9
48,482.6
44,954.3
28,999.2
21,462.7
% Change
1980-1982
1980
1981
1982
% Change
1980-1982
21.6
15.9
-3.2--4,020.3
10.5 5,440.4
- 3 . 0 2,847.2
-0.6 1,399.1
1.7 1,025.9
-6.5
247.1
22.1
-1,210.4
5,890.2
2,771.3
1,801.6
1,073.8
650.5
25.0
-1.070.3
3,742.8
1,088.9
-3,102.3
865.3
375.1
57.2
N.M.
-31.2
-61.8
N.M.
-15.7
51.8
Sources: All data except for manufactu ring housing were obtained from Business Week's"Corporate Scoreboard" from the March 16,1981, March 15,1982,
and March 14,1983, issues. Data for manufactured housing were obtained for selected public firms from Standard and Poor's Compustat Services,
Inc.
N.M. Not Meaningful
•Sales and net income figures for manufactured housing in 1982 are estimated from data through the third quarter of 1982.
mobile home production. This industry not only
provides an increasingly popular alternative to
custom-built—or "stick-built" 2 —housing but
also provides support to the economic base of
the Southeast.
The Rise of Manufactured Housing in the
U. S. and the Southeast
The American public is becoming more receptive to manufactured housing for several reasons,
one of which is quality improvement Construction
in a factory environment is more conducive to
quality control than on-site construction. Landmark improvement in the quality and safety of
mobile homes in particular began in 1976 when
Congress passed the Manufactured Home
Construction and Safety Standards Act Since
it took effect, only mobile homes that have been
inspected by the U.S. Department of Housing
and Urban Development can be sold for residential use.
Improvement in style has raised the visual
quality of manufactured housing. All varieties of
manufactured housing—pre-cut, modular, mobile
homes, and others—offer a greater choice of
options to the home buyer than in the past
Exteriors look more like stick-built exteriors.
••Housing that is built piece by piece on site is referred to as "stick-built"
because the frame of the house is built with one "stick" of lumber at a time.
FEDERAL RESERVE BANK OF ATLANTA
What is Manufactured Housing?
Manufactured housing is not what it used to be. The
old-fashioned metal box known as a mobile home is
no longer the typical manufactured house. Today,
manufactured housing comes in many varieties: panelized, pre-cut, and modular/sectional, as well as
mobile homes. Furthermore, mobile homes have
changed dramatically in recent years. The standard,
low-cost, box-like mobile home is still available, but the
industry now makes many styles of both single-wide
and multiwide mobile homes. Modern versions of the
mobile home look more like stick-built homes—the
siding is more appealing, windows are dressed better,
and the roofing appears more like that of the conventional home.
Newer varieties of manufactured housing differ
considerably in the "degree" to which the individual
unit is "manufactured"—some are only partially built
under factory conditions while others are almost
entirely manufactured. The complete range of manufactured housing includes custom-built housing that
contains some manufactured components, pre-cut
housing, panelized homes, modular housing, and mobile
homes. Of course, stick-built homes can be entirely
built on site. However, many custom-built homes do
contain some manufactured components such as
trusses. Pre-cut homes are built from parts cut to size
under factory controlled conditions and then are
assembled on the home site. Likewise, panelized
homes are assembled on site but not from pre-cut
parts. Instead, entire walls, floors, and roofs are built at
the factory and shipped as "panels" to the construction
site. Modular homes are assembled on site from
whole rooms that are delivered to the site from the
factory. Finally, mobile homes are almost entirely
assembled in the factory. Often, even furniture is
included in the finished mobile home.
41
Chart 1. New One-Family Houses Sold versus
Mobile Homes Shipped in the U.S.
Thousands
800
New One-Family Houses Sold r ~ l
Mobile Homes Shipped
600
400
200
I i i
1977
1978
1979
1980
1981
1982
Source: U.S. Department of Commerce
Inside, the customer can choose between many
options such as kitchen cabinets, bath fixtures,
and the color of the carpet. With the purchase of
a mobile home, there is often a choice in the style
of furniture.
Another change that has boosted the popularity
of mobile homes is the increased availability of
financing. Before 1969, the financing of mobile
homes was not easy. While fabricated housing
(such as pre-cut and modular) could be financed
on the same basis as conventionally built homes,
mobile homes had to be financed almost the
same as automobiles. More than a decade of
concerted action by mobile home manufacturers
and savings and loan officials finally has brought
mobile home financing close to par with financing
for site-built homes. Only in 1969 did the Federal
Home Loan Bank Board allow thrifts to make
mortgage loans on mobile homes. Even then,
mortgage maturities could be no more than 12
years for new mobile homes and no more than 8
years for used mobile homes. The amount of
available funds was severely restricted —a thrift
association was not allowed to invest more than
5 percent of its total assets into these mortgages.
The Department of Housing and Urban Development began insuring mobile home mortgages
under specific FHA plans in 1970. The Veterans
Administration began guaranteeing loans for mobile
home mortgages later in 1970. Only in 1973 did
the FH LBB allow thrifts to make FHA/VA loans for
mobile homes. Other restrictions were eased
42
throughout the 1970s and early 1980s. In particular, the dollar limit on financing for an individual
home has continually risen.
In early 1983, a mobile home—new or used—
could be financed for a term of up to 30 years.
The maximum loan amount is equal to 90 percent
of the buyer's total costs (excluding a few costs
such as credit life insurance). Furthermore, there
are no limits on the percentage of assets that
savings and loan associations can put into mobile
home mortgages. Still, many restrictions do apply
to mortgage lending on these homes by thrifts.
Among others, the home must be owner occupied
and the home must have "an intended permanency." To meet intended permanency requirements, the home must have the wheels
removed, be permanently attached to a foundation, be taxed as realty, meet zoning regulations, and must meet the same real estate
regulations of thrifts that apply for one-to-four
family conventional units.
Today's mobile homes do qualify for conventional loans in addition to FHA/VA home financing.
Additional funds were made available for loans
when, in 1981, the Federal National Mortgage
Association ("Fannie Mae") announced a change
in policy agreeing to purchase these mortgages
in the secondary market.
Finally, today's economic environment has
played no small role in increasing demand for
manufactured housing. Until the current recession
slowed inflation, housing costs had been rising
rapidly—more so than changes in the overall
consumer price index. In the third quarter of
1982, the average sales price of a new singlefamily house had risen to $83,900. In contrast,
the average sales price of a new mobile home
was $ 19,600.3 Atypical monthly payment forthis
average conventional home is estimated to have
been $1,076 versus $300 for the mobile home.4
The relative affordability of mobile homes has
increased their popularity. Affordability and the
availability of financing have played key roles in
helping mobile home sales to fare better during
3 Source:
U.S. Department of Commerce. Unlike new stick-built singlefamily houses, the sales price of mobile homes does not include the cost
of land. On the average, the price of a new single-family house is
estimated to consist of 1 8 to 20 percent land cost and the rest for the
actual construction costs.
"For both the conventional home and the mobile home, the monthly
payment estimates are based on a typical term of 30 years, a down
payment of 5 percent, and a mortgage rate of 16 percent (which was the
"going rate" during the third quarter of 1982). The sales price of the mobile
home is adjusted upward by 20 percent to take into account land costs.
Neither figure includes insurance or property tax expenses.
A P R I L 1983, E C O N O M I C
REVIEW
Table 2. 1982 Estimated Production and Shipments of Manufactured Housing in the Southeast
Factory-Built
Housing Units*
State
Alabama
Florida
Georgia
Louisana
Mississippi
Tennessee
Percent
of U.S.
Mobile Home
Units
Percent
of U.S.
Total
Manufactured
Units
Percent
of U.S.
1,310
2,390
4,430
2,720
670
660
1.1
1.2
3.7
2.3
0.6
0.6
18,757
18,950
34,010
3,269
6,031
7,584
7.9
8.0
14.2
1.4
2.5
3.2
20,067
21,340
38,440
5,989
6,701
8,244
5.6
5.9
10.7
1.7
1.9
2.3
Southeast
12,180
10.1
88,601
37.1
100,781
28.0
U.S. Total
121,000
100.0
239,000
100.0
360,000
100.0
'Factory-built housing units include panelized, pre-cut, and modular/sectional housing units.
Source: The '83 Red Book of Housing Manufacturers, South Edition, C M R Associates, Inc., 1983, Crofton, Maryland. The six states in the FRBAtlanta District represent part ot Red Book's South Region.
Table 3. 1978 Estimated Production and Shipments of Manufactured Housing in the Southeast
State
Factory-Built
Housing Units*
Percent
of U.S.
Mobile Home
Units
Percent
of U.S.
Total
Manufactured
Units
Percent
of U.S.
Alabama
Florida
Georgia
Louisiana
Mississippi
Tennessee
5,160
10,000
7,880
5,440
1,900
4,100
1.6
3.1
2.5
1.7
0.6
1.3
17,390
17,360
24,270
3,830
5,070
6,760
6.0
6.0
8.4
1.3
1.7
2.3
22,550
27,360
32,150
9,270
6,970
10,860
3.7
4.5
5.3
1.5
1.1
1.8
Southeast
34,480
10.8
74,680
25.8
109,160
17.9
U.S. Total
320,420
100.0
290,000
100.0
610,420
100.0
•Factory-built housing units include panelized, pre-cut, and modular/sectional housing units.
Source: T h e ' 7 9 Red Book of Housing Manufacturers, South Edition CMR Associates, Inc., 1979, Crofton, Maryland. The six states in the FRBAtlanta District represent part of Red Book's South Region.
the recession than sales of new one-family houses
(Chart 1). Other types of manufactured housing
also offer savings to consumers. Depending on
the variety of manufactured housing chosen by
the consumer, savings can run anywhere from 5
to 25 percent of the cost of a conventionally built
house.
Why Manufactured Housing Firms Are
Moving Into the Southeast
The Southeast's share of total manufactured
housing output is on the rise (Tables 2 and 3). Firms
FEDERAL R E S E R V E B A N K O F ATLANTA
are moving into the region from elsewhere in the
country; many existing southeastern plants are
expanding capacity, and others have plans for
expansion. In particular, the Southeast has
rapidly been improving its share of U.S. mobile
home production (see Chart 2). On the other
hand, the Southeast's share of "factory built
housing units" (not of the mobile home variety)
has remained fairly constant over the last few
years. But why is the Southeast making such
inroads into manufactured housing markets
overall?
Of all factors affecting long-term growth, the
region's demographics has to be the most
43
Chart 2. Southeast Share of Total U.S. Mobile
Home Production
T Percent
40
/
h
illlll
1977
1978
1979
1980
1981
1982
/
i
3,
r
i
•
*
T
F
»
\
\
/
I
•
I)
1
- " i « " *
\
•
\
\
•j
4
\
•
m
r/
•
I
.
•
A
\ •A
j
L o c a t i o n s of M a n u f a c t u r e d H o u s i n g
P l a n t s in t h e S o u t h e a s t w i t h 1 5 1
e m p l o y e e s or m o r e
•
\
m
1
f
\
\
Source: Individual state directories of manufacturers
Source: National Conference of States on Building Codes and
Standards, Inc.
important. An increasing population is attracting
new plants for factory-built housing and is
encouraging expansion at existing plants. This
trend is not just a southeastern phenomenon—it
is occurring throughout the "Sunbelt." During
the 1970s the South5 attracted more than
350,000 people each year compared to only
130,000 annually in the late 1960s.6 Overall, the
South's population increased by 22 percent
from 1970 to 1980.7 Though the population
increase slowed during the recession, the longterm trend is for the population growth rate to
remain relatively strong compared to the rest of
the nation. What this trend spells out is an
increase in the demand for housing. Throughout
the Sunbelt, home builders are being attracted
on a long-term basis in order to build this
housing. Just like any other home builders,
companies that build manufactured housing are
moving to where the markets are.
In addition to population growth, some
economic factors do affect the southward movement of industrial housing plants. Among these
5 For
the discussion of demographics, the "South" refers to the South
Census Region as defined by the Department of the Census. The region
includes Delaware, Maryland, Washington, D C., Virginia, West Virginia,
North Carolina, South Carolina, Georgia, Florida, Kentucky, Tennessee,
Alabama, Mississipi, Arkansas. Louisiana, Oklahoma, and Texas.
6 William J. Kahley. "Migration: Changing Faces of the South." E c o n o m i c
Review, Federal Reserve Bank of Atlanta, J u n e 1982.
' J a m e s W. Clay and Alfred W. Stuart, "Uneven Growth: Southern Population
Change at the County Level." E c o n o m i c Review, Federal Reserve Bank
of Atlanta, J u n e 1982
44
»
j
I
are "economies of agglomeration," labor costs,
and weather factors. In plain English, economies I
of agglomeration means that production of a t
good is cheaper when all of the firms producing
the inputs for the final product are located near •
the plant using these inputs. Their proximity
helps production flow more smoothly and at a
lower cost. For the producers of manufactured
housing, production is cheaper when plants are
"What this trend spells out is an
increase in the demand for housing."
|
located near suppliers. Supplier industries include .
lumber, plywood, furniture, appliances, and
fabricated metal among others.
Many of these supplier industries are locating ,
in the Southeast and the rest of the Sunbelt for
reasons independent of the manufactured housing « industry, while others are relocating for the
specific purpose of supplying firms that produce
industrial housing. In the Southeast, furniture,
appliance, and plywood are major industries that
relocated for general economic reasons, whereas i
producers of components for industrial housing
•3
(such as trusses, some fabricated metal, and
4 mobile home furniture) relocated for the specific
purpose of serving the manufactured housing
industry.
Once supplier firms became more concentrated
in the Southeast and the rest of the Sunbelt,
producers of manufactured housing found moving
9
to the area to be advantageous. As one producer
states, "It's a lot easier to make the product when
95 percent of your suppliers can be found within
a 250 to 300 mile radius. You just don't have that
, kind of situation in places like Montana." The
4
existence of satellite industries plays a major role
• in plant location.
J
f
,
"Tradition has much to do with the
success of manufactured housing
in the southeastern housing
markets."
|
f
»
,
h
t
,
The location of raw material such as lumber
and plywood does not play a significant role in
attracting firms. Lumber comes primarily from
the Northwest and from Canada For lumber,
producers prefer the tall hemlock fir and spruce
which are not found in the Southeast. On the
other hand, the fast-growing pine—which is used
in plywood—is grown primarily in the Southeast.
However, transportation costs of plywood are
relatively low compared to the transportation
costs of a finished manufactured house. Firms
prefer to locate close to the markets for the final
product because of the considerably higher
transportation costs of the actual home. But once
a decision to locate in the region has been made,
firms often do select a site near sources of
plywood or timber. Still, the dominant factor in
the location decision is the nearness of consumer
markets.
The warmer climate in the Southeast has
provided incentive for some firms to locate here.
Air-powered tools are frequently used in the
production of the housing units. Below-freezing
temperatures frequently freeze air-driven tools
because the moisture in the tools freezes. Exposure to the weather is less of a problem in the
Southeast. However, some northern companies
FEDERAL RESERVE BANK OF ATLANTA
I
I
report that cold weather is not that significant a
problem when production facilities are built to
the proper size and then heated. Still, warmer
weather does allow more days for transporting
finished homes. This reduces inventory costs for
Sunbelt firms.
Finally, traditional acceptance of manufactured
housing in the Southeast encourages firms to
locate here. The region still has a greater percentage of lower income families than the rest of the
nation. These families have been the backbone
of the market for manufactured housing—in
particular, for the mobile home market. Manufactured housing has long been accepted by
lower income families as an alternative to conventionally built homes. Though income levels in
the Southeast have risen, the region is still very
receptive to manufactured housing as an alternative to custom-built housing. Tradition has
much to do with the success of manufactured
housing in southeastern housing markets.
Demographics is the key reason for the growth
of industrial housing in the Southeast; a growing
population means an increasing demand for
housing—whether for conventionally built homes
or for manufactured homes. Other factors affecting
location of firms and plants are lower labor costs,
relocation of suppliers, a warmer climate, and a
traditional market for the products.
Characteristics of Manufactured
Housing Producers in the Southeast
Producers of the entire range of manufactured
housing types are located in the Southeast.
Mobile home producers far outnumber producers
of factory-built houses. I n terms of output, southeastern-produced mobile homes in 1981 are
estimated to have been 80,440 versus 9,910
factory-built housing units (see Table 2). Georgia
leads the Southeast in production of both. In
fact, Georgia is the second largest producer of
45
mobile homes in the nation behind Texas. Georgia
also leads the region in production of factorybuilt housing units with over 3,000 units being
built in 1981. Florida—with its heavy in-migration
and large retirement community—is second in
the region in both mobile home production and
in the number of factory-built housing units
produced.
The number of employees in mobile home
firms varies widely. A typical firm employs 51 to
100 employees (see Chart 3).
In contrast, about 70 percent of the producers
of prefabricated wood homes and components
have 50 or fewer workers. Approximately 20
percent of the firms have from 51 to 100 workers.
Only around 10 percent of these firms have over
100 workers. There is considerably less variety in
the firm sizes of these types of manufactured
housing producers.
In 1982, the output per worker (in terms of
sales revenue) in the mobile home industry
generally ranged from $85,000 to $130,000.
Industry spokespersons indicate that the"rule of
thumb" for management is that most firms try to
"run a 10 percent labor factor." Out of total
expenses, 10 percent of the cost should be for
labor, 70 percent for materials, 10 percent for
overhead, and 10 percent (hopefully) for profit
The fabricated housing component of manufactured housing is more labor intensive. The
sales revenue per employee ranged from $60,000
to $86,000 in 1982. Most of the variation in
workeroutput—in both the mobile home component and the prefabricated housing component—was a result of different approaches by
firms in adjustingto reductions in demand. Some
reduced the size of the labor force, while others
concentrated on reducing hours worked. Variations
in firm size did not appear to be related to
differences in sales revenue per employee.
W h o Are Some of the Producers
in the Region?
W e have seen where the firms are distributed
in the Southeast and how the firm size varies, but
who are some of the individual firms, what were
their experiences during the recession and what
are their plans for the future?
In many ways, Guerdon Industries (based in
Louisville, Kentucky) is typical of the "mobile
home" portion of the manufactured housing
industry. Perhaps not so typical is the geographic
46
Chart 3. Number of Producers in Southeast by
Employment
60
N u m b e r of F i r m s
H
50
40
30
20
10
Mobile H o m e s
Prefabricated W o o d H o m e s
and Components
iiI
1-50
51-100
L
101-150 151-200 201-250
E m p l o y e e s in Firm
251 +
Source: Slate directories of manufacturers—Alabama (1980-81),
Florida (1981), Georgia (1980-81), Louisiana (1982),
Mississippi (1980), and Tennessee (1978),
extent of the company—14 plants are scattered
throughout the Southeast and other parts of the
United States.8
The company only partially"planned" on taking
advantage of the Sunbelt's rapidly growing population—most plants were acquired through merger
before 1967 (before most in-migration really
began). However, Guerdon did view the Southeast and the rest of the Sunbelt as a traditional
market for manufactured housing. Southeastern
plant locations were chosen also because of the
region's labor supply being basically non-union
yet equally productive.
One characteristic that this company does
share with others in its sector of manufactured
housing is that Guerdon produces a full line of
mobile homes—from the low-cost mobile home
to the higher priced, luxury, "not-so-mobile"
home. How did the company's products sell
during the recession? As was the case with others,
sales have shifted considerably to smaller, singlewide homes away from the more luxurious
multiwide homes.9 Sales very much became a
function of the monthly payment required for
each product. Those who formerly could afford a
"Three of Guerdon's plants are in Georgia, two each are in Florida and
Arkansas, and one each is in Alabama, Mississippi. Kansas, Nebraska.
Idaho, Oregon, and California
'"Single-wide, double-wide, and multiwide" refer to the number of rooms
across the width of a mobile home A single-wide is one room in width; a
double-wide or other multiwide has two or more rooms. Most multiwide
homes are produced in single-wide sections that are |oined on site
A P R I L 1983, E C O N O M I C R E V I E W ,
double-wide may have recently been able to
afford only a single-wide. Profit margins were
squeezed as a result of a tighter market.
During the worst of the recession, this firm did
not have a significant inventory problem. Carrying
costs (interest charges) were manageable because
0 Guerdon (like most in the industry)10 "builds on
order." Only when a sales contract is signed,
does a home to fill that order go into production.
The company expects 1983 to be better than
1982. They have already seen a pickup in sales.
The company also believes that the second half
of the year will be stronger than the first half.
Cardinal Industries (based in Columbus, Ohio) is
f one of the newcomers to the region. The company also is in one of the more novel branches of
manufactured housing—the firm primarily manufactures apartments for full developments and
~
4
1
"Georgia leads the region in
production of factory-built housing
units."
J
for motels. The market strategy of the firm
exemplifies those in the industry who moved to
the Southeast in order to follow population
• flows. The company's first plant in the Southeast
was built in Columbus, Georgia in 1954. Originally, this plant produced manufactured building components—in 1970 it was converted to
produce modular housing. Following population
movements, Cardinal expanded into Orlando in
1976 and into Atlanta in 1982. A second plant
was also built in Columbus (Georgia) in 1982. As
> one company official stated, the company likes
tv. enter existing markets in densely populated
areas where demand is strong, labor is readily
available, and transportation networks are
"completed."
,0 ln
December 1982, mobile home dealers in the United States had less
than a one month's supply of homes on dealer lots whereas the supply of
new one-family houses was enough to last approximately six months
based on the sales rate for that month.
FEDERAL R E S E R V E B A N K O F ATLANTA
The company's production philosophy is partially indicative of the industry's desire to make a
high-quality, low-cost product. It also shows a
new trend in the management and marketing of
company products. Cardinal Industries follows
the philosophy of developing the product first
and then marketing the product rather than the
reverse philosophy of "chasing the market." By
specializing in a limited number of products,
resources can be shifted to managing the "environment" of the products. By managing land,
setting up the operation of apartments and
motels, and arranging financing, for example,
Cardinal is better able to service its customers.
Cardinal Industries has fared well overthe past
decade. For the past 13 years, the company's
revenue has grown at a 30 percent compounded
rate. Some of this can be attributed to its preparation for the latest recession by placing more
emphasis on expanding into the apartment market
Cardinal Industries expects an upturn in the
overall economy to improve business in 1983.
Though not all builders of fabricated housing
have fared well during the recession, Malone
Homes (based in Dothan, Alabama) is an example
of one that has. The company also provides an
example of how fabricated prducers can maintain
business during recession. Malone Homes is
very diversified in its field—products range from
small single-family dwellings of less than one
thousand square feet to multi-million dollar apartment complexes. However, most of its houses
are selling in the $60,000 to $90,000 range.
"About 70 percent of the producers
of prefabricated wood homes and
components have 50 or fewer
workers."
Since 1958, Malone Homes has been a producer of panelized homes. This company started
in conventional home building in the 1940s and
began organizing materials in an efficient manner
just by bundling materials together before going
on site. Eventually, this system was expanded into
47
The Special Problems of Factory
Built Housing
manufacturing various component parts. This
finally led to the decision to produce panelized
housing. Today, the company loads panels onto
a flat-bed truck and, after getting to the construction
site, can have a house basically completed after
only three days. The interior and siding are
finished by a local builder.
Like other home builders, this company is
marketing according to where the population is
growing—50 percent of the company's business
is in Florida. Malone—in contrast to some firmsfinds that the supplies of lumber and plywood
around Dothan play a significant role in determining plant location. Plywood is used for roof
sheathing and lumber is used for roof trusses.
However, timber for studs does come from the
Northwest and Canada.
During the recession, Malone placed more
emphasis on multifamily housing. The company's
multifamily apartments are based on multiples
of duplex units. Most of its apartments are
relatively small—either duplex or quadruplex
units—though the developments may contain
many such units.
During the recession, Malone decided to concentrate more on the small investor. Local sales
representatives would convince local builders
that the multifamily market would be stronger
than the single-family market. In turn, builders
and sales representatives sought out "small"
local investors such as doctors, lawyers, and
other professionals in the local community to
invest in developments using Malone's products. Furthermore, sales representatives worked
with local banks in order to obtain the necessary
financing to go with investors' funds. Malone's
strategy was successful—a company spokesperson
indicated that the shift to multifamily housing
together with a full-fledged marketing approach
was primarily responsible for an increase in
revenue in 1982 over 1981. For this fabricated
housing producer, marketing is a key component
in sales strategy.
48
Although the production of mobile homes
held up remarkably well during the recent recession, factory-built housing (panelized, precut, and modular) did not do as well. Units
produced fell by 62 percent in the nation from
1978 to 1982 compared with a more modest
decline of 18 percent for shipments of mobile
homes. Much of the decline can be attributed to
an undeveloped marketing structure; the remainder
is primarily a result of overhead cost problems.
Factory-produced housing is a very close substitute for stick-built housing. Theoretically, this
portion of the manufactured housing sector
should hold up better during recession than
"Factory-built housing did not fare
as well as mobile homes during the
recession."
conventional housing since the per unit cost can
be cheaper. However, there must be sufficient
demand for the homes in order to maintain an
efficient level of production in the plants. Unfortunately, many producers depend on conventional builders to erect the homes instead of
developing their own system of retailers and
builders. In boom times, conventional builders
will use factory-produced housing so as to keep
up with demand. In timesof slackdemand, these
builders will do all—or as much as possible—of
the construction work.
Another reason that factory-produced housing]!
declines more in recession than conventional
housing is that these producers have larger
overhead costs than conventional builders. While J
conventional builders "operate out of a pick-up
truck," factory producers must pay the expense
of operating a plant. If sales are too few to pay
these operational costs, then closing the plant ic,
a rational decision. Factory producers must have^
a larger minimum amount of sales in order fo?
unit costs to be low enough to leave a profit.
Some factory producers during recession do
manage to switch from building entire houses to
becoming a supplier of components for (partially
APRIL 1983, E C O N O M I C R E V I E W
,
j
and completely) manufactured housing. This
í reduces output numbers for factory-produced
housing units but does still aid employment in
the factory-produced housing industry.
!
P
I
f
í
L
T
•
I
%
'
*
j'
I
Although the future of factory-built housing is
promising, the industry must overcome several
problems. This sector needs to mature in its
marketing techniques. Producers must tie output
more to their own builders in order to remain
stable during recession. Also, these producers
must develop ties with the financial community
similar to those of mobile home producers. The
fact that mobile homes can now qualify for
conventional, FHA, or VA loans for 30-year terms
indicates the cohesiveness and marketing "savvy"
of the mobile home industry as a whole. While
factory-built homes can qualify for these same
mortgages (and did so before mobile homes
could), these producers overall have not acted as
far-sighted in their marketing and financing
strategies as have mobile home producers.
New Trends in Manufactured Housing
Competition and consumer demands are
bringing about a variety of new trends in the
manufactured housing industry. In the "mobile
. home" component of this industry, a greater
number of firms are becoming more self-sufficient
I Producers are responding to the quality-conscious
consumers by developing homes that look very
\ "conventional." Developers are responding to
the demand for quality by introducing"developments for manufactured housing" as a replacement
for "mobile home parks."
are primarily producing input products that do
not require a lot of capital or technology. Many
such input products typically include furniture,
cabinets, and draperies. Some firms have even
begun fabricating metal for some parts. One
other approach taken by some producers to
reduce supply costs is to act as broker for their
own supplies rather than go through a "middle
man."
Mobile home producers continue to compete
in product quality. Styling will be very much a
part of further quality improvement in the future.
As mobile homes look more like conventional
homes, so do consumers demand a life-style that
more closely resembles conventional housing
neighborhoods. In response to this demand, a
few innovative developers are introducing
"developments for manufactured housing." The
traditional "mobile home park" may give way to
developments with paved, winding roads, more
trees, more stylish housing units, and even
clubhouses and shared recreation facilities.
Manufacturers of multifamily housing are also
seeing some new innovations. The recession has
made multifamily housing a more attractive
market; still the market has been tight. I n order to
ease the entry of investors into the market for
multifamily developments, producers of this
type of housing are paying more attention to the
"environment" of their product. The physical
production of housing units is fine-tuned and
"routinized" so that management resources can
be shifted to managing the environment of
multifamily developments. Maintenance of this
environment includes helping developers with
site preparation plans, landscaping before and
after completion of construction, planning traffic
flow, helping to set up the management plans for
the development, and arranging financing.
"A few innovative developers are
introducing 'developments for
manufactured housing'.. .with paved,
winding roads, more trees, and
even clubhouses."
Mobile home manufacturers are becoming
more self-sufficient. This cost-cutting trend has
been encouraged partially by recession. The
firms that are producing some of their supplies
FEDERAL RESERVE BANK O F ATLANTA
\
!
49
A recent innovation of a few firms working with
multifamily markets is to set up a financial
subsidiary to sell securities to interested investors
in real estate developments using the parent
company's products. Some of the incentive for
this approach was a product of recession. A
broader market base was needed to raise the
level of investment. In order to attract more
(including smaller) investors, a method of setting
up developments financed through marketable
securities led to the use of financial subsidiaries.
Many producers of manufactured housing are
increasing the amount of marketing for their
products. In the past, these companies would
act as a "jobbing service." Each housing unit—or
job—would only be produced after receipt of
the order. Of course, the order would include
the various options chosen by the purchaser.
Even today, most producers of manufactured
housing only produce "on order." In contrast,
some firms are shifting strategy. More firms are
marketing their products "as is" and selling only
the homes as designed. This approach reduces
construction costs. Still, producers are pushing
more luxurious models and do have a large
variety of choice. However, the emphasis is more
on marketing fewer total products in greater
quantity to meet consumer wants.
Exports of Manufactured Housing
The export market appears to offer some
potential for producers of manufactured houses.
Although the volume of exports thus far is
extremely limited, sales of mobile homes have
been made in areas where construction labor is
scarce. Oil field areas and government sponsored
housing developments in the Middle East and in
Latin America have accounted for most of the
market.
Some of the problems that need to be solved
before export markets can be expanded significantly are, first, the lack of market development
50
by producers. No firms are known to have an
"export division." Sales abroad are made through
export agents who first contact an individual
company. Since foreign buyers usually know
little about manufactured housing, they often
seek business with the large national firms. Even
when approached by an agent for a foreign sale,
firms sometimes decline the contract because of
various production problems. Second, units produced for export must meet foreign building
standards. In particular, the wiring and plumbing
are often completely different from U.S. regulations. Third, transportation costs are expensive. Manufactured houses are easily damaged
during transport and must be specially "stacked"
into cargo ships. By the time the housing units
reach their final destination, the cost is often
double the cost leaving the factory. Some feel
that these obstacles can be overcome; that when
economies abroad improve, there is potential for
export development, particularly in the Middle
East and Latin America.
Summary
The manufactured housing industry is growing
(primarily in mobile home production) in the
Southeast. The chief factors causing this growth
are a growing population, movement of supplier
industries to the region and, to a lesser degree, a
warmer climate. Mobile home production has
held fairly steady during the recession as a result
of the product's affordability and improved
quality. Other types of manufactured housing
have not fared as well because of producer
reliance on local builders to "sell" the homes to
the consumer. Also, the mobile home industry's
marketing efforts (including the arranging of
financing) generally have been more effective
than those of fabricated housing producers.
—Gene D. Sullivan
and R. Mark Rogers
APRIL 1983, E C O N O M I C R E V I E W ,
I I I 1 I 1 B
n f i f l n
FINANCE
FEB
1983
itMMLIlK]
JAN
1983
millions
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings 3c Time
FEB
1982
1,232,493 1,245,791 1,099,303
292,126
323,014
289,113
69,832
68,433
53,777
277,506
219,770
148,282
622,295
663,834
634,123
52,092
52,276
41,552
4,312
4,192
2,685
42,752
43,436
36.283
ANN.
%
+ 12
1
30
87
2
25
61
18
Savings 3c Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
ALABAMA
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings 3 Time
c
136,863
34,153
9,365
30,085
65,990
4,979
363
4,248
136,742
37,361
8,951
23,731
69,905
4,992
369
4.262
118,491
34,162
7,030
14,713
65,409
4,088
278
3,487
+ 16
- 1
+ 33
+104
+ 1
+ 22
+ 31
+ 22
Savings 3c Loans
Total Deposits
NOW
Savings
Time
14,571
3,527
836
2,583
8,032
852
69
723
14,914
3,897
802
2,080
8,534
857
72
734
13,409
3,504
612
1,530
8,190
717
55
617
+ 9
+ 1
+ 37
+ 69
- 2
+ 19
+ 25
+ 17
Savings 3c Loans
Total Deposits
NOW
Savings
Time
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
46,676
12,122
4,018
13,432
17,924
2,247
193
1.787
45,582
13,216
3,923
10,263
19,257
2,255
197
^789
39,219
12,174
3,107
6,374
18,152
1,845
156
1^^431 _
+ 19
- 1
+ 29
+111
- 1
+ 22
+ 24
+ 25
Savings 3c Loans
Total Deposits
NOW
Savings
Time
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings 3c Time
19,525
6,178
1,256
4,089
8,841
934
39
836
20,234
6,696
1,206
3,916
9,253
923
41
828
16,151
5,877
997
1,573
8,634
755
23
703
+ 21
+ 5
+ 26
+160
+ 2
+ 24
+ 70
+ 19
Savings 3c Loans
Total Deposits
NOW
Savings
Time
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
24,166
5,927
1,240
4,094
13,322
21,511
6,227
941
2,380
12,493
114
+ 12
Savings 3c Loans
Total Deposits
NOW
Savings
Time
12
153
24,179
6,469
1,213
3,185
13,829
164
11
154
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings _3c Time
2,346
714
1,723
6,473
N.A.
N.A.
N.A.
2,487
654
1,197
6,779
N.A.
N.A.
N.A.
9,799
2,336
521
731
6,449
N.A.
N.A.
N.A
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings 3c Time
20,903
4,053
1,301
4,164
11,398
784
50
749
20,935
4,596
1,153
3,090
12,253
793
48
757
1M02
4,044
852
2,125
11,491
657
36
630
Notes:
162
- 5
+ 32
+ 72
+ 7
+ 42
+ 50
44
+ 12
0
+ 37
+136
+0
ANN.
%
CHG.
FEB
1983
CHG.
Mortgages Outstanding
Mortgage Commitments
Mortgages Outstanding
Mortgage Commitments
Mortgages Outstanding
^ Mortgage Commitments
Mortgages Outstanding
Mortgage Commitments
Savings 3c Loans
Total Deposits
NOW
Savings
Time
Savings 3c Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
JAN
1983
FEB
1982
571,306
15,417
157,114
401,389
DEC
475,696
17,730
556,603
13,454
124,374
421,051
NOV
479,934
19,563
521,441
8,377
92,743
420,811
DEC
509,133
15,163
82,691
2,636
19,841
60,818
DEC
67,971
2,908
81,287
2,342
15,679
63,859
NOV
68,199
2,980
76,565
1,371
11,750
63,470
DEC
74,633
3,487
4,564
178
649
3,784
DEC
3,684
49
4,559
147
594
3,847
NOV
3,695
49
4,404
71
579
3,782
DEC
4,003
50
50,183
1,787
13,498
35,181
DEC
39,968
2,248
49,137
1,600
10,524
37,282
NOV
40,135
2,319
46,371
962
7,893
37,444
DEC
45,702
3,059
10,256
250
2,154
DEC
8,760
201
10,240
245
1,834
8,314
NOV
8,809
227
9,720
143
1,183
8,430
DEC
9,349
111
8,432
174
1,841
6,470
DEC
7,541
223
8,176
139
1,488
6,603
NOV
7,476
215
7,519
83
1,216
6,238
DEC
7,141
208
+ 12
+110
+ 51
+ 4
2,508
86
417
2,028
DEC
2,055
22
2,508
75
336
2,124
NOV
2,067
21
2,378
37
222
2,131
DEC
2,205
17
+ 5
+132
+ 88
- 5
6,748
161
1,282
5,333
DEC
5,963
165
6,667
136
903
5,689
NOV
6,017
149
6,173
75
657
5,445
DEC
6,234
42
8,022
+ 10
+ 84
+ 69
5
7
+ 17
+
+
+
-
8
92
69
4
- 9
-17
+ 4
+151
+ 12
+ 0
-
8
2
+
8
+ 86
+ 71
7
-
13
27
6
75
82
5
- 6
+ 81
+ 6
+ 7
- 7
+ 29
+ 9
+115
+ 95
- 2
- 4
+293
„r
ivcacive jve^ori 01 iransacuon Accounts, otner ueposits and Vault Cash (FR2900),
and are reported for the average of the week ending the 1st Wednesday of the month. Tljis data, reported by institutions with
over $15 million in deposits as of December 31, 1979, represents 95% of deposits in the six state area. The major differences between
this Report and the call report" are size, the treatment of interbank v n i w , andV the treatment of float. The data generated from
'
—7
—
-- - ' ' u ^ deposits, a 1 J CIIC ucauucill
I
lit,
the Report of Transaction Accounts is for banks over $15 million in deposits as of December 31, 1979. The total deposit data generated
from the Report of Transaction Accounts eliminates interbank deposits by reporting the net of deposits "due to" and "due from" other
depository institutions. The Report of Transaction Accounts subtracts cash in process of collection from demand deposits, while the call
report does not Savings and loan mortgage data are from the Federal Home Loan Bank Board Selected Balance Sheet Data. The
Southeast data represent the total of the six states. Subcategories were chosen on a selective basis and do not add to total.
N.A. = fewer than four institutions reporting.
http://fraser.stlouisfed.org/
FEDERAL RESERVE BANK O F ATLANTA
Federal Reserve Bank of St. Louis
51
EMPLOYMENT
JAN
1983
DEC
1982
JAN
1982
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfe. Ave. Wklv. Earn. - $
109,779
97,262
12,517
10.4
N.A.
N.A.
39.1
312
110,477
98,849
11,628
10.8
N.A.
N.A.
39.7
345
108,014
97,831
10,183
+23
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfe. Avg. Wklv. Earn. - $
14,088
12,470
1,619
14,207
12,668
1,539
N.A.
N.A.
40.0
300
N.A.
N.A.
40.7
306
13,732
12,386
1,346
9.4
N.A.
N.A.
32.8
244
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wklv. Earn. - $
1,729
1,442
287
16.1
N.A.
N.A.
39.7
297
1,720
1,453
267
15.7
N.A.
N.A.
39.6
294
1,653
1,428
225
14.0
N.A.
N.A.
29.2
228
+ 1
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfe. Ave. Wkly. Earn. - $
4,783
4,285
499
10.2
N.A.
N.A.
39.8
293
4,798
4,343
455
9.5
N.A.
N.A.
41.4
302
4,482
4,138
344
7.4
N.A.
N.A.
40.0
273
+ 7
+ 4
+45
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Ave. Wklv. Earn. - $
2,621
2,406
215
8.2
N.A.
N.A.
39.8
276
2,670
2,461
209
8.1
N.A.
N.A.
40.4
279
2,606
2,387
220
8.2
N.A.
N.A.
29.9
200
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfe. Ave. Wklv. Earn. - $
1,812
1,608
204
10.4
N.A.
N.A.
42.1
384
1,855
1,640
215
12.0
N.A.
N.A.
42.7
401
1,849
1,659
189
10.1
N.A.
N.A.
34.9
328
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfe. Ave. Wklv. Earn. - $
1,032
906
126
11.5
N.A.
N.A.
39.2
259
1,051
927
124
11.9
N.A.
N.A.
40.1
262
1,029
917
112
10.2
N.A.
N.A.
28.7
181
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
2,111
1,823
288
12.3
N.A.
N.A.
39.5
293
2,113
1,844
269
12.8
N.A.
N.A.
39.8
295
2,113
1,857
256
10.9
N.A.
N.A.
34.4
251
ANN.
ANN.
%
CHG.
ÉHÉÈ
Notes:
1.
10
1.
10
+ 2
- 1
8.6
N.A.
N.A.
37.1
312
+ 3
+ 1
+20
+22
+23
+ 5
+28
+36
+30
-1
+ 7
+ 1
+ 1
-
2
+33
+38
-
2
- 3
+ 8
+21
+17
+ 0
-1
+13
+37
+43
- 0
-
2
+13
+15
+17
JAN
1983
% I
CHG.
JAN
1982
DEC
1982
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
Trans. Com. & Pub. Util.
87,681
17,995
3,546
20,334
15,654
18,863
5,303
4,913
89,327
18,156
3,797
20,941
15,949
19,084
5,357
5,014
89,269
19,353
3,576
20,417
15,862
18,523
5,290
5,065
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real Est.
Trans. C o m . & Pub. Util.
11,326
2,123
607
2,712
2,144
2,259
651
683
11,440
2,135
629
2,758
2,155
2,259
652
702
11,327
2,214
635
2,662
2,146
2,170
640
698
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
Trans. Com. & Pub. Util.
1,302
324
57
268
291
217
59
70
1,310
326
58
273
291
218
59
70
1,304
342
51
265
289
210
58
72
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., ¿c Real Est.
Trans. C o m . & Pub. Util.
3,822
464
237
1,036
631
935
283
227
3,834
461
242
1,034
638
927
284
239
3,772
470
264
1,002
630
889
278
229
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
Trans. C o m . & Pub. Util.
2,196
491
97
519
442
377
118
144
2,227
495
103
540
440
376
118
146
2,160
502
95
506
433
359
114
144
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
Trans. Com. & Pub. Util.
1,587
195
116
366
308
304
79
125
1,607
199
119
372
310
305
79
127
1,614
213
124
363
306
294
78
131
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., <c Real Est.
5
Trans. C o m . & Pub. Util.
780
196
39
160
179
123
33
39
794
198
40
167
182
124
33
39
790
205
37
158
184
120
33
39
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
Trans. Com. & Pub. UtiL
1,639
453
61
363
293
303
79
78
1,668
456
67
372
294
309
79
81
H
"2
1,687
482
64
368
304
298
79
83
-.11
-i;
A l l labor force data are from Bureau of Labor Statistics reports supplied by state agencies.
Only the unemployment rate data are seasonally adjusted.
The Southeast data represent the total of the six states.
The annual percent change calculation is based on the most recent data over prior year.
http://fraser.stlouisfed.org/
52
Federal Reserve Bank of St. Louis
A P R I L 1983, E C O N O M I C
REVIEW
<
CONSTRUCTION
JAN
1983
DEC
1982
JAN
1982
Nonresidential Building Permits - 5 Mil.
Total Nonresidential
45,193
Industrial Bldgs.
4,967
Offices
11,924
Stores
5,241
Hospitals
1,746
Schools
785
45,658
5,109
12,139
5,231
1,818
800
51,703
7,222
15,020
6,289
1,476
782
Nonresidential Building Permits - i MiL
Total Nonresidential
6,526
Industrial Bldgs.
727
Offices
1,405
Stores
947
Hospitals
341
Schools
108
6,426
723
1,384
927
329
109
6,590
790
1,373
1,109
286
78
Nonresidential Bunding Permits - $ MiL
Total Nonresidential
394
Industrial Bldgs.
62
Offices
73
Stores
64
Hospitals
36
Schools
5
399
63
69
64
44
8
ANN
%
CHG
JAN
1983
DEC
1982
JAN
1982
ANN
%
CHG
12-month Cumulative Kate
13
31
21
17
18
0
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ MiL
- 1
- 8
+ 2
- 15
+ 19
+ 38
Residential Building Permits
Value - $ MD.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ MiL
433
60
56
58
31
6
+
+
+
+
-
9
3
30
10
16
17
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ MiL
3,250
378
679
493
177
19
3,397
387
622
643
139
18
+
+
+
+
3
0
10
21
27
17
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ MiL
989
138
228
85
25
15
982
145
225
82
25
17
1,055
196
228
127
34
28
- 6
- 30
0
- 33
- 26
- 46
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ Mil.
Nonresidential Building Permits - $ MiL
Total Nonresidential
1,030
Industrial Bldgs.
83
Offices
308
Stores
155
Hospitals
54
Schools
51
976
84
300
151
32
50
874
73
297
129
47
18
+ 18
+ 14
+ 4
+ 20
+ 15
+183
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ MiL
nonresiaentiai «uuding hermits - $ MIL
Total Nonresidential
163
Industrial Bldgs.
14
Offices
14
Stores
38
Hospitals
5
Schools
5
160
14
16
38
5
4
175
17
45
32
8
1
- 7
- 18
- 69
+ 19
- 38
+400
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ MiL
nonresidential tsuuding P e r m i t s - » Mil.
Total Nonresidential
656
Industrial Bldgs.
41
Offices
95
Stores
95
Hospitals
44
Schools
11
659
39
95
99
45
11
655
57
125
120
18
6
+ 0
- 28
- 24
- 21
+144
+ 83
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ Mil.
Nonresidential Building Permits
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
>
- 4 MiL
Nonresidential Building Permits
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
+
+
- i MiL
3,296
388
687
509
176
21
41,118
39,636
39,366
561.1
460.8
537.5
447.6
543.2
403.3
+
4
86,312
85,295
91,068
-
5
7,282
7,103
7,954
-
8
116.5
87.8
110.5
86.2
113.6
98.4
+ 3
- 11
13,809
13,529
14,543
248
239
291
- 15
5.2
4.2
4.9
4.3
5.2
5.5
0
- 24
642
639
724
- 11
4,223
4,201
5,496
- 23
59.8
50.8
57.0
51.4
67.5
70.0
- 11
- 27
7,518
7,451
8,893
- 15
1,440
1,366
1,029
+ 40
27.8
14.4
26.3
13.0
20.5
8.8
+ 36
+ 64
2,429
2,348
2,084
+ 17
686
652
601
+ 14
11.8
9.0
11.2
8.4
9.7
8.3
+ 22
+ 8
1,716
1,628
1,475
+ 16
191
181
152
+ 26
3.7
2.2
3.5
2.2
3.4
1.6
+ 9
+ 38
353
340
327
+
495
463
385
+ 29
8.2
7.2
7.6
6.9
7.3
4.2
+ 12
+ 71
l,15i
1,122
1,040
+ 11
+ 3
+ 14
-
5
8
NOTES:
Data supplied by the U. S. Bureau of the Census, Housing Units Authorized By Building Permits and Public Contracts. C-40.
Nonresidential data excludes the cost of construction for publicly owned buildings. The southeast data represent the total of
the six states. The annual percent change calculation is based on the most recent month over prior year. Publication of F. W.
Dodge construction contracts has been discontinued.
http://fraser.stlouisfed.org/ K O F ATLANTA
FEDERAL R E S E R V E B A N
Federal Reserve Bank of St. Louis
53
GENERAL
LATEST
DATA
YEAR
AGO
ANN.
%
CHG.
CURR.
PERIOD
PREV.
PERIOD
2,584.9
90,663
N.A.
8,654.1
2,541.5
91,033
N.A.
8,680.5
2,447.6
87,216
N.A.
8,684.4
+ 6
+ 4
293.2
.163.4
293.1
178.3
283.4
168.7
+ 3
- 4
301.8
N.A.
3,603.1
1,384.0
289.3
N.A.
3,821.9
1,397.4
+ 6
DEC
FEB
307.4
N.A.
3,763.6
1,397.0
OCT
N.A.
27.6
N.A.
30.0
N.A.
27.6
3Q
NOV
DEC
FEB
33.8
23.0
98.0
54.0
33.6
22.5
97.9
53.0
32.8
21.7
105.2
56.4
N.A.
3.6
N.A.
3.7
N.A.
3.9
Personal Income
($bil. - S A A R )
3Q
Taxable Sales - $ biL
FEB
Plane Pass. Arr. 000's
DEC
Petroleum Prod, (thous.) FEB
Consumer Price Index - Miami
Nov. 1977 = 100
Kilowatt Hours - mils.
OCT
114.3
67.7
2,253.8
65.0
JAN
157.9
8.1
111.3
67.4
1,636.5
65.0
NOV
156.8
9.3
105.5
67.2
2,109.3
84.0
JAN
155.2
7.8
+ 8
+ 1
+ 7
-23
Personal Income
($bil. - S A A R )
3Q
Taxable Sales - $ bil.
3Q
Plane Pass. Arr. 000's
DEC
Petroleum Prod, (thous.)
Consumer Price Index - Atlanta
1967 = 100
Kilowatt Hours - mils.
OCT
53.3
39.4
1,568.9
N.A.
FEB
295.1
4.2
52.5
37.2
1,435.8
N.A.
DEC
296.1
4.8
50.6
38.1
1,603.8
N.A.
FEB
279.8
4.1
+ 5
+ 3
- 2
44.4
N.A.
247.7
1,190.0
43.7
N.A.
250.6
1,176.0
41.8
N.A.
255.2
1,163.0
+ 6
N.A.
5.0
N.A.
5.6
N.A.
4.8
19.9
N.A.
29.0
88.0
19.7
N.A.
28.8
90.0
19.0
N.A.
30.8
94.0
N.A.
1.1
N.A.
2.2
N.A.
1.9
41.7
28.7
128.8
N.A.
41.0
27.4
153.6
N.A.
39.6
26.9
140.1
N.A.
N.A.
4.9
N.A.
4.4
N.A.
5.1
Personal Income
($bil. - S A A R )
Taxable Sales - $biL
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - mils.
Personal Income
($bil. - S A A R )
Taxable Sales - $ bil.
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - mils.
Personal Income
($bil. - S A A R )
Taxable Sales - $ biL
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - mils.
3Q
FEB
FEB
3Q
Personal Income
($bil. - S A A R )
3Q
Taxable Sales - $ biL
DEC
Plane Pass. Arr. 000's
Petroleum Prod, (thous.) FEB
Consumer Price Index
1967 = 100
OCT
Kilowatt Hours - mils.
Personal Income
3Q
($bil. - S A A R )
Taxable Sales - $ biL
DEC
Plane Pass. Arr. 000's
Petroleum Prod, (thous.) FEB
Consumer Price Index
1967 = 100
OCT
Kilowatt Hours - mils.
Personal Income
3Q
($bil. - S A A R )
DEC
Taxable Sales - $ biL
DEC
Plane Pass. Arr. 000's
Petroleum Prod, (thous.) FEB
Consumer Price Index
1967 = 100
OCT
Kilowatt Hours - mils.
FEB
1983
J A N (R)
1983
FEB (R)
1982
Agriculture
Prices Rec'd by Farmers
132
Index (1977=100)
81,638
Broiler Placements (thous.)
66.20
C a l f Prices ($ per cwt.)
27.7
Broiler Prices ($ per lb.)
5.65
Soybean Prices ($ per bu.)
Broiler Feed Cost ($ per ton)
206
128
81,770
62.40
25.8
5.56
202
133
79,356
58.90
27.0
6.04
209
Agriculture
Prices Rec'd by Farmers
120
Index (1977=100)
31,405
Broiler Placements (thous.)
64.01
C a l f Prices ($ per cwt.)
26.9
Broiler Prices ($ per lb.)
5.76
Soybean Prices ($ per bu.)
195
Broiler Feed Cost ($ per ton)
116
31,619
59.14
24.7
5.66
191
119
30,098
55.74
25.5
6.25
205
Agriculture
Farm Cash Receipts - $ mil.
2,186
(Dates: DEC, DEC)
10,341
Broiler Placements (thous.)
61.80
C a l f Prices ($ per cwt.)
27.0
Broiler Prices (<t per lb.)
5.69
Soybean Prices ($ per bu.)
210
Broiler Feed Cost ($ per ton)
10,530
58.40
24.5
5.60
205
Agriculture
Farm Cash Receipts - $ mil.
4,194
(Dates: DEC, DEC)
1,965
Broiler Placements (thous.)
65.80
C a l f Prices ($ per cwt.)
27.0
Broiler Prices (« per lb.)
5.69
Soybean Prices ($ per bu.)
215
Broiler Feed Cost ($ per ton)
1,999
60.80
25.0
5.60
215
Agriculture
Farm Cash Receipts - $ mil.
3,322
(Dates: D E C , DEC)
12,727
Broiler Placements (thous.)
59.40
C a l f Prices ($ per cwt.)
26.5
Broiler Prices (•* per lb.)
5.64
Soybean Prices ($ per bu.)
185
Broiler Feed Cost ($ per ton)
12,718
55.30
24.0
5.56
185
Agriculture
Farm Cash Receipts - $ mil.
1,758
(Dates: D E C , DEC)
N.A.
Broiler Placements (thous.)
63.00
C a l f Prices ($ per cwt.)
28.0
Broiler Prices (<t per lb.)
5.81
Soybean Prices ($ per bu.)
255
Broiler Feed Cost ($ per ton)
N.A.
59.60
26.0
5.88
255
- 6
Agriculture
Farm Cash Receipts - $ mil.
2,311
(Dates: D E C , DEC)
6,371
Broiler Placements (thous.)
69.50
C a l f Prices ($ per cwt.)
27.0
Broiler Prices (t per lb.)
5.79
Soybean Prices ($ per bu.)
170
Broiler Feed Cost ($ per ton)
6,372
61.90
26.5
5.58
163
- 4
Agriculture
Farm Cash Receipts - $ mil.
1,953
(Dates: DEC, DEC)
N.A.
Broiler Placements (thous.)
63.30
C a l f Prices ($ per cwt.)
26.5
Broiler Prices (<t per lb.)
5.80
Soybean Prices ($ per bu.)
184
Broiler Feed Cost ($ per ton)
N.A.
58.00
22.5
5.65
181
ANN>
;
%
CHG. v .
- 0
- 2
- 0
+ 0
+
+
-
3
6
7
4
- 8
+ 2
+ 3
+ 5
+ 2
- 3
+ 2
+ 4
+ 5
- 6
- 6
2,211
9,874
54.80
24.5
6.25
225
-
-
-
-
-
-
4,039
2,006
58.10
27.0
6.25
225
3,278
12,183
54.00
25.0
5.92
189
-
+ 3
+12
+ 5
+U
+10
*
I
*
-
- *
it
+ 4k
- 2*
+13
-Î1
+ 1
+ 4
+10
+ 6
- 5
- 2
,.
1,714
N.A.
58.60
27.0
6.42
245
2,246
6,036
55.10
27.5
6.29
189
1,836
N.A.
54.40
25.0
6.18
191
+ 3
+ *
+26
-10
+ 6
+ 6
Personal Income data supplied by U. S. Department of Commerce. Taxable Sales are reported as a 12-month cumulative totaL
Plane
Passenger Arrivals are collected from 26 airports. Petroleum Production data supplied by U. S. Bureau of Mines. Consumer Price
Index data supplied by Bureau of Labor Statistics. Agriculture data supplied by U. S. Department of Agriculture.
Farm Cash
Receipts data are reported as cumulative for the calendar year through the month shown. Broiler placements are an average weekly
rate. The Southeast data represent the total of the six states. N.A. = not available. The annual percent change calculation is based
on most recent data over prior year. R = revised.
http://fraser.stlouisfed.org/
54
Federal Reserve Bank of St. Louis
F E D E R A L R E S E R V E B A N K O F ATLANTA 54
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Federal Reserve Bank of Atlanta
' P . O . Box 1731
Atlanta, Georgia 30301
B u l k Rate
U . S . Postage
PAID
Atlanta, Ga.
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@FedFRASER